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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 JUNE 30, 2012



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

COMMISSION FILE NUMBER: 0-22955





BAY BANKS OF
VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|VIRGINIA                                                       |  | 54-1838100                          
|(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)

100 SOUTH MAIN STREET, KILMARNOCK, VA 22482

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 435-1171

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    x  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:

2,610,856 shares of common stock on August 9, 2012









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FORM 10-Q

For the interim period ending June 30, 2012.

INDEX



|                               |  |                                                                                                                               |  |  |    | 
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I - FINANCIAL INFORMATION |  |                                                                                                                               |  | 
|                               |  |                                                                                                                              
|ITEM 1.                        |  | FINANCIAL STATEMENTS                                                                                                          |  |  |    | 
|                               |  |                                                                                                                              
|                               |  | CONSOLIDATED BALANCE SHEETS JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011                                                   |  |  | 3  | 
|                               |  |                                                                                                                              
|                               |  | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (UNAUDITED)                |  |  | 4  | 
|                               |  |                                                                                                                              
|                               |  | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2012 AND
 2011 (UNAUDITED) |  |  | 5  | 
|                               |  |                                                                                                                              
|                               |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND
 2011 (UNAUDITED)       |  |  | 6  | 
|                               |  |                                                                                                                              
|                               |  | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED)                             |  |  | 7  | 
|                               |  |                                                                                                                              
|                               |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                    |  |  | 8  | 
|                               |  |                                                                                                                              
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                                         |  |  | 20 | 
|                               |  |                                                                                                                              
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                    |  |  | 28 | 
|                               |  |                                                                                                                              
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                                                       |  |  | 28 | 
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                                                               |  | 
|                               |  |                                                                                                                              
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                                             |  |  | 28 | 
|                               |  |                                                                                                                              
|ITEM 1A.                       |  | RISK FACTORS                                                                                                                  |  |  | 28 | 
|                               |  |                                                                                                                              
|ITEM 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                   |  |  | 28 | 
|                               |  |                                                                                                                              
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                                               |  |  | 28 | 
|                               |  |                                                                                                                              
|ITEM 4.                        |  | MINE SAFETY DISCLOSURES                                                                                                       |  |  | 28 | 
|                               |  |                                                                                                                              
|ITEM 5.                        |  | OTHER INFORMATION                                                                                                             |  |  | 29 | 
|                               |  |                                                                                                                              
|ITEM 6.                        |  | EXHIBITS                                                                                                                      |  |  | 29 | 



2



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PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS



|                                                                                            |  |               |             |  |                   |   |             | 
|------------------------------------------------------------------------------------------- |  | ------------- | ----------- |  | ----------------- | - | ----------- | 
|                                                                                            |  | June 30, 2012 |             |  | December 31, 2011 |  
|                                                                                            |  | (Unaudited)   |             |  |                   |  
|ASSETS                                                                                      |  |               |             |  |                   |   |             | 
|Cash and due from banks                                                                     |  | $             | 13,963,464  |  |                   | $ | 4,728,895   | 
|Interest-bearing deposits                                                                   |  |               | 13,170,952  |  |                   |   | 10,369,075  | 
|Federal funds sold                                                                          |  |               | 230,295     |  |                   |   | 2,136,375   | 
|Securities available for sale, at fair value                                                |  |               | 34,289,311  |  |                   |   | 41,799,121  | 
|Restricted securities                                                                       |  |               | 1,675,300   |  |                   |   | 1,991,200   | 
|Loans, net of allowance for loan losses of $3,340,958 and $3,188,541                        |  |               | 238,149,621 |  |                   |   | 233,501,281 | 
|Premises and equipment, net                                                                 |  |               | 11,954,993  |  |                   |   | 12,300,274  | 
|Accrued interest receivable                                                                 |  |               | 1,190,789   |  |                   |   | 1,161,191   | 
|Other real estate owned, net of valuation allowance                                         |  |               | 2,729,966   |  |                   |   | 2,279,935   | 
|Goodwill                                                                                    |  |               | 2,807,842   |  |                   |   | 2,807,842   | 
|Other assets                                                                                |  |               | 1,739,553   |  |                   |   | 2,136,907   | 
|                                                                                            |  |               |             |  |                   |   |             | 
|Total assets                                                                                |  | $             | 321,902,086 |  |                   | $ | 315,212,096 | 
|                                                                                            |  |               |             |  |                   |   |             | 
|LIABILITIES                                                                                 |  |               |             |  |                   |   |             | 
|Noninterest-bearing deposits                                                                |  | $             | 46,056,610  |  |                   | $ | 43,803,349  | 
|Savings and interest-bearing demand deposits                                                |  |               | 107,990,005 |  |                   |   | 105,269,889 | 
|Time deposits                                                                               |  |               | 114,369,326 |  |                   |   | 116,444,867 | 
|                                                                                            |  |               |             |  |                   |   |             | 
|Total deposits                                                                              |  | $             | 268,415,941 |  |                   | $ | 265,518,105 | 
|                                                                                            |  |              
|Securities sold under repurchase agreements                                                 |  |               | 9,072,400   |  |                   |   | 5,277,158   | 
|Federal Home Loan Bank advances                                                             |  |               | 15,000,000  |  |                   |   | 15,000,000  | 
|Other liabilities                                                                           |  |               | 1,382,713   |  |                   |   | 1,402,049   | 
|Commitments and contingencies                                                               |  |               |            |  |                   |   |            | 
|                                                                                            |  |               |             |  |                   |   |             | 
|Total liabilities                                                                           |  | $             | 293,871,054 |  |                   | $ | 287,197,312 | 
|                                                                                            |  |               |             |  |                   |   |             | 
|SHAREHOLDERS EQUITY                                                                        |  |               |             |  |                   |   |             | 
|Common stock ($5 par value; authorized - 5,000,000 shares; outstanding - 2,610,856 shares,) |  | $             | 13,054,280  |  |                   | $ | 13,054,280  | 
|Additional paid-in capital                                                                  |  |               | 4,974,456   |  |                   |   | 4,971,531   | 
|Retained earnings                                                                           |  |               | 9,746,311   |  |                   |   | 9,543,634   | 
|Accumulated other comprehensive income, net                                                 |  |               | 255,985     |  |                   |   | 445,339     | 
|                                                                                            |  |               |             |  |                   |   |             | 
|Total shareholders equity                                                                  |  | $             | 28,031,032  |  |                   | $ | 28,014,784  | 
|                                                                                            |  |               |             |  |                   |   |             | 
|                                                                                            |  |              
|Total liabilities and shareholders equity                                                  |  | $             | 321,902,086 |  |                   | $ | 315,212,096 | 
|                                                                                            |  |               |             |  |                   |   |             | 

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|--------------------------------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | --------- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | --------- | -
|                                                    |  | Quarter endedJune 30, 2012 |           |   | Quarter endedJune 30, 2011 |   |           | For the sixmonths endedJune 30, 2012 |  |   | For the sixmonths endedJune 30, 2011 |  
|INTEREST INCOME                                     |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Loans, including fees                               |  | $                          | 3,264,259 |   |                            | $ | 3,422,673 |                                      |  | $ | 6,489,039                            |   |  | $ | 6,860,836 |  
|Securities:                                         |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Taxable                                             |  |                            | 180,011   |   |                            |   | 188,895   |                                      |  |   | 380,944                              |   |  |   | 394,029   |  
|Tax-exempt                                          |  |                            | 62,031    |   |                            |   | 60,161    |                                      |  |   | 132,625                              |   |  |   | 124,611   |  
|Federal funds sold                                  |  |                            | 1,244     |   |                            |   | 2,142     |                                      |  |   | 2,610                                |   |  |   | 5,114     |  
|Interest -bearing deposit accounts                  |  |                            | 8,561     |   |                            |   | 14,810    |                                      |  |   | 15,623                               |   |  |   | 23,870    |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total interest income                               |  |                            | 3,516,106 |   |                            |   | 3,688,681 |                                      |  |   | 7,020,841                            |   |  |   | 7,408,460 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|INTEREST EXPENSE                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Deposits                                            |  |                            | 716,967   |   |                            |   | 833,092   |                                      |  |   | 1,466,121                            |   |  |   | 1,653,773 |  
|                                                    |  |                            |           |  
|Securities sold under repurchase agreements         |  |                            | 5,146     |   |                            |   | 4,011     |                                      |  |   | 8,067                                |   |  |   | 7,409     |  
|FHLB advances                                       |  |                            | 140,923   |   |                            |   | 253,598   |                                      |  |   | 281,847                              |   |  |   | 595,786   |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total interest expense                              |  |                            | 863,036   |   |                            |   | 1,090,701 |                                      |  |   | 1,756,035                            |   |  |   | 2,256,968 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Net interest income                                 |  |                            | 2,653,070 |   |                            |   | 2,597,980 |                                      |  |   | 5,264,806                            |   |  |   | 5,151,492 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Provision for loan losses                           |  |                            | 546,661   |   |                            |   | 165,000   |                                      |  |   | 642,685                              |   |  |   | 220,000   |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Net interest income after provision for loan losses |  |                            | 2,106,409 |   |                            |   | 2,432,980 |                                      |  |   | 4,622,121                            |   |  |   | 4,931,492 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|NON-INTEREST INCOME                                 |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Income from fiduciary activities                    |  |                            | 157,688   |   |                            |   | 149,054   |                                      |  |   | 317,842                              |   |  |   | 303,487   |  
|Service charges and fees on deposit accounts        |  |                            | 192,826   |   |                            |   | 158,029   |                                      |  |   | 359,689                              |   |  |   | 324,285   |  
|VISA-related fees                                   |  |                            | 212,654   |   |                            |   | 193,420   |                                      |  |   | 372,123                              |   |  |   | 356,378   |  
|Other service charges and fees                      |  |                            | 255,685   |   |                            |   | 205,435   |                                      |  |   | 444,795                              |   |  |   | 371,030   |  
|Secondary market lending fees                       |  |                            | 121,687   |   |                            |   | 18,817    |                                      |  |   | 198,895                              |   |  |   | 56,705    |  
|Gains on sale of securities available for sale      |  |                            | 493,955   |   |                            |   | 125,259   |                                      |  |   | 502,816                              |   |  |   | 123,583   |  
|Other real estate (losses)                          |  |                            | (255,796  | ) |                            |   | (170,277  | )                                    |  |   | (323,849                             | ) |  |   | (288,053  | )
|Net (losses) gain on other assets                   |  |                            |          |   |                            |   |          |                                      |  |   | (4,906                               | ) |  |   | 4,082     |  
|Other income                                        |  |                            | 30,076    |   |                            |   | 16,061    |                                      |  |   | 58,400                               |   |  |   | 19,179    |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total non-interest income                           |  |                            | 1,208,775 |   |                            |   | 695,798   |                                      |  |   | 1,925,805                            |   |  |   | 1,270,676 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|NON-INTEREST EXPENSES                               |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Salaries and employee benefits                      |  |                            | 1,384,469 |   |                            |   | 1,548,310 |                                      |  |   | 2,946,638                            |   |  |   | 3,080,486 |  
|Occupancy expense                                   |  |                            | 546,034   |   |                            |   | 479,328   |                                      |  |   | 1,050,365                            |   |  |   | 944,442   |  
|Bank franchise tax                                  |  |                            | 42,990    |   |                            |   | 36,780    |                                      |  |   | 85,980                               |   |  |   | 73,560    |  
|VISA expense                                        |  |                            | 176,944   |   |                            |   | 167,698   |                                      |  |   | 308,104                              |   |  |   | 294,835   |  
|Telephone expense                                   |  |                            | 33,737    |   |                            |   | 45,283    |                                      |  |   | 75,061                               |   |  |   | 88,336    |  
|FDIC assessments                                    |  |                            | 103,851   |   |                            |   | 104,856   |                                      |  |   | 207,702                              |   |  |   | 251,954   |  
|Debit card expense                                  |  |                            | 60,445    |   |                            |   | 47,837    |                                      |  |   | 115,849                              |   |  |   | 95,281    |  
|Foreclosure property expense                        |  |                            | 62,532    |   |                            |   | 53,083    |                                      |  |   | 105,786                              |   |  |   | 95,649    |  
|Other expense                                       |  |                            | 795,302   |   |                            |   | 553,240   |                                      |  |   | 1,424,977                            |   |  |   | 1,050,308 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total non-interest expenses                         |  |                            | 3,206,304 |   |                            |   | 3,036,415 |                                      |  |   | 6,320,462                            |   |  |   | 5,974,851 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Net income before income taxes                      |  |                            | 108,880   |   |                            |   | 92,363    |                                      |  |   | 227,464                              |   |  |   | 227,317   |  
|                                                    |  |                            |           |  
|Income tax                                          |  |                            | 11,830    |   |                            |   | 5,727     |                                      |  |   | 24,787                               |   |  |   | 11,945    |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Net income                                          |  | $                          | 97,050    |   |                            | $ | 86,636    |                                      |  | $ | 202,677                              |   |  | $ | 215,372   |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Basic Earnings Per Share                            |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Average basic shares outstanding                    |  |                            | 2,610,856 |   |                            |   | 2,605,856 |                                      |  |   | 2,610,856                            |   |  |   | 2,605,856 |  
|Earnings per share, basic                           |  | $                          | 0.04      |   |                            | $ | 0.03      |                                      |  | $ | 0.08                                 |   |  | $ | 0.08      |  
|                                                    |  |                            |           |  
|Diluted Earnings Per Share                          |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Average diluted shares outstanding                  |  |                            | 2,613,877 |   |                            |   | 2,605,856 |                                      |  |   | 2,612,816                            |   |  |   | 2,605,856 |  
|Earnings per share, diluted                         |  | $                          | 0.04      |   |                            | $ | 0.03      |                                      |  | $ | 0.08                                 |   |  | $ | 0.08      |  

See Notes to Consolidated Financial Statements.



