##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

FOR THE QUARTERLY PERIOD ENDED June 30, 2006



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

COMMISSION FILE NUMBER: 0-22955



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BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer  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:

2,369,626 shares of common stock on July 21, 2006.



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##### Table of Contents

FORM 10-Q

For the interim period ending June 30, 2006.

INDEX



|                                                                                              |  |                                                                                                                        |  |  
|--------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | -
|PART I - FINANCIAL INFORMATION                                                                |  |                                                                                                                       
|                                                                                              | 
|ITEM 1. FINANCIAL STATEMENTS                                                                  |  |                                                                                                                       
|                                                                                              |  |                                                                                                                       
|                                                                                              |  | CONSOLIDATED BALANCE SHEETS JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31,
2005                                            |  | 3
|                                                                                              | 
|                                                                                              |  |                                                                                                                       
|                                                                                              |  | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND
2005 (UNAUDITED)                |  | 4
|                                                                                              | 
|                                                                                              |  |                                                                                                                       
|                                                                                              |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE SIX MONTHS ENDED
JUNE 30, 2006 AND 2005 (UNAUDITED) |  | 5
|                                                                                              | 
|                                                                                              |  |                                                                                                                       
|                                                                                              |  | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)                      |  | 6
|                                                                                              | 
|                                                                                              |  |                                                                                                                       
|                                                                                              |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                             |  | 7
|                                                                                              | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 12                                                                                                                    
|                                                                                              | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 17                                                                                                                    
|                                                                                              | 
|ITEM 4. CONTROLS AND PROCEDURES                                                               |  | 18                                                                                                                    
|                                                                                              | 
|PART II - OTHER INFORMATION                                                                   |  |                                                                                                                       
|                                                                                              | 
|ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 18                                                                                                                    
|                                                                                              | 
|ITEM 1A. RISK FACTORS                                                                         |  | 18                                                                                                                    
|                                                                                              | 
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 18                                                                                                                    
|                                                                                              | 
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |  | 18                                                                                                                    
|                                                                                              | 
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 19                                                                                                                    
|                                                                                              | 
|ITEM 5. OTHER INFORMATION                                                                     |  | 19                                                                                                                    
|                                                                                              | 
|ITEM 6. EXHIBITS                                                                              |  | 19                                                                                                                    



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

CONSOLIDATED BALANCE SHEETS



|                                                                                  |             |               |             |   |                   |   |             |  
|--------------------------------------------------------------------------------- | ----------- | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                  |             | June 30, 2006 |             |   | December 31, 2005 |  
|                                                                                  | (Unaudited) |               |             |   |                  
|ASSETS                                                                            |             |               |             |   |                   |   |             |  
|Cash and due from banks                                                           |             | $             | 6,680,545   |   |                   | $ | 5,213,462   |  
|Interest-bearing deposits                                                         |             |               | 119,266     |   |                   |   | 108,403     |  
|Federal funds sold                                                                |             |               | 809,036     |   |                   |   | 4,138,806   |  
|Securities available for sale, at fair value                                      |             |               | 40,916,664  |   |                   |   | 45,728,286  |  
|Securities held to maturity, at amortized cost (fair value $436,720 and $434,155) |             |               | 450,114     |   |                   |   | 443,243     |  
|Loans, net of allowance for loan losses of $2,280,440 and $2,157,716              |             |               | 239,472,659 |   |                   |   | 229,655,864 |  
|Premises and equipment, net                                                       |             |               | 10,010,337  |   |                   |   | 9,966,200   |  
|Accrued interest receivable                                                       |             |               | 1,362,361   |   |                   |   | 1,320,101   |  
|Other real estate owned                                                           |             |               | 561,745     |   |                   |   | 561,745     |  
|Core deposit intangible                                                           |             |               | 2,807,842   |   |                   |   | 2,807,842   |  
|Other assets                                                                      |             |               | 1,835,741   |   |                   |   | 1,876,590   |  
|                                                                                  |             |               |             |   |                   |   |             |  
|Total assets                                                                      |             | $             | 305,026,310 |   |                   | $ | 301,820,542 |  
|                                                                                  |             |               |             |   |                   |   |             |  
|LIABILITIES                                                                       |             |               |             |   |                   |   |             |  
|Non-interest bearing deposits                                                     |             | $             | 40,800,738  |   |                   | $ | 42,664,536  |  
|Savings and interest-bearing demand deposits                                      |             |               | 110,186,513 |   |                   |   | 123,557,342 |  
|Time deposits                                                                     |             |               | 102,490,776 |   |                   |   | 92,564,678  |  
|                                                                                  |             |               |             |   |                   |   |             |  
|Total deposits                                                                    |             | $             | 253,478,027 |   |                   | $ | 258,786,556 |  
|                                                                                  |             |              
|Federal funds purchased                                                           |             |               | 1,289,000   |   |                   |   |            |  
|Securities sold under repurchase agreements                                       |             |               | 7,459,379   |   |                   |   | 5,048,450   |  
|Federal Home Loan Bank advance                                                    |             |               | 15,000,000  |   |                   |   | 10,000,000  |  
|Other liabilities                                                                 |             |               | 1,417,999   |   |                   |   | 1,372,563   |  
|                                                                                  |             |               |             |   |                   |   |             |  
|Total liabilities                                                                 |             | $             | 278,644,405 |   |                   | $ | 275,207,569 |  
|                                                                                  |             |               |             |   |                   |   |             |  
|SHAREHOLDERS EQUITY                                                              |             |               |             |   |                   |   |             |  
|Common stock ($5 par value;                                                       |             |               |             |   |                   |   |             |  
|Authorized  5,000,000 shares;                                                    |             |               |             |   |                   |   |             |  
|Outstanding  2,372,126 and 2,385,966 shares)                                     |             | $             | 11,860,631  |   |                   | $ | 11,929,830  |  
|Additional paid-in capital                                                        |             |               | 4,682,783   |   |                   |   | 4,849,436   |  
|Retained earnings                                                                 |             |               | 10,305,904  |   |                   |   | 9,926,321   |  
|Accumulated other comprehensive loss, net                                         |             |               | (467,413    | ) |                   |   | (92,614     | )
|                                                                                  |             |               |             |   |                   |   |             |  
|Total shareholders equity                                                        |             | $             | 26,381,905  |   |                   | $ | 26,612,973  |  
|                                                                                  |             |               |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                        |             | $             | 305,026,310 |   |                   | $ | 301,820,542 |  
|                                                                                  |             |               |             |   |                   |   |             |  

