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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



For the Quarterly period ended September 30, 2003



| ̈ | TRANSITION REPORT UNDER 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)



|Virginia (State or other jurisdiction of incorporation or organization) |  | 54-1838100 (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 checkmark 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 Yes  x  No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ̈No  x



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



2,321,474 shares of common stock on October 31, 2003.



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FORM 10-Q



For the interim period ending September 30, 2003.



INDEX



|PART I FINANCIAL INFORMATION |  |                                                                                                                             
|---------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|                             |  |                                                                                                                             
|ITEM 1.                      |  | FINANCIALSTATEMENTS                                                                                                         
|                             |  |                                                                                                                             
|                             |  | CONSOLIDATED BALANCE SHEETS SEPTEMBER30,2003(UNAUDITED) AND DECEMBER 31, 2002                                               
|                             |  |                                                                                                                             
|                             |  | CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)             
|                             |  |                                                                                                                             
|                             |  | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)                     
|                             |  |                                                                                                                             
|                             |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
|                             |  |                                                                                                                             
|                             |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                  
|                             |  |                                                                                                                             
|ITEM 2.                      |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION                                        
|                             |  |                                                                                                                             
|                             |  | FINANCIAL HIGHLIGHTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002 (UNAUDITED)                
|                             |  |                                                                                                                             
|                             |  | NET INTEREST INCOME ANALYSIS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002 (UNAUDITED)        
|                             |  |                                                                                                                             
|                             |  | INTEREST RATE SENSITIVITIY GAP ANALYSIS AS OF SEPTEMBER 30, 2003 (UNAUDITED)                                                
|                             |  |                                                                                                                             
|ITEM 3.                      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                  
|                             |  |                                                                                                                             
|ITEM 4.                      |  | CONTROLS AND PROCEDURES                                                                                                     
|                             | 
|PART II OTHER INFORMATION    |  |                                                                                                                             
|                             |  |                                                                                                                             
|ITEM 1.                      |  | LEGAL PROCEEDINGS                                                                                                           
|                             |  |                                                                                                                             
|ITEM 2.                      |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                                   
|                             |  |                                                                                                                             
|ITEM 3.                      |  | DEFAULTS UPON SENIOR SECURITIES                                                                                             
|                             |  |                                                                                                                             
|ITEM 4.                      |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                         
|                             |  |                                                                                                                             
|ITEM 5.                      |  | OTHER INFORMATION                                                                                                           
|                             |  |                                                                                                                             
|ITEM 6.                      |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                            



2



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PART IFINANCIAL INFORMATION



|Item 1. |  | FINANCIAL STATEMENTS.
|------- |  | ---------------------



Bay Banks Of Virginia, Inc.

Consolidated Balance Sheets



|                                                                     |  | September 30,2003 |             | December 31,2002
|-------------------------------------------------------------------- |  | ----------------- | ----------- | ----------------
|                                                                     |  | (Unaudited)       |             |                 
|ASSETS                                                               |  |                   |             |                 
|Cash and due from banks                                              |  | $                 | 13,729,857  |                 
|Interest-bearing deposits                                            |  |                   | 121,710     |                 
|Federal funds sold                                                   |  |                   | 25,491,631  |                 
|Securities available for sale, at fair value                         |  |                   | 53,430,950  |                 
|Loans, net of allowance for loan losses of $1,852,322 and $1,696,914 |  |                   | 176,589,873 |                 
|Premises and equipment, net                                          |  |                   | 8,325,161   |                 
|Accrued interest receivable                                          |  |                   | 1,325,491   |                 
|Other real estate owned                                              |  |                   | 28,021      |                 
|Core deposit intangible                                              |  |                   | 2,807,842   |                 
|Other assets                                                         |  |                   | 1,225,993   |                 
|                                                                     |  |                   |             |                 
|Total assets                                                         |  | $                 | 283,076,529 |                 
|                                                                     |  |                  
|LIABILITIES                                                          |  |                   |             |                 
|Demand deposits                                                      |  | $                 | 33,369,748  |                 
|Savings and NOW deposits                                             |  |                   | 122,253,717 |                 
|Time deposits                                                        |  |                   | 93,922,340  |                 
|                                                                     |  |                   |             |                 
|Total deposits                                                       |  | $                 | 249,545,805 |                 
|Securities sold under repurchase agreements                          |  |                   | 6,720,411   |                 
|Other liabilities                                                    |  |                   | 1,851,576   |                 
|                                                                     |  |                   |             |                 
|Total liabilities                                                    |  | $                 | 258,117,792 |                 
|                                                                     |  |                  
|SHAREHOLDERS EQUITY                                                 |  |                   |             |                 
|Common stock$5 par value;                                           |  |                   |             |                 
|Authorized5,000,000 shares;                                         |  |                   |             |                 
|Outstanding2,321,474 and 2,307,360 shares                           |  | $                 | 11,607,370  |                 
|Additional paid-in capital                                           |  |                   | 4,270,098   |                 
|Retained Earnings                                                    |  |                   | 7,838,932   |                 
|Accumulated other comprehensive income                               |  |                   | 1,242,337   |                 
|                                                                     |  |                   |             |                 
|Total shareholders equity                                           |  | $                 | 24,958,737  |                 
|                                                                     |  |                  
|Total liabilities and shareholders equity                           |  | $                 | 283,076,529 |                 



See Notes to
Consolidated Financial Statements.



3



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Bay Banks Of Virginia, Inc.