4



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##### Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



|                                                                                       |  |  |          |   |  |   |          |  
|-------------------------------------------------------------------------------------- |  |  | -------- | - |  | - | -------- | -
|Six months ended June 30, 2012 (unaudited)                                             |  |  |          |   |  |   |          |  
|                                                                                       |  | 
|Net income                                                                             |  |  |          |   |  | $ | 202,677  |  
|Other comprehensive (loss), net of tax:                                                |  |  |          |   |  |   |          |  
|Unrealized gains (losses) on securities:                                               |  |  |          |   |  |   |          |  
|Unrealized holding gains arising during the period (net of tax, $73,412)               |  |  | 142,505  |   |  |   |          |  
|Less reclassification adjustment for gains recognized in income (net of tax, $170,957) |  |  | (331,859 | ) |  |   |          |  
|                                                                                       |  |  |          |   |  |   |          |  
|Other comprehensive (loss)                                                             |  |  | (189,354 | ) |  |   | (189,354 | )
|                                                                                       |  |  |          |   |  |   |          |  
|Comprehensive income                                                                   |  |  |          |   |  | $ | 13,323   |  
|                                                                                       |  |  |          |   |  |   |          |  
|Six months ended June 30, 2011 (unaudited)                                             |  |  |          |   |  |   |          |  
|                                                                                       |  | 
|Net income                                                                             |  |  |          |   |  | $ | 215,372  |  
|Other comprehensive income, net of tax:                                                |  |  |          |   |  |   |          |  
|Unrealized gains on securities:                                                        |  |  |          |   |  |   |          |  
|Unrealized holding gains arising during the period (net of tax, $173,128)              |  |  | 336,071  |   |  |   |          |  
|Less reclassification adjustment for gains recognized in income (net of tax, $42,018)  |  |  | (81,565  | ) |  |   |          |  
|                                                                                       |  |  |          |   |  |   |          |  
|Other comprehensive income                                                             |  |  | 254,506  |   |  |   | 254,506  |  
|                                                                                       |  |  |          |   |  |   |          |  
|Comprehensive income                                                                   |  |  |          |   |  | $ | 469,878  |  
|                                                                                       |  |  |          |   |  |   |          |  
|Three months ended June 30, 2012 (unaudited)                                           |  |  |          |   |  |   |          |  
|                                                                                       |  | 
|Net income                                                                             |  |  |          |   |  | $ | 97,050   |  
|Other comprehensive loss, net of tax:                                                  |  |  |          |   |  |   |          |  
|Unrealized gains (losses) on securities:                                               |  |  |          |   |  |   |          |  
|Unrealized holding (losses) arising during the period (net of tax, $225,592)           |  |  | (437,913 | ) |  |   |          |  
|Less reclassification adjustment for gains recognized in income (net of tax, $167,945) |  |  | (326,010 | ) |  |   |          |  
|                                                                                       |  |  |          |   |  |   |          |  
|Other comprehensive (loss)                                                             |  |  | (111,903 | ) |  |   | (111,903 | )
|                                                                                       |  |  |          |   |  |   |          |  
|Comprehensive (loss)                                                                   |  |  |          |   |  | $ | (14,853  | )
|                                                                                       |  |  |          |   |  |   |          |  
|Three months ended June 30, 2011 (unaudited)                                           |  |  |          |   |  |   |          |  
|                                                                                       |  | 
|Net income                                                                             |  |  |          |   |  | $ | 86,636   |  
|Other comprehensive income, net of tax:                                                |  |  |          |   |  |   |          |  
|Unrealized gains on securities:                                                        |  |  |          |   |  |   |          |  
|Unrealized holding gains arising during the period (net of tax, $147,539)              |  |  | 286,399  |   |  |   |          |  
|Less reclassification adjustment for gains recognized in income (net of tax, $42,588)  |  |  | (82,671  | ) |  |   |          |  
|                                                                                       |  |  |          |   |  |   |          |  
|Other comprehensive income                                                             |  |  | 203,728  |   |  |   | 203,728  |  
|                                                                                       |  |  |          |   |  |   |          |  
|Comprehensive income                                                                   |  |  |          |   |  | $ | 290,364  |  
|                                                                                       |  |  |          |   |  |   |          |  

See Notes to Consolidated Financial Statements.



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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



|                               |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|------------------------------ |  | -------------------- | --------- |  | ----------- | - | ---------- | ------------------------ |  | - | ---------------- |  |  | ------------------------------- | --------- |  | ----- | - | -------- | - |  | - | ---------- | -
|                               |  | Shares ofCommonStock |           |  | CommonStock |   |            | AdditionalPaid-inCapital |  |   | RetainedEarnings |  |  | OtherComprehensiveIncome (Loss) |           |  | Total |  
|SIX MONTHS ENDED JUNE 30, 2012 |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|(unaudited)                    |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|                               |  |                      |           |  |             |  
|Balance at beginning of period |  |                      | 2,610,856 |  |             | $ | 13,054,280 |                          |  | $ | 4,971,531        |  |  | $                               | 9,543,634 |  |       | $ | 445,339  |   |  | $ | 28,014,784 |  
|Net income                     |  |                      |          |  |             |   |           |                          |  |   |                 |  |  |                                 | 202,677   |  |       |   |         |   |  |   | 202,677    |  
|                               |  |                      |           |  |             |  
|Other comprehensive (loss)     |  |                      |          |  |             |   |           |                          |  |   |                 |  |  |                                 |          |  |       |   | (189,354 | ) |  |   | (189,354   | )
|Stock compensation expense     |  |                      |          |  |             |   |           |                          |  |   | 2,925            |  |  |                                 |          |  |       |   |         |   |  |   | 2,925      |  
|                               |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|Balance at end of period       |  |                      | 2,610,856 |  |             | $ | 13,054,280 |                          |  | $ | 4,974,456        |  |  | $                               | 9,746,311 |  |       | $ | 255,985  |   |  | $ | 28,031,032 |  
|                               |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|SIX MONTHS ENDED JUNE 30, 2011 |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|(unaudited)                    |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|                               |  |                      |           |  |             |  
|Balance at beginning of period |  |                      | 2,605,856 |  |             | $ | 13,029,280 |                          |  | $ | 4,965,460        |  |  | $                               | 9,193,492 |  |       | $ | 154,078  |   |  | $ | 27,342,310 |  
|Net income                     |  |                      |          |  |             |   |           |                          |  |   |                 |  |  |                                 | 215,372   |  |       |   |         |   |  |   | 215,372    |  
|Other comprehensive income     |  |                      |          |  |             |   |           |                          |  |   |                 |  |  |                                 |          |  |       |   | 254,506  |   |  |   | 254,506    |  
|Stock compensation expense     |  |                      |          |  |             |   |           |                          |  |   | 7,948            |  |  |                                 |          |  |       |   |         |   |  |   | 7,948      |  
|                               |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  
|Balance at end of period       |  |                      | 2,605,856 |  |             | $ | 13,029,280 |                          |  | $ | 4,973,408        |  |  | $                               | 9,408,864 |  |       | $ | 408,584  |   |  | $ | 27,820,136 |  
|                               |  |                      |           |  |             |   |            |                          |  |   |                  |  |  |                                 |           |  |       |   |          |   |  |   |            |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                  |  |      |            |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | -
|Six months ended June 30,                                                         |  | 2012 |            |   | 2011 |  
|Cash Flows From Operating Activities                                              |  |      |            |   |      |   |             |  
|Net income                                                                        |  | $    | 202,677    |   |      | $ | 215,372     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |            |   |      |   |             |  
|Depreciation                                                                      |  |      | 400,322    |   |      |   | 407,458     |  
|Net amortization and accretion of securities                                      |  |      | 126,999    |   |      |   | 38,178      |  
|Provision for loan losses                                                         |  |      | 642,685    |   |      |   | 220,000     |  
|Stock-based compensation                                                          |  |      | 2,925      |   |      |   | 7,948       |  
|                                                                                  |  |     
|(Gain) on securities available-for-sale                                           |  |      | (502,816   | ) |      |   | (123,583    | )
|Increase in OREO valuation allowance                                              |  |      | 111,094    |   |      |   | 249,835     |  
|Loss on sale of other real estate                                                 |  |      | 212,755    |   |      |   | 38,218      |  
|Loss (gain) on disposal of fixed assets                                           |  |      | 4,906      |   |      |   | (4,082      | )
|Decrease in accrued income and other assets                                       |  |      | 323,309    |   |      |   | 297,060     |  
|Increase (decrease) in other liabilities                                          |  |      | 78,210     |   |      |   | (73,710     | )
|                                                                                  |  |      |            |   |      |   |             |  
|Net cash provided by operating activities                                         |  | $    | 1,603,066  |   |      | $ | 1,272,694   |  
|                                                                                  |  |      |            |   |      |   |             |  
|Cash Flows From Investing Activities                                              |  |      |            |   |      |   |             |  
|Proceeds from maturities and principal paydowns of available-for-sale securities  |  | $    | 1,610,448  |   |      | $ | 4,769,373   |  
|Proceeds from sales and calls of available-for-sale securities                    |  |      | 9,849,763  |   |      |   | 4,081,190   |  
|Purchases of available-for-sale securities                                        |  |      | (3,861,484 | ) |      |   | (5,480,327  | )
|Sales of restricted securities                                                    |  |      | 315,900    |   |      |   | 76,700      |  
|(Increase) in interest bearing deposits in other banks                            |  |      | (2,801,877 | ) |      |   | (14,618,961 | )
|Decrease (increase) in federal funds sold                                         |  |      | 1,906,080  |   |      |   | (587,461    | )
|Loan (originations) and principal collections, net                                |  |      | (6,695,008 | ) |      |   | 8,502,482   |  
|Proceeds from sale of other real estate                                           |  |      | 674,550    |   |      |   | 1,879,456   |  
|                                                                                  |  |     
|(Purchases) of premises and equipment                                             |  |      | (59,947    | ) |      |   | (97,970     | )
|                                                                                  |  |      |            |   |      |   |             |  
|Net cash provided by (used in) investing activities                               |  | $    | 938,425    |   |      | $ | (1,475,518  | )
|                                                                                  |  |      |            |   |      |   |             |  
|Cash Flows From Financing Activities                                              |  |      |            |   |      |   |             |  
|Increase in demand, savings, and other interest-bearing deposits                  |  | $    | 4,973,377  |   |      | $ | 3,301,377   |  
|Net (decrease) increase in time deposits                                          |  |      | (2,075,541 | ) |      |   | 2,902,003   |  
|Net increase (decrease) in securities sold under repurchase agreements            |  |      | 3,795,242  |   |      |   | (106,247    | )
|(Decrease) in FHLB advances                                                       |  |      |           |   |      |   | (5,000,000  | )
|                                                                                  |  |      |            |   |      |   |             |  
|Net cash provided by financing activities                                         |  | $    | 6,693,078  |   |      | $ | 1,097,133   |  
|                                                                                  |  |      |            |   |      |   |             |  
|                                                                                  |  |     
|Net increase in cash and due from banks                                           |  |      | 9,234,569  |   |      |   | 894,309     |  
|                                                                                  |  |     
|Cash and due from banks at beginning of period                                    |  |      | 4,728,895  |   |      |   | 3,275,584   |  
|                                                                                  |  |      |            |   |      |   |             |  
|Cash and due from banks at end of period                                          |  | $    | 13,963,464 |   |      | $ | 4,169,893   |  
|                                                                                  |  |      |            |   |      |   |             |  
|Supplemental Schedule of Cash Flow Information                                    |  |      |            |   |      |   |             |  
|Interest paid                                                                     |  | $    | 1,765,190  |   |      | $ | 2,354,537   |  
|                                                                                  |  |      |            |   |      |   |             |  
|Income taxes paid                                                                 |  |      |           |   |      |   | 103,827     |  
|                                                                                  |  |      |            |   |      |   |             |  
|Unrealized gain (loss) on investment securities                                   |  |      | (286,900   | ) |      |   | 385,616     |  
|                                                                                  |  |      |            |   |      |   |             |  
|Loans transferred to other real estate owned                                      |  |      | 1,403,983  |   |      |   | 1,220,132   |  
|                                                                                  |  |      |            |   |      |   |             |  

See Notes to Consolidated Financial Statements.



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Notes to Consolidated Financial Statements

Note 1: General

Bay Banks of Virginia, Inc. (the Company) owns 100% of the Bank of Lancaster (the Bank), 100% of Bay Trust
Company, Inc. (the Trust Company) and 100% of Steptoes Holdings, LLC (Steptoes Holdings). The consolidated financial statements include the accounts of the Bank, the Trust Company, Steptoes Holdings 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
(GAAP) and to the general practices within the banking industry. 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 2011 Annual Report to Shareholders.

Note 2: Securities

The aggregate amortized costs and fair values of the available-for-sale securities portfolio are as follows:



|                                                        |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|------------------------------------------------------- |  | ------------- | ---------- |  | -------------------- | - | --------- | ----------------------- |  | - | --------- | - |  | - | ---------- | 
|Available-for-sale securities
June 30, 2012 (unaudited) |  | AmortizedCost |            |  | GrossUnrealizedGains |   |           | GrossUnrealized(Losses) |  |   | FairValue |  
|U.S. Government agencies                                |  | $             | 7,697,972  |  |                      | $ | 102,762   |                         |  | $ | (15,038   | ) |  | $ | 7,785,696  | 
|State and municipal obligations                         |  |               | 25,725,617 |  |                      |   | 803,240   |                         |  |   | (25,242   | ) |  |   | 26,503,615 | 
|                                                        |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|                                                        |  | $             | 33,423,589 |  |                      | $ | 906,002   |                         |  | $ | (40,280   | ) |  | $ | 34,289,311 | 
|                                                        |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|                                                        |  |               |            | 
|Available-for-sale securities
December 31, 2011         |  | AmortizedCost |            |  | GrossUnrealizedGains |   |           | GrossUnrealized(Losses) |  |   | FairValue |  
|U.S. Government agencies                                |  | $             | 8,698,771  |  |                      | $ | 100,951   |                         |  | $ | (4,656    | ) |  | $ | 8,795,066  | 
|State and municipal obligations                         |  |               | 31,947,729 |  |                      |   | 1,066,585 |                         |  |   | (10,259   | ) |  |   | 33,004,055 | 
|                                                        |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|                                                        |  | $             | 40,646,500 |  |                      | $ | 1,167,536 |                         |  | $ | (14,915   | ) |  | $ | 41,799,121 | 
|                                                        |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 

Securities with a market value of $10.2 million were pledged as collateral for repurchase agreements and for other
purposes as required by law as of June 30, 2012. The market value of pledged securities at December 31, 2011 was $9.3 million.

Securities in an unrealized loss position at June 30, 2012 and December 31, 2011, 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, we do expect to recover the entire amortized cost basis. Bonds with unrealized loss positions at June 30, 2012 included five municipals and
three federal agencies. Bonds with unrealized loss positions at December 31, 2011 included two municipals and one federal agency. The tables are shown below.



