##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



---



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



FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004



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



COMMISSION FILE NUMBER 0-22955



---



BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|VIRGINIA                                                       |  | 54-1838100                          
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)
|                                                               | 
|100 SOUTH MAIN STREET, KILMARNOCK, VA                          |  | 22482                               
|(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       |  | (ZIP CODE)                          



(804)435-1171

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)



---



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



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



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



2,347,937 shares of common stock on November 5, 2004.



---



---

##### Table of Contents

FORM 10-Q



For the interim period ending
September 30, 2004.



INDEX



|                                                                                                                             |  |    |  | 
|---------------------------------------------------------------------------------------------------------------------------- |  | -- |  | 
|PART I
FINANCIAL INFORMATION                                                                                                 |  |   
|                                                                                                                             | 
|ITEM 1.
FINANCIAL STATEMENTS                                                                                                 |  |   
|                                                                                                                             | 
|CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003                                             |  | 3 
|                                                                                                                             | 
|CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)                |  | 4 
|                                                                                                                             | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)                      |  | 5 
|                                                                                                                             | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) |  | 6 
|                                                                                                                             | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                                                       |  | 7 
|                                                                                                                             | 
|ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                |  | 10
|                                                                                                                             | 
|FINANCIAL HIGHLIGHTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003 (UNAUDITED)                 |  | 12
|                                                                                                                             | 
|NET INTEREST INCOME ANALYSIS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003 (UNAUDITED)         |  | 15
|                                                                                                                             | 
|INTEREST RATE SENSITIVITY GAP ANALYSIS AS OF SEPTEMBER 30, 2004 (UNAUDITED)                                                  |  | 16
|                                                                                                                             | 
|ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                           |  | 19
|                                                                                                                             | 
|ITEM 4.
CONTROLS AND PROCEDURES                                                                                              |  | 19
|                                                                                                                             | 
|PART II
OTHER INFORMATION                                                                                                    |  |   
|                                                                                                                             | 
|ITEM 1.
LEGAL PROCEEDINGS                                                                                                    |  | 19
|                                                                                                                             | 
|ITEM 2.
UNRESTRICTED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                          |  | 20
|                                                                                                                             | 
|ITEM 3.
DEFAULTS UPON SENIOR SECURITIES                                                                                      |  | 20
|                                                                                                                             | 
|ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                  |  | 20
|                                                                                                                             | 
|ITEM 5.
OTHER INFORMATION                                                                                                    |  | 20
|                                                                                                                             | 
|ITEM 6.
EXHIBITS                                                                                                             |  | 20



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. FINANCIAL STATEMENTS.



Bay Banks of Virginia, Inc.

Consolidated Balance Sheets



|                                                                                                         |  |                    |             |                   |   |            
|-------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ----------------- | - | -----------
|                                                                                                         |  | September 30, 2004 |             | December 31, 2003
|                                                                                                         |  | (unaudited)        |             |                  
|ASSETS                                                                                                   |  |                    |             |                   |   |            
|Cash and due from banks                                                                                  |  | $                  | 10,375,970  |                   | $ | 7,762,030  
|Interest-bearing deposits                                                                                |  |                    | 107,372     |                   |   | 102,868    
|Federal funds sold                                                                                       |  |                    | 15,453,530  |                   |   | 13,907,525 
|Securities available for sale, at fair value                                                             |  |                    | 55,639,492  |                   |   | 66,493,731 
|Securities held to maturity, at amortized cost                                                           |  |                    | 426,522     |                   |   | 0          
|Loans, net of allowance for loan losses of $2,013,116 and $1,901,576                                     |  |                    | 206,609,288 |                   |   | 188,450,953
|Premises and equipment, net                                                                              |  |                    | 8,471,384   |                   |   | 8,411,776  
|Accrued interest receivable                                                                              |  |                    | 1,213,738   |                   |   | 1,261,784  
|Other real estate owned                                                                                  |  |                    | 46,480      |                   |   | 76,514     
|Core deposit intangible                                                                                  |  |                    | 2,807,842   |                   |   | 2,807,842  
|Other assets                                                                                             |  |                    | 1,796,021   |                   |   | 1,435,602  
|                                                                                                         |  |                    |             |                   |   |            
|Total Assets                                                                                             |  | $                  | 302,947,639 |                   | $ | 290,710,625
|                                                                                                         |  |                    |             |                   |   |            
|LIABILITIES                                                                                              |  |                    |             |                   |   |            
|Demand deposits                                                                                          |  | $                  | 41,906,630  |                   | $ | 34,290,391 
|Savings and interest-bearing demand deposits                                                             |  |                    | 128,790,595 |                   |   | 126,127,299
|Time deposits                                                                                            |  |                    | 91,505,852  |                   |   | 96,665,504 
|                                                                                                         |  |                    |             |                   |   |            
|Total Deposits                                                                                           |  |                    | 262,203,077 |                   |   | 257,083,194
|                                                                                                         |  |                   
|Securities sold under repurchase agreements                                                              |  |                    | 5,722,946   |                   |   | 6,478,601  
|FHLB Advance                                                                                             |  |                    | 7,500,000   |                   |   | 0          
|Other liabilities                                                                                        |  |                    | 1,915,108   |                   |   | 2,070,426  
|                                                                                                         |  |                    |             |                   |   |            
|Total Liabilities                                                                                        |  | $                  | 277,341,131 |                   | $ | 265,632,221
|                                                                                                         |  |                    |             |                   |   |            
|SHAREHOLDERS EQUITY                                                                                     |  |                    |             |                   |   |            
|Common stock - $5 par value; Authorized - 5,000,000 shares; Outstanding - 2,347,937 and 2,326,080 shares |  | $                  | 11,739,684  |                   | $ | 11,630,401 
|Additional paid-in capital                                                                               |  |                    | 4,554,721   |                   |   | 4,336,929  
|Retained earnings                                                                                        |  |                    | 8,484,751   |                   |   | 8,146,613  
|Accumulated other comprehensive income, net                                                              |  |                    | 827,352     |                   |   | 964,461    
|                                                                                                         |  |                    |             |                   |   |            
|Total Shareholders Equity                                                                               |  | $                  | 25,606,508  |                   | $ | 25,078,404 
|                                                                                                         |  |                    |             |                   |   |            
|Total Liabilities and Shareholders Equity                                                               |  | $                  | 302,947,639 |                   | $ | 290,710,625
|                                                                                                         |  |                    |             |                   |   |            



See Notes to Consolidated Financial
Statements.



3



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Consolidated Statements of Income

(Unaudited)