Consolidated Statements of Income

(Unaudited)



|                                                    |  | Quarter ended     |           | For the nine months ended |  
|--------------------------------------------------- |  | ----------------- | --------- | ------------------------- | -
|                                                    |  | September 30,2003 |           | September 30,2002         |  
|INTEREST INCOME                                     |  |                   |           |                           |  
|Loans receivable (incl fees)                        |  | $                 | 2,584,315 |                           | $
|Securities:                                         |  |                   |           |                           |  
|Taxable                                             |  | $                 | 387,595   |                           | $
|Tax-exempt                                          |  |                   | 202,728   |                           |  
|Federal funds sold                                  |  |                   | 69,638    |                           |  
|                                                    |  |                   |           |                           |  
|Total interest income                               |  | $                 | 3,244,275 |                           | $
|                                                    |  |                   |           |                          
|INTEREST EXPENSE                                    |  |                   |           |                           |  
|Deposits                                            |  | $                 | 1,132,578 |                           | $
|Securities Sold to Repurchase                       |  |                   | 12,528    |                           |  
|                                                    |  |                   |           |                           |  
|Total interest expense                              |  | $                 | 1,145,106 |                           | $
|Net Interest Income                                 |  | $                 | 2,099,169 |                           | $
|Provision for loan losses                           |  | $                 | 78,000    |                           | $
|Net interest income after provision for loan losses |  | $                 | 2,021,169 |                           | $
|                                                    |  |                   |           |                          
|NONINTEREST INCOME                                  |  |                   |           |                           |  
|Income from fiduciary activities                    |  | $                 | 162,949   |                           | $
|Service charges & fees on deposit accounts          |  |                   | 154,002   |                           |  
|Other miscellaneous fees                            |  |                   | 187,994   |                           |  
|Secondary market brokerage income                   |  |                   | 123,887   |                           |  
|Gain/(loss) on sale of other real estate            |  |                   | 0         |                           |  
|Net securities gains                                |  |                   | 29,702    |                           |  
|Other income                                        |  |                   | 21,540    |                           |  
|                                                    |  |                   |           |                           |  
|Total noninterest income                            |  | $                 | 680,074   |                           | $
|                                                    |  |                   |           |                          
|NONINTEREST EXPENSES                                |  |                   |           |                           |  
|Salaries and employee benefits                      |  | $                 | 1,113,606 |                           | $
|Occupancy expense                                   |  |                   | 343,624   |                           |  
|Bank franchise tax                                  |  |                   | 53,563    |                           |  
|Deposit Insurance Premium                           |  |                   | 9,094     |                           |  
|Visa Expense                                        |  |                   | 110,639   |                           |  
|Amortization of Intangibles                         |  |                   | 4,620     |                           |  
|Other expense                                       |  |                   | 482,706   |                           |  
|                                                    |  |                   |           |                           |  
|Total noninterest expenses                          |  | $                 | 2,117,852 |                           | $
|                                                    |  |                   |           |                          
|Net Income before income taxes                      |  | $                 | 583,391   |                           | $
|Income tax expense                                  |  | $                 | 119,627   |                           | $
|Net Income                                          |  | $                 | 463,764   |                           | $
|                                                    |  |                   |           |                          
|Average basic shares outstanding                    |  |                   | 2,341,860 |                           |  
|Earnings per share, basic                           |  | $                 | 0.20      |                           | $
|Average diluted shares outstanding                  |  |                   | 2,372,754 |                           |  
|Earnings per share, diluted                         |  | $                 | 0.20      |                           | $



See Notes to
Consolidated Financial Statements.



4



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Bay Banks Of Virginia, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



|Nine months ended:                                                                |  | September 30,2003 |             |   | September 30,2002 |  
|--------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | -
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                   |             |   |                   |  
|Net Income                                                                        |  | $                 | 1,341,407   |   |                   | $
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                   |             |   |                   |  
|Depreciation                                                                      |  | $                 | 561,874     |   |                   | $
|Net amortization and accretion of securities                                      |  |                   | 26,359      |   |                   |  
|Provision for Loan Losses                                                         |  |                   | 234,000     |   |                   |  
|Net (Gain) / Loss on Sale of Securities                                           |  |                   | (54,545     | ) |                   |  
|(Gain) / Loss on sale of other real estate owned                                  |  |                   | (191,959    | ) |                   |  
|Decrease in accrued income and other assets                                       |  |                   | 544,509     |   |                   |  
|Increase / (Decrease) in Other Liabilities                                        |  |                   | (256,948    | ) |                   |  
|                                                                                  |  |                   |             |   |                   |  
|Net Cash Provided by Operating Activities                                         |  | $                 | 2,204,697   |   |                   | $
|                                                                                  |  |                  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                   |             |   |                   |  
|Proceeds from maturities of Available-for-Sale Securities                         |  | $                 | 4,702,856   |   |                   | $
|Proceeds from sales of Available-for-Sale Securities                              |  |                   | 8,030,375   |   |                   |  
|Purchases of Available-for-Sale Securities                                        |  |                   | (16,563,789 | ) |                   |  
|Decrease in interest bearing deposits                                             |  |                   | 38,020      |   |                   |  
|(Increase) in Loans outstanding                                                   |  |                   | (8,381,717  | ) |                   |  
|(Increase) / Decrease in Fed Sunds Sold                                           |  |                   | (5,512,943  | ) |                   |  
|Purchases of Premises and Equipment                                               |  |                   | (918,567    | ) |                   |  
|Proceeds from sale of other real estate owned                                     |  |                   | 744,105     |   |                   |  
|                                                                                  |  |                   |             |   |                   |  
|Net Cash (Used in) Investing Activities                                           |  | $                 | (17,861,660 | ) |                   | $
|                                                                                  |  |                  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                   |             |   |                   |  
|Increase in Demand, Savings, & NOW deposits                                       |  | $                 | 15,470,072  |   |                   | $
|Increase / (Decrease) in Time Deposits                                            |  |                   | 2,559,551   |   |                   |  
|Net increase in securities sold under repurchase agreements                       |  |                   | 2,238,647   |   |                   |  
|Proceeds from issuance of Common Stock                                            |  |                   | 294,238     |   |                   |  
|Repurchase of Common Stock                                                        |  |                   | (81,344     | ) |                   |  
|Dividends paid                                                                    |  |                   | (970,184    | ) |                   |  
|                                                                                  |  |                   |             |   |                   |  
|Net Cash Provided by Financing Activities                                         |  | $                 | 19,510,980  |   |                   | $
|                                                                                  |  |                  
|Net Increase in Cash & Due from Banks                                             |  | $                 | 3,854,017   |   |                   | $
|Cash & Due From Banks at Beginning of period                                      |  | $                 | 9,875,840   |   |                   | $
|Cash & Due From Banks at End of period                                            |  | $                 | 13,729,857  |   |                   | $
|                                                                                  |  |                  
|SUPPLEMENTAL DISCLOSURES:                                                         |  |                   |             |   |                   |  
|Interest paid                                                                     |  | $                 | 3,689,447   |   |                   | $
|Income taxes paid                                                                 |  |                   | 512,129     |   |                   |  
|Unrealized gain (loss) on investment securities                                   |  |                   | (579,059    | ) |                   |  
|Loans transferred to other real estate owned                                      |  |                   | 7,564       |   |                   |  