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##### Table of Contents

|                                      |  |                     |           |  |                   |   |        |           |  |   |                |  |  |           |       |  |                |   |           |  |  |   |        | 
|------------------------------------- |  | ------------------- | --------- |  | ----------------- | - | ------ | --------- |  | - | -------------- |  |  | --------- | ----- |  | -------------- | - | --------- |  |  | - | ------ | 
|                                      |  | Less than 12 months |           |  | 12 months or more |   |        | Total     | 
|June 30, 2012 (unaudited)             |  | FairValue           |           |  | UnrealizedLoss    |   |        | FairValue |  |   | UnrealizedLoss |  |  | FairValue |       |  | UnrealizedLoss |  
|U.S. Government agencies              |  | $                   | 1,064,773 |  |                   | $ | 11,440 |           |  | $ | 245,120        |  |  | $         | 3,598 |  |                | $ | 1,309,893 |  |  | $ | 15,038 | 
|States and municipal obligations      |  |                     | 2,388,401 |  |                   |   | 25,242 |           |  |   |               |  |  |           |      |  |                |   | 2,388,401 |  |  |   | 25,242 | 
|                                      |  |                     |           |  |                   |   |        |           |  |   |                |  |  |           |       |  |                |   |           |  |  |   |        | 
|Total temporarily impaired securities |  | $                   | 3,453,174 |  |                   | $ | 36,682 |           |  | $ | 245,120        |  |  | $         | 3,598 |  |                | $ | 3,698,294 |  |  | $ | 40,280 | 
|                                      |  |                     |           |  |                   |   |        |           |  |   |                |  |  |           |       |  |                |   |           |  |  |   |        | 
|                                      |  |                     |          
|                                      |  | Less than 12 months |           |  | 12 months or more |   |        | Total     | 
|December 31, 2011                     |  | FairValue           |           |  | UnrealizedLoss    |   |        | FairValue |  |   | UnrealizedLoss |  |  | FairValue |       |  | UnrealizedLoss |  
|U.S. Government agencies              |  | $                   | 311,122   |  |                   | $ | 4,656  |           |  | $ |               |  |  | $         |      |  |                | $ | 311,122   |  |  | $ | 4,656  | 
|States and municipal obligations      |  |                     | 819,809   |  |                   |   | 10,259 |           |  |   |               |  |  |           |      |  |                |   | 819,809   |  |  |   | 10,259 | 
|                                      |  |                     |           |  |                   |   |        |           |  |   |                |  |  |           |       |  |                |   |           |  |  |   |        | 
|Total temporarily impaired securities |  | $                   | 1,130,931 |  |                   | $ | 14,915 |           |  | $ |               |  |  | $         |      |  |                | $ | 1,130,931 |  |  | $ | 14,915 | 
|                                      |  |                     |           |  |                   |   |        |           |  |   |                |  |  |           |       |  |                |   |           |  |  |   |        | 

The Companys investment in Federal Home Loan Bank of Atlanta (FHLB) stock totaled $1.2 million at
June 30, 2012 and $1.6 million at December 31, 2011. 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 FHLBs
or its 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. Despite the FHLBs temporary suspension
of repurchases of excess capital stock in 2010, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2012 and no impairment has been recognized. FHLB stock is shown in the restricted securities line
item on the consolidated balance sheets and is not a part of the available-for-sale securities portfolio.

Note 3: Loans

The following is a summary of the balances of loans:



|                                          |  |               |             |   |                   |   |             |  
|----------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                          |  | June 30, 2012 |             |   | December 31, 2011 |  
|                                          |  | (unaudited)   |             |   |                   |  
|Mortgage loans on real estate:            |  |               |             |   |                   |   |             |  
|Construction, Land and Land Development   |  | $             | 28,582,337  |   |                   | $ | 27,642,280  |  
|Farmland                                  |  |               | 1,484,981   |   |                   |   | 1,526,050   |  
|Commercial Mortgages (Non-Owner Occupied) |  |               | 20,884,287  |   |                   |   | 16,198,584  |  
|Commercial Mortgages (Owner Occupied)     |  |               | 26,063,505  |   |                   |   | 27,845,596  |  
|Residential First Mortgages               |  |               | 110,120,103 |   |                   |   | 107,638,735 |  
|Residential Junior Mortgages              |  |               | 28,800,598  |   |                   |   | 28,526,008  |  
|Commercial and Industrial loans           |  |               | 18,316,782  |   |                   |   | 18,983,332  |  
|Consumer Loans                            |  |               | 7,237,986   |   |                   |   | 8,329,237   |  
|                                          |  |               |             |   |                   |   |             |  
|Total loans                               |  | $             | 241,490,579 |   |                   | $ | 236,689,822 |  
|Allowance for loan losses                 |  |               | (3,340,958  | ) |                   |   | (3,188,541  | )
|                                          |  |               |             |   |                   |   |             |  
|Loans, net                                |  | $             | 238,149,621 |   |                   | $ | 233,501,281 |  
|                                          |  |               |             |   |                   |   |             |  



9



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##### Table of Contents

The recorded investment in past due and nonaccruing loans is shown in the following table. A loan past due
by more than 90 days is generally placed on nonaccrual unless it is both well secured and in the process of collection.



|                                                         |  |                   |         |  |                   |   |         |                                          |  |   |             |  |  |                              |           |  |         |   |           |            |  |   |             |  |  |   |             | 
|-------------------------------------------------------- |  | ----------------- | ------- |  | ----------------- | - | ------- | ---------------------------------------- |  | - | ----------- |  |  | ---------------------------- | --------- |  | ------- | - | --------- | ---------- |  | - | ----------- |  |  | - | ----------- | 
|Loans Past Due and Nonaccruals
June 30, 2012 (unaudited) |  | 30-59DaysPast Due |         |  | 60-89DaysPast Due |   |         | 90 Days orMore PastDue
andStill Accruing |  |   | Nonaccruals |  |  | Total PastDue
andNonaccruals |           |  | Current |   |           | TotalLoans | 
|Construction, Land and Land Development                  |  | $                 |        |  |                   | $ | 122,479 |                                          |  | $ | 400,723     |  |  | $                            | 406,378   |  |         | $ | 929,580   |            |  | $ | 27,652,757  |  |  | $ | 28,582,337  | 
|Farmland                                                 |  |                   |        |  |                   |   |        |                                          |  |   |            |  |  |                              |          |  |         |   |          |            |  |   | 1,484,982   |  |  |   | 1,484,981   | 
|Commercial Mortgages (Non-Owner Occupied)                |  |                   |        |  |                   |   |        |                                          |  |   |            |  |  |                              | 318,418   |  |         |   | 318,418   |            |  |   | 20,565,869  |  |  |   | 20,884,287  | 
|Commercial Mortgages (Owner Occupied)                    |  |                   |        |  |                   |   |        |                                          |  |   |            |  |  |                              | 915,795   |  |         |   | 915,795   |            |  |   | 25,147,710  |  |  |   | 26,063,505  | 
|Residential First Mortgages                              |  |                   | 183,887 |  |                   |   | 97,311  |                                          |  |   |            |  |  |                              | 3,253,860 |  |         |   | 3,535,058 |            |  |   | 106,585,044 |  |  |   | 110,120,103 | 
|Residential Junior Mortgages                             |  |                   | 60,123  |  |                   |   |        |                                          |  |   |            |  |  |                              | 1,886,099 |  |         |   | 1,946,222 |            |  |   | 26,854,376  |  |  |   | 28,800,598  | 
|Commercial and Industrial                                |  |                   | 1,678   |  |                   |   |        |                                          |  |   |            |  |  |                              | 513,009   |  |         |   | 514,687   |            |  |   | 17,802,095  |  |  |   | 18,316,782  | 
|Consumer Loans                                           |  |                   | 4,247   |  |                   |   |        |                                          |  |   |            |  |  |                              | 16,186    |  |         |   | 20,433    |            |  |   | 7,217,553   |  |  |   | 7,237,986   | 
|                                                         |  |                   |         |  |                   |   |         |                                          |  |   |             |  |  |                              |           |  |         |   |           |            |  |   |             |  |  |   |             | 
|Total                                                    |  | $                 | 249,935 |  |                   | $ | 219,790 |                                          |  | $ | 400,723     |  |  | $                            | 7,309,745 |  |         | $ | 8,180,193 |            |  | $ | 233,310,386 |  |  | $ | 241,490,579 | 
|                                                         |  |                   |         |  |                   |   |         |                                          |  |   |             |  |  |                              |           |  |         |   |           |            |  |   |             |  |  |   |             | 
|                                                         |  |                   |         |  |                   |   |        
|Loans Past Due and NonaccrualsDecember 31, 2011          |  | 30-59DaysPast Due |         |  | 60-89Days PastDue |   |         | 90 Days orMore PastDue andStill
Accruing |  |   | Nonaccruals |  |  | Total PastDue andNonaccruals |           |  | Current |   |           | TotalLoans | 
|Construction, Land and Land Development                  |  | $                 |        |  |                   | $ | 93,287  |                                          |  | $ |            |  |  | $                            | 534,037   |  |         | $ | 627,324   |            |  | $ | 27,014,956  |  |  | $ | 27,642,280  | 
|Farmland                                                 |  |                   |        |  |                   |   |        |                                          |  |   |            |  |  |                              |          |  |         |   |          |            |  |   | 1,526,050   |  |  |   | 1,526,050   | 
|Commercial Mortgages (Non-Owner Occupied)                |  |                   |        |  |                   |   |        |                                          |  |   |            |  |  |                              | 384,168   |  |         |   | 384,168   |            |  |   | 15,814,416  |  |  |   | 16,198,584  | 
|Commercial Mortgages (Owner Occupied)                    |  |                   |        |  |                   |   |        |                                          |  |   |            |  |  |                              | 256,749   |  |         |   | 256,749   |            |  |   | 27,588,847  |  |  |   | 27,845,596  | 
|Residential First Mortgages                              |  |                   | 128,632 |  |                   |   | 92,503  |                                          |  |   |            |  |  |                              | 1,666,779 |  |         |   | 1,887,914 |            |  |   | 105,750,821 |  |  |   | 107,638,735 | 
|Residential Junior Mortgages                             |  |                   | 29,712  |  |                   |   |        |                                          |  |   |            |  |  |                              | 1,741,286 |  |         |   | 1,770,998 |            |  |   | 26,755,010  |  |  |   | 28,526,008  | 
|Commercial and Industrial                                |  |                   | 43,364  |  |                   |   |        |                                          |  |   |            |  |  |                              | 742,720   |  |         |   | 786,084   |            |  |   | 18,197,248  |  |  |   | 18,983,332  | 
|Consumer Loans                                           |  |                   | 56,272  |  |                   |   | 466,560 |                                          |  |   | 60,090      |  |  |                              | 90,933    |  |         |   | 673,855   |            |  |   | 7,655,382   |  |  |   | 8,329,237   | 
|                                                         |  |                   |         |  |                   |   |         |                                          |  |   |             |  |  |                              |           |  |         |   |           |            |  |   |             |  |  |   |             | 
|Total                                                    |  | $                 | 257,980 |  |                   | $ | 652,350 |                                          |  | $ | 60,090      |  |  | $                            | 5,416,672 |  |         | $ | 6,387,092 |            |  | $ | 230,302,730 |  |  | $ | 236,689,822 | 
|                                                         |  |                   |         |  |                   |   |         |                                          |  |   |             |  |  |                              |           |  |         |   |           |            |  |   |             |  |  |   |             | 

Note 4: Allowance for Loan Losses

A disaggregation of and an analysis of the change in the allowance for loan losses by segment is shown below.

Allowance for Loan Losses by Portfolio Segment

For the six months ended June 30, 2012 (unaudited)



|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |         |  |  |   |             |  
|------------------------------------- |  | ------------------------------------ | ---------- | - | -------- | - | --------- | ------------------------------------- |  | - | ---------------------------------- | - |  | ------------------------- | ---------- | - | -------------------------- | - | ----------- | ----------------------- |  | - | ------------- | - |  | ----------- | ---------- | - | ----- | - | --------- | - |  | - | ------- |  |  | - | ----------- | -
|                                      |  | Construction,Land andLandDevelopment |            |   | Farmland |   |           | CommercialMortgages(NonOwnerOccupied) |  |   | CommercialMortgages(OwnerOccupied) |   |  | ResidentialFirstMortgages |            |   | ResidentialJuniorMortgages |   |             | CommercialandIndustrial |  |   | ConsumerLoans |   |  | Unallocated |            |   | Total |  
|ALLOWANCE FOR LOAN LOSSES:            |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   | 
|Beginning Balance                     |  | $                                    | 190,500    |   |          | $ |          |                                       |  | $ | 88,000                             |   |  | $                         | 554,318    |   |                            | $ | 1,161,551   |                         |  | $ | 719,121       |   |  | $           | 281,650    |   |       | $ | 185,000   |   |  | $ | 8,401   |  |  | $ | 3,188,541   |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |  
|(Charge-offs)                         |  |                                      | (57,660    | ) |          |   |          |                                       |  |   | (283,569                           | ) |  |                           |           |   |                            |   | (203,544    | )                       |  |   | (32,674       | ) |  |             | (185,427   | ) |       |   | (75,381   | ) |  |   |         |  |  |   | (838,255    | )
|                                      |  |                                      |            |   |          |   |           |                                       |  |  
|Recoveries                            |  |                                      |           |   |          |   |          |                                       |  |   | 285,084                            |   |  |                           |           |   |                            |   |            |                         |  |   |              |   |  |             | 10,869     |   |       |   | 52,034    |   |  |   |         |  |  |   | 347,987     |  
|Provision                             |  |                                      | 41,031     |   |          |   | 1,000     |                                       |  |   | (515                               | ) |  |                           | (179,522   | ) |                            |   | 277,334     |                         |  |   | (76,007       | ) |  |             | 180,740    |   |       |   | 99,557    |   |  |   | 299,067 |  |  |   | 642,685     |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |         |  |  |   |             |  
|Ending Balance                        |  | $                                    | 173,871    |   |          | $ | 1,000     |                                       |  | $ | 89,000                             |   |  | $                         | 374,796    |   |                            | $ | 1,235,341   |                         |  | $ | 610,440       |   |  | $           | 287,832    |   |       | $ | 261,210   |   |  | $ | 307,468 |  |  | $ | 3,340,958   |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |         |  |  |   |             |  
|Individually evaluated for impairment |  | $                                    | 117,871    |   |          | $ |          |                                       |  | $ |                                   |   |  | $                         | 140,796    |   |                            | $ | 843,341     |                         |  | $ | 431,440       |   |  | $           | 176,832    |   |       | $ | 94,210    |   |  | $ |        |  |  | $ | 1,804,490   |  
|Collectively evaluated for impairment |  | $                                    | 56,000     |   |          | $ | 1,000     |                                       |  | $ | 89,000                             |   |  | $                         | 234,000    |   |                            | $ | 392,000     |                         |  | $ | 179,000       |   |  | $           | 111,000    |   |       | $ | 167,000   |   |  | $ | 307,468 |  |  | $ | 1,536,468   |  
|                                      |  |                                      |            |   |          |   |           |                                      
|LOAN RECEIVABLES:                     |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   | 
|Ending Balance:                       |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |         |  |  |   |             |  
|Individually evaluated for impairment |  | $                                    | 406,378    |   |          | $ |          |                                       |  | $ |                                   |   |  | $                         | 1,603,830  |   |                            | $ | 4,025,871   |                         |  | $ | 1,760,201     |   |  | $           | 513,008    |   |       | $ | 94,210    |   |  |   |         |  |  | $ | 8,403,498   |  
|Collectively evaluated for impairment |  |                                      | 28,175,959 |   |          |   | 1,484,981 |                                       |  |   | 20,884,287                         |   |  |                           | 24,459,675 |   |                            |   | 106,094,232 |                         |  |   | 27,040,397    |   |  |             | 17,803,774 |   |       |   | 7,143,776 |   |  |   |         |  |  |   | 233,087,081 |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |         |  |  |   |             |  
|Total Gross Loans                     |  | $                                    | 28,582,337 |   |          | $ | 1,484,981 |                                       |  | $ | 20,884,287                         |   |  | $                         | 26,063,505 |   |                            | $ | 110,120,103 |                         |  | $ | 28,800,598    |   |  | $           | 18,316,782 |   |       | $ | 7,237,986 |   |  |   |         |  |  | $ | 241,490,579 |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |         |  |  |   |             |  

Provision is negative for the Commercial Mortgages (Owner occupied) and Residential Junior Mortgages segments due mainly
to a reduction in the level of individual impaired allowance required for each of these segments.



