##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



---



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



FOR THE QUARTERLY PERIOD ENDED March 31, 2005



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



COMMISSION FILE NUMBER 0-22955



---



BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|VIRGINIA                                                       |  | 54-1838100                          
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)



|                                         |  |           
|---------------------------------------- |  | ----------
|100 SOUTH MAIN STREET, KILMARNOCK, VA    |  | 22482     
|(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) |  | (ZIP CODE)



(804) 435-1171

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)



---



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 is an accelerated filer (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:



2,361,443 shares of common stock on April 22, 2005.



---



---

##### Table of Contents

FORM 10-Q



For the interim period ending
March 31, 2005.



INDEX



|                                                                                                                          |  |   
|------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I - FINANCIAL INFORMATION                                                                                            |  |   
|                                                                                                                          | 
|ITEM 1. FINANCIAL STATEMENTS                                                                                              |  |   
|                                                                                                                          | 
|CONSOLIDATED BALANCE SHEETS MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004                                              |  | 3 
|                                                                                                                          | 
|CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)                          |  | 4 
|                                                                                                                          | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)                      |  | 5 
|                                                                                                                          | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED) |  | 6 
|                                                                                                                          | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                                                    |  | 7 
|                                                                                                                          | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                             |  | 11
|                                                                                                                          | 
|FINANCIAL HIGHLIGHTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO MARCH 31, 2004 (UNAUDITED)                     |  | 12
|                                                                                                                          | 
|NET INTEREST INCOME ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO MARCH 31, 2004 (UNAUDITED)             |  | 14
|                                                                                                                          | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        |  | 17
|                                                                                                                          | 
|ITEM 4. CONTROLS AND PROCEDURES                                                                                           |  | 17
|                                                                                                                          | 
|PART II - OTHER INFORMATION                                                                                               |  |   
|                                                                                                                          | 
|ITEM 1. LEGAL PROCEEDINGS                                                                                                 |  | 18
|                                                                                                                          | 
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                       |  | 18
|                                                                                                                          | 
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                                   |  | 18
|                                                                                                                          | 
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                               |  | 18
|                                                                                                                          | 
|ITEM 5. OTHER INFORMATION                                                                                                 |  | 18
|                                                                                                                          | 
|ITEM 5b. CHANGES IN NOMINATING PROCESS                                                                                    |  | 18
|                                                                                                                          | 
|ITEM 6. EXHIBITS                                                                                                          |  | 18



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. FINANCIAL STATEMENTS.



Bay Banks of Virginia, Inc.

Consolidated Balance Sheets



|                                                                                  |  |                |             |                   |   |            
|--------------------------------------------------------------------------------- |  | -------------- | ----------- | ----------------- | - | -----------
|                                                                                  |  | March 31, 2005 |             | December 31, 2004
|                                                                                  |  | (unaudited)    |             |                  
|ASSETS                                                                            |  |                |             |                   |   |            
|Cash and due from banks                                                           |  | $              | 6,123,738   |                   | $ | 8,572,672  
|Interest-bearing deposits                                                         |  |                | 107,732     |                   |   | 104,949    
|Federal funds sold                                                                |  |                | 10,922,019  |                   |   | 13,989,278 
|Securities available for sale, at fair value                                      |  |                | 51,422,196  |                   |   | 51,916,490 
|Securities held to maturity, at amortized cost (fair value $420,095 and $426,320) |  |                | 433,133     |                   |   | 429,815    
|Loans, net of allowance for loan losses of of $2,163,401 and $2,032,185           |  |                | 216,985,480 |                   |   | 213,350,454
|Premises and equipment, net                                                       |  |                | 9,744,651   |                   |   | 9,086,442  
|Accrued interest receivable                                                       |  |                | 1,276,458   |                   |   | 1,163,976  
|Other real estate owned                                                           |  |                | 27,671      |                   |   | 16,601     
|Core deposit intangible                                                           |  |                | 2,807,842   |                   |   | 2,807,842  
|Other assets                                                                      |  |                | 1,900,351   |                   |   | 2,031,067  
|                                                                                  |  |                |             |                   |   |            
|Total assets                                                                      |  | $              | 301,751,271 |                   | $ | 303,469,586
|                                                                                  |  |                |             |                   |   |            
|LIABILITIES                                                                       |  |                |             |                   |   |            
|Non-interest bearing deposits                                                     |  | $              | 41,022,798  |                   | $ | 38,877,338 
|Savings and interest-bearing demand deposits                                      |  |                | 132,263,092 |                   |   | 133,887,530
|Time deposits                                                                     |  |                | 87,834,327  |                   |   | 89,181,113 
|                                                                                  |  |                |             |                   |   |            
|Total deposits                                                                    |  |                | 261,120,217 |                   |   | 261,945,981
|Securities sold under repurchase agreements                                       |  |                | 5,581,457   |                   |   | 6,342,456  
|Federal Home Loan Bank advance                                                    |  |                | 7,500,000   |                   |   | 7,500,000  
|Other liabilities                                                                 |  |                | 1,854,092   |                   |   | 1,861,627  
|                                                                                  |  |                |             |                   |   |            
|Total liabilities                                                                 |  | $              | 276,055,766 |                   | $ | 277,650,064
|                                                                                  |  |                |             |                   |   |            
|SHAREHOLDERS EQUITY                                                              |  |                |             |                   |   |            
|Common stock ($5 par value;                                                       |  |                |             |                   |   |            
|Authorized - 5,000,000 shares;                                                    |  |                |             |                   |   |            
|Outstanding - 2,360,881 and 2,354,187 shares)                                     |  | $              | 11,804,405  |                   | $ | 11,770,937 
|Additional paid-in capital                                                        |  |                | 4,685,285   |                   |   | 4,621,295  
|Retained earnings                                                                 |  |                | 9,099,339   |                   |   | 8,860,506  
|Accumulated other comprehensive income, net                                       |  |                | 106,476     |                   |   | 566,784    
|                                                                                  |  |                |             |                   |   |            
|Total shareholders equity                                                        |  | $              | 25,695,505  |                   | $ | 25,819,522 
|                                                                                  |  |                |             |                   |   |            
|Total liabilities and shareholders equity                                        |  | $              | 301,751,271 |                   | $ | 303,469,586
|                                                                                  |  |                |             |                   |   |            



See Notes to Consolidated Financial
Statements.



3



---

##### Table of Contents

Bay Banks of Virginia, Inc.



Consolidated Statements of Income

(Unaudited)



