##### 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, 2009



| ̈ | 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 has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).     ̈  yes     ̈  no

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).     ̈  yes    x  no

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

2,395,571 shares of common stock on May 1, 2009









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##### Table of Contents

FORM 10-Q

For the interim period ending March 31, 2009.

INDEX



|                                                                                                                          |  |   
|------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I - FINANCIAL INFORMATION                                                                                            |  |   
|                                                                                                                          | 
|ITEM 1. FINANCIAL STATEMENTS                                                                                              |  |   
|                                                                                                                          | 
|CONSOLIDATED BALANCE SHEETS MARCH 31, 2009 (UNAUDITED) AND DECEMBER 31, 2008                                              |  | 3 
|                                                                                                                          | 
|CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)                          |  | 4 
|                                                                                                                          | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED) |  | 5 
|                                                                                                                          | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)                      |  | 6 
|                                                                                                                          | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                |  | 7 
|                                                                                                                          | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                             |  | 14
|                                                                                                                          | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        |  | 20
|                                                                                                                          | 
|ITEM 4. CONTROLS AND PROCEDURES                                                                                           |  | 20
|                                                                                                                          | 
|PART II - OTHER INFORMATION                                                                                               |  |   
|                                                                                                                          | 
|ITEM 1. LEGAL PROCEEDINGS                                                                                                 |  | 21
|                                                                                                                          | 
|ITEM 1A. RISK FACTORS                                                                                                     |  | 21
|                                                                                                                          | 
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                       |  | 21
|                                                                                                                          | 
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                                   |  | 21
|                                                                                                                          | 
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                               |  | 21
|                                                                                                                          | 
|ITEM 5. OTHER INFORMATION                                                                                                 |  | 21
|                                                                                                                          | 
|ITEM 6. EXHIBITS                                                                                                          |  | 21



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

CONSOLIDATED BALANCE
SHEETS



|                                                                                                                       |  |                |             |   |                   |   |             |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                       |  | March 31, 2009 |             |   | December 31, 2008 |  
|                                                                                                                       |  | (Unaudited)    |             |   |                   |  
|ASSETS                                                                                                                 |  |                |             |   |                   |   |             |  
|Cash and due from banks                                                                                                |  | $              | 4,290,690   |   |                   | $ | 5,247,480   |  
|Interest-bearing deposits                                                                                              |  |                | 11,241,374  |   |                   |   | 363,425     |  
|Federal funds sold                                                                                                     |  |                | 8,242,001   |   |                   |   | 7,250,753   |  
|Securities available for sale, at fair value                                                                           |  |                | 32,347,952  |   |                   |   | 34,967,141  |  
|Securities held to maturity, at amortized cost (fair value, $494,270 and $490,815)                                     |  |                | 489,850     |   |                   |   | 486,097     |  
|Loans, net of allowance for loan losses of $2,439,352 and $2,552,091                                                   |  |                | 250,593,289 |   |                   |   | 249,699,647 |  
|Premises and equipment, net                                                                                            |  |                | 13,821,005  |   |                   |   | 13,317,619  |  
|Accrued interest receivable                                                                                            |  |                | 1,137,306   |   |                   |   | 1,300,324   |  
|Other real estate owned                                                                                                |  |                | 1,442,475   |   |                   |   | 1,004,475   |  
|Goodwill                                                                                                               |  |                | 2,807,842   |   |                   |   | 2,807,842   |  
|Other assets                                                                                                           |  |                | 1,347,250   |   |                   |   | 1,505,710   |  
|                                                                                                                       |  |                |             |   |                   |   |             |  
|Total assets                                                                                                           |  | $              | 327,761,034 |   |                   | $ | 317,950,513 |  
|                                                                                                                       |  |                |             |   |                   |   |             |  
|                                                                                                                       |  |               
|LIABILITIES                                                                                                            |  |                |             |   |                   |   |             |  
|Noninterest-bearing deposits                                                                                           |  | $              | 40,510,464  |   |                   | $ | 37,106,404  |  
|Savings and interest-bearing demand deposits                                                                           |  |                | 98,839,336  |   |                   |   | 95,106,834  |  
|Time deposits                                                                                                          |  |                | 124,564,528 |   |                   |   | 118,836,194 |  
|                                                                                                                       |  |                |             |   |                   |   |             |  
|Total deposits                                                                                                         |  | $              | 263,914,328 |   |                   | $ | 251,049,432 |  
|Federal Funds purchased and securities sold under repurchase agreements                                                |  |                | 4,929,911   |   |                   |   | 8,341,848   |  
|Federal Home Loan Bank advances                                                                                        |  |                | 30,000,000  |   |                   |   | 30,000,000  |  
|Other liabilities                                                                                                      |  |                | 2,641,903   |   |                   |   | 2,271,003   |  
|Commitments and contingencies                                                                                          |  |                |            |   |                   |   |            |  
|                                                                                                                       |  |                |             |   |                   |   |             |  
|Total liabilities                                                                                                      |  | $              | 301,486,142 |   |                   | $ | 291,662,283 |  
|                                                                                                                       |  |                |             |   |                   |   |             |  
|                                                                                                                       |  |               
|SHAREHOLDERS EQUITY                                                                                                   |  |                |             |   |                   |   |             |  
|Common stock ($5 par value; authorized - 5,000,000 shares; outstanding - 2,395,571 and 2,387,272 shares, respectively) |  | $              | 11,977,857  |   |                   | $ | 11,936,362  |  
|Additional paid-in capital                                                                                             |  |                | 4,815,912   |   |                   |   | 4,776,604   |  
|Retained Earnings                                                                                                      |  |                | 10,668,375  |   |                   |   | 10,855,078  |  
|Accumulated other comprehensive (loss), net                                                                            |  |                | (1,187,252  | ) |                   |   | (1,279,814  | )
|                                                                                                                       |  |                |             |   |                   |   |             |  
|Total shareholders equity                                                                                             |  | $              | 26,274,892  |   |                   | $ | 26,288,230  |  
|                                                                                                                       |  |                |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                             |  | $              | 327,761,034 |   |                   | $ | 317,950,513 |  
|                                                                                                                       |  |                |             |   |                   |   |             |  