See Notes to Consolidated Financial Statements.



5



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Bay Banks Of Virginia, Inc.

Consolidated Statement of Changes in Shareholders Equity

(Unaudited)



|                                                                                             |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome/(Loss) |   |  | TotalShareholdersEquity |          
|-------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ------------------------------------------ | - |  | ----------------------- | ---------
|Balance on 1/1/2002                                                                          |  | $           | 5,766,405  |   |                          | $ | 3,940,720 |                  |  | $ | 12,363,054                                 |   |  | $                       | 546,612  
|Comprehensive Income:                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Net Income                                                                                   |  |             |            |   |                          |   |           |                  |  |   | 1,788,839                                  |   |  |                         |          
|Net changes in unrealized gain of available- for-sale securities, net of taxes of ($694,666) |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         | 1,348,469
|                                                                                             |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Total Comprehensive Income                                                                   |  |             |           |   |                          |   |          |                  |  | $ | 1,788,839                                  |   |  | $                       | 1,348,469
|Dividends paid ($0.36/share)                                                                 |  |             |            |   |                          |   |           |                  |  |   | (828,247                                   | ) |  |                         |          
|Stock repurchases                                                                            |  |             | (74,645    | ) |                          |   | (128,900  | )                |  |   | (201,176                                   | ) |  |                         |          
|Sale of common stock:                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Dividends Reinvested                                                                         |  |             | 59,562     |   |                          |   | 184,403   |                  |  |   |                                           |   |  |                         |         
|2-for-1 stock split in the form of a 100% stock dividend                                     |  |             | 5,750,427  |   |                          |   |           |                  |  |   | (5,750,427                                 | ) |  |                         |          
|Stock Options exercised                                                                      |  |             | 24,875     |   |                          |   | 30,845    |                  |  |   | (18,558                                    | ) |  |                         |         
|                                                                                             |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Balance on 9/30/02                                                                           |  | $           | 11,526,624 |   |                          | $ | 4,027,068 |                  |  | $ | 7,353,485                                  |   |  | $                       | 1,895,081
|                                                                                             |  |             |            |   |                         
|Balance on 1/1/2003                                                                          |  | $           | 11,536,800 |   |                          | $ | 4,080,693 |                  |  | $ | 7,514,790                                  |   |  | $                       | 1,624,516
|Comprehensive Income:                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Net Income                                                                                   |  |             |            |   |                          |   |           |                  |  |   | 1,341,407                                  |   |  |                         |          
|Net changes in unrealized gain of available- for-sale securities, net of taxes of ($196,880) |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         | (382,179 
|                                                                                             |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Total Comprehensive Income                                                                   |  |             |           |   |                          |   |          |                  |  | $ | 1,341,407                                  |   |  | $                       | (382,179 
|Dividends paid ($0.42/share)                                                                 |  |             |            |   |                          |   |           |                  |  |   | (970,184                                   | ) |  |                         |          
|Stock repurchases                                                                            |  |             | (26,000    | ) |                          |   | (8,263    | )                |  |   | (47,081                                    | ) |  |                         |          
|Sale of common stock:                                                                        |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Dividends Reinvested                                                                         |  |             | 91,570     |   |                          |   | 194,918   |                  |  |   |                                           |   |  |                         |         
|Stock Options exercised                                                                      |  |             | 5,000      |   |                          |   | 2,750     |                  |  |   |                                           |   |  |                         |         
|                                                                                             |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                         |          
|Balance on 9/30/03                                                                           |  | $           | 11,607,370 |   |                          | $ | 4,270,098 |                  |  | $ | 7,838,932                                  |   |  | $                       | 1,242,337



See Notes to
Consolidated Financial Statements.



6



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Notes to Consolidated Financial Statements

(unaudited)



Note 1:



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



The accounting and reporting policies of the registrant conform to
accounting principles generally accepted by 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 financial statements have been reclassified to
conform with 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 2002 Annual Report to Shareholders.