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|--------------------------------------------------- |  | --------------------------- | --------- | --------------------------- | - | -------------------------------------- |  | -------------------------------------- | --------- |  | - | ---------
|                                                    |  | Quarter ended June 30, 2006 |           | Quarter ended June 30, 2005 |   | For the six months ended June 30, 2006 |  | For the six months ended June 30, 2005
|INTEREST INCOME                                     |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Loans, including fees                               |  | $                           | 4,002,733 |                             | $ | 3,432,807                              |  | $                                      | 7,879,125 |  | $ | 6,650,955
|Securities:                                         |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Taxable                                             |  |                             | 257,000   |                             |   | 328,179                                |  |                                        | 537,889   |  |   | 629,075  
|Tax-exempt                                          |  |                             | 189,353   |                             |   | 185,183                                |  |                                        | 380,603   |  |   | 371,683  
|Federal funds sold                                  |  |                             | 47,094    |                             |   | 48,342                                 |  |                                        | 74,893    |  |   | 124,776  
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Total interest income                               |  |                             | 4,496,180 |                             |   | 3,994,511                              |  |                                        | 8,872,510 |  |   | 7,776,489
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|INTEREST EXPENSE                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Deposits                                            |  |                             | 1,541,840 |                             |   | 1,145,670                              |  |                                        | 3,009,214 |  |   | 2,226,466
|Securities sold to repurchase                       |  |                             | 64,370    |                             |   | 26,568                                 |  |                                        | 102,588   |  |   | 42,328   
|Federal funds purchased                             |  |                             | 20,207    |                             |   | 57,461                                 |  |                                        | 26,808    |  |   | 94,386   
|Federal home loan bank advances                     |  |                             | 186,924   |                             |   |                                       |  |                                        | 287,286   |  |   |         
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Total interest expense                              |  |                             | 1,813,341 |                             |   | 1,229,699                              |  |                                        | 3,425,896 |  |   | 2,363,180
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Net interest income                                 |  |                             | 2,682,839 |                             |   | 2,764,812                              |  |                                        | 5,446,614 |  |   | 5,413,309
|Provision for loan losses                           |  |                             | 75,000    |                             |   | 137,500                                |  |                                        | 150,000   |  |   | 275,000  
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Net interest income after provision for loan losses |  |                             | 2,607,839 |                             |   | 2,627,312                              |  |                                        | 5,296,614 |  |   | 5,138,309
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|NON-INTEREST INCOME                                 |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Income from fiduciary activities                    |  |                             | 180,651   |                             |   | 186,348                                |  |                                        | 353,984   |  |   | 360,805  
|Service charges and fees on deposit accounts        |  |                             | 187,683   |                             |   | 177,092                                |  |                                        | 345,674   |  |   | 349,624  
|Other service charges and fees                      |  |                             | 298,557   |                             |   | 245,414                                |  |                                        | 564,135   |  |   | 453,793  
|Secondary market lending fees                       |  |                             | 41,159    |                             |   | 55,312                                 |  |                                        | 82,283    |  |   | 70,477   
|Other income                                        |  |                             | 31,202    |                             |   | 19,692                                 |  |                                        | 54,261    |  |   | 55,779   
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Total non-interest income                           |  |                             | 739,252   |                             |   | 683,858                                |  |                                        | 1,400,337 |  |   | 1,290,478
|                                                    |  |                             |           |                            
|NON-INTEREST EXPENSES                               |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Salaries and employee benefits                      |  |                             | 1,375,469 |                             |   | 1,197,503                              |  |                                        | 2,754,187 |  |   | 2,432,251
|Occupancy expense                                   |  |                             | 433,968   |                             |   | 411,908                                |  |                                        | 864,262   |  |   | 781,231  
|Bank franchise tax                                  |  |                             | 46,685    |                             |   | 57,988                                 |  |                                        | 93,369    |  |   | 114,194  
|Visa expense                                        |  |                             | 132,676   |                             |   | 115,125                                |  |                                        | 237,576   |  |   | 212,187  
|Telephone expense                                   |  |                             | 45,543    |                             |   | 47,923                                 |  |                                        | 93,086    |  |   | 91,208   
|Other expenses                                      |  |                             | 582,689   |                             |   | 599,310                                |  |                                        | 1,096,275 |  |   | 1,088,035
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Total non-interest expenses                         |  |                             | 2,617,030 |                             |   | 2,429,757                              |  |                                        | 5,138,755 |  |   | 4,719,106
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Net income before income taxes                      |  |                             | 730,061   |                             |   | 881,413                                |  |                                        | 1,558,196 |  |   | 1,709,681
|                                                    |  |                             |           |                            
|Income tax expense                                  |  |                             | 202,601   |                             |   | 242,776                                |  |                                        | 420,172   |  |   | 467,272  
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Net income                                          |  | $                           | 527,460   |                             | $ | 638,637                                |  | $                                      | 1,138,024 |  | $ | 1,242,409
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Basic Earnings Per Share                            |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Average basic shares outstanding                    |  |                             | 2,370,441 |                             |   | 2,363,184                              |  |                                        | 2,372,398 |  |   | 2,358,725
|Earnings per share, basic                           |  | $                           | 0.22      |                             | $ | 0.27                                   |  | $                                      | 0.48      |  | $ | 0.53     
|                                                    |  |                             |           |                            
|Diluted Earnings Per Share                          |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          
|Average diluted shares outstanding                  |  |                             | 2,376,237 |                             |   | 2,372,860                              |  |                                        | 2,384,935 |  |   | 2,371,910
|Earnings per share, diluted                         |  | $                           | 0.22      |                             | $ | 0.27                                   |  | $                                      | 0.48      |  | $ | 0.52     
|                                                    |  |                             |           |                             |   |                                        |  |                                        |           |  |   |          

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 |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | TotalShareholdersEquity |         
|Balance on January 1, 2005                                                                                       |  | $           | 11,770,937 |   |                          | $ | 4,621,295 |                  |  | $ | 8,860,506                                     |   |  | $                        | 566,784  |   |  | $ | 25,819,522 |  
|Comprehensive Income:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Net Income                                                                                                       |  |             |            |   |                          |   |           |                  |  |   | 1,242,409                                     |   |  |                          |          |   |  |   | 1,242,409  |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of ($125,481)          |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          | (243,581 | ) |  |   | (243,581   | )
|Reclassification adjustment for securities gains included in net income, net of taxes of ($64)                   |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          | (126     | ) |  |   | (126       | )
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Total Comprehensive Income                                                                                       |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   | 998,702    |  
|Cash dividends paid  $0.31/share                                                                                |  |             |            |   |                          |   |           |                  |  |   | (731,636                                      | ) |  |                          |          |   |  |   | (731,636   | )
|Stock repurchases                                                                                                |  |             | (9,570     | ) |                          |   | (19,439   | )                |  |   |                                              |   |  |                          |         |   |  |   | (29,009    | )
|Sale of common stock:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Dividends Reinvested                                                                                             |  |             | 54,362     |   |                          |   | 115,518   |                  |  |   |                                              |   |  |                          |         |   |  |   | 169,880    |  
|Stock Options Exercised                                                                                          |  |             | 34,880     |   |                          |   | (14,006   | )                |  |   |                                              |   |  |                          |         |   |  |   | 20,874     |  
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Balance on June 30, 2005                                                                                         |  | $           | 11,850,609 |   |                          | $ | 4,703,368 |                  |  | $ | 9,371,279                                     |   |  | $                        | 323,077  |   |  | $ | 26,248,333 |  
|                                                                                                                 |  |             |            |   |                         
|Balance on January 1, 2006                                                                                       |  | $           | 11,929,830 |   |                          | $ | 4,849,436 |                  |  | $ | 9,926,321                                     |   |  | $                        | (92,614  | ) |  | $ | 26,612,973 |  
|Comprehensive Income:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Net Income                                                                                                       |  |             |            |   |                          |   |           |                  |  |   | 1,138,024                                     |   |  |                          |          |   |  |   | 1,138,024  |  
|Changes in unrealized holding gains (losses) on securities arising during the period, net of taxes of ($193,078) |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          | (374,799 | ) |  |   | (374,799   | )
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Total Comprehensive Income                                                                                       |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   | 763,225    |  
|Cash dividends paid  $0.32/share                                                                                |  |             |            |   |                          |   |           |                  |  |   | (758,441                                      | ) |  |                          |          |   |  |   | (758,441   | )
|Stock repurchases                                                                                                |  |             | (150,000   | ) |                          |   | (284,407  | )                |  |   |                                              |   |  |                          |         |   |  |   | (434,407   | )
|Stock-based compensation                                                                                         |  |             |            |   |                          |   | 26,965    |                  |  |   |                                               |   |  |                          |          |   |  |   | 26,965     |  
|Sale of common stock:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Dividends Reinvested                                                                                             |  |             | 61,071     |   |                          |   | 110,479   |                  |  |   |                                              |   |  |                          |         |   |  |   | 171,550    |  
|Stock Options Exercised                                                                                          |  |             | 19,730     |   |                          |   | (19,690   | )                |  |   |                                              |   |  |                          |         |   |  |   | 40         |  
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  
|Balance on June 30, 2006                                                                                         |  | $           | 11,860,631 |   |                          | $ | 4,682,783 |                  |  | $ | 10,305,904                                    |   |  | $                        | (467,413 | ) |  | $ | 26,381,905 |  
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                               |   |  |                          |          |   |  |   |            |  

See Notes to Consolidated Financial Statements.