|                                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|----------------------------------------------------- |  | ------------------------------- | --------- | - | -------------------------------- | - | ----------------------------------------- |  | ----------------------------------------- | ---------- |  | - | ----------
|                                                      |  | Quarter ended September 30,2004 |           |   | Quarter ended September 30, 2003 |   | For the ninemonths endedSeptember 30,2004 |  | For the ninemonths endedSeptember 30,2003
|INTEREST INCOME                                       |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Loans, including fees                                 |  | $                               | 2,979,692 |   |                                  | $ | 2,584,315                                 |  | $                                         | 8,681,462  |  | $ | 8,002,779 
|Securities:                                           |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Taxable                                               |  |                                 | 338,750   |   |                                  |   | 387,595                                   |  |                                           | 1,008,424  |  |   | 1,199,850 
|Tax-exempt                                            |  |                                 | 191,720   |   |                                  |   | 202,728                                   |  |                                           | 591,873    |  |   | 561,712   
|Federal funds sold                                    |  |                                 | 43,506    |   |                                  |   | 69,638                                    |  |                                           | 106,985    |  |   | 239,645   
|                                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Total interest income                                 |  |                                 | 3,553,668 |   |                                  |   | 3,244,275                                 |  |                                           | 10,388,744 |  |   | 10,003,985
|                                                      |  |                                 |           |  
|INTEREST EXPENSE                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Deposits                                              |  |                                 | 1,048,864 |   |                                  |   | 1,132,578                                 |  |                                           | 3,151,289  |  |   | 3,608,827 
|Fed Funds Purchased and Securities Sold to Repurchase |  |                                 | 4,979     |   |                                  |   | 12,528                                    |  |                                           | 15,554     |  |   | 32,366    
|FHLB Advance                                          |  |                                 | 14,947    |   |                                  |   | 0                                         |  |                                           | 19,322     |  |   | 0         
|                                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Total interest expense                                |  |                                 | 1,068,790 |   |                                  |   | 1,145,106                                 |  |                                           | 3,186,165  |  |   | 3,641,193 
|                                                      |  |                                 |           |  
|Net Interest Income                                   |  |                                 | 2,484,878 |   |                                  |   | 2,099,169                                 |  |                                           | 7,202,579  |  |   | 6,362,792 
|                                                      |  |                                 |           |  
|Provision for loan losses                             |  |                                 | 75,000    |   |                                  |   | 78,000                                    |  |                                           | 225,000    |  |   | 234,000   
|                                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Net interest income after provision for loan losses   |  |                                 | 2,409,878 |   |                                  |   | 2,021,169                                 |  |                                           | 6,977,579  |  |   | 6,128,792 
|                                                      |  |                                 |           |  
|NONINTEREST INCOME                                    |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Income from fiduciary activities                      |  |                                 | 160,496   |   |                                  |   | 162,949                                   |  |                                           | 488,952    |  |   | 450,291   
|Service charges & fees on deposit accounts            |  |                                 | 178,882   |   |                                  |   | 154,002                                   |  |                                           | 480,566    |  |   | 450,923   
|Other miscellaneous fees                              |  |                                 | 240,988   |   |                                  |   | 187,994                                   |  |                                           | 638,414    |  |   | 496,458   
|Secondary market brokerage income                     |  |                                 | 38,348    |   |                                  |   | 123,887                                   |  |                                           | 140,538    |  |   | 330,102   
|Other real estate gains / (losses)                    |  |                                 | (2,093    | ) |                                  |   | 0                                         |  |                                           | 20,654     |  |   | 191,959   
|Net securities gains                                  |  |                                 | 15,524    |   |                                  |   | 29,702                                    |  |                                           | 170,261    |  |   | 54,545    
|Other income                                          |  |                                 | 52,372    |   |                                  |   | 21,540                                    |  |                                           | 90,478     |  |   | 71,291    
|                                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Total noninterest income                              |  |                                 | 684,517   |   |                                  |   | 680,074                                   |  |                                           | 2,029,863  |  |   | 2,045,569 
|                                                      |  |                                 |           |  
|NONINTEREST EXPENSES                                  |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Salaries and employee benefits                        |  |                                 | 1,232,615 |   |                                  |   | 1,113,606                                 |  |                                           | 3,879,976  |  |   | 3,252,874 
|Occupancy expense                                     |  |                                 | 358,512   |   |                                  |   | 343,624                                   |  |                                           | 1,054,760  |  |   | 1,045,804 
|Bank franchise tax                                    |  |                                 | 55,850    |   |                                  |   | 53,563                                    |  |                                           | 168,759    |  |   | 155,955   
|Visa Expense                                          |  |                                 | 117,112   |   |                                  |   | 110,639                                   |  |                                           | 299,688    |  |   | 272,676   
|Telephone                                             |  |                                 | 48,090    |   |                                  |   | 40,256                                    |  |                                           | 122,711    |  |   | 130,770   
|Other expense                                         |  |                                 | 505,987   |   |                                  |   | 456,164                                   |  |                                           | 1,503,589  |  |   | 1,498,937 
|                                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Total noninterest expenses                            |  |                                 | 2,318,166 |   |                                  |   | 2,117,852                                 |  |                                           | 7,029,483  |  |   | 6,357,017 
|                                                      |  |                                 |           |  
|Net Income before income taxes                        |  |                                 | 776,229   |   |                                  |   | 583,391                                   |  |                                           | 1,977,959  |  |   | 1,817,344 
|                                                      |  |                                 |           |  
|Income tax expense                                    |  |                                 | 186,539   |   |                                  |   | 119,627                                   |  |                                           | 540,342    |  |   | 475,937   
|                                                      |  |                                 |           |   |                                  |   |                                           |  |                                           |            |  |   |           
|Net Income                                            |  | $                               | 589,690   |   |                                  | $ | 463,764                                   |  | $                                         | 1,437,617  |  | $ | 1,341,407 
|                                                      |  |                                 |           |  
|Average basic shares outstanding                      |  |                                 | 2,341,955 |   |                                  |   | 2,341,860                                 |  |                                           | 2,334,036  |  |   | 2,319,558 
|Earnings per share, basic                             |  |                                 | 0.25      |   |                                  |   | 0.20                                      |  |                                           | 0.62       |  |   | 0.58      
|                                                      |  |                                 |           |  
|Average diluted shares outstanding                    |  |                                 | 2,357,636 |   |                                  |   | 2,372,754                                 |  |                                           | 2,354,062  |  |   | 2,342,434 
|Earnings per share, diluted                           |  |                                 | 0.25      |   |                                  |   | 0.20                                      |  |                                           | 0.61       |  |   | 0.57      



See Notes to Consolidated Financial
Statements.



4



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Consolidated Statements of Cash Flows



|                                                                                  |  |                    |             |   |                    |   |             |  
|--------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ----------- | -
|Nine months ended:                                                                |  | September 30, 2004 |             |   | September 30, 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                    |             |   |                    |   |             |  
|Net Income                                                                        |  | $                  | 1,437,617   |   |                    | $ | 1,341,407   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |             |   |                    |   |             |  
|Depreciation                                                                      |  |                    | 579,825     |   |                    |   | 561,874     |  
|Net amortization of securities                                                    |  |                    | 37,003      |   |                    |   | 26,359      |  
|Provision for Loan Losses                                                         |  |                    | 225,000     |   |                    |   | 234,000     |  
|Gain on Sale of Securities                                                        |  |                    | (170,261    | ) |                    |   | (54,545     | )
|Gain on sale of other real estate owned                                           |  |                    | (20,654     | ) |                    |   | (191,959    | )
|(Increase) / Decrease in other assets                                             |  |                    | (312,373    | ) |                    |   | 544,509     |  
|Decrease in Other Liabilities                                                     |  |                    | (84,686     | ) |                    |   | (256,948    | )
|                                                                                  |  |                    |             |   |                    |   |             |  
|Net Cash Provided by Operating Activities                                         |  |                    | 1,691,471   |   |                    |   | 2,204,697   |  
|                                                                                  |  |                   
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                    |             |   |                    |   |             |  
|Proceeds from maturities of Available-for-Sale Securities                         |  |                    | 3,269,002   |   |                    |   | 4,702,856   |  
|Proceeds from sales of Available-for-Sale Securities                              |  |                    | 24,657,270  |   |                    |   | 8,030,375   |  
|Purchases of Available-for-Sale Securities                                        |  |                    | (17,573,038 | ) |                    |   | (16,563,789 | )
|Increase / (Decrease) in interest bearing deposits                                |  |                    | (4,504      | ) |                    |   | 38,020      |  
|(Increase) in Fed Funds Sold                                                      |  |                    | (1,546,005  | ) |                    |   | (5,512,943  | )
|Increase in Loans outstanding                                                     |  |                    | (18,433,398 | ) |                    |   | (8,381,717  | )
|Purchases of Premises and Equipment                                               |  |                    | (639,433    | ) |                    |   | (918,567    | )
|Proceeds from sale of other real estate owned                                     |  |                    | 100,751     |   |                    |   | 744,105     |  
|                                                                                  |  |                    |             |   |                    |   |             |  
|Net Cash (Used in) Investing Activities                                           |  |                    | (10,169,355 | ) |                    |   | (17,861,660 | )
|                                                                                  |  |                   
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                    |             |   |                    |   |             |  
|Increase in Demand, Savings, & other interest-bearing demand deposits             |  |                    | 10,279,535  |   |                    |   | 15,470,072  |  
|Increase / (Decrease) in Time Deposits                                            |  |                    | (5,159,652  | ) |                    |   | 2,559,551   |  
|Net Increase / (Decrease) in securities sold under repurchase agreements          |  |                    | (755,655    | ) |                    |   | 2,238,647   |  
|Increase in FHLB advance                                                          |  |                    | 7,500,000   |   |                    |   | 0           |  
|Proceeds from issuance of Common Stock                                            |  |                    | 323,148     |   |                    |   | 294,238     |  
|Dividends paid                                                                    |  |                    | (1,050,397  | ) |                    |   | (970,184    | )
|Repurchase of Common Stock                                                        |  |                    | (45,155     | ) |                    |   | (81,344     | )
|                                                                                  |  |                    |             |   |                    |   |             |  
|Net Cash Provided by Financing Activities                                         |  |                    | 11,091,824  |   |                    |   | 19,510,980  |  
|                                                                                  |  |                   
|Net Increase in Cash & Due from Banks                                             |  | $                  | 2,613,940   |   |                    | $ | 3,854,017   |  
|                                                                                  |  |                   
|Cash & Due From Banks at Beginning of period                                      |  |                    | 7,762,030   |   |                    |   | 9,875,840   |  
|Cash & Due From Banks at End of period                                            |  |                    | 10,375,970  |   |                    |   | 13,729,857  |  
|                                                                                  |  |                   
|SUPPLEMENTAL DISCLOSURES                                                          |  |                    |             |   |                    |   |             |  
|Interest paid                                                                     |  |                    | 3,192,504   |   |                    |   | 3,689,447   |  
|Income taxes paid                                                                 |  |                    | 510,000     |   |                    |   | 512,129     |  
|Unrealized gain / (loss) on investment securities                                 |  |                    | (207,741    | ) |                    |   | (579,059    | )
|Loans transferred to other real estate owned                                      |  |                    | 60,180      |   |                    |   | 7,564       |  