As of September 30, 2003, the Company has three stock-based compensation plans. The Company accounts for the plans under the
recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. No stock-based compensation cost is reflected in net income, as all
options granted under these plans had an exercise price equal to market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied fair
value recognition provisions of FASB No. 123, Accounting for Stock-Based Compensation.



|For the nine months ended September 30,                                                                                    |  | 2003 |           |   | 2002 |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -
|Net income, as reported                                                                                                    |  | $    | 1,341,407 |   |      | $
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax
effects |  |      | (68,869   | ) |      |  
|                                                                                                                           |  |      |           |   |      |  
|Pro forma net income                                                                                                       |  | $    | 1,272,538 |   |      | $
|                                                                                                                           |  |     
|Earnings per share:                                                                                                        |  |      |           |   |      |  
|Basicas reported                                                                                                          |  | $    | 0.58      |   |      | $
|Basicpro forma                                                                                                            |  | $    | 0.55      |   |      | $
|Dilutedas reported                                                                                                        |  | $    | 0.57      |   |      | $
|Dilutedpro forma                                                                                                          |  | $    | 0.54      |   |      | $



Note
2: Securities Available for Sale



The carrying amounts of debt
and other securities and their approximate fair values at September 30, 2003, and December 31, 2002, follow:



|September 30, 2003:            |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|------------------------------ |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ----------
|U.S. Government agencies       |  | $             | 12,269,769 |                      | $ | 245,277               |  | $ | (105,354  
|State and municipal securities |  |               | 30,367,600 |                      |   | 1,369,880             |  |   | (220,576  
|Corporate bonds                |  |               | 7,587,653  |                      |   | 593,101               |  |   | 0         
|Restricted securities          |  |               | 1,323,600  |                      |   | 0                     |  |   | 0         
|                               |  |               |            |                      |   |                       |  |   |           
|                               |  | $             | 51,548,622 |                      | $ | 2,208,258             |  | $ | (325,930  



7



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|December 31, 2002:             |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|------------------------------ |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ----------
|U.S. Government agencies       |  | $             | 7,511,155  |                      | $ | 358,248               |  |   |           
|State and municipal securities |  |               | 25,712,115 |                      |   | 1,410,938             |  |   | (15,619   
|Corporate bonds                |  |               | 13,146,266 |                      |   | 715,713               |  |   | (7,892    
|Restricted securities          |  |               | 1,320,341  |                      |   | 0                     |  |   | 0         
|                               |  |               |            |                      |   |                       |  |   |           
|                               |  | $             | 47,689,877 |                      | $ | 2,484,899             |  | $ | (23,511   



Note
3: Loans



The components of loans in the balance sheets were as follows:



|                                                             |  | September 30,2003 |             |   | December 31,2002 |  
|------------------------------------------------------------ |  | ----------------- | ----------- | - | ---------------- | -
|Construction                                                 |  | $                 | 22,655,552  |   |                  | $
|Secured by farmland                                          |  |                   | 1,184,135   |   |                  |  
|Secured by 1-4 family residential                            |  |                   | 96,132,839  |   |                  |  
|Other real estate loans                                      |  |                   | 23,758,739  |   |                  |  
|Loans to farmers (except those secured by real estate)       |  |                   | 71,479      |   |                  |  
|Commercial and industrial loans (not secured by real estate) |  |                   | 20,944,445  |   |                  |  
|Consumer installment loans                                   |  |                   | 10,180,172  |   |                  |  
|All other loans                                              |  |                   | 2,114,312   |   |                  |  
|Net deferred loan costs and fees                             |  |                   | 1,400,522   |   |                  |  
|                                                             |  |                   |             |   |                  |  
|Total loans                                                  |  | $                 | 178,442,195 |   |                  | $
|Allowance for loan losses                                    |  |                   | (1,852,322  | ) |                  |  
|                                                             |  |                   |             |   |                  |  
|Loans, net                                                   |  | $                 | 176,589,873 |   |                  | $



Loans upon which the accrual of
interest has been discontinued totaled $1,275 thousand as of September 30, 2003, and $269 thousand as of December 31, 2002.



Note 4: Earnings per share



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



|                               |  | September 30, 2003 |  | September 30, 2002
|------------------------------ |  | ------------------ |  | ------------------
|                               |  | AverageShares      |  | Per shareAmount   
|Basic earnings per share       |  | 2,319,558          |  | $                 
|Effect of dilutive securities: |  |                    |  |                   
|Stock options                  |  | 22,876             |  |                   
|Diluted earnings per share     |  | 2,342,434          |  | $                 



Note
5: Core Deposit Intangibles



The Company has core deposit intangibles recorded
on the financial statements relating to the purchase of five branches. The balance of the intangibles at September 30, 2003, as reflected on the Consolidated Balance Sheet, was $2,807,842. Management has determined that these purchases qualified as
acquisitions of businesses, as is allowed under FASB No. 147, and therefore has discontinued amortization, effective January 1, 2002.



The Company performs an annual impairment test to support the value reported.



8



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|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- |  | -------------------------------------------------------------------------------------



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



CRITICAL ACCOUNTING POLICIES



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



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



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



RECENT ACCOUNTING PRONOUNCEMENTS. In November 2002, the FASB issued FASB Interpretation No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). The Interpretation elaborates on the disclosures to be made by a guarantor
in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the
guarantee. The Interpretation requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for
the guarantors obligations under the guarantee. The recognition requirements of the Interpretation were effective beginning January 1, 2003. Management does not anticipate that the recognition requirements of this Interpretation will have a
material impact on the Companys consolidated financial statements.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This Interpretation provides guidance with respect to the
identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a corporations consolidated financial statements. The
Interpretation requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial
support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling
financial interest, which include the ability to make decisions about the entitys activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual
returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities beginning in the fourth quarter of 2003. Management is currently
evaluating the applicability of FIN 46 but the adoption of this Interpretation is not expected to have a material impact on the Companys consolidated financial statements.



9



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In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts(collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an
impact on the Companys consolidated financial statements.



In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many
of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Companys consolidated financial statements.



10



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Bay Banks Of Virginia, Inc.

