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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, 2009



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

COMMISSION FILE NUMBER: 0-22955





BAY BANKS OF
VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)







|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|VIRGINIA                                                      |  | 54-1838100                         
|(STATE OR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYERIDENTIFICATION NO.)

100 SOUTH MAIN STREET, KILMARNOCK, VA 22482

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 435-1171

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)





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

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

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



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

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

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

2,404,322 shares of common stock on November 4, 2009









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##### Table of Contents

FORM 10-Q

For the interim period ending SEPTEMBER 30, 2009.

INDEX



|                               |  |                                                                                                                              |  |   
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  |                                                                                                                             
|                               |  |                                                                                                                             
|ITEM 1.                        |  | FINANCIAL STATEMENTS                                                                                                         |  |   
|                               |  | CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008                                             |  | 3 
|                               |  | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)         |  | 4 
|                               |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008 (UNAUDITED) |  | 5 
|                               |  | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)                      |  | 6 
|                               |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                   |  | 7 
|                               |  |                                                                                                                             
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                                        |  | 14
|                               |  |                                                                                                                             
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                   |  | 22
|                               |  |                                                                                                                             
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                                                      |  | 22
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                                             
|                               |  |                                                                                                                             
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                                            |  | 22
|                               |  |                                                                                                                             
|ITEM 1A.                       |  | RISK FACTORS                                                                                                                 |  | 22
|                               |  |                                                                                                                             
|ITEM 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                  |  | 22
|                               |  |                                                                                                                             
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                                              |  | 22
|                               |  |                                                                                                                             
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                          |  | 23
|                               |  |                                                                                                                             
|ITEM 5.                        |  | OTHER INFORMATION                                                                                                            |  | 23
|                               |  |                                                                                                                             
|ITEM 6.                        |  | EXHIBITS                                                                                                                     |  | 23



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

CONSOLIDATED BALANCE SHEETS



|                                                                                                                       |  |                    |             |   |                   |   |             |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                       |  | September 30, 2009 |             |   | December 31, 2008 |  
|                                                                                                                       |  | (Unaudited)        |             |   |                   |  
|                                                                                                                       |  |                   
|ASSETS                                                                                                                 |  |                    |             |   |                   |   |             |  
|Cash and due from banks                                                                                                |  | $                  | 2,239,087   |   |                   | $ | 5,247,480   |  
|Interest-bearing deposits                                                                                              |  |                    | 12,740,497  |   |                   |   | 363,425     |  
|Federal funds sold                                                                                                     |  |                    | 3,161,999   |   |                   |   | 7,250,753   |  
|Securities available for sale, at fair value                                                                           |  |                    | 40,056,804  |   |                   |   | 34,967,141  |  
|Securities held to maturity, at amortized cost (fair value, $498,900 and $490,815)                                     |  |                    | 497,430     |   |                   |   | 486,097     |  
|Loans, net of allowance for loan losses of $2,511,778 and $2,552,091                                                   |  |                    | 246,177,330 |   |                   |   | 249,699,647 |  
|Premises and equipment, net                                                                                            |  |                    | 13,546,874  |   |                   |   | 13,317,619  |  
|Accrued interest receivable                                                                                            |  |                    | 1,314,147   |   |                   |   | 1,300,324   |  
|Other real estate owned                                                                                                |  |                    | 2,041,113   |   |                   |   | 1,004,475   |  
|Goodwill                                                                                                               |  |                    | 2,807,842   |   |                   |   | 2,807,842   |  
|Other assets                                                                                                           |  |                    | 1,198,980   |   |                   |   | 1,505,710   |  
|                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total assets                                                                                                           |  | $                  | 325,782,103 |   |                   | $ | 317,950,513 |  
|                                                                                                                       |  |                    |             |   |                   |   |             |  
|                                                                                                                       |  |                   
|LIABILITIES                                                                                                            |  |                    |             |   |                   |   |             |  
|Noninterest-bearing deposits                                                                                           |  | $                  | 40,968,144  |   |                   | $ | 37,106,404  |  
|Savings and interest-bearing demand deposits                                                                           |  |                    | 100,519,246 |   |                   |   | 95,106,834  |  
|Time deposits                                                                                                          |  |                    | 118,492,968 |   |                   |   | 118,836,194 |  
|                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total deposits                                                                                                         |  | $                  | 259,980,358 |   |                   | $ | 251,049,432 |  
|                                                                                                                       |  |                   
|Federal Funds purchased and securities sold under repurchase agreements                                                |  |                    | 7,004,077   |   |                   |   | 8,341,848   |  
|Federal Home Loan Bank advances                                                                                        |  |                    | 30,000,000  |   |                   |   | 30,000,000  |  
|Other liabilities                                                                                                      |  |                    | 2,159,008   |   |                   |   | 2,271,003   |  
|Commitments and contingencies                                                                                          |  |                    |            |   |                   |   |            |  
|                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total liabilities                                                                                                      |  | $                  | 299,143,443 |   |                   | $ | 291,662,283 |  
|                                                                                                                       |  |                    |             |   |                   |   |             |  
|                                                                                                                       |  |                   
|SHAREHOLDERS EQUITY                                                                                                   |  |                    |             |   |                   |   |             |  
|Common stock ($5 par value; authorized - 5,000,000 shares; outstanding - 2,404,322 and 2,387,272 shares,
respectively) |  | $                  | 12,021,612  |   |                   | $ | 11,936,362  |  
|Additional paid-in capital                                                                                             |  |                    | 4,838,113   |   |                   |   | 4,776,604   |  
|Retained earnings                                                                                                      |  |                    | 10,465,625  |   |                   |   | 10,855,078  |  
|Accumulated other comprehensive (loss), net                                                                            |  |                    | (686,690    | ) |                   |   | (1,279,814  | )
|                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total shareholders equity                                                                                             |  | $                  | 26,638,600  |   |                   | $ | 26,288,230  |  
|                                                                                                                       |  |                    |             |   |                   |   |             |  
|                                                                                                                       |  |                   
|Total liabilities and shareholders equity                                                                             |  |                    | 325,782,103 |   |                   | $ | 317,950,513 |  
|                                                                                                                       |  |                    |             |   |                   |   |             |  