5



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##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                  |  |               |             |   |               |   |             |  
|--------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                  |  | June 30, 2006 |             |   | June 30, 2005 |  
|Cash Flows From Operating Activities                                              |  |               |             |   |               |   |             |  
|Net Income                                                                        |  | $             | 1,138,024   |   |               | $ | 1,242,409   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |               |             |   |               |   |             |  
|Depreciation                                                                      |  |               | 464,165     |   |               |   | 393,157     |  
|Net amortization and accretion of securities                                      |  |               | 9,036       |   |               |   | 11,793      |  
|Provision for loan losses                                                         |  |               | 150,000     |   |               |   | 275,000     |  
|Stock-based compensation                                                          |  |               | 26,965      |   |               |   |            |  
|Net securities (gains)                                                            |  |               |            |   |               |   | (190        | )
|Gain on sale of other real estate owned                                           |  |               |            |   |               |   | (164        | )
|(Increase) / decrease in accrued income and other assets                          |  |               | (2,868      | ) |               |   | 75,459      |  
|Increase in other liabilities                                                     |  |               | 238,514     |   |               |   | 99,697      |  
|                                                                                  |  |               |             |   |               |   |             |  
|Net cash provided by operating activities                                         |  | $             | 2,023,836   |   |               | $ | 2,097,161   |  
|                                                                                  |  |               |             |   |               |   |             |  
|Cash Flows From Investing Activities                                              |  |               |             |   |               |   |             |  
|Proceeds from maturities of available-for-sale securities                         |  |               | 810,745     |   |               |   | 1,106,352   |  
|Proceeds from sales of available-for-sale securities                              |  |               | 4,583,900   |   |               |   | 249,997     |  
|Purchases of available-for-sale securities                                        |  |               | (1,166,807  | ) |               |   | (1,538,355  | )
|(Increase) / decrease in interest bearing deposits                                |  |               | (10,863     | ) |               |   | 4,949       |  
|Decrease in Federal funds sold                                                    |  |               | 3,329,770   |   |               |   | 4,260,231   |  
|Loan originations and principal collections, net                                  |  |               | (9,966,794  | ) |               |   | (11,376,682 | )
|Purchases of premises and equipment                                               |  |               | (506,846    | ) |               |   | (1,090,097  | )
|                                                                                  |  |               |             |   |               |   |             |  
|Net cash (used in) investing activities                                           |  | $             | (2,953,860  | ) |               | $ | (8,383,605  | )
|                                                                                  |  |               |             |   |               |   |             |  
|Cash Flows From Financing Activities                                              |  |               |             |   |               |   |             |  
|Net increase / (decrease) in demand, savings, and other interest-bearing deposits |  |               | (15,234,627 | ) |               |   | 3,091,003   |  
|Net increase in time deposits                                                     |  |               | 9,926,098   |   |               |   | 1,714,286   |  
|Net increase / (decrease) in securities sold under repurchase agreements          |  |               | 3,699,929   |   |               |   | (873,866    | )
|Increase in FHLB advances                                                         |  |               | 5,000,000   |   |               |   | 2,500,000   |  
|Proceeds from issuance of common stock                                            |  |               | 171,590     |   |               |   | 190,754     |  
|Dividends paid                                                                    |  |               | (758,441    | ) |               |   | (731,636    | )
|Repurchase of common stock                                                        |  |               | (434,407    | ) |               |   | (29,009     | )
|                                                                                  |  |               |             |   |               |   |             |  
|Net cash provided by financing activities                                         |  | $             | 2,397,107   |   |               | $ | 5,861,532   |  
|                                                                                  |  |               |             |   |               |   |             |  
|Net increase / (decrease) in cash and due from banks                              |  |               | 1,467,083   |   |               |   | (424,912    | )
|                                                                                  |  |              
|Cash and due from banks at beginning of period                                    |  |               | 5,213,462   |   |               |   | 8,572,672   |  
|                                                                                  |  |               |             |   |               |   |             |  
|Cash and due from banks at end of period                                          |  | $             | 6,680,545   |   |               | $ | 8,147,760   |  
|                                                                                  |  |               |             |   |               |   |             |  
|Supplemental Disclosures:                                                         |  |               |             |   |               |   |             |  
|Interest paid                                                                     |  | $             | 3,318,092   |   |               | $ | 2,355,869   |  
|                                                                                  |  |               |             |   |               |   |             |  
|Income taxes paid                                                                 |  |               | 506,822     |   |               |   | 490,262     |  
|                                                                                  |  |               |             |   |               |   |             |  
|Unrealized loss on investment securities                                          |  |               | (567,877    | ) |               |   | (369,254    | )
|                                                                                  |  |               |             |   |               |   |             |  
|Loans transferred to other real estate owned                                      |  |               |            |   |               |   | 11,070      |  
|                                                                                  |  |               |             |   |               |   |             |  



|See | Notes to Consolidated Financial Statements.
|--- | -------------------------------------------



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

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

These consolidated financial statements should be read in conjunction with the
financial statements and notes to financial statements included in the registrants 2005 Annual Report to Shareholders.

In March
2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement 140 (Statement 156). Statement 156
amends Statement 140 with respect to separately recognized servicing assets and liabilities. Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering
into a servicing contract and requires all servicing assets and liabilities to be initially measured at fair value, if practicable. Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization
method or fair value measurement method. Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing. Under the fair value measurement method, servicing assets are
measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs.

Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequent to September 15, 2006. Earlier adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet
issued financial statements, including interim financial statements.

The Company does not expect the adoption of Statement 156 at the
beginning of 2007 to have a material impact on its financial performance.

