UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)


x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
quarterly period ended September 30, 2010


or


 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
transition period from ______ to ______


Commission
File Number:  000-12896





OLD
POINT FINANCIAL CORPORATION


(Exact
name of registrant as specified in its charter)





VIRGINIA
              
              54-1265373(State or other jurisdiction of
              
              (I.R.S. Employerincorporation or organization)
              
              Identification No.)





1
West Mellen Street, Hampton, Virginia  23663


(Address
of principal executive offices) (Zip Code)





(757)
728-1200


(Registrant's
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.         x
Yes    ̈ No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈
Yes    ̈ No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large accelerated filer  ̈
              Accelerated filer xNon-accelerated filer  ̈ (Do not check if a smaller reporting company)
              Smaller reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


 ̈ Yes x No





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





4,936,989
shares of common stock ($5.00 par value) outstanding as of October 31,
2010





OLD
POINT FINANCIAL CORPORATION





FORM
10-Q





INDEX





PagePART I - FINANCIAL INFORMATIONItem 1.
                                      Financial
      Statements.
                                      1Consolidated
      Balance SheetsSeptember
      30, 2010 (unaudited) and December 31, 2009
                                      1Consolidated
      Statements of IncomeThree
      months ended September 30, 2010 and 2009 (unaudited)
                                      2Nine
      months ended September 30, 2010 and 2009 (unaudited)
                                      2Consolidated
      Statements of Changes in Stockholders' EquityNine
      months ended September 30, 2010 and 2009 (unaudited)
                                      3Consolidated
      Statements of Cash FlowsNine
      months ended September 30, 2010 and 2009 (unaudited)
                                      4Notes
      to Consolidated Financial Statements (unaudited)
                                      5Item 2.
                                      Management's
      Discussion and Analysis of Financial Condition and Results of
       Operations.
                                      17Item 3.
                                      Quantitative
      and Qualitative Disclosures About Market Risk.
                                      29Item 4.
                                      Controls
      and Procedures.
                                      30PART II - OTHER INFORMATIONItem 1.
                                      Legal
      Proceedings.
                                      30Item 1A.
                                      Risk
      Factors.
                                      30Item 2.
                                      Unregistered
      Sales of Equity Securities and Use of Proceeds.
                                      30Item 3.
                                      Defaults
      Upon Senior Securities.
                                      31Item 4.
                                      [Removed
      and Reserved]
                                      31Item 5.
                                      Other
      Information.
                                      31Item 6.
                                      Exhibits.
                                      31




(i)




PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements.





Old
Point Financial Corporation and Subsidiaries


Consolidated
Balance Sheets





September
      30,
                
                
                December
      31,2010
                
                
                2009(unaudited)AssetsCash
      and due from banks
                
                $
                12,106,481
                
                
                $
                13,223,901Federal
      funds sold
                
                
                31,127,858
                
                
                
                34,412,097Cash
      and cash equivalents
                
                
                43,234,339
                
                
                
                47,635,998Securities
      available-for-sale, at fair value
                
                
                194,610,074
                
                
                
                173,774,953Securities
      held-to-maturity (fair value approximates $2,106,830 and
      $2,233,133)
                
                
                2,082,000
                
                
                
                2,212,000Restricted
      securities
                
                
                4,481,800
                
                
                
                4,814,700Loans,
      net of allowance for loan losses of $12,105,063 and
    $7,864,451
                
                
                604,631,108
                
                
                
                627,378,089Premises
      and equipment, net
                
                
                29,724,372
                
                
                
                30,397,444Bank
      owned life insurance
                
                
                17,863,165
                
                
                
                16,290,838Foreclosed
      assets, net of valuation allowance of $1,202,930 and
    $860,000
                
                
                10,140,170
                
                
                
                7,623,500Other
      assets
                
                
                11,949,586
                
                
                
                11,294,719$
                918,716,614
                
                
                $
                921,422,241Liabilities
      & Stockholders' EquityDeposits:Noninterest-bearing
      deposits
                
                $
                129,201,973
                
                
                $
                111,636,590Savings
      deposits
                
                
                224,066,801
                
                
                
                205,647,611Time
      deposits
                
                
                343,393,363
                
                
                
                345,216,588Total
      deposits
                
                
                696,662,137
                
                
                
                662,500,789Federal
      funds purchased and other borrowings
                
                
                1,076,711
                
                
                
                1,018,559Overnight
      repurchase agreements
                
                
                51,146,620
                
                
                
                49,560,402Term
      repurchase agreements
                
                
                50,203,772
                
                
                
                59,858,542Federal
      Home Loan Bank advances
                
                
                35,000,000
                
                
                
                65,000,000Accrued
      expenses and other liabilities
                
                
                1,498,932
                
                
                
                1,875,496Total
      liabilities
                
                
                835,588,172
                
                
                
                839,813,788Commitments
      and contingenciesStockholders'
      equity:Common
      stock, $5 par value, 10,000,000 shares authorized; 4,936,989 and 4,916,535
      shares issued and outstanding
                
                
                24,684,945
                
                
                
                24,582,675Additional
      paid-in capital
                
                
                15,997,076
                
                
                
                15,768,840Retained
      earnings
                
                
                42,606,770
                
                
                
                42,518,889Accumulated
      other comprehensive loss, net
                
                
                (160,349
                )
                
                
                (1,261,951
                )Total
      stockholders' equity
                
                
                83,128,442
                
                
                
                81,608,453Total
      liabilities and stockholders' equity
                
                $
                918,716,614
                
                
                $
                921,422,241





See Notes
to Consolidated Financial Statements.


- 1
-





Old
Point Financial Corporation and Subsidiaries


Consolidated
Statements of Income





Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember
      30,
                    
                    
                    September
      30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(unaudited)
                    
                    
                    (unaudited)Interest
      and Dividend Income:Interest
      and fees on loans
                    
                    $
                    9,237,260
                    
                    
                    $
                    9,649,472
                    
                    
                    $
                    27,982,311
                    
                    
                    $
                    28,466,848Interest
      on federal funds sold
                    
                    
                    15,471
                    
                    
                    
                    11,260
                    
                    
                    
                    63,954
                    
                    
                    
                    33,287Interest
      on securities:Taxable
                    
                    
                    854,323
                    
                    
                    
                    583,535
                    
                    
                    
                    2,507,614
                    
                    
                    
                    1,953,319Tax-exempt
                    
                    
                    53,104
                    
                    
                    
                    120,796
                    
                    
                    
                    220,630
                    
                    
                    
                    434,429Dividends
      and interest on all other securities
                    
                    
                    12,265
                    
                    
                    
                    107,032
                    
                    
                    
                    34,632
                    
                    
                    
                    373,874Total
      interest and dividend income
                    
                    
                    10,172,423
                    
                    
                    
                    10,472,095
                    
                    
                    
                    30,809,141
                    
                    
                    
                    31,261,757Interest
      Expense:Interest
      on savings deposits
                    
                    
                    108,701
                    
                    
                    
                    85,732
                    
                    
                    
                    302,159
                    
                    
                    
                    278,798Interest
      on time deposits
                    
                    
                    1,604,779
                    
                    
                    
                    2,341,178
                    
                    
                    
                    5,168,834
                    
                    
                    
                    7,776,266Interest
      on federal funds purchased, securities sold under agreements to repurchase
      and other borrowings
                    
                    
                    109,603
                    
                    
                    
                    150,880
                    
                    
                    
                    470,751
                    
                    
                    
                    392,299Interest
      on Federal Home Loan Bank advances
                    
                    
                    429,717
                    
                    
                    
                    848,061
                    
                    
                    
                    1,969,974
                    
                    
                    
                    2,596,890Total
      interest expense
                    
                    
                    2,252,800
                    
                    
                    
                    3,425,851
                    
                    
                    
                    7,911,718
                    
                    
                    
                    11,044,253Net
      interest income
                    
                    
                    7,919,623
                    
                    
                    
                    7,046,244
                    
                    
                    
                    22,897,423
                    
                    
                    
                    20,217,504Provision
      for loan losses
                    
                    
                    1,500,000
                    
                    
                    
                    1,000,000
                    
                    
                    
                    7,500,000
                    
                    
                    
                    5,000,000Net
      interest income, after provision for loan losses
                    
                    
                    6,419,623
                    
                    
                    
                    6,046,244
                    
                    
                    
                    15,397,423
                    
                    
                    
                    15,217,504Noninterest
      Income:Income
      from fiduciary activities
                    
                    
                    718,008
                    
                    
                    
                    701,789
                    
                    
                    
                    2,319,856
                    
                    
                    
                    2,230,009Service
      charges on deposit accounts
                    
                    
                    1,068,455
                    
                    
                    
                    1,402,771
                    
                    
                    
                    3,663,196
                    
                    
                    
                    4,115,443Other
      service charges, commissions and fees
                    
                    
                    719,193
                    
                    
                    
                    629,979
                    
                    
                    
                    2,163,999
                    
                    
                    
                    1,898,241Income
      from bank owned life insurance
                    
                    
                    216,218
                    
                    
                    
                    198,831
                    
                    
                    
                    815,541
                    
                    
                    
                    550,860Gain
      on sale of available-for-sale securities, net
                    
                    
                    541,241
                    
                    
                    
                    0
                    
                    
                    
                    541,317
                    
                    
                    
                    0Other
      operating income
                    
                    
                    130,072
                    
                    
                    
                    69,531
                    
                    
                    
                    311,119
                    
                    
                    
                    273,541Total
      noninterest income
                    
                    
                    3,393,187
                    
                    
                    
                    3,002,901
                    
                    
                    
                    9,815,028
                    
                    
                    
                    9,068,094Noninterest
      Expense:Salaries
      and employee benefits
                    
                    
                    4,539,062
                    
                    
                    
                    4,462,648
                    
                    
                    
                    13,691,812
                    
                    
                    
                    13,277,101Occupancy
      and equipment
                    
                    
                    1,084,972
                    
                    
                    
                    1,026,532
                    
                    
                    
                    3,235,289
                    
                    
                    
                    3,073,035FDIC
      insurance
                    
                    
                    404,093
                    
                    
                    
                    264,013
                    
                    
                    
                    1,050,274
                    
                    
                    
                    1,117,075Data
      processing
                    
                    
                    316,123
                    
                    
                    
                    287,106
                    
                    
                    
                    917,931
                    
                    
                    
                    810,401Customer
      development
                    
                    
                    215,414
                    
                    
                    
                    227,878
                    
                    
                    
                    655,644
                    
                    
                    
                    610,038Advertising
                    
                    
                    177,369
                    
                    
                    
                    161,428
                    
                    
                    
                    527,650
                    
                    
                    
                    513,008Loan
      expenses
                    
                    
                    117,658
                    
                    
                    
                    173,183
                    
                    
                    
                    481,531
                    
                    
                    
                    474,157Other
      outside service fees
                    
                    
                    157,932
                    
                    
                    
                    96,260
                    
                    
                    
                    357,518
                    
                    
                    
                    264,587Legal
      and audit expenses
                    
                    
                    244,760
                    
                    
                    
                    139,434
                    
                    
                    
                    564,498
                    
                    
                    
                    338,857Loss
      (gain) on write-down/sale of foreclosed assets
                    
                    
                    480,801
                    
                    
                    
                    (82,982
                    )
                    
                    
                    429,754
                    
                    
                    
                    58,227Other
                    
                    
                    664,064
                    
                    
                    
                    686,843
                    
                    
                    
                    2,196,652
                    
                    
                    
                    2,200,637Total
      noninterest expense
                    
                    
                    8,402,248
                    
                    
                    
                    7,442,343
                    
                    
                    
                    24,108,553
                    
                    
                    
                    22,737,123Income
      before income taxes
                    
                    
                    1,410,562
                    
                    
                    
                    1,606,802
                    
                    
                    
                    1,103,898
                    
                    
                    
                    1,548,475Income
      tax expense
                    
                    
                    376,052
                    
                    
                    
                    449,132
                    
                    
                    
                    6,919
                    
                    
                    
                    242,867Net
      income
                    
                    $
                    1,034,510
                    
                    
                    $
                    1,157,670
                    
                    
                    $
                    1,096,979
                    
                    
                    $
                    1,305,608Basic
      Earnings per Share:Average
      shares outstanding
                    
                    
                    4,930,578
                    
                    
                    
                    4,909,035
                    
                    
                    
                    4,925,571
                    
                    
                    
                    4,908,094Net
      income per share of common stock
                    
                    $
                    0.21
                    
                    
                    $
                    0.24
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.27Diluted
      Earnings per Share:Average
      shares outstanding
                    
                    
                    4,932,731
                    
                    
                    
                    4,934,522
                    
                    
                    
                    4,931,977
                    
                    
                    
                    4,936,247Net
      income per share of common stock
                    
                    $
                    0.21
                    
                    
                    $
                    0.24
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.26





See Notes
to Consolidated Financial Statements.