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|--------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------- | - | --------- | ------------------------------------------ |  | - | ------------------------------------------ | - |  | - | ---------- | -
|                                                    |  | Quarter endedSeptember 30, 2009 |           |   | Quarter endedSeptember 30, 2008 |   |           | For the ninemonths endedSeptember 30, 2009 |  |   | For the ninemonths endedSeptember 30, 2008 |  
|                                                    |  |                                 |           |  
|INTEREST INCOME                                     |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Loans, including fees                               |  | $                               | 3,735,491 |   |                                 | $ | 4,078,488 |                                            |  | $ | 11,386,916                                 |   |  | $ | 12,604,232 |  
|Securities:                                         |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Taxable                                             |  |                                 | 228,386   |   |                                 |   | 199,467   |                                            |  |   | 533,629                                    |   |  |   | 690,537    |  
|Tax-exempt                                          |  |                                 | 156,211   |   |                                 |   | 191,879   |                                            |  |   | 500,671                                    |   |  |   | 580,472    |  
|Federal funds sold                                  |  |                                 | 1,833     |   |                                 |   | 51,814    |                                            |  |   | 7,849                                      |   |  |   | 189,413    |  
|Interest-bearing deposit accounts                   |  |                                 | 11,812    |   |                                 |   | 3,130     |                                            |  |   | 26,784                                     |   |  |   | 10,656     |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total interest income                               |  |                                 | 4,133,733 |   |                                 |   | 4,524,778 |                                            |  |   | 12,455,849                                 |   |  |   | 14,075,310 |  
|                                                    |  |                                 |           |  
|INTEREST EXPENSE                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Deposits                                            |  |                                 | 1,158,947 |   |                                 |   | 1,479,468 |                                            |  |   | 3,727,415                                  |   |  |   | 4,922,613  |  
|Federal funds purchased                             |  |                                 | 56        |   |                                 |   | 77        |                                            |  |   | 108                                        |   |  |   | 334        |  
|Securities sold under repurchase agreements         |  |                                 | 4,053     |   |                                 |   | 14,813    |                                            |  |   | 11,151                                     |   |  |   | 66,823     |  
|FHLB advances                                       |  |                                 | 349,792   |   |                                 |   | 351,792   |                                            |  |   | 1,037,970                                  |   |  |   | 1,041,772  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total interest expense                              |  |                                 | 1,512,848 |   |                                 |   | 1,846,150 |                                            |  |   | 4,776,644                                  |   |  |   | 6,031,542  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Net interest income                                 |  |                                 | 2,620,885 |   |                                 |   | 2,678,628 |                                            |  |   | 7,679,205                                  |   |  |   | 8,043,768  |  
|Provision for loan losses                           |  |                                 | 492,008   |   |                                 |   | 75,000    |                                            |  |   | 772,701                                    |   |  |   | 152,238    |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|Net interest income after provision for loan losses |  |                                 | 2,128,877 |   |                                 |   | 2,603,628 |                                            |  |   | 6,906,504                                  |   |  |   | 7,891,530  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|NON-INTEREST INCOME                                 |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Income from fiduciary activities                    |  |                                 | 147,354   |   |                                 |   | 166,466   |                                            |  |   | 439,031                                    |   |  |   | 496,356    |  
|Service charges and fees on deposit accounts        |  |                                 | 169,130   |   |                                 |   | 166,092   |                                            |  |   | 495,896                                    |   |  |   | 503,892    |  
|VISA-related fees                                   |  |                                 | 239,328   |   |                                 |   | 287,341   |                                            |  |   | 594,909                                    |   |  |   | 677,559    |  
|Other service charges and fees                      |  |                                 | 160,412   |   |                                 |   | 159,222   |                                            |  |   | 520,344                                    |   |  |   | 581,424    |  
|Secondary market lending fees                       |  |                                 | 56,021    |   |                                 |   | 8,376     |                                            |  |   | 182,199                                    |   |  |   | 106,065    |  
|Other real estate income (losses)                   |  |                                 | 11,343    |   |                                 |   | (548      | )                                          |  |   | 11,343                                     |   |  |   | (51,556    | )
|Gains on sale of securities available for sale      |  |                                 | 6,019     |   |                                 |   | 541       |                                            |  |   | 13,436                                     |   |  |   | 34,261     |  
|Net gains (losses) on other investments             |  |                                 | 4,500     |   |                                 |   |          |                                            |  |   | 4,500                                      |   |  |   | (79,995    | )
|Other income                                        |  |                                 | 10,562    |   |                                 |   | 21,500    |                                            |  |   | 19,976                                     |   |  |   | 35,990     |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total non-interest income                           |  |                                 | 804,669   |   |                                 |   | 808,990   |                                            |  |   | 2,281,634                                  |   |  |   | 2,303,996  |  
|                                                    |  |                                 |           |  
|NON-INTEREST EXPENSES                               |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Salaries and employee benefits                      |  |                                 | 1,520,729 |   |                                 |   | 1,418,431 |                                            |  |   | 4,596,922                                  |   |  |   | 4,417,612  |  
|Occupancy expense                                   |  |                                 | 503,738   |   |                                 |   | 450,715   |                                            |  |   | 1,464,577                                  |   |  |   | 1,283,476  |  
|Bank franchise tax                                  |  |                                 | 42,467    |   |                                 |   | 51,792    |                                            |  |   | 126,407                                    |   |  |   | 155,370    |  
|Visa expense                                        |  |                                 | 195,275   |   |                                 |   | 238,372   |                                            |  |   | 481,184                                    |   |  |   | 561,800    |  
|Telephone expense                                   |  |                                 | 47,760    |   |                                 |   | 43,910    |                                            |  |   | 131,221                                    |   |  |   | 140,894    |  
|FDIC Assessments                                    |  |                                 | 121,629   |   |                                 |   | 11,705    |                                            |  |   | 402,725                                    |   |  |   | 26,549     |  
|Other expense                                       |  |                                 | 551,362   |   |                                 |   | 548,398   |                                            |  |   | 1,819,030                                  |   |  |   | 1,811,213  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total non-interest expenses                         |  |                                 | 2,982,960 |   |                                 |   | 2,763,323 |                                            |  |   | 9,022,066                                  |   |  |   | 8,396,914  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|Net income before income taxes                      |  |                                 | (49,414   | ) |                                 |   | 649,295   |                                            |  |   | 166,072                                    |   |  |   | 1,798,612  |  
|Income tax expense (benefit)                        |  |                                 | (84,220   | ) |                                 |   | 154,504   |                                            |  |   | (137,898                                   | ) |  |   | 434,095    |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|Net income                                          |  | $                               | 34,806    |   |                                 | $ | 494,791   |                                            |  | $ | 303,970                                    |   |  | $ | 1,364,517  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|Basic Earnings Per Share                            |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Average basic shares outstanding                    |  |                                 | 2,399,801 |   |                                 |   | 2,373,175 |                                            |  |   | 2,394,440                                  |   |  |   | 2,368,310  |  
|Earnings per share, basic                           |  | $                               | 0.01      |   |                                 | $ | 0.21      |                                            |  | $ | 0.13                                       |   |  | $ | 0.58       |  
|                                                    |  |                                 |           |  
|Diluted Earnings Per Share                          |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Average diluted shares outstanding                  |  |                                 | 2,399,801 |   |                                 |   | 2,373,175 |                                            |  |   | 2,394,440                                  |   |  |   | 2,368,310  |  
|Earnings per share, diluted                         |  | $                               | 0.01      |   |                                 | $ | 0.21      |                                            |  | $ | 0.13                                       |   |  | $ | 0.58       |  

See Notes to Consolidated Financial Statements.



4



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##### Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS EQUITY



|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------ | ---------- | - |  | - | ---------- | -
|                                                                                                          |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity |           
|Balance at January 1, 2008                                                                                |  | $           | 11,819,583 |   |                          | $ | 4,643,827 |                  |  | $ | 10,959,793                                 |   |  | $                        | (350,340   | ) |  | $ | 27,072,863 |  
|Comprehensive Income:                                                                                     |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                                |  |             |           |   |                          |   |          |                  |  |   | 1,364,517                                  |   |  |                          |           |   |  |   | 1,364,517  |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of $85,467      |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | 165,907    |   |  |   | 165,907    |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($11,649)        |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | (22,612    | ) |  |   | (22,612    | )
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                                |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 1,507,812  |  
|Effects of changing the pension plan measurement date pursuant to FAS158, net of tax benefit of ($17,731) |  |             |           |   |                          |   |          |                  |  |   | (34,419                                    | ) |  |                          |            |   |  |   | (34,419    | )
|Cash dividends paid $0.51 per share                                                                      |  |             |           |   |                          |   |          |                  |  |   | (1,207,437                                 | ) |  |                          |           |   |  |   | (1,207,437 | )
|Stock repurchases                                                                                         |  |             | (37,630    | ) |                          |   | (47,880   | )                |  |   |                                           |   |  |                          |            |   |  |   | (85,510    | )
|Stock-based compensation                                                                                  |  |             |           |   |                          |   | 20,857    |                  |  |   |                                           |   |  |                          |           |   |  |   | 20,857     |  
|Sale of common stock:                                                                                     |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Dividends Reinvested                                                                                      |  |             | 104,555    |   |                          |   | 128,236   |                  |  |   |                                           |   |  |                          |           |   |  |   | 232,791    |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at September 30, 2008                                                                             |  | $           | 11,886,508 |   |                          | $ | 4,745,040 |                  |  | $ | 11,082,454                                 |   |  | $                        | (207,045   | ) |  | $ | 27,506,957 |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|                                                                                                          |  |             |            |   |                         
|Balance at January 1, 2009                                                                                |  | $           | 11,936,362 |   |                          | $ | 4,776,604 |                  |  | $ | 10,855,078                                 |   |  | $                        | (1,279,814 | ) |  | $ | 26,288,230 |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Comprehensive Income:                                                                                     |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                                |  |             |           |   |                          |   |          |                  |  |   | 303,970                                    |   |  |                          |           |   |  |   | 303,970    |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of $310,117     |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | 601,992    |   |  |   | 601,992    |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($4,568)         |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | (8,868     | ) |  |   | (8,868     | )
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                                |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 1,015,894  |  
|Cash dividends paid $0.29 per share                                                                      |  |             |           |   |                          |   |          |                  |  |   | (693,423                                   | ) |  |                          |           |   |  |   | (693,423   | )
|Stock-based compensation                                                                                  |  |             |           |   |                          |   | 14,627    |                  |  |   |                                           |   |  |                          |           |   |  |   | 14,627     |  
|Sale of common stock:                                                                                     |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Dividends Reinvested                                                                                      |  |             | 85,250     |   |                          |   | 46,882    |                  |  |   |                                           |   |  |                          |           |   |  |   | 132,132    |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at September 30, 2009                                                                             |  | $           | 12,021,612 |   |                          | $ | 4,838,113 |                  |  | $ | 10,465,625                                 |   |  | $                        | (686,690   | ) |  | $ | 26,638,660 |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  

See Notes to Consolidated Financial Statements.



