##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004



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



COMMISSION FILE NUMBER 0-22955



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BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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



(804)435-1171

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the 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: 2,341,613 shares of
common stock on August 9, 2004.



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##### Table of Contents

FORM 10-Q



For the interim period ending June
30, 2004.



INDEX



|                                                                                             |  |                                                                                                                        |  |   
|-------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | --
|PART I FINANCIAL INFORMATION                                                                 |  |                                                                                                                       
|                                                                                             | 
|ITEM 1. FINANCIAL STATEMENTS                                                                 |  |                                                                                                                       
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | CONSOLIDATED BALANCE SHEETS JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003                                            |  | 3 
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)                |  | 4 
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)                      |  | 5 
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) |  | 6 
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                             |  | 7 
|                                                                                             | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |  | 10                                                                                                                    
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | FINANCIAL HIGHLIGHTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003 (UNAUDITED)                      |  | 11
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | NET INTEREST INCOME ANALYSIS FOR THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003 (UNAUDITED)              |  | 14
|                                                                                             |  |                                                                                                                       
|                                                                                             |  | INTEREST RATE SENSITIVITY GAP ANALYSIS AS OF JUNE 30, 2004 (UNAUDITED)                                                 |  | 15
|                                                                                             | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           |  | 18                                                                                                                    
|                                                                                             | 
|ITEM 4. CONTROLS AND PROCEDURES                                                              |  | 18                                                                                                                    
|                                                                                             | 
|PART II OTHER INFORMATION                                                                    |  |                                                                                                                       
|                                                                                             | 
|ITEM 1. LEGAL PROCEEDINGS                                                                    |  | 18                                                                                                                    
|                                                                                             | 
|ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            |  | 18                                                                                                                    
|                                                                                             | 
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      |  | 19                                                                                                                    
|                                                                                             | 
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  |  | 19                                                                                                                    
|                                                                                             | 
|ITEM 5. OTHER INFORMATION                                                                    |  | 19                                                                                                                    
|                                                                                             | 
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     |  | 19                                                                                                                    



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. FINANCIAL STATEMENTS.



Bay Banks of Virginia, Inc.

Consolidated Balance Sheets



|                                                                                                         |  |               |             |                   |   |            
|-------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | ----------------- | - | -----------
|                                                                                                         |  | June 30, 2004 |             | December 31, 2003
|                                                                                                         |  | (unaudited)   |             |                  
|ASSETS                                                                                                   |  |               |             |                   |   |            
|Cash and due from banks                                                                                  |  | $             | 9,306,850   |                   | $ | 7,762,030  
|Interest-bearing deposits                                                                                |  |               | 125,915     |                   |   | 102,868    
|Federal funds sold                                                                                       |  |               | 13,424,727  |                   |   | 13,907,525 
|Securities available for sale, at fair value                                                             |  |               | 60,572,800  |                   |   | 66,077,470 
|Securities held to maturity, at amortized cost                                                           |  |               | 423,254     |                   |   | 416,261    
|Loans, net of allowance for loan losses of $1,954,387 and $1,901,576                                     |  |               | 204,176,888 |                   |   | 188,450,953
|Premises and equipment, net                                                                              |  |               | 8,357,680   |                   |   | 8,411,776  
|Accrued interest receivable                                                                              |  |               | 1,211,453   |                   |   | 1,261,784  
|Other real estate owned                                                                                  |  |               | 135,512     |                   |   | 76,514     
|Core deposit intangible                                                                                  |  |               | 2,807,842   |                   |   | 2,807,842  
|Other assets                                                                                             |  |               | 1,869,215   |                   |   | 1,435,602  
|                                                                                                         |  |               |             |                   |   |            
|Total Assets                                                                                             |  | $             | 302,412,136 |                   | $ | 290,710,625
|                                                                                                         |  |               |             |                   |   |            
|LIABILITIES                                                                                              |  |               |             |                   |   |            
|Demand deposits                                                                                          |  | $             | 38,745,066  |                   | $ | 34,290,391 
|Savings and interest-bearing demand deposits                                                             |  |               | 129,850,833 |                   |   | 126,127,299
|Time deposits                                                                                            |  |               | 94,064,787  |                   |   | 96,665,504 
|                                                                                                         |  |               |             |                   |   |            
|Total Deposits                                                                                           |  |               | 262,660,686 |                   |   | 257,083,194
|                                                                                                         |  |              
|Securities sold under repurchase agreements                                                              |  |               | 5,918,025   |                   |   | 6,478,601  
|FHLB Advance                                                                                             |  |               | 7,500,000   |                   |   | 0          
|Other liabilities                                                                                        |  |               | 1,638,959   |                   |   | 2,070,426  
|                                                                                                         |  |               |             |                   |   |            
|Total Liabilities                                                                                        |  | $             | 277,717,670 |                   | $ | 265,632,221
|                                                                                                         |  |               |             |                   |   |            
|SHAREHOLDERS EQUITY                                                                                     |  |               |             |                   |   |            
|Common stock - $5 par value; Authorized - 5,000,000 shares; Outstanding - 2,341,613 and 2,326,080 shares |  | $             | 11,708,064  |                   | $ | 11,630,401 
|Additional paid-in capital                                                                               |  |               | 4,489,907   |                   |   | 4,336,929  
|Retained earnings                                                                                        |  |               | 8,249,457   |                   |   | 8,146,613  
|Accumulated other comprehensive income, net                                                              |  |               | 247,038     |                   |   | 964,461    
|                                                                                                         |  |               |             |                   |   |            
|Total Shareholders Equity                                                                               |  | $             | 24,694,466  |                   | $ | 25,078,404 
|                                                                                                         |  |               |             |                   |   |            
|Total Liabilities and Shareholders Equity                                                               |  | $             | 302,412,136 |                   | $ | 290,710,625
|                                                                                                         |  |               |             |                   |   |            



See Notes to Consolidated Financial
Statements.



3



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##### Table of Contents

Bay Banks of Virginia, Inc.

Consolidated Statements of Income

(Unaudited)