- 2
-


Old
Point Financial Corporation and Subsidiaries


Consolidated
Statements of Changes in Stockholders' Equity





AccumulatedShares
      of
                  
                  
                  
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  OtherCommon
                  
                  
                  Common
                  
                  
                  Paid-in
                  
                  
                  Retained
                  
                  
                  Comprehensive(unaudited)
                  
                  Stock
                  
                  
                  Stock
                  
                  
                  Capital
                  
                  
                  Earnings
                  
                  
                  Loss
                  
                  
                  TotalFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2010Balance
      at beginning of period
                  
                  
                  4,916,535
                  
                  
                  $
                  24,582,675
                  
                  
                  $
                  15,768,840
                  
                  
                  $
                  42,518,889
                  
                  
                  $
                  (1,261,951
                  )
                  
                  $
                  81,608,453Comprehensive
      income:Net
      income
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  1,096,979
                  
                  
                  
                  0
                  
                  
                  
                  1,096,979Unrealized
      holding gains arising during the period (net of tax,
    $751,541)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  1,458,871
                  
                  
                  
                  1,458,871Reclassification
      adjustment (net of tax, $184,048)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  (357,269
                  )
                  
                  
                  (357,269
                  )Total
      comprehensive income
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  1,096,979
                  
                  
                  
                  1,101,602
                  
                  
                  
                  2,198,581Exercise
      of stock options
                  
                  
                  23,874
                  
                  
                  
                  119,370
                  
                  
                  
                  126,514
                  
                  
                  
                  (23,974
                  )
                  
                  
                  0
                  
                  
                  
                  221,910Tax
      benefit from disqualification of stock options
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  16,324
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  16,324Repurchase
      and retirement of common stock
                  
                  
                  (3,420
                  )
                  
                  
                  (17,100
                  )
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  (17,100
                  )Stock
      compensation expense
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  85,398
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  85,398Cash
      dividends ($0.20 per share)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  (985,124
                  )
                  
                  
                  0
                  
                  
                  
                  (985,124
                  )Balance
      at end of period
                  
                  
                  4,936,989
                  
                  
                  $
                  24,684,945
                  
                  
                  $
                  15,997,076
                  
                  
                  $
                  42,606,770
                  
                  
                  $
                  (160,349
                  )
                  
                  $
                  83,128,442FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2009Balance
      at beginning of period
                  
                  
                  4,905,229
                  
                  
                  $
                  24,526,145
                  
                  
                  $
                  15,506,322
                  
                  
                  $
                  43,250,906
                  
                  
                  $
                  (385,463
                  )
                  
                  $
                  82,897,910Comprehensive
      income:Net
      income
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  1,305,608
                  
                  
                  
                  0
                  
                  
                  
                  1,305,608Unrealized
      holding losses arising during the period (net of tax benefit,
      $9,159)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  (17,779
                  )
                  
                  
                  (17,779
                  )Total
      comprehensive income
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  1,305,608
                  
                  
                  
                  (17,779
                  )
                  
                  
                  1,287,829Repurchase
      and retirement of common stock
                  
                  
                  (1,818
                  )
                  
                  
                  (9,090
                  )
                  
                  
                  0
                  
                  
                  
                  (27,189
                  )
                  
                  
                  0
                  
                  
                  
                  (36,279
                  )Exercise
      of stock options
                  
                  
                  5,624
                  
                  
                  
                  28,120
                  
                  
                  
                  77,308
                  
                  
                  
                  (41,541
                  )
                  
                  
                  0
                  
                  
                  
                  63,887Stock
      compensation expense
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  82,394
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  82,394Cash
      dividends ($0.37 per share)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  (1,816,074
                  )
                  
                  
                  0
                  
                  
                  
                  (1,816,074
                  )Balance
      at end of period
                  
                  
                  4,909,035
                  
                  
                  $
                  24,545,175
                  
                  
                  $
                  15,666,024
                  
                  
                  $
                  42,671,710
                  
                  
                  $
                  (403,242
                  )
                  
                  $
                  82,479,667





See Notes
to Consolidated Financial Statements.


- 3
-




Old
Point Financial Corporation and Subsidiaries


Consolidated
Statements of Cash Flows





Nine
      Months EndedSeptember
      30,2010
                            
                            
                            2009(unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                            
                            $
                            1,096,979
                            
                            
                            $
                            1,305,608Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                            
                            
                            1,476,008
                            
                            
                            
                            1,371,772Provision
      for loan losses
                            
                            
                            7,500,000
                            
                            
                            
                            5,000,000Net
      gain on sale of available-for-sale securities
                            
                            
                            (541,317
                            )
                            
                            
                            0Net
      accretion of securities
                            
                            
                            25,772
                            
                            
                            
                            13,820Net
      loss on disposal of premises and equipment
                            
                            
                            3,373
                            
                            
                            
                            3,655Net
      loss on write-down/sale of foreclosed assets
                            
                            
                            429,754
                            
                            
                            
                            58,227Income
      from bank owned life insurance
                            
                            
                            (815,541
                            )
                            
                            
                            (550,860
                            )Stock
      compensation expense
                            
                            
                            85,398
                            
                            
                            
                            82,394Deferred
      tax benefit
                            
                            
                            (2,038,791
                            )
                            
                            
                            (297,243
                            )Increase
      in other assets
                            
                            
                            (3,268,956
                            )
                            
                            
                            (10,413,938
                            )Increase
      (decrease) in other liabilities
                            
                            
                            (376,564
                            )
                            
                            
                            52,152Net
      cash provided by (used in) operating activities
                            
                            
                            3,576,115
                            
                            
                            
                            (3,374,413
                            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of available-for-sale securities
                            
                            
                            (195,846,321
                            )
                            
                            
                            (143,295,926
                            )Purchases
      of held-to-maturity securities
                            
                            
                            (1,370,000
                            )
                            
                            
                            (1,500,000
                            )Purchases
      of restricted securities
                            
                            
                            0
                            
                            
                            
                            (23,650
                            )Proceeds
      from maturities and calls of securities
                            
                            
                            88,012,522
                            
                            
                            
                            109,924,724Proceeds
      from sales of available-for-sale securities
                            
                            
                            90,683,319
                            
                            
                            
                            3,485,000Proceeds
      from sales of restricted securities
                            
                            
                            332,900
                            
                            
                            
                            0(Increase)
      decrease in loans made to customers
                            
                            
                            15,246,981
                            
                            
                            
                            (1,325,989
                            )Proceeds
      from sales of foreclosed assets
                            
                            
                            1,322,176
                            
                            
                            
                            3,560,924Purchases
      of bank owned life insurance
                            
                            
                            (940,000
                            )
                            
                            
                            0Purchases
      of premises and equipment
                            
                            
                            (806,309
                            )
                            
                            
                            (3,949,481
                            )Net
      cash used in investing activities
                            
                            
                            (3,364,732
                            )
                            
                            
                            (33,124,398
                            )CASH
      FLOWS FROM FINANCING ACTIVITIESIncrease
      (decrease) in noninterest-bearing deposits
                            
                            
                            17,565,383
                            
                            
                            
                            (13,328,351
                            )Increase
      (decrease) in savings deposits
                            
                            
                            18,419,190
                            
                            
                            
                            (663,864
                            )Decrease
      in time deposits
                            
                            
                            (1,823,225
                            )
                            
                            
                            (6,914,035
                            )Increase
      (decrease) in federal funds purchased, repurchase agreements and other
      borrowings
                            
                            
                            (8,010,400
                            )
                            
                            
                            63,053,705Decrease
      in Federal Home Loan Bank advances
                            
                            
                            (30,000,000
                            )
                            
                            
                            (5,000,000
                            )Proceeds
      from exercise of stock options
                            
                            
                            221,910
                            
                            
                            
                            63,887Repurchase
      and retirement of common stock
                            
                            
                            (17,100
                            )
                            
                            
                            (36,279
                            )Tax
      benefit from disqualification of stock options
                            
                            
                            16,324
                            
                            
                            
                            0Cash
      dividends paid on common stock
                            
                            
                            (985,124
                            )
                            
                            
                            (1,816,074
                            )Net
      cash provided by (used in) financing activities
                            
                            
                            (4,613,042
                            )
                            
                            
                            35,358,989Net
      decrease in cash and cash equivalents
                            
                            
                            (4,401,659
                            )
                            
                            
                            (1,139,822
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            47,635,998
                            
                            
                            
                            47,324,713Cash
      and cash equivalents at end of period
                            
                            $
                            43,234,339
                            
                            
                            $
                            46,184,891SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      payments for:Interest
                            
                            $
                            8,435,557
                            
                            
                            $
                            11,243,092Income
      tax
                            
                            $
                            2,100,000
                            
                            
                            $
                            650,000SUPPLEMENTAL
      SCHEDULE OF NONCASH TRANSACTIONSUnrealized
      gain (loss) on investment securities
                            
                            $
                            1,669,095
                            
                            
                            $
                            (26,938
                            )Loans
      transferred to foreclosed assets
                            
                            $
                            4,277,600
                            
                            
                            $
                            9,445,523





See Notes
to Consolidated Financial Statements.


- 4
-


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)





Note
1. General


The
accompanying unaudited consolidated financial statements of Old Point Financial
Corporation (the Company) and its subsidiaries have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) for interim financial
information. All significant intercompany balances and transactions have
been eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments and reclassifications
of a normal and recurring nature considered necessary to present fairly the
financial positions at September 30, 2010 and December 31, 2009, the results of
operations for the three and nine months ended September 30, 2010 and 2009 and
statements of cash flows and changes in stockholders’ equity for the nine months
ended September 30, 2010 and 2009. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
the full year.





These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 2009 annual
report on Form 10-K. Certain previously reported amounts have been reclassified
to conform to current period presentation.




Available
Information


The
Company maintains a website on the Internet at www.oldpoint.com. The
Company makes available free of charge, on or through its website, its proxy
statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the Securities and
Exchange Commission (SEC). The information available on the Company’s
Internet website is not part of this Form 10-Q or any other report filed by the
Company with the SEC. The public may read and copy any documents the
Company files at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s
website on the Internet at www.sec.gov.




Note
2. Securities


Amortized
costs and fair values of securities held-to-maturity are as
follows:





Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value(in thousands)September
      30, 2010Obligations
      of U.S. Government agencies
                  
                  $
                  1,670
                  
                  
                  $
                  8
                  
                  
                  $
                  0
                  
                  
                  $
                  1,678Obligations
      of state and political subdivisions
                  
                  
                  412
                  
                  
                  
                  17
                  
                  
                  
                  0
                  
                  
                  
                  429Total
                  
                  $
                  2,082
                  
                  
                  $
                  25
                  
                  
                  $
                  0
                  
                  
                  $
                  2,107December
      31, 2009Obligations
      of U.S. Government agencies
                  
                  $
                  1,800
                  
                  
                  $
                  4
                  
                  
                  $
                  (7
                  )
                  
                  $
                  1,797Obligations
      of state and political subdivisions
                  
                  
                  412
                  
                  
                  
                  24
                  
                  
                  
                  0
                  
                  
                  
                  436Total
                  
                  $
                  2,212
                  
                  
                  $
                  28
                  
                  
                  $
                  (7
                  )
                  
                  $
                  2,233


- 5
-


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





Gross
                    
                    
                    GrossAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Value(in thousands)September
      30, 2010U.S.
      Treasury securities
                    
                    $
                    600
                    
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    600Obligations
      of U.S. Government agencies
                    
                    
                    186,204
                    
                    
                    
                    1,605
                    
                    
                    
                    0
                    
                    
                    
                    187,809Obligations
      of state and political subdivisions
                    
                    
                    4,033
                    
                    
                    
                    101
                    
                    
                    
                    0
                    
                    
                    
                    4,134Mortgage-backed
      securities
                    
                    
                    456
                    
                    
                    
                    12
                    
                    
                    
                    0
                    
                    
                    
                    468Money
      market investments
                    
                    
                    1,599
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    1,599Total
                    
                    $
                    192,892
                    
                    
                    $
                    1,718
                    
                    
                    $
                    0
                    
                    
                    $
                    194,610December
      31, 2009U.S.
      Treasury securities
                    
                    $
                    400
                    
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    400Obligations
      of U.S. Government agencies
                    
                    
                    161,645
                    
                    
                    
                    341
                    
                    
                    
                    (446
                    )
                    
                    
                    161,540Obligations
      of state and political subdivisions
                    
                    
                    8,702
                    
                    
                    
                    124
                    
                    
                    
                    (1
                    )
                    
                    
                    8,825Mortgage-backed
      securities
                    
                    
                    1,273
                    
                    
                    
                    31
                    
                    
                    
                    0
                    
                    
                    
                    1,304Money
      market investments
                    
                    
                    1,706
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    1,706Total
                    
                    $
                    173,726
                    
                    
                    $
                    496
                    
                    
                    $
                    (447
                    )
                    
                    $
                    173,775





Temporarily
Impaired Securities


The
following table shows the gross unrealized losses and fair value at December 31,
2009 of the Company’s investments with unrealized losses that are not deemed to
be other-than-temporarily impaired, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position. The Company had no securities with unrealized losses as of September
30, 2010.