10



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##### Table of Contents

Allowance for Loan Losses by Portfolio Segment

For the Year Ended December 31, 2011



|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  
|------------------------------------- |  | ------------------------------------ | ---------- | - | -------- | - | --------- | ------------------------------------- |  | - | ---------------------------------- | - |  | ------------------------- | ---------- | - | -------------------------- | - | ----------- | ----------------------- |  | - | ------------- | - |  | ----------- | ---------- | - | ----- | - | --------- | - |  | - | -------- | - |  | - | ----------- | -
|                                      |  | Construction,Land
andLandDevelopment |            |   | Farmland |   |           | CommercialMortgages(NonOwnerOccupied) |  |   | CommercialMortgages(OwnerOccupied) |   |  | ResidentialFirstMortgages |            |   | ResidentialJuniorMortgages |   |             | CommercialandIndustrial |  |   | ConsumerLoans |   |  | Unallocated |            |   | Total |  
|ALLOWANCE FOR LOAN LOSSES:            |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  
|Beginning Balance                     |  | $                                    | 192,518    |   |          | $ | 3,000     |                                       |  | $ | 108,000                            |   |  | $                         | 1,270,451  |   |                            | $ | 206,171     |                         |  | $ | 460,648       |   |  | $           | 69,869     |   |       | $ | 210,662   |   |  | $ | 709,358  |   |  | $ | 3,230,677   |  
|(Charge-offs)                         |  |                                      | (35,428    | ) |          |   |          |                                       |  |   | (52,117                            | ) |  |                           |           |   |                            |   | (232,904    | )                       |  |   | (29,162       | ) |  |             | (16,553    | ) |       |   | (211,117  | ) |  |   |         |   |  |   | (577,281    | )
|Recoveries                            |  |                                      | 175        |   |          |   |          |                                       |  |   |                                   |   |  |                           |           |   |                            |   | 1,393       |                         |  |   |              |   |  |             |           |   |       |   | 38,577    |   |  |   |         |   |  |   | 40,145      |  
|Provision                             |  |                                      | 33,235     |   |          |   | (3,000    | )                                     |  |   | 32,117                             |   |  |                           | (716,133   | ) |                            |   | 1,186,891   |                         |  |   | 287,635       |   |  |             | 228,334    |   |       |   | 146,878   |   |  |   | (700,957 | ) |  |   | 495,000     |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  
|Ending Balance                        |  | $                                    | 190,500    |   |          | $ |          |                                       |  | $ | 88,000                             |   |  | $                         | 554,318    |   |                            | $ | 1,161,551   |                         |  | $ | 719,121       |   |  | $           | 281,650    |   |       | $ | 185,000   |   |  | $ | 8,401    |   |  | $ | 3,188,541   |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  
|Individually evaluated for impairment |  | $                                    | 119,500    |   |          | $ |          |                                       |  | $ |                                   |   |  | $                         | 244,318    |   |                            | $ | 726,552     |                         |  | $ | 465,121       |   |  | $           | 236,650    |   |       | $ |          |   |  | $ |         |   |  | $ | 1,792,141   |  
|Collectively evaluated for impairment |  | $                                    | 71,000     |   |          | $ |          |                                       |  | $ | 88,000                             |   |  | $                         | 310,000    |   |                            | $ | 435,000     |                         |  | $ | 254,000       |   |  | $           | 45,000     |   |       | $ | 185,000   |   |  | $ | 8,401    |   |  | $ | 1,396,401   |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |  
|LOAN RECEIVABLES:                     |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  
|Ending Balance:                       |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  
|Individually evaluated for impairment |  | $                                    | 408,640    |   |          | $ |          |                                       |  | $ |                                   |   |  | $                         | 1,447,278  |   |                            | $ | 3,187,147   |                         |  | $ | 1,790,858     |   |  | $           | 560,197    |   |       | $ |          |   |  |   |          |   |  | $ | 7,394,120   |  
|Collectively evaluated for impairment |  |                                      | 27,233,640 |   |          |   | 1,526,050 |                                       |  |   | 16,198,584                         |   |  |                           | 26,398,318 |   |                            |   | 104,451,588 |                         |  |   | 26,735,150    |   |  |             | 18,423,135 |   |       |   | 8,329,237 |   |  |   |          |   |  |   | 229,295,702 |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  
|Total Gross Loans                     |  | $                                    | 27,642,280 |   |          | $ | 1,526,050 |                                       |  | $ | 16,198,584                         |   |  | $                         | 27,845,596 |   |                            | $ | 107,638,735 |                         |  | $ | 28,526,008    |   |  | $           | 18,983,332 |   |       | $ | 8,329,237 |   |  |   |          |   |  | $ | 236,689,822 |  
|                                      |  |                                      |            |   |          |   |           |                                       |  |   |                                    |   |  |                           |            |   |                            |   |             |                         |  |   |               |   |  |             |            |   |       |   |           |   |  |   |          |   |  |   |             |  

Internal risk rating grades are assigned to commercial loans not secured by real estate, commercial mortgages,
residential mortgages greater than $1 million, loans to real estate developers and contractors, and consumer loans greater than $250,000 with chronic delinquency, as shown in the following table. The grading analysis estimates the capability of the
borrower to repay the contractual obligations of the loan agreements as scheduled. Risk grades are evaluated as new information becomes available for each borrowing relationship or at least quarterly.

As of June 30, 2012 (unaudited)



|                            |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|--------------------------- |  | ------------------------------------ | ---------- |  | -------- | - | --------- | -------------------------------------- |  | - | ---------------------------------- |  |  | ----------------------- | ---------- |  | ----- | - | ---------- |  |  | - | ---------- | 
|                            |  | Construction,Land
andLandDevelopment |            |  | Farmland |   |           | CommercialMortgages(Non-OwnerOccupied) |  |   | CommercialMortgages(OwnerOccupied) |  |  | CommercialandIndustrial |            |  | Total |  
|INTERNAL RISK RATING GRADES |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|Grade:                      |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|Pass                        |  | $                                    | 21,681,318 |  |          | $ | 1,484,982 |                                        |  | $ | 15,087,894                         |  |  | $                       | 17,044,474 |  |       | $ | 14,057,251 |  |  | $ | 69,355,919 | 
|Watch                       |  |                                      | 4,581,011  |  |          |   |          |                                        |  |   | 2,468,359                          |  |  |                         | 6,261,502  |  |       |   | 3,461,592  |  |  |   | 16,772,464 | 
|Special mention             |  |                                      |           |  |          |   |          |                                        |  |   | 2,574,371                          |  |  |                         |           |  |       |   |           |  |  |   | 2,574,371  | 
|Substandard                 |  |                                      | 1,977,390  |  |          |   |          |                                        |  |   | 753,663                            |  |  |                         | 2,757,529  |  |       |   | 284,930    |  |  |   | 5,773,512  | 
|Doubtful                    |  |                                      | 342,618    |  |          |   |          |                                        |  |   |                                   |  |  |                         |           |  |       |   | 513,009    |  |  |   | 855,627    | 
|                            |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|Total                       |  | $                                    | 28,582,337 |  |          | $ | 1,484,982 |                                        |  | $ | 20,884,287                         |  |  | $                       | 26,063,505 |  |       | $ | 18,316,782 |  |  | $ | 95,331,893 | 
|                            |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|                            |  |                                      |            |  |          |  
|As of December 31, 2011     |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|                            |  |                                      |            |  |          |  
|                            |  | Construction,Land
andLandDevelopment |            |  | Farmland |   |           | CommercialMortgages(Non-OwnerOccupied) |  |   | CommercialMortgages(OwnerOccupied) |  |  | CommercialandIndustrial |            |  | Total |  
|INTERNAL RISK RATING GRADES |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|Grade:                      |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|Pass                        |  | $                                    | 20,365,500 |  |          | $ | 1,526,050 |                                        |  | $ | 11,209,765                         |  |  | $                       | 17,875,112 |  |       | $ | 13,790,715 |  |  | $ | 64,767,142 | 
|Watch                       |  |                                      | 2,807,742  |  |          |   |          |                                        |  |   | 1,847,911                          |  |  |                         | 7,079,654  |  |       |   | 3,952,068  |  |  |   | 15,687,375 | 
|Special mention             |  |                                      | 2,186,094  |  |          |   |          |                                        |  |   | 2,393,755                          |  |  |                         | 310,959    |  |       |   |           |  |  |   | 4,890,808  | 
|Substandard                 |  |                                      | 1,940,326  |  |          |   |          |                                        |  |   | 681,403                            |  |  |                         | 2,323,122  |  |       |   | 457,698    |  |  |   | 5,402,549  | 
|Doubtful                    |  |                                      | 342,618    |  |          |   |          |                                        |  |   | 65,750                             |  |  |                         | 256,749    |  |       |   | 782,851    |  |  |   | 1,447,968  | 
|                            |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 
|Total                       |  | $                                    | 27,642,280 |  |          | $ | 1,526,050 |                                        |  | $ | 16,198,584                         |  |  | $                       | 27,845,596 |  |       | $ | 18,983,332 |  |  | $ | 92,195,842 | 
|                            |  |                                      |            |  |          |   |           |                                        |  |   |                                    |  |  |                         |            |  |       |   |            |  |  |   |            | 



11



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##### Table of Contents

Loans not assigned internal risk rating grades are comprised of residential mortgages and smaller consumer
loans. Payment activity of these loans is reviewed monthly by management. Loans are considered to be nonperforming when they are delinquent by 90 days or more or on nonaccrual, as shown in the table below.

As of June 30, 2012 (unaudited)



|                        |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 
|----------------------- |  | ------------------------- | ----------- |  | -------------------------- | - | ---------- | ------------- |  | - | --------- |  |  | - | ----------- | 
|                        |  | ResidentialFirstMortgages |             |  | ResidentialJuniorMortgages |   |            | ConsumerLoans |  |   | Total     | 
|PAYMENT ACTIVITY STATUS |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 
|Performing              |  | $                         | 106,866,242 |  |                            | $ | 26,914,499 |               |  | $ | 7,221,800 |  |  | $ | 141,002,541 | 
|Nonperforming           |  |                           | 3,253,860   |  |                            |   | 1,886,099  |               |  |   | 16,186    |  |  |   | 5,156,145   | 
|                        |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 
|Total                   |  | $                         | 110,120,102 |  |                            | $ | 28,800,598 |               |  | $ | 7,237,986 |  |  | $ | 146,158,686 | 
|                        |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 
|                        |  |                           |             | 
|As of December 31, 2011 |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 
|                        |  |                           |             | 
|                        |  | ResidentialFirstMortgages |             |  | ResidentialJuniorMortgages |   |            | ConsumerLoans |  |   | Total     | 
|PAYMENT ACTIVITY STATUS |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 
|Performing              |  | $                         | 105,971,956 |  |                            | $ | 26,784,722 |               |  | $ | 8,178,214 |  |  | $ | 140,934,892 | 
|Nonperforming           |  |                           | 1,666,779   |  |                            |   | 1,741,286  |               |  |   | 151,023   |  |  |   | 3,559,088   | 
|                        |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 
|Total                   |  | $                         | 107,638,735 |  |                            | $ | 28,526,008 |               |  | $ | 8,329,237 |  |  | $ | 144,493,980 | 
|                        |  |                           |             |  |                            |   |            |               |  |   |           |  |  |   |             | 

The following table shows the Companys recorded investment and the customers unpaid principal balances for
impaired loans, with the associated allowance amount, if applicable. Also shown are the average recorded investments in impaired loans and the related amount of interest recognized and collected during the time the loans were impaired.