|                                                      |  |                |           |                |   |          
|----------------------------------------------------- |  | -------------- | --------- | -------------- | - | ---------
|Quarters ended                                        |  | March 31, 2005 |           | March 31, 2004
|INTEREST INCOME                                       |  |                |           |                |   |          
|Loans, including fees                                 |  | $              | 3,218,148 |                | $ | 2,819,926
|Securities:                                           |  |                |           |                |   |          
|Taxable                                               |  |                | 300,896   |                |   | 350,884  
|Tax-exempt                                            |  |                | 186,500   |                |   | 200,381  
|Federal funds sold                                    |  |                | 76,434    |                |   | 29,238   
|                                                      |  |                |           |                |   |          
|Total interest income                                 |  |                | 3,781,978 |                |   | 3,400,429
|                                                      |  |               
|INTEREST EXPENSE                                      |  |                |           |                |   |          
|Deposits                                              |  |                | 1,080,796 |                |   | 1,057,899
|Securities sold to repurchase and fed funds purchased |  |                | 15,760    |                |   | 5,911    
|Federal Home Loan Bank advance                        |  |                | 36,925    |                |   |         
|                                                      |  |                |           |                |   |          
|Total interest expense                                |  |                | 1,133,481 |                |   | 1,063,810
|                                                      |  |               
|Net Interest Income                                   |  |                | 2,648,497 |                |   | 2,336,619
|                                                      |  |               
|Provision for loan losses                             |  |                | 137,500   |                |   | 75,000   
|                                                      |  |                |           |                |   |          
|Net interest income after provision for loan losses   |  |                | 2,510,997 |                |   | 2,261,619
|                                                      |  |               
|NONINTEREST INCOME                                    |  |                |           |                |   |          
|Income from fiduciary activities                      |  |                | 174,457   |                |   | 165,006  
|Service charges & fees on deposit accounts            |  |                | 172,532   |                |   | 137,536  
|Other service charges and fees                        |  |                | 208,380   |                |   | 182,289  
|Secondary market lending fees                         |  |                | 15,165    |                |   | 21,481   
|Other real estate gains                               |  |                | 58        |                |   | 7,136    
|Securities gains                                      |  |                | 190       |                |   | 154,599  
|Other income                                          |  |                | 35,839    |                |   | 23,169   
|                                                      |  |                |           |                |   |          
|Total noninterest income                              |  |                | 606,621   |                |   | 691,216  
|                                                      |  |               
|NONINTEREST EXPENSES                                  |  |                |           |                |   |          
|Salaries and employee benefits                        |  |                | 1,234,748 |                |   | 1,405,295
|Occupancy expense                                     |  |                | 369,323   |                |   | 358,762  
|Bank franchise tax                                    |  |                | 56,206    |                |   | 56,455   
|Visa expense                                          |  |                | 97,062    |                |   | 80,414   
|Telephone expense                                     |  |                | 43,285    |                |   | 41,196   
|Other expense                                         |  |                | 488,725   |                |   | 445,376  
|                                                      |  |                |           |                |   |          
|Total noninterest expenses                            |  |                | 2,289,349 |                |   | 2,387,498
|                                                      |  |               
|Net Income before income taxes                        |  |                | 828,269   |                |   | 565,337  
|                                                      |  |               
|Income tax expense                                    |  |                | 224,496   |                |   | 168,618  
|                                                      |  |                |           |                |   |          
|Net income                                            |  | $              | 603,773   |                | $ | 396,719  
|                                                      |  |                |           |                |   |          
|Average basic shares outstanding                      |  |                | 2,354,218 |                |   | 2,325,920
|Earnings per share, basic                             |  | $              | 0.26      |                | $ | 0.17     
|                                                      |  |               
|Average diluted shares outstanding                    |  |                | 2,370,912 |                |   | 2,352,716
|Earnings per share, diluted                           |  | $              | 0.25      |                | $ | 0.17     



See Notes to Consolidated Financial
Statements.



4



---

##### Table of Contents

Banks of Virginia, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                            |  |                |            |   |                |   |             |  
|------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | -------------- | - | ----------- | -
|Quarters ended                                                                              |  | March 31, 2005 |            |   | March 31, 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                        |  |                |            |   |                |   |             |  
|Net income                                                                                  |  | $              | 603,773    |   |                | $ | 396,719     |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                |            |   |                |   |             |  
|Depreciation                                                                                |  |                | 191,089    |   |                |   | 186,794     |  
|Net amortization and accretion of securities                                                |  |                | 6,835      |   |                |   | (15,158     | )
|Provision for loan losses                                                                   |  |                | 137,500    |   |                |   | 75,000      |  
|Net (gain) on sale of securities                                                            |  |                | (190       | ) |                |   | (154,599    | )
|(Gain) on sale of other real estate owned                                                   |  |                | (58        | ) |                |   | (7,136      | )
|Increase/ (decrease) in accrued income and other assets                                     |  |                | 18,234     |   |                |   | (492,232    | )
|Increase / (decrease) in other liabilities                                                  |  |                | 229,594    |   |                |   | (87,194     | )
|                                                                                            |  |                |            |   |                |   |             |  
|Net cash provided by (used in) operating activities                                         |  |                | 1,186,777  |   |                |   | (97,806     | )
|                                                                                            |  |                |            |   |                |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                        |  |                |            |   |                |   |             |  
|Proceeds from maturities of available-for-sale securities                                   |  |                | 1,062,750  |   |                |   | 2,399,803   |  
|Proceeds from sales of available-for-sale securities                                        |  |                | 150,000    |   |                |   | 18,166,037  |  
|Purchases of available-for-sale securities                                                  |  |                | (1,425,855 | ) |                |   | (8,439,776  | )
|(Increase) in interest bearing deposits                                                     |  |                | (2,783     | ) |                |   | (13,810     | )
|(Increase) / decrease in fed funds sold                                                     |  |                | 3,067,259  |   |                |   | (1,478,476  | )
|(Increase) in loans outstanding                                                             |  |                | (3,783,539 | ) |                |   | (12,778,010 | )
|Purchases of premises and equipment                                                         |  |                | (849,298   | ) |                |   | (249,956    | )
|Proceeds from sale of other real estate owned                                               |  |                |           |   |                |   | 4,492       |  
|                                                                                            |  |                |            |   |                |   |             |  
|Net cash (used in) investing activities                                                     |  |                | (1,781,466 | ) |                |   | (2,389,696  | )
|                                                                                            |  |                |            |   |                |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                        |  |                |            |   |                |   |             |  
|Increase in demand, savings, and other interest bearing deposits                            |  |                | 521,022    |   |                |   | 5,430,293   |  
|(Decrease) in time deposits                                                                 |  |                | (1,346,786 | ) |                |   | (957,751    | )
|Net (decrease) in securities sold under repurchase agreements                               |  |                | (760,999   | ) |                |   | (1,260,554  | )
|Proceeds from issuance of common stock                                                      |  |                | 100,468    |   |                |   | 100,555     |  
|Dividends paid                                                                              |  |                | (364,940   | ) |                |   | (348,815    | )
|Repurchase of common stock                                                                  |  |                | (3,010     | ) |                |   | (10,499     | )
|                                                                                            |  |                |            |   |                |   |             |  
|Net cash provided by / (used in) financing activities                                       |  |                | (1,854,245 | ) |                |   | 2,953,229   |  
|                                                                                            |  |                |            |   |                |   |             |  
|Net increase / (decrease) in cash & due from Banks                                          |  |                | (2,448,934 | ) |                |   | 465,727     |  
|Cash & due from Banks at beginning of period                                                |  |                | 8,572,672  |   |                |   | 7,762,030   |  
|                                                                                            |  |                |            |   |                |   |             |  
|Cash & due from Banks at end of period                                                      |  | $              | 6,123,738  |   |                | $ | 8,227,757   |  
|                                                                                            |  |                |            |   |                |   |             |  
|SUPPLEMENTAL DISCLOSURES                                                                    |  |                |            |   |                |   |             |  
|Interest paid                                                                               |  | $              | 1,118,799  |   |                | $ | 1,059,258   |  
|Unrealized gain (loss) on investment securities                                             |  | $              | (697,436   | ) |                | $ | 626,468     |  
|Loans transferred to other real estate owned                                                |  | $              | 11,070     |   |                | $ | 60,180      |  



See Notes to Consolidated Financial
Statements.