5



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  |                    |             |   |                    |   |            |  
|----------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ---------- | -
|Nine months ended                                                                         |  | September 30, 2009 |             |   | September 30, 2008 |  
|                                                                                          |  |                   
|Cash Flows From Operating Activities                                                      |  |                    |             |   |                    |   |            |  
|Net Income                                                                                |  | $                  | 303,970     |   |                    | $ | 1,364,517  |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                    |             |   |                    |   |            |  
|Depreciation                                                                              |  |                    | 678,788     |   |                    |   | 624,965    |  
|Net amortization and accretion of securities                                              |  |                    | 53,885      |   |                    |   | 9,058      |  
|Provision for loan losses                                                                 |  |                    | 772,701     |   |                    |   | 152,238    |  
|Stock-based compensation                                                                  |  |                    | 14,627      |   |                    |   | 20,857     |  
|Deferred income tax expense (benefit)                                                     |  |                    | (10,710     | ) |                    |   |           |  
|(Gain) on securities available-for-sale                                                   |  |                    | (13,436     | ) |                    |   | (34,261    | )
|(Gain) Loss on sale of other real estate                                                  |  |                    | (11,342     | ) |                    |   | 51,556     |  
|Net (gain) loss on other investments                                                      |  |                    | (4,500      | ) |                    |   | 79,995     |  
|(Increase) decrease in accrued income and other assets                                    |  |                    | 835,684     |   |                    |   | (351,221   | )
|Increase (decrease) in other liabilities                                                  |  |                    | (949,611    | ) |                    |   | 428,351    |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|Net cash provided by operating activities                                                 |  | $                  | 1,670,056   |   |                    | $ | 2,346,055  |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|                                                                                          |  |                   
|Cash Flows From Investing Activities                                                      |  |                    |             |   |                    |   |            |  
|Proceeds from maturities of available-for-sale securities                                 |  |                    | 3,785,736   |   |                    |   | 2,695,495  |  
|Proceeds from sales of available-for-sale securities                                      |  |                    | 2,500,449   |   |                    |   | 13,645,800 |  
|Purchases of available-for-sale securities                                                |  |                    | (10,528,957 | ) |                    |   | (8,887,987 | )
|(Increase) decrease in interest bearing deposits in other banks                           |  |                    | (12,377,072 | ) |                    |   | 10,994     |  
|Decrease (Increase) in federal funds sold                                                 |  |                    | 4,088,754   |   |                    |   | (5,763,388 | )
|Loan (originations) and principal collections, net                                        |  |                    | 1,506,178   |   |                    |   | 6,390,622  |  
|Proceeds from sale of other real estate                                                   |  |                    | 218,142     |   |                    |   | 368,565    |  
|Purchases of premises and equipment                                                       |  |                    | (903,543    | ) |                    |   | (2,066,610 | )
|                                                                                          |  |                    |             |   |                    |   |            |  
|Net cash provided by (used in) investing activities                                       |  | $                  | (11,710,313 | ) |                    | $ | 6,393,491  |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|                                                                                          |  |                   
|Cash Flows From Financing Activities                                                      |  |                    |             |   |                    |   |            |  
|Increase (decrease) in demand, savings, and other interest-bearing deposits               |  |                    | 9,274,152   |   |                    |   | (4,722,563 | )
|Net (decrease) in time deposits                                                           |  |                    | (343,226    | ) |                    |   | (2,790,715 | )
|Net (decrease) in securities sold under repurchase agreements and federal funds purchased |  |                    | (1,337,771  | ) |                    |   | (582,633   | )
|Proceeds from issuance of common stock                                                    |  |                    | 132,132     |   |                    |   | 232,791    |  
|Dividends paid                                                                            |  |                    | (693,423    | ) |                    |   | (1,207,437 | )
|Repurchase of common stock                                                                |  |                    |            |   |                    |   | (85,510    | )
|                                                                                          |  |                    |             |   |                    |   |            |  
|Net cash provided by (used in) financing activities                                       |  | $                  | 7,031,864   |   |                    | $ | (9,156,067 | )
|                                                                                          |  |                    |             |   |                    |   |            |  
|                                                                                          |  |                   
|Net (decrease) in cash and due from banks                                                 |  |                    | (3,008,393  | ) |                    |   | (416,521   | )
|                                                                                          |  |                   
|Cash and due from banks at beginning of period                                            |  |                    | 5,247,480   |   |                    |   | 5,015,762  |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|Cash and due from banks at end of period                                                  |  | $                  | 2,239,087   |   |                    | $ | 4,599,241  |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|                                                                                          |  |                   
|Supplemental Schedule of Cash Flow Information:                                           |  |                    |             |   |                    |   |            |  
|Interest paid                                                                             |  | $                  | 4,837,378   |   |                    | $ | 6,131,923  |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|Income taxes paid                                                                         |  |                    |            |   |                    |   | 428,060    |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|Unrealized gain on investment securities                                                  |  |                    | 898,673     |   |                    |   | 217,113    |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|Change in pension measurement date                                                        |  |                    |            |   |                    |   | 52,150     |  
|                                                                                          |  |                    |             |   |                    |   |            |  
|Loans transferred to other real estate owned                                              |  |                    | 1,243,438   |   |                    |   | 630,167    |  
|                                                                                          |  |                    |             |   |                    |   |            |  

See Notes to Consolidated Financial Statements.



6



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##### Table of Contents

Notes to Consolidated Financial Statements

Note 1: General

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

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

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

These consolidated financial statements should be read in conjunction with the financial statements and notes to financial statements
included in the Companys 2008 Annual Report to Shareholders.

Note 2: Securities

The carrying amounts of debt and other securities and their approximate fair values at September 30, 2009 and December 31, 2008,
follow:



|                                                 |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|------------------------------------------------ |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | ----------
|Available-for-sale securities September 30, 2009 |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|(unaudited)                                      |  |               |            |                      |   |                         |  |   |          
|U.S. Government agencies                         |  | $             | 1,599,043  |                      | $ | 32,798                  |  | $ | (58       | ) |  | $ | 1,631,783 
|State and municipal obligations                  |  |               | 35,164,590 |                      |   | 1,071,760               |  |   | (49,829   | ) |  |   | 36,186,521
|Restricted securities                            |  |               | 2,238,500  |                      |   |                        |  |   |          |   |  |   | 2,238,500 
|                                                 |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                 |  | $             | 39,002,133 |                      | $ | 1,104,558               |  | $ | (49,887   | ) |  | $ | 40,056,804
|                                                 |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                 |  |               |            |                     
|Available-for-sale securities December 31, 2008  |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|                                                 |  |               |            |                     
|U.S. Government agencies                         |  | $             | 1,622,084  |                      | $ | 52,279                  |  | $ | (1,426    | ) |  | $ | 1,672,937 
|State and municipal obligations                  |  |               | 30,934,959 |                      |   | 288,096                 |  |   | (182,951  | ) |  |   | 31,040,104
|Restricted securities                            |  |               | 2,254,100  |                      |   |                        |  |   |          |   |  |   | 2,254,100 
|                                                 |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                 |  | $             | 34,811,143 |                      | $ | 340,375                 |  | $ | (184,377  | ) |  | $ | 34,967,141
|                                                 |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                 |  |               |            |                     
|Held-to-maturity securities September 30, 2009   |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|(unaudited)                                      |  |               |            |                      |   |                         |  |   |          
|                                                 |  |               |            |                     
|State and municipal obligations                  |  | $             | 497,430    |                      | $ | 1,470                   |  | $ |          |   |  | $ | 498,900   
|                                                 |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                 |  |               |            |                     
|Held-to-maturity securities December 31, 2008    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|                                                 |  |               |            |                     
|State and municipal obligations                  |  | $             | 486,097    |                      | $ | 4,718                   |  | $ |          |   |  | $ | 490,815   
|                                                 |  |               |            |                      |   |                         |  |   |           |   |  |   |           

Securities with a market value of $13.0 million were pledged as collateral for
repurchase agreements and for other purposes as required by law as of September 30, 2009. The market value of pledged securities at year-end 2008 was $9.9 million.



7



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##### Table of Contents

Notes to Consolidated Financial Statements(Continued)



Securities in an unrealized loss position at September 30, 2009 and
December 31, 2008, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate movements as there is minimal credit risk exposure in these investments. All securities are investment
grade or better and all losses are considered temporary. Management does not intend to sell the securities and does not expect to be required to sell the securities. Furthermore, they do expect to recover the entire amortized cost basis. Bonds with
unrealized loss positions at September 30, 2009 included 1 federal agency and 7 municipal bonds, as shown below.



|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|------------------------------------- |  | ------------------- | --------- | ----------------- | - | --------- |  | -------------- | --------- | --------- | - | -------------- |  | - | --------- |  | - | -------
|                                      |  | Less than 12 months |           | 12 months or more |   | Total    
|September 30, 2009                    |  | FairValue           |           | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |           | FairValue |   | UnrealizedLoss
|                                      |  |                     |           |                   |   |          
|U.S. Government agencies              |  | $                   | 50,415    |                   | $ | 58        |  | $              |          |           | $ |               |  | $ | 50,415    |  | $ | 58     
|States and municipal obligations      |  |                     | 2,396,349 |                   |   | 25,225    |  |                | 1,029,336 |           |   | 24,604         |  |   | 3,425,685 |  |   | 49,829 
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|Total temporarily impaired securities |  | $                   | 2,446,764 |                   | $ | 25,283    |  | $              | 1,029,336 |           | $ | 24,604         |  | $ | 3,476,100 |  | $ | 49,887 
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|                                      |  |                     |          
|                                      |  | Less than 12 months |           | 12 months or more |   | Total    
|December 31, 2008                     |  | FairValue           |           | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |           | FairValue |   | UnrealizedLoss
|                                      |  |                     |           |                   |   |          
|U.S. Government agencies              |  | $                   |          |                   | $ |          |  | $              | 58,675    |           | $ | 1,426          |  | $ | 58,675    |  | $ | 1,426  
|States and municipal obligations      |  |                     | 8,850,276 |                   |   | 182,951   |  |                |          |           |   |               |  |   | 8,850,276 |  |   | 182,951
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|Total temporarily impaired securities |  | $                   | 8,850,276 |                   | $ | 182,951   |  | $              | 58,675    |           | $ | 1,426          |  | $ | 8,908,951 |  | $ | 184,377
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        

The Companys investment in Federal Home Loan Bank of Atlanta (FHLB)
stock totaled $1.9 million at September 30, 2009. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLB or member
institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Although the FHLB temporarily suspended cash dividend
payments and repurchased excess capital stock earlier in 2009, they have resumed dividend payments and the Company does not consider this investment to be other than temporarily impaired at September 30, 2009. Therefore, no impairment has been
recognized.