IMPAIRED LOANS

As of June 30, 2012 (unaudited)



|                                          |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|----------------------------------------- |  | ------------------- | --------- |  | ----------------------------------- | - | --------- | ----------------- |  | - | --------------------------- |  |  | -------------------------- | --------- |  | ------------------------- | - | ------- |  |  | - | ------ | 
|                                          |  | Recorded Investment |           |  | Customers Unpaid
Principal Balance |   |           | Related Allowance |  |   | Average Recorded Investment |  |  | Interest Income Recognized |           |  | Interest Income Collected |  
|With no related allowance:                |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|Construction, land & land development     |  | $                   |          |  |                                     | $ |          |                   |  | $ |                            |  |  | $                          |          |  |                           | $ |        |  |  | $ |       | 
|Farmland                                  |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|Residential First Mortgages               |  |                     | 2,070,907 |  |                                     |   | 2,070,907 |                   |  |   |                            |  |  |                            | 1,660,547 |  |                           |   | 41,149  |  |  |   | 24,912 | 
|Residential Junior Mortgages (1)          |  |                     | 28,278    |  |                                     |   | 28,278    |                   |  |   |                            |  |  |                            | 29,510    |  |                           |   |        |  |  |   |       | 
|Commercial Mortgages (Non-owner occupied) |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|Commercial Mortgages (Owner occupied)     |  |                     | 737,990   |  |                                     |   | 737,990   |                   |  |   |                            |  |  |                            | 418,580   |  |                           |   | 19,218  |  |  |   | 19,874 | 
|Commercial & industrial                   |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|Consumer (2)                              |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|                                          |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|                                          |  | $                   | 2,837,175 |  |                                     | $ | 2,837,175 |                   |  | $ |                            |  |  | $                          | 2,108,637 |  |                           | $ | 60,367  |  |  | $ | 44,786 | 
|                                          |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|With an allowance recorded:               |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|Construction, land & land development     |  | $                   | 406,378   |  |                                     | $ | 408,540   |                   |  | $ | 117,871                     |  |  | $                          | 407,510   |  |                           | $ |        |  |  | $ |       | 
|Farmland                                  |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|Residential First Mortgages               |  |                     | 1,954,964 |  |                                     |   | 2,125,388 |                   |  |   | 843,341                     |  |  |                            | 1,870,295 |  |                           |   | 24,129  |  |  |   | 23,564 | 
|Residential Junior Mortgages (1)          |  |                     | 1,731,923 |  |                                     |   | 2,054,084 |                   |  |   | 431,440                     |  |  |                            | 1,745,835 |  |                           |   | 3,750   |  |  |   | 1,875  | 
|Commercial Mortgages (Non-owner occupied) |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|Commercial Mortgages (Owner occupied)     |  |                     | 865,840   |  |                                     |   | 865,840   |                   |  |   | 140,796                     |  |  |                            | 865,861   |  |                           |   | 15,900  |  |  |   | 9,010  | 
|Commercial & industrial                   |  |                     | 513,008   |  |                                     |   | 593,740   |                   |  |   | 176,832                     |  |  |                            | 486,690   |  |                           |   |        |  |  |   | 316    | 
|Consumer (2)                              |  |                     | 94,210    |  |                                     |   | 94,210    |                   |  |   | 94,210                      |  |  |                            | 62,807    |  |                           |   | 4,050   |  |  |   | 4,050  | 
|                                          |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|                                          |  | $                   | 5,566,323 |  |                                     | $ | 6,141,802 |                   |  | $ | 1,804,490                   |  |  | $                          | 5,438,998 |  |                           | $ | 47,829  |  |  | $ | 38,815 | 
|                                          |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|Total Impaired Loans:                     |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|Construction, land & land development     |  | $                   | 406,378   |  |                                     | $ | 408,540   |                   |  | $ | 117,871                     |  |  | $                          | 407,510   |  |                           | $ |        |  |  | $ |       | 
|Farmland                                  |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|Residential First Mortgages               |  |                     | 4,025,871 |  |                                     |   | 4,196,295 |                   |  |   | 843,341                     |  |  |                            | 3,530,842 |  |                           |   | 65,278  |  |  |   | 48,476 | 
|Residential Junior Mortgages (1)          |  |                     | 1,760,201 |  |                                     |   | 2,082,362 |                   |  |   | 431,440                     |  |  |                            | 1,775,345 |  |                           |   | 3,750   |  |  |   | 1,875  | 
|Commercial Mortgages (Non-owner occupied) |  |                     |          |  |                                     |   |          |                   |  |   |                            |  |  |                            |          |  |                           |   |        |  |  |   |       | 
|Commercial Mortgages (Owner occupied)     |  |                     | 1,603,830 |  |                                     |   | 1,603,830 |                   |  |   | 140,796                     |  |  |                            | 1,284,441 |  |                           |   | 35,118  |  |  |   | 28,884 | 
|Commercial & industrial                   |  |                     | 513,008   |  |                                     |   | 593,740   |                   |  |   | 176,832                     |  |  |                            | 486,690   |  |                           |   |        |  |  |   | 316    | 
|Consumer (2)                              |  |                     | 94,210    |  |                                     |   | 94,210    |                   |  |   | 94,210                      |  |  |                            | 62,807    |  |                           |   | 4,050   |  |  |   | 4,050  | 
|                                          |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 
|                                          |  | $                   | 8,403,498 |  |                                     | $ | 8,978,977 |                   |  | $ | 1,804,490                   |  |  | $                          | 7,547,635 |  |                           | $ | 108,196 |  |  | $ | 83,601 | 
|                                          |  |                     |           |  |                                     |   |           |                   |  |   |                             |  |  |                            |           |  |                           |   |         |  |  |   |        | 



|(1) | Junior mortgages include equity lines
|--- | -------------------------------------

|(2) | includes credit cards
|--- | ---------------------



12



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##### Table of Contents

IMPAIRED LOANS

As of December 31, 2011



|                                          |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|----------------------------------------- |  | ------------------ | --------- |  | -------------------------------- | - | --------- | ---------------- |  | - | ------------------------- |  |  | ------------------------ | --------- |  | ----------------------- | - | ------- |  |  | - | ------- | 
|                                          |  | RecordedInvestment |           |  | CustomersUnpaidPrincipalBalance |   |           | RelatedAllowance |  |   | AverageRecordedInvestment |  |  | InterestIncomeRecognized |           |  | InterestIncomeCollected |  
|With no related allowance:                |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|Construction, land & land development     |  | $                  |          |  |                                  | $ |          |                  |  | $ |                          |  |  | $                        |          |  |                         | $ |        |  |  | $ |        | 
|Farmland                                  |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|Residential First Mortgages               |  |                    | 901,132   |  |                                  |   | 901,132   |                  |  |   |                          |  |  |                          | 726,266   |  |                         |   | 52,293  |  |  |   | 52,378  | 
|Residential Junior Mortgages              |  |                    | 131,226   |  |                                  |   | 131,226   |                  |  |   |                          |  |  |                          | 66,245    |  |                         |   | 7,325   |  |  |   | 6,208   | 
|Commercial Mortgages (Non-owner occupied) |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|Commercial Mortgages (Owner occupied)     |  |                    | 258,875   |  |                                  |   | 258,875   |                  |  |   |                          |  |  |                          | 208,153   |  |                         |   | 14,311  |  |  |   | 14,309  | 
|Commercial & industrial                   |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|Consumer                                  |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|                                          |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|                                          |  | $                  | 1,291,233 |  |                                  | $ | 1,291,233 |                  |  | $ |                          |  |  | $                        | 1,000,665 |  |                         | $ | 73,929  |  |  | $ | 72,895  | 
|                                          |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|With an allowance recorded:               |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|Construction, land & land development     |  | $                  | 408,640   |  |                                  | $ | 408,640   |                  |  | $ | 119,500                   |  |  | $                        | 355,822   |  |                         | $ | 3,865   |  |  | $ | 3,260   | 
|Farmland                                  |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|Residential First Mortgages               |  |                    | 2,286,015 |  |                                  |   | 2,303,167 |                  |  |   | 726,552                   |  |  |                          | 1,254,593 |  |                         |   | 100,550 |  |  |   | 95,208  | 
|Residential Junior Mortgages              |  |                    | 1,659,632 |  |                                  |   | 1,961,728 |                  |  |   | 465,121                   |  |  |                          | 1,451,332 |  |                         |   | 14,483  |  |  |   | 9,846   | 
|Commercial Mortgages (Non-owner occupied) |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|Commercial Mortgages (Owner occupied)     |  |                    | 1,188,403 |  |                                  |   | 1,191,301 |                  |  |   | 244,318                   |  |  |                          | 891,128   |  |                         |   | 48,600  |  |  |   | 44,593  | 
|Commercial & industrial                   |  |                    | 560,197   |  |                                  |   | 610,822   |                  |  |   | 236,650                   |  |  |                          | 356,905   |  |                         |   | 15,982  |  |  |   | 14,548  | 
|Consumer                                  |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|                                          |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|                                          |  | $                  | 6,102,887 |  |                                  | $ | 6,475,658 |                  |  | $ | 1,792,141                 |  |  | $                        | 4,309,779 |  |                         | $ | 183,480 |  |  | $ | 167,455 | 
|                                          |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|Total Impaired Loans:                     |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|Construction, land & land development     |  | $                  | 408,640   |  |                                  | $ | 408,640   |                  |  | $ | 119,500                   |  |  | $                        | 355,822   |  |                         | $ | 3,865   |  |  | $ | 3,260   | 
|Farmland                                  |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|Residential First Mortgages               |  |                    | 3,187,147 |  |                                  |   | 3,204,299 |                  |  |   | 726,552                   |  |  |                          | 1,980,859 |  |                         |   | 152,843 |  |  |   | 147,586 | 
|Residential Junior Mortgages              |  |                    | 1,790,858 |  |                                  |   | 2,092,954 |                  |  |   | 465,121                   |  |  |                          | 1,517,577 |  |                         |   | 21,808  |  |  |   | 16,054  | 
|Commercial Mortgages (Non-owner occupied) |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|Commercial Mortgages (Owner occupied)     |  |                    | 1,447,278 |  |                                  |   | 1,450,176 |                  |  |   | 244,318                   |  |  |                          | 1,099,281 |  |                         |   | 62,911  |  |  |   | 58,902  | 
|Commercial & industrial                   |  |                    | 560,197   |  |                                  |   | 610,822   |                  |  |   | 236,650                   |  |  |                          | 356,905   |  |                         |   | 15,982  |  |  |   | 14,548  | 
|Consumer                                  |  |                    |          |  |                                  |   |          |                  |  |   |                          |  |  |                          |          |  |                         |   |        |  |  |   |        | 
|                                          |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 
|                                          |  | $                  | 7,394,120 |  |                                  | $ | 7,766,891 |                  |  | $ | 1,792,141                 |  |  | $                        | 5,310,444 |  |                         | $ | 257,409 |  |  | $ | 240,350 | 
|                                          |  |                    |           |  |                                  |   |           |                  |  |   |                           |  |  |                          |           |  |                         |   |         |  |  |   |         | 

At June 30, 2012, the Bank had five relationships that constitute troubled debt restructurings (TDR),
totaling $3.8 million. One relationship involves seven loans totaling $1.8 million, which is included above in the commercial and industrial segment; the construction, land and land development segment; and the residential junior mortgages segment.
These loans had defaulted and have been nonaccruing since October of 2010, and were modified during the second quarter of 2011 to provide cross-collateralization between loans and reduced payments. Three relationships each involved residential first
mortgages for a total of $1.5 million in principal balances. Two of these three with balances of $804,064 as of June 30, 2012, were restructured during 2011. The third relationship was added in 2012, which involved a residential first mortgage
totaling $649,485, and a consumer loan totaling $94,210. In the second quarter of 2012, a commercial owner occupied mortgage was added totaling $479,115. Of these five relationships, two are non-accruing related to bankruptcies, one is non-accruing
due to default, and two are performing according to modified terms.

At December 31, 2011, the Bank had four relationships that
constituted TDRs, totaling $3.3 million. One of these relationships, with a balance of $451,755, was dispensed via foreclosure in the second quarter of 2012, resulting in a charge-off of $188,122.

At June 30, 2012 and December 31, 2011, nonaccruing loans excluded from impaired loan disclosure totaled $453,210 and $681,592, respectively.
If interest on these nonaccruing loans had been accrued, such income would have approximated $4,056 during the six months ended June 30, 2012 and $32,560 during the year ended December 31, 2011.



13



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##### Table of Contents

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 |           |  | Six Months Ended |  
|                               |  | June 30, 2012      |           |  | June 30, 2011    |   |      | June 30, 2012 |  |  | June 30, 2011    | 
|(Unaudited)                    |  | AverageShares      |           |  | Per 
ShareAmount |   |      | AverageShares |  |  | Per 
shareAmount |  |  | AverageShares |      |  | Per 
ShareAmount |  |           | AverageShares |  |   | Per 
ShareAmount | 
|                               |  |                    |           |  |                  |   |     
|Basic earnings per share       |  |                    | 2,610,856 |  |                  | $ | 0.04 |               |  |  | 2,605,856        |  |  | $             | 0.03 |  |                  |  | 2,610,856 |               |  | $ | 0.08             |  |  |  | 2,605,856 |  |  | $ | 0.08 | 
|                               |  |                    |           |  |                  |   |      |              
|Effect of dilutive securities: |  |                    |           |  |                  |   |      |               |  |  |                  |  |  |               |      |  |                  |  |           |               |  |   |                  |  |  |  |           |  |  |   |      | 
|Stock options                  |  |                    | 3,021     |  |                  |   |      |               |  |  |                 |  |  |               |      |  |                  |  | 1,960     |               |  |   |                  |  |  |  |          |  |  |   |      | 
|                               |  |                    |           |  |                  |   |      |              
|Diluted earnings per share     |  |                    | 2,613,877 |  |                  | $ | 0.04 |               |  |  | 2,605,856        |  |  | $             | 0.03 |  |                  |  | 2,612,816 |               |  | $ | 0.08             |  |  |  | 2,605,856 |  |  | $ | 0.08 | 

As of June 30, 2012 and 2011, options on 122,056 and 206,388 shares, respectively, were not included in computing
diluted earnings per share, because their effects were anti-dilutive.

Note 6: Stock-Based Compensation

Incremental stock-based compensation expense recognized was $2,924 during the first six months of 2012 and $7,948 for the same period
in 2011. There was no unrecognized compensation expense related to stock options as of June 30, 2012. As of October 6, 2011, 5000 shares of the Companys common stock was granted to the new Chief Executive Officer. These shares
vested immediately and $16,000 in stock compensation expense was posted on that date

Stock option compensation expense is the estimated fair
value of options granted using the Black-Scholes Model amortized on a straight-line basis over the vesting period of the award. There were no options granted and no options exercised during the six month period ended June 30, 2012.

Stock option plan activity for the six months ended June 30, 2012, is summarized below:



|                               |  |        |         |   |                                |   |       |                                     |  |  |                             |  |  |   |       | 
|------------------------------ |  | ------ | ------- | - | ------------------------------ | - | ----- | ----------------------------------- |  |  | --------------------------- |  |  | - | ----- | 
|                               |  | Shares |         |   | Weighted 
AverageExercisePrice |   |       | RemainingContractualLife (in years) |  |  | AggregateIntrinsicValue (1) | 
|Options outstanding, January 1 |  |        | 197,423 |   |                                | $ | 10.00 |                                     |  |  | 5.8                         |  |  |   |       | 
|Granted                        |  |        |        |   |                                |   |      |                                     |  |  |                             |  |  |   |       | 
|Forfeited                      |  |        | (47,645 | ) |                                |   | 9.17  |                                     |  |  |                             |  |  |   |       | 
|Exercised                      |  |        |        |   |                                |   |      |                                     |  |  |                             |  |  |   |       | 
|Expired                        |  |        | (17,222 | ) |                                |   | 15.34 |                                     |  |  |                             |  |  |   |       | 
|                               |  |        |         |   |                                |   |       |                                     |  |  |                             |  |  |   |       | 
|Options outstanding, June 30   |  |        | 132,556 |   |                                |   | 9.60  |                                     |  |  | 5.8                         |  |  | $ | 9,963 | 
|                               |  |        |         |   |                                |   |       |                                     |  |  |                             |  |  |   |       | 
|Options exercisable, June 30   |  |        | 132,556 |   |                                |   | 9.60  |                                     |  |  | 5.8                         |  |  | $ | 9,963 | 
|                               |  |        |         |   |                                |   |       |                                     |  |  |                             |  |  |   |       | 



|(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 June 30, 2012. This amount changes based on changes in the market value of the
Companys common 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 June 30, 2012 and December 31, 2011, 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 was tested for impairment as of September 30, 2010, and no impairment was determined to
exist. Based on Accounting Standards Update (ASU) 2011-08, which the Company chose to adopt early, a qualitative assessment performed as of September 30, 2011 indicated that no further impairment testing was necessary for 2011.
Considerations of the qualitative assessment included macroeconomic conditions, industry and market environments, financial performance of the five branches, and changes in key personnel, customers or strategy, none of which cause management to
believe that the goodwill is impaired.