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three month periods ended



|                                                    |  |                |           |                |   |          
|--------------------------------------------------- |  | -------------- | --------- | -------------- | - | ---------
|                                                    |  | March 31, 2009 |           | March 31, 2008
|INTEREST INCOME                                     |  |                |           |                |   |          
|Loans, including fees                               |  | $              | 3,839,303 |                | $ | 4,427,281
|Securities:                                         |  |                |           |                |   |          
|Taxable                                             |  |                | 145,370   |                |   | 275,727  
|Tax-exempt                                          |  |                | 178,885   |                |   | 195,527  
|Federal funds sold                                  |  |                | 3,676     |                |   | 43,739   
|                                                    |  |                |           |                |   |          
|Total interest income                               |  |                | 4,167,234 |                |   | 4,942,274
|                                                    |  |                |           |                |   |          
|                                                    |  |               
|INTEREST EXPENSE                                    |  |                |           |                |   |          
|Deposits                                            |  |                | 1,310,417 |                |   | 1,816,413
|Fed funds purchased                                 |  |                | 12        |                |   | 257      
|Securities sold under repurchase agreements         |  |                | 3,828     |                |   | 36,828   
|FHLB advances                                       |  |                | 342,188   |                |   | 345,990  
|                                                    |  |                |           |                |   |          
|Total interest expense                              |  |                | 1,656,445 |                |   | 2,199,488
|                                                    |  |                |           |                |   |          
|                                                    |  |               
|Net interest income                                 |  |                | 2,510,789 |                |   | 2,742,786
|Provision for loan losses                           |  |                | 95,001    |                |   | 15,238   
|                                                    |  |                |           |                |   |          
|                                                    |  |               
|Net interest income after provision for loan losses |  |                | 2,415,788 |                |   | 2,727,548
|                                                    |  |                |           |                |   |          
|                                                    |  |               
|NON-INTEREST INCOME                                 |  |                |           |                |   |          
|Income from fiduciary activities                    |  |                | 140,472   |                |   | 168,246  
|Service charges and fees on deposit accounts        |  |                | 157,080   |                |   | 165,114  
|VISA-related fees                                   |  |                | 161,833   |                |   | 159,247  
|Other service charges and fees                      |  |                | 169,014   |                |   | 174,426  
|Secondary market lending fees                       |  |                | 34,129    |                |   | 57,277   
|Gain on sale of securities available for sale       |  |                | 1,991     |                |   | 12,920   
|Other income                                        |  |                | 18,319    |                |   | 7,000    
|                                                    |  |                |           |                |   |          
|Total non-interest income                           |  |                | 682,838   |                |   | 744,230  
|                                                    |  |               
|NON-INTEREST EXPENSES                               |  |                |           |                |   |          
|Salaries and employee benefits                      |  |                | 1,529,523 |                |   | 1,535,201
|Occupancy expense                                   |  |                | 460,110   |                |   | 417,403  
|Bank franchise tax                                  |  |                | 41,970    |                |   | 51,789   
|Visa expense                                        |  |                | 127,555   |                |   | 133,108  
|Telephone expense                                   |  |                | 41,600    |                |   | 48,076   
|Other expense                                       |  |                | 663,759   |                |   | 667,887  
|                                                    |  |                |           |                |   |          
|Total non-interest expenses                         |  |                | 2,864,517 |                |   | 2,853,464
|                                                    |  |                |           |                |   |          
|                                                    |  |               
|Net income before income taxes                      |  |                | 234,109   |                |   | 618,314  
|Income tax expense                                  |  |                | 14,976    |                |   | 132,701  
|                                                    |  |                |           |                |   |          
|Net income                                          |  | $              | 219,133   |                | $ | 485,613  
|                                                    |  |                |           |                |   |          
|                                                    |  |               
|Basic Earnings Per Share                            |  |                |           |                |   |          
|Average basic shares outstanding                    |  |                | 2,387,641 |                |   | 2,363,614
|Earnings per share, basic                           |  | $              | 0.09      |                | $ | 0.21     
|                                                    |  |               
|Diluted Earnings Per Share                          |  |                |           |                |   |          
|Average diluted shares outstanding                  |  |                | 2,387,641 |                |   | 2,363,614
|Earnings per share, diluted                         |  | $              | 0.09      |                | $ | 0.21     

See Notes to Consolidated Financial Statements.



4



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##### Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(unaudited)



|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------ | ---------- | - |  | - | ---------- | -
|                                                                                                      |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity |           
|Balance at January 1, 2008                                                                            |  | $           | 11,819,583 |   |                          | $ | 4,643,827 |                  |  | $ | 10,959,793                                 |   |  | $                        | (350,340   | ) |  | $ | 27,072,863 |  
|Comprehensive Income:                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                            |  |             |           |   |                          |   |          |                  |  |   | 485,613                                    |   |  |                          |           |   |  |   | 485,613    |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of $114,807 |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | 222,858    |   |  |   | 222,858    |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($4,393)     |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | (8,527     | ) |  |   | (8,527     | )
|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 699,944    |  
|Effects of changing the pension plan measurement date                                                 |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Pursuant to FAS158, net of tax benefit of ($17,731)                                                   |  |             |           |   |                          |   |          |                  |  |   | (34,419                                    | ) |  |                          |            |   |  |   | (34,419    | )
|Cash dividends paid $0.17 per share                                                                  |  |             |           |   |                          |   |          |                  |  |   | (401,533                                   | ) |  |                          |           |   |  |   | (401,533   | )
|Stock repurchases                                                                                     |  |             | (8,000     | ) |                          |   | (12,770   | )                |  |   |                                           |   |  |                          |           |   |  |   | (20,770    | )
|Stock-based compensation                                                                              |  |             |           |   |                          |   | 7,184     |                  |  |   |                                           |   |  |                          |           |   |  |   | 7,184      |  
|Sale of common stock:                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Dividends Reinvested                                                                                  |  |             | 30,035     |   |                          |   | 47,442    |                  |  |   |                                           |   |  |                          |           |   |  |   | 77,477     |  
|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at March 31, 2008                                                                             |  | $           | 11,841,618 |   |                          | $ | 4,685,683 |                  |  | $ | 11,009,454                                 |   |  | $                        | (136,009   | ) |  | $ | 27,400,746 |  
|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|                                                                                                      |  |             |            |   |                         
|Balance at January 1, 2009                                                                            |  | $           | 11,936,362 |   |                          | $ | 4,776,604 |                  |  | $ | 10,855,078                                 |   |  | $                        | (1,279,814 | ) |  | $ | 26,288,230 |  
|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Comprehensive Income:                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                            |  |             |           |   |                          |   |          |                  |  |   | 219,133                                    |   |  |                          |           |   |  |   | 219,133    |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of $48,360  |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | 93,876     |   |  |   | 93,876     |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($677)       |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | (1,314     | ) |  |   | (1,314     | )
|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 311,695    |  
|Cash dividends paid $0.17 per share                                                                  |  |             |           |   |                          |   |          |                  |  |   | (405,836                                   | ) |  |                          |           |   |  |   | (405,836   | )
|Stock-based compensation                                                                              |  |             |           |   |                          |   | 3,347     |                  |  |   |                                           |   |  |                          |           |   |  |   | 3,347      |  
|Sale of common stock:                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Dividends Reinvested                                                                                  |  |             | 41,495     |   |                          |   | 35,961    |                  |  |   |                                           |   |  |                          |           |   |  |   | 77,456     |  
|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at March 31, 2009                                                                             |  | $           | 11,977,857 |   |                          | $ | 4,815,912 |                  |  | $ | 10,668,375                                 |   |  | $                        | (1,187,252 | ) |  | $ | 26,274,892 |  
|                                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  

See Notes to Consolidated Financial Statements.