December
      31, 2009Less Than Twelve Months
                            
                            
                            More Than Twelve Months
                            
                            
                            TotalGross
                            
                            
                            
                            
                            
                            Gross
                            
                            
                            
                            
                            
                            GrossUnrealized
                            
                            
                            Fair
                            
                            
                            Unrealized
                            
                            
                            Fair
                            
                            
                            Unrealized
                            
                            
                            FairLosses
                            
                            
                            Value
                            
                            
                            Losses
                            
                            
                            Value
                            
                            
                            Losses
                            
                            
                            Value(in thousands)Securities
    Available-for-SaleDebt
      securities:Obligations
      of U. S. Government agencies
                            
                            $
                            446
                            
                            
                            $
                            49,589
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            446
                            
                            
                            $
                            49,589Obligations
      of state and political subdivisions
                            
                            
                            1
                            
                            
                            
                            859
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            1
                            
                            
                            
                            859Total
      securities available-for-sale
                            
                            $
                            447
                            
                            
                            $
                            50,448
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            447
                            
                            
                            $
                            50,448Securities Held-to-MaturityObligations
      of U. S. Government agencies
                            
                            $
                            7
                            
                            
                            $
                            893
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            7
                            
                            
                            $
                            893Total
                            
                            $
                            454
                            
                            
                            $
                            51,341
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            454
                            
                            
                            $
                            51,341


- 6
-


Obligations of U.S.
Government agencies


The U.S.
Government agencies portfolio had ten investments with unrealized losses at
December 31, 2009. These unrealized losses were caused by increases in market
interest rates. The contractual terms of those investments do not permit the
issuer to settle the securities at a price less than the amortized cost basis of
the investments. Because the Company does not intend to sell the investments,
and management believes it is unlikely that the Company will be required to sell
the investments before recovery of their amortized cost basis, which may be at
maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.





Obligations of state and
political subdivisions


The
unrealized loss on one investment in obligations of state and political
subdivisions at December 31, 2009 was caused by increases in market interest
rates. Because the Company does not intend to sell the investment, and
management believes it is unlikely that the Company will be required to sell the
investment before recovery of its amortized cost basis, which may be at
maturity, the Company does not consider the investment to be
other-than-temporarily impaired at December 31, 2009.





Other-than-Temporarily
Impaired Securities


Management
evaluates securities for other-than-temporary impairment on at least a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (i) the length of time and the extent to
which the fair value has been less than cost, (ii) the financial condition and
near-term prospects of the issuer, and (iii) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.





The 2009
unrealized losses relate to obligations of U.S. Government agencies and state
and political subdivisions. In analyzing an issuer's financial condition,
management considers whether the securities are issued by the federal government
or its agencies, whether downgrades by bond rating agencies have occurred, and
industry analysts' reports. The unrealized losses are a result of changes in
market interest rates and not credit issues. Since the Company has the ability
to hold debt securities until maturity, or for the foreseeable future if
classified as available-for-sale, no declines are deemed to be other than
temporary.





The
restricted security category on the balance sheets is comprised of Federal Home
Loan Bank of Atlanta (FHLB) and Federal Reserve Bank (FRB) stock. These stocks
are classified as restricted securities because their ownership is restricted to
certain types of entities and they lack a market. Therefore, this stock is
carried at cost and evaluated for impairment. When evaluating this stock for
impairment, its value is determined based on the ultimate recoverability of the
par value rather than by recognizing temporary declines in value.




The FHLB
paid a quarterly dividend for the last three quarters of 2009 and the first and
second quarters of 2010. On October 29, 2010, the FHLB declared a dividend for
the third quarter of 2010. The FHLB filed its 2009 annual report on Form 10-K in
late March 2010. According to the annual report, the FHLB’s net income for 2009
was $283.5 million, a $29.7 million, or 11.70%, increase from net income for
2008. In the first three quarters of 2010, earnings releases were generally
favorable, with positive earnings in each of the three quarters. In an earnings
release dated October 29, 2010, the FHLB reported net income of approximately
$74.0 million, an increase of approximately $63.0 million from net income of
approximately $11.0 million for the third quarter of 2009. The FHLB reported
that it was in compliance with all of its regulatory capital requirements as of
December 31, 2009.





Restricted
stock, including FHLB stock, is viewed as a long-term investment. If the value
of the restricted stock were to decline below its book value, the Company has
the ability and the intent to hold the stock until its value recovers.
Therefore, the Company determined the FHLB stock was not impaired as of
September 30, 2010.


- 7
-


Note
3. Loans


The
Company’s loan portfolio is summarized as follows:





September
      30,
                      
                      
                      December
      31,2010
                      
                      
                      2009(in
      thousands)Mortgage
      loans on real estate:Residential
      1-4 family
                      
                      $
                      97,149
                      
                      
                      $
                      100,788Commercial
                      
                      
                      352,261
                      
                      
                      
                      345,753Construction
                      
                      
                      19,801
                      
                      
                      
                      30,696Second
      mortgages
                      
                      
                      16,905
                      
                      
                      
                      19,997Equity
      lines of credit
                      
                      
                      38,967
                      
                      
                      
                      39,192Total
      mortgage loans on real estate
                      
                      
                      525,083
                      
                      
                      
                      536,426Commercial
      loans
                      
                      
                      37,240
                      
                      
                      
                      60,353Consumer
      installment loans
                      
                      
                      26,702
                      
                      
                      
                      33,371Other
                      
                      
                      27,192
                      
                      
                      
                      4,626Total
      loans
                      
                      
                      616,217
                      
                      
                      
                      634,776Net
      deferred loan costs *
                      
                      
                      519
                      
                      
                      
                      466Less:
      Allowance for loan losses
                      
                      
                      (12,105
                      )
                      
                      
                      (7,864
                      )Loans,
      net
                      
                      $
                      604,631
                      
                      
                      $
                      627,378*
      Net deferred loan costs are related to second mortgages and mortgages on
      commercial real estate





The
following is a summary of information pertaining to impaired loans, nonaccrual
loans and loans ninety days or more past due and still accruing
interest:





September
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009(in
      thousands)Impaired
      loans without a valuation allowance
                    
                    $
                    7,595
                    
                    
                    $
                    0Impaired
      loans with a valuation allowance
                    
                    
                    15,260
                    
                    
                    
                    1,105Total
      impaired loans
                    
                    $
                    22,855
                    
                    
                    $
                    1,105Valuation
      allowance related to impaired loans
                    
                    $
                    3,503
                    
                    
                    $
                    387Total
      nonaccrual loans
                    
                    $
                    23,636
                    
                    
                    $
                    4,917Total
      loans past-due ninety days ormore
      and still accruing interest
                    
                    $
                    243
                    
                    
                    $
                    389


- 8
-


Note
4. Allowance for Loan Losses


The
following summarizes activity in the allowance for loan losses for the nine
months ended September 30, 2010 and the year ended December 31,
2009:





September
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009(in
      thousands)Balance,
      beginning of year
                    
                    $
                    7,864
                    
                    
                    $
                    6,406Recoveries
                    
                    
                    533
                    
                    
                    
                    937Provision
      for loan losses
                    
                    
                    7,500
                    
                    
                    
                    6,875Loans
      charged off
                    
                    
                    (3,792
                    )
                    
                    
                    (6,354
                    )Balance,
      end of period
                    
                    $
                    12,105
                    
                    
                    $
                    7,864





Note
5. Share-Based Compensation


Share-based
compensation arrangements include stock options, restricted stock awards,
performance-based awards, stock appreciation rights and employee stock purchase
plans. Accounting standards require all share-based payments to employees
to be valued using a fair value method on the date of grant and to be expensed
based on that fair value over the applicable vesting period.




There
were no options granted in the first nine months of 2010 or in
2009.





On March
9, 2008, the Company’s 1998 stock option plan expired. Options to purchase
234,502 shares of common stock were outstanding under the Company’s 1998 stock
option plan at September 30, 2010. The exercise price of each option equals
the market price of the Company’s common stock on the date of the grant and each
option’s maximum term is ten years.




Stock
option activity for the nine months ended September 30, 2010 is summarized
below:





WeightedAverageWeighted
                  
                  
                  Remaining
                  
                  
                  AggregateAverage
                  
                  
                  Contractual
                  
                  
                  IntrinsicExercise
                  
                  
                  Life
                  
                  
                  ValueShares
                  
                  
                  Price
                  
                  
                  (in years)
                  
                  
                  (in thousands)Options
      outstanding, January 1, 2010
                  
                  
                  271,275
                  
                  
                  $
                  18.59Granted
                  
                  
                  0
                  
                  
                  
                  0Exercised
                  
                  
                  (23,874
                  )
                  
                  
                  10.30Canceled
      or expired
                  
                  
                  (12,899
                  )
                  
                  
                  14.96Options
      outstanding, September 30, 2010
                  
                  
                  234,502
                  
                  
                  $
                  19.63
                  
                  
                  
                  4.60
                  
                  
                  $
                  0Options
      exercisable, September 30, 2010
                  
                  
                  171,526
                  
                  
                  $
                  19.48
                  
                  
                  
                  3.70
                  
                  
                  $
                  0





The
aggregate intrinsic value of a stock option in the table above represents the
total pre-tax intrinsic value (the amount by which the current market value of
the underlying stock exceeds the exercise price of the option) that would have
been received by the option holders had all option holders exercised their
options on September 30, 2010. This amount changes based on changes in the
market value of the Company’s common stock. As of September 30, 2010, the
outstanding options had no intrinsic value because the exercise prices of all
outstanding options were below the market value of a share of the Company’s
common stock.





The total
proceeds of the in-the-money options exercised during the nine months ended
September 30, 2010 were $222 thousand. The total intrinsic value of options
exercised during the same period was $65 thousand.


- 9
-


As of
September 30, 2010, there was $232 thousand of unrecognized compensation cost
related to nonvested options. This cost is expected to be recognized over a
weighted-average period of 24 months.





Note
6. Pension Plan


The
Company provides pension benefits for eligible participants through a
non-contributory defined benefits pension plan. The plan was frozen effective
September 30, 2006; therefore, no additional participants will be added to the
plan.  The components of net periodic pension plan cost are as
follows:





Three
      months ended September 30,
                          
                          2010
                          
                          
                          2009Pension
      BenefitsInterest
      cost
                          
                          $
                          78,430
                          
                          
                          $
                          71,058Expected
      return on plan assets
                          
                          
                          (97,295
                          )
                          
                          
                          (82,667
                          )Amortization
      of net loss
                          
                          
                          31,702
                          
                          
                          
                          25,861Net
      periodic pension plan cost
                          
                          $
                          12,837
                          
                          
                          $
                          14,252





Nine
      months ended September 30,
                    
                    2010
                    
                    
                    2009Pension
      BenefitsInterest
      cost
                    
                    $
                    235,292
                    
                    
                    $
                    213,174Expected
      return on plan assets
                    
                    
                    (291,886
                    )
                    
                    
                    (248,000
                    )Amortization
      of net loss
                    
                    
                    95,105
                    
                    
                    
                    77,583Net
      periodic pension plan cost
                    
                    $
                    38,511
                    
                    
                    $
                    42,757





At
September 30, 2010, management had not yet determined the amount, if any, that
the Company will contribute to the plan in the year ending December 31,
2010.




Note
7. Earnings per Share


Basic
earnings per share is computed by dividing net income by the weighted average
number of shares outstanding during the period. Diluted earnings per share
is computed using the weighted average number of common shares outstanding
during the period, including the effect of dilutive potential common shares
attributable to outstanding stock options.





The
Company did not include 235 thousand and 181 thousand potential common shares
attributable to outstanding stock options in the diluted earnings per share
calculation for the three and nine months ended September 30, 2010,
respectively, because they were antidilutive.





Note
8. Recent Accounting Pronouncements


In
June 2009, the Financial Accounting Standards Board (FASB) issued new
guidance relating to the accounting for transfers of financial assets. The new
guidance, which was issued as Statement of Financial Accounting Standards No.
166 (SFAS 166), Accounting for Transfers of Financial Assets, an amendment to
SFAS No. 140, was adopted into Codification in December 2009 through the
issuance of Accounting Standards Update (ASU) 2009-16. The new standard provides
guidance to improve the relevance, representational faithfulness and
comparability of the information that an entity provides in its financial
statements about a transfer of financial assets; the effects of a transfer on
its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets.
The Company adopted the new guidance in 2010. This guidance is not expected to
have a material impact on the Company’s consolidated financial
statements.





In June
2009, the FASB issued new guidance relating to variable interest entities
(VIEs). The new guidance, which was issued as SFAS No. 167, Amendments to
FASB Interpretation No. 46(R) (SFAS 167), was adopted into Codification in
December 2009. The objective of the guidance is to improve financial reporting
by enterprises involved with VIEs and to provide more relevant and reliable
information to users of financial statements. SFAS 167 is effective as of
January 1, 2010. The Company does not expect the adoption of the new
guidance to have a material impact on its consolidated financial
statements.


- 10
-


In
October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing
(ASU 2009-15). ASU 2009-15 amends Subtopic 470-20 to expand accounting and
reporting guidance for own-share lending arrangements issued in contemplation of
a convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning
on or after December 15, 2009 and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The Company
does not expect the adoption of ASU 2009-15 to have a material impact on its
consolidated financial statements.





In
January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics –
Technical Corrections to SEC Paragraphs (ASU 2010-04). ASU 2010-04 makes
technical corrections to existing SEC guidance including the following topics:
accounting for subsequent investments, termination of an interest rate swap,
issuance of financial statements - subsequent events, use of the residual method
to value acquired assets other than goodwill, adjustments in assets and
liabilities for holding gains and losses, and selections of discount rate used
for measuring defined benefit obligation. The Company does not expect the
adoption of ASU 2010-04 to have a material impact on its consolidated financial
statements.





In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 amends Subtopic 820-10 to clarify existing
disclosures and require new disclosures, and includes conforming amendments to
guidance on employers’ disclosures about postretirement benefit plan assets. ASU
2010-06 is effective for interim and annual periods beginning after December 15,
2009, except for disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010 and
for interim periods within those fiscal years. The Company does not expect the
adoption of ASU 2010-06 to have a material impact on its consolidated financial
statements.