Financial Highlights

(Unaudited)



|Nine months ended (Thousands)                           |  | 9/30/2003 |           |   | 9/30/2002 |   |           | Change | 
|------------------------------------------------------- |  | --------- | --------- | - | --------- | - | --------- | ------ | 
|FINANCIAL CONDITION                                     |  |           |           |   |           |   |           |        | 
|Average Assets                                          |  | $         | 273,993   |   |           | $ | 249,488   |        | 
|Average Interest-earning Assets                         |  |           | 246,937   |   |           |   | 228,147   |        | 
|Average Earning Assets to Total Average Assets          |  |           | 90.1      | % |           |   | 91.4      | %      | 
|Period-end Interest-bearing Liabilities                 |  | $         | 222,896   |   |           | $ | 199,795   |        | 
|Average Interest-bearing Liabilities                    |  |           | 217,300   |   |           |   | 201,959   |        | 
|Average Equity, including FAS 115 adjustment            |  |           | 25,405    |   |           |   | 23,622    |        | 
|Tier 1 Capital                                          |  |           | 20,909    |   |           |   | 20,099    |        | 
|Net Risk-weighted Assets                                |  |           | 183,379   |   |           |   | 168,260   |        | 
|Tier 2 Capital                                          |  |           | 1,852     |   |           |   | 1,538     |        | 
|                                                        |  |           |          
|RESULTS OF OPERATIONS                                   |  |           |           |   |           |   |           |        | 
|Net Interest Income before Provision                    |  | $         | 6,363     |   |           | $ | 6,495     |        | 
|Net Income                                              |  |           | 1,341     |   |           |   | 1,789     |        | 
|Annualized Yield on Average Interest-earning Assets     |  |           | 5.57      | % |           |   | 6.34      | %      | 
|Annualized Cost of Average Interest-bearing Liabilities |  |           | 2.23      | % |           |   | 2.70      | %      | 
|Annualized Net Yield on Average Interest-earning Assets |  |           | 3.60      | % |           |   | 3.94      | %      | 
|Annualized Net Interest Rate Spread                     |  |           | 3.34      | % |           |   | 3.63      | %      | 
|                                                        |  |           |          
|RATIOS                                                  |  |           |           |   |           |   |           |        | 
|Total Capital to Risk-weighted Assets (10% min)         |  |           | 12.4      | % |           |   | 12.9      | %      | 
|Tier 1 Capital to Risk-weighted Assets (6% min)         |  |           | 11.4      | % |           |   | 11.9      | %      | 
|Leverage Ratio (5% min)                                 |  |           | 7.7       | % |           |   | 8.1       | %      | 
|Annualized Return on Average Assets (ROA)               |  |           | 0.7       | % |           |   | 1.0       | %      | 
|Annualized Return on Average Equity (ROE)               |  |           | 7.0       | % |           |   | 10.1      | %      | 
|                                                        |  |           |          
|Period-end basic shares outstanding                     |  |           | 2,321,474 |   |           |   | 2,305,325 |        | 
|Average basic shares outstanding                        |  |           | 2,319,558 |   |           |   | 2,300,905 |        | 
|Average diluted shares outstanding                      |  |           | 2,342,434 |   |           |   | 2,337,575 |        | 
|                                                        |  |           |          
|PER SHARE DATA                                          |  |           |           |   |           |   |           |        | 
|Diluted earnings per average share (EPS) (nine months)  |  | $         | 0.57      |   |           | $ | 0.77      |        | 
|Cash Dividends per average share (nine months)          |  |           | 0.42      |   |           |   | 0.36      |        | 
|Book Value per share                                    |  |           |           |   |           |   |           |        | 
|before Accumulated Comprehensive Income/Loss            |  | $         | 10.22     |   |           | $ | 9.86      |        | 
|after Accumulated Comprehensive Income/Loss             |  |           | 10.75     |   |           |   | 10.68     |        | 
|                                                        |  |           |          
|Book Value per average share                            |  |           |           |   |           |   |           |        | 
|before Accumulated Comprehensive Income/Loss            |  | $         | 10.22     |   |           | $ | 9.88      |        | 
|after Accumulated Comprehensive Income/Loss             |  |           | 10.76     |   |           |   | 10.70     |        | 



11



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EARNINGS SUMMATION



For the nine months ended September 30, 2003, net income was $1.3 million as compared to $1.8 million for the comparable
period in 2002, a decrease of 25.0%. Diluted earnings per average share for the first nine months of 2003 were $0.57 as compared to $0.77 for the first nine months of 2002. Annualized return on average equity was 7.0% for the first nine months of
2003 as compared to 10.1% for the first nine months of 2002, a decrease of 30.3%. Annualized return on average assets was 0.7% for the first nine months of 2003, compared to 1.0% for the first nine months of 2002, a decrease of 31.7%. Net interest
income for the first nine months of 2003 was $6.4 million, compared to $6.5 million for the first nine months of 2002, a decrease of 2.0%. Average interest-earning assets totaled $246.9 million for the first nine months of 2003 as compared to $228.1
million for the first nine months of 2002, an increase of 8.2%. Average interest-bearing liabilities totaled $217.3 million for the first nine months of 2003 as compared to $202.0 million for the first nine months of 2002, an increase of 7.6%. The
annualized yield on average interest-earning assets for the first nine months of 2003 was 5.57% as compared to 6.34% for the first nine months of 2002, a decrease of 12.1%. The annualized yield (cost) on interest-bearing liabilities for the first
nine months of 2003 was 2.23% as compared to 2.70% for the first nine months of 2002, a decrease of 17.4%. Average interest-earning assets as a percent of total average assets was 90.1% for the first nine months of 2003 as compared to 91.4% for the
comparable period of 2002, a decrease of 1.4%. Average total assets for the first nine months of 2003 were $274 million as compared to $249 million for the first nine months of 2002, an increase of 9.8%.