Note 3: Loans

The components of loans were as follows:



|                                                             |  |                    |             |   |                   |   |             |  
|------------------------------------------------------------ |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | September 30, 2009 |             |   | December 31, 2008 |  
|                                                             |  | (unaudited)        |             |   |                   |  
|Mortgage loans on real estate:                               |  |                    |             |   |                   |   |             |  
|Construction                                                 |  | $                  | 32,080,423  |   |                   | $ | 36,506,103  |  
|Secured by farmland                                          |  |                    | 1,463,041   |   |                   |   | 80,313      |  
|Secured by 1-4 family residential                            |  |                    | 137,369,477 |   |                   |   | 142,317,668 |  
|Other real estate loans                                      |  |                    | 45,893,104  |   |                   |   | 43,669,144  |  
|Commercial and industrial loans (not secured by real estate) |  |                    | 13,784,987  |   |                   |   | 13,913,946  |  
|Consumer installment loans                                   |  |                    | 9,653,035   |   |                   |   | 8,602,716   |  
|All other loans                                              |  |                    | 7,498,416   |   |                   |   | 6,304,383   |  
|Net deferred loan costs and fees                             |  |                    | 946,625     |   |                   |   | 857,465     |  
|                                                             |  |                    |             |   |                   |   |             |  
|                                                             |  |                   
|Total loans                                                  |  | $                  | 248,689,108 |   |                   | $ | 252,251,738 |  
|Allowance for loan losses                                    |  |                    | (2,511,778  | ) |                   |   | (2,552,091  | )
|                                                             |  |                    |             |   |                   |   |             |  
|                                                             |  |                   
|Loans, net                                                   |  | $                  | 246,177,330 |   |                   | $ | 249,699,647 |  
|                                                             |  |                    |             |   |                   |   |             |  

Loans upon which the accrual of interest has been discontinued totaled $3.4 million
as of September 30, 2009 and $6.0 million as of December 31, 2008.



8



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##### Table of Contents

Notes to Consolidated Financial Statements(Continued)



Note 4: Allowance for Loan Losses



|                           |  |                    |           |   |                   |   |           |                    |  |   |           |  
|-------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | ------------------ |  | - | --------- | -
|                           |  | September 30, 2009 |           |   | December 31, 2008 |   |           | September 30, 2008 | 
|                           |  | (unaudited)        |           |   |                   |   |           | (unaudited)        | 
|                           |  |                    |          
|Balance, beginning of year |  | $                  | 2,552,091 |   |                   | $ | 2,347,244 |                    |  | $ | 2,347,244 |  
|Provision for loan losses  |  |                    | 772,701   |   |                   |   | 394,255   |                    |  |   | 152,238   |  
|Recoveries                 |  |                    | 80,457    |   |                   |   | 14,330    |                    |  |   | 8,759     |  
|Loans charged off          |  |                    | (893,471  | ) |                   |   | (203,738  | )                  |  |   | (169,078  | )
|                           |  |                    |           |   |                   |   |           |                    |  |   |           |  
|Balance, end of period     |  | $                  | 2,511,778 |   |                   | $ | 2,552,091 |                    |  | $ | 2,339,163 |  
|                           |  |                    |           |   |                   |   |           |                    |  |   |           |  

Information about impaired loans is as follows:

for the nine months and twelve months ended:



|                                                                                 |  |                    |           |                   |   |          
|-------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                                                                 |  | September 30, 2009 |           | December 31, 2008
|                                                                                 |  | (unaudited)        |           |                  
|Impaired loans for which an allowance has been provided                          |  | $                  | 4,300,734 |                   | $ | 3,093,247
|Impaired loans for which no allowance has been provided                          |  |                    |          |                   |   |         
|                                                                                 |  |                    |           |                   |   |          
|Total impaired loans                                                             |  | $                  | 4,300,734 |                   | $ | 3,093,247
|                                                                                 |  |                    |           |                   |   |          
|Allowance provided for impaired loans, included in the Allowance for loan losses |  | $                  | 1,317,651 |                   | $ | 1,098,126
|                                                                                 |  |                    |           |                   |   |          
|                                                                                 |  |                   
|Average balance impaired loans                                                   |  | $                  | 4,419,420 |                   | $ | 3,334,047
|                                                                                 |  |                    |           |                   |   |          
|                                                                                 |  |                   
|Interest income recognized (collected $42,817 and $128,439, respectively)        |  | $                  | 99,690    |                   | $ | 147,292  
|                                                                                 |  |                    |           |                   |   |          

At September 30, 2009 and December 31, 2008, non-accrual loans excluded
from impaired loan disclosure totaled $1,655,824 and $4,285,607, respectively. If interest on these loans had been accrued, such income would have approximated $102,930 during the nine months ended September 30, 2009 and $219,460 during the
year ended December 31, 2008.

Note 5: Earnings per share

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



|                               |  |                    |  |                    |      |                    |           |                    |   |               |  |                 |  |               |      |                 |           |  |   |     
|------------------------------ |  | ------------------ |  | ------------------ | ---- | ------------------ | --------- | ------------------ | - | ------------- |  | --------------- |  | ------------- | ---- | --------------- | --------- |  | - | ----
|                               |  | Three Months Ended |  | Nine Months Ended 
|                               |  | September 30, 2009 |  | September 30, 2008 |      | September 30, 2009 |           | September 30, 2008
|(Unaudited)                    |  | AverageShares      |  | Per shareAmount    |      | AverageShares      |           | Per shareAmount    |   | AverageShares |  | Per shareAmount |  | AverageShares |      | Per shareAmount
|Basic earnings per share       |  | 2,399,801          |  | $                  | 0.01 |                    | 2,373,175 |                    | $ | 0.21          |  | 2,394,440       |  | $             | 0.13 |                 | 2,368,310 |  | $ | 0.58
|                               |  |                    |  |                    |      |                    |           |                   
|Effect of dilutive securities: |  |                    |  |                    |      |                    |           |                    |   |               |  |                 |  |               |      |                 |           |  |   |     
|Stock options                  |  |                   |  |                    |      |                    |          |                    |   |               |  |                |  |               |      |                 |          |  |   |     
|                               |  |                    |  |                    |      |                    |           |                    |   |               |  |                 |  |               |      |                 |           |  |   |     
|                               |  |                    |  |                    |      |                    |           |                   
|Diluted earnings per share     |  | 2,399,801          |  | $                  | 0.01 |                    | 2,373,175 |                    | $ | 0.21          |  | 2,394,440       |  | $             | 0.13 |                 | 2,368,310 |  | $ | 0.58

As of September 30, 2009 and 2008, options on 183,056 and 176,414 shares,
respectively, were not included in computing diluted earnings per share, because their effects were anti-dilutive.



9



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##### Table of Contents

Notes to Consolidated Financial Statements(Continued)



Note 6: Stock-Based Compensation

Incremental stock-based compensation expense recognized was $15 thousand during the first nine months of 2009. As of September 30, 2009,
there was $8 thousand unrecognized compensation expense related to stock options.

Stock option compensation expense is the
estimated fair value of options granted using the Black-Scholes Model amortized on a straight-line basis over the vesting period of the award. There were 42,600 options granted and no options exercised during the nine month period ended
September 30, 2009.