In
February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). ASU
2010-09 addresses both the interaction of the requirements of Topic 855 with the
SEC’s reporting requirements and the intended breadth of the reissuance
disclosures provisions related to subsequent events. An entity that is an SEC
filer is not required to disclose the date through which subsequent events have
been evaluated. ASU 2010-09 is effective immediately. The adoption of the new
guidance did not have a material impact on the Company’s consolidated financial
statements.





In July
2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. The new disclosure
guidance will significantly expand the existing requirements and will lead to
greater transparency into a company’s exposure to credit losses from lending
arrangements. The extensive new disclosures of information as of the end of a
reporting period will become effective for both interim and annual reporting
periods ending after December 31, 2010. Specific items regarding activity that
occurred before the issuance of the ASU, such as the allowance rollforward and
modification disclosures, will be required for periods beginning after December
15, 2010. The Company is currently assessing the impact that ASU 2010-20 will
have on its consolidated financial statements.





On
September 15, 2010, the SEC issued Release No. 33-9142, Internal Control Over
Financial Reporting In Exchange Act Periodic Reports of Non-Accelerated Filers.
This release issued a final rule adopting amendments to its rules and forms to
conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added
by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Dodd-Frank Act). SOX Section 404(c) provides that SOX Section 404(b) shall
not apply with respect to any audit report prepared for an issuer that is
neither an accelerated filer nor a large accelerated filer as defined in Rule
12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was
effective September 21, 2010. Beginning with the Annual Report on Form 10-K that
will be filed in March of 2011, the Company will no longer qualify as an
accelerated filer, and therefore will not be subject to the requirement of SOX
Section 404(b) to include in that Annual Report on Form 10-K the auditor’s
attestation regarding the Company’s internal control over financial
reporting.


- 11
-


On
September 17, 2010, the SEC issued Release No. 33-9144, Commission Guidance on
Presentation of Liquidity and Capital Resources Disclosures in Management’s
Discussion and Analysis. This interpretive release is intended to improve
discussion of liquidity and capital resources in Management’s Discussion and
Analysis of Financial Condition and Results of Operations in order to facilitate
understanding by investors of the liquidity and funding risks facing public
companies. This release was issued in conjunction with a proposed rule,
Short-Term Borrowings Disclosure, which would require public companies to
disclose additional information to investors about their short-term borrowing
arrangements. Release No. 33-9144 was effective on September 28, 2010. The
Company is currently assessing the impact that Release No. 33-9144 and the
proposed Short-Term Borrowing Disclosure rule, if adopted, will have on its
consolidated financial statements.





Note
9. Fair Value Measurements


The fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there
are no quoted market prices for the Company's various financial instruments. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Accordingly, the fair value estimates may
not be realized in an immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded from the disclosure
requirements. Accordingly, the aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the Company’s financial
instruments.





The
estimated fair values, and related carrying or notional amounts, of the
Company's financial instruments are as follows:





September 30, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  Value(in
      thousands)Financial
      assets:Cash
      and cash equivalents
                  
                  $
                  43,234
                  
                  
                  $
                  43,234
                  
                  
                  $
                  47,636
                  
                  
                  $
                  47,636Securities
      available-for-sale
                  
                  
                  194,610
                  
                  
                  
                  194,610
                  
                  
                  
                  173,775
                  
                  
                  
                  173,775Securities
      held-to-maturity
                  
                  
                  2,082
                  
                  
                  
                  2,107
                  
                  
                  
                  2,212
                  
                  
                  
                  2,233Restricted
      securities
                  
                  
                  4,482
                  
                  
                  
                  4,482
                  
                  
                  
                  4,815
                  
                  
                  
                  4,815Loans,
      net of allowances for loan losses
                  
                  
                  604,631
                  
                  
                  
                  604,287
                  
                  
                  
                  627,378
                  
                  
                  
                  627,354Bank
      owned life insurance
                  
                  
                  17,863
                  
                  
                  
                  17,863
                  
                  
                  
                  16,291
                  
                  
                  
                  16,291Accrued
      interest receivable
                  
                  
                  2,605
                  
                  
                  
                  2,605
                  
                  
                  
                  2,873
                  
                  
                  
                  2,873Financial
      liabilities:Deposits
                  
                  
                  696,662
                  
                  
                  
                  698,920
                  
                  
                  
                  662,501
                  
                  
                  
                  664,625Federal
      funds purchased and other borrowings
                  
                  
                  1,077
                  
                  
                  
                  1,077
                  
                  
                  
                  1,019
                  
                  
                  
                  1,019Overnight
      repurchase agreements
                  
                  
                  51,147
                  
                  
                  
                  51,147
                  
                  
                  
                  49,560
                  
                  
                  
                  49,560Term
      repurchase agreements
                  
                  
                  50,204
                  
                  
                  
                  50,181
                  
                  
                  
                  59,859
                  
                  
                  
                  59,878Federal
      Home Loan Bank advances
                  
                  
                  35,000
                  
                  
                  
                  40,198
                  
                  
                  
                  65,000
                  
                  
                  
                  74,043Accrued
      interest payable
                  
                  
                  926
                  
                  
                  
                  926
                  
                  
                  
                  1,449
                  
                  
                  
                  1,449





U.S. GAAP
specifies a hierarchy of valuation techniques based on whether the inputs to
those valuation techniques are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect the Company’s market assumptions. The three levels of the fair value
hierarchy based on these two types of inputs are as follows:




Level
      1 –
            Valuation
      is based on quoted prices in active markets for identical assets or
      liabilities that the reporting entity has the ability to access at the
      measurement date. Level 1 assets and liabilities generally include
      debt and equity securities that are traded in an active exchange
      market. Valuations are obtained from readily available pricing
      sources for market transactions involving identical assets or
      liabilities.


- 12
-





Level
      2 –
            Valuation
      is based on inputs other than quoted prices included within Level 1 that
      are observable for the asset or liability, either directly or
      indirectly. The valuation may be based on quoted prices for similar
      assets or liabilities; quoted prices in markets that are not active; or
      other inputs that are observable or can be corroborated by observable
      market data for substantially the full term of the asset or
      liability.





Level
      3 –
            Valuation
      is based on unobservable inputs that are supported by little or no market
      activity and that are significant to the fair value of the assets or
      liabilities. Level 3 assets and liabilities include financial
      instruments whose value is determined using pricing models, discounted
      cash flow methodologies, or similar techniques, as well as instruments for
      which determination of fair value requires significant management judgment
      or estimation.





The
following describes the valuation techniques used by the Company to measure
certain financial assets recorded at fair value on a recurring basis in the
financial statements:





Securities
available-for-sale


Securities
available-for-sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted market prices, when available (Level 1). If
quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which
significant assumptions are derived primarily from or corroborated by observable
market data. Third party vendors compile prices from various sources and may
determine the fair value of identical or similar securities by using pricing
models that consider observable market data (Level 2). In certain cases
where there is limited activity or less transparency around inputs to the
valuation, securities are classified within Level 3 of the valuation hierarchy.
Currently, all of the Company’s non-restricted securities are considered to be
Level 2 securities.





The
following table presents the balances of certain financial assets measured at
fair value on a recurring basis:





Fair
      Value Measurements at September 30, 2010 Using(in thousands)Description
                    
                    Balance
                    
                    
                    Quoted
      Prices in
                      Active
      Markets
                      for
      Identical
                      Assets
                      (Level
      1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level
      2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level
      3)Available-for-sale
      securitiesU.S.
      Treasury securities
                    
                    $
                    600
                    
                    
                    $
                    0
                    
                    
                    $
                    600
                    
                    
                    $
                    0Obligations
      of U.S. Government agencies
                    
                    
                    187,809
                    
                    
                    
                    0
                    
                    
                    
                    187,809
                    
                    
                    
                    0Obligations
      of state and political subdivisions
                    
                    
                    4,134
                    
                    
                    
                    0
                    
                    
                    
                    4,134
                    
                    
                    
                    0Mortgage-backed
      securities
                    
                    
                    468
                    
                    
                    
                    0
                    
                    
                    
                    468
                    
                    
                    
                    0Money
      market investments
                    
                    
                    1,599
                    
                    
                    
                    0
                    
                    
                    
                    1,599
                    
                    
                    
                    0Total
      available-for-sale securities
                    
                    $
                    194,610
                    
                    
                    $
                    0
                    
                    
                    $
                    194,610
                    
                    
                    $
                    0


- 13
-





Fair
      Value Measurements at December 31, 2009 Using(in thousands)Description
                    
                    Balance
                    
                    
                    Quoted
      Prices in
                      Active
      Markets
                      for
      Identical
                      Assets
                      (Level
      1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level
      2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level
      3)Available-for-sale
      securitiesU.S.
      Treasury securities
                    
                    $
                    400
                    
                    
                    $
                    0
                    
                    
                    $
                    400
                    
                    
                    $
                    0Obligations
      of U.S. Government agencies
                    
                    
                    161,540
                    
                    
                    
                    0
                    
                    
                    
                    161,540
                    
                    
                    
                    0Obligations
      of state and political subdivisions
                    
                    
                    8,825
                    
                    
                    
                    0
                    
                    
                    
                    8,825
                    
                    
                    
                    0Mortgage-backed
      securities
                    
                    
                    1,304
                    
                    
                    
                    0
                    
                    
                    
                    1,304
                    
                    
                    
                    0Money
      market investments
                    
                    
                    1,706
                    
                    
                    
                    0
                    
                    
                    
                    1,706
                    
                    
                    
                    0Total
      available-for-sale securities
                    
                    $
                    173,775
                    
                    
                    $
                    0
                    
                    
                    $
                    173,775
                    
                    
                    $
                    0





Certain
financial assets are measured at fair value on a nonrecurring basis in
accordance with U.S. GAAP. Adjustments to the fair value of these assets usually
result from the application of lower-of-cost-or-market accounting or write-downs
of individual assets.




The
following describes the valuation techniques used by the Company to measure
certain financial assets recorded at fair value on a nonrecurring basis in the
financial statements:





Impaired
loans


Loans are
designated as impaired when, in the judgment of management based on current
information and events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected. The measurement
of loss associated with impaired loans can be based on either the observable
market price of the loan or the fair value of the collateral. Fair value is
measured based on the value of the collateral securing the loans. Collateral may
be in the form of real estate or business assets including equipment, inventory,
and accounts receivable. The vast majority of the collateral is real estate. The
value of real estate collateral is determined utilizing an income or market
valuation approach based on an appraisal conducted by an independent, licensed
appraiser outside of the Company using observable market data (Level 2).
However, if the collateral is a house or building in the process of construction
or if an appraisal of the real estate property is over two years old, then the
fair value is considered Level 3. The value of business equipment is based upon
an outside appraisal if deemed significant, or the net book value on the
applicable business’ financial statements if not considered significant using
observable market data. Likewise, values for inventory and accounts receivable
collateral are based on financial statement balances or aging reports (Level 3).
Impaired loans allocated to the allowance for loan losses are measured at fair
value on a nonrecurring basis. Any fair value adjustments are recorded in the
period incurred as part of the provision for loan losses on the Consolidated
Statements of Income.





Foreclosed
assets


Loans are
transferred to foreclosed assets when the collateral securing them is foreclosed
on. The measurement of loss associated with foreclosed assets is based on the
fair value of the collateral compared to the unpaid loan balance and anticipated
costs to sell the property. If there is a contract for the sale of a property,
and management reasonably believes the transaction will be consummated in
accordance with the terms of the contract, fair value is based on the sale price
in that contract (Level 1). Lacking such a contract, the value of real estate
collateral is determined utilizing an income or market valuation approach based
on an appraisal conducted by an independent, licensed appraiser outside of the
Company using observable market data (Level 2). However, if the collateral is a
house or building in the process of construction or if an appraisal of the real
estate property is over two years old, then the fair value is considered Level
3. Any fair value adjustments to foreclosed assets are recorded in the period
incurred and expensed against current earnings.