5



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##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended

(unaudited)



|                                                                                          |  |                |             |   |                |   |             |  
|----------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                          |  | March 31, 2009 |             |   | March 31, 2008 |  
|Cash Flows From Operating Activities                                                      |  |                |             |   |                |   |             |  
|Net Income                                                                                |  | $              | 219,133     |   |                | $ | 485,613     |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                |             |   |                |   |             |  
|Depreciation                                                                              |  |                | 216,750     |   |                |   | 204,482     |  
|Net amortization and accretion of securities                                              |  |                | 4,199       |   |                |   | 3,794       |  
|Provision for loan losses                                                                 |  |                | 95,001      |   |                |   | 15,238      |  
|Stock-based compensation                                                                  |  |                | 3,347       |   |                |   | 7,184       |  
|Deferred income tax expense (benefit)                                                     |  |                | (10,710     | ) |                |   |            |  
|(Gain) on securities available-for-sale                                                   |  |                | (1,991      | ) |                |   | (12,920     | )
|(Increase) decrease in accrued income and other assets                                    |  |                | 332,188     |   |                |   | (586,718    | )
|Increase in other liabilities                                                             |  |                | 323,217     |   |                |   | 714,332     |  
|                                                                                          |  |                |             |   |                |   |             |  
|Net cash provided by operating activities                                                 |  | $              | 1,181,134   |   |                | $ | 831,005     |  
|                                                                                          |  |                |             |   |                |   |             |  
|                                                                                          |  |               
|Cash Flows From Investing Activities                                                      |  |                |             |   |                |   |             |  
|Proceeds from maturities of available-for-sale securities                                 |  |                | 2,368,473   |   |                |   | 560,145     |  
|Proceeds from sales of available-for-sale securities                                      |  |                | 385,000     |   |                |   | 5,450,677   |  
|Purchases of available-for-sale securities                                                |  |                |            |   |                |   | (1,265,890  | )
|(Increase) decrease in interest bearing deposits in other banks                           |  |                | (10,877,949 | ) |                |   | 19,827      |  
|(Increase) in federal funds sold                                                          |  |                | (991,248    | ) |                |   | (11,427,295 | )
|Loan (originations) and principal collections, net                                        |  |                | (1,426,643  | ) |                |   | 4,851,802   |  
|Purchases of premises and equipment                                                       |  |                | (720,136    | ) |                |   | (656,320    | )
|                                                                                          |  |                |             |   |                |   |             |  
|Net cash (used in) investing activities                                                   |  | $              | (11,262,503 | ) |                | $ | (2,467,054  | )
|                                                                                          |  |                |             |   |                |   |             |  
|                                                                                          |  |               
|Cash Flows From Financing Activities                                                      |  |                |             |   |                |   |             |  
|Increase (decrease) in demand, savings, and other interest-bearing deposits               |  |                | 7,136,562   |   |                |   | (2,938,187  | )
|Net increase in time deposits                                                             |  |                | 5,728,334   |   |                |   | 6,763,241   |  
|Net (decrease) in securities sold under repurchase agreements and federal funds purchased |  |                | (3,411,937  | ) |                |   | (1,804,555  | )
|Proceeds from issuance of common stock                                                    |  |                | 77,456      |   |                |   | 77,477      |  
|Dividends paid                                                                            |  |                | (405,836    | ) |                |   | (401,533    | )
|Repurchase of common stock                                                                |  |                |            |   |                |   | (20,770     | )
|                                                                                          |  |                |             |   |                |   |             |  
|Net cash provided by financing activities                                                 |  | $              | 9,124,579   |   |                | $ | 1,675,673   |  
|                                                                                          |  |                |             |   |                |   |             |  
|                                                                                          |  |               
|Net increase (decrease) in cash and due from banks                                        |  |                | (956,790    | ) |                |   | 39,624      |  
|                                                                                          |  |               
|Cash and due from banks at beginning of period                                            |  |                | 5,247,480   |   |                |   | 5,015,762   |  
|                                                                                          |  |                |             |   |                |   |             |  
|Cash and due from banks at end of period                                                  |  | $              | 4,290,690   |   |                | $ | 5,055,386   |  
|                                                                                          |  |                |             |   |                |   |             |  
|                                                                                          |  |               
|Supplemental Schedule of Cash Flow Information:                                           |  |                |             |   |                |   |             |  
|Interest paid                                                                             |  | $              | 1,616,576   |   |                | $ | 2,227,729   |  
|                                                                                          |  |                |             |   |                |   |             |  
|Income taxes paid                                                                         |  |                |            |   |                |   | 12,086      |  
|                                                                                          |  |                |             |   |                |   |             |  
|Unrealized gain on investment securities                                                  |  |                | 140,245     |   |                |   | 324,745     |  
|                                                                                          |  |                |             |   |                |   |             |  
|Change in pension measurement date                                                        |  |                |            |   |                |   | 52,150      |  
|                                                                                          |  |                |             |   |                |   |             |  
|Loans transferred to other real estate owned                                              |  |                | 438,000     |   |                |   | 342,167     |  
|                                                                                          |  |                |             |   |                |   |             |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

Notes to Consolidated Financial Statements

Note 1: General

Bay Banks of Virginia, Inc. (the
Company) owns 100% of the Bank of Lancaster (the Bank) and 100% of Bay Trust Company, Inc. (the Trust Company). The consolidated financial statements include the accounts of the Bank, the Trust Company, and Bay
Banks of Virginia, Inc.

The accounting and reporting policies of the Company 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
Companys 2008 Annual Report to Shareholders.

Note 2: Securities

The carrying amounts of debt and other securities and their approximate fair values at March 31, 2009, and December 31, 2008, follow:



|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|----------------------------------------------- |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | ----------
|Available-for-sale securities March 31, 2009    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|(unaudited)                                     |  |               |            |                      |   |                         |  |   |          
|U.S. Government agencies                        |  | $             | 1,614,419  |                      | $ | 47,388                  |  | $ |          |   |  | $ | 1,661,807 
|State and municipal obligations                 |  |               | 28,198,791 |                      |   | 462,957                 |  |   | (214,103  | ) |  |   | 28,447,645
|Restricted securities                           |  |               | 2,238,500  |                      |   |                        |  |   |          |   |  |   | 2,238,500 
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  | $             | 32,051,710 |                      | $ | 510,345                 |  | $ | (214,103  | ) |  | $ | 32,347,952
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  |               |            |                     
|Available-for-sale securities December 31, 2008 |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|U.S. Government agencies                        |  | $             | 1,622,084  |                      | $ | 52,279                  |  | $ | (1,426    | ) |  | $ | 1,672,937 
|State and municipal obligations                 |  |               | 30,934,959 |                      |   | 288,096                 |  |   | (182,951  | ) |  |   | 31,040,104
|Restricted securities                           |  |               | 2,254,100  |                      |   |                        |  |   |          |   |  |   | 2,254,100 
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  | $             | 34,811,143 |                      | $ | 340,375                 |  | $ | (184,377  | ) |  | $ | 34,967,141
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           



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##### Table of Contents

|                                              |  |               |         |                      |   |                         |  |           |   |  |   |        
|--------------------------------------------- |  | ------------- | ------- | -------------------- | - | ----------------------- |  | --------- | - |  | - | -------
|Held-to-maturity securities March 31, 2009    |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  | FairValue
|(unaudited)                                   |  |               |         |                      |   |                         |  |          
|State and municipal obligations               |  | $             | 489,850 |                      | $ | 4,420                   |  | $         |  |  | $ | 494,270
|                                              |  |               |         |                      |   |                         |  |           |   |  |   |        
|                                              |  |               |         |                     
|Held-to-maturity securities December 31, 2008 |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  | FairValue
|State and municipal obligations               |  | $             | 486,097 |                      | $ | 4,718                   |  | $         |  |  | $ | 490,815
|                                              |  |               |         |                      |   |                         |  |           |   |  |   |        

Securities with a market value of $12.7 million were pledged as collateral for repurchase
agreements and for other purposes as required by law as of March 31, 2009. The market value of pledged securities at year-end 2008 was $9.9 million.