See Notes to Consolidated Financial
Statements.



5



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Consolidated Statement of Changes in Shareholders Equity

(Unaudited)



|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ----------------------------------- | - |  | ----------------------- | --------- | - |  | - | ---------- | -
|                                                                                                                 |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TotalShareholdersEquity |          
|Balance on 1/1/2003                                                                                              |  | $           | 11,536,800 |   |                          | $ | 4,080,693 |                  |  | $ | 7,514,790                           |   |  | $                       | 1,624,516 |   |  | $ | 24,756,799 |  
|Comprehensive Income:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Net Income                                                                                                       |  |             |            |   |                          |   |           |                  |  |   | 1,341,407                           |   |  |                         |           |   |  |   | 1,341,407  |  
|Other comprehensive income:                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Changes in unrealized holding gains / losses on securities arising during the period, net of taxes of ($178,335) |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | (346,179  | ) |  |   | (346,179   | )
|Reclassification adjustment for security gains included in net income, net of taxes of ($18,545)                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | (36,000   | ) |  |   | (36,000    | )
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Total Comprehensive Income                                                                                       |  |             |           |   |                          |   |          |                  |  |   | 1,341,407                           |   |  |                         | (382,179  | ) |  |   | 959,228    |  
|                                                                                                                 |  |             |            |   |                         
|Cash dividends paid-$0.42/share                                                                                  |  |             |            |   |                          |   |           |                  |  |   | (970,184                            | ) |  |                         |           |   |  |   | (970,184   | )
|Stock repurchases                                                                                                |  |             | (26,000    | ) |                          |   | (8,263    | )                |  |   | (47,081                             | ) |  |                         |           |   |  |   | (81,344    | )
|Sale of common stock:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Dividend reinvestment plan                                                                                       |  |             | 91,570     |   |                          |   | 194,918   |                  |  |   |                                    |   |  |                         |          |   |  |   | 286,488    |  
|Stock Options exercised                                                                                          |  |             | 5,000      |   |                          |   | 2,750     |                  |  |   |                                    |   |  |                         |          |   |  |   | 7,750      |  
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Balance on 9/30/03                                                                                               |  | $           | 11,607,370 |   |                          | $ | 4,270,098 |                  |  | $ | 7,838,932                           |   |  | $                       | 1,242,337 |   |  | $ | 24,958,737 |  
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Balance on 1/1/2004                                                                                              |  | $           | 11,630,401 |   |                          | $ | 4,336,929 |                  |  | $ | 8,146,613                           |   |  | $                       | 964,461   |   |  | $ | 25,078,404 |  
|Comprehensive Income:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Net Income                                                                                                       |  |             |            |   |                          |   |           |                  |  |   | 1,437,617                           |   |  |                         |           |   |  |   | 1,437,617  |  
|Other comprehensive income:                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of ($12,743)           |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | (24,737   | ) |  |   | (24,737    | )
|Reclassification adjustment for security gains included in net income, net of taxes of ($57,889)                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | (112,372  | ) |  |   | (112,372   | )
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Total Comprehensive Income / (Loss)                                                                              |  |             |           |   |                          |   |          |                  |  |   | 1,437,617                           |   |  |                         | (137,109  | ) |  |   | 1,300,508  |  
|                                                                                                                 |  |             |            |   |                         
|Cash dividends paid-$0.45/share                                                                                  |  |             |            |   |                          |   |           |                  |  |   | (1,050,397                          | ) |  |                         |           |   |  |   | (1,050,397 | )
|Stock repurchases                                                                                                |  |             | (14,750    | ) |                          |   | (5,500    | )                |  |   | (24,905                             | ) |  |                         |           |   |  |   | (45,155    | )
|Sale of common stock:                                                                                            |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Dividends Reinvested                                                                                             |  |             | 99,138     |   |                          |   | 199,840   |                  |  |   |                                    |   |  |                         |          |   |  |   | 298,978    |  
|Stock Options exercised                                                                                          |  |             | 24,895     |   |                          |   | 23,452    |                  |  |   | (24,177                             | ) |  |                         |           |   |  |   | 24,170     |  
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Balance on 9/30/04                                                                                               |  | $           | 11,739,684 |   |                          | $ | 4,554,721 |                  |  | $ | 8,484,751                           |   |  | $                       | 827,352   |   |  | $ | 25,606,508 |  
|                                                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  



See Notes to Consolidated Financial
Statements.



6



---

##### Table of Contents

Notes to Consolidated Financial Statements (unaudited)



Note 1:



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



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



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



These consolidated financial statements should be read in conjunction with the financial statements and notes to financial statements included in the
registrants 2003 Annual Report to Shareholders.



As of
September 30, 2004, the Company has four stock-based compensation plans. The Company accounts for the plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on net income and earnings per share for the nine months ended September 30, 2004 and 2003 if the Company had applied fair value recognition provisions of FASB No. 123, Accounting for Stock-Based
Compensation.



|                                                                                                                           |  |                    |           |   |                    |   |           |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ------------------ | - | --------- | -
|                                                                                                                           |  | September 30, 2004 |           |   | September 30, 2003 |  
|                                                                                                                           |  | (unaudited)        |           |   | (unaudited)        |  
|Net Income, as reported                                                                                                    |  | $                  | 1,437,617 |   |                    | $ | 1,341,407 |  
|                                                                                                                           |  |                   
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |                    | (22,641   | ) |                    |   | (68,869   | )
|                                                                                                                           |  |                    |           |   |                    |   |           |  
|Pro forma net income                                                                                                       |  | $                  | 1,414,976 |   |                    | $ | 1,272,538 |  
|                                                                                                                           |  |                    |           |   |                    |   |           |  
|Earnings per share:                                                                                                        |  |                    |           |   |                    |   |           |  
|Basic - as reported                                                                                                        |  | $                  | 0.62      |   |                    | $ | 0.58      |  
|Basic - pro forma                                                                                                          |  | $                  | 0.61      |   |                    | $ | 0.55      |  
|Diluted - as reported                                                                                                      |  | $                  | 0.61      |   |                    | $ | 0.57      |  
|Diluted - pro forma                                                                                                        |  | $                  | 0.60      |   |                    | $ | 0.54      |  