Note 2: Securities

The carrying amounts of debt and other securities and their approximate fair values at June 30, 2006, and December 31, 2005, follow:



|                                                        |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|------------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities June 30, 2006 (unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|U.S. Government agencies                                |  | $             | 11,720,093 |                      | $ | 289                     |  | $ | (391,752   | ) |  | $ | 11,328,630
|State and municipal obligations                         |  |               | 26,775,076 |                      |   | 99,620                  |  |   | (442,942   | ) |  |   | 26,431,754
|Corporate bonds                                         |  |               | 1,535,896  |                      |   | 26,584                  |  |   |           |   |  |   | 1,562,480 
|Restricted securities                                   |  |               | 1,593,800  |                      |   |                        |  |   |           |   |  |   | 1,593,800 
|                                                        |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                        |  | $             | 41,624,865 |                      | $ | 126,493                 |  | $ | (834,694   | ) |  | $ | 40,916,664
|                                                        |  |               |            |                      |   |                         |  |   |            |   |  |   |           



7



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|                                                      |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|----------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities December 31, 2005       |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|U.S. Government agencies                              |  | $             | 12,270,642 |                      | $ | 4,336                   |  | $ | (251,563   | ) |  | $ | 12,023,415
|State and municipal obligations                       |  |               | 30,687,331 |                      |   | 279,400                 |  |   | (236,528   | ) |  |   | 30,730,203
|Corporate bonds                                       |  |               | 1,537,938  |                      |   | 64,030                  |  |   |           |   |  |   | 1,601,968 
|Restricted securities                                 |  |               | 1,372,700  |                      |   |                        |  |   |           |   |  |   | 1,372,700 
|                                                      |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                      |  | $             | 45,868,611 |                      | $ | 347,766                 |  | $ | (488,091   | ) |  | $ | 45,728,286
|                                                      |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                      |  |               |            |                     
|Held-to-maturity securities June 30, 2006 (unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|State and municipal obligations                       |  | $             | 450,114    |                      | $ |                        |  | $ | (13,394    | ) |  | $ | 436,720   
|                                                      |  |               |            |                      |   |                         |  |   |            |   |  |   |           



|                                              |  |               |         |                      |   |                         |  |   |            |   |  |   |        
|--------------------------------------------- |  | ------------- | ------- | -------------------- | - | ----------------------- |  | - | ---------- | - |  | - | -------
|Held-to-maturity securities December 31, 2005 |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|State and municipal obligations               |  | $             | 443,243 |                      | $ |                        |  | $ | (9,088     | ) |  | $ | 434,155
|                                              |  |               |         |                      |   |                         |  |   |            |   |  |   |        

Securities with a market value of $12.1 million were pledged as collateral for public deposits,
repurchase agreements and for other purposes as required by law as of June 30, 2006. The market value of pledged securities at year-end 2005 was $11.7 million.

Securities in an unrealized loss position at June 30, 2006, and December 31, 2005, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate
movements as there is minimal credit risk exposure in these investments. All securities are investment grade or better and all losses are temporary. Bonds with unrealized loss positions at June 30, 2006, included 27 federal agencies and 54
municipal bonds, as shown below.



|                                      |            |                     |                |                   |            |         |                |   |            |  |                |         |  |   |            |  |   |        
|------------------------------------- | ---------- | ------------------- | -------------- | ----------------- | ---------- | ------- | -------------- | - | ---------- |  | -------------- | ------- |  | - | ---------- |  | - | -------
|June 30, 2006 (unaudited)             |            | Less than 12 months |                | 12 months or more |            | Total  
|                                      | Fair Value |                     | UnrealizedLoss |                   | Fair Value |         | UnrealizedLoss |   | Fair Value |  | UnrealizedLoss
|U.S. Government agencies              |            | $                   | 1,781,341      |                   | $          | 38,452  |                | $ | 9,446,779  |  | $              | 353,287 |  | $ | 11,228,120 |  | $ | 391,752
|States and municipal obligations      |            |                     | 5,750,618      |                   |            | 132,709 |                |   | 8,450,775  |  |                | 323,627 |  |   | 13,764,673 |  |   | 456,336
|                                      |            |                     |                |                   |            |         |                |   |            |  |                |         |  |   |            |  |   |        
|Total temporarily impaired securities |            | $                   | 7,531,959      |                   | $          | 171,161 |                | $ | 17,897,554 |  | $              | 676,914 |  | $ | 24,992,793 |  | $ | 848,088
|                                      |            |                     |                |                   |            |         |                |   |            |  |                |         |  |   |            |  |   |        



|                                      |  |                     |            |                   |   |            |  |                |            |            |   |                |  |   |            |  |   |        
|------------------------------------- |  | ------------------- | ---------- | ----------------- | - | ---------- |  | -------------- | ---------- | ---------- | - | -------------- |  | - | ---------- |  | - | -------
|                                      |  | Less than 12 months |            | 12 months or more |   | Total     
|December 31, 2005                     |  | Fair Value          |            | UnrealizedLoss    |   | Fair Value |  | UnrealizedLoss |            | Fair Value |   | UnrealizedLoss
|U.S. Government agencies              |  | $                   | 3,432,253  |                   | $ | 58,478     |  | $              | 7,887,867  |            | $ | 193,085        |  | $ | 11,320,120 |  | $ | 251,563
|States and municipal obligations      |  |                     | 8,847,041  |                   |   | 144,698    |  |                | 3,025,121  |            |   | 100,918        |  |   | 11,872,162 |  |   | 245,616
|                                      |  |                     |            |                   |   |            |  |                |            |            |   |                |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 12,279,294 |                   | $ | 203,176    |  | $              | 10,912,988 |            | $ | 294,003        |  | $ | 23,192,282 |  | $ | 497,179
|                                      |  |                     |            |                   |   |            |  |                |            |            |   |                |  |   |            |  |   |        

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



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Note 3: Loans

The components of loans were as follows:



|                                                             |             |               |             |   |                   |   |             |  
|------------------------------------------------------------ | ----------- | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                             |             | June 30, 2006 |             |   | December 31, 2005 |  
|                                                             | (unaudited) |               |             |   |                  
|Mortgage loans on real estate:                               |             |               |             |   |                   |   |             |  
|Construction                                                 |             | $             | 47,758,835  |   |                   | $ | 40,998,818  |  
|Secured by farmland                                          |             |               | 678,745     |   |                   |   | 1,329,479   |  
|Secured by 1-4 family residential                            |             |               | 129,133,423 |   |                   |   | 123,573,952 |  
|Other real estate loans                                      |             |               | 32,832,317  |   |                   |   | 31,045,731  |  
|Commercial and industrial loans (not secured by real estate) |             |               | 19,563,039  |   |                   |   | 22,668,129  |  
|Consumer installment loans                                   |             |               | 10,267,662  |   |                   |   | 10,580,279  |  
|All other loans                                              |             |               | 587,486     |   |                   |   | 595,920     |  
|Net deferred loan costs and fees                             |             |               | 931,592     |   |                   |   | 1,021,272   |  
|                                                             |             |               |             |   |                   |   |             |  
|Total loans                                                  |             | $             | 241,753,099 |   |                   | $ | 231,813,580 |  
|Allowance for loan losses                                    |             |               | (2,280,440  | ) |                   |   | (2,157,716  | )
|                                                             |             |               |             |   |                   |   |             |  
|Loans, net                                                   |             | $             | 239,472,659 |   |                   | $ | 229,655,864 |  
|                                                             |             |               |             |   |                   |   |             |  

Loans upon which the accrual of interest has been discontinued totaled $1.6 million as of
June 30, 2006, and $253 thousand as of December 31, 2005.