14



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##### Table of Contents

Note 8: Employee Benefit Plans

The Company has a non-contributory, defined benefit pension plan for all full-time employees over 21 years of age. Under this cash
balance plan, until December 31, 2012, the account balance for each participant will grow each year with annual pay credits based on age and years of service and monthly interest credits based on an amount established each year by the
Companys Board of Directors. Effective December 31, 2012, this plan will be frozen. Subsequently, annual pay credits will be discontinued, but each participants account balance will continue to grow based on monthly interest
credits. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

The
Company sponsors a postretirement benefit plan covering current and future retirees who acquire age 55 and 10 years of service or age 65 and 5 years of service. The post-retirement benefit plan provides coverage toward a retirees eligible
medical and life insurance benefits expenses.

Components of Net Periodic Benefit Cost

(Unaudited)



|                                                                   |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 
|------------------------------------------------------------------ |  | ---------------- | -------- | - | ------------------------ | - | -------- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                   |  | Pension Benefits |          |   | Post Retirement Benefits |  
|Six months ended June 30,                                          |  | 2012             |          |   | 2011                     |   |          | 2012 |  |   | 2011   | 
|Service cost                                                       |  | $                | 127,142  |   |                          | $ | 137,474  |      |  | $ | 13,001 |  |  | $ | 11,141 | 
|Interest cost                                                      |  |                  | 89,149   |   |                          |   | 103,988  |      |  |   | 14,978 |  |  |   | 15,886 | 
|Expected return on plan assets                                     |  |                  | (160,932 | ) |                          |   | (176,574 | )    |  |   |       |  |  |   |       | 
|Amortization of unrecognized prior service cost                    |  |                  | (26,981  | ) |                          |   | (26,982  | )    |  |   |       |  |  |   |       | 
|Amortization of unrecognized net loss                              |  |                  | 35,720   |   |                          |   | 21,210   |      |  |   | 1,457  |  |  |   | 84     | 
|Remaining amortization of unrecognized net loss due to settlements |  |                  | 112,313  |   |                          |   |         |      |  |   |       |  |  |   |       | 
|                                                                   |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 
|Net gain due to curtailment                                        |  |                  | (191,177 | ) |                          |   |         |      |  |   |       |  |  |   |       | 
|                                                                   |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 
|Amortization of transition obligation                              |  |                  |         |   |                          |   |         |      |  |   | 1,471  |  |  |   | 1,456  | 
|                                                                   |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 
|Net periodic benefit cost                                          |  | $                | (14,766  | ) |                          | $ | 59,116   |      |  | $ | 30,907 |  |  | $ | 28,567 | 
|                                                                   |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 

The Company expects to make no contribution to its pension plan and $22,061 to its post-retirement benefit plan in 2012.
The Company has contributed $7,655 toward the post-retirement plan during the first six months of 2012.

Note 9: Long Term Debt

On June 30, 2012, the Bank had FHLB debt consisting of two advances. The FHLB holds an option to terminate the $10 million advance
on any quarterly payment date. The $10 million advance has an early conversion option which gives the FHLB the option to convert, in whole only, into a one-month LIBOR-based floating rate advance, effective on any quarterly payment date. If the FHLB
elects to convert, the Bank may elect to terminate, in whole or in part, without a prepayment fee.

Advances on the FHLB lines are secured by
a blanket lien on qualified 1 to 4 family residential real estate loans with a lendable collateral value of $55.8 million. Immediate available credit, as of June 30, 2012, was $40.0 million. With additional collateral, the total line of credit
is worth $64.7 million, with $38.8 million available.

The two advances are shown in the following table.



|                  |  |         |            |  |          |  |           |                      |  |  |              |   |  |  |           | 
|----------------- |  | ------- | ---------- |  | -------- |  | --------- | -------------------- |  |  | ------------ | - |  |  | --------- | 
|Description       |  | Balance |            |  | Acquired |  |           | CurrentInterest Rate |  |  | MaturityDate |  
|Convertible       |  | $       | 10,000,000 |  |          |  | 9/12/2006 |                      |  |  | 4.23         | % |  |  | 9/12/2016 | 
|Fixed Rate Hybrid |  |         | 5,000,000  |  |          |  | 5/20/2011 |                      |  |  | 2.69         | % |  |  | 5/20/2014 | 
|                  |  |         |            |  |          |  |           |                      |  |  |              |   |  |  |           | 
|                  |  | $       | 15,000,000 |  |          |  |           |                      |  |  |              |   |  |  |           | 
|                  |  |         |            |  |          |  |           |                      |  |  |              |   |  |  |           | 

Note 10: Fair Value Measurements

The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting
guidance 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.

Authoritative accounting guidance 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.



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

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

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

The following table presents the balances of financial
assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:



|                                |  |                                |            |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |   | 
|------------------------------- |  | ------------------------------ | ---------- |  | --------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | - | 
|                                |  |                                |            |  | Fair Value Measurements at June 30, 2012 Using            |  
|Description                     |  | Balance as ofJune 30, 2012     |            |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|                                |  | (unaudited)                    |            |  |                                                           |   |   |                                           |  |   |                                        | 
|U. S. Government agencies       |  | $                              | 7,785,696  |  |                                                           | $ |  |                                           |  | $ | 7,785,696                              |  |  | $ |  | 
|State and municipal obligations |  |                                | 26,503,615 |  |                                                           |   |  |                                           |  |   | 26,503,615                             |  |  |   |  | 
|                                |  |                               
|                                |  |                                |            |  | Fair Value Measurements at December 31, 2011 Using        |  
|Description                     |  | Balance as ofDecember 31, 2011 |            |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|U. S. Government agencies       |  | $                              | 8,795,066  |  |                                                           | $ |  |                                           |  | $ | 8,795,066                              |  |  | $ |  | 
|State and municipal obligations |  |                                | 33,004,055 |  |                                                           |   |  |                                           |  |   | 33,004,055                             |  |  |   |  | 

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

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



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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 are measured at the lower of their carrying value or fair value less estimated 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. Management believes that the fair value component in its
valuation follows the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) 820 and that current real estate appraisals support a Level 2 valuation.

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



|                                           |  |                               |           |  |                                                           |   |   |                                            |  |   |                                        |  |  |   |           | 
|------------------------------------------ |  | ----------------------------- | --------- |  | --------------------------------------------------------- | - | - | ------------------------------------------ |  | - | -------------------------------------- |  |  | - | --------- | 
|                                           |  |                               |           |  | Fair value measurements at June 30, 2012 using            |  
|Description                                |  | Balance as ofJune 30, 2012    |           |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level
 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|                                           |  | (unaudited)                   |           |  |                                                           |   |   |                                            |  |   |                                        | 
|Impaired Loans, net of valuation allowance |  | $                             | 3,761,833 |  |                                                           | $ |  |                                            |  | $ | 1,618,409                              |  |  | $ | 2,143,424 | 
|Other real estate owned                    |  | $                             | 2,729,966 |  |                                                           | $ |  |                                            |  | $ | 2,729,966                              |  |  | $ |          | 
|                                           |  |                              
|                                           |  |                               |           |  | Fair value measurements at December 31, 2011 using        |  
|Description                                |  | Balance as ofDecember 31,2011 |           |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level
 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Impaired Loans, net of valuation allowance |  | $                             | 4,310,746 |  |                                                           | $ |  |                                            |  | $ | 2,057,314                              |  |  | $ | 2,253,432 | 
|Other real estate owned                    |  | $                             | 2,279,935 |  |                                                           | $ |  |                                            |  | $ | 2,279,935                              |  |  | $ |          | 



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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.



|                                            |  |               |             |  |                                                           |   |            |                                            |  |   |                                        |  |  |   |           | 
|------------------------------------------- |  | ------------- | ----------- |  | --------------------------------------------------------- | - | ---------- | ------------------------------------------ |  | - | -------------------------------------- |  |  | - | --------- | 
|                                            |  |               |             |  | Fair Value Measurements at June 30, 2012 Using            |  
|June 30, 2012 (unaudited)                   |  | CarryingValue |             |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |            | SignificantOtherObservableInputs(Level
 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Assets:                                     |  |               |             |  |                                                           |   |            |                                            |  |   |                                        |  |  |   |           | 
|Cash and due from banks                     |  | $             | 13,963,464  |  |                                                           | $ | 13,963,464 |                                            |  | $ |                                       |  |  | $ |          | 
|Interest-bearing deposits                   |  |               | 13,170,952  |  |                                                           |   |           |                                            |  |   | 13,170,952                             |  |  |   |          | 
|Federal funds sold                          |  |               | 230,295     |  |                                                           |   |           |                                            |  |   | 230,295                                |  |  |   |          | 
|Securities available-for-sale               |  |               | 34,289,311  |  |                                                           |   |           |                                            |  |   | 34,289,311                             |  |  |   |          | 
|Restricted securities                       |  |               | 1,675,300   |  |                                                           |   |           |                                            |  |   | 1,675,300                              |  |  |   |          | 
|Loans, net                                  |  |               | 238,149,621 |  |                                                           |   |           |                                            |  |   | 239,720,381                            |  |  |   | 2,143,424 | 
|Accrued interest receivable                 |  |               | 1,190,789   |  |                                                           |   |           |                                            |  |   | 1,190,789                              |  |  |   |          | 
|                                            |  |               |             | 
|Liabilities:                                |  |               |             |  |                                                           |   |            |                                            |  |   |                                        |  |  |   |           | 
|Non-interest-bearing deposits               |  | $             | 46,056,610  |  |                                                           | $ |           |                                            |  | $ | 46,056,610                             |  |  | $ |          | 
|Savings and other interest-bearing deposits |  |               | 107,990,005 |  |                                                           |   |           |                                            |  |   | 107,990,005                            |  |  |   |          | 
|Time deposits                               |  |               | 114,369,326 |  |                                                           |   |           |                                            |  |   | 117,465,510                            |  |  |   |          | 
|Securities sold under repurchase agreements |  |               | 9,072,400   |  |                                                           |   |           |                                            |  |   | 9,072,400                              |  |  |   |          | 
|FHLB advances                               |  |               | 15,000,000  |  |                                                           |   |           |                                            |  |   | 16,599,811                             |  |  |   |          | 
|Accrued interest payable                    |  |               | 159,473     |  |                                                           |   |           |                                            |  |   | 159,473                                |  |  |   |          | 
|                                            |  |              
|                                            |  |               |             |  | Fair Value Measurements at December 31, 2011 Using        |  
|December 31, 2011                           |  | CarryingValue |             |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |            | SignificantOtherObservableInputs(Level
 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Assets:                                     |  |               |             |  |                                                           |   |            |                                            |  |   |                                        |  |  |   |           | 
|Cash and due from banks                     |  | $             | 4,728,895   |  |                                                           | $ | 4,728,895  |                                            |  | $ |                                       |  |  | $ |          | 
|Interest-bearing deposits                   |  |               | 10,369,075  |  |                                                           |   |           |                                            |  |   | 10,369,075                             |  |  |   |          | 
|Federal funds sold                          |  |               | 2,136,375   |  |                                                           |   |           |                                            |  |   | 2,136,375                              |  |  |   |          | 
|Securities available-for-sale               |  |               | 41,799,121  |  |                                                           |   |           |                                            |  |   | 41,799,121                             |  |  |   |          | 
|Restricted securities                       |  |               | 1,991,200   |  |                                                           |   |           |                                            |  |   | 1,991,200                              |  |  |   |          | 
|Loans, net                                  |  |               | 233,501,821 |  |                                                           |   |           |                                            |  |   | 231,681,647                            |  |  |   | 2,253,432 | 
|Accrued interest receivable                 |  |               | 1,161,191   |  |                                                           |   |           |                                            |  |   | 1,161,191                              |  |  |   |          | 
|                                            |  |               |             | 
|Liabilities:                                |  |               |             |  |                                                           |   |            |                                            |  |   |                                        |  |  |   |           | 
|Non-interest-bearing deposits               |  | $             | 43,803,349  |  |                                                           | $ |           |                                            |  | $ | 43,803,349                             |  |  | $ |          | 
|Savings and other interest-bearing deposits |  |               | 105,269,889 |  |                                                           |   |           |                                            |  |   | 105,269,889                            |  |  |   |          | 
|Time deposits                               |  |               | 116,444,867 |  |                                                           |   |           |                                            |  |   | 118,668,679                            |  |  |   |          | 
|Securities sold under repurchase agreements |  |               | 5,277,158   |  |                                                           |   |           |                                            |  |   | 5,277,158                              |  |  |   |          | 
|FHLB advances                               |  |               | 15,000,000  |  |                                                           |   |           |                                            |  |   | 16,651,084                             |  |  |   |          | 
|Accrued interest payable                    |  |               | 168,628     |  |                                                           |   |           |                                            |  |   | 168,628                                |  |  |   |          | 



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The fair values shown do not necessarily represent the amounts which would be received on immediate
settlement of the instruments. Authoritative accounting guidance excludes certain financial instruments and all non-financial instruments 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, accrued interest,
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 fair values measured utilizing independent valuation techniques of identical or
similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Therefore carrying value equals market value. The carrying value of restricted securities approximates fair value based on the
redemption provisions.

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 the FHLB advances is estimated by discounting the 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 June 30, 2012
and December 31, 2011, 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

The Company remains
energized under its new leadership and management is continuing the implementation of numerous plans and projects to improve earnings which are beginning to show results. The reduction in work force of 15% of total full-time employees completed in
January of 2012 is showing related salary and benefit expense reductions. Under the Banks new residential lending manager, secondary market lending fee income dramatically improved this quarter. New loan products are being introduced in August
2012, which we anticipate will allow us to put more loans on our balance sheet. Our Board of Directors has approved the freezing of our cash balance pension plan effective December 31, 2012, which will save more than $100 thousand this year.
Our net interest margin continues to improve. The Banks new Investment Advantage representative is bringing in new customers and contributing noticeably to the improvement in non-deposit product fee income. The Banks new Overdraft
Privilege Program, which is offered to customers who demonstrate responsible management of their funds, is contributing improvements in fees on deposit accounts. Other projects are beginning to contribute to improved fee income. We continue our
traditional conservative philosophy and service to our community.