5



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Consolidated Statement of Changes in Shareholders Equity

(Unaudited)



|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | --------------------------------------------- | - |  | ----------------------- | --------- | - |  | - | ---------- | -
|                                                                                                        |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | Accumulated Other Comprehensive Income/(Loss) |   |  | TotalShareholdersEquity |          
|Balance on 1/1/2004                                                                                     |  | $           | 11,630,401 |   |                          | $ | 4,336,929 |                  |  | $ | 8,146,613                                     |   |  | $                       | 964,461   |   |  | $ | 25,078,404 |  
|Comprehensive income:                                                                                   |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Net income                                                                                              |  |             |            |   |                          |   |           |                  |  |   | 396,719                                       |   |  |                         |           |   |  |   | 396,719    |  
|Other comprehensive income:                                                                             |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of $160,436   |  |             |           |   |                          |   |          |                  |  |   |                                              |   |  |                         | 311,434   |   |  |   | 311,434    |  
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Reclassification adjustment for securities gains Included in net income, net of taxes of $52,564        |  |             |           |   |                          |   |          |                  |  |   |                                              |   |  |                         | 102,035   |   |  |   | 102,035    |  
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Total comprehensive income                                                                              |  |             |           |   |                          |   |          |                  |  |   | 396,719                                       |   |  |                         | 413,469   |   |  |   | 810,188    |  
|Cash dividends paid  $0.15/share                                                                       |  |             |            |   |                          |   |           |                  |  |   | (348,815                                      | ) |  |                         |           |   |  |   | (348,815   | )
|Stock repurchases                                                                                       |  |             | (3,250     | ) |                          |   | (1,212    | )                |  |   | (6,037                                        | ) |  |                         |           |   |  |   | (10,499    | )
|Sale of common stock:                                                                                   |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Dividends reinvested                                                                                    |  |             | 32,437     |   |                          |   | 68,118    |                  |  |   |                                              |   |  |                         |          |   |  |   | 100,555    |  
|Stock options exercised                                                                                 |  |             |           |   |                          |   |          |                  |  |   |                                              |   |  |                         |          |   |  |   |           |  
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Balance on 3/31/04                                                                                      |  | $           | 11,659,588 |   |                          | $ | 4,403,835 |                  |  | $ | 8,188,480                                     |   |  | $                       | 1,377,930 |   |  | $ | 25,629,833 |  
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Balance on 1/1/2005                                                                                     |  | $           | 11,770,937 |   |                          | $ | 4,621,295 |                  |  | $ | 8,860,506                                     |   |  | $                       | 566,784   |   |  | $ | 25,819,522 |  
|Comprehensive income:                                                                                   |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Net income                                                                                              |  |             |            |   |                          |   |           |                  |  |   | 603,773                                       |   |  |                         |           |   |  |   | 603,773    |  
|Other comprehensive income:                                                                             |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of ($237,193) |  |             |           |   |                          |   |          |                  |  |   |                                              |   |  |                         | (460,434  | ) |  |   | (460,434   | )
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Reclassification adjustment for securities gains included in net income, net of taxes of $64            |  |             |           |   |                          |   |          |                  |  |   |                                              |   |  |                         | 126       |   |  |   | 126        |  
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Total comprehensive income                                                                              |  |             |           |   |                          |   |          |                  |  |   | 603,773                                       |   |  |                         | (460,308  | ) |  |   | 143,465    |  
|Cash dividends paid  $0.155/share                                                                      |  |             |            |   |                          |   |           |                  |  |   | (364,940                                      | ) |  |                         |           |   |  |   | (364,940   | )
|Stock repurchases                                                                                       |  |             | (1,000     | ) |                          |   | (2,010    | )                |  |   |                                              |   |  |                         |           |   |  |   | (3,010     | )
|Sale of common stock:                                                                                   |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Dividends reinvested                                                                                    |  |             | 27,168     |   |                          |   | 58,410    |                  |  |   |                                              |   |  |                         |          |   |  |   | 85,578     |  
|Stock options exercised                                                                                 |  |             | 7,300      |   |                          |   | 7,590     |                  |  |   |                                              |   |  |                         |          |   |  |   | 14,890     |  
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  
|Balance on 3/31/05                                                                                      |  | $           | 11,804,405 |   |                          | $ | 4,685,285 |                  |  | $ | 9,099,339                                     |   |  | $                       | 106,476   |   |  | $ | 25,695,505 |  
|                                                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                         |           |   |  |   |            |  



See Notes to Consolidated Financial
Statements.



6



---

##### Table of Contents

Notes to Consolidated Financial Statements (unaudited)



Note 1:



Bay Banks of
Virginia, Inc. (the Company) owns 100% of the Bank of Lancaster (the Bank) and 100% of Bay Trust Company of Virginia, Inc. (the Trust Company). The Consolidated Financial Statements include the accounts of the
Bank, the Trust Company, and Bay Banks of Virginia.



The
accounting and reporting policies of the registrant conform to accounting principles generally accepted in the United States of America and to the general practices within the banking industry. However, in managements opinion, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results to be
expected for the full year.



Certain amounts in the
consolidated financial statements have been reclassified to conform to current year presentations.



These consolidated financial statements should be read in conjunction with the financial statements and notes to financial statements included in the
registrants 2004 Annual Report to Shareholders.



As of
March 31, 2005, the Company has four stock-based compensation plans. The Company accounts for the plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees and related interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to market value of the underlying common stock on the date of the grant.
The following table illustrates the effect on net income and earnings per share for the three months ended March 31, 2005 and 2004 if the Company had applied fair value recognition provisions of the Financial Accounting Standards Board
(FASB) Statement No. 123, Accounting for Stock-Based Compensation.



|                                                                                                                           |  |                          |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                           |  | Quarters Ended March 31, |        
|                                                                                                                           |  | 2005                     |         |   | 2004 |  
|Net income, as reported                                                                                                    |  | $                        | 603,773 |   |      | $ | 396,719 |  
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |                          | (9,814  | ) |      |   | (10,563 | )
|                                                                                                                           |  |                          |         |   |      |   |         |  
|Pro forma net income                                                                                                       |  | $                        | 593,959 |   |      | $ | 386,156 |  
|                                                                                                                           |  |                          |         |   |      |   |         |  
|Earnings per share:                                                                                                        |  |                          |         |   |      |   |         |  
|Basic - as reported                                                                                                        |  | $                        | 0.26    |   |      | $ | 0.17    |  
|Basic - pro forma                                                                                                          |  | $                        | 0.25    |   |      | $ | 0.16    |  
|Diluted - as reported                                                                                                      |  | $                        | 0.25    |   |      | $ | 0.17    |  
|Diluted - pro forma                                                                                                        |  | $                        | 0.25    |   |      | $ | 0.16    |  



Note 2: Securities



The carrying amounts of debt and other securities and their approximate
fair values at March 31, 2005, and December 31, 2004, follow:



|                                                         |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|-------------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities March 31, 2005 (unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies                                 |  | $             | 12,632,155 |                      | $ | 9,238                 |  | $ | (265,839   | ) |  | $ | 12,375,554
|State and municipal obligations                          |  |               | 29,879,864 |                      |   | 463,569               |  |   | (172,454   | ) |  |   | 30,170,979
|Corporate bonds                                          |  |               | 7,488,649  |                      |   | 126,814               |  |   |           |   |  |   | 7,615,463 
|Restricted securities                                    |  |               | 1,260,200  |                      |   |                      |  |   |           |   |  |   | 1,260,200 
|                                                         |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|                                                         |  | $             | 51,260,868 |                      | $ | 599,621               |  | $ | (438,293   | ) |  | $ | 51,422,196



7



---

##### Table of Contents

|                                                       |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|------------------------------------------------------ |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities December 31,
2004        |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses   |  |   | Fair Value
|U.S. Government agencies                               |  | $             | 12,178,591 |                      | $ | 25,767                  |  | $ | (85,636    | ) |  | $ | 12,118,722
|State and municipal obligations                        |  |               | 30,105,661 |                      |   | 773,164                 |  |   | (45,322    | ) |  |   | 30,833,503
|Corporate bonds                                        |  |               | 7,539,474  |                      |   | 190,791                 |  |   |           |   |  |   | 7,730,265 
|Restricted securities                                  |  |               | 1,234,000  |                      |   |                        |  |   |           |   |  |   | 1,234,000 
|                                                       |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                       |  | $             | 51,057,726 |                      | $ | 989,722                 |  | $ | (130,958   | ) |  | $ | 51,916,490
|                                                       |  |               |            |                     
|Held-to-maturity securities March 31, 2005
(unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|State and municipal obligations                        |  | $             | 433,133    |                      | $ |                        |  | $ | (13,038    | ) |  | $ | 420,095   
|                                                       |  |               |            |                     
|Held-to-maturity securities December 31,
2004          |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|State and municipal obligations                        |  | $             | 429,815    |                      | $ |                        |  | $ | (3,495     | ) |  | $ | 426,320   



Securities with a
market value of $12.2 million were pledged as collateral for public deposits, repurchase agreements and for other purposes as required by law as of March 31, 2005. The market value of pledged securities at year-end 2004 was $11.9 million.