Securities in an unrealized loss position at March 31, 2009 and December 31, 2008, 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 considered temporary. Management has the intent and demonstrated ability to hold securities to scheduled
maturity or call dates. Bonds with unrealized loss positions at March 31, 2009 included 14 municipal bonds, as shown below.



|                                      |           |                     |                |                   |           |         |                |   |           |  |                |       |  |   |           |  |   |        
|------------------------------------- | --------- | ------------------- | -------------- | ----------------- | --------- | ------- | -------------- | - | --------- |  | -------------- | ----- |  | - | --------- |  | - | -------
|March 31, 2009 (unaudited)            |           | Less than 12 months |                | 12 months or more |           | Total  
|                                      | FairValue |                     | UnrealizedLoss |                   | FairValue |         | UnrealizedLoss |   | FairValue |  | UnrealizedLoss
|U.S. Government agencies              |           | $                   |               |                   | $         |        |                | $ |          |  | $              |      |  | $ |          |  | $ |       
|States and municipal obligations      |           |                     | 5,127,027      |                   |           | 214,103 |                |   |          |  |                |      |  |   | 5,127,027 |  |   | 214,103
|                                      |           |                     |                |                   |           |         |                |   |           |  |                |       |  |   |           |  |   |        
|Total temporarily impaired securities |           | $                   | 5,127,027      |                   | $         | 214,103 |                | $ |          |  | $              |      |  | $ | 5,127,027 |  | $ | 214,103
|                                      |           |                     |                |                   |           |         |                |   |           |  |                |       |  |   |           |  |   |        
|                                      |           |                     |               
|December 31, 2008                     |           | Less than 12 months |                | 12 months or more |           | Total  
|                                      | FairValue |                     | UnrealizedLoss |                   | FairValue |         | UnrealizedLoss |   | FairValue |  | UnrealizedLoss
|U.S. Government agencies              |           | $                   |               |                   | $         |        |                | $ | 58,675    |  | $              | 1,426 |  | $ | 58,675    |  | $ | 1,426  
|States and municipal obligations      |           |                     | 8,850,276      |                   |           | 182,951 |                |   |          |  |                |      |  |   | 8,850,276 |  |   | 182,951
|                                      |           |                     |                |                   |           |         |                |   |           |  |                |       |  |   |           |  |   |        
|Total temporarily impaired securities |           | $                   | 8,850,276      |                   | $         | 182,951 |                | $ | 58,675    |  | $              | 1,426 |  | $ | 8,908,951 |  | $ | 184,377
|                                      |           |                     |                |                   |           |         |                |   |           |  |                |       |  |   |           |  |   |        



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Note 3: Loans

The components of loans were as follows:



|                                                             |  |                |             |   |                   |   |             |  
|------------------------------------------------------------ |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | March 31, 2009 |             |   | December 31, 2008 |  
|                                                             |  | (unaudited)    |             |   |                   |  
|Mortgage loans on real estate:                               |  |                |             |   |                   |   |             |  
|Construction                                                 |  | $              | 33,825,885  |   |                   | $ | 36,506,103  |  
|Secured by farmland                                          |  |                | 78,512      |   |                   |   | 80,313      |  
|Secured by 1-4 family residential                            |  |                | 142,540,990 |   |                   |   | 142,317,668 |  
|Other real estate loans                                      |  |                | 44,125,544  |   |                   |   | 43,669,144  |  
|Commercial and industrial loans (not secured by real estate) |  |                | 15,482,548  |   |                   |   | 13,913,946  |  
|Consumer installment loans                                   |  |                | 8,915,721   |   |                   |   | 8,602,716   |  
|All other loans                                              |  |                | 7,143,242   |   |                   |   | 6,304,383   |  
|Net deferred loan costs and fees                             |  |                | 920,199     |   |                   |   | 857,465     |  
|                                                             |  |                |             |   |                   |   |             |  
|                                                             |  |               
|Total loans                                                  |  | $              | 253,032,641 |   |                   | $ | 252,251,738 |  
|Allowance for loan losses                                    |  |                | (2,439,352  | ) |                   |   | (2,552,091  | )
|                                                             |  |                |             |   |                   |   |             |  
|                                                             |  |               
|Loans, net                                                   |  | $              | 250,593,289 |   |                   | $ | 249,699,647 |  
|                                                             |  |                |             |   |                   |   |             |  

Loans upon which the accrual of interest has been discontinued totaled $4.8 million as of
March 31, 2009 and $6.0 million as of December 31, 2008.

Note 4: Allowance for Loan Losses



|                           |  |                |           |   |                   |   |           |                |  |   |           |  
|-------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -------------- |  | - | --------- | -
|                           |  | March 31, 2009 |           |   | December 31, 2008 |   |           | March 31, 2008 | 
|                           |  | (unaudited)    |           |   |                   |   |           | (unaudited)    | 
|Balance, beginning of year |  | $              | 2,552,091 |   |                   | $ | 2,347,244 |                |  | $ | 2,347,244 |  
|Provision for loan losses  |  |                | 95,001    |   |                   |   | 394,255   |                |  |   | 15,238    |  
|Recoveries                 |  |                | 30,183    |   |                   |   | 14,330    |                |  |   | 6,252     |  
|Loans charged off          |  |                | (237,923  | ) |                   |   | (203,738  | )              |  |   | (61,210   | )
|                           |  |                |           |   |                   |   |           |                |  |   |           |  
|                           |  |                |          
|Balance, end of period     |  | $              | 2,439,352 |   |                   | $ | 2,552,091 |                |  | $ | 2,307,524 |  
|                           |  |                |           |   |                   |   |           |                |  |   |           |  

Information about impaired loans is as follows:



|                                                                                 |  |                |           |                   |   |          
|-------------------------------------------------------------------------------- |  | -------------- | --------- | ----------------- | - | ---------
|for the three months and twelve months ended:                                    |  | March 31, 2009 |           | December 31, 2008
|                                                                                 |  | (unaudited)    |           |                  
|Impaired loans for which an allowance has been provided                          |  | $              | 3,979,825 |                   | $ | 3,093,247
|Impaired loans for which no allowance has been provided                          |  |                |          |                   |   |         
|                                                                                 |  |                |           |                   |   |          
|Total impaired loans                                                             |  | $              | 3,979,825 |                   | $ | 3,093,247
|                                                                                 |  |                |           |                   |   |          
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $              | 1,180,803 |                   | $ | 1,098,126
|                                                                                 |  |                |           |                   |   |          
|Average balance impaired loans                                                   |  | $              | 4,099,045 |                   | $ | 3,334,047
|                                                                                 |  |                |           |                   |   |          
|                                                                                 |  |               
|Interest income recognized (collected $31,270 and $128,439, respectively)        |  | $              | 31,456    |                   | $ | 147,292  
|                                                                                 |  |                |           |                   |   |          

At March 31, 2009 and December 31, 2008, non-accrual loans excluded from impaired loan
disclosure under Statement of Financial Accounting Standard (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, totaled $2,614,714 and $4,285,607, respectively. If interest on these loans had been accrued, such
income would have approximated $55,678 during the three months ended March 31, 2009 and $219,460 during the year ended December 31, 2008.



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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, 2009 |                 | March 31, 2008
|                               | AverageShares |                | Per shareAmount |                | AverageShares |  | Per shareAmount
|Basic earnings per share       |               | 2,387,641      |                 | $              | 0.09          |  | 2,363,614       |  | $ | 0.21
|                               |               |                |                 |                |               |  |                 |  |   |     
|                               |               |                |                 |               
|Effect of dilutive securities: |               |                |                 |                |               |  |                 |  |   |     
|Stock options                  |               |               |                 |                |               |  |                |  |   |     
|                               |               |                |                 |                |               |  |                 |  |   |     
|                               |               |                |                 |               
|Diluted earnings per share     |               | 2,387,641      |                 | $              | 0.09          |  | 2,363,614       |  | $ | 0.21
|                               |               |                |                 |                |               |  |                 |  |   |     

As of March 31, 2009 and 2008, options on 176,481 and 145,353 shares, respectively, were not
included in computing diluted earnings per share, because their effects were anti-dilutive.