Stock option plan activity for the nine months ended September 30, 2009 is summarized below:



|                                  |  |         |   |  |                               |       |                                                      |     |                             |   |  
|--------------------------------- |  | ------- | - |  | ----------------------------- | ----- | ---------------------------------------------------- | --- | --------------------------- | - | -
|                                  |  | Shares  |   |  | Weighted AverageExercisePrice |       | Weighted AverageRemaining ContractualLife (in years) |     | AggregateIntrinsicValue (1)
|                                  |  |         |   | 
|Options outstanding, January 1    |  | 176,481 |   |  | $                             | 14.75 |                                                      | 5.7 |                             | $ | 
|                                  |  |         |   |  |                               |       |                                                      |     |                             |   |  
|                                  |  |         |   | 
|Granted                           |  | 42,600  |   |  |                               | 8.09  |                                                      |     |                             |   |  
|Forfeited                         |  | (24,655 | ) |  |                               | 12.75 |                                                      |     |                             |   |  
|Exercised                         |  |        |   |  |                               |      |                                                      |    |                             |   |  
|Expired                           |  | (11,370 | ) |  |                               | 15.82 |                                                      |     |                             |   |  
|                                  |  |         |   |  |                               |       |                                                      |     |                             |   |  
|Options outstanding, September 30 |  | 183,056 |   |  |                               | 13.40 |                                                      | 6.0 |                             | $ | 
|                                  |  |         |   |  |                               |       |                                                      |     |                             |   |  
|                                  |  |         |   | 
|Options exercisable, September 30 |  | 147,956 |   |  |                               | 14.69 |                                                      | 5.2 |                             | $ | 
|                                  |  |         |   |  |                               |       |                                                      |     |                             |   |  



|(1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the
underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2009. This amount changes based on changes in the market value of the
Companys stock. At September 30, 2009, the exercise price of all options outstanding exceeded the market value of the Companys stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 7: Goodwill

The Company has goodwill recorded on the consolidated
financial statements relating to the purchase of five branches during the years 1994 through 2000. The balance of the goodwill at September 30, 2009 and December 31, 2008, as reflected on the consolidated balance sheets was $2,807,842.
Management determined that these purchases qualified as acquisitions of businesses and that the related unidentifiable intangibles were goodwill. Therefore, amortization was discontinued effective January 1, 2002. The goodwill balance is tested
for impairment at least annually. No impairment was recorded in 2008.

Note 8: Employee Benefit Plans

Components of Net Periodic Benefit Cost



|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       
|----------------------------------------------- |  | ---------------- | -------- | - | ------------------------ | - | -------- | ---- |  | ---- | ------ |  | - | ------
|                                                |  | Pension Benefits |          |   | Post Retirement Benefits
|Nine months ended September 30,                 |  | 2009             |          |   | 2008                     |   |          | 2009 |  | 2008
|Service cost                                    |  | $                | 231,731  |   |                          | $ | 235,319  |      |  | $    | 16,075 |  | $ | 14,167
|Interest cost                                   |  |                  | 183,276  |   |                          |   | 186,502  |      |  |      | 22,223 |  |   | 20,498
|Expected return on plan assets                  |  |                  | (182,684 | ) |                          |   | (280,537 | )    |  |      |       |  |   |      
|Amortization of unrecognized prior service cost |  |                  | 3,499    |   |                          |   | 12,279   |      |  |      |       |  |   |      
|Amortization of unrecognized net loss           |  |                  | 79,486   |   |                          |   | 2,887    |      |  |      | 139    |  |   | 92    
|Amortization of transition obligation           |  |                  |         |   |                          |   |         |      |  |      | 2,185  |  |   | 2,185 
|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       
|                                                |  |                  |          |  
|Net periodic benefit cost                       |  | $                | 315,308  |   |                          | $ | 156,450  |      |  | $    | 40,622 |  | $ | 36,942
|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       

The Company intends to contribute $450,000 to its pension plan and $20,149 to its
post-retirement benefit plan in 2009. The Company has made the pension plan contribution in full and has contributed $9,551 toward the post-retirement plan during the first nine months of 2009.



10



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##### Table of Contents

Notes to Consolidated Financial Statements(Continued)



Note 9: FHLB Advances

On September 30, 2009, the FHLB debt consisting of three advances, one for $15.0 million, which was acquired on May 18, 2006, one
for $10.0 million, which was acquired on September 12, 2006, and one for $5.0 million, which was acquired on May 18, 2007. The interest rate on the $15 million advance is fixed at 4.81%, payable quarterly and matures on May 18, 2011.
The interest rate on the $10 million advance is fixed at 4.23%, payable quarterly and matures on September 12, 2016. The interest rate on the $5 million advance is fixed at 4.485%, payable quarterly and matures on May 18, 2012. The FHLB
holds an option to terminate any of the advances on any quarterly payment date.

Advances on the FHLB line are secured by a
blanket lien on qualified 1 to 4 family residential real estate loans. Total borrowing capacity is approximately $63 million. Remaining available credit is $31 million.

Note 10: Fair Value Measurements

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

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



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

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

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



11



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##### Table of Contents

Notes to Consolidated Financial Statements(Continued)



The following table presents the balances of financial assets and liabilities measured
at fair value on a recurring basis as of September 30, 2009:



|                              |  |                                |            |                                                           |  |                                           |   |                                        |  | 
|----------------------------- |  | ------------------------------ | ---------- | --------------------------------------------------------- |  | ----------------------------------------- | - | -------------------------------------- |  | 
|                              |  |                                |            | Fair Value Measurements at September 30, 2009 Using      
|Description                   |  | Balance as ofSeptember 30,2009 |            | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |  | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3)
|                              |  |                                |            |                                                          
|Available-for-sale securities |  | $                              | 37,818,304 |                                                           |  |                                           | $ | 37,818,304                             |  | 

Certain financial assets are measured at fair value on a nonrecurring basis in
accordance with accounting principles generally accepted in the United States (GAAP). Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual
assets.

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

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

Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at the lower of their carrying value or fair value less cost to sell. Management estimates
the fair value of real estate acquired through foreclosure at an estimated fair value less costs to sell. At or near the time of foreclosure, the bank obtains real estate appraisals on the properties acquired through foreclosure. The real estate is
then valued at the lesser of the loan balance, including interest receivable, or the appraised value at the time of foreclosure less an estimate of costs to sell the property.

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



|                                           |  |                                 |           |                                                           |   |                                           |  |                                        |   |  |   |          
|------------------------------------------ |  | ------------------------------- | --------- | --------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | ---------
|                                           |  |                                 |           | Carrying value at September 30, 2009                     
|Description                                |  | Balance as ofSeptember 30, 2009 |           | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|                                           |  |                                 |           |                                                          
|Impaired Loans, net of valuation allowance |  | $                               | 2,983,083 |                                                           | $ |                                          |  | $                                      |  |  | $ | 2,983,083
|                                           |  |                                 |           |                                                          
|Other real estate owned                    |  | $                               | 2,041,113 |                                                           | $ |                                          |  | $                                      |  |  | $ | 2,041,113



12



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##### Table of Contents

Notes to Consolidated Financial Statements(Continued)



The estimated fair values of financial instruments are shown in the
following table. The carrying amounts in the table are included in the balance sheet under the applicable captions.



|                                            |  |                    |             |                   |   |                |  |            |             |  |   |            
|------------------------------------------- |  | ------------------ | ----------- | ----------------- | - | -------------- |  | ---------- | ----------- |  | - | -----------
|                                            |  | September 30, 2009 |             | December 31, 2008
|                                            |  | CarryingAmount     |             | Fair Value        |   | CarryingAmount |  | Fair Value
|                                            |  |                    |             |                  
|Financial Assets:                           |  |                    |             |                   |   |                |  |            |             |  |   |            
|Cash and due from banks                     |  | $                  | 2,239,087   |                   | $ | 2,239,087      |  | $          | 5,247,480   |  | $ | 5,247,480  
|Interest-bearing deposits                   |  |                    | 12,740,497  |                   |   | 12,740,497     |  |            | 363,425     |  |   | 363,425    
|Federal funds sold                          |  |                    | 3,161,999   |                   |   | 3,161,999      |  |            | 7,250,753   |  |   | 7,250,753  
|Securities available-for-sale               |  |                    | 40,056,804  |                   |   | 40,056,804     |  |            | 34,967,141  |  |   | 34,967,141 
|Securities held-to-maturity                 |  |                    | 497,430     |                   |   | 498,900        |  |            | 486,097     |  |   | 490,815    
|Loans, net                                  |  |                    | 246,357,330 |                   |   | 246,291,492    |  |            | 249,699,647 |  |   | 249,574,054
|Accrued interest receivable                 |  |                    | 1,314,147   |                   |   | 1,314,147      |  |            | 1,300,324   |  |   | 1,300,324  
|                                            |  |                    |             |                  
|Financial Liabilities:                      |  |                    |             |                   |   |                |  |            |             |  |   |            
|Non-interest-bearing liabilities            |  | $                  | 40,968,144  |                   | $ | 40,968,144     |  | $          | 37,106,404  |  | $ | 37,106,404 
|Savings and other interest-bearing deposits |  |                    | 100,519,246 |                   |   | 100,519,246    |  |            | 95,106,834  |  |   | 95,106,834 
|Time deposits                               |  |                    | 118,492,968 |                   |   | 121,162,663    |  |            | 118,836,194 |  |   | 120,829,776
|Securities sold under repurchase agreements |  |                    | 7,004,077   |                   |   | 7,004,077      |  |            | 8,341,848   |  |   | 8,341,848  
|FHLB advances                               |  |                    | 30,000,000  |                   |   | 27,595,391     |  |            | 30,000,000  |  |   | 27,025,520 
|Accrued interest payable                    |  |                    | 334,389     |                   |   | 334,389        |  |            | 395,123     |  |   | 395,123    

The fair values shown do not necessarily represent the amounts which would be
received on immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.