|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|--------------------------------------------------- |  | --------------------------- | --------- | -------------------------- | - | ------------------------------------ |  | ------------------------------------ | --------- |  | - | ---------
|                                                    |  | Quarter ended June 30, 2004 |           | Quarterended June 30, 2003 |   | For the sixmonthsended June 30, 2004 |  | For the sixmonthsended June 30, 2003
|INTEREST INCOME                                     |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Loans receivable (incl fees)                        |  | $                           | 2,881,844 |                            | $ | 2,685,975                            |  | $                                    | 5,701,770 |  | $ | 5,418,464
|Securities:                                         |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Taxable                                             |  |                             | 318,790   |                            |   | 386,846                              |  |                                      | 669,674   |  |   | 812,255  
|Tax-exempt                                          |  |                             | 199,772   |                            |   | 179,431                              |  |                                      | 400,153   |  |   | 358,984  
|Federal funds sold                                  |  |                             | 34,241    |                            |   | 97,201                               |  |                                      | 63,479    |  |   | 170,007  
|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Total interest income                               |  |                             | 3,434,647 |                            |   | 3,349,453                            |  |                                      | 6,835,076 |  |   | 6,759,710
|                                                    |  |                             |           |                           
|INTEREST EXPENSE                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Deposits                                            |  |                             | 1,044,526 |                            |   | 1,217,271                            |  |                                      | 2,102,425 |  |   | 2,476,249
|Securities Sold to Repurchase                       |  |                             | 4,664     |                            |   | 10,511                               |  |                                      | 10,575    |  |   | 19,838   
|Short term borrowings                               |  |                             | 4,375     |                            |   | 0                                    |  |                                      | 4,375     |  |   | 0        
|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Total interest expense                              |  |                             | 1,053,565 |                            |   | 1,227,782                            |  |                                      | 2,117,375 |  |   | 2,496,087
|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Net Interest Income                                 |  |                             | 2,381,082 |                            |   | 2,121,671                            |  |                                      | 4,717,701 |  |   | 4,263,623
|                                                    |  |                             |           |                           
|Provision for loan losses                           |  |                             | 75,000    |                            |   | 78,000                               |  |                                      | 150,000   |  |   | 156,000  
|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Net interest income after provision for loan losses |  |                             | 2,306,082 |                            |   | 2,043,671                            |  |                                      | 4,567,701 |  |   | 4,107,623
|                                                    |  |                             |           |                           
|NONINTEREST INCOME                                  |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Income from fiduciary activities                    |  |                             | 163,450   |                            |   | 148,874                              |  |                                      | 328,456   |  |   | 287,342  
|Service charges & fees on deposit accounts          |  |                             | 164,148   |                            |   | 158,627                              |  |                                      | 301,684   |  |   | 296,921  
|Other miscellaneous fees                            |  |                             | 215,137   |                            |   | 160,468                              |  |                                      | 397,426   |  |   | 308,464  
|Secondary market brokerage income                   |  |                             | 80,709    |                            |   | 113,927                              |  |                                      | 102,190   |  |   | 206,215  
|Other real estate gains                             |  |                             | 15,611    |                            |   | 157,048                              |  |                                      | 22,747    |  |   | 191,959  
|Net securities gains                                |  |                             | 138       |                            |   | 3,986                                |  |                                      | 154,737   |  |   | 24,843   
|Other income                                        |  |                             | 14,937    |                            |   | 12,873                               |  |                                      | 38,106    |  |   | 49,751   
|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Total noninterest income                            |  |                             | 654,130   |                            |   | 755,803                              |  |                                      | 1,345,346 |  |   | 1,365,495
|                                                    |  |                             |           |                           
|NONINTEREST EXPENSES                                |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Salaries and employee benefits                      |  |                             | 1,242,066 |                            |   | 1,094,659                            |  |                                      | 2,647,361 |  |   | 2,139,268
|Occupancy expense                                   |  |                             | 337,486   |                            |   | 344,685                              |  |                                      | 696,248   |  |   | 702,180  
|Bank franchise tax                                  |  |                             | 56,454    |                            |   | 49,904                               |  |                                      | 112,909   |  |   | 102,392  
|Visa Expense                                        |  |                             | 102,162   |                            |   | 90,671                               |  |                                      | 182,576   |  |   | 162,037  
|Telephone                                           |  |                             | 33,425    |                            |   | 44,214                               |  |                                      | 74,621    |  |   | 90,514   
|Other expense                                       |  |                             | 552,226   |                            |   | 571,541                              |  |                                      | 997,602   |  |   | 1,042,774
|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Total noninterest expenses                          |  |                             | 2,323,819 |                            |   | 2,195,674                            |  |                                      | 4,711,317 |  |   | 4,239,165
|                                                    |  |                             |           |                           
|Net Income before income taxes                      |  |                             | 636,393   |                            |   | 603,800                              |  |                                      | 1,201,730 |  |   | 1,233,953
|                                                    |  |                             |           |                           
|Income tax expense                                  |  |                             | 185,185   |                            |   | 165,078                              |  |                                      | 353,803   |  |   | 356,310  
|                                                    |  |                             |           |                            |   |                                      |  |                                      |           |  |   |          
|Net Income                                          |  | $                           | 451,208   |                            | $ | 438,722                              |  | $                                    | 847,927   |  | $ | 877,643  
|                                                    |  |                             |           |                           
|Average basic shares outstanding                    |  |                             | 2,334,145 |                            |   | 2,311,052                            |  |                                      | 2,330,033 |  |   | 2,308,234
|Earnings per share, basic                           |  |                             | 0.19      |                            |   | 0.19                                 |  |                                      | 0.36      |  |   | 0.38     
|Average diluted shares outstanding                  |  |                             | 2,351,794 |                            |   | 2,337,883                            |  |                                      | 2,352,255 |  |   | 2,327,101
|Earnings per share, diluted                         |  |                             | 0.19      |                            |   | 0.19                                 |  |                                      | 0.36      |  |   | 0.38     



See Notes to Consolidated Financial
Statements.



4



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##### Table of Contents

Bay Banks of Virginia, Inc.

Consolidated Statements of Cash Flows



|                                                                                  |  |               |             |   |               |   |             |  
|--------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------- | - | ----------- | -
|Six months ended:                                                                 |  | June 30, 2004 |             |   | June 30, 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |               |             |   |               |   |             |  
|Net Income                                                                        |  | $             | 847,927     |   |               | $ | 877,643     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |               |             |   |               |   |             |  
|                                                                                  |  |              
|Depreciation                                                                      |  |               | 375,529     |   |               |   | 371,086     |  
|Net amortization / (accretion) of securities                                      |  |               | 26,687      |   |               |   | 11,740      |  
|Provision for Loan Losses                                                         |  |               | 150,000     |   |               |   | 156,000     |  
|Gain on Sale of Securities                                                        |  |               | (154,737    | ) |               |   | (24,843     | )
|Gain on sale of other real estate owned                                           |  |               | (22,747     | ) |               |   | (191,959    | )
|(Increase) / Decrease in other assets                                             |  |               | (383,281    | ) |               |   | 484,794     |  
|Decrease in Other Liabilities                                                     |  |               | (61,885     | ) |               |   | (199,648    | )
|                                                                                  |  |               |             |   |               |   |             |  
|Net Cash Provided by Operating Activities                                         |  |               | 777,493     |   |               |   | 1,484,813   |  
|                                                                                  |  |              
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |               |             |   |               |   |             |  
|Proceeds from maturities of Available-for-Sale Securities                         |  |               | 2,533,919   |   |               |   | 3,831,853   |  
|Proceeds from sales of Available-for-Sale Securities                              |  |               | 18,440,720  |   |               |   | 5,237,000   |  
|Purchases of Available-for-Sale Securities                                        |  |               | (16,435,918 | ) |               |   | (8,551,399  | )
|Increase in interest bearing deposits                                             |  |               | (23,047     | ) |               |   | (2,990      | )
|(Increase) / Decrease in Fed Funds Sold                                           |  |               | 482,798     |   |               |   | (11,046,211 | )
|Increase in Loans outstanding                                                     |  |               | (15,923,905 | ) |               |   | (2,798,129  | )
|Purchases of Premises and Equipment                                               |  |               | (321,433    | ) |               |   | (634,928    | )
|Proceeds from sale of other real estate owned                                     |  |               | 11,719      |   |               |   | 743,730     |  
|                                                                                  |  |               |             |   |               |   |             |  
|Net Cash (Used in) Investing Activities                                           |  |               | (11,235,147 | ) |               |   | (13,221,074 | )
|                                                                                  |  |              
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |               |             |   |               |   |             |  
|Increase in Demand, Savings, & other interest-bearing demand deposits             |  |               | 8,178,209   |   |               |   | 13,831,152  |  
|Increase / (Decrease) in Time Deposits                                            |  |               | (2,600,717  | ) |               |   | 2,203,489   |  
|Net increase / (Decrease) in securities sold under repurchase agreements          |  |               | (560,576    | ) |               |   | 406,627     |  
|Increase in FHLB advances                                                         |  |               | 7,500,000   |   |               |   | 0           |  
|Proceeds from issuance of Common Stock                                            |  |               | 223,968     |   |               |   | 198,793     |  
|Dividends paid                                                                    |  |               | (699,156    | ) |               |   | (646,177    | )
|Repurchase of Common Stock                                                        |  |               | (39,254     | ) |               |   | (61,770     | )
|                                                                                  |  |               |             |   |               |   |             |  
|Net Cash Provided by Financing Activities                                         |  |               | 12,002,474  |   |               |   | 15,932,114  |  
|                                                                                  |  |              
|Net Increase in Cash & Due from Banks                                             |  | $             | 1,544,820   |   |               | $ | 4,195,853   |  
|                                                                                  |  |              
|Cash & Due From Banks at Beginning of period                                      |  |               | 7,762,030   |   |               |   | 9,875,840   |  
|Cash & Due From Banks at End of period                                            |  |               | 9,306,850   |   |               |   | 14,071,693  |  
|                                                                                  |  |              
|SUPPLEMENTAL DISCLOSURES                                                          |  |               |             |   |               |   |             |  
|Interest paid                                                                     |  |               | 2,122,317   |   |               |   | 2,515,266   |  
|Income taxes paid                                                                 |  |               | 340,000     |   |               |   | 342,129     |  
|Unrealized gain / (loss) on investment securities                                 |  |               | (1,087,005  | ) |               |   | 460,282     |  
|Loans transferred to other real estate owned                                      |  |               | 60,180      |   |               |   | 7,564       |  