Note 6: Stock-Based Compensation

Incremental stock-based compensation expense recognized was $3,347 during the first three months of 2009. As of March 31, 2009, there was no
unrecognized compensation expense related to stock options.

Stock option compensation expense is the estimated fair value of options
granted using the Black-Scholes Model amortized on a straight-line basis over the vesting period of the award. There were no options granted and none exercised during the three month period ended March 31, 2009.

Stock option plan activity for the three months ended March 31, 2009 is summarized below:



|                               |  |         |  |                                |       |                                                      |     |                             |   |  
|------------------------------ |  | ------- |  | ------------------------------ | ----- | ---------------------------------------------------- | --- | --------------------------- | - | -
|(unaudited)                    |  | Shares  |  | Weighted AverageExercise Price |       | Weighted AverageRemaining ContractualLife (in years) |     | AggregateIntrinsicValue (1)
|Options outstanding, January 1 |  | 176,481 |  | $                              | 14.75 |                                                      | 5.7 |                             |   |  
|                               |  |         |  |                               
|Granted                        |  |        |  |                                |      |                                                      |     |                             |   |  
|Forfeited                      |  |        |  |                                |      |                                                      |     |                             |   |  
|Exercised                      |  |        |  |                                |       |                                                      |     |                             |   |  
|Expired                        |  |        |  |                                |      |                                                      |     |                             |   |  
|Options outstanding, March 31  |  | 176,481 |  | $                              | 14.75 |                                                      | 5.5 |                             | $ | 
|                               |  |         |  |                                |       |                                                      |     |                             |   |  
|                               |  |         |  |                               
|Options exercisable, March 31  |  | 143,481 |  | $                              | 15.38 |                                                      | 4.7 |                             | $ | 
|                               |  |         |  |                                |       |                                                      |     |                             |   |  



|(1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock
exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2009. This amount changes based on changes in the market value of the Companys
stock. At March 31, 2009, the exercise price of all options outstanding exceeded the market value of the Companys stock.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Note 7: Goodwill

The Company has goodwill recorded on the consolidated financial statements relating to the purchase of five branches during the years 1994 through 2000. The balance of the goodwill at March 31, 2009 and
December 31, 2008, as reflected on the consolidated balance sheets was $2,807,842. In accordance with SFAS Nos. 141 (SFAS 141), Business Combinations, and 142 (SFAS 142), Goodwill and Other Intangible
Assets, management determined that these purchases qualified as acquisitions of businesses and that the related unidentifiable intangibles were goodwill. Therefore, amortization was discontinued effective January 1, 2002. The goodwill
balance is tested for impairment at least annually, and there was no impairment recorded in the first quarter of 2009 or 2008.

Note 8: Employee Benefit
Plans

Components of Net Periodic Benefit Cost



|                                                |  |                  |         |   |                          |   |         |      |  |      |        |  |   |       
|----------------------------------------------- |  | ---------------- | ------- | - | ------------------------ | - | ------- | ---- |  | ---- | ------ |  | - | ------
|(unaudited)                                     |  | Pension Benefits |         |   | Post Retirement Benefits
|Three months ended March 31,                    |  | 2009             |         |   | 2008                     |   |         | 2009 |  | 2008
|Service cost                                    |  | $                | 77,245  |   |                          | $ | 78,440  |      |  | $    | 5,359  |  | $ | 4,722 
|Interest cost                                   |  |                  | 61,092  |   |                          |   | 62,167  |      |  |      | 7,408  |  |   | 6,833 
|Expected return on plan assets                  |  |                  | (60,895 | ) |                          |   | (93,512 | )    |  |      |       |  |   |      
|Amortization of unrecognized prior service cost |  |                  | 1,166   |   |                          |   | 4,093   |      |  |      |       |  |   |      
|Amortization of unrecognized net loss           |  |                  | 26,495  |   |                          |   | 962     |      |  |      | 46     |  |   | 31    
|Amortization of transition obligation           |  |                  |        |   |                          |   |        |      |  |      | 728    |  |   | 728   
|                                                |  |                  |         |   |                          |   |         |      |  |      |        |  |   |       
|                                                |  |                  |         |  
|Net periodic benefit cost                       |  | $                | 105,103 |   |                          | $ | 52,150  |      |  | $    | 13,541 |  | $ | 12,314
|                                                |  |                  |         |   |                          |   |         |      |  |      |        |  |   |       

The Company intends to contribute $450,000 to its pension plan and $20,149 to its post-retirement
benefit plan in 2009. The Company has made the pension plan contribution in full and has contributed $3,184 toward the post-retirement plan during the first three months of 2009.

Note 9: FHLB Advances

On March 31, 2009, the Bank had Federal Home Loan Bank of Atlanta
(FHLB) debt consisting of three advances, one for $15.0 million, which was acquired on May 18, 2006, one for $10.0 million, which was acquired on September 12, 2006, and one for $5.0 million, which was acquired on May 18,
2007. The interest rate on the $15 million advance is fixed at 4.81%, payable quarterly and matures on May 18, 2011. The interest rate on the $10 million advance is fixed at 4.23%, payable quarterly and matures on September 12, 2016. The
interest rate on the $5 million advance is fixed at 4.485%, payable quarterly and matures on May 18, 2012. The FHLB holds an option to terminate any of the advances on any quarterly payment date.

Advances on the FHLB line is secured by a blanket lien on qualified 1 to 4 family residential real estate loans. Total borrowing capacity is
approximately $65 million. Remaining available credit is $27 million.

Note 10: Fair Value Measurements

The Company adopted SFAS No.157 (SFAS 157), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to
determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants.

In February of 2008, the FASB issued Staff Position No. 157-2 (FSP 157-2) which delayed the
effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of
SFAS 157 for such nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Thus, the Company has only partially applied SFAS 157. Those items affected by
FSP 157-2 include other real estate owned (OREO), goodwill and core deposit intangibles.

In October of 2008, the FASB issued FSP 157-3 to
clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance,
including prior periods for which financials statements were not issued.



11



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SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation
techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys market assumptions. The three levels of the fair value hierarchy under SFAS 157
based on these two types of inputs are as follows:



|          |  |                                                                                                                                                                                                                                                                                                                                                                   
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1  |  | Valuation is based on quoted prices in active markets for identical assets and liabilities.                                                                                                                                                                                                                                                                       
|          | 
|Level 2  |  | Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active
markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
|          | 
|Level 3  |  | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.                                                                                                                                                                                                                          

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

Securities available for sale: Securities available
for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation
techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of
identical or similar securities by using pricing models that considers observable market data (Level 2).

The following table presents the
balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2009:



|                              |  |                             |            |                                                           |  |                                           |   |                                        |  | 
|----------------------------- |  | --------------------------- | ---------- | --------------------------------------------------------- |  | ----------------------------------------- | - | -------------------------------------- |  | 
|                              |  |                             |            | Fair Value Measurements at March 31, 2009 Using          
|Description                   |  | Balance as ofMarch 31, 2009 |            | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |  | SignificantOtherObservableInputs(Level
2) |   | SignificantUnobservableInputs(Level 3)
|Available-for-sale securities |  | $                           | 30,109,452 |                                                           |  |                                           | $ | 30,109,452                             |  | 

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

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

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



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##### Table of Contents

The following table summarizes the Companys financial assets that were measured at fair value on a
nonrecurring basis during the period.



|                                           |  |                             |           |                                                           |   |                                           |  |                                        |   |  |   |          
|------------------------------------------ |  | --------------------------- | --------- | --------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | ---------
|                                           |  |                             |           | Carrying value at March 31, 2009                         
|Description                                |  | Balance as ofMarch 31, 2009 |           | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|Impaired Loans, net of valuation allowance |  | $                           | 2,799,022 |                                                           | $ |                                          |  | $                                      |  |  | $ | 2,799,022



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##### Table of Contents

|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 the Company. This discussion
should be read in conjunction with the above consolidated financial statements and the notes thereto.