- 14
-


The
following table summarizes theCompany’s financial
assets that were measured at fair value on a nonrecurring basis:





Carrying
      Value at September 30, 2010(in thousands)Description
                  
                  Fair
      Value
                  
                  
                  Quoted
      Prices in
                    Active
      Markets for
                    Identical
      Assets
                    (Level
      1)
                  
                  
                  Significant
      Other
                    Observable
      Inputs
                    (Level
      2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level
      3)Assets:Impaired
      loans
                  
                  $
                  11,757
                  
                  
                  $
                  0
                  
                  
                  $
                  9,410
                  
                  
                  $
                  2,347Foreclosed
      assets
                  
                  $
                  10,140
                  
                  
                  $
                  0
                  
                  
                  $
                  10,140
                  
                  
                  $
                  0





Carrying
      Value at December 31, 2009(in thousands)Description
                  
                  Fair
      Value
                  
                  
                  Quoted
      Prices in
                    Active
      Markets for
                    Identical
      Assets
                    (Level
      1)
                  
                  
                  Significant
      Other
                    ObservableInputs
                    (Level
      2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level
      3)Assets:Impaired
      loans
                  
                  $
                  718
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  718Foreclosed
      assets
                  
                  $
                  7,623
                  
                  
                  $
                  0
                  
                  
                  $
                  7,373
                  
                  
                  $
                  250





Note
10. Segment Reporting


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





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





Information
about reportable segments and reconciliation of such information to the
consolidated financial statements follows:


- 15
-





Three Months Ended September 30,
      2010Bank
                
                
                Trust
                
                
                Unconsolidated
                  Parent
                
                
                Eliminations
                
                
                ConsolidatedRevenuesInterest
      and dividend income
                
                $
                10,159,276
                
                
                $
                12,515
                
                
                $
                1,127,461
                
                
                $
                (1,126,829
                )
                
                $
                10,172,423Income
      from fiduciary activities
                
                
                0
                
                
                
                718,008
                
                
                
                0
                
                
                
                0
                
                
                
                718,008Other
      income
                
                
                2,594,607
                
                
                
                96,448
                
                
                
                75,000
                
                
                
                (90,876
                )
                
                
                2,675,179Total
      operating income
                
                
                12,753,883
                
                
                
                826,971
                
                
                
                1,202,461
                
                
                
                (1,217,705
                )
                
                
                13,565,610ExpensesInterest
      expense
                
                
                2,254,951
                
                
                
                0
                
                
                
                3,123
                
                
                
                (5,274
                )
                
                
                2,252,800Provision
      for loan losses
                
                
                1,500,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                1,500,000Salaries
      and employee benefits
                
                
                3,881,046
                
                
                
                530,575
                
                
                
                127,441
                
                
                
                0
                
                
                
                4,539,062Other
      expenses
                
                
                3,656,342
                
                
                
                224,303
                
                
                
                73,417
                
                
                
                (90,876
                )
                
                
                3,863,186Total
      operating expenses
                
                
                11,292,339
                
                
                
                754,878
                
                
                
                203,981
                
                
                
                (96,150
                )
                
                
                12,155,048Income
      before taxes
                
                
                1,461,544
                
                
                
                72,093
                
                
                
                998,480
                
                
                
                (1,121,555
                )
                
                
                1,410,562Income
      tax expense (benefit)
                
                
                387,571
                
                
                
                24,511
                
                
                
                (36,030
                )
                
                
                0
                
                
                
                376,052Net
      income
                
                $
                1,073,973
                
                
                $
                47,582
                
                
                $
                1,034,510
                
                
                $
                (1,121,555
                )
                
                $
                1,034,510Total
      assets
                
                $
                914,325,739
                
                
                $
                4,996,581
                
                
                $
                83,373,669
                
                
                $
                (83,979,375
                )
                
                $
                918,716,614





Three Months Ended September 30,
      2009Bank
                
                
                Trust
                
                
                Unconsolidated
                  Parent
                
                
                Eliminations
                
                
                ConsolidatedRevenuesInterest
      and dividend income
                
                $
                10,457,193
                
                
                $
                15,918
                
                
                $
                1,255,865
                
                
                $
                (1,256,881
                )
                
                $
                10,472,095Income
      from fiduciary activities
                
                
                0
                
                
                
                701,789
                
                
                
                0
                
                
                
                0
                
                
                
                701,789Other
      income
                
                
                2,220,944
                
                
                
                93,944
                
                
                
                75,000
                
                
                
                (88,776
                )
                
                
                2,301,112Total
      operating income
                
                
                12,678,137
                
                
                
                811,651
                
                
                
                1,330,865
                
                
                
                (1,345,657
                )
                
                
                13,474,996ExpensesInterest
      expense
                
                
                3,430,783
                
                
                
                0
                
                
                
                6,487
                
                
                
                (11,419
                )
                
                
                3,425,851Provision
      for loan losses
                
                
                1,000,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                1,000,000Salaries
      and employee benefits
                
                
                3,814,298
                
                
                
                517,309
                
                
                
                131,041
                
                
                
                0
                
                
                
                4,462,648Other
      expenses
                
                
                2,782,108
                
                
                
                208,340
                
                
                
                74,625
                
                
                
                (85,378
                )
                
                
                2,979,695Total
      operating expenses
                
                
                11,027,189
                
                
                
                725,649
                
                
                
                212,153
                
                
                
                (96,797
                )
                
                
                11,868,194Income
      before taxes
                
                
                1,650,948
                
                
                
                86,002
                
                
                
                1,118,712
                
                
                
                (1,248,860
                )
                
                
                1,606,802Income
      tax expense (benefit)
                
                
                459,000
                
                
                
                29,242
                
                
                
                (39,110
                )
                
                
                0
                
                
                
                449,132Net
      income
                
                $
                1,191,948
                
                
                $
                56,760
                
                
                $
                1,157,822
                
                
                $
                (1,248,860
                )
                
                $
                1,157,670Total
      assets
                
                $
                867,259,003
                
                
                $
                6,070,045
                
                
                $
                82,726,263
                
                
                $
                (84,309,093
                )
                
                $
                871,746,218


- 16
-





Nine
      Months Ended September 30, 2010Bank
                    
                    
                    Trust
                    
                    
                    Unconsolidated
                      Parent
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenuesInterest
      and dividend income
                    
                    $
                    30,767,195
                    
                    
                    $
                    40,457
                    
                    
                    $
                    1,354,548
                    
                    
                    $
                    (1,353,059
                    )
                    
                    $
                    30,809,141Income
      from fiduciary activities
                    
                    
                    0
                    
                    
                    
                    2,319,856
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    2,319,856Other
      income
                    
                    
                    7,191,614
                    
                    
                    
                    346,248
                    
                    
                    
                    228,038
                    
                    
                    
                    (270,728
                    )
                    
                    
                    7,495,172Total
      operating income
                    
                    
                    37,958,809
                    
                    
                    
                    2,706,561
                    
                    
                    
                    1,582,586
                    
                    
                    
                    (1,623,787
                    )
                    
                    
                    40,624,169ExpensesInterest
      expense
                    
                    
                    7,919,228
                    
                    
                    
                    0
                    
                    
                    
                    9,267
                    
                    
                    
                    (16,777
                    )
                    
                    
                    7,911,718Provision
      for loan losses
                    
                    
                    7,500,000
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    7,500,000Salaries
      and employee benefits
                    
                    
                    11,745,806
                    
                    
                    
                    1,557,484
                    
                    
                    
                    388,522
                    
                    
                    
                    0
                    
                    
                    
                    13,691,812Other
      expenses
                    
                    
                    9,792,181
                    
                    
                    
                    710,300
                    
                    
                    
                    184,988
                    
                    
                    
                    (270,728
                    )
                    
                    
                    10,416,741Total
      operating expenses
                    
                    
                    36,957,215
                    
                    
                    
                    2,267,784
                    
                    
                    
                    582,777
                    
                    
                    
                    (287,505
                    )
                    
                    
                    39,520,271Income
      before taxes
                    
                    
                    1,001,594
                    
                    
                    
                    438,777
                    
                    
                    
                    999,809
                    
                    
                    
                    (1,336,282
                    )
                    
                    
                    1,103,898Income
      tax expense (benefit)
                    
                    
                    (45,095
                    )
                    
                    
                    149,184
                    
                    
                    
                    (97,170
                    )
                    
                    
                    0
                    
                    
                    
                    6,919Net
      income
                    
                    $
                    1,046,689
                    
                    
                    $
                    289,593
                    
                    
                    $
                    1,096,979
                    
                    
                    $
                    (1,336,282
                    )
                    
                    $
                    1,096,979Total
      assets
                    
                    $
                    914,325,739
                    
                    
                    $
                    4,996,581
                    
                    
                    $
                    83,373,669
                    
                    
                    $
                    (83,979,375
                    )
                    
                    $
                    918,716,614





Nine
      Months Ended September 30, 2009Bank
                  
                  
                  Trust
                  
                  
                  Unconsolidated
                    Parent
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedRevenuesInterest
      and dividend income
                  
                  $
                  31,200,640
                  
                  
                  $
                  61,698
                  
                  
                  $
                  1,557,919
                  
                  
                  $
                  (1,558,500
                  )
                  
                  $
                  31,261,757Income
      from fiduciary activities
                  
                  
                  0
                  
                  
                  
                  2,230,009
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  2,230,009Other
      income
                  
                  
                  6,558,815
                  
                  
                  
                  321,248
                  
                  
                  
                  225,000
                  
                  
                  
                  (266,978
                  )
                  
                  
                  6,838,085Total
      operating income
                  
                  
                  37,759,455
                  
                  
                  
                  2,612,955
                  
                  
                  
                  1,782,919
                  
                  
                  
                  (1,825,478
                  )
                  
                  
                  40,329,851ExpensesInterest
      expense
                  
                  
                  11,059,362
                  
                  
                  
                  0
                  
                  
                  
                  6,487
                  
                  
                  
                  (21,596
                  )
                  
                  
                  11,044,253Provision
      for loan losses
                  
                  
                  5,000,000
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  5,000,000Salaries
      and employee benefits
                  
                  
                  11,346,914
                  
                  
                  
                  1,534,113
                  
                  
                  
                  396,074
                  
                  
                  
                  0
                  
                  
                  
                  13,277,101Other
      expenses
                  
                  
                  8,930,906
                  
                  
                  
                  625,334
                  
                  
                  
                  170,760
                  
                  
                  
                  (266,978
                  )
                  
                  
                  9,460,022Total
      operating expenses
                  
                  
                  36,337,182
                  
                  
                  
                  2,159,447
                  
                  
                  
                  573,321
                  
                  
                  
                  (288,574
                  )
                  
                  
                  38,781,376Income
      before taxes
                  
                  
                  1,422,273
                  
                  
                  
                  453,508
                  
                  
                  
                  1,209,598
                  
                  
                  
                  (1,536,904
                  )
                  
                  
                  1,548,475Income
      tax expense (benefit)
                  
                  
                  184,683
                  
                  
                  
                  154,194
                  
                  
                  
                  (96,010
                  )
                  
                  
                  0
                  
                  
                  
                  242,867Net
      income
                  
                  $
                  1,237,590
                  
                  
                  $
                  299,314
                  
                  
                  $
                  1,305,608
                  
                  
                  $
                  (1,536,904
                  )
                  
                  $
                  1,305,608Total
      assets
                  
                  $
                  867,259,003
                  
                  
                  $
                  6,070,045
                  
                  
                  $
                  82,726,263
                  
                  
                  $
                  (84,309,093
                  )
                  
                  $
                  871,746,218





The Bank
extends a line of credit for $370 thousand to the Parent, of which $244 thousand
was drawn at September 30, 2010.  This line of credit is used primarily to
repurchase the Parent’s publicly traded stock, although it is also available to
provide a source of liquidity for the Parent.  Interest is charged at
the Wall Street Journal Prime Rate minus 0.5%, with a floor of
5.0%.  This loan is secured by a held-to-maturity security with a book
value of $412 thousand and a market value of $429 thousand.  Both the
Parent and the Trust companies maintain deposit accounts with the Bank, on terms
substantially similar to those available to other customers.  These
transactions are eliminated to reach consolidated totals.





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





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.


- 17
-





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, but are not limited to, statements regarding
profitability, liquidity, allowance for loan losses, trends regarding the
provision for loan losses, trends regarding net loan charge-offs, trends
regarding the future levels of nonperforming assets, levels of overdraft or
other fee income, levels of noninterest expense, losses or gains in the
write-down/sale of foreclosed assets, the costs of expanding a current branch
office, interest rates and yields, 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 size of the provision for
loan losses, the adequacy of the allowance for loan losses, the level of
nonperforming assets, impaired loans and charge-offs, the local real estate
market, results of internal assessments and external bank regulatory
examinations, the value of collateral securing loans, the value of and the
Company’s ability to sell foreclosed assets, the Company’s ability to enter into
an agreement with a general contractor to expand a current branch office on
acceptable terms, 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 and other 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
(OCC), U.S. Treasury and the Board of Governors of the Federal Reserve
System.  The requirements of the Dodd-Frank Act may also adversely
affect the Company.




The
Company has experienced reduced earnings due to the current economic
climate.  Dramatic declines in the residential and commercial real
estate markets in recent years have resulted in increases in nonperforming
assets and 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 (DIF).  This special assessment
plus higher quarterly assessments have impacted and will continue to impact the
Company’s performance by directly increasing expenses. Additionally, due to the
current capitalization of the DIF and to reforms contained in the Dodd-Frank
Act, the Company expects increased deposit insurance assessments to continue
through future operating periods.




It is not
clear what other impacts the 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.  It is also not clear what
effects future regulatory reforms, including the implementation of the
Dodd-Frank Act, may have on financial markets, the financial services industry
and depository institutions. 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.




- 18
-


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 21 branch
offices.   Trust is a wealth management services
provider.





Critical
Accounting Policies and Estimates


As of
September 30, 2010, there have been no significant changes with regard to the
critical accounting policies and estimates disclosed in the Company’s 2009
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.  In 2010,
there have been slight changes to the critical accounting estimate for the
allowance for loan losses in the period used to calculate the historic
loss.  See the Allowance for Loan Losses section in the Management’s
Discussion and Analysis for more details about these slight
changes.





Earnings
Summary


Net
income for the third quarter of 2010 was $1.0 million as compared with $1.2
million in the third quarter of 2009, a decrease of $123 thousand or 10.64%. Net
income for the first nine months of 2010 was down 15.98% from the same period in
2009.  During the third quarter of 2010, the loan loss provision was
$1.5 million, compared to $1.0 million in the third quarter of 2009. The Company
believes that the increase in the loan loss provision in the third quarter of
2010 is appropriate based on its analysis of the allowance for loan losses (see
the Allowance for Loan Losses section below). Expenses for the third quarter of
2010 were negatively impacted by higher loss on write-down/sale of foreclosed
assets, up $564 thousand compared to the third quarter of 2009. Basic and
diluted earnings per share for the third quarter of 2010 were $0.21. Basic and
diluted earnings per share for the third quarter of 2009 were $0.24. Basic and
diluted earnings per share for the nine months ended September 30, 2010 were
$0.22 and basic and diluted earnings per share were $0.27 and $0.26,
respectively, for the nine months ended September 30, 2009.