See Notes to Consolidated Financial
Statements.



5



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##### Table of Contents

Bay Banks of Virginia, Inc.

Consolidated Statement of Changes in Shareholders Equity

(Unaudited)



|                                                                                                               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ----------------------------------- | - |  | ----------------------- | --------- | - |  | - | ---------- | -
|                                                                                                               |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TotalShareholdersEquity |          
|Balance on 1/1/2003                                                                                            |  | $           | 11,536,800 |   |                          | $ | 4,080,693 |                  |  | $ | 7,514,790                           |   |  | $                       | 1,624,516 |   |  | $ | 24,756,799 |  
|Comprehensive Income:                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Net Income                                                                                                     |  |             |            |   |                          |   |           |                  |  |   | 877,643                             |   |  |                         |           |   |  |   | 877,643    |  
|Other comprehensive income:                                                                                    |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Changes in unrealized holding gains / losses on securities arising during the period, net of taxes of $164,942 |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | 320,182   |   |  |   | 320,182    |  
|Reclassification adjustment for security gains included in net income, net of taxes of ($8,447)                |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | (16,396   | ) |  |   | (16,396    | )
|                                                                                                               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Total Comprehensive Income                                                                                     |  |             |           |   |                          |   |          |                  |  |   | 877,643                             |   |  |                         | 303,786   |   |  |   | 1,181,429  |  
|Cash dividends paid-$0.28/share                                                                                |  |             |            |   |                          |   |           |                  |  |   | (646,176                            | ) |  |                         |           |   |  |   | (646,176   | )
|Stock repurchases                                                                                              |  |             | (20,000    | ) |                          |   | (6,147    | )                |  |   | (35,623                             | ) |  |                         |           |   |  |   | (61,770    | )
|Sale of common stock:                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Dividend reinvestment plan                                                                                     |  |             | 62,647     |   |                          |   | 128,396   |                  |  |   |                                    |   |  |                         |          |   |  |   | 191,043    |  
|Stock Options exercised                                                                                        |  |             | 5,000      |   |                          |   | 2,750     |                  |  |   |                                    |   |  |                         |          |   |  |   | 7,750      |  
|                                                                                                               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Balance on 6/30/03                                                                                             |  | $           | 11,584,447 |   |                          | $ | 4,205,692 |                  |  | $ | 7,710,634                           |   |  | $                       | 1,928,302 |   |  | $ | 25,429,075 |  
|                                                                                                               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Balance on 1/1/2004                                                                                            |  | $           | 11,630,401 |   |                          | $ | 4,336,929 |                  |  | $ | 8,146,613                           |   |  | $                       | 964,461   |   |  | $ | 25,078,404 |  
|Comprehensive Income:                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Net Income                                                                                                     |  |             |            |   |                          |   |           |                  |  |   | 847,927                             |   |  |                         |           |   |  |   | 847,927    |  
|Other comprehensive income:                                                                                    |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of ($316,971)        |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | (615,297  | ) |  |   | (615,297   | )
|Reclassification adjustment for security gains included in net income, net of taxes of ($52,611)               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         | (102,126  | ) |  |   | (102,126   | )
|                                                                                                               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Total Comprehensive Income / (Loss)                                                                            |  |             |           |   |                          |   |          |                  |  |   | 847,927                             |   |  |                         | (717,423  | ) |  |   | 130,504    |  
|Cash dividends paid-$0.30/share                                                                                |  |             |            |   |                          |   |           |                  |  |   | (699,156                            | ) |  |                         |           |   |  |   | (699,156   | )
|Stock repurchases                                                                                              |  |             | (12,750    | ) |                          |   | (4,754    | )                |  |   | (21,750                             | ) |  |                         |           |   |  |   | (39,254    | )
|Sale of common stock:                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Dividends Reinvested                                                                                           |  |             | 65,518     |   |                          |   | 134,280   |                  |  |   |                                    |   |  |                         |          |   |  |   | 199,798    |  
|Stock Options exercised                                                                                        |  |             | 24,895     |   |                          |   | 23,452    |                  |  |   | (24,177                             | ) |  |                         |           |   |  |   | 24,170     |  
|                                                                                                               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  
|Balance on 6/30/04                                                                                             |  | $           | 11,708,064 |   |                          | $ | 4,489,907 |                  |  | $ | 8,249,457                           |   |  | $                       | 247,038   |   |  | $ | 24,694,466 |  
|                                                                                                               |  |             |            |   |                          |   |           |                  |  |   |                                     |   |  |                         |           |   |  |   |            |  



See Notes to Consolidated Financial
Statements.



6



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##### Table of Contents

Notes to Consolidated Financial Statements



|Note | 1:
|---- | --



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



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



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



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



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



|                                                                                                                           |  |               |         |   |               |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                           |  | June 30, 2004 |         |   | June 30, 2003 |  
|                                                                                                                           |  | (unaudited)   |         |   | (unaudited)   |  
|Net Income, as reported                                                                                                    |  | $             | 847,927 |   |               | $ | 877,643 |  
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |               | (19,077 | ) |               |   | (20,027 | )
|                                                                                                                           |  |               |         |   |               |   |         |  
|Pro forma net income                                                                                                       |  | $             | 828,850 |   |               | $ | 857,616 |  
|                                                                                                                           |  |               |         |   |               |   |         |  
|Earnings per share:                                                                                                        |  |               |         |   |               |   |         |  
|Basic - as reported                                                                                                        |  | $             | 0.36    |   |               | $ | 0.38    |  
|Basic - pro forma                                                                                                          |  | $             | 0.36    |   |               | $ | 0.37    |  
|Diluted - as reported                                                                                                      |  | $             | 0.36    |   |               | $ | 0.38    |  
|Diluted - pro forma                                                                                                        |  | $             | 0.35    |   |               | $ | 0.37    |  



Note 2: Securities



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

|
|

|                                                        |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|------------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities June 30, 2004
(unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies                                |  | $             | 16,988,244 |                      | $ | 15,126                |  | $ | (254,445   | ) |  | $ | 16,748,925
|State and municipal securities                          |  |               | 33,272,603 |                      |   | 689,200               |  |   | (305,329   | ) |  |   | 33,656,474
|Corporate bonds                                         |  |               | 8,549,754  |                      |   | 229,746               |  |   | 0          |   |  |   | 8,779,500 
|Restricted securities                                   |  |               | 1,387,900  |                      |   | 0                     |  |   | 0          |   |  |   | 1,387,900 
|                                                        |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|                                                        |  | $             | 60,198,501 |                      | $ | 934,073               |  |   | (559,773   | ) |  | $ | 60,572,800