EXECUTIVE SUMMARY

Interest margins remain one of managements primary challenges in 2009. The Federal Open Market Committee began precipitously reducing the Federal
funds target rate in the fourth quarter of 2007, and continued the reductions throughout 2008. This rate dropped 4.00 percentage points from December of 2007 to December of 2008. It now stands at an historic low of 0.00% to 0.25%. Throughout 2008,
as loan rates decreased, reducing interest income, management was able to decrease deposit rates, reducing interest expense. However, further reductions in deposit rates will hamper the Banks ability to maintain funding sources, due to
extraordinary competition for time deposits. As a result, loan yields continue to deteriorate as existing loan rates adjust downward and mortgage holders flock to refinance at historically low rates.

Another primary challenge that remains into 2009 is minimal loan growth. Although the Bank originates millions of dollars in new loans each month, the
level of originations is not sufficient to offset normal levels of loan prepayments and payoffs. Additionally, potential loan customers are not meeting minimum underwriting standards. The result is that increases in loan volumes are not available to
mitigate the effect of reductions in loan yields, causing interest income to decline materially.

However, the Companys core capital
levels and regulatory ratios remain strong. Given the challenging economic environment, management is guarding the Companys capital closely. The Company is experiencing the effects of what has become a lengthy economic recession. More loans
are impaired than we have traditionally experienced, others are no longer providing interest income, and regrettably, a few foreclosures have been unavoidable. However, levels of delinquent loans and nonaccrual loans have declined during the first
quarter of 2009. Further, recoveries on previously charged off loans have increased. If these trends continue, these could be signs of a strengthening economy.

In the non-interest expense area, all banks in the United States will be experiencing dramatic increases in FDIC insurance assessments. This is because the FDICs Deposit Insurance Fund has fallen below 1.15% of
insurable domestic deposits, which compels the FDIC to increase assessments. As a result, not only has the FDIC doubled the insurance premiums for most banks, but it will be collecting a special assessment in September, 2009, that will likely triple
this expense for the full year 2009. For our Bank, the quarterly premium will increase in June, 2009 from approximately $45,000 to approximately $90,000. Then, the special assessment could cost the Bank up to an estimated additional $180,000 to
$500,000.

Management continues to control salaries and benefits expense by restructuring responsibilities among existing employees as
attrition occurs. Delays in non-essential capital expenditures are providing relief in related depreciation expense.

However, management
is not sacrificing future growth for present challenges. Investments made in technology and the Banks two new branch offices position the Company to take advantage of growth potential when the economy improves.

For more information, visit the Companys website at www.baybanks.com.

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 these 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.
Historical losses are used as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors used. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of transactions would be the same, the timing of events that would impact these transactions could change.

ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on 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 allowance
for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations
that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.



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The allowance for loan losses is increased by charges to income and decreased by loans charged off (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.

EARNINGS SUMMATION

For the three months ended March 30, 2009, net income was $219 thousand, a decrease of 54.9% compared to the $486 thousand for the similar period in
2008, but up 24.4% from the $176 thousand for the prior quarter ended December 31, 2008. Diluted earnings per average share for the three months ended March 31, 2009 were $0.09 as compared to $0.21 for the three months ended March 31,
2008. Annualized return on average assets was 0.3% and 0.6% for the three-month periods ended March 31, 2009 and 2008, respectively. Annualized return on average equity was 3.3% for the three months ended March 31, 2009, down from 7.1% for
the similar period ended March 31, 2008.

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 an effect on net interest income, the net interest margin, and net income. Net interest income before provision for loan losses for the three months ended
March 31, 2009 was $2.5 million, a decrease of 8.46% compared to the three months ended March 31, 2008. Net interest income after the provision for loan losses is down 11.4% for the same period comparison.

Although interest income declined by $775 thousand for the year-to-date period ended March 31, 2009 compared to the same period in 2008, decreases
in interest expense of $543 thousand for the same period comparison helped to minimize the decrease in net interest income, leaving net interest income (before the provision for loan losses) down only $232 thousand. The $775 thousand decrease in
interest income was driven mainly by reduced loan yields, a result of reductions in the Wall Street Prime Rate, which affects adjustable and variable-rate loans. The $543 thousand decrease in interest expense was primarily due to reductions in
rates.



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##### Table of Contents

Net Interest Income Analysis (unaudited)



|                                                        |                |                              |                |  |                              |       |  |                |   |                |   |                      |  |   |       |  |      |  
|------------------------------------------------------- | -------------- | ---------------------------- | -------------- |  | ---------------------------- | ----- |  | -------------- | - | -------------- | - | -------------------- |  | - | ----- |  | ---- | -
|(Fully taxable equivalent basis) (Dollars in thousands) |                | Three months ended 3/31/2009 |                |  | Three months ended 3/31/2008 |      
|                                                        | AverageBalance |                              | Income/Expense |  | AnnualizedYield/Rate         |       |  | AverageBalance |   | Income/Expense |   | AnnualizedYield/Rate | 
|INTEREST EARNING ASSETS:                                |                |                              |                |  |                              |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Taxable investments                                     |                | $                            | 13,933         |  | $                            | 139   |  | 3.99           | % |                | $ | 21,118               |  | $ | 270   |  | 5.11 | %
|Tax-exempt investments (1)                              |                |                              | 19,990         |  |                              | 271   |  | 5.43           | % |                |   | 21,224               |  |   | 297   |  | 5.60 | %
|                                                        |                |                              |                |  |                              |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Total Investments                                       |                |                              | 33,923         |  |                              | 410   |  | 4.84           | % |                |   | 42,342               |  |   | 567   |  | 5.36 | %
|                                                        |                |                              |                |  |                              |      
|Gross loans (2)                                         |                |                              | 252,345        |  |                              | 3,839 |  | 6.10           | % |                |   | 257,135              |  |   | 4,428 |  | 6.89 | %
|Interest-bearing deposits                               |                |                              | 7,320          |  |                              | 6     |  | 0.36           | % |                |   | 401                  |  |   | 4     |  | 5.45 | %
|Fed funds sold                                          |                |                              | 6,592          |  |                              | 4     |  | 0.23           | % |                |   | 6,277                |  |   | 44    |  | 2.80 | %
|                                                        |                |                              |                |  |                              |       |  |                |   |                |   |                      |  |   |       |  |      |  
|TOTAL INTEREST EARNING ASSETS                           |                | $                            | 300,180        |  | $                            | 4,259 |  | 5.68           | % |                | $ | 306,155              |  | $ | 5,043 |  | 6.59 | %
|                                                        |                |                              |                |  |                              |      
|INTEREST-BEARING LIABILITIES:                           |                |                              |                |  |                              |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Savings deposits                                        |                | $                            | 45,125         |  | $                            | 106   |  | 0.95           | % |                | $ | 51,281               |  | $ | 290   |  | 2.26 | %
|NOW deposits                                            |                |                              | 33,067         |  |                              | 42    |  | 0.52           | % |                |   | 35,045               |  |   | 86    |  | 0.98 | %
|Time deposits >= $100,000                               |                |                              | 53,465         |  |                              | 470   |  | 3.57           | % |                |   | 48,224               |  |   | 560   |  | 4.65 | %
|Time deposits < $100,000                                |                |                              | 69,776         |  |                              | 615   |  | 3.57           | % |                |   | 68,276               |  |   | 750   |  | 4.39 | %
|Money market deposit accounts                           |                |                              | 18,205         |  |                              | 77    |  | 1.72           | % |                |   | 18,551               |  |   | 130   |  | 2.80 | %
|                                                        |                |                              |                |  |                              |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Total interest bearing deposits                         |                | $                            | 219,638        |  | $                            | 1,310 |  | 2.42           | % |                | $ | 221,377              |  | $ | 1,816 |  | 3.28 | %
|                                                        |                |                              |                |  |                              |      
|Fed funds purchased                                     |                |                              | 8              |  |                              |      |  | 0.25           | % |                |   | 112                  |  |   |      |  | 3.66 | %
|Securities sold to repurchase                           |                |                              | 5,734          |  |                              | 4     |  | 0.28           | % |                |   | 6,915                |  |   | 37    |  | 2.14 | %
|FHLB advance                                            |                |                              | 30,000         |  |                              | 342   |  | 4.62           | % |                |   | 30,000               |  |   | 346   |  | 4.61 | %
|                                                        |                |                              |                |  |                              |       |  |                |   |                |   |                      |  |   |       |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES                      |                | $                            | 255,380        |  | $                            | 1,656 |  | 2.63           | % |                | $ | 258,404              |  | $ | 2,199 |  | 3.40 | %
|                                                        |                |                              |                |  |                              |      
|Net interest income/yield on earning assets             |                |                              |                |  | $                            | 2,603 |  | 3.47           | % |                |   |                      |  | $ | 2,844 |  | 3.72 | %
|Net interest rate spread                                |                |                              |                |  |                              |       |  | 3.05           | % |                |   |                      |  |   |       |  | 3.19 | %