The carrying amounts of cash and due from banks, federal funds sold or purchased,
non-interest-bearing deposits, savings, and securities sold under repurchase agreements, represent items which do not present significant market risks, are payable on demand, or are of such short duration that carrying value approximates market
value.

Available-for-sale securities are carried at the quoted market prices for the individual securities held. Therefore
carrying value equals market value. Held-to-maturity securities are carried at book value, and fair value for these securities is obtained from quoted market prices.

The fair value of loans is estimated by discounting future cash flows using the interest rates at which similar loans would be made to borrowers.

Time deposits are presented at estimated fair value using interest rates offered for deposits of similar remaining maturities.

The fair value of FHLB advances are estimated by discounting its future cash flows using the interest rate offered for similar advances.

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements,
taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed
rates.

The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

At
September 30, 2009 and December 31, 2008, the fair value of loan commitments and standby letters of credit was immaterial. Therefore, they are not included in the table above.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a
result, the fair value of the Companys financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities
to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans
and deposits and by investing in securities with terms that mitigate the Companys overall interest rate risk.



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##### Table of Contents

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

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

EXECUTIVE SUMMARY

There are encouraging indications recently that the national economy may be
improving. Monthly job losses are shrinking and existing home sales and values are up. In the Companys market area, the foreclosure rate is among the lowest in the nation, real estate values have been appreciating since January, consumer
spending appears to be increasing through July, and unemployment is improving. All of these are very positive trends for the Companys primary market area, including the Northern Neck.

Net interest income increased in the third quarter compared to the second quarter. This is a positive trend given that interest margins have
been among managements primary challenges in 2009. In December 2008, the Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the Federal Reserve) reduced the federal funds target rate to an
historic low range of 0.00% to 0.25%. As a result, loan yields deteriorated as existing loan rates adjusted downward and mortgage holders refinanced existing loans at historically low rates, creating material reductions in interest income. During
the third quarter of 2009, however, reductions in loan yields have moderated.

On the interest expense side of the income
statement, reductions in deposit rates have reduced interest expense, thereby mitigating some, but not all, of the declines in interest income. As time deposits mature and new ones are issued at lower rates, reductions in interest expense are
beginning to outpace reductions in interest income. The result is that net interest income is increasing. Management anticipates this trend to continue into 2010.

The Companys liquidity, core capital levels and regulatory ratios remain acceptable. The Bank remains well capitalized. Given the challenging economic environment, management is closely guarding the
Companys liquidity and capital. Along with most other financial institutions, the Company is experiencing the effects of what has become a lengthy economic recession. Loan foreclosures and charge-offs are high for the Bank. As a result,
management has been compelled to increase the provision for loan losses. However, balances in non-accrual loans, which no longer provide interest income, have declined. Bank staff works diligently with borrowers who are experiencing financial
difficulties to help them through these challenging times.

All banks holding federally insured deposits in the United States
are experiencing dramatic increases in FDIC insurance cost. This is because the FDICs Deposit Insurance Fund has fallen below 1.15% of insurable domestic deposits, which compels the FDIC to increase the cost of deposit insurance. As a result,
in 2009, not only has the FDIC doubled the insurance premiums for most banks, and collected a special assessment, but it plans to require insured financial institutions to prepay three years worth of insurance premiums on December 30,
2009. Management currently estimates FDIC expenses to reduce earnings by $686 thousand in 2009. The year-end prepayment is estimated at $1.6 million, of which $103 thousand will affect 2009 earnings.

Another challenge that remains is minimal loan growth. Although the Bank originates millions of dollars in new loans each month, overall
demand for loans has fallen as consumers and businesses trim their spending and delay expansion plans. Additionally, the Bank continues to be prudent by not reaching for loan growth by reducing underwriting standards. The result is that increases in
loan volumes are not available to mitigate the effect of reductions in loan yields, preventing growth in interest income.

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

Although media coverage continues regarding the financial industrys challenges, the Company is proud of its
conservative philosophy and service to its community. The Bank does not invest in exotic debt securities, nor does it have programs that originate Sub-Prime, Alt-A, or other risky types of mortgages. All employees pay their civic rent
and the Bank is committed to investing in the communities it serves. Management is confident that our Company has a bright future as the dust from the Great Recession begins to settle. In the meantime, our employees will participate in
over 40 community events this year, not including the myriad community programs and partnerships we support.

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



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##### Table of Contents

CRITICAL ACCOUNTING POLICIES

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

ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be sustained in the
loan portfolio. The allowance is based on two basic principles of accounting: (1) Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (2) Accounting by Creditors for
Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for
loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.

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

EARNINGS SUMMATION

For the nine months ended September 30, 2009, net income was $304 thousand, a decrease of 77.7% compared to the $1.4 million for the
similar period in 2008. Diluted earnings per average share for the nine months ended September 30, 2009 were $0.13 as compared to $0.58 for the nine months ended September 30, 2008. Annualized return on average assets was 0.1% and 0.6% for
the nine-month periods ended September 30, 2009 and 2008, respectively. Annualized return on average equity was 1.2% for the nine months ended September 30, 2009, down from 6.7% for the similar period ended September 30, 2008.

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest
income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, the associated yields
and rates, and the volume of non-performing assets have an effect on net interest income, the net interest margin, and net income. Net interest income before provision for loan losses for the nine months ended September 30, 2009 was $7.7
million, a decrease of 4.5% compared to the nine months ended September 30, 2008. Net interest income after the provision for loan losses is down 12.5% for the same period comparison.

Although interest income declined by $1.6 million for the year-to-date period ended September 30, 2009 compared to the same period in
2008, decreases in interest expense of $1.3 million for the same period comparison helped to minimize the decrease in net interest income, leaving net interest income (before the provision for loan losses) down only $365 thousand. The $1.6 million
decrease in interest income was driven mainly by reduced loan yields, a result of reductions in the Wall Street Prime Rate, which affects adjustable and variable-rate loans. The $1.3 million decrease in interest expense was primarily due to
reductions in rates.



15



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##### Table of Contents

Net Interest Income Analysis (unaudited)



|                                                        |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|------------------------------------------------------- | -------------- | --------------------------- | -------------- |  | --------------------------- | ------ |  | -------------- | - | -------------- | - | -------------------- |  | - | ------ |  | ---- | -
|(Fully taxable equivalent basis) (Dollars in thousands) |                | Nine months ended 9/30/2009 |                |  | Nine months ended 9/30/2008 |       
|                                                        | AverageBalance |                             | Income/Expense |  | AnnualizedYield/Rate        |        |  | AverageBalance |   | Income/Expense |   | AnnualizedYield/Rate | 
|                                                        |                |                             |                |  |                             |       
|INTEREST-EARNING ASSETS:                                |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Taxable investments                                     |                | $                           | 17,087         |  | $                           | 534    |  | 4.17           | % |                | $ | 18,141               |  | $ | 689    |  | 5.06 | %
|Tax-exempt investments (1)                              |                |                             | 18,278         |  |                             | 759    |  | 5.53           | % |                |   | 20,838               |  |   | 879    |  | 5.62 | %
|                                                        |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Total Investments                                       |                |                             | 35,365         |  |                             | 1,293  |  | 4.87           | % |                |   | 38,979               |  |   | 1,568  |  | 5.36 | %
|                                                        |                |                             |                |  |                             |       
|Gross loans (2)                                         |                |                             | 250,013        |  |                             | 11,387 |  | 6.08           | % |                |   | 253,071              |  |   | 12,604 |  | 6.64 | %
|Interest-bearing deposits                               |                |                             | 11,803         |  |                             | 27     |  | 0.31           | % |                |   | 368                  |  |   | 12     |  | 4.35 | %
|Federal funds sold                                      |                |                             | 5,672          |  |                             | 8      |  | 0.19           | % |                |   | 12,115               |  |   | 189    |  | 2.08 | %
|                                                        |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|TOTAL INTEREST-EARNING ASSETS                           |                | $                           | 302,853        |  | $                           | 12,715 |  | 5.60           | % |                | $ | 304,533              |  | $ | 14,373 |  | 6.29 | %
|                                                        |                |                             |                |  |                             |       
|INTEREST-BEARING LIABILITIES:                           |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|Savings deposits                                        |                | $                           | 45,215         |  | $                           | 312    |  | 0.92           | % |                | $ | 56,350               |  | $ | 888    |  | 2.10 | %
|NOW deposits                                            |                |                             | 34,698         |  |                             | 113    |  | 0.44           | % |                |   | 33,994               |  |   | 194    |  | 0.76 | %
|Time deposits >= $100,000                               |                |                             | 51,530         |  |                             | 1,322  |  | 3.43           | % |                |   | 45,938               |  |   | 1,512  |  | 4.39 | %
|Time deposits < $100,000                                |                |                             | 70,120         |  |                             | 1,788  |  | 3.41           | % |                |   | 63,919               |  |   | 1,995  |  | 4.16 | %
|Money market deposit accounts                           |                |                             | 19,222         |  |                             | 192    |  | 1.34           | % |                |   | 18,524               |  |   | 334    |  | 2.40 | %
|                                                        |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|                                                        |                |                             |                |  |                             |       
|Total interest bearing deposits                         |                | $                           | 220,785        |  | $                           | 3,727  |  | 2.26           | % |                | $ | 218,725              |  | $ | 4,923  |  | 3.00 | %
|                                                        |                |                             |                |  |                             |       
|Federal funds purchased                                 |                |                             | 24             |  |                             |       |  | 0.25           | % |                |   | 42                   |  |   |       |  | 1.07 | %
|Securities sold to repurchase                           |                |                             | 6,418          |  |                             | 11     |  | 0.23           | % |                |   | 7,188                |  |   | 67     |  | 1.24 | %
|FHLB advance                                            |                |                             | 30,000         |  |                             | 1,038  |  | 4.63           | % |                |   | 30,000               |  |   | 1,042  |  | 4.63 | %
|                                                        |                |                             |                |  |                             |        |  |                |   |                |   |                      |  |   |        |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES                      |                | $                           | 257,227        |  | $                           | 4,776  |  | 2.48           | % |                | $ | 255,955              |  | $ | 6,032  |  | 3.14 | %
|                                                        |                |                             |                |  |                             |       
|Net interest income/yield on earning assets             |                |                             |                |  | $                           | 7,939  |  | 3.50           | % |                |   |                      |  | $ | 8,341  |  | 3.65 | %
|Net interest rate spread                                |                |                             |                |  |                             |        |  | 3.12           | % |                |   |                      |  |   |        |  | 3.15 | %