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##### Table of Contents

|                                                      |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|----------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ----------
|Available-for-sale securities December 31,
2003       |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies                              |  | $             | 20,644,546 |                      | $ | 66,235                |  | $ | (102,717   | ) |  | $ | 20,608,064
|State and municipal securities                        |  |               | 36,081,810 |                      |   | 1,196,751             |  |   | (174,565   | ) |  |   | 37,103,996
|Corporate bonds                                       |  |               | 6,565,676  |                      |   | 476,134               |  |   | 0          |   |  |   | 7,041,810 
|Restricted securities                                 |  |               | 1,323,600  |                      |   | 0                     |  |   | 0          |   |  |   | 1,323,600 
|                                                      |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|                                                      |  | $             | 64,615,632 |                      | $ | 1,739,120             |  | $ | (277,282   | ) |  | $ | 66,077,470
|                                                      |  |               |            |                     
|Held-to-maturity securities June 30, 2004
(unaudited) |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies                              |  | $             | 0          |                      | $ | 0                     |  | $ | 0          |   |  | $ | 0         
|State and municipal securities                        |  |               | 423,254    |                      |   | 0                     |  |   | (17,324    | ) |  |   | 405,930   
|Corporate bonds                                       |  |               | 0          |                      |   | 0                     |  |   | 0          |   |  |   | 0         
|Restricted securities                                 |  |               | 0          |                      |   | 0                     |  |   | 0          |   |  |   | 0         
|                                                      |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|                                                      |  | $             | 423,254    |                      | $ | 0                     |  | $ | (17,324    | ) |  | $ | 405,930   
|                                                      |  |               |            |                     
|Held-to-maturity securities December 31,
2003         |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies                              |  | $             | 0          |                      | $ | 0                     |  | $ | 0          |   |  | $ | 0         
|State and municipal securities                        |  |               | 416,794    |                      |   |                       |  |   | (534       | ) |  |   | 416,261   
|Corporate bonds                                       |  |               | 0          |                      |   | 0                     |  |   | 0          |   |  |   | 0         
|Restricted securities                                 |  |               | 0          |                      |   | 0                     |  |   | 0          |   |  |   | 0         
|                                                      |  |               |            |                      |   |                       |  |   |            |   |  |   |           
|                                                      |  | $             | 416,794    |                      | $ | 0                     |  | $ | (534       | ) |  | $ | 416,261   



Securities with a
market value of $10.9 million were pledged as collateral for public deposits, repurchase agreements and for other purposes as required by law as of June 30, 2004. The market value of pledged securities at year-end 2003 was $12.3 million.



Securities with an unrealized loss, as shown above, recognized no
impairment due to managements intent and demonstrated ability to hold securities to scheduled maturity or call date. The unrealized loss positions are directly related to interest rate movements as there is minimal credit risk exposure in
these investments. All securities are investment grade or better and all losses are temporary.



Note 3: Loans



The
components of loans were as follows:



|                                                             |  |               |             |   |                   |   |             |  
|------------------------------------------------------------ |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | June 30, 2004 |             |   | December 31, 2003 |  
|                                                             |  | (unaudited)   |             |   |                   |  
|Mortgage loans on real estate:                               |  |               |             |   |                   |   |             |  
|Construction                                                 |  | $             | 29,698,243  |   |                   | $ | 24,959,214  |  
|Secured by farmland                                          |  |               | 2,066,151   |   |                   |   | 1,134,585   |  
|Secured by 1-4 family residential                            |  |               | 113,665,070 |   |                   |   | 104,104,372 |  
|Other real estate loans                                      |  |               | 27,881,710  |   |                   |   | 22,338,503  |  
|Loans to farmers (except those secured by real estate)       |  |               | 71,736      |   |                   |   | 71,479      |  
|Commercial and industrial loans (not secured by real estate) |  |               | 19,922,848  |   |                   |   | 24,819,068  |  
|Consumer installment loans                                   |  |               | 9,668,460   |   |                   |   | 10,555,735  |  
|All other loans                                              |  |               | 1,768,162   |   |                   |   | 974,448     |  
|Net deferred loan costs and fees                             |  |               | 1,388,895   |   |                   |   | 1,395,125   |  
|                                                             |  |               |             |   |                   |   |             |  
|Total loans                                                  |  | $             | 206,131,275 |   |                   | $ | 190,352,529 |  
|Allowance for loan losses                                    |  |               | (1,954,387  | ) |                   |   | (1,901,576  | )
|                                                             |  |               |             |   |                   |   |             |  
|Loans, net                                                   |  | $             | 204,176,888 |   |                   | $ | 188,450,953 |  



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Loans upon which the accrual of interest has been discontinued totaled $1.7 million as of June 30, 2004,
and $1.4 million as of December 31, 2003.



Note 4: Allowance for Loan Losses



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



|                           |  |             |           |   |            |   |           |             |  |   |           |  
|-------------------------- |  | ----------- | --------- | - | ---------- | - | --------- | ----------- |  | - | --------- | -
|                           |  | 6/30/2004   |           |   | 12/31/2003 |   |           | 6/30/2003   | 
|                           |  | (unaudited) |           |   |            |   |           | (unaudited) | 
|Balance, beginning of year |  | $           | 1,901,576 |   |            | $ | 1,696,914 |             |  | $ | 1,696,914 |  
|Provision for loan losses  |  |             | 150,000   |   |            |   | 312,000   |             |  |   | 156,000   |  
|Recoveries                 |  |             | 12,907    |   |            |   | 13,032    |             |  |   | 6,293     |  
|Loans charged off          |  |             | (110,096  | ) |            |   | (120,370  | )           |  |   | (60,368   | )
|                           |  |             |           |   |            |   |           |             |  |   |           |  
|Balance, end of period     |  | $           | 1,954,387 |   |            | $ | 1,901,576 |             |  | $ | 1,798,839 |  
|                           |  |             |           |   |            |   |           |             |  |   |           |  



|Note | 5: Earnings per share
|---- | ---------------------



The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of
diluted potential common stock. Potential diluted common stock had no effect on earnings per share available to shareholders.



|                               |  |                                |  |                                |      |               |           |                 |   |     
|------------------------------ |  | ------------------------------ |  | ------------------------------ | ---- | ------------- | --------- | --------------- | - | ----
|                               |  | Six months ended June 30, 2004 |  | Six months ended June 30, 2003
|(Unaudited)                    |  | AverageShares                  |  | Per shareAmount                |      | AverageShares |           | Per shareAmount
|Basic earnings per share       |  | 2,330,033                      |  | $                              | 0.36 |               | 2,308,234 |                 | $ | 0.38
|                               |  |                                |  |                               
|Effect of dilutive securities: |  |                                |  |                                |      |               |           |                 |   |     
|Stock options                  |  | 22,222                         |  |                                |      |               | 18,867    |                 |   |     
|                               |  |                                |  |                               
|Diluted earnings per share     |  | 2,352,255                      |  | $                              | 0.36 |               | 2,327,101 |                 | $ | 0.38



As of June 30, 2004, and June 30,
2003, options on 128,414 shares and 83,008 shares, respectively, were not included in computing diluted earnings per share, because their effects were anti-dilutive.



Note 6: Unidentifiable Intangibles



The Company has unidentifiable intangibles recorded on the consolidated financial statements relating to the purchase of five branches. The balance of the
intangibles at June 30, 2004, as reflected on the consolidated balance sheet, was $2,807,842. Management has determined that these purchases qualified as acquisitions of businesses, and therefore discontinued amortization, effective January 1, 2002.
Based on managements assessment, there is no impairment in value at June 30, 2004.