Notes:

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

(2)-Includes Visa Program & nonaccrual loans.

The annualized net interest margin was 3.47% for
the three months ended March 31, 2009, compared to 3.72% for the same period in 2008. The main reason for this decline is reductions in the Wall Street Prime Rate throughout 2008, as mentioned earlier. Although reductions in the federal funds
target rate have provided some relief by allowing the Bank to reduce the cost of deposits, the cost of funding has not declined as much as the yield on earning assets.

Average interest-earning assets decreased 2.0% to $300.2 million for the three months ended March 31, 2009 as compared to $306.2 million for the three months ended March 31, 2008. Average interest-earning
assets as a percent of total average assets was 92.3% for the three months ended March 31, 2009 as compared to 93.3% for the comparable period of 2008. As shown above, for the three months ended March 31, 2009, the loan portfolio with
$252.3 million is the largest category of interest-earning assets.

Average interest-bearing liabilities decreased 1.2% to $255.4 million
for the three months ended March 31, 2009, as compared to $258.4 million for the three months ended March 31, 2008. The largest category of interest-bearing liabilities is time deposits, with combined average balances of $123.2 million for
the three months ended March 31, 2009.

The net interest spread, which is the difference between the annualized yield on earning
assets and the annualized cost of interest-bearing liabilities, was 3.05% for the three months ended March 31, 2009 and 3.19% for the same period in 2008.



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LIQUIDITY

The Company maintains adequate short-term assets to meet its liquidity needs as anticipated by management. Federal funds sold, interest-bearing deposits at the Federal Reserve, and investments that mature in one year or less provide the
major sources of funding for liquidity needs. On March 31, 2009, federal funds sold totaled $8.2 million, interest-bearing deposits at the Federal Reserve totaled $10.8 million, and securities maturing in one year or less totaled $9.1 million,
for a total pool of $17.3 million. The liquidity ratio as of March 31,2009 was 16.1% as compared to 12.4% as of December 31, 2008. The Company determines this ratio by dividing the sum of cash and cash equivalents, investment securities
maturing in one year or less, loans maturing in one year or less and federal funds sold, by total assets. Recently, to provide an additional cushion in these uncertain times, management has chosen to hold funds received from maturing securities in
cash instead of reinvesting those funds in new securities. In addition, as noted earlier, the Company has a line of credit with the FHLB worth $65 million, plus federal funds lines with several correspondent banks.

There have been no material changes to the off balance sheet items disclosed in Managements Discussion and Analysis of Financial Condition
and Results of Operation in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

CONTRACTUAL
OBLIGATIONS

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

CAPITAL RESOURCES

From December 31, 2008 to March 31, 2009, total shareholders equity remained essentially unchanged at $26.3 million. Several factors
impact shareholders equity, including the Companys commitment to returning earnings to its shareholders through dividends while meeting regulatory capital requirements.

The Companys capital resources are also 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. Another factor effecting Accumulated Other
Comprehensive Income or Loss is changes in the fair value of the Companys pension and post-retirement benefit plans. Shareholders equity before accumulated other comprehensive loss was $27.5 million on March 31, 2009 compared to
$27.6 million on December 31, 2008. Accumulated other comprehensive loss decreased by $93 thousand between December 31, 2008 and March 31, 2009, a result of unrealized gains in the investment portfolio.

Book value per share, basic, on March 31, 2009, compared to December 31, 2008, decreased by less than 1.0% to $10.97 from $11.01. Book value
per share, basic, before accumulated comprehensive loss on March 31, 2009, compared to December 31, 2008, decreased to $11.46 from $11.55. Cash dividends paid for each of the three-month periods ended March 31,
2009, December 31, 2008, and March 31, 2008 were $0.17 per share. Of the 5,000,000 common shares authorized, 2,395,571 are outstanding.

The Company began a share repurchase program in August of 1999 and has continued the program into 2009. No repurchases were made during the first three months of 2009, compared to shares repurchased at a cost of $21
thousand during the comparable period in 2008.

The Bank is subject to minimum regulatory capital ratios as defined by Federal Financial
Institutions Examination Council guidelines. These ratios continue to be well in excess of regulatory minimums. As of March 31, 2009, the Bank maintained Tier 1 capital of $24.1 million, net risk weighted assets of $240.6 million, and Tier 2
capital of $2.4 million. On March 31, 2009, the Tier 1 capital to risk weighted assets ratio was 10.0%, the total capital ratio was 11.0%, and the Tier 1 leverage ratio was 7.6%.



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FINANCIAL CONDITION

Total assets increased by 3.1% to $327.8 million during the three months ended March 31, 2009. Cash and cash equivalents, which produce no income, decreased to $4.3 million on March 31, 2009, from $5.2
million at year-end 2008.

During the three months ended March 31, 2009, gross loans increased by $781 thousand or 0.3%, to $253.0
million from $252.3 million at year-end 2008. The largest component of this increase was commercial and industrial loans with an 11.3% increase to $15.5 million.

Compared to the first quarter of 2008, when the Company charged off loans totaling $55 thousand, net of recoveries, the $208 thousand of net charge-offs during the first quarter of 2009 is higher. However, management
is confident that the level of net charge-offs during this most recent quarter are an anomaly, and does not expect similar amounts in future quarters. For the comparable period in 2008, total loans charged off were $55 thousand, net of recoveries.
The Company maintained $1.4 million of other real estate owned (OREO) as of March 31, 2009, compared to $1.0 million at year-end 2008. All properties maintained as OREO are actively marketed.