Note 2: Securities



The carrying amounts of debt and other securities and their approximate
fair values at September 30, 2004, and December 31, 2003, follow:



|                                                             |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|------------------------------------------------------------ |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities September 30,
2004 (unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies                                     |  | $             | 12,425,574 |                      | $ | 51,885                |  | $ | (43,263    | ) |  | $ | 12,434,196
|State and municipal securities                               |  |               | 32,024,248 |                      |   | 992,687               |  |   | (34,789    | ) |  |   | 32,982,146
|Corporate bonds                                              |  |               | 8,548,206  |                      |   | 287,044               |  |   | 0          |   |  |   | 8,835,250 
|Restricted securities                                        |  |               | 1,387,900  |                      |   | 0                     |  |   | 0          |   |  |   | 1,387,900 
|                                                             |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|                                                             |  | $             | 54,385,928 |                      | $ | 1,331,616             |  | $ | (78,052    | ) |  | $ | 55,639,492



7



---

##### Table of Contents

|                                                           |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|---------------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities December 31,
2003            |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies                                   |  | $             | 20,644,546 |                      | $ | 66,235                |  | $ | (102,717   | ) |  | $ | 20,608,064
|State and municipal securities                             |  |               | 36,498,604 |                      |   | 1,196,751             |  |   | (175,099   | ) |  |   | 37,520,256
|Corporate bonds                                            |  |               | 6,565,676  |                      |   | 476,134               |  |   | 0          |   |  |   | 7,041,810 
|Restricted securities                                      |  |               | 1,323,600  |                      |   | 0                     |  |   | 0          |   |  |   | 1,323,600 
|                                                           |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|                                                           |  | $             | 65,032,426 |                      | $ | 1,739,120             |  | $ | (277,816   | ) |  | $ | 66,493,731
|                                                           |  |               |            |                     
|Held-to-maturity securities September 30,
2004 (unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|State and municipal securities                             |  |               | 426,522    |                      |   | 0                     |  |   | (3,342     | ) |  |   | 423,180   



Securities with a
market value of $11.3 million were pledged as collateral for public deposits, repurchase agreements and for other purposes as required by law as of September 30, 2004. The market value of pledged securities at year-end 2003 was $12.3 million.



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. The unrealized loss positions are 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.



Note 3: Loans



The
components of loans were as follows:



|                                                             |  |                    |             |   |                   |   |             |  
|------------------------------------------------------------ |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | September 30, 2004 |             |   | December 31, 2003 |  
|                                                             |  | (unaudited)        |             |   |                   |  
|Mortgage loans on real estate:                               |  |                    |             |   |                   |   |             |  
|Construction                                                 |  | $                  | 29,905,455  |   |                   | $ | 24,959,214  |  
|Secured by farmland                                          |  |                    | 2,064,573   |   |                   |   | 1,134,584   |  
|Secured by 1-4 family residential                            |  |                    | 117,226,492 |   |                   |   | 104,104,372 |  
|Other real estate loans                                      |  |                    | 27,172,553  |   |                   |   | 22,338,503  |  
|Loans to farmers (except those secured by real estate)       |  |                    | 71,810      |   |                   |   | 71,479      |  
|Commercial and industrial loans (not secured by real estate) |  |                    | 19,912,825  |   |                   |   | 24,819,068  |  
|Consumer installment loans                                   |  |                    | 9,439,305   |   |                   |   | 10,555,735  |  
|All other loans                                              |  |                    | 1,460,565   |   |                   |   | 974,448     |  
|Net deferred loan costs and fees                             |  |                    | 1,368,826   |   |                   |   | 1,395,125   |  
|                                                             |  |                    |             |   |                   |   |             |  
|Total loans                                                  |  | $                  | 208,622,404 |   |                   | $ | 190,352,528 |  
|Allowance for loan losses                                    |  |                    | (2,013,116  | ) |                   |   | (1,901,576  | )
|                                                             |  |                    |             |   |                   |   |             |  
|Loans, net                                                   |  | $                  | 206,609,288 |   |                   | $ | 188,450,952 |  



Loans upon which the
accrual of interest has been discontinued totaled $1.6 million as of September 30, 2004, and $1.4 million as of December 31, 2003.



Note 4: Allowance for Loan Losses



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



|                           |  |             |           |   |            |   |           |             |  |   |           |  
|-------------------------- |  | ----------- | --------- | - | ---------- | - | --------- | ----------- |  | - | --------- | -
|                           |  | 9/30/2004   |           |   | 12/31/2003 |   |           | 9/30/2003   | 
|                           |  | (unaudited) |           |   |            |   |           | (unaudited) | 
|Balance, beginning of year |  | $           | 1,901,576 |   |            | $ | 1,696,914 |             |  | $ | 1,696,914 |  
|Provision for loan losses  |  |             | 225,000   |   |            |   | 312,000   |             |  |   | 234,000   |  
|Recoveries                 |  |             | 28,796    |   |            |   | 13,032    |             |  |   | 10,058    |  
|Loans charged off          |  |             | (142,256  | ) |            |   | (120,370  | )           |  |   | (88,650   | )
|                           |  |             |           |   |            |   |           |             |  |   |           |  
|Balance, end of period     |  | $           | 2,013,116 |   |            | $ | 1,901,576 |             |  | $ | 1,852,322 |  
|                           |  |             |           |   |            |   |           |             |  |   |           |  



8



---

##### Table of Contents

Note 5: 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. Potential diluted common stock had no effect on earnings per share available to shareholders.



|                               |  |                                     |  |                                     |      |               |           |                 |   |     
|------------------------------ |  | ----------------------------------- |  | ----------------------------------- | ---- | ------------- | --------- | --------------- | - | ----
|                               |  | Nine months endedSeptember 30, 2004 |  | Nine months endedSeptember 30, 2003
|(Unaudited)                    |  | AverageShares                       |  | Per shareAmount                     |      | AverageShares |           | Per shareAmount
|Basic earnings per share       |  | 2,334,036                           |  | $                                   | 0.62 |               | 2,319,558 |                 | $ | 0.58
|                               |  |                                     |  |                                    
|Effect of dilutive securities: |  |                                     |  |                                     |      |               |           |                 |   |     
|Stock options                  |  | 20,026                              |  |                                     |      |               | 22,876    |                 |   |     
|                               |  |                                     |  |                                    
|Diluted earnings per share     |  | 2,354,062                           |  | $                                   | 0.61 |               | 2,342,434 |                 | $ | 0.57



As of September 30, 2004, and
September 30, 2003, options on 139,053 shares and 81,508 shares, respectively, were not included in computing diluted earnings per share, because their effects were anti-dilutive.



Note 6: Unidentifiable Intangibles



The Company has unidentifiable intangibles recorded on the consolidated financial statements relating to the purchase of five branches. The balance of the
intangibles at September 30, 2004, 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 September 30, 2004.