Securities in an unrealized loss position at March 31, 2005,
and December 31, 2004, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate movements as there is minimal credit risk exposure in these investments. All securities are investment
grade or better and all losses are temporary. Bonds with unrealized loss positions at March 31, 2005, included 26 federal agencies and 37 municipal bonds, as shown below.



|                                      |  |                     |            |                   |   |            |  |                |           |            |   |                |  |   |            |  |   |        
|------------------------------------- |  | ------------------- | ---------- | ----------------- | - | ---------- |  | -------------- | --------- | ---------- | - | -------------- |  | - | ---------- |  | - | -------
|                                      |  | Less than 12 months |            | 12 months or more |   | Total     
|March 31, 2005                        |  | Fair Value          |            | UnrealizedLoss    |   | Fair Value |  | UnrealizedLoss |           | Fair Value |   | UnrealizedLoss
|US Government agencies                |  | $                   | 8,500,591  |                   | $ | 151,119    |  | $              | 3,585,927 |            | $ | 114,719        |  | $ | 12,086,518 |  | $ | 265,839
|States and municipal obligation       |  |                     | 7,695,133  |                   |   | 05,319     |  |                | 2,590,678 |            |   | 80,174         |  |   | 10,285,811 |  |   | 185,492
|                                      |  |                     |            |                   |   |            |  |                |           |            |   |                |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 16,195,724 |                   | $ | 256,438    |  | $              | 6,176,605 |            | $ | 194,893        |  | $ | 22,372,329 |  | $ | 451,331
|                                      |  |                     |            |                   |   |            |  |                |           |            |   |                |  |   |            |  |   |        
|                                      |  |                     |           
|                                      |  | Less than 12 months |            | 12 months or more |   | Total     
|December 31, 2004                     |  | Fair Value          |            | UnrealizedLoss    |   | Fair Value |  | UnrealizedLoss |           | Fair Value |   | UnrealizedLoss
|US Government agencies                |  | $                   | 7,907,795  |                   | $ | 53,196     |  | $              | 1,652,560 |            | $ | 32,440         |  | $ | 9,560,355  |  | $ | 85,636 
|States and municipal obligation       |  |                     | 4,715,650  |                   |   | 36,936     |  |                | 552,331   |            |   | 11,881         |  |   | 5,267,981  |  |   | 48,817 
|                                      |  |                     |            |                   |   |            |  |                |           |            |   |                |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 12,623,445 |                   | $ | 90,132     |  | $              | 2,204,891 |            | $ | 44,321         |  | $ | 14,828,336 |  | $ | 134,453
|                                      |  |                     |            |                   |   |            |  |                |           |            |   |                |  |   |            |  |   |        



No impairment has been
recognized on any of the securities in a loss position because of managements intent and demonstrated ability to hold securities to scheduled maturity or call dates.



8



---

##### Table of Contents

Note 3: Loans



The components of loans were as follows:



|                                                             |  |                |             |   |                   |   |             |  
|------------------------------------------------------------ |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | March 31, 2005 |             |   | December 31, 2004 |  
|                                                             |  | (unaudited)    |             |   |                   |  
|Mortgage loans on real estate:                               |  |                |             |   |                   |   |             |  
|Construction                                                 |  | $              | 31,569,116  |   |                   | $ | 31,184,514  |  
|Secured by farmland                                          |  |                | 2,017,226   |   |                   |   | 2,017,226   |  
|Secured by 1-4 family residential                            |  |                | 122,409,911 |   |                   |   | 120,060,032 |  
|Other real estate loans                                      |  |                | 28,266,763  |   |                   |   | 28,050,397  |  
|Loans to farmers (except those secured by real estate)       |  |                | 582,832     |   |                   |   | 71,810      |  
|Commercial and industrial loans (not secured by real estate) |  |                | 22,855,048  |   |                   |   | 21,519,358  |  
|Consumer installment loans                                   |  |                | 9,337,990   |   |                   |   | 9,897,965   |  
|All other loans                                              |  |                | 901,975     |   |                   |   | 1,296,370   |  
|Net deferred loan costs and fees                             |  |                | 1,208,020   |   |                   |   | 1,284,967   |  
|                                                             |  |                |             |   |                   |   |             |  
|Total loans                                                  |  | $              | 219,148,881 |   |                   | $ | 215,382,639 |  
|                                                             |  |               
|Allowance for loan losses                                    |  |                | (2,163,401  | ) |                   |   | (2,032,185  | )
|                                                             |  |                |             |   |                   |   |             |  
|Loans, net                                                   |  | $              | 216,985,480 |   |                   | $ | 213,350,454 |  



Loans upon which the
accrual of interest has been discontinued totaled $1.8 million as of March 31, 2005, and $1.3 million as of December 31, 2004.



Note 4: Allowance for Loan Losses



An analysis of the change in the allowance for loan losses follows:



|                           |  |                |           |   |                   |   |           |                |  |   |           |  
|-------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -------------- |  | - | --------- | -
|                           |  | March 31, 2005 |           |   | December 31, 2004 |   |           | March 31, 2004 | 
|                           |  | (unaudited)    |           |   |                   |   |           | (unaudited)    | 
|Balance, beginning of year |  | $              | 2,032,185 |   |                   | $ | 1,901,576 |                |  | $ | 1,901,576 |  
|Provision for loan losses  |  |                | 137,500   |   |                   |   | 300,000   |                |  |   | 75,000    |  
|Recoveries                 |  |                | 6,821     |   |                   |   | 31,874    |                |  |   | 10,456    |  
|Loans charged off          |  |                | (13,105   | ) |                   |   | (201,265  | )              |  |   | (77,874   | )
|                           |  |                |           |   |                   |   |           |                |  |   |           |  
|Balance, end of period     |  | $              | 2,163,401 |   |                   | $ | 2,032,185 |                |  | $ | 1,909,158 |  
|                           |  |                |           |   |                   |   |           |                |  |   |           |  



Information about impaired loans is as
follows:



|                                                                                 |  |                |           |                   |   |        
|-------------------------------------------------------------------------------- |  | -------------- | --------- | ----------------- | - | -------
|                                                                                 |  | March 31, 2005 |           | December 31, 2004
|Impaired loans for which an allowance has been provided                          |  | $              | 1,570,708 |                   | $ | 979,701
|Impaired loans for which no allowance has been provided                          |  |                |          |                   |   |       
|                                                                                 |  |                |           |                   |   |        
|Total impaired loans                                                             |  | $              | 1,570,708 |                   | $ | 979,701
|                                                                                 |  |                |           |                   |   |        
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $              | 574,502   |                   | $ | 572,930
|                                                                                 |  |                |           |                   |   |        
|Average balance impaired loans                                                   |  | $              | 1,571,346 |                   | $ | 983,451
|                                                                                 |  |                |           |                   |   |        
|Interest income recognized                                                       |  | $              | 7,055     |                   | $ | 3      
|                                                                                 |  |                |           |                   |   |        



9



---

##### Table of Contents

Note 5: Earnings per share



The following table shows the weighted average number of shares used in computing earnings per share and the effect on the
weighted average number of shares of dilutive potential common stock.



|                               |               |                |                 |                |               |  |                 |  |   |     
|------------------------------ | ------------- | -------------- | --------------- | -------------- | ------------- |  | --------------- |  | - | ----
|Three months ended (Unaudited) |               | March 31, 2005 |                 | March 31, 2004
|                               | AverageShares |                | Per shareAmount |                | AverageShares |  | Per shareAmount
|Basic earnings per share       |               | 2,354,218      |                 | $              | 0.26          |  | 2,325,920       |  | $ | 0.17
|Effect of dilutive securities: |               |                |                 |                |               |  |                 |  |   |     
|Stock options                  |               | 16,694         |                 |                |               |  | 26,796          |  |   |     
|Diluted earnings per share     |               | 2,370,912      |                 | $              | 0.25          |  | 2,352,716       |  | $ | 0.17



As of March 31, 2005, and March 31,
2004, options on 89,694 shares and 74,308 shares, respectively, were not included in computing diluted earnings per share, because their effects were anti-dilutive.