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 $8.0 million in the third
quarter of 2010, an increase of $835 thousand from the third quarter of 2009.
The net interest yield was 3.77% in the third quarter of 2010, 19 basis points
higher than the 3.58% net interest yield in the equivalent period in 2009. The
higher net interest yield in 2010 was the result of the rate on interest-bearing
liabilities decreasing 76 basis points, compared to a 47 basis-point decrease in
the yield on earning assets.





Tax-equivalent
interest income decreased by $338 thousand, or 3.20%, in the third quarter of
2010 compared to the same period of 2009.  Average earning assets grew
$49.5 million, or 6.22%, compared to the third quarter of
2009.  Interest expense decreased $1.2 million, or 34.24%, and average
interest-bearing liabilities increased by $33.0 million, or 4.94% in the third
quarter of 2010 compared to the same period of 2009. The decrease in
interest expense despite the increase in average interest-bearing liabilities is
a result of the 76 basis-point decrease in the rate on interest-bearing
liabilities in the third quarter of 2010 compared to the third quarter of
2009.




- 19
-


For the
nine months ended September 30, 2010, tax-equivalent net interest income was
$23.1 million, up 12.53% from the first nine months of 2009. The net interest
yield of 3.57% in the first nine months of 2010 was 14 basis points higher than
the yield for the same period of 2009, again due to the rate on interest-bearing
liabilities decreasing faster than the yield on earning assets. Tax-equivalent
interest income for the nine months ended September 30, 2010 decreased $565
thousand, or only 1.79%, from the first nine months of 2009, while interest
expense fell $3.1 million, or 28.36% between the same periods.  As in
the three-month period ended September 30, 2010, the decrease in interest
expense occurred even though average interest-bearing liabilities
increased.  This decline in interest expense was due to a 77-basis
point decline in the rate on interest-bearing liabilities in the first nine
months on 2010 as compared to the first nine months of 2009.  Average
earning assets grew 8.12% between September 30, 2010 and September 30, 2009;
average interest-bearing liabilities grew even faster during that period at
9.45%.





The yield
on average earning assets and cost of average interest-bearing liabilities both
decreased due to 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 and the first nine months of 2010. 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.  Assuming that the FOMC keeps
interest rates at current levels, management believes that the average rate on
interest-bearing liabilities will continue to decrease more rapidly than the
average rate on earning assets, although the gap between the two is expected to
narrow.





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


- 20
-





AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND
RATES*





For
      the quarter ended September 30,2010
                    
                    
                    2009Interest
                    
                    
                    
                    
                    
                    
                    
                    
                    InterestAverage
                    
                    
                    Income/
                    
                    
                    Yield/
                    
                    
                    Average
                    
                    
                    Income/
                    
                    
                    Yield/Balance
                    
                    
                    Expense
                    
                    
                    Rate**
                    
                    
                    Balance
                    
                    
                    Expense
                    
                    
                    Rate**(in
      thousands)(unaudited)Loans*
                    
                    $
                    619,241
                    
                    
                    $
                    9,252
                    
                    
                    
                    5.98
                    %
                    
                    $
                    628,833
                    
                    
                    $
                    9,666
                    
                    
                    
                    6.15
                    %Investment
      securities:Taxable
                    
                    
                    186,227
                    
                    
                    
                    854
                    
                    
                    
                    1.83
                    %
                    
                    
                    120,045
                    
                    
                    
                    584
                    
                    
                    
                    1.95
                    %Tax-exempt*
                    
                    
                    4,517
                    
                    
                    
                    80
                    
                    
                    
                    7.08
                    %
                    
                    
                    10,051
                    
                    
                    
                    183
                    
                    
                    
                    7.28
                    %Total
      investment securities
                    
                    
                    190,744
                    
                    
                    
                    934
                    
                    
                    
                    1.96
                    %
                    
                    
                    130,096
                    
                    
                    
                    767
                    
                    
                    
                    2.36
                    %Federal
      funds sold
                    
                    
                    29,249
                    
                    
                    
                    15
                    
                    
                    
                    0.21
                    %
                    
                    
                    21,368
                    
                    
                    
                    11
                    
                    
                    
                    0.21
                    %Other
      investments
                    
                    
                    6,109
                    
                    
                    
                    12
                    
                    
                    
                    0.79
                    %
                    
                    
                    15,532
                    
                    
                    
                    107
                    
                    
                    
                    2.76
                    %Total
      earning assets
                    
                    
                    845,343
                    
                    
                    $
                    10,213
                    
                    
                    
                    4.83
                    %
                    
                    
                    795,829
                    
                    
                    $
                    10,551
                    
                    
                    
                    5.30
                    %Allowance
      for loan losses
                    
                    
                    (12,138
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (7,400
                    )Other
      nonearning assets
                    
                    
                    82,090
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    73,261Total
      assets
                    
                    $
                    915,295
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    861,690Time
      and savings deposits:Interest-bearing
      transaction accounts
                    
                    $
                    10,663
                    
                    
                    $
                    1
                    
                    
                    
                    0.04
                    %
                    
                    $
                    9,569
                    
                    
                    $
                    1
                    
                    
                    
                    0.04
                    %Money
      market deposit accounts
                    
                    
                    164,714
                    
                    
                    
                    95
                    
                    
                    
                    0.23
                    %
                    
                    
                    138,209
                    
                    
                    
                    74
                    
                    
                    
                    0.21
                    %Savings
      accounts
                    
                    
                    46,010
                    
                    
                    
                    12
                    
                    
                    
                    0.10
                    %
                    
                    
                    41,623
                    
                    
                    
                    11
                    
                    
                    
                    0.11
                    %Time
      deposits, $100,000 or more
                    
                    
                    145,729
                    
                    
                    
                    645
                    
                    
                    
                    1.77
                    %
                    
                    
                    167,406
                    
                    
                    
                    827
                    
                    
                    
                    1.98
                    %Other
      time deposits
                    
                    
                    199,196
                    
                    
                    
                    960
                    
                    
                    
                    1.93
                    %
                    
                    
                    160,691
                    
                    
                    
                    1,514
                    
                    
                    
                    3.77
                    %Total
      time and savings deposits
                    
                    
                    566,312
                    
                    
                    
                    1,713
                    
                    
                    
                    1.21
                    %
                    
                    
                    517,498
                    
                    
                    
                    2,427
                    
                    
                    
                    1.88
                    %Federal
      funds purchased, repurchase agreements and other
borrowings
                    
                    
                    99,293
                    
                    
                    
                    110
                    
                    
                    
                    0.44
                    %
                    
                    
                    85,156
                    
                    
                    
                    151
                    
                    
                    
                    0.71
                    %Federal
      Home Loan Bank advances
                    
                    
                    35,000
                    
                    
                    
                    430
                    
                    
                    
                    4.91
                    %
                    
                    
                    65,000
                    
                    
                    
                    848
                    
                    
                    
                    5.22
                    %Total
      interest-bearing liabilities
                    
                    
                    700,605
                    
                    
                    
                    2,253
                    
                    
                    
                    1.29
                    %
                    
                    
                    667,654
                    
                    
                    
                    3,426
                    
                    
                    
                    2.05
                    %Demand
      deposits
                    
                    
                    129,741
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    108,994Other
      liabilities
                    
                    
                    2,233
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,780Stockholders'
      equity
                    
                    
                    82,716
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    82,262Total
      liabilities and stockholders' equity
                    
                    $
                    915,295
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    861,690Net
      interest income/yield
                    
                    
                    
                    
                    
                    $
                    7,960
                    
                    
                    
                    3.77
                    %
                    
                    
                    
                    
                    
                    $
                    7,125
                    
                    
                    
                    3.58
                    %





For
      the nine months ended September 30,2010
                    
                    
                    2009Interest
                    
                    
                    
                    
                    
                    
                    
                    
                    InterestAverage
                    
                    
                    Income/
                    
                    
                    Yield/
                    
                    
                    Average
                    
                    
                    Income/
                    
                    
                    Yield/Balance
                    
                    
                    Expense
                    
                    
                    Rate**
                    
                    
                    Balance
                    
                    
                    Expense
                    
                    
                    Rate**(in
      thousands)(unaudited)Loans*
                    
                    $
                    627,677
                    
                    
                    $
                    28,028
                    
                    
                    
                    5.95
                    %
                    
                    $
                    632,636
                    
                    
                    $
                    28,516
                    
                    
                    
                    6.01
                    %Investment
      securities:Taxable
                    
                    
                    179,912
                    
                    
                    
                    2,508
                    
                    
                    
                    1.86
                    %
                    
                    
                    111,693
                    
                    
                    
                    1,953
                    
                    
                    
                    2.33
                    %Tax-exempt*
                    
                    
                    6,110
                    
                    
                    
                    334
                    
                    
                    
                    7.29
                    %
                    
                    
                    12,152
                    
                    
                    
                    658
                    
                    
                    
                    7.22
                    %Total
      investment securities
                    
                    
                    186,022
                    
                    
                    
                    2,842
                    
                    
                    
                    2.04
                    %
                    
                    
                    123,845
                    
                    
                    
                    2,611
                    
                    
                    
                    2.81
                    %Federal
      funds sold
                    
                    
                    40,807
                    
                    
                    
                    64
                    
                    
                    
                    0.21
                    %
                    
                    
                    20,214
                    
                    
                    
                    33
                    
                    
                    
                    0.22
                    %Other
      investments
                    
                    
                    6,134
                    
                    
                    
                    35
                    
                    
                    
                    0.76
                    %
                    
                    
                    19,334
                    
                    
                    
                    374
                    
                    
                    
                    2.58
                    %Total
      earning assets
                    
                    
                    860,640
                    
                    
                    $
                    30,969
                    
                    
                    
                    4.80
                    %
                    
                    
                    796,029
                    
                    
                    $
                    31,534
                    
                    
                    
                    5.28
                    %Allowance
      for loan losses
                    
                    
                    (10,563
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (6,947
                    )Other
      nonearning assets
                    
                    
                    79,760
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    68,189Total
      assets
                    
                    $
                    929,837
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    857,271Time
      and savings deposits:Interest-bearing
      transaction accounts
                    
                    $
                    10,948
                    
                    
                    $
                    5
                    
                    
                    
                    0.06
                    %
                    
                    $
                    9,571
                    
                    
                    $
                    5
                    
                    
                    
                    0.07
                    %Money
      market deposit accounts
                    
                    
                    156,955
                    
                    
                    
                    262
                    
                    
                    
                    0.22
                    %
                    
                    
                    135,051
                    
                    
                    
                    232
                    
                    
                    
                    0.23
                    %Savings
      accounts
                    
                    
                    44,998
                    
                    
                    
                    35
                    
                    
                    
                    0.10
                    %
                    
                    
                    40,961
                    
                    
                    
                    42
                    
                    
                    
                    0.14
                    %Time
      deposits, $100,000 or more
                    
                    
                    164,020
                    
                    
                    
                    2,072
                    
                    
                    
                    1.68
                    %
                    
                    
                    152,428
                    
                    
                    
                    2,859
                    
                    
                    
                    2.50
                    %Other
      time deposits
                    
                    
                    183,994
                    
                    
                    
                    3,097
                    
                    
                    
                    2.24
                    %
                    
                    
                    182,948
                    
                    
                    
                    4,917
                    
                    
                    
                    3.58
                    %Total
      time and savings deposits
                    
                    
                    560,915
                    
                    
                    
                    5,471
                    
                    
                    
                    1.30
                    %
                    
                    
                    520,959
                    
                    
                    
                    8,055
                    
                    
                    
                    2.06
                    %Federal
      funds purchased, repurchase agreements and other
borrowings
                    
                    
                    108,559
                    
                    
                    
                    471
                    
                    
                    
                    0.58
                    %
                    
                    
                    71,057
                    
                    
                    
                    392
                    
                    
                    
                    0.74
                    %Federal
      Home Loan Bank advances
                    
                    
                    51,827
                    
                    
                    
                    1,970
                    
                    
                    
                    5.07
                    %
                    
                    
                    67,037
                    
                    
                    
                    2,597
                    
                    
                    
                    5.17
                    %Total
      interest-bearing liabilities
                    
                    
                    721,301
                    
                    
                    
                    7,912
                    
                    
                    
                    1.46
                    %
                    
                    
                    659,053
                    
                    
                    
                    11,044
                    
                    
                    
                    2.23
                    %Demand
      deposits
                    
                    
                    123,946
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    112,432Other
      liabilities
                    
                    
                    2,438
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,031Stockholders'
      equity
                    
                    
                    82,152
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    82,755Total
      liabilities and stockholders' equity
                    
                    $
                    929,837
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    857,271Net
      interest income/yield
                    
                    
                    
                    
                    
                    $
                    23,057
                    
                    
                    
                    3.57
                    %
                    
                    
                    
                    
                    
                    $
                    20,490
                    
                    
                    
                    3.43
                    %





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


**Annualized


- 21
-


Provision
for Loan Losses


The
provision for loan losses is a charge against earnings necessary to maintain the
allowance for loan losses at a level consistent with management’s evaluation of
the portfolio. This expense is based on management’s estimate of 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.