Notes:



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

|(2) | Includes Visa Program & nonaccrual loans.
|--- | -----------------------------------------

The annualized net interest margin was 3.50% for the nine months ended September 30, 2009, compared to 3.65% for the same period in 2008. The main reason for this decline is reductions in loan yield,
as mentioned earlier. Although deposit rates have been reduced, the cost of funding has not declined as much as the yield on earning assets. However, further reductions in the cost of funds are anticipated as time deposits mature and are replaced at
lower rates. This trend is expected to continue and to have positive effects on the net interest margin.

Average
interest-earning assets decreased 0.6% to $302.9 million for the nine months ended September 30, 2009 as compared to $304.5 million for the nine months ended September 30, 2008. Average interest-earning assets as a percent of total average
assets was 92.9% for the nine months ended September 30, 2009 as compared to 93.7% for the comparable period of 2008. As shown above, for the nine months ended September 30, 2009, the loan portfolio with $250.0 million is the largest
category of interest-earning assets.

Average interest-bearing liabilities increased 0.5% to $257.2 million for the nine
months ended September 30, 2009, as compared to $256.0 million for the nine months ended September 30, 2008. The largest category of interest-bearing liabilities is time deposits, with combined average balances of $121.7 million for the
nine months ended September 30, 2009.

The net interest spread, which is the difference between the annualized yield on
earning assets and the annualized cost of interest-bearing liabilities, was 3.12% for the nine months ended September 30, 2009 and 3.15% for the same period in 2008.



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LIQUIDITY

The Company maintains adequate short-term assets to meet its liquidity needs as anticipated by management. Federal funds sold,
interest-bearing deposits at the Federal Reserve, and investments that mature in one year or less provide the major sources of funding for liquidity needs. On September 30, 2009, federal funds sold totaled $3.2 million, interest-bearing
deposits at the Federal Reserve totaled $12.4 million, and securities maturing in one year or less totaled $7.7 million. The liquidity ratio as of September 30, 2009 was 13.1% as compared to 12.4% as of December 31, 2008. The Company
determines this ratio by dividing the sum of cash and cash equivalents, investment securities maturing in one year or less, loans maturing in one year or less and federal funds sold, by total assets. In addition, as noted earlier, the Company has a
line of credit with the FHLB worth $62.8 million, plus federal funds lines of credit with correspondent banks totaling $19.0 million.

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

CONTRACTUAL OBLIGATIONS

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

CAPITAL RESOURCES

From December 31, 2008 to September 30, 2009, total shareholders equity increased from $26.3 million to $26.6 million.
Several factors impact shareholders equity, including the Companys commitment to returning earnings to its shareholders through dividends while meeting regulatory capital requirements.

The Companys capital resources are also impacted by net unrealized gains or losses on securities. The available for sale securities
portfolio is marked to market monthly and unrealized gains or losses, net of taxes, are recognized as accumulated other comprehensive income or loss on the balance sheet and statement of changes in shareholders equity. Another factor effecting
Accumulated Other Comprehensive Income or Loss is changes in the fair value of the Companys pension and post-retirement benefit plans. Shareholders equity before accumulated other comprehensive loss was $27.3 million on
September 30, 2009 compared to $27.6 million on December 31, 2008. Accumulated other comprehensive loss decreased by $593 thousand between December 31, 2008 and September 30, 2009, a result of unrealized gains in the investment
portfolio.

Book value per share, basic, increased by 0.6% to $11.08 on September 30, 2009 from $11.01 on
December 31, 2008. Book value per share, basic, before accumulated comprehensive loss on September 30, 2009, compared to December 31, 2008, decreased to $11.37 from $11.55. Cash dividends paid were $0.29 per share for the nine-month
period ended September 30, 2009, and $0.51 per share for the comparable period ended September 30, 2008. Of the 5,000,000 common shares authorized, 2,404,323 were outstanding on September 30, 2009.

The Company began a share repurchase program in August 1999 and has continued the program into 2009. No repurchases were made during the
first nine months of 2009, compared to shares repurchased at a cost of $85 thousand during the comparable period in 2008.

The
Bank is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council guidelines. These ratios continue to be well in excess of regulatory minimums. As of September 30, 2009, the Bank maintained
Tier 1 capital of $23.9 million, net risk weighted assets of $241.4 million, and Tier 2 capital of $2.5 million. On September 30, 2009, the Tier 1 capital to risk weighted assets ratio was 9.9%, the total capital ratio was 11.0%, and the Tier 1
leverage ratio was 7.3%.

FINANCIAL CONDITION

Total assets increased by 2.5 % to $325.8 million during the nine months ended September 30, 2009. Cash and cash equivalents, which
produce no income, decreased to $2.2 million on September 30, 2009 from $5.2 million at year-end 2008.

During the nine
months ended September 30, 2009, gross loans decreased by $3.6 million or 1.4%, to $248.7 million from $252.3 million at year-end 2008. The largest component of this decrease was 1-4 family residential loans with a 3.5% decrease to $137.4
million.



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##### Table of Contents

Loans charged off during the first nine months of 2009, net of recoveries, totaled $813
thousand compared to $160 thousand for the comparable period in 2008. The vast majority of these charge-offs were anticipated and specific reserves had been provided for them in the Allowance for Loan Losses. Going forward, this increase has been
incorporated into the process for establishing the Allowance for Loan Losses, and appropriate increases in provision expense have been made.

In consideration of this extraordinary increase in charge-offs, management has been compelled to materially increase the provision for loan losses, resulting in provision expense of $773 thousand during
the nine months ended September 30, 2009, compared to $152 thousand for the similar period of 2008. The Allowance for Loan Losses, as a percentage of total loans, remained at 1.01% at September 30, 2009, the same as 1.01% at
December 31, 2008. To determine the necessary provision, the allowance for loan losses is analyzed quarterly for adequacy on a loan-by-loan basis for adversely classified loans, plus with a set of weighted factors addressing such considerations
as the national and local economies, changes in non-performing assets, competition and trends in growth, among others. Management adjusts provision expense, as needed, to maintain the allowance indicated by this quarterly process. However, in the
third quarter, an additional $180,000 was provided over the amount calculated by this process.

Management believes the
resulting estimate of the allowance for loan losses (ALL) is reasonable. Non-performing loans, as defined by loans past due by 90 days or more plus loans on which the accrual of interest has been discontinued (non-accruing
loans), have declined from $6.3 million on December 31, 2008 to $3.4 million on September 30, 2009. This corresponds to a decrease in non-performing loans as a percentage of total loans from 2.5% on December 31, 2008 to 1.4% on
September 30, 2009. Of the $2.6 million reduction in non-accruing loans, $1.6 million is attributable to anticipated charge-offs, which were already incorporated in the allowance for loan losses, as noted above. Only five loans totaling $583
thousand were added to non-accruing loans during the first nine months of 2009.