Note 4: Allowance for Loan Losses



|                           |  |               |           |   |                   |   |           |               |  |   |           |  
|-------------------------- |  | ------------- | --------- | - | ----------------- | - | --------- | ------------- |  | - | --------- | -
|                           |  | June 30, 2006 |           |   | December 31, 2005 |   |           | June 30, 2005 | 
|                           |  | (unaudited)   |           |   |                   |   |           | (unaudited)   | 
|Balance, beginning of year |  | $             | 2,157,716 |   |                   | $ | 2,032,185 |               |  | $ | 2,032,185 |  
|Provision for loan losses  |  |               | 150,000   |   |                   |   | 559,068   |               |  |   | 275,000   |  
|Recoveries                 |  |               | 33,615    |   |                   |   | 83,367    |               |  |   | 70,871    |  
|Loans charged off          |  |               | (60,891   | ) |                   |   | (516,904  | )             |  |   | (435,911  | )
|                           |  |               |           |   |                   |   |           |               |  |   |           |  
|Balance, end of year       |  | $             | 2,280,440 |   |                   | $ | 2,157,716 |               |  | $ | 1,942,145 |  
|                           |  |               |           |   |                   |   |           |               |  |   |           |  



|Information | about impaired loans is as follows:
|----------- | -----------------------------------



|                                                                                 |  |               |           |                   |   |        
|-------------------------------------------------------------------------------- |  | ------------- | --------- | ----------------- | - | -------
|                                                                                 |  | June 30, 2006 |           | December 31, 2005
|                                                                                 |  | (unaudited)   |           |                  
|Impaired loans for which an allowance has been provided                          |  | $             | 1,420,508 |                   | $ | 14,188 
|Impaired loans for which no allowance has been provided                          |  |               |          |                   |   |       
|Total impaired loans                                                             |  | $             | 1,420,508 |                   | $ | 14,188 
|                                                                                 |  |               |           |                   |   |        
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $             | 689,747   |                   | $ | 14,188 
|                                                                                 |  |               |           |                   |   |        
|Average balance impaired loans                                                   |  | $             | 229,969   |                   | $ | 655,279
|                                                                                 |  |               |           |                   |   |        
|Interest income recognized                                                       |  | $             | 43,157    |                   | $ | 19,388 
|                                                                                 |  |               |           |                   |   |        



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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) |               | June 30, 2006 |                 | June 30, 2005
|                               | AverageShares |               | Per shareAmount |               | AverageShares |  | Per shareAmount
|Basic earnings per share       |               | 2,372,398     |                 | $             | 0.48          |  | 2,358,725       |  | $ | 0.53
|Effect of dilutive securities: |               |               |                 |               |               |  |                 |  |   |     
|Stock options                  |               | 12,537        |                 |               |               |  | 13,185          |  |   |     
|Diluted earnings per share     |               | 2,384,935     |                 | $             | 0.48          |  | 2,371,910       |  | $ | 0.52

As of June 30, 2006 and 2005, options on 135,028 shares and 117,958 shares, respectively,
were not included in computing diluted earnings per share, because their effects were anti-dilutive.

Note 6: Stock-Based Compensation

In December, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair
value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The Company adopted SFAS
123R effective January 1, 2006 using the modified prospective method and, as such, results for prior periods have not been restated. Prior to January 1, 2006, no compensation expense was recognized for stock option grants, as all such
grants had an exercise price equal to the fair market value on the date of grant.

As a result of adopting SFAS 123R on January 1,
2006, incremental stock-based compensation expense recognized was $27 thousand during the six months of 2006. As of June 30, 2006, there was $28 thousand of unrecognized compensation expense related to nonvested stock options, which will be
recognized over the remaining vesting period.

The following illustrates the effect on net income and earnings per share if the Company had
applied the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation, prior to January 1, 2006:



|                                                                                                                           |  |                               |           |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | -
|                                                                                                                           |  | Six Months EndedJune 30, 2005 |          
|Net income, as reported                                                                                                    |  | $                             | 1,242,409 |  
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |                               | (12,776   | )
|                                                                                                                           |  |                               |           |  
|Pro forma net income                                                                                                       |  | $                             | 1,229,633 |  
|                                                                                                                           |  |                               |           |  
|Earnings per share:                                                                                                        |  |                               |           |  
|Basic  as reported                                                                                                        |  | $                             | 0.53      |  
|Basic  pro forma                                                                                                          |  | $                             | 0.53      |  
|Diluted  as reported                                                                                                      |  | $                             | 0.52      |  
|Diluted  pro forma                                                                                                        |  | $                             | 0.52      |  
|                                                                                                                           | 
|Basic Average Shares Outstanding                                                                                           |  |                               | 2,358,725 |  
|Diluted Average Shares Outstanding                                                                                         |  |                               | 2,371,910 |  



10



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##### Table of Contents

Stock option compensation expense is the estimated fair value of options granted amortized on a
straight-line basis over the vesting period of the award.

Stock option plan activity for the six months ended June 30, 2006 is
summarized below:



|                               |  |         |   |  |                                 |       |                                                     |     |                                        |   |      
|------------------------------ |  | ------- | - |  | ------------------------------- | ----- | --------------------------------------------------- | --- | -------------------------------------- | - | -----
|                               |  | Shares  |   |  | Weighted Average Exercise Price |       | WeightedAverageRemainingContractual Life (in years) |     | Value ofUnexercisedIn-The-MoneyOptions
|Options outstanding, January 1 |  | 176,939 |   |  | $                               | 15.01 |                                                     | 5.4 |                                        | $ | 9.62 
|Granted                        |  | 42,500  |   |  | $                               | 13.60 |                                                     |     |                                        |   |      
|Forfeited                      |  | (22,837 | ) |  | $                               | 14.24 |                                                     |     |                                        |   |      
|Exercised                      |  | (9,100  | ) |  | $                               | 8.50  |                                                     |     |                                        |   |      
|                               |  |         |   |  |                                 |       |                                                     |     |                                        |   |      
|Options outstanding, June 30   |  | 187,502 |   |  | $                               | 15.15 |                                                     | 6.4 |                                        | $ | 13.68
|                               |  |         |   | 
|Options exercisable, June 30   |  | 151,502 |   |  | $                               | 15.57 |                                                     | 5.6 |                                        | $ | 13.95

Note 7: Unidentifiable Intangibles

The Company has unidentifiable intangibles recorded on the consolidated financial statements relating to the purchase of five branches. The balance of the
intangibles at June 30, 2006, as reflected on the consolidated balance sheet, was $2,807,842. Management has determined that these purchases qualified as acquisitions of businesses, and therefore discontinued amortization, effective
January 1, 2002. Based on managements assessment, there is no impairment in value at June 30, 2006.

Note 8: Employee Benefit Plans

Components of Net Periodic Benefit Cost

(unaudited)



|                                                |  |                  |          |   |                          |   |         |      |  |      |        |  |   |       
|----------------------------------------------- |  | ---------------- | -------- | - | ------------------------ | - | ------- | ---- |  | ---- | ------ |  | - | ------
|                                                |  | Pension Benefits |          |   | Post Retirement Benefits
|Six months ended June 30,                       |  | 2006             |          |   | 2005                     |   |         | 2006 |  | 2005
|Service cost                                    |  | $                | 146,065  |   |                          | $ | 152,694 |      |  | $    | 10,029 |  | $ | 8,508 
|Interest cost                                   |  |                  | 101,742  |   |                          |   | 98,893  |      |  |      | 15,723 |  |   | 16,687
|Expected return on plan assets                  |  |                  | (117,281 | ) |                          |   | (99,058 | )    |  |      |       |  |   |      
|Amortization of unrecognized prior service cost |  |                  | 8,186    |   |                          |   | 8,186   |      |  |      |       |  |   |      
|Amortization of unrecognized net loss           |  |                  | 25,800   |   |                          |   | 31,775  |      |  |      | 5,371  |  |   | 6,577 
|Amortization of transition obligation           |  |                  |         |   |                          |   |        |      |  |      | 1,457  |  |   | 1,457 
|                                                |  |                  |          |   |                          |   |         |      |  |      |        |  |   |       
|Net periodic benefit cost                       |  | $                | 164,512  |   |                          | $ | 192,490 |      |  | $    | 32,580 |  | $ | 33,229
|                                                |  |                  |          |   |                          |   |         |      |  |      |        |  |   |       

Employer Contributions

The Company disclosed in its Annual Report on Form 10-K for the year ended December 31, 2005, that it expected to contribute $148,927 to its pension plan and $26,381 to its post-retirement benefit plan in 2006.
The Company has made the pension plan contribution in full and has contributed $10,440 toward the post-retirement plan during the first six months of 2006.