The provision for loan losses amounted to $95 thousand during the three months ended March 31, 2009, compared to $242 thousand for the fourth
quarter of 2008, and $15 thousand for the first quarter of 2008. Due to the unusual amount of charge-offs discussed above, which were anticipated, as evidenced by the increased provision in 2008s fourth quarter, the allowance for loan losses,
as a percentage of total loans, was 0.96% at March 31, 2009, compared to 1.01% at December 31, 2008. To determine the necessary provision, the allowance for loan losses is analyzed quarterly for adequacy on a loan-by-loan basis, plus with
a set of weighted factors addressing such considerations as the national and local economies, changes in non-performing assets, competition and trends in growth, among others. Additional provision was deemed unnecessary for the first quarter of
2009, as management anticipates that planned provision expense will more than offset charge-offs in the coming quarter. Also, in order to reduce potential charge-offs, management has been proactively addressing troubled assets to obtain additional
collateral, as appropriate.

As of March 31, 2009, $4.0 million of loans were considered impaired, of which $1.6 million were on
non-accrual status. Compared to December 31, 2008, impaired loan balances have increased by $887 thousand. Impaired loans are identified based on SFAS No. 114. Specific reserves established on impaired loans increased by $83 thousand from
December 31, 2008.

Loans no longer accruing interest totaled $4.8 million as of March 31, 2009, down from $6.0 million as of
year-end 2008. Loans still accruing interest but delinquent for 90 days or more totaled $527 thousand on March 31, 2009, as compared to $395 thousand on December 31, 2008. 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, 2009,
securities available for sale at market value totaled $32.3 million as compared to $35.0 million on December 31, 2008. This represents a net decrease of $2.6 million or 7.5% for the three months. Securities classified as held-to-maturity at
book value were $490 thousand as of March 31, 2009, compared to $486 thousand at December 31, 2008. As of March 31, 2009, the investment portfolio represented 10.0% of total assets and 10.8% 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. These gains or losses are booked as an adjustment to shareholders equity based upon market conditions, and are not realized as
an adjustment to earnings until the securities are actually sold or an other than temporary impairment occurs. Management does not consider any of the unrealized losses to be other than temporarily impaired.

As of March 31, 2009, total deposits were $263.9 million compared to $251.0 million at year-end 2008. This represents an increase in balances of
$12.9 million or 5.1% during the three months. Components of this increase include savings and interest-bearing demand deposits with a 3.9% increase to $98.8 million, non interest-bearing deposits with a 9.2% increase to $40.5 million and time
deposits with a 4.8% increase to $124.6 million.

On June 4, 2008, the Bank
opened a new branch office in Burgess, Northumberland County, Virginia. This is the Banks 8thretail office and a strategic extension of its
market into the financially attractive eastern region of that county.

The Banks latest new office, in Colonial Beach, Virginia, was
opened on March 11, 2009. This is the Banks 9th retail office and the 2nd in Westmoreland County, another strategic extension of its market to that countys western end.

These new offices will result in increases to depreciation and related expense. Management believes that improvements in customer service,
efficiency and an expanded market footprint will reap benefits well in excess of costs over time, and are essential to the continued growth of the Company. A well-trained and motivated staff is present in each office to establish the same long-term
personal relationships provided to current customers.



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RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income of $683 thousand for the three months ended March 31, 2009, is down from $744
thousand for the three months ended March 31, 2008. Declines were due mainly to declines in income from fiduciary activities and secondary market lending fees. Income from Investment Advantage was $92 thousand, down from $94 thousand for the
same quarter of 2008.

The Companys fiduciary income is derived from the operations of its subsidiary, Bay Trust Company, which
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 and bond market, which directly impacts the market value of the accounts upon which fees are earned, and explains the quarterly and year-to-date declines shown
in the Consolidated Statement of Earnings.

NON-INTEREST EXPENSE

For the three months ended March 31, 2009, non-interest expenses were $2.9 million, an increase of 0.4% compared to the same period in 2008. During this continued economic downturn, management has been and
continues to actively manage all expenses. The largest components of non-interest expense are salaries and benefits, and occupancy expense. For the three months ended March 31, 2009, compared to the same period in 2008, management reduced
salary and benefit expense by 0.4%. Occupancy expense is up by 10.2% to $460 thousand, due mainly to the Banks newest two branch offices, discussed above.

Other non-interest expenses include bank franchise taxes which were down to $42 thousand for the
first three months of 2009 compared to $52 thousand for the same period in 2008; expenses related to the Visa® program which were down to $128 thousand for the first three months of 2009
compared to $133 thousand for the same period in 2008; and telephone expenses which were down to $42 thousand for the current period compared to $48 thousand for the same period in 2008. Telephone expenses include the cost of the Companys
Customer Care Center and data network communications. Other expenses were down to $664 thousand for the current period as compared to $668 thousand for the three months ended March 31, 2008, even though FDIC insurance assessments increased by
$43 thousand within this category.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides
enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. The Company adopted SFAS 157 on January 1, 2008. The FASB approved a one-year deferral for the implementation of the Statement
for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted the provisions of SFAS 157 for nonfinancial assets and liabilities as of January 1,
2009 without a material impact on the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)). The Standard significantly changed the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for
how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of
an entitys first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

In April 2009, the FASB issued Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies. FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or



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liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4
is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. Earlier adoption is permitted for periods ending after March 15, 2009. The Company/Bank does not expect the adoption of FSP FAS
157-4 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, the FSP amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the
adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued
FSP FAS 115-1 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-1 and FAS 124-2 amends other-than-temporary impairment guidance for debt securities to make guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS
115-1 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 115-1 and FAS 124-2 to
have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 111 (SAB 111). SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series entitled Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities. SAB 111 maintains the SEC
Staffs previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. The Company does not expect the implementation of SAB 111 to have a material impact on its consolidated financial statements.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Not
required.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and
with the participation of the Companys management, including the Companys Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures
pursuant to Rule 13a-14 of the Exchange Act. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential conditions. Based upon their evaluation, the Companys Chief Executive Officer and Principal Financial Officer concluded that the Companys disclosure
controls and procedures are effective 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 as of March 31, 2009.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There was no change to the Companys internal control over financial reporting during the quarter ended March 31, 2009 that materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

In the ordinary course of its
operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial
condition, or results of operations of the Company.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Not required.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

The Company began a share repurchase program in August of 1999 and has continued the program into 2009. There are a total of 280,000 shares authorized for repurchase under the program. No shares were repurchased during the quarter ended
March 31, 2009.



|ITEM 3. | DEFAULT UPON SENIOR SECURITIES
|------- | ------------------------------

None to report.



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

There were no
matters submitted to a vote of security holders during the quarter ended March 31, 2009.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

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.
| | ---- | ----------------------------------------------------------------------------------------------------------------------



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##### 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)               
|             |  |                            
|May 11, 2009 |  | By:                         |  | /s/ Austin L. Roberts, III           
|             |  |                             |  | Austin L. Roberts, III               
|             |  |                             |  | President and Chief Executive Officer
|             |  |                             |  | (Principal Executive Officer)        
|             |  |                            
|             |  | By:                         |  | /s/ Deborah M. Evans                 
|             |  |                             |  | Deborah M. Evans                     
|             |  |                             |  | Treasurer                            
|             |  |                             |  | (Principal Financial Officer)        



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