Note 7: Employee Benefit Plans



Components of Net Periodic Benefit Cost

Six months ended June 30, 2004 (unaudited)



|                                      |  |                  |         |   |                          |   |         |      |  |      |        |  |   |       
|------------------------------------- |  | ---------------- | ------- | - | ------------------------ | - | ------- | ---- |  | ---- | ------ |  | - | ------
|                                      |  | Pension Benefits |         |   | Post Retirement Benefits
|                                      |  | 2004             |         |   | 2003                     |   |         | 2004 |  | 2003
|Service Cost                          |  | $                | 118,506 |   |                          | $ | 93,970  |      |  | $    | 7,658  |  | $ | 6,590 
|Interest Cost                         |  |                  | 83,110  |   |                          |   | 67,924  |      |  |      | 16,305 |  |   | 19,558
|Expected Return on Plan Assets        |  |                  | (67,379 | ) |                          |   | (54,089 | )    |  |      | 0      |  |   | 0     
|Amortization of Prior Service Cost    |  |                  | 8,186   |   |                          |   | 8,186   |      |  |      | 0      |  |   | 0     
|Recognition of Net (Gain)/Loss        |  |                  | 22,648  |   |                          |   | 20,316  |      |  |      | 10,000 |  |   | 15,268
|Amortization of Transition Obligation |  |                  |        |   |                          |   | (9,156  | )    |  |      | 1,456  |  |   | 1,456 
|                                      |  |                  |         |   |                          |   |         |      |  |      |        |  |   |       
|Net Periodic Benefit Cost             |  | $                | 165,071 |   |                          | $ | 127,151 |      |  | $    | 35,419 |  | $ | 42,872



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Employer Contributions



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



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



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



CRITICAL ACCOUNTING POLICIES



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



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



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



GOODWILL. In October 2003, the Financial Accounting Standards Board issued
Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement amends previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the
application of Statement No. 141, Business Combinations,and Statement No. 142, Goodwill and Other Intangible Assets,to branch acquisitions if such transactions meet the definition of a business combination. The provisions of the
Statement do not apply to transactions between two or more mutual enterprises. In addition, the Statement amends Statement No. 144, Accounting for the Impairment of Long-Lived Assets,to include in its scope core deposit intangibles of
financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to



10



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##### Table of Contents

the impairment recognition and measurement provisions required for other long-lived assets held and used. The Company
adopted this interpretation of Statement 147 for the intangibles associated with branch acquisitions that were executed in 1994, 1997, and 2000. The Company conducted an in-depth study of the issue and has determined that the intangibles associated
with these branch acquisitions qualify as a business combination as described in Statement 141 and 142, as well as Emerging Issues Task Force Ruling 98-3.



RECENT ACCOUNTING PRONOUNCEMENTS.



There were no new Financial Accounting Standards Board promulgations in the second quarter of 2004 that will impact Bay Banks of Virginia, Inc.



STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



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



Bay Banks of Virginia, Inc.

Financial Highlights (unaudited)



|                                                        |  |                     |   |  |                     |   |  |        |  
|------------------------------------------------------- |  | ------------------- | - |  | ------------------- | - |  | ------ | -
|Six months ended (Thousands)                            |  | As of June 30, 2004 |   |  | As of June 30, 2003 |   |  | Change |  
|FINANCIAL CONDITION                                     |  |                     |   |  |                     |   |  |        |  
|Average Assets                                          |  | 293,963             |   |  | 270,348             |   |  | 8.7    | %
|Average Interest-earning Assets                         |  | 273,098             |   |  | 244,865             |   |  | 11.5   | %
|Average Earning Assets to Total Average Assets          |  | 92.9                | % |  | 90.6                | % |  | 2.6    | %
|Period-end Interest-bearing Liabilities                 |  | 237,335             |   |  | 220,292             |   |  | 7.7    | %
|Average Interest-bearing Liabilities                    |  | 231,465             |   |  | 214,983             |   |  | 7.7    | %
|Average Equity, including FAS 115 adjustment            |  | 25,567              |   |  | 25,078              |   |  | 1.9    | %
|Tier 1 Capital                                          |  | 21,639              |   |  | 20,693              |   |  | 4.6    | %
|Net Risk-weighted Assets                                |  | 208,205             |   |  | 177,605             |   |  | 15.9   | %
|Tier 2 Capital                                          |  | 1,954               |   |  | 1,799               |   |  | 8.6    | %
|                                                        |  |                     |  
|RESULTS OF OPERATIONS                                   |  |                     |   |  |                     |   |  |        |  
|Net Interest Income before Provision                    |  | 4,718               |   |  | 4,264               |   |  | 10.7   | %
|Net Income                                              |  | 848                 |   |  | 878                 |   |  | -3.4   | %
|Annualized Yield on Average Interest-earning Assets     |  | 5.16                | % |  | 5.68                | % |  | -9.2   | %
|Annualized Cost of Average Interest-bearing Liabilities |  | 1.83                | % |  | 2.32                | % |  | -21.1  | %
|Annualized Net Yield on Average Interest-earning Assets |  | 3.61                | % |  | 3.64                | % |  | -0.8   | %
|Annualized Net Interest Rate Spread                     |  | 3.33                | % |  | 3.36                | % |  | -0.9   | %
|                                                        |  |                     |  
|RATIOS                                                  |  |                     |   |  |                     |   |  |        |  
|Total Capital to Risk-weighted Assets (10% min)         |  | 11.3                | % |  | 12.5                | % |  | -9.5   | %
|Tier 1 Capital to Risk-weighted Assets (6% min)         |  | 10.4                | % |  | 11.5                | % |  | -9.8   | %
|Leverage Ratio (5% min)                                 |  | 7.3                 | % |  | 7.7                 | % |  | -5.2   | %
|Annualized Return on Average Assets (ROA)               |  | 0.6                 | % |  | 0.6                 | % |  | -11.1  | %
|Annualized Return on Average Equity (ROE)               |  | 6.6                 | % |  | 7.0                 | % |  | -5.7   | %
|                                                        |  |                     |  
|Period-end basic shares outstanding                     |  | 2,341,613           |   |  | 2,316,889           |   |  | 1.1    | %
|Average basic shares outstanding                        |  | 2,330,033           |   |  | 2,308,234           |   |  | 0.9    | %
|Average diluted shares outstanding                      |  | 2,352,255           |   |  | 2,327,101           |   |  | 1.1    | %
|                                                        |  |                     |  
|PER SHARE DATA                                          |  |                     |   |  |                     |   |  |        |  
|                                                        |  |                     |  
|Diluted earnings per average share (EPS)                |  | 0.36                |   |  | 0.38                |   |  | -4.4   | %
|Cash Dividends per average share (six months)           |  | 0.30                |   |  | 0.28                |   |  | 7.2    | %
|Book Value per share - basic                            |  |                     |   |  |                     |   |  |        |  
|before Accumulated Comprehensive Income/Loss            |  | 10.44               |   |  | 10.14               |   |  | 2.9    | %
|after Accumulated Comprehensive Income/Loss             |  | 10.55               |   |  | 10.98               |   |  | -3.9   | %
|                                                        |  |                     |  
|Book Value per average share - basic                    |  |                     |   |  |                     |   |  |        |  
|before Accumulated Comprehensive Income/Loss            |  | 10.49               |   |  | 10.18               |   |  | 3.1    | %
|after Accumulated Comprehensive Income/Loss             |  | 10.60               |   |  | 11.02               |   |  | -3.8   | %



11



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##### Table of Contents

EARNINGS SUMMATION



For the six months ended June 30, 2004, net income was $848 thousand as compared to $878 thousand for the comparable period in 2003, a decrease of 3.5%.
Diluted earnings per average share for the first six months of 2004 were $0.36 as compared to $0.38 for the first six months of 2003. Annualized return on average assets was .6% for the first six months of 2004 and 2003. Annualized return on average
equity was 6.6% for the first six months of 2004, compared to 7.0% for the first six months of 2003, a decrease of 5.7%.