Also, the non-specific portion of the ALL
represents 26% of the total allowance on September 30, 2009. Since the non-specific portion represents managements estimate of intangible factors such as the economy, and since there is evidence of economic stabilization, management
believes this 26% level is adequate. However, management recognizes that there are risks associated with the level of the ALL, and is reevaluating the process for calculating it.

Due to increased foreclosures, the Company now maintains $2.0 million of OREO as of September 30, 2009, compared to $1.0 million at
year-end 2008. All properties maintained as OREO are valued at the lesser of carrying value or fair value less estimated costs to sell and are actively marketed.

As of September 30, 2009, loans worth $4.3 million were considered impaired, of which $1.7 million were non-accruing. Compared to December 31, 2008, impaired loan balances have increased by $1.2
million. Since these loans were better collateralized, specific reserves established on impaired loans increased by a lesser $220 thousand compared to December 31, 2008.

Loans no longer accruing interest totaled $3.4 million as of September 30, 2009, down from $6.0 million as of year-end 2008. Loans
still accruing interest but delinquent for 90 days or more totaled $3 thousand on September 30, 2009, as compared to $383 thousand on December 31, 2008. Management has reviewed these credits and the underlying collateral and expects no
additional loss above that which is specifically reserved in the ALL.

As of September 30, 2009, securities available for
sale at market value totaled $40.1 million as compared to $35.0 million on December 31, 2008. This represents a net increase of $5.1 million or 14.6% for the nine months. Securities classified as held-to-maturity at book value were $497
thousand as of September 30, 2009, compared to $486 thousand at December 31, 2008. As of September 30, 2009, the investment portfolio represented 12.4% of total assets and 13.3% of earning assets. The greater portion of the
Companys investment portfolio is classified as available-for-sale and marked to market on a monthly basis. These gains or losses are booked as an adjustment to shareholders equity based upon market conditions, and are not realized as an
adjustment to earnings until the securities are actually sold or an other than temporary impairment occurs. Management does not consider any of the unrealized losses to be other than temporarily impaired.

As of September 30, 2009, total deposits were $260.0 million compared to $251.0 million at year-end 2008. This represents an increase
in balances of $8.9 million or 3.6% during the nine months. Components of this increase include savings and interest-bearing demand deposits with a 5.7% increase to $100.5 million, non-interest bearing deposits with a 10.4% increase to $41.0 million
and time deposits with a 0.3% decrease to $118.5 million.

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



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

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the nine months ended September 30, 2009, is down by a slight $22 thousand compared to the nine months ended
September 30, 2008. However, if the non-recurring losses in 2008 related to other real estate sales and other investments are excluded, non-interest income would be down by $170 thousand. Declines were due partially to declines in income from
Investment Advantage, which was down to $266 thousand from $336 thousand for the same period of 2008, a difference of $70 thousand. Investment Advantage contributes the majority of income to other service charges and fees, and since this income is
commission-based, declines in investment activity will cause declines in the Companys income. VISA-related fees declined by $83 thousand in the first nine months of 2009 compared to the similar period in 2008. Income from fiduciary activities
was down by $57 thousand for the first nine months of 2009 compared to the first nine months of 2008. Because Bay Trust Company earns fiduciary income mainly from fees based on a percentage of assets under management, declines in the value of the
stock market have driven declines in this fee income.

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

NON-INTEREST EXPENSE

For the nine months ended September 30, 2009, non-interest expenses totaled $9.0 million, an increase of 7.4% compared to
the same period in 2008, due mainly to the $376 thousand increase in FDIC insurance expense. Management currently estimates total FDIC insurance expense to be a substantial $686 thousand for the full year 2009. As discussed in the Executive Summary,
these FDIC premium payments are effecting all institutions holding federally insured deposits. The largest components of non-interest expense are salaries and benefits, and occupancy expense. Salaries and benefits expense is up by $179 thousand to
$4.6 million for the first nine months of 2009 compared to the same period in 2008. This is due primarily to increases in defined benefit plan expense of $159 thousand. Occupancy expense is up by 14.1% to $1.5 million, due mainly to the Banks
two new retail offices in Burgess and Colonial Beach. During this continued economic downturn, management continues to actively manage all expenses.

Other non-interest expenses include bank franchise taxes, which decreased to $126 thousand for the first nine months of 2009 compared to $155 thousand for the same period in 2008; expenses related to the
Visa® program, which decreased to $481 thousand for the first nine months of 2009 compared to $562 thousand for the same period in 2008; and telephone expenses, which decreased to $131 thousand for the current period compared to $142 thousand
for the same period in 2008. Telephone expenses include the cost of the Companys Customer Care Center and data network communications.

Recent Accounting Pronouncements

In December 2007, the Financial
Accounting Standards Board ( FASB), issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)) (ASC 805 Business Combinations). The Standard significantly changed the
financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the
acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entitys first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to
have a material impact on its consolidated financial statements, at this time.



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In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies (ASC 805 Business Combinations). FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated financial
statements.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820 Fair Value Measurements and Disclosures). FSP FAS 157-4 provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. Earlier adoption is permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 157-4 to
have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB
28-1, Interim Disclosures about Fair Value of Financial Instruments (ASC 825 Financial Instruments and ASC 270 Interim Reporting). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, the FSP amends APB Opinion No. 28,
Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009, with earlier adoption permitted for
periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
(ASC 320 Investments  Debt and Equity Securities). FSP FAS 115-2 and FAS 124-2 amends other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for
interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its
consolidated financial statements.

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

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (ASC 855 Subsequent
Events). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim and annual
periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 165 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140 (ASC 860
Transfers and Servicing). SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a report entity provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. SFAS 166 is effective for interim and annual periods ending after
November 15, 2009. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (ASC 810 Consolidation). SFAS 167 improves financial
reporting by enterprises involved with variable interest entities. SFAS 167 is effective for interim and annual periods ending after November 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of SFAS 167 to have a
material impact on its consolidated financial statements.



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In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles  replacement of FASB Statement No. 162 (ASC 105 Generally Accepted Accounting Principles). SFAS 168 establishes the FASB
Accounting Standards Codification which will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective immediately. The Company does not expect the adoption of SFAS 168 to have a
material impact on its consolidated financial statements.

In June 2009, the FASB issued EITF Issue No. 09-1,
Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (ASC 470 Debt). EITF Issue No. 09-1 clarifies how an entity should account for an own-share lending arrangement that is
entered into in contemplation of a convertible debt offering. EITF Issue No. 09-1 is effective for arrangements entered into on or after June 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of EITF Issue
No. 09-1 to have a material impact on its consolidated financial statements.

In June 2009, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent
with current GAAP. The Company does not expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05), Fair Value Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair Value. ASU
2009-05 amends Subtopic 820-10, Fair Value Measurements and Disclosures  Overall, and provides clarification for the fair value measurement of liabilities. ASU 2009-05 is effective for the first reporting period including interim
period beginning after issuance. The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.

In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (ASU 2009-12), Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent). ASU 2009-12 provides guidance on estimating the fair value of alternative investments. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company does not
expect the adoption of ASU 2009-12 to have a material impact on its consolidated financial statements.

In October 2009, the
FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand
accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal
years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In October 2009, the Securities and Exchange Commission issued Release No. 33-99072, Internal Control over Financial Reporting in
Exchange Act Periodic Reports of Non-Accelerated Filers. Release No. 33-99072 delays the requirement for non-accelerated filers to include an attestation report of their independent auditor on internal control over financial reporting
with their annual report until the fiscal year ending on or after June 15, 2010.



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##### Table of Contents

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

Not required.



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

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period to which this report
relates, the Company has carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures is also based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions. Based upon their evaluation, the Companys Chief Executive
Officer and Principal Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to
be included in the Companys periodic SEC filings as of September 30, 2009.

CHANGES IN INTERNAL CONTROLS OVER
FINANCIAL REPORTING

There was no change to the Companys internal control over financial reporting during the
quarter ended September 30, 2009 that materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II  OTHER INFORMATION



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

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



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

Not
required.



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

The Company began a share repurchase program in August of 1999 and has continued the program into 2009. There are a total of 280,000 shares authorized for repurchase under the program. No shares were
repurchased during the quarter ended September 30, 2009.



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

None to report.



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##### Table of Contents

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

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.



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SIGNATURES

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



|                 |  |                             |  |                                                                    
|---------------- |  | --------------------------- |  | -------------------------------------------------------------------
|                 |  | Bay Banks of Virginia, Inc.
|                 |  | (Registrant)               
|                 |  |                            
|November 5, 2009 |  | By:                         |  | /S/    AUSTIN L.
ROBERTS, III                                      
|                 |  |                             |  | Austin L. Roberts, III                                             
|                 |  |                             |  | President and Chief Executive Officer (Principal Executive Officer)
|                 |  |                            
|                 |  | By:                         |  | /S/    DEBORAH M.
EVANS                                            
|                 |  |                             |  | Deborah M. Evans                                                   
|                 |  |                             |  | Treasurer (Principal Financial Officer)                            



24