Note 6: Unidentifiable Intangibles



The Company has unidentifiable intangibles recorded on the consolidated financial statements relating to the purchase of five branches. The balance of the
intangibles at March 31, 2005, as reflected on the consolidated balance sheet, was $2,807,842. Management has determined that these purchases qualified as acquisitions of businesses, and therefore discontinued amortization, effective January 1,
2002. Based on managements assessment, there is no impairment in value at March 31, 2005.



Note 7: Employee Benefit Plans



Components of Net Periodic Benefit Cost

(unaudited)



|                                                |  |                  |         |   |                         |   |         |      |  |      |        |  |   |       
|----------------------------------------------- |  | ---------------- | ------- | - | ----------------------- | - | ------- | ---- |  | ---- | ------ |  | - | ------
|                                                |  | Pension Benefits |         |   | Post RetirementBenefits
|Three months ended March 31,                    |  | 2005             |         |   | 2004                    |   |         | 2005 |  | 2004
|Service cost                                    |  | $                | 76,347  |   |                         | $ | 59,253  |      |  | $    | 4,254  |  | $ | 3,829 
|Interest cost                                   |  |                  | 49,447  |   |                         |   | 41,555  |      |  |      | 8,343  |  |   | 8,152 
|Expected return on plan assets                  |  |                  | (49,529 | ) |                         |   | (33,689 | )    |  |      |       |  |   |      
|Amortization of unrecognized prior service cost |  |                  | 4,093   |   |                         |   | 4,093   |      |  |      |       |  |   |      
|Amortization of unrecognized net Loss           |  |                  | 15,887  |   |                         |   | 11,324  |      |  |      | 3,289  |  |   | 5,000 
|Amortization of transition obligation           |  |                  |        |   |                         |   |        |      |  |      | 728    |  |   | 728   
|                                                |  |                  |         |   |                         |   |         |      |  |      |        |  |   |       
|Net periodic benefit cost                       |  | $                | 96,245  |   |                         | $ | 82,536  |      |  | $    | 16,614 |  | $ | 17,709



Employer Contributions



The Company disclosed in its Annual Report on Form 10-K
its consolidated financial statements for the year-ended December 31, 2004, that it expected to contribute $324,479 to its pension plan and $27,843 to its post-retirement benefit plan in 2005. As of March 31, 2005, a contribution of $324,479 and
$27,843, respectively, has been made. The Company presently anticipates no further contributions during the remainder of 2005.



Note 8: FHLB Advance



On March 31, 2005, the Company had Federal Home Loan Bank of Atlanta (FHLB) debt consisting of one advance for $7.5 million. The interest rate
is variable at the three-month London Interbank Offering Rate (LIBOR) minus 50 basis points until May 15, 2005, after which it is fixed at 3.92%, maturing on May 14, 2007. At March 31, 2005, the actual rate was 2.59%. Interest is payable
quarterly. This instrument has an early conversion option which gives FHLB the option to convert, in whole only, into a three-month LIBOR-based floating rate advance, effective May 16, 2005. If the FHLB elects to convert, the Company may elect to
terminate, in whole or in part, without a prepayment fee.



10



---

##### Table of Contents

Advances on the FHLB line are secured by a blanket lien on qualified 1 to 4 family residential real
estate loans. Immediate available credit, as of March 31, 2005, was $11.5 million.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion is intended to assist in understanding the results of operations and the financial condition of Bay Banks of Virginia, Inc. (the
Company), a bank holding company. This discussion should be read in conjunction with the above consolidated financial statements and the notes thereto.



CRITICAL ACCOUNTING POLICIES



GENERAL. The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States
(GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of
factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be
present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could change.



ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (1) Statement of
Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The use of these values is
inherently subjective and our actual losses could be greater or less than the estimates.



The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Managements periodic evaluation of the adequacy of the allowance is based on past loan loss
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral, and current economic conditions.



RECENT ACCOUNTING PRONOUNCEMENTS.



On December 16, 2004, the Financial Accounting Standards Board issued
Statement No. 123R (revised 2004), Share-Based Payment, (FAS 123R) that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company
or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using
the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual periods
beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Corporations results of operations at the present time.



On March 29, 2005, the SEC Staff issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff
regarding the interaction of FAS123R and certain SEC rules and regulations and provides the SEC staffs view regarding the valuation of share-based payment arrangements for public companies.



SAB 107 does not impact the Corporations results of operations at the
present time.





11



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Financial Highlights (unaudited)



|                                                        |  |                |           |   |                |   |           |        |  |      |  
|------------------------------------------------------- |  | -------------- | --------- | - | -------------- | - | --------- | ------ |  | ---- | -
|Three months ended (Dollars in thousands)               |  | March 31, 2005 |           |   | March 31, 2004 |   |           | Change | 
|FINANCIAL CONDITION                                     |  |                |           |   |                |   |           |        |  |      |  
|Average assets                                          |  | $              | 302,141   |   |                | $ | 292,655   |        |  | 3.2  | %
|Average interest-earning assets                         |  |                | 281,422   |   |                |   | 266,237   |        |  | 5.7  | %
|Average earning assets to total average assets          |  |                | 93.1      | % |                |   | 91.0      | %      |  | 2.3  | %
|Period-end interest-bearing liabilities                 |  | $              | 233,178   |   |                | $ | 232,159   |        |  | 0.4  | %
|Average interest-bearing liabilities                    |  |                | 236,088   |   |                |   | 227,303   |        |  | 3.9  | %
|Average equity, including FAS 115 adjustment            |  |                | 26,138    |   |                |   | 25,231    |        |  | 3.6  | %
|Tier 1 capital                                          |  |                | 22,781    |   |                |   | 21,444    |        |  | 6.2  | %
|Net risk-weighted assets                                |  |                | 221,822   |   |                |   | 202,239   |        |  | 9.7  | %
|Tier 2 capital                                          |  |                | 2,163     |   |                |   | 1,909     |        |  | 13.3 | %
|                                                        |  |                |          
|RESULTS OF OPERATIONS                                   |  |                |           |   |                |   |           |        |  |      |  
|Net interest income before provision                    |  | $              | 2,648     |   |                | $ | 2,337     |        |  | 13.3 | %
|Net income                                              |  |                | 604       |   |                |   | 397       |        |  | 52.1 | %
|Annualized yield on average interest-earning assets     |  |                | 5.51      | % |                |   | 5.26      | %      |  | 4.8  | %
|Annualized cost of average interest-bearing liabilities |  |                | 1.92      | % |                |   | 1.88      | %      |  | 2.7  | %
|Annualized net yield on average interest-earning assets |  |                | 3.90      | % |                |   | 3.66      | %      |  | 6.6  | %
|Annualized net interest rate apread                     |  |                | 3.59      | % |                |   | 3.38      | %      |  | 6.2  | %
|                                                        |  |                |          
|RATIOS                                                  |  |                |           |   |                |   |           |        |  |      |  
|Total capital to risk-weighted assets (10% min)         |  |                | 11.2      | % |                |   | 11.5      | %      |  | -2.6 | %
|Tier 1 capital to risk-weighted assets (6% min)         |  |                | 10.3      | % |                |   | 10.6      | %      |  | -2.8 | %
|Leverage ratio (5% min)                                 |  |                | 7.6       | % |                |   | 7.4       | %      |  | 2.7  | %
|Annualized return on average assets (ROA)               |  |                | 0.8       | % |                |   | 0.5       | %      |  | 60.0 | %
|Annualized return on average equity (ROE)               |  |                | 9.5       | % |                |   | 6.3       | %      |  | 50.8 | %
|                                                        |  |                |          
|Period-end basic shares outstanding                     |  |                | 2,360,881 |   |                |   | 2,331,918 |        |  | 1.2  | %
|Average basic shares outstanding                        |  |                | 2,354,218 |   |                |   | 2,325,920 |        |  | 1.2  | %
|Average diluted shares outstanding                      |  |                | 2,370,912 |   |                |   | 2,350,336 |        |  | 0.8  | %
|                                                        |  |                |          
|PER SHARE DATA                                          |  |                |           |   |                |   |           |        |  |      |  
|Diluted earnings per average share (EPS) (three months) |  | $              | 0.25      |   |                | $ | 0.17      |        |  | 47.1 | %
|Cash dividends per average share (three months)         |  |                | 0.155     |   |                |   | 0.15      |        |  | 6.7  | %
|Book value per share                                    |  |                |           |   |                |   |           |        |  |      |  
|before accumulated comprehensive income/loss            |  |                | 10.84     |   |                |   | 10.40     |        |  | 4.2  | %
|after accumulated comprehensive income/loss             |  |                | 10.88     |   |                |   | 10.99     |        |  | -1.0 | %
|                                                        |  |                |          
|Book value per average share                            |  |                |           |   |                |   |           |        |  |      |  
|before accumulated comprehensive income/loss            |  |                | 10.87     |   |                |   | 10.43     |        |  | 4.2  | %
|after accumulated comprehensive income/loss             |  |                | 10.91     |   |                |   | 11.02     |        |  | -1.0 | %