The
provision for loan losses was $1.5 million in the third quarter of 2010, as
compared to $1.0 million in the third quarter of 2009. Management concluded that
the higher provision was appropriate based on the increases in nonperforming
loans during the third quarter of 2010 and on the Company’s analysis of the
credit quality of the loan portfolio.  In the first nine months of
2010, the provision for loan losses was $7.5 million, compared to $5.0 million
in the first nine months of 2009.





The
increase in the provision for loan losses in the first nine months of 2010 was
due to several factors.  First, a lending relationship of $9.4 million was
placed in nonaccrual during the first quarter of 2010.  This loan is
secured by commercial real estate and other collateral that have a combined
value of $6.6 million, leaving an unsecured amount of $2.8 million. 
Second, management made changes to the historical loss calculation of the
allowance for loan losses during the first nine months of 2010.  For
more information regarding the changes to the historical loss calculation, see
the Allowance for Loan Losses section of this Form 10-Q. Also, nonperforming
loans have increased $16.1 million since December 31, 2009.  See below
in this section for more details regarding this $16.1 million increase.
Management believes that the large increase of $4.7 million in the provision for
loan losses for the first quarter of 2010 should not continue and the provision
should be lower in future periods, as evidenced by the reduced provision for the
second and third quarters of 2010.  The primary reason for the $4.7
million provision in the first quarter of 2010 was a $9.4 million relationship
that was moved into nonaccrual status in that quarter.  The Company’s
analysis of its loan portfolio since that time has not identified other
significant relationships that are at risk of being placed in nonaccrual
status.





Net loans
charged off were $1.1 million for the third quarter of 2010 as compared to $521
thousand for the third quarter of 2009. For the first nine months of 2010 and
2009, net loans charged off were $3.3 million and $3.7 million respectively. Net
charge-offs in 2009 were impacted by a $1.4 million write-down on a real estate
construction project in the second quarter. On an annualized basis, net loan
charge-offs were 0.70% of total loans for the first nine months of 2010 compared
with 0.77% for the same period in 2009. While net loan charge-offs remain high
and reflect ongoing difficulties in the commercial and consumer real estate
sectors, the gradual improvement in the economy helped reduce charge-offs in the
first nine months of 2010 as compared to the first nine months of 2009. However,
management believes that net loans charged off will remain relatively high until
the economic recovery becomes more pronounced.





Nonperforming
assets consist of nonaccrual loans, loans past due 90 days or more and accruing
interest, restructured loans, and foreclosed assets. Restructured loans are
loans with terms that were modified in a troubled debt restructuring for
borrowers experiencing financial difficulties.  As of September 30,
2010, the Company did not have any restructured loans.  It is
generally the Company’s policy that restructured loans that have continued to be
in compliance with modified terms for six months and yield a market rate at the
time of restructuring not be reported as restructured loans in years subsequent
to the year in which the loan was first restructured.  In September of
2009, the Company restructured a $2.5 million real estate mortgage
loan.  Since the restructuring, the loan has been in compliance with
its modified terms and is yielding a market rate. Based on these factors, the
loan was recategorized as a performing loan in the third quarter of 2010 and no
longer considered either a restructured loan or a nonperforming
asset.  Foreclosed assets consist of real estate from foreclosures on
loan collateral. 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 “past due 90 days or more and accruing interest” status 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.


- 22
-


The
following table presents information concerning nonperforming
assets:





September
      30,
                  
                  
                  December
      31,
                  
                  
                  Increase2010
                  
                  
                  2009
                  
                  
                  (Decrease)(unaudited)(in
      thousands)Nonaccrual
      loansCommercial
                  
                  $
                  248
                  
                  
                  $
                  255
                  
                  
                  $
                  (7
                  )Real
      estate-construction
                  
                  
                  27
                  
                  
                  
                  524
                  
                  
                  
                  (497
                  )Real
      estate-mortgage
                  
                  
                  23,226
                  
                  
                  
                  4,109
                  
                  
                  
                  19,117Installment
      loans to individuals
                  
                  
                  135
                  
                  
                  
                  29
                  
                  
                  
                  106Total
      nonaccrual loans
                  
                  $
                  23,636
                  
                  
                  $
                  4,917
                  
                  
                  $
                  18,719Loans
      past due 90 days or more and accruing interestCommercial
                  
                  $
                  43
                  
                  
                  $
                  40
                  
                  
                  $
                  3Real
      estate-construction
                  
                  
                  39
                  
                  
                  
                  0
                  
                  
                  
                  39Real
      estate-mortgage
                  
                  
                  120
                  
                  
                  
                  228
                  
                  
                  
                  (108
                  )Installment
      loans to individuals
                  
                  
                  41
                  
                  
                  
                  117
                  
                  
                  
                  (76
                  )Other
                  
                  
                  0
                  
                  
                  
                  4
                  
                  
                  
                  (4
                  )Total
      loans past due 90 days or more and accruing interest
                  
                  $
                  243
                  
                  
                  $
                  389
                  
                  
                  $
                  (146
                  )Restructured
      loans (in compliance with modified terms)Real
      estate-mortgage
                  
                  $
                  0
                  
                  
                  $
                  2,480
                  
                  
                  $
                  (2,480
                  )Total
      restructured loans (in compliance with modified terms)
                  
                  $
                  0
                  
                  
                  $
                  2,480
                  
                  
                  $
                  (2,480
                  )Foreclosed
      assetsReal
      estate-construction
                  
                  $
                  5,451
                  
                  
                  $
                  5,149
                  
                  
                  $
                  302Real
      estate-mortgage
                  
                  
                  4,689
                  
                  
                  
                  2,474
                  
                  
                  
                  2,215Total
      foreclosed assets
                  
                  $
                  10,140
                  
                  
                  $
                  7,623
                  
                  
                  $
                  2,517Total
      nonperforming assets
                  
                  $
                  34,019
                  
                  
                  $
                  15,409
                  
                  
                  $
                  18,610





The large
increase in the nonaccrual loan category during the nine months ended September
30, 2010 is mainly due to one credit relationship of $9.4 million or 50.22% of
the $18.7 million total increase in that category. This loan is secured by
commercial real estate and other collateral that have a combined value of $6.6
million. The majority of the balance of nonaccrual loans is related to a few
large credit relationships.  Of the $23.6 million of nonaccrual loans
at September 30, 2010, $19.3 million or 81.71% was comprised of eight credit
relationships: the $9.4 million relationship discussed above and seven other
relationships of $3.6 million, $1.6 million, $1.2 million, $1.1 million, $1.0
million, $739 thousand and $674 thousand.





If
current economic conditions, which have been showing some signs of improvement,
do not in fact improve, management believes nonperforming assets could continue
to increase, which would have a negative effect on the Company’s financial
position.  As was seen in the nine months ended September 30, 2010,
the effect of a sustained increase in nonperforming assets 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.  Therefore,
management believes that the current trend of declining asset quality will
improve, although the improvement may take some time. Management will work with
customers that are having difficulties meeting their loan payments, with
foreclosure considered a last resort.





As
reflected in the $18.6 million increase in nonperforming assets during the first
nine months of 2010, the quality of the Company’s loan portfolio declined during
this period. Management believes the decline in the quality of the
Company’s loan portfolio during this period was primarily due to the general
decline of economic conditions, depressed commercial and residential real estate
markets and the effects of unemployment on borrowers.  Due to this
decline, management has increased the allowance for loan losses to $12.1 million
as of September 30, 2010 as compared to a balance of $7.9 million as of December
31, 2009. As of September 30, 2010, the allowance for loan losses was 35.58% of
nonperforming assets and 50.69% of nonperforming loans. The definition of
nonperforming loans is nonperforming assets less foreclosed assets. The
allowance for loan losses was 1.96% of total loans on September 30, 2010 and
1.24% of total loans on December 31, 2009.


- 23
-





Allowance
for Loan Losses


The
allowance for loan losses is based on several components: historical loss rates,
impairment analysis of nonperforming loans, including collateral valuation, and
qualitative factors.  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 loans)





Historical
loss rates, adjusted for the current economic 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. Prior to 2010, the historical loss
calculation was based on the previous four years.  In the first
quarter of 2010, the historical loss was based on the previous nine quarters, or
all of 2008 and 2009 and the first quarter of 2010. The historical loss for the
second quarter of 2010 was based on the most recent six quarters, or all of 2009
and the first two quarters of 2010. For the third quarter of 2010, the
historical loss was based on the most recent seven quarters, or all of 2009 and
the first three quarters of 2010. The seven-quarter loss history component of
the allowance amounted to $3.8 million as of September 30,
2010.  Management believes the shorter historical loss periods more
accurately reflect the current economic environment.





During
the first and second quarter of 2010, the historical loss was based on an annual
calculation, rather than a quarterly one. During the third quarter of 2010,
management converted the annual calculation to a quarterly calculation. In
management’s opinion, the use of a quarterly loss history more accurately
reflects the loss potential of the loan portfolio in the current economic
environment.





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.  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 (i.e. the collateral value is considered sufficient), 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. 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, 2010, the impaired loan component of the
allowance amounted to $3.5 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, loan concentrations, and legal and
regulatory changes. Due to the decline in the overall economy in 2008 and 2009,
management increased the component of the allowance for loan losses related to
the economy in each of the loan portfolios in 2009. This component remains
at this level for the first three quarters of 2010. During the third quarter of
2010, management increased the component of the allowance for loan losses
related to legal and regulatory changes due to the passing of the Dodd-Frank
Act. The qualitative component of the allowance amounted to $4.3 million as
of September 30, 2010.


- 24
-





As a
result of these changes and the overall increase in nonperforming assets, the
Company added $7.5 million to the allowance for loan losses in the first nine
months of 2010, with $1.5 million added during the third quarter of
2010.  Management is concerned about the increase in nonperforming
assets during the first nine months of 2010 but believes that the allowance has
been appropriately funded for additional losses on existing loans, based on
currently available information. The Company will continue to monitor
nonperforming assets closely and make changes to the allowance for loan losses
when management concludes such changes are necessary.





Noninterest
Income


Compared
to the same period in 2009, total noninterest income was $390 thousand higher in
the third quarter of 2010.  In the service charges on deposit accounts
category, there was a decrease in overdraft fees of $393 thousand between the
third quarter of 2009 and the third quarter of 2010. The majority of this
decrease in overdraft fees is attributed to the changes in Regulation E
requiring a customer to authorize in advance overdrafts caused by debit card and
ATM transactions.  The Company expected overdraft fees to continue to
decrease and is compensating for the projected decrease in overdraft income
by pursuing new product offerings, such as remote deposit capture and lockbox
services, to help drive future noninterest income.





The other
service charges, commissions and fees noninterest income category increased $89
thousand, or 14.16% during the third quarter of 2010 as compared to the same
quarter in 2009.  The majority of this increase was attributed to
increases in debit card and merchant processing income which increased $57
thousand and $28 thousand, respectively, mainly as a result of increased sales
focus in these areas.





Income
from bank owned life insurance increased $17 thousand, or 8.74%, due to the
purchase of additional policies for newly-qualified employees.  Also, other
operating income increased $61 thousand when comparing the third quarter of 2010
to the third quarter of 2009.  The majority of this increase, or $52
thousand, was due to increased income from Old Point Mortgage, LLC, which is the
Company’s joint venture with Tidewater Mortgage Services, Inc. to provide
mortgage origination services.





In
addition, in the third quarter of 2010 the Company recognized $541 thousand in
gains on sales of available-for-sale securities.  Management
considered the effect on future yields prior to initiating the sale of these
securities and believes that the selling of securities to recognize this gain
presented the most advantageous option for the Company at the time the
transactions occurred.





For the
nine months ended September 30, 2010, noninterest income increased $747
thousand, or 8.24%, as compared to the same period in 2009. The overall increase
in noninterest income occurred despite a decrease of $563 thousand in overdraft
fee income.  One significant component of this overall increase was a
$541 thousand increase in gains on sales of available-for-sale securities. Other
components of the increase included higher income from other service charges,
commissions and fees of $266 thousand, mainly from debit card, merchant
processing and ATM interchange fee income.  Income from bank owned life
insurance increased $265 thousand, due to the receipt of insurance proceeds and
the purchase of additional policies.  Also, income from fiduciary
activities increased $90 thousand during the first nine months of 2010 as
compared to the same period in 2009.  The increase in fiduciary
activities income is generated by increased sales efforts.





Noninterest
Expense


For the
third quarter of 2010, noninterest expense increased $960 thousand, or
12.90%, over the third quarter of 2009. The largest increase between the third
quarters of 2009 and 2010 was in losses on write-down/sale of foreclosed assets,
which increased $564 thousand. The increase in this foreclosed asset expense
account was mainly due to the write-down of several properties, after obtaining
current appraisals at lower market values. FDIC insurance increased $140
thousand during the third quarter of 2010 as compared to the third quarter of
2009, caused by higher assessments.  Other outside service fees
increased $62 thousand during the third quarter of 2010 as compared to the same
quarter in 2009.  The majority of the increase in other outside
service fees was related to an audit of the Company’s computer network,
including penetration testing, to ensure strong security in this area. Legal and
audit expenses also increased significantly, rising 75.54% between the third
quarter of 2009 and the same period in 2010. The majority of the difference was
due to the need for additional legal advice on securities and regulatory issues,
as well as advice on troubled loans.  Management expects noninterest
expenses to remain elevated until the economy is well into
recovery.