Bay Banks Of Virginia, Inc.

Net Interest Income Analysis

(Unaudited)



|(Fully taxable equivalent basis)            |  | Nine months ended 9/30/2003 |         |                | Nine months ended 9/30/2002 |                     
|------------------------------------------- |  | --------------------------- | ------- | -------------- | --------------------------- | --------------------
|(Thousands)                                 |  | AverageBalance              |         | Income/Expense |                             | AnnualizedYield/Rate
|INTEREST EARNING ASSETS:                    |  |                             |         |                |                             |                     
|Investments (Book Value):                   |  |                             |         |                |                             |                     
|Taxable Investments                         |  | $                           | 28,518  |                | $                           | 1,199               
|Tax-Exempt Investments (1)                  |  |                             | 17,805  |                |                             | 851                 
|                                            |  |                             |         |                |                             |                     
|Total Investments                           |  | $                           | 46,323  |                | $                           | 2,050               
|Gross Loans (1) (2)                         |  | $                           | 171,676 |                | $                           | 8,024               
|Interest-bearing Deposits                   |  |                             | 169     |                |                             | 1                   
|Fed Funds Sold                              |  |                             | 28,769  |                |                             | 240                 
|                                            |  |                             |         |                |                             |                     
|TOTAL INTEREST EARNING ASSETS               |  | $                           | 246,937 |                | $                           | 10,315              
|                                            |  |                             |         |                |                             |                     
|INTEREST-BEARING LIABILITIES:               |  |                             |         |                |                             |                     
|Deposits:                                   |  |                             |         |                |                             |                     
|Savings Deposits                            |  | $                           | 61,585  |                | $                           | 815                 
|NOW Deposits                                |  |                             | 40,962  |                |                             | 244                 
|CDs >= $100,000                            |  |                             | 25,854  |                |                             | 716                 
|CDs < $100,000                             |  |                             | 68,149  |                |                             | 1,712               
|Money Market Deposit Accounts               |  |                             | 16,403  |                |                             | 122                 
|                                            |  |                             |         |                |                             |                     
|Total Interest Bearing Deposits             |  | $                           | 212,953 |                | $                           | 3,609               
|                                            |  |                             |         |                |                             |                     
|Securities Sold to Repurchase               |  |                             | 4,347   |                |                             | 32                  
|                                            |  |                             |         |                |                             |                     
|TOTAL INTEREST-BEARING LIABILITIES          |  | $                           | 217,300 |                | $                           | 3,641               
|                                            |  |                             |         |                |                             |                     
|Net Interest Income/Yield on Earning Assets |  |                             |         |                | $                           | 6,674               
|Net Interest Rate Spread                    |  |                             |         |                |                             |                     



Notes:

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

(2) - Includes Visa
Program & nonaccrual loans.



This Net Interest Income
Analysis table shows net interest margin decreasing to 3.60% from 3.94% for the first nine months of 2003 compared to the first nine months of 2002. This has been



12



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driven mainly by a reduction in real estate loan yields due to competitive market forces and mortgage refinancings.
Management has partially offset this reduction in yield on earning assets with reductions in the yield (cost) of interest-bearing liabilities.



Through the nine months ended September 30, 2003, average interest-earning assets were comprised mainly of the loan portfolio with $171.7 million and the
investment portfolio with $46.3 million. For the nine month period ended September 30, 2003, compared to the same period in 2002, on a fully tax equivalent basis, tax-exempt investment yields declined to 6.37% from 6.61%, and taxable investment
yields decreased to 5.61% from 6.05%, resulting in a decrease in total investment yield to 5.90% from 6.21%. In the first nine months of 2003, gross loans on average volumes yielded 6.23% as compared to 7.04% for the same period in 2002, for reasons
described in the previous paragraph.



Management has reduced
the yields (costs) on average interest-bearing deposits during the first nine months of 2003, compared to the same period in 2002, as follows. Savings yields were reduced to 1.76% compared to 2.27%, NOW accounts were reduced to 0.80% compared to
1.29%, money market demand accounts were reduced to 0.99% compared to 1.61%, certificates of deposit greater than or equal to $100 thousand were reduced to 3.69% compared to 3.90%, and certificates of deposit less than $100 thousand were reduced to
3.35% compared to 3.57%. The resulting total yield on deposits through September 30, 2003, was reduced to 2.26% compared to 2.73% for the same period a year ago.



The Company has reclassified loan fee income for 2002 to conform to Financial Accounting Standards Boards Statement
No. 91, which addresses accounting for loan fees and costs. The reclassification reduced loan fee income by $804 thousand in the first nine months of 2002. The corresponding entries reduced salary expense by the same amount, as discussed later in
the Non-Interest Expense section.