12



---

##### Table of Contents

EARNINGS SUMMATION



For the three months ended March 31, 2005, net income was $604 thousand as compared to $397 thousand for the comparable period in 2004, an increase of
52.1%. Diluted earnings per average share for the first three months of 2005 were $0.25 as compared to $0.17 for the first three months of 2004. Annualized return on average assets was 0.8% for the first three months of 2005 and 0.5% for the similar
period in 2004, an increase of 60.0%. Annualized return on average equity was 9.5% for the first three months of 2005, compared to 6.3% for the first three months of 2004, a increase of 50.8%.



The principal source of earnings for the Company is net interest income. Net
interest income is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest earning assets. Changes in the volume and mix of interest earning assets and
interest bearing liabilities, the associated yields and rates, and the volume of non-performing assets have a significant impact on net interest income, the net interest margin, and net income. The annualized net interest margin was 3.90% for the
three months ended March 31, 2005, compared to 3.66% for the same period in 2004.



Net interest income before provision for loan losses for the first three months of 2005 was $2.6 million, compared to $2.3 million for the first three months of 2004, an increase of $311 thousand or 13.3%. Increases
in net interest income were driven by loan growth (changes in volume) during the first three months of 2005, compared to the same period in 2004. Average interest-earning assets totaled $281.4 million for the first three months of 2005 as compared
to $266.2 million for the first three months of 2004, an increase of 5.7%. Average interest-earning assets as a percent of total average assets was 93.1% for the first three months of 2005 as compared to 91.0% for the comparable period of 2004, an
increase of 2.3%. The annualized yield on average interest-earning assets for the first three months of 2005 was 5.51% as compared to 5.26% for the first three months of 2004.



As loan volume continues to increase and loan rates adjust upward, the Company should realize increasing net interest
income. Management expects loan growth and rate increases to continue through 2005 and into 2006, in which case net interest income should continue to improve. Based on the Companys assumptions, the balance sheet has been asset sensitive, and
therefore, should be well-positioned to take advantage of a rising rate environment.



Average interest-bearing liabilities totaled $236.1 million for the first three months of 2005 as compared to $227.3 million for the first three months of 2004, an increase of 3.9%. The annualized yield (cost) on
interest-bearing liabilities for the first three months of 2005 was 1.93% as compared to 1.88% for the first three months of 2004.



The Company took an advance of $7.5 million from the Federal Home Bank of Atlanta in May of 2004. The average cost of these funds was 1.97% for the three
months ended March 31, 2005.



The net interest spread, which is
the difference between the annualized yield on earning assets and the annualized cost of interest bearing liabilities was 3.59% for the first quarter of 2005 and 3.38% for the first quarter of 2004.



Average total assets for the first three months of 2005 were $302.1 million
as compared to $292.7 million for the first three months of 2004, an increase of 3.2%.



13



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Net Interest Income Analysis (unaudited)



|                                                        |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|------------------------------------------------------- |  | ---------------------------- | ------- | -------------- | ---------------------------- | -------------------- |  | ---- | -------------- |  | -------------- | ------- | -------------------- | - | ----- |  | ---- | -
|                                                        |  | Three months ended 3/31/2005 |         |                | Three months ended 3/31/2004 |                     
|(Fully taxable equivalent basis) (Dollars in thousands) |  | AverageBalance               |         | Income/Expense |                              | AnnualizedYield/Rate |  |      | AverageBalance |  | Income/Expense |         | AnnualizedYield/Rate |  
|INTEREST EARNING ASSETS:                                |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Investments:                                            |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Taxable Investments                                     |  | $                            | 32,559  |                | $                            | 301                  |  | 3.70 | %              |  | $              | 38,400  |                      | $ | 351   |  | 3.65 | %
|Tax-Exempt Investments (1)                              |  |                              | 19,804  |                |                              | 283                  |  | 5.72 | %              |  |                | 20,464  |                      |   | 303   |  | 5.93 | %
|                                                        |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Total Investments                                       |  |                              | 52,363  |                |                              | 584                  |  | 4.46 | %              |  |                | 58,864  |                      |   | 654   |  | 4.45 | %
|                                                        |  |                              |         |                |                              |                     
|Gross Loans (2)                                         |  |                              | 217,126 |                |                              | 3,218                |  | 5.93 | %              |  |                | 196,411 |                      |   | 2,820 |  | 5.74 | %
|Interest-bearing Deposits                               |  |                              | 109     |                |                              | 0                    |  | 1.17 | %              |  |                | 117     |                      |   | 0     |  | 0.33 | %
|Fed Funds Sold                                          |  |                              | 11,824  |                |                              | 76                   |  | 2.57 | %              |  |                | 10,845  |                      |   | 29    |  | 1.08 | %
|                                                        |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|TOTAL INTEREST EARNING ASSETS                           |  | $                            | 281,422 |                | $                            | 3,878                |  | 5.51 | %              |  | $              | 266,237 |                      | $ | 3,504 |  | 5.26 | %
|                                                        |  |                              |         |                |                              |                     
|INTEREST-BEARING LIABILITIES:                           |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Deposits:                                               |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Savings Deposits                                        |  | $                            | 67,422  |                | $                            | 308                  |  | 1.83 | %              |  | $              | 64,414  |                      | $ | 236   |  | 1.46 | %
|NOW Deposits                                            |  |                              | 48,934  |                |                              | 61                   |  | 0.51 | %              |  |                | 44,777  |                      |   | 57    |  | 0.51 | %
|CDs >= $100,000                                        |  |                              | 30,300  |                |                              | 247                  |  | 3.26 | %              |  |                | 31,719  |                      |   | 250   |  | 3.15 | %
|CDs < $100,000                                         |  |                              | 58,693  |                |                              | 449                  |  | 3.06 | %              |  |                | 64,617  |                      |   | 502   |  | 3.10 | %
|Money Market Deposit Accounts                           |  |                              | 18,144  |                |                              | 16                   |  | 0.37 | %              |  |                | 18,235  |                      |   | 17    |  | 0.37 | %
|                                                        |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Total Interest Bearing Deposits                         |  | $                            | 223,493 |                | $                            | 1,081                |  | 1.94 | %              |  | $              | 223,763 |                      | $ | 1,062 |  | 1.90 | %
|                                                        |  |                              |         |                |                              |                     
|Fed funds purchased                                     |  |                              |        |                |                              | 0                    |  | 0.00 | %              |  |                | 10      |                      |   | 0     |  | 1.12 | %
|Securities Sold to Repurchase                           |  |                              | 5,095   |                |                              | 16                   |  | 1.26 | %              |  |                | 3,531   |                      |   | 6     |  | 0.65 | %
|FHLB advance                                            |  |                              | 7,500   |                |                              | 37                   |  | 1.97 | %              |  |                |        |                      |   |      |  | 0.00 | %
|                                                        |  |                              |         |                |                              |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES                      |  | $                            | 236,088 |                | $                            | 1,134                |  | 1.92 | %              |  | $              | 227,304 |                      | $ | 1,068 |  | 1.88 | %
|Net Interest Income/Yield on Earning Assets             |  |                              |         |                | $                            | 2,744                |  | 3.90 | %              |  |                |         |                      | $ | 2,436 |  | 3.66 | %
|Net Interest Rate Spread                                |  |                              |         |                |                              |                      |  | 3.59 | %              |  |                |         |                      |   |       |  | 3.38 | %