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Note 9: FHLB Advance

On June 30, 2006, the Company had Federal Home Loan Bank of Atlanta (FHLB) debt consisting of one advance for $15.0 million, which was acquired on May 18, 2006. The interest rate on this advance
is fixed at 4.81% payable quarterly and matures on May 18, 2011. The FHLB holds an option to terminate this advance on May 18, 2007, or any subsequent quarterly payment date. On June 19, 2006, the Company repaid the $10.0 million
advance it had acquired on May 19, 2005.

Advances on the FHLB line are secured by a blanket lien on qualified 1 to 4 family
residential real estate loans. Immediate available credit, as of June 30, 2006, was $15.3 million.

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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



12



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##### Table of Contents

EARNINGS SUMMATION

For the six months ended June 30, 2006, net income was $1.1 million as compared to $1.2 million for the comparable period in 2005, a decrease of 8.4%. Diluted earnings per average share for the six months ended
June 30, 2006 were $0.48 as compared to $0.52 for the six months ended June 30, 2005. Annualized return on average assets was 0.8% for the six months ended June 30, 2006, unchanged from the similar period in 2005. Annualized return on
average equity was 8.5% for the six months ended June 30, 2006, down from 9.5% for the similar period ended June 30, 2005.

The
principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest-earning
assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, and the volume of non-performing assets have a significant impact on net interest income, the net interest margin,
and net income. The annualized net interest margin was 3.97% for the six months ended June 30, 2006, compared to 3.96% for the same period in 2005.

Net interest income before provision for loan losses for the six months ended June 30, 2006 was $5.4 million, compared to $5.4 million for the six months ended June 30, 2005, a slight increase of 0.6%.
Increases in net interest income were driven mainly by increases in loan rates during the six months ended June 30, 2006, compared to the same period in 2005. Average interest-earning assets totaled $284.3 million for the six months ended
June 30, 2006 as compared to $283.1 million for the six months ended June 30, 2005, an increase of 0.4%. Average interest-earning assets as a percent of total average assets was 93.5% for the six months ended June 30, 2006 as compared
to 93.2% for the comparable period of 2005. The annualized yield on average interest-earning assets for the six months ended June 30, 2006 was 6.38% as compared to 5.63% for the six months ended June 30, 2006.

As loan volume continues to increase and loan rates adjust upward, the Company should realize increasing loan interest income. However, for nearly two
years, short term rates, exemplified by the Federal Funds target rate, have been rising faster than long term rates, such as mortgage rates, causing most financial institutions to experience faster increases in cost of funds than in yields on
earning assets. A continuation of this rate environment could affect the Companys net interest margin negatively. Management expects loan growth and positive loan rate adjustments to continue through 2006, in which case interest income should
continue to improve. However, management expects the cost of funds, and hence interest expense, to continue to rise. Therefore, the Company continues to diligently manage its cost of funds.

Average interest-bearing liabilities totaled $233.6 million for the six months ended June 30, 2006, as compared to $235.2 million for the six months
ended June 30, 2005, a decrease of 0.5%. The annualized cost of interest-bearing liabilities for the six months ended June 30, 2006, was 2.93% as compared to 2.01% for the six months ended June 30, 2006.

The net interest spread, which is the difference between the annualized yield on earning assets and the annualized cost of interest-bearing liabilities
was 3.45% for the six months ended June 30, 2006 and 3.62% for the same period in 2005.

Average total assets for the six months ended
June 30, 2006 were $304.1 million as compared to $303.6 million for the six months ended June 30, 2005.



13



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##### Table of Contents

Bay Banks of Virginia, Inc.

Net Interest Income Analysis (unaudited)



|                                              |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|--------------------------------------------- | -------------- | -------------------------- | -------------- |  | -------------------------- | ----- |  | -------------- | - | -------------- | - | -------------------- |  | - | ----- |  | ---- | -
|(Fully taxable equivalent basis) (Tthousands) |                | Six months ended 6/30/2006 |                |  | Six months ended 6/30/2005 |      
|                                              | AverageBalance |                            | Income/Expense |  | AnnualizedYield/Rate       |       |  | AverageBalance |   | Income/Expense |   | AnnualizedYield/Rate | 
|INTEREST-EARNING ASSETS:                      |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Taxable investments                           |                | $                          | 22,989         |  | $                          | 534   |  | 4.64           | % |                | $ | 32,572               |  | $ | 627   |  | 3.85 | %
|Tax-exempt investments (1)                    |                |                            | 19,973         |  |                            | 577   |  | 5.77           | % |                |   | 19,609               |  |   | 563   |  | 5.74 | %
|                                              |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Total Investments                             |                |                            | 42,962         |  |                            | 1,111 |  | 5.17           | % |                |   | 52,181               |  |   | 1,190 |  | 4.56 | %
|                                              |                |                            |                |  |                            |      
|Gross loans (2)                               |                |                            | 237,646        |  |                            | 7,879 |  | 6.63           | % |                |   | 221,234              |  |   | 6,651 |  | 6.01 | %
|Interest-bearing deposits                     |                |                            | 139            |  |                            | 4     |  | 5.92           | % |                |   | 113                  |  |   | 2     |  | 3.25 | %
|Federal funds sold                            |                |                            | 3,587          |  |                            | 75    |  | 4.75           | % |                |   | 9,550                |  |   | 125   |  | 2.61 | %
|                                              |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|TOTAL INTEREST-EARNING ASSETS                 |                | $                          | 284,334        |  | $                          | 9,069 |  | 6.38           | % |                | $ | 283,078              |  | $ | 7,968 |  | 5.63 | %
|                                              |                |                            |                |  |                            |      
|INTEREST-BEARING LIABILITIES:                 |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Savings deposits                              |                | $                          | 60,399         |  | $                          | 828   |  | 2.74           | % |                | $ | 67,200               |  | $ | 643   |  | 1.91 | %
|NOW deposits                                  |                |                            | 42,563         |  |                            | 158   |  | 0.74           | % |                |   | 48,185               |  |   | 126   |  | 0.52 | %
|Time deposits >= $100,000                     |                |                            | 30,906         |  |                            | 623   |  | 4.03           | % |                |   | 30,632               |  |   | 510   |  | 3.33 | %
|Time deposits < $100,000                      |                |                            | 65,769         |  |                            | 1,244 |  | 3.78           | % |                |   | 58,623               |  |   | 910   |  | 3.10 | %
|Money market deposit accounts                 |                |                            | 14,950         |  |                            | 156   |  | 2.09           | % |                |   | 17,275               |  |   | 37    |  | 0.43 | %
|                                              |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Total interest bearing deposits               |                | $                          | 214,587        |  | $                          | 3,009 |  | 2.80           | % |                | $ | 221,915              |  | $ | 2,226 |  | 2.01 | %
|                                              |                |                            |                |  |                            |      
|Federal funds purchased                       |                |                            | 1,004          |  |                            | 27    |  | 4.79           | % |                |   | 152                  |  |   | 3     |  | 2.98 | %
|Securities sold to repurchase                 |                |                            | 5,373          |  |                            | 103   |  | 1.91           | % |                |   | 5,183                |  |   | 40    |  | 0.77 | %
|FHLB advance                                  |                |                            | 12,652         |  |                            | 287   |  | 4.54           | % |                |   | 7,970                |  |   | 94    |  | 2.37 | %
|                                              |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES            |                | $                          | 233,616        |  | $                          | 3,426 |  | 2.93           | % |                | $ | 235,220              |  | $ | 2,363 |  | 2.01 | %
|                                              |                |                            |                |  |                            |      
|Net interest income/yield on earning assets   |                |                            |                |  | $                          | 5,642 |  | 3.97           | % |                |   |                      |  | $ | 5,605 |  | 3.96 | %
|Net interest rate spread                      |                |                            |                |  |                            |       |  | 3.45           | % |                |   |                      |  |   |       |  | 3.62 | %

---

Notes:

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

(2)-Includes Visa
Program & nonaccrual loans.