The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest
expense. The net interest margin is net interest income expressed as a percentage of interest earning assets. Changes in the volume and mix of interest earning assets and interest bearing liabilities, the associated yields and rates, and the volume
of non-performing assets have a significant impact on net interest income, the net interest margin, and net income. The annualized net interest margin was 3.61% as of June 30, 2004 compared to 3.64% for the same period in 2003 for a decrease of .8%.



Net interest income before provision for loan losses for the
first six months of 2004 was $4.7 million, compared to $4.3 million for the first six months of 2003, an increase of $454 thousand or 10.6%. Increases in net interest income were driven by loan growth (changes in volume) during the first six months
of 2004. Average interest-earning assets totaled $273.1 million for the first six months of 2004 as compared to $244.9 million for the first six months of 2003, an increase of 11.5%. Average interest-earning assets as a percent of total average
assets was 92.9% for the first six months of 2004 as compared to 90.6% for the comparable period of 2003, an increase of 2.6%. The annualized yield on average interest-earning assets for the first six months of 2004 was 5.16% as compared to 5.68%
for the first six months of 2003, a decrease of 9.2%.



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



Average interest-bearing liabilities totaled $231.5 million for the first six months of 2004 as compared to $215.0 million for the first six months of 2003, an increase of 7.7%. The annualized yield (cost) on
interest-bearing liabilities for the first six months of 2004 was 1.83% as compared to 2.32% for the first six months of 2003, a decrease of 21.1%.



12



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##### Table of Contents

The net interest spread, which is the difference between the annualized yield on earning assets and the
annualized rate on interest bearing liabilities was 3.33% through six months of 2004 and 3.36% through six months of 2003.



Average total assets for the first six months of 2004 were $294.0 million as compared to $270.3 million for the first six months of 2003, an increase of
8.7%.



Throughout 2003, the Company experienced significant
compression in its net interest margin and consequently its net interest income. As the general rate environment reached historic lows during the fourth quarter of 2002 and throughout 2003, the Company experienced heavy volumes of loan prepayments
as consumers fled adjustable rate mortgages for conventional 30 year fixed rate loans. These conventional mortgages are not held in the Companys portfolio, but rather, are sold into the secondary market on an individual loan by loan basis. The
sale of these loans creates fee income at the time of sale, but reduces the Companys expected future cash flow from interest income and principal repayment. Fortunately, while record numbers of loans were being paid off into the secondary
market, record numbers of new loans were being generated for the Companys loan portfolio.



However, as the historically low interest rate environment continued to persist, the new loan volume that was placed in the Companys loan portfolio
was at significantly lower rates than those that were paid off and re-financed into conventional secondary market mortgages. The first six months of 2004 has resulted in strong loan growth. This growth has resulted in increases in net interest
income through volume rather than rate. The vast majority of loans being recorded are adjustable and variable rate loans which will re-price upwardly when the interest rate market becomes less accommodative. The balance sheet of the Company remains
asset sensitive and is therefore well positioned for a rising rate environment.



13



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##### Table of Contents

Bay Banks of Virginia, Inc.

Net Interest Income Analysis (unaudited)



|                                                      |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|----------------------------------------------------- |  | -------------------------- | ------- | -------------- | -------------------------- | -------------------- |  | ---- | -------------- |  | -------------- | ------- | -------------------- | - | ----- |  | ---- | -
|(Fully taxable equivalent basis)                      |  | Six months ended 6/30/2004 |         |                | Six months ended 6/30/2003 |                     
|(Thousands)                                           |  | AverageBalance             |         | Income/Expense |                            | AnnualizedYield/Rate |  |      | AverageBalance |  | Income/Expense |         | AnnualizedYield/Rate |  
|INTEREST EARNING ASSETS:                              |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Investments (Book Value):                             |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Taxable Investments                                   |  | $                          | 38,310  |                | $                          | 669                  |  | 3.49 | %              |  | $              | 28,348  |                      | $ | 812   |  | 5.73 | %
|Tax-Exempt Investments (1)                            |  |                            | 20,932  |                |                            | 606                  |  | 5.79 | %              |  |                | 17,557  |                      |   | 544   |  | 6.20 | %
|                                                      |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Total Investments                                     |  |                            | 59,242  |                |                            | 1,275                |  | 4.30 | %              |  |                | 45,904  |                      |   | 1,356 |  | 5.91 | %
|                                                      |  |                            |         |                |                            |                     
|Gross Loans (2)                                       |  |                            | 200,962 |                |                            | 5,702                |  | 5.67 | %              |  |                | 170,311 |                      |   | 5,432 |  | 6.38 | %
|Interest-bearing Deposits                             |  |                            | 120     |                |                            | 1                    |  | 1.95 | %              |  |                | 177     |                      |   | 1     |  | 0.57 | %
|Fed Funds Sold                                        |  |                            | 12,774  |                |                            | 63                   |  | 0.98 | %              |  |                | 28,473  |                      |   | 170   |  | 1.19 | %
|                                                      |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|TOTAL INTEREST EARNING ASSETS                         |  | $                          | 273,098 |                | $                          | 7,041                |  | 5.16 | %              |  | $              | 244,865 |                      | $ | 6,958 |  | 5.68 | %
|                                                      |  |                            |         |                |                            |                     
|INTEREST-BEARING LIABILITIES:                         |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Deposits:                                             |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Savings Deposits                                      |  | $                          | 65,481  |                | $                          | 476                  |  | 1.45 | %              |  | $              | 60,685  |                      | $ | 567   |  | 1.87 | %
|NOW Deposits                                          |  |                            | 46,207  |                |                            | 114                  |  | 0.49 | %              |  |                | 40,326  |                      |   | 181   |  | 0.90 | %
|CDs >= $100,000                                      |  |                            | 31,802  |                |                            | 500                  |  | 3.14 | %              |  |                | 25,377  |                      |   | 477   |  | 3.76 | %
|CDs < $100,000                                       |  |                            | 64,029  |                |                            | 980                  |  | 3.06 | %              |  |                | 67,997  |                      |   | 1,153 |  | 3.39 | %
|Money Market Deposit Accounts                         |  |                            | 17,525  |                |                            | 32                   |  | 0.36 | %              |  |                | 16,593  |                      |   | 98    |  | 1.18 | %
|                                                      |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Total Interest Bearing Deposits                       |  | $                          | 225,044 |                | $                          | 2,102                |  | 1.87 | %              |  | $              | 210,978 |                      | $ | 2,477 |  | 2.35 | %
|                                                      |  |                            |         |                |                            |                     
|Fed funds purchased and securities sold to repurchase |  |                            | 4,443   |                |                            | 11                   |  | 0.48 | %              |  |                |         |                      |   |       |  | 0.99 | %
|FHLB advance                                          |  |                            | 1,978   |                |                            | 4                    |  | 0.70 | %              |  |                | 4,005   |                      |   | 20    |  | 0.00 | %
|                                                      |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES                    |  | $                          | 231,465 |                | $                          | 2,117                |  | 1.83 | %              |  | $              | 214,983 |                      | $ | 2,497 |  | 2.32 | %
|Net Interest Income/Yield on Earning Assets           |  |                            |         |                | $                          | 4,924                |  | 3.61 | %              |  |                |         |                      | $ | 4,461 |  | 3.64 | %
|Net Interest Rate Spread                              |  |                            |         |                |                            |                      |  | 3.33 | %              |  |                |         |                      |   |       |  | 3.36 | %