---

|(1) | -Yield and income assumes a federal tax rate of 34%
|--- | ---------------------------------------------------

|(2) | -Includes Visa program and non-accrual loans
|--- | --------------------------------------------



Through the three months ended March 31, 2005, average interest-earning assets were comprised of the loan portfolio with $217.1 million and the investment
portfolio with $52.4 million. For the three month period ended March 31, 2005, compared to the same period in 2004, on a fully tax equivalent basis, tax-exempt investment yields declined to 5.72% from 5.93%, and taxable investment yields increased
to 3.70% from 3.65%, resulting in a increase in total investment yield to 4.46% from 4.45%. The investment portfolio will provide liquidity as short investments mature during 2005 and 2006.



In the first three months of 2005, gross loans on average yielded 5.93% as
compared to 5.74% for the same period in 2004. The Company has been successful in growing the loan portfolio with variable and adjustable rate loans through 2004. By keeping the re-pricing terms of the loan portfolio short, the Company is positioned
well for a rising rate environment.



14



---

##### Table of Contents

As short-term rates in the market increased during 2004, the Company held its deposit rates wherever
possible in order to control its cost of funds. As this rising rate trend continues in the market, and competitive pressure has increased, the Company has begun to raise its deposit rates. For the first three months of 2005 compared to 2004, savings
yields have increased to 1.83% compared to 1.46%, and certificates of deposit greater than or equal to $100 thousand have increased to 3.26% compared to 3.15%, but the cost of NOW deposits, money market deposits, and certificates less than $100,000,
have decreased or remained unchanged. The resulting total cost of average deposits through March 31, 2005, has increased to 1.94% compared to 1.90% for the same period of 2004.



LIQUIDITY



The Company maintains adequate short-term assets to meet the Companys liquidity needs as anticipated by management. Federal funds sold and
investments that mature in one year or less provide the major sources of funding for liquidity needs. On March 31, 2005, federal funds sold totaled $10.9 million and securities maturing in one year or less totaled $11.4 million, for a total pool of
$22.3 million. The liquidity ratio as of March 31, 2005 was 20.6% as compared to 22.7% as of December 31, 2004. The Company determines this ratio by dividing the sum of cash and cash equivalents, unpledged investment securities and federal funds
sold, by interest bearing liabilities. Management, through historical analysis, has deemed 15% an adequate liquidity ratio and does not anticipate a significant change in the liquidity structure of the Company. In addition, the Company maintains
available lines of credit with the Federal Home Loan Bank of Atlanta and several correspondent banks.



CAPITAL RESOURCES



From
December 31, 2004 to March 31, 2005, total shareholders equity decreased to $25.7 million from $25.8 million or 0.4%. The Companys capital resources are impacted by net unrealized gains or losses on securities. The securities portfolio
is marked to market monthly and unrealized gains or losses, net of taxes, are recognized as accumulated other comprehensive income or loss on the balance sheet and statement of changes in shareholders equity. Shareholders equity before
accumulated other comprehensive income was $25.6 million on March 31, 2005, and $25.3 million on December 31, 2004. Accumulated other comprehensive income was $106 thousand at March 31, 2005 and $567 thousand at December 31, 2004, a decrease of $461
thousand or 81.3% during the three month period.



Book value
per share, basic, on March 31, 2005, compared to March 31, 2004, decreased to $10.88 from $10.99, or 1.0%. Book value per share, basic, before accumulated comprehensive income on March 31, 2005, compared to March 31, 2004, grew to $10.84 from
$10.40, an increase of 4.2%. Cash dividends paid for the three months ended March 31, 2005, were $365 thousand, or $0.155 per share, compared to $349 thousand, or $0.15 per share, for the comparable period ended March 31, 2004 an increase of 4.6%.
Average basic shares outstanding for the three months ended March 31, 2005, were 2,354,218 compared to 2,325,920 for the comparable period ended March 31, 2004. The Company began a share repurchase program in August of 1999 and has continued the
program into 2004. The plan authorizes a total of 115,000 shares for repurchase.



The Company is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council guidelines. As of March 31, 2005, the Company maintained Tier 1 capital of $22.8 million,
net risk weighted assets of $221.8 million, and Tier 2 capital of $2.2 million. On March 31, 2005, the Tier 1 capital to risk weighted assets ratio was 10.3%, the total capital ratio was 11.2%, and the tier 1 leverage ratio was 7.6%. These ratios
continue to be well in excess of regulatory minimums.



FINANCIAL CONDITION



As of March 31, 2005, total assets decreased by 0.6% for
the three month period. Total assets were $301.8 million at March 31, 2005 as compared to $303.5 million at year-end 2004. Cash and cash equivalents, which produce no income, decreased to $6.2 million on March 31, 2005, compared to $8.7 million at
year-end 2004.



During the three months ended March 31, 2005,
gross loans increased by $3.7 million or 1.7%, to $219.1 million from $215.4 million at year-end 2004. The major components of this increase were commercial and industrial loans with 6.2% growth to $22.9 million, and real estate mortgage loans
secured by 1-4 family residential collateral with 1.9% growth to $122.4 million.



15



---

##### Table of Contents

For the three months ended March 31, 2005, the Company charged off loans totaling $13 thousand. For the
comparable period in 2004, total loans charged off were $78 thousand. The Company maintained $28 thousand of other real estate owned (OREO) as of March 31, 2005. As of year-end 2004, this balance was $17 thousand. The Company actively
markets all OREO properties, and expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of book or market value.



The provision for loan losses amounted to $138 thousand through the first three months of 2005, and the allowance for loan
losses as of March 31, 2005 was $2.2 million. The allowance for loan losses, as a percentage of average total loans through the first three months of 2005 was 0.99%. The allowance for loan losses is analyzed for adequacy on a quarterly basis to
determine the necessary provision. A loan by loan review is conducted of all loan classes and inherent losses on these individual loans are determined. This valuation is then compared to historical data in an effort to determine the prevailing
trends. A third component of the process is the analysis of a tabular presentation of loss allocation percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As of March 31, 2005,
management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio.