Although our non-performing assets ratios remain favorable compared to
peers, we remain frustrated with the agonizingly slow economic growth and its related effects on our borrowers. The level of non-performing assets and impaired loans remains a primary concern.

Significant efforts are made to prevent foreclosures, but some are unavoidable, and although some Other Real Estate Owned (OREO) properties
have been sold, others have been added, leaving the balance of OREO at around $2.8 million. These foreclosed properties continue to stress earnings due to repair and maintenance expenses and reductions in book value.

Non-accruing loans, which no longer accrue interest income, have grown to $7.3 million. On a positive note, though, balances on loans considered impaired
that are not already non-accruing decreased to $1.5 million as of June 30, 2012 compared to $2.6 million on December 31, 2011.

Charge-offs against the Allowance for Loan Losses (ALL) are higher so far in 2012 compared to the same period in 2011, causing related
increases in provision for loan losses expense. The vast majority of these charged off loans were included in the ALL as specific reserves on impaired loans. As the local market for real estate appears to have stabilized, we remain cautiously
optimistic that the worst levels of foreclosures and charge-offs are behind us.

Like all financial institutions holding insured domestic
deposits, one of the major challenges to earnings is Federal Deposit Insurance Corporation (FDIC) insurance premiums for those deposits. This insurance remains historically high as the FDIC rebuilds the Deposit Insurance Fund. As a
result, the Bank continues to experience elevated levels of FDIC assessment expense.

Interest margins continue to improve. Although interest
rates remain at historic lows, management continues to mitigate declines in interest income with larger reductions in interest expense, resulting in increases in net interest income. Loan yields continue to decline, contributing to the reduced
interest income, which is also negatively impacted to a lesser degree by nonaccruing loans. However, management has systematically reduced deposit rates to reflect the current rate environment, creating compensating reductions in costs of funds and
interest expense. The $15 million paydown in Federal Home Loan Bank of Atlanta (FHLB) advances in the second and third quarters of 2011 contributed a material reduction in interest expense and cost of funds. Looking forward, as time
deposits continue to mature and new ones are issued at lower rates, reductions in interest expense are expected to continue.

As market
interest rates have continued to decline, unrealized gains on securities in the Banks investment portfolio continue to increase. This has allowed us to sell securities and realize gains to improve earnings and mitigate much of the
non-performing asset challenges. These sales of securities contributed the majority of the increase in cash levels this quarter. As a result, our liquidity levels are noticeably higher and more than sufficient.

Finally, our core capital levels and regulatory ratios remain solid. According to the Banks regulators, the Bank remains well
capitalized under supervisory guidelines. The Board and management are closely monitoring the developments related to the Consumer Financial Protection Bureaus proposed rules for Basel III capital requirements.

For more information, visit the Companys website at www.baybanks.com. Information contained on the Companys website is not a part of this
report.

CRITICAL ACCOUNTING POLICIES

GENERAL. The Companys financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, financial information that is
based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or
relieving a liability. For example, historical loss factors are 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 those transactions could change.

ALLOWANCE FOR LOAN LOSSES. The ALL is an estimate which reflects managements judgment of probable losses inherent in the loan portfolio. The ALL is
based on two basic principles of accounting: (1) that losses be accrued when they are probable of occurring and estimable and (2) 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 ALL is increased by charges to income, through the provision for loan losses expense, and decreased by charge-offs (net of recoveries).



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##### Table of Contents

Management calculates the ALL and evaluates it for adequacy every quarter. This process is lengthy and
thorough. The calculation is based on information such as past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrowers ability to repay, the estimated value of any underlying collateral,
and current economic conditions. The quarterly process includes consideration of certain borrowers payment histories compared to the terms of each loan agreement and other adverse factors such as divorce, loss of employment income, and
bankruptcy. Each loan is then given a risk grade which represents the extent (or lack) of weakness. This grading process occurs dynamically throughout each quarter as new information is learned about each borrowing relationship.

The ALL calculation has three main elements. First, large commercial and construction loan relationships with adverse risk rating grades, in bankruptcy,
nonaccruing, or more than 30 days past due are evaluated for impairment. For loans determined to be impaired, a specific allowance is provided when the loan balance exceeds its discounted collateral value. Real estate collateral value is determined
based on appraisals done by third parties. At such time as a loan is assigned to a watch grade, if the most recent appraisal is more than two years old, a new appraisal will generally be ordered. Discounts applied to collateral include
estimated realtor commissions on real estate (in consideration of selling costs should the Bank end up owning the property), and industry-standard reductions in values for accounts receivable, inventory and other varying forms of collateral.

Second, loans not deemed impaired under the first element plus smaller commercial loans, residential mortgages and consumer loans are
collectively evaluated in groups of homogenous pools called segments, then a historical loss factor is applied to each segment of loans. The historical loss factor for each segment is calculated by averaging the losses over the prior six quarters.

Finally, a set of qualitative factors, such as changes in credit quality, changes in loan staff experience, changes in loan policies and
underwriting guidelines, and changes in national and local economic conditions, is used to estimate the value of intrinsic risk in each of the segments.

The summation of these three elements results in the total estimated ALL. Management may also include an unallocated component to cover uncertainties in the level of probable losses. This estimate is
inherently subjective and actual losses could be greater or less than the estimates. For a more detailed description of the ALL, see Note 1 to the Consolidated Financial Statements in Item 8 of the previously filed Form 10-K for the year ended
December 31, 2011.

EARNINGS SUMMATION

For the six months ended June 30, 2012, net income was $203 thousand, a decrease of 5.9% compared to the $215 thousand for the similar period in 2011. Diluted earnings per average share for the six
months ended June 30, 2012 remained at $0.08, no change from the same period in 2011; annualized return on average assets was 0.13% for both the six months ended June 30, 2012 and 2011; and annualized return on average equity was 1.44% and
1.58%, respectively.

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. Although interest income is down by $388 thousand in the first six months of 2012 compared to the same period
in 2011, interest expense is down by $501 thousand, thereby increasing the level of net interest income by $113 thousand, or 2.2%. The $388 thousand decrease in interest income was driven by lower average loan balances, but more due to reduced loan
yields. The $501 thousand decrease in interest expense was primarily due to reduced rates on savings accounts and time deposits and reduced FHLB borrowings.



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Net Interest Income Analysis (unaudited)



|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|------------------------------------------- |  | -------------------------- | ------- |  | -------------------------- | - | ----- | ---------- |  |  | -------------- | - |  | -------------- | ------- |  | ---------- | - | ----- |  |  |  | ---- | -
|                                            |  | Six months ended 6/30/2012 |         |  | Six months ended 6/30/2011 |  
|(Dollars in Thousands)                      |  | AverageBalance             |         |  | Income/Expense             |   |       | Yield/Cost |  |  | AverageBalance |   |  | Income/Expense |         |  | Yield/Cost |  
|INTEREST EARNING ASSETS:                    |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Taxable investments                         |  | $                          | 28,769  |  |                            | $ | 381   |            |  |  | 2.65           | % |  | $              | 25,244  |  |            | $ | 394   |  |  |  | 3.12 | %
|Tax-exempt investments (1)                  |  |                            | 11,331  |  |                            |   | 202   |            |  |  | 3.55           | % |  |                | 6,865   |  |            |   | 189   |  |  |  | 5.52 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Total investments                           |  |                            | 40,100  |  |                            |   | 583   |            |  |  | 2.91           | % |  |                | 32,109  |  |            |   | 583   |  |  |  | 3.63 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|                                            |  |                            |         |  |                            |  
|Gross loans (2)                             |  |                            | 240,739 |  |                            |   | 6,489 |            |  |  | 5.40           | % |  |                | 244,560 |  |            |   | 6,861 |  |  |  | 5.62 | %
|Interest-bearing deposits                   |  |                            | 12,844  |  |                            |   | 16    |            |  |  | 0.24           | % |  |                | 20,289  |  |            |   | 24    |  |  |  | 0.24 | %
|Federal funds sold                          |  |                            | 2,366   |  |                            |   | 3     |            |  |  | 0.22           | % |  |                | 5,557   |  |            |   | 5     |  |  |  | 0.19 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Total Interest Earning Assets               |  | $                          | 296,049 |  |                            | $ | 7,091 |            |  |  | 4.79           | % |  | $              | 302,515 |  |            | $ | 7,473 |  |  |  | 4.94 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|INTEREST-BEARING LIABILITIES:               |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Savings deposits                            |  | $                          | 47,838  |  |                            | $ | 101   |            |  |  | 0.43           | % |  | $              | 48,589  |  |            | $ | 200   |  |  |  | 0.83 | %
|NOW deposits                                |  |                            | 38,137  |  |                            |   | 40    |            |  |  | 0.21           | % |  |                | 38,380  |  |            |   | 49    |  |  |  | 0.26 | %
|Time deposits => $100,000                   |  |                            | 51,687  |  |                            |   | 593   |            |  |  | 2.31           | % |  |                | 47,920  |  |            |   | 590   |  |  |  | 2.48 | %
|Time deposits < $100,000                    |  |                            | 63,789  |  |                            |   | 657   |            |  |  | 2.08           | % |  |                | 64,485  |  |            |   | 736   |  |  |  | 2.30 | %
|Money market deposit accounts               |  |                            | 23,000  |  |                            |   | 74    |            |  |  | 0.65           | % |  |                | 20,289  |  |            |   | 79    |  |  |  | 0.79 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Total Deposits                              |  | $                          | 224,451 |  |                            | $ | 1,465 |            |  |  | 1.32           | % |  | $              | 219,663 |  |            | $ | 1,654 |  |  |  | 1.52 | %
|                                            |  |                            |         |  |                            |  
|Securities sold under repurchase agreements |  | $                          | 6,060   |  |                            | $ | 8     |            |  |  | 0.27           | % |  | $              | 6,747   |  |            | $ | 7     |  |  |  | 0.21 | %
|FHLB advances                               |  |                            | 15,000  |  |                            |   | 282   |            |  |  | 3.78           | % |  |                | 28,790  |  |            |   | 596   |  |  |  | 4.17 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Total Interest-Bearing Liabilities          |  | $                          | 245,511 |  |                            | $ | 1,755 |            |  |  | 1.44           | % |  | $              | 255,200 |  |            | $ | 2,257 |  |  |  | 1.78 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Net interest income and net interest margin |  |                            |         |  |                            | $ | 5,336 |            |  |  | 3.60           | % |  |                |         |  |            | $ | 5,215 |  |  |  | 3.45 | %
|                                            |  |                            |         |  |                            |   |       |            |  |  |                |   |  |                |         |  |            |   |       |  |  |  |      |  
|Net interest rate spread                    |  |                            |         |  |                            |   |       |            |  |  | 3.35           | % |  |                |         |  |            |   |       |  |  |  | 3.16 | %

Notes:



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

|(2) | Includes VISA program and nonaccrual loans.
|--- | -------------------------------------------

The annualized net interest margin was 3.60% for the six months ended June 30, 2012, up from 3.45% for the same period in 2011. The main reason for
this improvement is reductions in FHLB advances. Unfortunately, because interest rates remain at historic lows, new loans are generally added to the loan portfolio at lower yields than the average yield of the portfolio as a whole. Combined with
paydowns and payoffs of generally higher yielding loans, and a smaller loan portfolio, interest income has continued to decline. However, deposit rates have declined to reduce the cost of funding and interest expense. One FHLB advance matured during
the second quarter of 2011, allowing management to reduce the level of FHLB borrowings at materially lower interest rates. Two more FHLB advances were prepaid in August of 2011. These reductions in rates and balances of interest bearing liabilities
have more than mitigated the declines in interest income, thus improving net interest income and the net interest margin. Also, since December 31, 2011, balances in checking, savings and money market accounts have increased while time deposit
balances have declined, creating an improvement in the cost of the deposit mix. Further reductions in the cost of funds are anticipated as time deposits mature and are replaced at lower rates. As long as market rates remain low, this trend is
expected to continue, but at a slower pace, and to have positive effects on the net interest margin.

Average interest-earning assets
decreased 2.1% to $296.0 million for the six months ended June 30, 2012, as compared to $302.5 million for the six months ended June 30, 2011. Average interest-earning assets as a percent of total average assets remained 92.0% for the six
months ended June 30, 2012 as compared to the same period of 2011. As shown in the table above, for the six months ended June 30, 2012, the loan portfolio, with $240.7 million, is the largest category of interest-earning assets.



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Average interest-bearing liabilities decreased 3.8% to $245.5 million for the six months ended June 30,
2012, as compared to $255.2 million for the six months ended June 30, 2011. The largest category of interest-bearing liabilities is time deposits, with combined average balances of $115.5 million for the six months ended June 30, 2012, up
from $112.4 million for the similar period in 2011.

The net interest spread, which is the difference between the annualized yield on earning
assets and the annualized cost of interest-bearing liabilities, increased to 3.35% for the six months ended June 30, 2012 compared to 3.16% for the same period in 2011.

LIQUIDITY

Liquidity represents an institutions ability to meet present and future
financial obligations (such as commitments to fund loans) through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with other
banks, federal funds sold and investments and loans maturing within one year. The Companys ability to obtain deposits and purchase funds at favorable rates are major factors for liquidity. Management believes that the Company maintains overall
liquidity that is sufficient to satisfy its depositors requirements and to meet its customers credit needs.

At June 30,
2012, cash totaled $14.0 million, federal funds sold totaled $230 thousand, interest-bearing deposits at the Federal Reserve Bank of Richmond totaled $13.2 million, and securities and loans maturing in one year or less totaled $24.2 million. This
results in a liquidity ratio as of June 30, 2012 of 16.0% as compared to 14.2% as of December 31, 2011. 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. The Bank has a formal liquidity management policy and contingency plan. Given current economic uncertainty, management is maintaining a historically high level of liquidity.

In addition, as noted earlier, the Company has a line of credit with the FHLB of $55.8 million, plus federal funds lines of credit with
correspondent banks totaling $20.3 million.