---

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

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



Through the six months ended June 30, 2004, average interest-earning assets were comprised of the loan portfolio with $201.0 million and the investment
portfolio with $59.2 million. For the six month period ended June 30, 2004, compared to the same period in 2003, on a fully tax equivalent basis, tax-exempt investment yields declined to 5.79% from 6.20%, and taxable investment yields decreased to
3.49% from 5.73%, resulting in a decrease in total investment yield to 4.30% from 5.91%. During 2003 the Company experienced higher volumes of called bonds and pay-downs on mortgage-backed investments. Coupled with the sale of bonds, at a gain, the
yield on the investment portfolio has declined. However, management has positioned the bond portfolio with a much shorter average life in anticipation of improving yields. In addition, loan growth has remained strong through the first six months of
2004, and the investment portfolio will provide liquidity as short investments mature during 2004 and 2005.



In the first six months of 2004, gross loans on average yielded 5.67% as compared to 6.38% for the same period in 2003. As mentioned above, loan
prepayments were significant in 2003 and have resulted in compression in the net interest margin. The Company has been successful in growing the loan portfolio with variable and adjustable rate loans through the second quarter of 2004. In addition,
the Company did not enter into the thirty year fixed rate market and did not, therefore, place any significant amount of fixed rate loans in its portfolio. By keeping the re-pricing terms of the loan portfolio short, the Company is positioned for a
rising rate environment.



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In an effort to offset the reduction in loan and investment yields, management has reduced the yields
(costs) on average interest-bearing deposits during the first six months of 2004, compared to the same period in 2003, as follows. Savings yields were reduced to 1.45% compared to 1.87%, NOW accounts were reduced to 0.49% compared to .90%, money
market demand accounts were reduced to 0.36% compared to 1.18%, certificates of deposit greater than or equal to $100 thousand were reduced to 3.14% compared to 3.76%, and certificates of deposit less than $100 thousand were reduced to 3.06%
compared to 3.39%. The resulting total yield on average deposits through June 30, 2004, was reduced to 1.87% compared to 2.35% for the same period of 2003.



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



Interest Rate Sensitivity Analysis

as of June 30, 2004



|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|---------------------------------- |  | -------------- |  | ----------- | - |  | --------- | - |  | ----------- |  | -------
|(Thousands)                        |  | Within 3months |  | 3-12 Months |   |  | 1-5 Years |   |  | Over 5Years |  | Total  
|Interest-Bearing Due From Banks    |  | 126            |  | 0           |   |  | 0         |   |  | 0           |  | 126    
|Fed Funds Sold                     |  | 13,425         |  | 0           |   |  | 0         |   |  | 0           |  | 13,425 
|Investments                        |  | 18,288         |  | 3,411       |   |  | 20,423    |   |  | 18,874      |  | 60,996 
|Loans                              |  | 56,685         |  | 51,969      |   |  | 79,478    |   |  | 16,610      |  | 204,742
|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|Total Earning Assets               |  | 88,524         |  | 55,380      |   |  | 99,901    |   |  | 35,484      |  | 279,289
|                                   |  |                |  |             |  
|NOW Accounts                       |  | 15,023         |  | 30,501      |   |  | 0         |   |  | 0           |  | 45,524 
|MMDAs                             |  | 16,581         |  | 0           |   |  | 0         |   |  | 0           |  | 16,581 
|Savings                            |  | 10,000         |  | 14,404      |   |  | 43,342    |   |  | 0           |  | 67,746 
|CDs < $100,000                    |  | 6,531          |  | 13,906      |   |  | 42,454    |   |  | 5           |  | 62,896 
|CDs >= $100,000                   |  | 3,794          |  | 5,383       |   |  | 21,992    |   |  | 0           |  | 31,169 
|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|Total Interest Bearing Deposits    |  | 51,929         |  | 64,194      |   |  | 107,788   |   |  | 5           |  | 223,916
|Securities Sold to Repurchase      |  | 5,918          |  | 0           |   |  | 0         |   |  | 0           |  | 5,918  
|FHLB advance                       |  | 0              |  | 7,500       |   |  | 0         |   |  | 0           |  | 7,500  
|                                   |  |                |  |             |   |  |           |   |  |             |  |        
|Total Interest Bearing Liabilities |  | 57,847         |  | 71,694      |   |  | 107,788   |   |  | 5           |  | 237,334
|                                   |  |                |  |             |  
|Rate Sensitive Gap                 |  | 30,677         |  | (16,314     | ) |  | (7,887    | ) |  | 35,479      |  | 41,955 
|                                   |  |                |  |             |  
|Cumulative Gap                     |  | 30,677         |  | 14,363      |   |  | 6,476     |   |  | 41,955      |  |        



As of June 30, 2004,
the Company had interest-earning assets that mature within three months totaling $88.5 million, within twelve months totaling $55.4 million, through five years totaling $99.9 million, and over five years totaling $35.5 million. In comparison,
interest-bearing liabilities maturing within three months totaled $57.8 million, within twelve months totaled $71.7 million, within five years totaled $107.8 million and $5 thousand over five years. The tabular information indicates that the Company
is asset sensitive for all periods presented on a cumulative basis. Management believes this will position the Company favorably in a rising rate environment. Management is continually reviewing loan and deposit products to modify or develop
offerings that are less subject to interest rate risk.



LIQUIDITY



The Company maintains adequate short-term assets to meet
the Companys liquidity needs as anticipated by management. Federal funds sold and investments that mature in one year or less provide the major sources of funding for liquidity needs. On June 30, 2004, federal funds sold totaled $13.4 million
and securities maturing in one year or



15



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##### Table of Contents

less totaled $21.7 million, for a total pool of $35.1 million. The liquidity ratio as of June 30, 2004 was 26.2% as
compared to 28.8% as of December 31, 2003. The Company determines this ratio by dividing the sum of cash and cash equivalents, unpledged investment securities and Federal Funds Sold, by interest bearing liabilities. Management, through historical
analysis, has deemed 15% an adequate liquidity ratio and does not anticipate a significant change in the liquidity structure of the Company. In addition, the Company maintains available lines of credit with the Federal Home Loan Bank of Atlanta and
several correspondent banks.



In May of 2004 the Company took a
short term advance of $7.5 million from the Federal Home Bank of Atlanta.



CAPITAL RESOURCES



From December 31, 2003, to
June 30, 2004, total shareholders equity decreased to $24.7 million from $25.1 million or 1.6%. The Companys capital resources are impacted by net unrealized gains or losses on securities. The securities portfolio is marked to market
monthly and unrealized gains or losses, net of taxes, are recognized as accumulated comprehensive income or loss on the balance sheet and statement of changes in shareholders equity. Shareholders equity before unrealized gains or losses
was $24.5 million on June 30, 2004, and $24.1 million on December 31, 2003. Accumulated other comprehensive income was $247 thousand at June 30, 2004 and $964 thousand at December 31, 2003. This represents a decrease of $717 thousand or 74.4% during
the six month period.