As of March 31, 2005, $1.8 million of loans were on non-accrual status, of which $1.6 million are considered impaired. There were $1.3 million of loans on
non-accrual status as of year-end 2004. On March 31, 2004, non-accrual loans totaled $1.4 million, of which $1.0 million were considered impaired. Impaired loans are those non-accrual loans that are considered commercial or non-farm/non-residential
in nature. Loans still accruing interest but delinquent for 90 days or more were $319 thousand on March 31, 2005, as compared to $271 thousand on March 31, 2004. Management has reviewed these credits and the underlying collateral and expects no
additional loss above that which is specifically reserved in the allowance for loan losses.



As of March 31, 2005, securities available for sale at market value totaled $51.4 million as compared to $51.9 million on December 31, 2004. This represents a net decrease of $494 thousand or 1.0% for the three
months. Securities held to maturity were $433 thousand as of March 31, 2005 compared to $430 at December 31, 2004. At quarter end the investment portfolio represented 17.2% of total assets and 18.5% of earning assets. The greater portion of the
Companys investment portfolio is classified as available-for-sale and marked to market on a monthly basis. The resulting accumulated adjustment to book value as of March 31, 2005 was a net unrealized gain of $161 thousand. The corresponding
accumulated adjustment to shareholders equity was $106 thousand. These gains or losses are booked monthly as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the securities are
actually sold. Management does not anticipate the realization of net losses on investments during 2005.



As of March 31, 2005, total deposits were $261.1 million compared to $261.9 at year-end 2004. This represents a decrease in balances of $826 thousand or
0.3% during the three months. Components of this decrease include savings and interest bearing demand deposit accounts at 1.2% to $132.3 million, and time deposits at 1.6% to $87.8 million. However, non-interest bearing demand deposits grew 5.4% to
$41.0 million.



RESULTS OF OPERATIONS



NON-INTEREST INCOME



Non-interest income for the first three months of 2005 totaled $607 thousand. Non-interest income includes income from
fiduciary activities, service charges on deposit accounts, other miscellaneous fees, gains on the sale of securities, and other income. Of these categories, the major components are fiduciary activities which contributed $174 thousand compared to
$165 thousand through three months of 2004, service charges on deposit accounts which contributed $173 thousand through three months of 2005 versus $138 thousand for the comparable period in 2004, and other service charges and fees, which
contributed $208 thousand compared to $183 thousand through the three months of 2005 and 2004, respectively. The primary component of the increase in other service charges and fees is non-deposit product fee income and miscellaneous VISA income.
Minor contributors to the increase in other service charges and fees were improvements in collection of cashiers check and money order fees, as well as increases in ATM interchange fees. Secondary market lending fees declined to $15 thousand
compared to $22 thousand through three months of 2005 versus 2004, due mainly to reductions in refinancing activity. Gains on the sale of investments were $190 through March 31, 2005 compared to $155 thousand for the comparable period of 2004. Gains
on the sale of other real estate totaled $58 through three months of 2005 compared to $7 thousand for the comparable period of 2004, and other income totaled $36 thousand through three months of 2005 compared to $23 thousand for the three months
ended March 31, 2004.



16



---

##### Table of Contents

The Companys fiduciary income is derived from the operations of its subsidiary, Bay Trust Company.
The Trust Company offers a broad range of trust and related fiduciary services. Among these are estate settlement and testamentary trusts, revocable and irrevocable personal trusts, managed agency, custodial accounts, and rollover IRAs both
self-directed and managed. Fiduciary income is largely affected by changes in the performance of the stock market, which directly impacts the market value of the accounts upon which fees are earned. This being the case, performance of fiduciary
activities can be expected to approximate the performance of the national stock markets. In recent quarters the fee income of the Trust Company has improved as the stock markets have gained value, thereby increasing the market value of the assets
under management. In addition, the Trust Company has also been successful in increasing new accounts. Increased marketing and sales efforts are expected to continue this trend.



Management continues to explore methods of increasing non-interest income. Continued expansion of fiduciary services,
diversification of business lines, and expansion of fee-based services provided to bank customers are among the areas under regular review.



NON-INTEREST EXPENSE



Non-interest expenses totaled $2.3 million during the first three months of 2005 as compared to $2.4 million for the same period in 2004, a decrease of
4.1%. The largest components of non-interest expense are salaries and benefits, and occupancy expense. Through the three months ended March 31, 2005, salary and benefit expense was $1.2 million, and $1.4 million for the same period of 2004. Salary
expense is impacted by the application of SFAS No.91, which governs the accounting for loan fees and costs. Salary expense is adjusted for the recognition of costs associated with the origination and processing of real estate loans. The adjustment
to salaries for recognition of these costs was $126 thousand through the first three months of 2005 as compared to $183 thousand for the same period in 2004. Occupancy expense was $369 thousand through the first three months of 2005 as compared to
$359 thousand for the same period of 2004.



Other expenses
include bank franchise taxes which totaled $56 thousand through three months of 2005 and 2004, expenses related to the Visa® program which were $97 thousand through three months of 2005 and $80 thousand through three months of 2004, telephone expenses which were $43 thousand
for the current period and $41 thousand through three months of 2004, and other operating expenses which totaled $489 thousand for the current period versus $445 thousand for the three months ended March 31, 2004. Telephone expenses include the cost
of the Companys Customer Care Center and data Network communications. The Company will be capitalizing an addition to the main office building in May, 2005. Consequently, management expects depreciation expense to increase.



Regulatory requirements created by the Sarbanes-Oxley Act of 2002 have
increased the consulting expenses of the Company. Management expects continued increases in consulting expenses, as well as accounting fees, as the reporting and risk monitoring process develops.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



There have been no significant changes from the quantitative and qualitative disclosures made in the Companys report on Form 10-K for the year-ended
December 31, 2004.



ITEM 4. CONTROLS AND PROCEDURES



The Company, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer, has evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Companys Chief Executive Officer concluded that the
Companys disclosure controls and procedures are operating effectively in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic SEC
filings. No significant changes in the Companys internal control over financial reporting occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.



17



---

##### Table of Contents

PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None.



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



The status of the Companys stock repurchase plan is shown in the table below



Issuer Purchases of Equity Securities



|               |  |                               |  |                            |       |                                                                     |     |                                                                   |       
|-------------- |  | ----------------------------- |  | -------------------------- | ----- | ------------------------------------------------------------------- | --- | ----------------------------------------------------------------- | ------
|               |  | TotalNumber ofSharesPurchased |  | AveragePrice Paidper Share |       | Total Number of SharesPurchased as Part ofPublicly AnnouncedProgram |     | Maximum Number ofShares that May Yet bePurchased Under theProgram
|January, 2005  |  | 200                           |  | $                          | 15.05 |                                                                     | 200 |                                                                   | 39,342
|February, 2005 |  |                              |  |                            | 0.00  |                                                                     |    |                                                                   | 39,342
|March, 2005    |  |                              |  |                            | 0.00  |                                                                     |    |                                                                   | 39,342
|               |  |                               |  |                            |       |                                                                     |     |                                                                   |       
|               |  | 200                           |  | $                          | 15.05 |                                                                     | 200 |                                                                   |       
|               |  |                               |  |                            |       |                                                                     |     |                                                                   |       



ITEM 3. DEFAULT UPON SENIOR SECURITIES



None to
report.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None to report.



ITEM 5. OTHER INFORMATION



None to report.



ITEM 5b. CHANGES IN NOMINATING PROCESS



None to
report.



ITEM 6. EXHIBITS



|     |  |                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 



18



---

##### Table of Contents

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.



|        |  |     |  |                                                              
|------- |  | --- |  | -------------------------------------------------------------
|        |  |     |  | Bay Banks of Virginia, Inc.                                  
|        |  |     |  | (Registrant)                                                 
|        |  |    
|4/27/05 |  | By: |  | /s/ Austin L. Roberts, III                                   
|        |  |     |  | Austin L. Roberts, III                                       
|        |  |     |  | President and Chief Executive Officer                        
|        |  |     |  | (principal executive officer and principal financial officer)



19