OFF BALANCE SHEET COMMITMENTS

In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments may involve elements of liquidity, credit and
interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and
standby-letters of credit is represented by the contractual amount of these instruments. Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third-party. The credit risk of issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.



|                                   |  |                                |        |  |                   |   |        | 
|---------------------------------- |  | ------------------------------ | ------ |  | ----------------- | - | ------ | 
|                                   |  | Off Balance Sheet Arrangements |        |  |                   |  
|                                   |  | June 30, 2012                  |        |  | December 31, 2011 |  
|(Dollars in Thousands)             |  | (unaudited)                    |        |  |                   |  
|Total Loan Commitments Outstanding |  | $                              | 30,745 |  |                   | $ | 31,170 | 
|Standby-by Letters of Credit       |  |                                | 383    |  |                   |   | 378    | 

The Company maintains liquidity and credit facilities with non-affiliated banks in excess of the total loan commitments
and stand-by letters of credit. As these commitments are earning assets only upon takedown of the instrument by the customer, thereby increasing loan balances, management expects the revenue of the Company to be enhanced as these credit facilities
are utilized.

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, 2011.



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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, 2011.

CAPITAL RESOURCES

Capital resources represent funds, earned or obtained, over which a financial institution can exercise greater long-term control in comparison with deposits and borrowed funds. The adequacy of the
Companys capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Companys resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a
capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders. The Companys
capital, also known as shareholders equity, is comprised mainly of outstanding common stock and retained earnings. Capital can be increased with securities offerings or through earnings. The Company has a formal capital policy and plan and
management believes that the capital level at June 30, 2012, supports current economic uncertainty.

From December 31, 2011 to
June 30, 2012, total shareholders equity increased by $16 thousand to $28.0 million. Several factors impact shareholders equity, including net income, earnings returned to shareholders through cash dividends and 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 on the balance sheets and statement of changes in shareholders equity. Another factor
effecting accumulated other comprehensive income is changes in the Companys pension and post-retirement benefit plans. Shareholders equity before accumulated other comprehensive income was $27.8 million on June 30, 2012 compared to
$27.6 million on December 31, 2011. Accumulated other comprehensive income decreased $189.4 thousand between December 31, 2011 and June 30, 2012, a result of reductions in unrealized gains in the investment portfolio due to sales of
securities.

Book value per share, basic, increased by 0.1% to $10.74 on June 30, 2012 from $10.73 on December 31, 2011. Book value
per share, basic, before accumulated other comprehensive income on June 30, 2012, compared to December 31, 2011, increased by 0.8% to $10.64 from $10.56. No cash dividends were paid for the six-month period ended June 30, 2012, nor
for the comparable period ended June 30, 2011. Of the 5,000,000 common shares authorized, 2,610,856 were outstanding on June 30, 2012 and December 31, 2011.

The Company began a share repurchase program in August of 1999 and has continued the program into 2012. No repurchases were made during the first six months of 2012 nor during the comparable period in
2011.

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 June 30, 2012, the Bank maintained Tier 1 capital of $24.7 million, net risk weighted assets of $224.6 million, and Tier 2 capital of $2.8 million. On June 30, 2012,
the Tier 1 capital to risk weighted assets ratio was 11.01%, the total capital ratio was 12.27%, and the Tier 1 leverage ratio was 7.79%.

FINANCIAL CONDITION

Total assets
increased by 2.1% to $321.9 million during the six months ended June 30, 2012 from $315.2 million at December 31, 2011. Cash and due from banks, which produces no income, increased to $14.0 million on June 30, 2012 from $4.7 million
at year-end 2011. This is due to $10.0 million which was committed to the Banks primary correspondent bank account, which earns 0.35% toward reduction in fee expenses generated by that account. This represents an improvement over the 0.25%
these funds would earn in the Banks Federal Reserve Bank of Richmond account.

During the six months ended June 30, 2012, gross
loans increased by $4.8 million or 2.0%, to $241.5 million from $236.7 million at year-end 2011. The largest component of this increase was in Commercial non-owner occupied mortgages with a 28.9% increase of $4.7 million to $20.9 million. Noticeable
growth also occurred in Residential mortgages and Construction mortgages, which increased $2.5 million and $940 thousand, respectively.

Consumer loans, including residential real estate loans, are generally underwritten based on the borrowers debt-to-income ratio, credit score or
payment history and the ratio of the requested loan amount to the value of any collateral. There are established underwriting criteria for these parameters to determine if a loan will be considered an acceptable credit risk. For
commercial borrowers, factors we assess include the legal entity of the borrower, the capacity of the borrower to cover its debt service obligations, the strength and creditworthiness of any guarantor support, the value of any collateral relative to
the loan amount, stability and predictability of the borrowers cash flow, and the borrowers standing with the Virginia State Corporation Commission.



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As of June 30, 2012, loans valued at $8.4 million were considered impaired, whereas $7.4 million were
considered impaired as of December 31, 2011. Between December 31, 2011 and June 30, 2012, six impaired loan relationships were identified and five were dispensed through foreclosures and charge-offs. Management has reviewed these
impaired credits and the underlying collateral and expects no additional losses above those which are specifically reserved in the ALL.

Risk
rating grades are assigned conservatively, causing some homogenous loans, like residential mortgages, to fall into the pool of adversely risk rated loans and thereby evaluated for impairment, even though they may be performing as agreed and
therefore not impaired.

Non-Performing Assets



|                                                        |  |               |        |   |                   |  |      |   |  |   |       |   |  |  |      |  
|------------------------------------------------------- |  | ------------- | ------ | - | ----------------- |  | ---- | - |  | - | ----- | - |  |  | ---- | -
|(Dollars in Thousands)                                  |  | June 30, 2012 |        |   | December 31, 2011 | 
|                                                        |  | (unaudited)   |        |   |                   |  |      |   | 
|(percentages are as a percent of total loans)           |  | $             |        |   | %                 |  |      | $ |  |   | %     |  
|Loans past due 90 days or more and still accruing       |  | $             | 401    |   |                   |  | 0.2  | % |  | $ | 60    |   |  |  | 0.0  | %
|Non-accruing loans                                      |  |               | 7,310  |   |                   |  | 3.0  | % |  |   | 5,417 |   |  |  | 2.3  | %
|                                                        |  |               |        |   |                   |  |      |   |  |   |       |   |  |  |      |  
|Total non-performing loans                              |  | $             | 7,711  |   |                   |  | 3.2  | % |  | $ | 5,477 |   |  |  | 2.3  | %
|                                                        |  |               |        |   |                   |  |      |   |  |   |       |   |  |  |      |  
|Allowance for loan losses                               |  | $             | 3,341  |   |                   |  | 1.38 | % |  | $ | 3,189 |   |  |  | 1.35 | %
|Allowance to non-performing loans                       |  |               | 43.3   | % |                   |  |      |   |  |   | 58.2  | % |  |  |      |  
|(percentages are as a percent of total loans plus OREO) |  |               |        |   |                   |  |      |   |  |   |       |   |  |  |      |  
|Other real estate owned                                 |  |               | 2,730  |   |                   |  | 1.1  | % |  |   | 2,280 |   |  |  | 1.0  | %
|                                                        |  |               |        |   |                   |  |      |   |  |   |       |   |  |  |      |  
|Total non-performing assets                             |  | $             | 10,441 |   |                   |  | 4.3  | % |  | $ | 7,757 |   |  |  | 3.2  | %
|                                                        |  |               |        |   |                   |  |      |   |  |   |       |   |  |  |      |  

Non-performing loans, which include loans past due 90 days or more and still accruing plus non-accruing loans, as a
percentage of total loans, increased to 3.2% as of June 30, 2012 compared to 2.3% as of December 31, 2011, a result of one large relationship placed on nonaccrual and one loan past due 151 days. Non-accruing loans totaled $7.3 million as
of June 30, 2012, up from $5.4 million at year-end 2011. One loan with a balance of $401 thousand was delinquent for more than 90 days on June 30, 2012 but still accruing interest because it was in the process of collection and is well
collateralized. Non-performing assets, which include OREO in addition to non-performing loans, increased to 4.3% at June 30, 2012 from 3.2% at December 31, 2011. Management believes that the Allowance to non-performing loans ratio of 43.3%
is sufficient because the increase in non-performing loans is materially due to one relationship which is well collateralized. The Bank has thirteen TDRs which are comprised by five borrowers, one more at June 30, 2012 than at December 31,
2011, for a total of $3.8 million. The most recent TDR involves one loan with a balance of $479 thousand.

Loans charged off during the first
six months of 2012, net recoveries, totaled $490 thousand compared to $134 thousand for the comparable period in 2011. This represents a growth in the annualized net charge-off ratio from 0.13% for the first six months of 2011 to 0.41% for the same
period of 2012. The majority of the charge-offs were anticipated and specific reserves had been provided for them in the ALL. The large amount of recoveries was driven by a successful legal judgment on a piece of residential real estate related to a
prior foreclosure. Management is maintaining a conservative level of the ALL at 1.38% of total loans, up from 1.35% on December 31, 2011.

The Bank had $2.7 million of OREO at June 30, 2012 and $2.3 million at December 31, 2011. OREO consists of three residences, 14 lots, two
former convenience stores, a seafood house, one piece of farmland, one former nursery property and two commercial business properties. In 2012, ten OREO properties with a book value of $968 thousand were sold for a loss of $214 thousand, and nine
properties with a total book value of $1.4 million from nine borrowers were added through foreclosures and a deed in lieu of foreclosure. Write-downs of book value on OREO properties totaled $111 thousand during the first six months of 2012,
compared to $250 thousand for the same period in 2011. 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 June 30, 2012, securities available-for-sale at fair value totaled $34.3 million as compared to $41.8 million on December 31, 2011. This
represents a net decrease of $7.5 million or 18.0% for the six months, due mainly to sales of securities. As of June 30, 2012, these securities represented 10.7% of total assets and 11.8% of earning assets. All securities in the Companys
investment portfolio are classified as available-for-sale and marked to market on a monthly basis based on market conditions. These gains or losses, net of tax, are booked as an adjustment to shareholders equity, 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 securities with unrealized losses to be other than temporarily impaired.

As of June 30, 2012, total deposits were $268.4 million compared to $265.5 million at year-end 2011. This represents an increase in balances of $2.9
million or 1.1% during the six months. This increase was due materially to both savings and demand deposits with a 3.4% increase of $5.0 million.



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##### Table of Contents

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the six months ended
June 30, 2012, was up by $655 thousand, or 51.6%, compared to the six months ended June 30, 2011. The main driver of this increase is gains on sales of securities, which were up to $503 thousand for the six months ended June 30, 2012,
compared to $124 thousand for the same period in 2011. Overdraft fees have increased to $274 thousand for the first six months of 2012 compared to $243 thousand for the similar period in 2011, a result of the Banks new Overdraft Privilege
Program. Fees from sales of mortgages into the secondary market more than tripled from $57 thousand to $199 thousand. Income from Investment Advantage was up to $188 thousand from $120 thousand for the same period of 2011, an increase of $68
thousand. Investment Advantage contributes the majority of income to other service charges and fees, and since income from Investment Advantage is commission-based, increases in investment activity will cause increases in the Companys income.
VISA® related fees increased by $16 thousand to $372 thousand in the first six months of 2012 compared to the
similar period in 2011.

Income from fiduciary activities was up by $15 thousand to $318 thousand for the first six months of 2012 compared to
the similar period in 2011. 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 IRAs, 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 therefore the levels of this fee income.

NON-INTEREST EXPENSE

For the six months ended June 30, 2012, non-interest expenses totaled $6.3 million, an increase of $346 thousand, or 5.8%,
compared to $5.9 million for the same period in 2011, due mainly to a $375 thousand increase in other expenses, which is related to consulting expense for strategic planning and revenue enhancement, fraud investigation expense, a large paid item
write-off, and foreclosed property expense. Non-interest expense is comprised of salaries and benefits, occupancy expense, bank franchise tax, Visa® program expense, telephone expense, FDIC assessments and other expense. The largest portion of non-interest expense is salary and benefits, which decreased by $134
thousand in the first six months of 2012 compared to the same period in 2011, a result of the reduction in force completed in January of 2012.

Occupancy expense increased by $106 thousand for the first six months of 2012 compared to the similar period in 2011, a result of deferred maintenance
expense and new software maintenance. Bank franchise taxes increased to $86 thousand for the first six months of 2012 compared to $74 thousand for the same period in 2011 and telephone expenses declined to $75 thousand for the current period
compared to $88 thousand for the same period in 2011. Telephone expenses include the cost of the Companys Customer Care Center and data network communications. Also, FDIC insurance assessments are down by $44 thousand for the same period
comparison.

Expenses related to the VISA® program increased by 4.5% to $308 thousand in the first six months of 2012 as compared to $295 thousand for the same period in 2011. However, when also considering
the interest and non-interest income generated by the VISA® program prior to taxes, it provided a net positive
contribution to the Company of $90 thousand in the first six months of 2012, up from $72 thousand for the same period in 2011.

Recent
Accounting Pronouncements

In April 2011, the Financial Accounting Standards (FASB) issued Accounting Standards Update
(ASU) 2011-03, Transfers and Servicing (Topic 860)  Reconsideration of Effective Control for Repurchase Agreements. The amendments in this ASU remove from the assessment of effective control (1) the criterion
requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to
that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that
occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820)  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. generally accepted
accounting principles (GAAP) and IFRSs. This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair
value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording
differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is
not permitted. The Company has included the required disclosures in its consolidated financial statements.



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In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)  Presentation of
Comprehensive Income. The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to
present components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments require that all non-owner changes in stockholders equity be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other
comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of
other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of
other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal
years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has
included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangible
 Goodwill and Other (Topic 350)  Testing Goodwill for Impairment. The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the
fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a
likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its
carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill
impairment tests performed as of a date before September 15, 2011, if an entitys financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material
impact on the Companys consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic
210)  Disclosures about Offsetting Assets and Liabilities. This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments
and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.
An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220)  Deferral of the Effective Date for Amendments to
the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments are being made to allow the Board time to redeliberate whether to present on the face
of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational
concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of
accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either
in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The
Company has included the required disclosures in its consolidated financial statements.



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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 Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934. 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 Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic Securities and Exchange Commission filings as of
June 30, 2012.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There was no change to the Companys internal control over financial reporting during the quarter ended June 30, 2012 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 2012. There are a
total of 280,000 shares authorized for repurchase under the program. No shares were repurchased during the quarter ended June 30, 2012.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None to report.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.



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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)               
|                |  |  | 
|August 14, 2012 |  |  |  | By:                         |  | /s/ Randal R. Greene                        
|                |  |  |  |                             |  | Randal R. Greene                            
|                |  |  |  |                             |  | President and Chief Executive Officer       
|                |  |  |  |                             |  | (Principal Executive Officer)               
|                |  |  | 
|                |  |  |  | By:                         |  | /s/ Deborah M. Evans                        
|                |  |  |  |                             |  | Deborah M. Evans                            
|                |  |  |  |                             |  | Treasurer and Chief Financial Officer       
|                |  |  |  |                             |  | (Principal Financial and Accounting Officer)



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