- 25
-





Noninterest
expense for the nine months ended September 30, 2010 was up $1.4 million, or
6.03%, over the first nine months of 2009.  As in the third quarter, a
portion of the change was driven by legal expenses, outside service fees and
write-down of foreclosed assets.  In addition, salaries and employee
benefit costs for the first nine months of 2010 were $415 thousand, or 3.12%
higher than the first nine months of 2009.  The rise in salary expense
was caused by several factors: merit increases resulting from annual reviews,
additions to staff in the Corporate Banking department in the second half of
2009, and the filling of positions which had been vacant for some
time.





On the
positive side, FDIC insurance costs declined $67 thousand, or 5.98%, in the
first nine months of 2010, compared to the first nine months of
2009.  In the second quarter of 2009, the Company paid a $386 thousand
special assessment based on asset size, which was assessed to all
banks.  FDIC insurance costs, however, were $87 thousand higher in the
third quarter of 2010 than in the second quarter of 2010 and management expects
increased deposit insurance assessments to continue through future operating
periods as a result of the higher reserve requirements for the DIF established
by the Dodd-Frank Act.





Balance
Sheet Review


At
September 30, 2010, the Company had total assets of $918.7 million, a decrease
of 0.29% from $921.4 million at December 31, 2009. This minimal decrease
occurred despite the payoff at maturity in the second quarter of 2010 of $30.0
million of advances from the FHLB, funded from available cash and equivalents.
These fixed-rate FHLB advances, at market rates when the Company obtained them,
became less favorable with the significant declines in market rates in recent
years.  As the Company had planned, these advances were paid off at
maturity to improve the net interest margin. Net loans as of September 30, 2010
were $604.6 million, a decrease of 3.63% from $627.4 million at December 31,
2009. The decrease in loans was partly due to the net increase of $4.2 million
in the allowance for loan losses. Loan balances have also declined for several
reasons, including: higher than normal amortization of residential loans in this
attractive refinance market; closer managing of revolving credits; purposeful
exiting of troubled credits; partial charge-offs of some larger troubled loans
to properly account for reasonable collateral value; and regularly scheduled
payoffs exceeding loan demand from qualified borrowers.  The Company
believes it has sufficient liquidity to fund new loans.





The
Company’s holdings of “Alt-A” type mortgage loans such as adjustable rate and
nontraditional type loans were inconsequential, amounting to less than 1.00% of
the Company’s loan portfolio as of September 30, 2010.





The
Company does not have a formal program for subprime lending.  The
Company is required by law to comply with the requirements of the Community
Reinvestment Act (the CRA), which imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income borrowers. In order to comply
with the CRA and meet the credit needs of its local communities, the Company
finds it necessary to make certain loans with subprime
characteristics.





For the
purposes of this discussion, a “subprime loan” is defined as a loan to a
borrower having a credit score of 660 or below.  The majority of the
Company’s subprime loans are to customers in the Company’s local market
area.




- 26
-


The
following table details, as of September 30, 2010, the Company’s loans with
subprime characteristics that were secured by 1-4 family first mortgages, 1-4
family open-end and 1-4 family junior lien loans for which the Company has
recorded a credit score in its system.





Loans Secured by 1 - 4 Family First Mortgages,


1
- 4 Family Open-end and 1 - 4 Family Junior Liens





Amount
                  
                  
                  PercentSubprime
                  
                  $
                  25,466,056
                  
                  
                  
                  20.9
                  %Non-subprime
                  
                  
                  96,305,750
                  
                  
                  
                  79.1
                  %$
                  121,771,806
                  
                  
                  
                  100.0
                  %Total
      loans
                  
                  $
                  616,736,171Percentage
      of Real Estate-Secured Subprime Loans
                    to
      Total Loans
                  
                  
                  
                  4.13
                  %




In
addition to the subprime loans secured by real estate discussed above, as of
September 30, 2010, the Company had an additional $4.5 million in subprime
consumer loans that were either unsecured or secured by collateral other than
real estate.  Together with the subprime loans secured by real estate,
the Company’s total subprime loans as of September 30, 2010 were $30.0 million,
amounting to 4.86% of the Company’s total loans at September 30,
2010.  The Company’s total subprime loans as of December 31, 2009 were
$33.1 million or 5.20% of the Company’s total loans.  There has been a
reduction of $3.1 million or 34 basis points in the first three quarters of 2010
in subprime loans.





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





Average
assets for the first nine months of 2010 were $929.8 million compared to $857.3
million for the first nine months of 2009.  The growth in average
assets in 2010 was due mainly to the growth in average investment securities and
federal funds sold, which increased 50.21% and 101.87%, respectively, as
compared to the same period in 2009. A portion of the strong growth in
investment securities resulted from $10.0 million of funds that were in other
investments as of  September 30, 2009 maturing and being replaced with
investment securities by September 30, 2010.  The increase in federal
funds sold was a result of liquidity provided by significant growth in deposits
since September 30, 2009.





Total
available-for-sale and held-to-maturity securities at September 30, 2010 were
$196.7 million, an increase of 11.77% from $176.0 million at December 31,
2009.  Since low-cost deposits have increased and loan demand has
slowed this year, the Company has increased its security holdings. 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
September 30, 2010, total deposits were $34.2 million, or 5.16%, higher than the
balance of $662.5 million at December 31, 2009. Repurchase agreements decreased
$8.1 million, or 7.37% since December 31, 2009. The Bank’s repurchase agreements
are fully collateralized by government agencies, providing customers with
protection for funds that might otherwise exceed the limit for FDIC insurance
coverage.  The decrease in the level of term repurchase agreements was
primarily due to successful sales efforts aimed at increasing low-cost deposits,
allowing the Bank to focus on customer relationships and not higher-cost funding
sources to meet liquidity needs.





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 September 30, 2010.  As shown below, these
ratios were all well above the regulatory minimum levels.




- 27
-




2010RegulatoryMinimums
                    
                    
                    September 30, 2010Tier
      1
                    
                    
                    4.00
                    %
                    
                    
                    12.23
                    %Total
      Capital
                    
                    
                    8.00
                    %
                    
                    
                    13.48
                    %Tier
      1 Leverage
                    
                    
                    4.00
                    %
                    
                    
                    9.10
                    %




Book
value per share was $16.84 at September 30, 2010 and $16.80 at September 30,
2009.  Cash dividends were $985 thousand or $0.20 per share in the
first three quarters of 2010 and $1.8 million or $0.37 per share in the first
three quarters of 2009. 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.





A major
source of the Company’s liquidity is its large stable deposit
base.  In addition, secondary liquidity sources are available through
the use of borrowed funds if the need should arise, including secured advances
from the FHLB.  During the first nine months of 2010, the Company paid
off $30.0 million of advances from the FHLB.  As of the end of the
third quarter of 2010, the Company had $239.3 million in FHLB borrowing
availability. The Company has available short-term unsecured borrowed funds in
the form of federal funds lines with correspondent banks.  As of the
end of the third quarter of 2010, the Company had $28.0 million available in
federal funds lines to handle any short-term borrowing needs.





Management
is aware of the current market and institutional trends, events and
uncertainties, including 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 or capital resources of the
Company.  Management is not aware of any current recommendations by
regulatory authorities that would have a material effect on liquidity or capital
resources, except those provisions contained in the recently-passed Dodd-Frank
Act.While
it is too early to fully assess the impact of the Dodd-Frank Act and subsequent
regulatory rulemaking processes, the act increases regulatory supervision and
examination of bank holding companies and their banking and non-banking
subsidiaries and imposes more stringent capital requirements on bank holding
companies, as discussed in the Risk Factors section of the Company’s second
quarter 2010 report on Form 10-Q.  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.





The
Company’s liquidity position has improved during the nine months ended September
30, 2010, as reflected in the Consolidated Statements of Cash
Flows.  Growth in low-cost deposits, as discussed previously, allowed
the Company to pay off $39.7 million of higher-cost funding in the form of FHLB
advances and term repurchase agreements.  This reduction in
collateralized borrowings increased the amount of unpledged securities held by
the Company.  These unpledged available-for-sale securities provide an
additional funding source that is immediately available should a need
arise.





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 has plans to expand the building of a current branch
office.  The Company has not signed a contract with a general
contractor for this project as of the filing of this Form 10-Q but anticipates
that the project will likely cost between $8.0 million and $10.0 million over
the next two to three years.


- 28
-





As of
September 30, 2010, there have been no material changes outside the ordinary
course of business in the Company’s contractual obligations disclosed in the
Company’s 2009 annual report on Form 10-K.





Off-Balance
Sheet Arrangements


As of
September 30, 2010, there were no material changes in the Company's off-balance
sheet arrangements disclosed in the Company’s 2009 annual report on Form
10-K.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.





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
offset 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 generation and pricing, funding sources and
pricing, and off-balance sheet commitments. These decisions are based on
management’s expectations regarding future interest rate movements, the state of
the national and regional economy, and other financial and business risk
factors.  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 as of September
30, 2010.  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. At
September 30, 2010, non-maturing deposit liabilities totaled $353.3 million or
50.71% of total deposit liabilities.





In a
rising rate environment, changes in 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 asset sensitive, net interest income should improve if interest rates
rise since assets will reprice faster than liabilities. Conversely, if interest
rates fall, net interest income should decline, depending on the optionality
(prepayment speeds) of the assets.  When the Company is liability
sensitive, net interest income should fall if rates rise and rise 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, or “shocks”, 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 assess the impact on the Company’s earnings at
September 30, 2010.  The rate shock model reveals that a 50 basis
point decrease in rates would cause an approximate 0.70% annual decrease in net
interest income. The rate shock model reveals that a 50 basis point rise in
rates would cause an approximate 0.89% annual increase in net interest income
and that a 100 basis point rise in rates would cause an approximate 2.24%
increase in net interest income.




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Item
4.  Controls and Procedures.





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





In
designing and evaluating its disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.  The
design of any disclosure controls and procedures also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.





Internal Control over Financial
Reporting.  Management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act).  No changes in the Company’s
internal control over financial reporting occurred during the fiscal quarter
ended September 30, 2010 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.





Because
of its inherent limitations, a system of internal control over financial
reporting may not prevent or detect misstatements.  Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.





PART
II - OTHER INFORMATION





Item
1.  Legal Proceedings.





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





Item
1A.  Risk Factors.





There
have been no material changes in the risk factors faced by the Company from
those disclosed in the Company’s 2009 annual report on Form 10-K and quarterly
report on Form 10-Q for the quarter ended June 30, 2010.





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





The table
below gives information on a monthly basis regarding purchases made by the
Company of its common stock during the three months ended September 30,
2010.


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-





Total
      Number of
                    
                    
                    Maximum
      Number ofTotal
                    
                    
                    
                    
                    
                    Shares
      Purchased
                    
                    
                    Shares
      that May YetNumber
                    
                    
                    Average
                    
                    
                    as
      Part of Publicly
                    
                    
                    Be
      Purchased Underof
      Shares
                    
                    
                    Price
      Paid
                    
                    
                    Announced
      Plans
                    
                    
                    the
      Plans orPeriod
                    
                    Purchased
      (1)
                    
                    
                    Per
      Share
                    
                    
                    or
      Programs
                    
                    
                    Programs7/1/2010-7/31/2010
                    
                    
                    0
                    
                    
                    $
                    0
                    
                    
                    
                    n/a
                    
                    
                    
                    n/a8/1/2010-8/31/2010
                    
                    
                    3,187
                    
                    
                    
                    12.01
                    
                    
                    
                    n/a
                    
                    
                    
                    n/a9/1/2010-9/30/2010
                    
                    
                    233
                    
                    
                    
                    12.11
                    
                    
                    
                    n/a
                    
                    
                    
                    n/aTotal
                    
                    
                    3,420




(1)
            These
      shares were canceled in connection with exercises of stock
      options.  Pursuant to the Company’s stock option plans,
      participants may exercise stock options by surrendering shares of the
      Company’s common stock that the participants already
      own.  Shares surrendered by participants of these plans are
      repurchased at current market value pursuant to the terms of the
      applicable stock options.  During the three months ended
      Spetember 30, 2010, the Company did not repurchase any shares pursuant to
      the Company’s stock repurchase
program.





Item
3.  Defaults Upon Senior Securities.





None.





Item
4.  [Removed and Reserved].





Item
5.  Other Information.





The
Company has made no changes to the procedures by which security holders may
recommend nominees to its board of directors.





Item
6.  Exhibits.





Exhibit No.
                  
                  Description3.1
                  
                  Articles
      of Incorporation of Old Point Financial Corporation, as amended effective
      June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed
      March 12, 2009)3.2
                  
                  Bylaws
      of Old Point Financial Corporation, as amended and restated September 11,
      2007 (incorporated by reference to Exhibit 3.2 to Form 8-K/A filed
      September 20, 2007)31.1
                  
                  Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
                  
                  Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002




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-


SIGNATURES





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





OLD
      POINT FINANCIAL CORPORATIONNovember
      8, 2010
            /s/Robert F. Shuford, Sr.Robert
      F. Shuford, Sr.Chairman,
      President & Chief Executive Officer(Principal
      Executive Officer)November
      8, 2010
            /s/Laurie D. GrabowLaurie
      D. GrabowChief
      Financial Officer & Senior Vice President/Finance(Principal
      Financial & Accounting Officer)





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