Through the six months ended June 30, 2006, average interest-earning assets were comprised of
the loan portfolio with $237.6 million and the investment portfolio with $43.0 million. For the six month period ended June 30, 2006, compared to the same period in 2005, on a fully tax equivalent basis, tax-exempt investment yields increased
to 5.77% from 5.74%, and taxable investment yields increased to 4.64% from 3.85%, resulting in an increase in total investment yield to 5.17% from 4.56%. The investment portfolio will provide liquidity as short investments mature during 2006 and
2007.

In the six months ended June 30, 2006, gross loans on average yielded 6.63% as compared to 6.01% for the same period in 2005.
The Company has been successful in growing the loan portfolio with variable and adjustable rate loans since 2004. By keeping the re-pricing terms of the loan portfolio short, these assets are positioned well for this rising rate environment.

As short-term rates in the market increased during 2005 and 2006, the Company held its deposit rates wherever possible in order to control
its cost of funds. As this rising rate trend continues in the market, increasing competitive pricing pressure, the Company has begun to raise its deposit rates. For the six months ended June 30, 2006 compared to June 30, 2005, the cost of
total interest-bearing deposits has increased to 2.80% from 2.01%, with increases in each type of deposit category.



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##### Table of Contents

LIQUIDITY

The Company maintains adequate short-term assets to meet its liquidity needs as anticipated by management. Federal funds sold and investments that mature in one year or less provide the major sources of funding for liquidity needs. On
June 30, 2006, federal funds sold totaled $809 thousand and securities maturing in one year or less totaled $5.4 million, for a total pool of $6.2 million. The liquidity ratio as of June 30, 2006 was 13.2% as compared to 15.9% as of
December 31, 2005. The Company determines this ratio by dividing the sum of cash and cash equivalents, unpledged investment securities and federal funds sold, by interest-bearing liabilities. Management, through historical analysis, has deemed
15% an adequate liquidity ratio. As cash balances can vary by as much as $4 million daily, it is not unexpected that this ratio may dip below 15% on any given day. In addition, as noted earlier, the Company has $15.3 million available on lines of
credit with the FHLB , plus federal fund lines with several correspondent banks.

OFF BALANCE SHEET ITEMS

There have been no material changes to the off balance sheet items disclosed in Managements Discussion and Analysis in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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, 2005.

CAPITAL RESOURCES

From December 31, 2005 to June 30, 2006, total shareholders equity decreased to $26.4 million from $26.6 million or 0.9%. The
Companys capital resources are impacted by net unrealized gains or losses on securities. The securities portfolio is marked to market monthly and unrealized gains or losses, net of taxes, are recognized as accumulated other comprehensive
income or loss on the balance sheet and statement of changes in shareholders equity. Shareholders equity before accumulated other comprehensive income was $26.8 million on June 30, 2006 and $26.7 on December 31, 2005.
Accumulated other comprehensive loss increased by $374.8 thousand between December 31, 2005 and June 30, 2006, which was the major driver for the $231 thousand decrease in total shareholders equity.

Another negative effect on shareholders equity was $758.4 thousand of cash dividends paid to shareholders. However, $171.6 thousand of these
dividends were reinvested through the Companys Dividend Reinvestment Plan (DRIP), reducing the net negative effect. The Company continues to be committed to returning earnings to its shareholders through dividend payments.

Earnings, or net income, is the largest positive contributor to shareholders equity, and was $1.1 million during the six month
period ended June 30, 2006.

Book value per share, basic, on June 30, 2006, compared to June 30, 2005, increased to $11.12
from $11.07, or 0.5%. Book value per share, basic, before accumulated comprehensive income on June 30, 2006, compared to June 30, 2005, grew to $11.32 from $10.94, an increase of 3.5%. Cash dividends paid for the six months ended
June 30, 2006, were $0.32 per share, compared to $0.31 per share, for the comparable period ended June 30, 2005, an increase of 3.7%. Average basic shares outstanding for the six months ended June 30, 2006, were 2,372,398 compared to
2,358,725 for the comparable period ended June 30, 2005.

The Company began a share repurchase program in August of 1999 and has
continued the program into 2006. In May of 2006, an additional 100,000 shares were authorized, bringing the total to 280,000 shares available for repurchase. A total of 30,000 shares have been repurchased at an average price of $14.48 during the
six-month period ending June 30, 2006.

The Company is subject to minimum regulatory capital ratios as defined by Federal Financial
Institutions Examination Council guidelines. As of June 30, 2006, the Company maintained Tier 1 capital of $24.0 million, net risk weighted assets of $235.3 million, and Tier 2 capital of $2.3 million. On June 30, 2006, the Tier 1 capital
to risk weighted assets ratio was 10.2%, the total capital ratio was 11.2%, and the Tier 1 leverage ratio was 8.0%. These ratios continue to be well in excess of regulatory minimums.



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##### Table of Contents

FINANCIAL CONDITION

Total assets increased by 1.1% during the six-month period ended June 30, 2006. Total assets were $305.0 million at June 30, 2006, as compared to $301.8 million at year-end 2005. Cash and cash equivalents,
which produce no income, increased to $6.7 million on June 30, 2006, compared to $5.2 million at year-end 2005.

During the six months
ended June 30, 2006, gross loans increased by $9.9 million or 4.3%, to $241.8 million from $231.8 million at year-end 2005. The major components of this increase were construction loans, with 16.5% growth to $47.8 million, and real estate
mortgage loans secured by 1-4 family residential collateral, with 4.5% growth to $129.1 million.

For the six months ended June 30,
2006, the Company charged off loans totaling $61 thousand. For the comparable period in 2005, total loans charged off were $436 thousand. The Company maintained $562 thousand of other real estate owned (OREO) as of June 30, 2006,
which is unchanged from year-end 2005. The Company actively markets all OREO properties, and expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of book or market value.

The provision for loan losses amounted to $150 thousand through the six months ended June 30, 2006, and the allowance for loan losses
as of June 30, 2006, was $2.3 million. The allowance for loan losses, as a percentage of total loans, was 0.94% at June 30, 2006. The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the necessary
provision. A loan by loan review is conducted of all loan classes and inherent losses on these individual loans are determined. This valuation is then compared to historical data in an effort to determine the prevailing trends. A third component of
the process is the analysis of a tabular presentation of loss allocation percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As of June 30, 2006, management deemed the loan loss
reserve reasonable for the loss risk identified in the loan portfolio.