Interest Rate Sensitivity
Analysis as of September 30, 2003



|(Thousands)                        |  | Within 3months |         |   | 3-12Months |   |         | 1-5Years |  | Over 5Years |        | Total
|---------------------------------- |  | -------------- | ------- | - | ---------- | - | ------- | -------- |  | ----------- | ------ | -----
|Interest-Bearing Due From Banks    |  | $              | 122     |   |            | $ | 0       |          |  | $           | 0      |      
|Fed Funds Sold                     |  |                | 25,492  |   |            |   | 0       |          |  |             | 0      |      
|Investments (Market Value)         |  |                | 2,713   |   |            |   | 6,513   |          |  |             | 21,443 |      
|Loans                              |  |                | 43,539  |   |            |   | 50,969  |          |  |             | 72,448 |      
|                                   |  |                |         |   |            |   |         |          |  |             |        |      
|Total Earning Assets               |  | $              | 71,866  |   |            | $ | 57,482  |          |  | $           | 93,891 |      
|                                   |  |                |         |   |           
|NOW Accounts                       |  |                | 41,806  |   |            | $ | 0       |          |  |             | 0      |      
|MMDAs                             |  |                | 16,605  |   |            | $ | 0       |          |  |             | 0      |      
|Savings                            |  |                | 59,040  |   |            | $ | 0       |          |  |             | 0      |      
|CDs < $100,000                    |  |                | 8,795   |   |            |   | 14,548  |          |  |             | 43,268 |      
|CDs >= $100,000                   |  |                | 2,804   |   |            |   | 5,746   |          |  |             | 18,757 |      
|                                   |  |                |         |   |            |   |         |          |  |             |        |      
|Total Interest Bearing Deposits    |  | $              | 129,050 |   |            | $ | 20,294  |          |  | $           | 62,025 |      
|Fed Funds Purchased                |  |                | 0       |   |            |   | 0       |          |  |             | 0      |      
|Securities Sold to Repurchase      |  |                | 6,720   |   |            |   | 0       |          |  |             | 0      |      
|                                   |  |                |         |   |            |   |         |          |  |             |        |      
|Total Interest Bearing Liabilities |  | $              | 135,770 |   |            | $ | 20,294  |          |  | $           | 62,025 |      
|                                   |  |                |         |   |           
|Rate Sensitive Gap                 |  | $              | (63,904 | ) |            | $ | 37,188  |          |  | $           | 31,866 |      
|Cumulative Gap                     |  |                | (63,904 | ) |            |   | (26,716 | )        |  |             | 5,150  |      



As of September 30,
2003, the Company had interest-earning assets that mature within 3 months totaling $71.9 million, in 3-12 months totaling $57.5 million, in 1-5 years totaling $93.9 million, and over 5 years totaling $34.2 million. In comparison, interest-bearing
liabilities maturing within 3 months totaled $135.8 million, in 3-12 months totaled $20.3 million, in 1-5 years totaled $62.0 million, and $4 thousand over 5 years. This table indicates that the Company is liability-sensitive for the first three
months, becoming asset-sensitive within nine to twelve months and forward. Management believes this will position the Company favorably in a rising rate environment. Management is continually reviewing loan and deposit products to modify or develop
offerings that are less subject to interest rate risk.



13



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LIQUIDITY



The Company maintains adequate short-term assets to meet the Companys liquidity needs as anticipated by management.
Federal funds sold and investments that mature in one year or less provide the major sources of funding for liquidity needs. On September 30, 2003, federal funds sold totaled $25.5 million and securities maturing in one year or less totaled $9.2
million, for a total pool of $34.7 million. The liquidity ratio as of September 30, 2003 was 32.3% as compared to 33.6% as of December 31, 2002. The Company determines this ratio by dividing the sum of cash and cash equivalents, unpledged investment
securities and Federal Funds Sold, by net liabilities. Management, through historical analysis, has deemed 15% an adequate liquidity ratio.



CAPITAL RESOURCES



From December 31, 2002, to September 30, 2003, total shareholders equity has grown by 0.8%. It is impacted by net unrealized gains on securities in
the amount of $1.2 million as of September 30, 2003. Unrealized gains or losses, net of taxes, are recognized as accumulated comprehensive income or loss on the balance sheet and statement of changes in shareholders equity. Shareholders
equity before unrealized gains or losses was $23.7 million on September 30, 2003, and $23.1 million on December 31, 2002. This represents an increase of $584 thousand or 2.5% during the nine-month period.



The Company paid a 2-for-1 stock split in the form of a 100% stock dividend
on June 7, 2002. All share information has been adjusted to reflect the split for all periods presented.



Book value per share, basic, on September 30, 2003, compared to September 30, 2002, grew to $10.75 from $10.68, an increase of 0.6%. Book value per share,
basic, before accumulated comprehensive income on September 30, 2003, compared to September 30, 2002, grew to $10.22 from $9.86, an increase of 3.6%. Cash dividends paid for the nine months ended September 30, 2003, were $970 thousand, or $0.42 per
share, compared to $828 thousand, or $0.36 per share, for the comparable period ended September 30, 2002, an increase of 17.1%. Average basic shares outstanding for the nine months ended September 30, 2003, were 2,319,558 compared to 2,300,905 for
the comparable period ended September 30, 2002. The Company began a share repurchase program in August of 1999 and has continued the program into 2003. The plan authorizes a total of 115,000 shares for repurchase.



The Company is subject to minimum regulatory capital ratios as defined by
Federal Financial Institutions Examination Council guidelines. As of September 30, 2003 the Company maintained Tier 1 capital of $20.9 million, net risk weighted assets of $183.4 million, and Tier 2 capital of $1.9 million. On September 30, 2003,
the Tier 1 capital to risk weighted assets ratio was 11.4%, the total capital ratio was 12.4%, and the tier 1 leverage ratio was 7.7%. These ratios continue to be well in excess of regulatory minimums.



FINANCIAL CONDITION



As of September 30, 2003, total assets have increased 7.6% since December
31, 2002, from $263.1 million to $283.1 million. Cash and cash equivalents totaled $13.9 million on September 30, 2003, compared to $10.0 million at year-end 2002.



During the nine months ended September 30, 2003, gross loans increased by 4.9%, from $170.1 million to $178.4 million. The
components of this increase were real estate mortgage loans with 2.4% growth to $143.7 million, commercial loans with 24.9% growth to $20.9 million, and installment and other loans with 9.0% growth to $12.3 million.