Note 7: Employee Benefit Plans



Components of Net Periodic Benefit Cost

Nine months ended September 30, 2004 (unaudited)



|                                      |  |                  |          |   |                          |   |         |      |  |      |        |  |   |       
|------------------------------------- |  | ---------------- | -------- | - | ------------------------ | - | ------- | ---- |  | ---- | ------ |  | - | ------
|                                      |  | Pension Benefits |          |   | Post Retirement Benefits
|                                      |  | 2004             |          |   | 2003                     |   |         | 2004 |  | 2003
|Service Cost                          |  | $                | 177,759  |   |                          | $ | 140,958 |      |  | $    | 11,487 |  | $ | 9,750 
|Interest Cost                         |  |                  | 124,665  |   |                          |   | 101,886 |      |  |      | 24,456 |  |   | 9,765 
|Expected Return on Plan Assets        |  |                  | (101,067 | ) |                          |   | (81,132 | )    |  |      | 0      |  |   | 0     
|Amortization of Prior Service Cost    |  |                  | 12,279   |   |                          |   | 12,279  |      |  |      | 0      |  |   | 0     
|Recognition of Net (Gain)/Loss        |  |                  | 33,972   |   |                          |   | 30,474  |      |  |      | 15,000 |  |   | 6,051 
|Amortization of Transition Obligation |  |                  |         |   |                          |   | (13,734 | )    |  |      | 2,184  |  |   | 2,184 
|                                      |  |                  |          |   |                          |   |         |      |  |      |        |  |   |       
|Net Periodic Benefit Cost             |  | $                | 247,608  |   |                          | $ | 190,731 |      |  | $    | 53,127 |  | $ | 27,750



Employer Contributions



The Company previously disclosed in its Annual Report on
Form 10-K its consolidated financial statements for the year-ended December 31, 2003, that it expected to contribute $771,589 to its pension plan and $27,843 to its post-retirement benefit plan in 2004. As of September 30, 2004, a contribution of
$771,589 and $27,843, respectively, has been made. The Company presently anticipates no further contributions during the remainder of 2004.



9



---

##### Table of Contents

Note 8: FHLB Advance



In May of 2004, the Company took a short-term advance of $7.5 million from the Federal Home Bank of Atlanta. This advance is structured as a four-year
credit. The advance is variable to the three-month LIBOR (London Interbank Offered Rates) minus 50 basis points for twelve months and then converted to a fixed rate credit at 3.92% for 36 months. At the one-year anniversary, the Company has the
option to pre-pay the loan with no penalty.



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.



GOODWILL. In October 2003, the Financial Accounting Standards Board issued
Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement amends 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,to branch acquisitions if such transactions meet the definition of a business combination. The provisions of the
Statement do not apply to transactions between two or more mutual enterprises. In addition, the Statement amends Statement No. 144, Accounting for the Impairment of Long-Lived Assets,to include in its scope core deposit intangibles of
financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used. The Company
adopted this interpretation of Statement 147 for the intangibles associated with branch acquisitions that were executed in 1994, 1997, and 2000. The Company conducted an in-depth study of the issue and has determined that the intangibles associated
with these branch acquisitions qualify as a business combination as described in Statement 141 and 142, as well as Emerging Issues Task Force Ruling 98-3.



10



---

##### Table of Contents

RECENT ACCOUNTING PRONOUNCEMENTS.



On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to
Loan Commitments(SAB 105). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (IRLC), subject to SFAS No. 149 and
Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other
internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The Company has adopted the provisions of SAB 105. Since the
provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, management does not anticipate that this guidance will have a material adverse effect on either the Companys consolidated financial position or
consolidated results of operations.



Emerging Issues Task Force
Issue No. 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments(EITF 03-1) was issued and is effective March 31, 2004. The EITF 03-1 provides guidance for determining the
meaning of other than-temporarily impaired and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and
Equity Securities(SFAS No. 115) and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be
recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines that an investment with a fair value less than cost is not other-than-temporarily impaired.



On September 30, 2004, the Financial Accounting Standards
Board decided to delay the effective date for the measurement and recognition guidance contained in Issue 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative
literature. The disclosure guidance in Issue 03-1 was not delayed.



EITF No. 03-16, Accounting for Investments in Limited Liability Companies was ratified by the Board and is effective for reporting periods beginning after June 15, 2004.APB Opinion No. 18, The Equity
Method of Accounting Investments in Common Stock, prescribes the accounting for investments in common stock of corporations that are not consolidated. AICPA Accounting Interpretation 2, Investments in Partnerships Ventures,of Opinion 18, indicates that many of the provisions of the Opinion would be appropriate in accounting for partnerships. In EITF Abstracts,Topic No. D-46, Accounting for Limited Partnership Investments,the
SEC staff clarified its view that investments of more than 3 to 5 percent are considered to be more than minor and, therefore, should be accounted for using the equity method. Limited liability companies (LLCs) have characteristics of both
corporations and partnerships, but are dissimilar from both in certain respects. Due to those similarities and differences, diversity in practice exists with respect to accounting for non-controlling investments in LLCs. The consensus reached was
that an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a non-controlling investment should be accounted for using the cost method or the equity method of accounting.



11



---

##### Table of Contents

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



This report contains statements concerning the Companys expectations, plans, objectives, future financial performance
and other statements that are not historical facts. These statements may constitute forward-looking statements as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by
management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Company
include, but are not limited to, changes in: interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board,
the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Companys market area and accounting principles, policies and guidelines. These risks
and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.



Bay Banks of Virginia, Inc.

Financial Highlights (unaudited)



|                                                        |  |                         |   |  |                         |   |  |        |  
|------------------------------------------------------- |  | ----------------------- | - |  | ----------------------- | - |  | ------ | -
|Nine months ended (Thousands)                           |  | As ofSeptember 30, 2004 |   |  | As ofSeptember 30, 2003 |   |  | Change |  
|FINANCIAL CONDITION                                     |  |                         |   |  |                         |   |  |        |  
|Average Assets                                          |  | 296,699                 |   |  | 273,993                 |   |  | 8.3    | %
|Average Interest-earning Assets                         |  | 275,648                 |   |  | 249,614                 |   |  | 11.4   | %
|Average Earning Assets to Total Average Assets          |  | 92.9                    | % |  | 91.1                    | % |  | 2.0    | %
|Period-end Interest-bearing Liabilities                 |  | 233,519                 |   |  | 222,896                 |   |  | 4.8    | %
|Average Interest-bearing Liabilities                    |  | 232,683                 |   |  | 217,300                 |   |  | 7.1    | %
|Average Equity, including FAS 115 adjustment            |  | 25,283                  |   |  | 25,405                  |   |  | -0.5   | %
|Tier 1 Capital                                          |  | 21,971                  |   |  | 20,909                  |   |  | 5.1    | %
|Net Risk-weighted Assets                                |  | 211,111                 |   |  | 183,379                 |   |  | 15.1   | %
|Tier 2 Capital                                          |  | 2,013                   |   |  | 1,852                   |   |  | 8.7    | %
|                                                        |  |                         |  
|RESULTS OF OPERATIONS                                   |  |                         |   |  |                         |   |  |        |  
|Net Interest Income before Provision                    |  | 7,203                   |   |  | 6,363                   |   |  | 13.2   | %
|Net Income                                              |  | 1,438                   |   |  | 1,341                   |   |  | 7.2    | %
|Annualized Yield on Average Interest-earning Assets     |  | 5.17                    | % |  | 5.51                    | % |  | -6.2   | %
|Annualized Cost of Average Interest-bearing Liabilities |  | 1.83                    | % |  | 2.23                    | % |  | -17.9  | %
|Annualized Net Yield on Average Interest-earning Assets |  | 3.63                    | % |  | 3.57                    | % |  | 1.7    | %
|Annualized Net Interest Rate Spread                     |  | 3.35                    | % |  | 3.28                    | % |  | 2.1    | %
|                                                        |  |                         |  
|RATIOS                                                  |  |                         |   |  |                         |   |  |        |  
|Total Capital to Risk-weighted Assets (10% min)         |  | 11.4                    | % |  | 12.4                    | % |  | -8.5   | %
|Tier 1 Capital to Risk-weighted Assets (6% min)         |  | 10.4                    | % |  | 11.4                    | % |  | -8.7   | %
|Leverage Ratio (5% min)                                 |  | 7.5                     | % |  | 7.7                     | % |  | -4.8   | %
|Annualized Return on Average Assets (ROA)               |  | 0.6                     | % |  | 0.7                     | % |  | -1.0   | %
|Annualized Return on Average Equity (ROE)               |  | 7.6                     | % |  | 7.0                     | % |  | 7.7    | %
|                                                        |  |                         |  
|Period-end basic shares outstanding                     |  | 2,347,937               |   |  | 2,326,080               |   |  | 0.9    | %
|Average basic shares outstanding                        |  | 2,334,036               |   |  | 2,319,558               |   |  | 0.6    | %
|Average diluted shares outstanding                      |  | 2,354,062               |   |  | 2,342,434               |   |  | 0.5    | %
|                                                        |  |                         |  
|PER SHARE DATA                                          |  |                         |   |  |                         |   |  |        |  
|Diluted earnings per average share (EPS)                |  | 0.61                    |   |  | 0.57                    |   |  | 7.0    | %
|Cash Dividends per average share (six months)           |  | 0.45                    |   |  | 0.42                    |   |  | 7.1    | %
|Book Value per share - basic                            |  |                         |   |  |                         |   |  |        |  
|before Accumulated Comprehensive Income/Loss            |  | 10.55                   |   |  | 10.20                   |   |  | 3.4    | %
|after Accumulated Comprehensive Income/Loss             |  | 10.91                   |   |  | 10.73                   |   |  | 1.7    | %
|                                                        |  |                         |  
|Book Value per average share - basic                    |  |                         |   |  |                         |   |  |        |  
|before Accumulated Comprehensive Income/Loss            |  | 10.62                   |   |  | 10.22                   |   |  | 3.9    | %
|after Accumulated Comprehensive Income/Loss             |  | 10.97                   |   |  | 10.76                   |   |  | 2.0    | %