As of June 30, 2006, $1.7 million of loans were on non-accrual
status, of which $1.4 million are considered impaired. There were $251 thousand of loans on non-accrual status as of year-end 2005. On June 30, 2005, non-accrual loans totaled $803 thousand, of which $608 thousand were considered impaired.
Impaired loans are those non-accrual loans that are considered commercial or non-farm/non-residential in nature. Loans still accruing interest but delinquent for 90 days or more were $851 thousand on June 30, 2006, as compared to $447 thousand
on June 30, 2005. 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 June 30, 2006, securities available for sale at market value totaled $40.9 million as compared to $45.7 million on December 31, 2005.
This represents a net decrease of $4.8 million or 10.5% for the six months. Securities held to maturity were $450 thousand as of June 30, 2006, compared to $443 thousand at December 31, 2005. As of June 30, 2006, the investment
portfolio represented 13.6% of total assets and 14.7% of earning assets. The greater portion of the Companys investment portfolio is classified as available-for-sale and marked to market on a monthly basis. The resulting accumulated adjustment
to book value as of June 30, 2006, was a net unrealized loss of $708 thousand. The corresponding accumulated loss adjustment to shareholders equity was $467 thousand. These gains or losses are booked monthly as an adjustment to book value
based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold.

As of
June 30, 2006, total deposits were $253.5 million compared to $258.8 million at year-end 2005. This represents a decrease in balances of $5.3 million or 2.1% during the six months. Components of this decrease include non-interest-bearing
deposits, with a 4.4% decrease to $40.8 million, and savings and interest-bearing demand deposits with a 10.8% decrease to 110.2 million. Time deposits increased by 10.7% to $102.5 million.

In July, 2006, the Bank received approval on its application to establish a Colonial Beach, Virginia, branch office, at the intersection of State Routes
205 and 632. Colonial Beach is an incorporated town within Westmoreland County. Accordingly, the Bank intends to construct and occupy a new de novo facility within the next twelve months as the applications approval provides. This
will be the Banks 8th banking office and the 2nd in Westmoreland County, an extension of its market to that Countys western end.



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##### Table of Contents

In addition to this new branch office, the Bank is renovating its Callao office, located in
Northumberland County, Virginia. These construction projects will result in some increases to depreciation and related expense. Management believes that improvements in customer service and an expanded market footprint will reap benefits
in excess of costs.

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the six months ended June 30, 2006 and 2005 totaled $1.4 million and $1.3
million, respectively. Non-interest income includes income from fiduciary activities, service charges on deposit accounts, other miscellaneous fees, gains on the sale of securities, and other income. Of these categories, the major components are
fiduciary activities which contributed $354 thousand compared to $361 thousand through six months of 2006 versus 2005, service charges on deposit accounts which contributed $346 thousand through six months of 2006 versus $350 thousand for the
comparable period in 2005, and other service charges and fees, which contributed $564 thousand compared to $454 thousand through the six months of 2006 and 2005, respectively. The primary component of the increase in other service charges and fees
is Visa® income, and secondary market lending fees.
Visa® income was $306 thousand for the first six
months of 2006, compared to $267 thousand for the same period in 2005. Secondary market lending fees totaled $82 thousand for the six-month period ended June 30, 2006, compared to $52 thousand for the same period in 2005.

The Companys fiduciary income is derived from the operations of its subsidiary, Bay Trust Company. The Trust Company offers a broad range of trust
and related fiduciary services. Among these are estate settlement and testamentary trusts, revocable and irrevocable personal trusts, managed agency, custodial accounts, and rollover IRAs both self-directed and managed. Fiduciary income is
largely affected by changes in the performance of the stock and bond market, which directly impacts the market value of the accounts upon which fees are earned.

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

NON-INTEREST EXPENSE

For the six months ended June 30, 2006, non-interest expenses were $5.1 million compared to $4.7 million for the six month period ended June 30,2005. The largest components of non-interest expense are
salaries and benefits, and occupancy expense. Through the six months ended June 30, 2006, salary and benefit expense was $2.8 million, compared to $2.4 million for the same period of 2005. In preparation for planned growth, the Bank has hired
new personnel in key revenue-producing areas of the Bank, which has resulted in this expected increase in salary and benefit expense. Occupancy expense was $864 thousand through the six months ended June 30, 2006 as compared to $781 thousand
for the same period of 2005. The Company capitalized an addition to its main office building in May 2005, resulting in increased depreciation expense.

Other expenses include bank franchise taxes which totaled $93 thousand through six months of 2006 and $114 thousand for 2005, expenses related to the Visa® program which were $238 thousand through six months of 2006 and $212 thousand through
six months of 2005, telephone expenses which were $93 thousand for the current period and $91 thousand through six months of 2005, and other operating expenses which totaled $1.1 million for the current period versus $1.1 million for the six months
ended June 30, 2005. Telephone expenses include the cost of the Companys Customer Care Center and data network communications.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes
from the quantitative and qualitative disclosures made in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.



17



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##### Table of Contents

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

The Company, under the
supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Treasurer, has evaluated the effectiveness of the design and operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Companys Chief Executive Officer and Treasurer concluded that the Companys
disclosure controls and procedures are operating effectively in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic Securities and
Exchange Commission (SEC) filings. No significant changes in the Companys internal control over financial reporting occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.

PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

As of August 2, 2006, there were no material changes to the risk factors
previously disclosed in the Companys Annual Report on form 10-K for the fiscal year ended December 31, 2005

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 2006. On May 4, 2006, an additional 100,000 shares were authorized for repurchase, bringing the combined total to 280,000 shares the Company has authorized under the program.

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

Issuer Purchases of Equity Securities



|            |  |                               |  |                             |       |                                                                                 |       |                                                                              |        
|----------- |  | ----------------------------- |  | --------------------------- | ----- | ------------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------- | -------
|            |  | TotalNumber ofSharesPurchased |  | Average Price Paidper Share |       | Total Number of Shares Purchased as Part of Publicly AnnouncedPlans or Programs |       | Maximum Number ofShares that May Yet be Purchased Under thePlans or
Programs
|April, 2006 |  | 3,000                         |  | $                           | 14.32 |                                                                                 | 3.000 |                                                                              | 11,128 
|May, 2006   |  | 1,500                         |  |                             | 14.97 |                                                                                 | 1,500 |                                                                              | 109,628
|June, 2006  |  | 3,000                         |  |                             | 14.93 |                                                                                 | 3,000 |                                                                              | 106,628
|            |  |                               |  |                             |       |                                                                                 |       |                                                                              |        
|            |  | 7,500                         |  | $                           | 14.69 |                                                                                 | 7,500 |                                                                              |        
|            |  |                               |  |                             |       |                                                                                 |       |                                                                              |        

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None to report.



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##### Table of Contents

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

The Company held its Annual Meeting of Stockholders on
May 15, 2006. The stockholders were asked to consider two proposals, as follows:



| | 1. | Election of one Class I director to serve for a term of three years.
| | -- | --------------------------------------------------------------------



| | 2. | Ratification of the Board of Directors appointment of Yount, Hyde & Barbour, P.C. as independent auditors
| | -- | ----------------------------------------------------------------------------------------------------------

of the Company for 2006.

The vote tabulation was as follows:



|                                                                             |  |           |  |                |  |               |  | 
|---------------------------------------------------------------------------- |  | --------- |  | -------------- |  | ------------- |  | 
|                                                                             |  | Votes For |  | Votes Withheld |  | Votes Against
|1.      Election of one Class I director to serve for a term of three
years: |  |           |  |                |  |              
|                                                                             |  |           |  |               
|Director                                                                     |  |           |  |                |  |               |  | 
|Robert J.
Wittman                                                            |  |           |  | 2,028,515      |  | 2,008         |  | 
|                                                                             |  |           | 
|2.      Yount, Hyde & Barbour, P.C.                                          |  | 2,089,377 |  | 1,146          |  | 8,124        

The following directors terms of office continued after the meeting:

Allen C. Marple

Ammon G. Dunton, Jr.

Robert C. Berry, Jr.

Weston F. Conley, Jr.

Richard A. Farmer, III

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)                         
|               | 
|August 2, 2006 |  | 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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