For the nine months ended September 30, 2003, the Company charged off loans
totaling $88.7 thousand. For the comparable period in 2002, total loans charged off were $288 thousand. The Company maintained $28 thousand of other real estate owned (OREO) as of September 30, 2003. As of year-end 2002, the balance was
$580 thousand. The Company actively markets all OREO properties, and expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of book or market value.



The provision for loan losses amounted to $234 thousand through the first
nine months, and the allowance for loan losses as of September 30, 2003, was $1.9 million. The allowance for loan losses, as a percentage of average total loans through the first nine months of 2003 was 1.1%.



As of September 30, 2003, $1.3 million of loans were on non-accrual status.
There were $62 thousand of loans on non-accrual status as of September 30, 2002. Loans still accruing interest but delinquent for 90 days or more were $602 thousand on September 30, 2003, as compared to $657 thousand on September 30, 2002.



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



14



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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 September
30, 2003, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio.



As of September 30, 2003, securities available for sale totaled $53.4 million at market value. This compares with December 2002 market value of $50.2
million, growth of 6.5% for the nine months. The investment portfolio represents 18.9% of total assets and 20.7% of earning assets. The Companys investment portfolio is classified as available-for-sale, and therefore management has elected to
mark the entire investment portfolio to market. The resulting accumulated adjustment to book value as of September 30, 2003 was an unrealized gain of $1.9 million. The corresponding accumulated adjustment to shareholders equity was $1.2
million. These gains or losses are booked monthly as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold. Management does not anticipate the realization
of net losses on investments during 2003.



As of September 30,
2003, total deposits were $249.5 million. Compared to $231.5 at year-end 2002, this represents growth in balances of 7.8% during the nine months. Components of this growth include non-interest-bearing demand deposits at 29.7% growth to $33.4
million, savings and NOW accounts at 6.8% growth to $122.3 million, and time deposits at 2.8% growth to $93.9 million.



RESULTS OF OPERATIONS



NON-INTEREST INCOME



Non-interest income for the first nine months of 2003 totaled $2.0 million compared to $1.5 million for the same period in 2002, an increase of 33.1%.
This increase is due mainly to secondary mortgage market brokerage fees and gains on sales of other real estate. 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, fiduciary activities contributed $450.3 thousand, service charges on deposit accounts contributed $450.9 thousand, other miscellaneous fees contributed $496.5 thousand, secondary market
brokerage income contributed $330.1 thousand, and other income, including gains, contributed $317.8 thousand. For the first nine months of 2002, these totals were $481.7 thousand, $396.7 thousand, $470.0 thousand, $155.6 thousand, and $33.3
thousand, respectively.



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



NON-INTEREST EXPENSE



Non-interest expenses totaled $6.4 million during the first nine months of
2003 as compared to $5.2 million for the same period in 2002, an increase of 22.3%. The largest components of non-interest expense are salaries and benefits, and occupancy expense. Through the nine months ended September 30, 2003, salary and benefit
expense was $3.3 million, and occupancy expense was $1.0 million. For the same period in 2002, these totals were $2.6 million, and $782.6 thousand, respectively. The increase in salary and benefit expense is due mainly to additional employees.



In the fourth quarter of 2002, the Company adopted Financial
Accounting Standards Board Statement No. 147, Acquisitions of Certain Financial Institutions. This statement amended previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial
institutions, and requires the application of Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Upon adoption of Statement No. 147, the Bank was able to recover the non-cash expense
allocated to the amortization of the core deposit intangible that was associated with each of the branch acquisition transactions previously executed. The result was a reduction in other expense of $174.6 thousand in the first nine months of 2002.



Also in the fourth quarter of 2002, the Company reclassified
salary expense to conform to Financial Accounting Standards Boards Statement No. 91, which addresses accounting for loan fees and costs. Salary expense was reduced due to this reclassification by $803.8 thousand in the first nine months of
2002. As discussed earlier, the corresponding entries reduced loan fee income by the same amount.



15



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FORWARDLOOKING STATEMENTS



In addition to the historical information contained herein, this discussion
contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the operations of the Bank, and the Companys actual results could differ significantly from those discussed in the forward looking statements.
Some of the factors that could cause or contribute to such differences are discussed herein, but also include changes in economic conditions in the Companys or Banks market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Banks market area, and competition. Any of these factors could cause actual results to differ materially from historical earnings and those presently anticipated or projected.



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



There have been no significant changes from the quantitative and qualitative disclosures made in the Companys report on Form 10-K for the year ended
December 31, 2002.



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



The Company has carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the Companys periodic Securities and Exchange Commission filings. There have been no significant changes in the Companys internal controls or in other factors that
could significantly affect internal controls subsequent to the date the Company carried out its evaluation.



PART IIOTHER INFORMATION



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



None to report.



|ITEM  2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS.
|-------- |  | ------------------------------------------



None to report.



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



None to report.



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



None to report.



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



None to report.



|ITEM  6: |  | EXHIBITS AND REPORTS ON FORM 8-K.
|-------- |  | ---------------------------------



(a) Exhibit Index:



|     | 
|---- | 
|3.0  | 
|     | 
|10.1 | 
|     | 
|10.2 | 



16



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|     | 
|---- | 
|10.3 | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 



(b) Reports on Form 8-K:



One report on Form 8-K was filed with the Securities and Exchange
Commission on August 26, 2003, announcing the third quarter dividend.



17



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SIGNATURES



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



| |  |          |  | Bay Banks of Virginia, Inc.
| |  | -------- |  | ---------------------------
| |  |          |  | (Registrant)               
| |  |          | 
| |  | 11/14/03 |  |                            
| |  |          |  |                            
| |  |          |  |                            
| |  |          |  |                            



| |  |          | 
| |  | -------- | 
| |  | 11/14/03 | 
| |  |          | 
| |  |          | 
| |  |          | 



18