12



---

##### Table of Contents

EARNINGS SUMMATION



For the nine months ended September 30, 2004, net income was $1.4 million as compared to $1.3 million for the comparable period in 2003, an increase of
7.2%. Diluted earnings per average share for the first nine months of 2004 were $0.61 as compared to $0.57 for the first nine months of 2003. Annualized return on average assets was 0.6% for the first nine months of 2004 and 0.7% for the similar
period in 2003. Annualized return on average equity was 7.6% for the first nine months of 2004, compared to 7.0% for the first nine months of 2003, an increase of 7.7%.



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 3.63% as of September 30, 2004 compared to 3.57% for the same period
in 2003 for an increase of 6 basis points.



Net interest income
before provision for loan losses for the first nine months of 2004 was $7.2 million, compared to $6.4 million for the first nine months of 2003, an increase of $840 thousand or 13.2%. Increases in net interest income were driven by loan growth
(changes in volume) during the first nine months of 2004. Average interest-earning assets totaled $275.6 million for the first nine months of 2004 as compared to $249.6 million for the first nine months of 2003, an increase of 10.4%. Average
interest-earning assets as a percent of total average assets was 92.9% for the first nine months of 2004 as compared to 91.1% for the comparable period of 2003, an increase of 2.0%. The annualized yield on average interest-earning assets for the
first nine months of 2004 was 5.17% as compared to 5.51% for the first nine months of 2003, a decrease of 34 basis points.



As loan volumes continue to increase, the Company will realize increasing net interest income as a result. These increases are incremental, however, as
the increase in yield on new loan volume which is replacing Federal Funds Sold, is partially offset by the decline in investment yields. Management expects loan growth to continue through 2004 and into 2005, in which case net interest income should
continue to improve. In addition, as the investment portfolio management continues, yields on this asset should also improve, thereby further increasing net interest income.



Average interest-bearing liabilities totaled $232.7 million for the first nine months of 2004 as compared to $217.3 million
for the first nine months of 2003, an increase of 7.1%. The annualized yield (cost) on interest-bearing liabilities for the first nine months of 2004 was 1.83% as compared to 2.23% for the first nine months of 2003, a decrease of 40 basis points.



As noted earlier, the Company took an advance of $7.5 million
from the Federal Home Bank of Atlanta in May of 2004. The average cost of these funds was 0.67% through September 30, 2004, reducing the Companys total cost of interest-bearing liabilities, and improving net interest income.



The net interest spread, which is the difference between the annualized yield
on earning assets and the annualized rate on interest bearing liabilities was 3.35% through nine months of 2004 and 3.28% through nine months of 2003.



Average total assets for the first nine months of 2004 were $296.7 million as compared to $274.0 million for the first nine months of 2003, an increase of
8.3%.



The first nine months of 2004 has resulted in strong
loan growth. This growth has resulted in increases in net interest income through volume rather than rate. The vast majority of loans being recorded are adjustable and variable rate loans which will re-price upwardly when the interest rate market
becomes less accommodative. The balance sheet of the Company remains asset sensitive and is therefore well positioned for a rising rate environment.



13



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Net Interest Income Analysis (unaudited)



|                                                      |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|----------------------------------------------------- | -------------- | --------------------------- | -------------- |  | --------------------------- | ------ |  | -------------- | - | -------------- | - | -------------------- |  | - | ------ |  | ---- | -
|(Fully taxable equivalent basis) (Thousands)          |                | Nine months ended 9/30/2004 |                |  | Nine months ended 9/30/2003 |       
|                                                      | AverageBalance |                             | Income/Expense |  | AnnualizedYield/Rate        |        |  | AverageBalance |   | Income/Expense |   | AnnualizedYield/Rate | 
|INTEREST EARNING ASSETS:                              |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Investments:                                          |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Taxable Investments                                   |                | $                           | 38,862         |  | $                           | 1,008  |  | 3.46           | % |                | $ | 30,347               |  | $ | 1,199  |  | 5.27 | %
|Tax-Exempt Investments (1)                            |                |                             | 20,629         |  |                             | 897    |  | 5.80           | % |                |   | 18,654               |  |   | 851    |  | 6.08 | %
|                                                      |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Total Investments                                     |                |                             | 59,491         |  |                             | 1,905  |  | 4.27           | % |                |   | 49,001               |  |   | 2,050  |  | 5.58 | %
|                                                      |                |                             |                |  |                             |       
|Gross Loans (2)                                       |                |                             | 203,203        |  |                             | 8,681  |  | 5.70           | % |                |   | 171,676              |  |   | 8,024  |  | 6.23 | %
|Interest-bearing Deposits                             |                |                             | 123            |  |                             | 1      |  | 1.44           | % |                |   | 169                  |  |   | 1      |  | 0.50 | %
|Fed Funds Sold                                        |                |                             | 12,831         |  |                             | 106    |  | 1.10           | % |                |   | 28,769               |  |   | 240    |  | 1.11 | %
|                                                      |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|TOTAL INTEREST EARNING ASSETS                         |                | $                           | 275,648        |  | $                           | 10,693 |  | 5.17           | % |                | $ | 249,614              |  | $ | 10,315 |  | 5.51 | %
|                                                      |                |                             |                |  |                             |       
|INTEREST-BEARING LIABILITIES:                         |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Deposits:                                             |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Savings Deposits                                      |                | $                           | 66,276         |  | $                           | 739    |  | 1.49           | % |                | $ | 61,585               |  | $ | 815    |  | 1.76 | %
|NOW Deposits                                          |                |                             | 46,121         |  |                             | 171    |  | 0.49           | % |                |   | 40,962               |  |   | 244    |  | 0.80 | %
|CDs >= $100,000                                      |                |                             | 31,364         |  |                             | 742    |  | 3.15           | % |                |   | 25,854               |  |   | 716    |  | 3.69 | %
|CDs < $100,000                                       |                |                             | 63,290         |  |                             | 1,454  |  | 3.06           | % |                |   | 68,149               |  |   | 1,712  |  | 3.35 | %
|Money Market Deposit Accounts                         |                |                             | 16,954         |  |                             | 46     |  | 0.36           | % |                |   | 16,403               |  |   | 122    |  | .99  | %
|                                                      |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Total Interest Bearing Deposits                       |                | $                           | 224,005        |  | $                           | 3,152  |  | 1.88           | % |                | $ | 212,953              |  | $ | 3,609  |  | 2.26 | %
|                                                      |                |                             |                |  |                             |       
|Fed funds purchased and securities sold to repurchase |                |                             | 4,846          |  |                             | 16     |  | 0.43           | % |                |   | 4,347                |  |   | 32     |  | 0.99 | %
|FHLB advance                                          |                |                             | 3,832          |  |                             | 19     |  | 0.67           | % |                |   |                     |  |   |       |  | 0.00 | %
|                                                      |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES                    |                | $                           | 232,683        |  | $                           | 3,187  |  | 1.83           | % |                | $ | 217,300              |  | $ | 3,641  |  | 2.23 | %
|                                                      |                |                             |                |  |                             |       
|Net Interest Income/Yield on Earning Assets           |                |                             |                |  | $                           | 7,506  |  | 3.63           | % |                |   |                      |  | $ | 6,674  |  | 3.57 | %
|Net Interest Rate Spread                              |                |                             |                |  |                             |        |  | 3.35           | % |                |   |                      |  |   |        |  | 3.28 | %

---

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

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



Through the nine months ended September 30, 2004, average interest-earning assets were comprised of the loan portfolio with $203.2 million and the
investment portfolio with $59.5 million. For the nine month period ended September 30, 2004, compared to the same period in 2003, on a fully tax equivalent basis, tax-exempt investment yields declined to 5.80% from 6.08%, and taxable investment
yields decreased to 3.46% from 5.27%, resulting in a decrease in total investment yield to 4.27% from 5.58%. The investment portfolio will provide liquidity as short investments mature during 2004 and 2005.



In the first nine months of 2004, gross loans on average yielded 5.70% as
compared to 6.23% for the same period in 2003. The Company has been successful in growing the loan portfolio with variable and adjustable rate loans through the third quarter of 2004. By keeping the re-pricing terms of the loan portfolio short, the
Company is positioned for a rising rate environment.



In an
effort to offset the reduction in loan and investment yields, management has reduced the yields (costs) on average interest-bearing deposits during the first nine months of 2004, compared to the same period in 2003, as follows. Savings yields were
reduced to 1.49% compared to 1.76%, NOW accounts were reduced to 0.49% compared to .80%, money market demand accounts were reduced to 0.36% compared to 0.99%, certificates of deposit greater than or equal



14



---

##### Table of Contents

to $100 thousand were reduced to 3.15% compared to 3.69%, and certificates of deposit less than $100 thousand were
reduced to 3.06% compared to 3.35%. The resulting total yield on average deposits through September 30, 2004, was reduced to 1.88% compared to 2.26% for the same period of 2003.



The Company is positioned in a highly competitive environment. The competition for deposits has been historically strong.
Currently, competition for deposits has not resulted in significant increases in the advertised rates for deposits and this has allowed the Company to maintain a favorable deposit rate structure. However, competitive pressure from other local banks,
regional banks, insurance companies, credit unions and credit card companies may increase throughout 2004 and 2005.



Interest Rate Sensitivity Analysis

as of September 30, 2004



|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|---------------------------------- |  | -------------- |  | ----------- | - |  | --------- | - |  | ----------- |  | -------
|(Thousands)                        |  | Within 3months |  | 3-12 Months |   |  | 1-5 Years |   |  | Over 5Years |  | Total  
|Interest-Bearing Due From Banks    |  | 107            |  | 0           |   |  | 0         |   |  | 0           |  | 107    
|Fed Funds Sold                     |  | 15,454         |  | 0           |   |  | 0         |   |  | 0           |  | 15,454 
|Investments                        |  | 12,966         |  | 2,998       |   |  | 20,924    |   |  | 19,178      |  | 56,066 
|Loans                              |  | 61,258         |  | 45,184      |   |  | 84,956    |   |  | 15,854      |  | 207,252
|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|Total Earning Assets               |  | 89,785         |  | 48,182      |   |  | 105,880   |   |  | 35,032      |  | 278,879
|                                   |  |                |  |             |  
|NOW Accounts                       |  | 14,858         |  | 29,716      |   |  | 0         |   |  | 0           |  | 44,574 
|MMDAs                             |  | 16,300         |  | 0           |   |  | 0         |   |  | 0           |  | 16,300 
|Savings                            |  | 10,187         |  | 14,262      |   |  | 43,466    |   |  | 0           |  | 67,915 
|CDs < $100,000                    |  | 6,617          |  | 12,488      |   |  | 42,032    |   |  | 5           |  | 61,142 
|CDs >= $100,000                   |  | 3,314          |  | 4,332       |   |  | 22,718    |   |  | 0           |  | 30,364 
|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|Total Interest Bearing Deposits    |  | 51,276         |  | 60,798      |   |  | 108,216   |   |  | 5           |  | 220,295
|                                   |  |                |  |             |  
|Securities Sold to Repurchase      |  | 5,723          |  | 0           |   |  | 0         |   |  | 0           |  | 5,723  
|FHLB advance                       |  | 0              |  | 7,500       |   |  | 0         |   |  | 0           |  | 7,500  
|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|Total Interest Bearing Liabilities |  | 56,999         |  | 68,298      |   |  | 108,216   |   |  | 5           |  | 233,518
|                                   |  |                |  |             |  
|Rate Sensitive Gap                 |  | 32,786         |  | (20,116     | ) |  | (2,336    | ) |  | 35,027      |  | 45,361 
|                                   |  |                |  |             |  
|Cumulative Gap                     |  | 32,786         |  | 12,670      |   |  | 10,334    |   |  | 45,361      |  |        



As of September 30,
2004, the Company had interest-earning assets that mature within three months totaling $89.8 million, within twelve months totaling $48.2 million, through five years totaling $105.9 million, and over five years totaling $35.0 million. In comparison,
interest-bearing liabilities maturing within three months totaled $57.0 million, within twelve months totaled $68.3 million, within five years totaled $108.2 million and $5 thousand over five years. The tabular information indicates that the Company
is asset sensitive for all periods presented on a cumulative basis. 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.



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, 2004, federal funds sold totaled $15.5
million and securities maturing in one year or less totaled $15.9 million, for a total pool of $31.4 million. The liquidity ratio as of September 30, 2004 was 25.5% as compared to 28.8% as of December 31, 2003. 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,



15



---

##### Table of Contents

through historical analysis, has deemed 15% an adequate liquidity ratio and does not anticipate a significant change in
the liquidity structure of the Company. In addition, the Company maintains available lines of credit with the Federal Home Loan Bank of Atlanta and several correspondent banks.



CAPITAL RESOURCES



From December 31, 2003, to September 30, 2004, total shareholders equity increased to $25.6 million from $25.1 million or 2.0%. 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 comprehensive income or loss on the
balance sheet and statement of changes in shareholders equity. Shareholders equity before unrealized gains or losses was $24.8 million on September 30, 2004, and $24.1 million on December 31, 2003. Accumulated other comprehensive income
was $827 thousand at September 30, 2004 and $964 thousand at December 31, 2003. This represents a decrease of $137 thousand or 14.2% during the nine month period.



Book value per share, basic, on September 30, 2004, compared to September 30, 2003, increased to $10.91 from $10.73, or
1.7%. Book value per share, basic, before accumulated comprehensive income on September 30, 2004, compared to September 30, 2003, grew to $10.55 from $10.20, an increase of 3.4%. Cash dividends paid for the nine months ended September 30, 2004, were
$1.1 million, or $0.45 per share, compared to $970 thousand, or $0.42 per share, for the comparable period ended September 30, 2003 an increase of 7.1%. Average basic shares outstanding for the nine months ended September 30, 2004, were 2,334,036
compared to 2,319,558 for the comparable period ended September 30, 2003. The Company began a share repurchase program in August of 1999 and has continued the program into 2004. The plan authorizes a total of 115,000 shares for repurchase.



The Company is subject to minimum regulatory capital ratios as
defined by Federal Financial Institutions Examination Council guidelines. As of September 30, 2004 the Company maintained Tier 1 capital of $22.0 million, net risk weighted assets of $211.1 million, and Tier 2 capital of $2.0 million. On September
30, 2004, the Tier 1 capital to risk weighted assets ratio was 10.4%, the total capital ratio was 11.4%, and the tier 1 leverage ratio was 7.3%. These ratios continue to be well in excess of regulatory minimums.



FINANCIAL CONDITION



As of September 30, 2004, total assets increased by 4.2% for the nine month period. Total assets were $302.9 million at
September 30, 2004 as compared to $290.7 million at year-end 2003. Cash and cash equivalents totaled $10.4 million on September 30, 2004, compared to $7.8 million at year-end 2003.



During the nine months ended September 30, 2004, gross loans increased by $18.3 million or 9.6%, to $208.6 million from
$190.4 million at year-end 2003. The major components of this increase were real estate mortgage loans secured by 1-4 family residential collateral with 12.6% growth to $117.2 million, and residential construction loans growing 19.8% to $29.9
million.



For the nine months ended September 30, 2004, the
Company charged off loans totaling $142 thousand. For the comparable period in 2003, total loans charged off were $88.7 thousand. The Company maintained $46 thousand of other real estate owned (OREO) as of September 30, 2004. As of
year-end 2003, this balance was $77 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 $225 thousand
through the first nine months, and the allowance for loan losses as of September 30, 2004, was $2.0 million. The allowance for loan losses, as a percentage of average total loans through the first nine months of 2004 was 0.96%. 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 September 30, 2004, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio.



16



---

##### Table of Contents

As of September 30, 2004, $1.6 million of loans were on non-accrual status of which $1.0 million are
considered impaired. There were $1.4 million of loans on non-accrual status as of year-end 2003. On September 30, 2003, non-accrual loans totaled $1.3 million, of which $1.0 million were considered impaired. Changes in market conditions, interest
rates, or the local economy could increase the realized loss on this credit. 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 $336 thousand on September 30, 2004, as compared to $602 thousand on September 30, 2003. Management has reviewed the credit and the underlying collateral and expects no additional loss above that which is specifically reserved in the
allowance for loan losses.



As of September 30, 2004,
securities available for sale at market value totaled $55.6 million as compared to $66.5 million on December 31, 2003. This represents a net decrease of $10.9 million or 16.3% for the nine months. Securities held to maturity were $427 thousand as of
September 30, 2004. At quarter end the investment portfolio represented 18.5% of total assets and 25.0% 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 September 30, 2004 was a net unrealized gain of $1.3 million. The corresponding accumulated adjustment to shareholders equity was $827 thousand. These gains or losses are
booked monthly as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold. Management does not anticipate the realization of net losses on investments during
2004.



As of September 30, 2004, total deposits were $262.2
million compared to $257.1 at year-end 2003. This represents growth in balances of $5.1 million or 2.0% during the nine months. Components of this growth include non-interest-bearing demand deposits at 22.2% growth to $41.9 million, and savings and
interest bearing demand deposit accounts at 2.1% growth to $128.8 million. Time deposits decreased by 5.3% to $91.5 million.



RESULTS OF OPERATIONS



NON-INTEREST INCOME



Non-interest income for the first nine months of 2004 and 2003 totaled $2.0 million. 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 $489 thousand compared to $450 thousand through nine months of 2003, service charges on deposit accounts contributed $481 thousand
through nine months of 2004 and $451 thousand for the comparable period in 2003, other fees contributed $638 thousand compared to $496 thousand through the nine months of 2004 and 2003, consecutively. The main driver of the increase in other fees is
non-deposit product fee income and miscellaneous VISA income. Minor contributors to the increase in other fees were improvements in collection of cashiers check and money order fees, as well as increases in ATM interchange fees. Secondary market
real estate loan brokerage income declined to $141 thousand compared to $330 through nine months of 2003, due mainly to reductions in refinancing activity. Gains on the sale of investments were $170 thousand through September 30, 2004 compared to
$55 thousand for the comparable period of 2003. Gains on the sale of other real estate totaled $21 thousand through nine months of 2004 compared to $192 thousand for the comparable period of 2003, and other income totaled $90 thousand through nine
months of 2004 compared to $71 thousand for the nine months ended September 30, 2003.



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 testamentary
trusts, revocable and irrevocable personal, managed agency, and custodial trusts. Fiduciary income is largely affected by changes in the performance of the stock market, which directly impacts the market value of the accounts upon which fees are
earned. This being the case, performance of fiduciary activities can be expected to approximate the performance of the national stock markets. In recent quarters the fee income of the Trust Company has improved as the stock markets have gained
value, thereby increasing the market value of the assets under management. In addition, the Trust Company has also been successful in increasing new accounts. Increased marketing and sales efforts are expected to continue this trend.



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



17



---

##### Table of Contents

NON-INTEREST EXPENSE



Non-interest expenses totaled $7.0 million during the first nine months of 2004 as compared to $6.4 million for the same period in 2003, an increase of
10.6%. The largest components of non-interest expense are salaries and benefits, and occupancy expense. Through the nine months ended September 30, 2004, salary and benefit expense was $3.9 million, and $3.3 million for the same period of 2003.
Salary expense is impacted by the application of FAS-91, which governs the accounting for loan fees and costs. Salary expense is adjusted for the recognition of costs associated with the origination and processing of real estate loans. The
adjustment to salaries for recognition of these costs was $536 thousand through the first nine months of 2004 as compared to $751 thousand for the same period in 2003. This resulted in an increase in salary expense of $215 thousand. The increase in
expense is associated with an adjustment in the cost factor used for the calculation of the loan cost associated with FAS-91 loan fees and costs. Occupancy expense was $1.1 million through the first nine months of 2004 as compared to $1.0 million
for the same period of 2003.



Other expenses include bank
franchise taxes which totaled $169 thousand through nine months of 2004 and $156 thousand for 2003, expenses related to the Visa® program which were $300 thousand through nine months of 2004 and $273 thousand through nine months of 2003,
telephone expenses which were $123 thousand for the current period and $131 thousand through nine months of 2003, and other operating expenses which totaled $1.5 million through both September 30, 2004 and September 30, 2003. Telephone expenses
include the cost of the Companys Customer Care Center and data Network communications.



Regulatory requirements created by the Sarbanes Oxley Act of 2002 have increased personnel, legal and accounting expenses of the Company. Management expects this trend to continue to increase expenses as the reporting
and risk monitoring process develops.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



There have been no significant changes from the quantitative and qualitative disclosures made in the Companys report on Form 10-K for the year-ended
December 31, 2003.



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



PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None to report.



18



---

##### Table of Contents

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



Issuer Purchases of Equity Securities



|                |  |                               |  |                            |  |                                                                     |  |                                                                  
|--------------- |  | ----------------------------- |  | -------------------------- |  | ------------------------------------------------------------------- |  | -----------------------------------------------------------------
|                |  | TotalNumber ofSharesPurchased |  | AveragePrice Paidper Share |  | Total Number of SharesPurchased as Part ofPublicly AnnouncedProgram |  | Maximum Number ofShares that May Yet bePurchased Under theProgram
|July, 2004      |  |                              |  |                           |  |                                                                    |  | 40,442                                                           
|August, 2004    |  |                              |  |                           |  |                                                                    |  | 40,442                                                           
|September, 2004 |  | 400                           |  | 14.75                      |  | 400                                                                 |  | 40,042                                                           
|                |  |                               |  |                            |  |                                                                     |  |                                                                  
|                |  | 400                           |  | 14.75                      |  | 400                                                                 |  |                                                                  
|                |  |                               |  |                            |  |                                                                     |  |                                                                  



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



|     |  |                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------
|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 



19



---

##### 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)                         
|         | 
|11/11/04 |  | /s/ Austin L. Roberts, III           
|         |  | Austin L. Roberts, III               
|         |  | President and Chief Executive Officer
|         |  | (principal executive officer)        
|         | 
|11/11/04 |  | /s/ Richard C. Abbott                
|         |  | Richard C. Abbott                    
|         |  | Treasurer                            
|         |  | (principal financial officer)        



20