Book value per share, basic, on June 30,
2004, compared to June 30, 2003, declined to $10.60 from $11.02, a decrease of 3.8%. Book value per share, basic, before accumulated comprehensive income on June 30, 2004, compared to June 30, 2003, grew to $10.49 from $10.18, an increase of 3.1%.
Cash dividends paid for the six months ended June 30, 2004, were $699 thousand, or $0.30 per share, compared to $646 thousand, or $0.28 per share, for the comparable period ended June 30, 2003 an increase of 7.2%. Average basic shares outstanding
for the six months ended June 30, 2004, were 2,330,033 compared to 2,308,234 for the comparable period ended June 30, 2003. The Company began a share repurchase program in August of 1999 and has continued the program into 2004. The plan authorizes a
total of 115,000 shares for repurchase.



The Company is subject
to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council guidelines. As of June 30, 2004 the Company maintained Tier 1 capital of $21.6 million, net risk weighted assets of $208.2 million, and Tier 2
capital of $1.9 million. On June 30, 2004, the Tier 1 capital to risk weighted assets ratio was 10.4%, the total capital ratio was 11.3%, and the tier 1 leverage ratio was 7.3%. These ratios continue to be well in excess of regulatory minimums.



FINANCIAL CONDITION



As of June 30, 2004, total assets increased by 4.0% for the six month
period. Total assets were $302.4 million at June 30, 2004 as compared to $290.7 million at year-end 2003. Cash and cash equivalents totaled $9.3 million on June 30, 2004, compared to $7.8 million at year-end 2003.



During the six months ended June 30, 2004, gross loans increased by $15.7
million or 8.3%, to $204.2 million from $188.5 million at year-end 2003. The major components of this increase were real estate mortgage loans secured by 1-4 family residential collateral with 9.2% growth to $113.7 million, and residential
construction loans growing 19.0% to $29.7 million.



For the six
months ended June 30, 2004, the Company charged off loans totaling $110 thousand. For the comparable period in 2003, total loans charged off were $60 thousand. The Company maintained $135.5 thousand of other real estate owned (OREO) as
of June 30, 2004. As of year-end 2003, this balance was $77 thousand. The Company actively markets all OREO properties, and expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of
book or market value.



The provision for loan losses amounted
to $150 thousand through the first six months, and the allowance for loan losses as of June 30, 2004, was $1.9 million. The allowance for loan losses, as a percentage of average total loans through the first six months of 2004 was .95%. The
allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the necessary provision. A loan by loan review is conducted of all loan classes and inherent losses on these individual loans are determined. This valuation is then
compared to historical data in an effort to determine the prevailing trends. A third component of the process is the analysis of a tabular presentation of loss allocation



16



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##### Table of Contents

percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As
of June 30, 2004, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio.



As of June 30, 2004, $1.7 million of loans were on non-accrual status of which $1.1 million are considered impaired. There were $1.4 million of loans on
non-accrual status as of year-end 2003. Changes in market conditions, interest rates, or the local economy could increase the realized loss on this credit. . Impaired loans totaled $1,068,054 on June 30, 2004 and $157,917 on June 30, 2003. Impaired
loans are those non-accrual loans that are considered commercial or non-farm/non-residential in nature. Loans still accruing interest but delinquent for 90 days or more were $287 thousand on June 30, 2004, as compared to $1.5 million on June 30,
2003. Management has reviewed the credit and the underlying collateral and expects no additional loss above that which is specifically reserved in the allowance for loan losses



As of June 30, 2004, securities available for sale at market value totaled $60.6 million as compared to December 31, 2003
market value of $66.1 million. This represents a net decrease of $5.5 million or 8.3% for the six months. Securities held to maturity were $423 thousand as of June 30, 2004, compared to $417 thousand at December 31, 2003. At quarter end the
investment portfolio represented 20.0% of total assets and 21.6% of earning assets. The greater portion of the Companys investment portfolio is classified as available-for-sale and marked to market on a monthly basis. The resulting accumulated
adjustment to book value as of June 30, 2004 was a net unrealized loss of $717 thousand. The corresponding accumulated adjustment to shareholders equity was $247 thousand. These gains or losses are booked monthly as an adjustment to book value
based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold. Management does not anticipate the realization of net losses on investments during 2004.



As of June 30, 2004, total deposits were $262.7 million compared to $257.1 at
year-end 2003. This represents growth in balances of $5.6 million or 2.2% during the six months. Components of this growth include non-interest-bearing demand deposits at 13.0% growth to $38.7 million, and savings and interest bearing demand deposit
accounts at 3.0% growth to $129.9 million. Time deposits decreased by 2.7% to $94.1 million.



RESULTS OF OPERATIONS



NON-INTEREST
INCOME



Non-interest income for the first six months of
2004 and 2003 totaled $1.3 million. Non-interest income includes income from fiduciary activities, service charges on deposit accounts, other miscellaneous fees, gains on the sale of securities, and other income. Of these categories, the major
components are fiduciary activities which contributed $328 thousand compared to $287 thousand through six months of 2003, service charges on deposit accounts contributed $302 thousand through six months of 2004 and $297 thousand for the comparable
period in 2003, other fees contributed $397 thousand compared to $308 thousand through the six months of 2004 and 2003, consecutively. Secondary market real estate loan brokerage income contributed $102 thousand compared to $206 through six months
of 2003, gains on the sale of investments were $155 thousand through June 30, 2004 compared to $25 thousand for the comparable period of 2003. Gains on the sale of other real estate totaled $23 thousand through six months of 2004 compared to $192
thousand for the comparable period of 2003, and other income totaled $38 thousand through six months of 2004 compared to $50 thousand for the six months ended June 30, 2003.



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



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



17



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##### Table of Contents

NON-INTEREST EXPENSE



Non-interest expenses totaled $4.7 million during the first six months of 2004 as compared to $4.2 million for the same period in 2003, an increase of
11.1%. The largest components of non-interest expense are salaries and benefits, and occupancy expense. Through the six months ended June 30, 2004, salary and benefit expense was $2.6 million, and occupancy expense was $696 thousand. For the same
period in 2003, these totals were $2.1 million, and $702 thousand, respectively.



Other expenses include bank franchise taxes which totaled $113 thousand through six months of 2004 and $102 thousand for 2003, expenses related to the Visa® program which were $183 thousand through six months of 2004 and $162 thousand through
six months of 2003, expenses related to the operation of the Companys Customer Care Center which were $75 thousand for the current period and $91 thousand through six months of 2003, and other operating expenses which totaled $998 thousand
through June 30, 2004 and $1.0 million for the comparable period of 2003.



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



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



ITEM 4. CONTROLS AND PROCEDURES



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



PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None to report



|ITEM | 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OR EQUITY SECURITIES
|---- | -------------------------------------------------------------------------------------



Issuer Purchases of Equity Securities



|            |  |                               |  |                             |       |                                                                     |       |                                                                   |       
|----------- |  | ----------------------------- |  | --------------------------- | ----- | ------------------------------------------------------------------- | ----- | ----------------------------------------------------------------- | ------
|            |  | TotalNumber ofSharesPurchased |  | Average Price Paidper Share |       | Total Number of SharesPurchased as Part ofPublicly AnnouncedProgram |       | Maximum Number ofShares that May Yet bePurchased Under theProgram
|April, 2004 |  | 200                           |  | $                           | 16.20 |                                                                     | 200   |                                                                   | 42,142
|May, 2004   |  | 1,100                         |  |                             | 14.97 |                                                                     | 1,100 |                                                                   | 41,042
|June, 2004  |  | 600                           |  |                             | 15.08 |                                                                     | 600   |                                                                   | 40,442
|            |  |                               |  |                             |       |                                                                     |       |                                                                   |       
|            |  | 1,900                         |  | $                           | 15.13 |                                                                     | 1,900 |                                                                   |       
|            |  |                               |  |                             |       |                                                                     |       |                                                                   |       



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In August of 1999, the Companys board of directors made an initial authorization for the repurchase of 15,000
shares of the Companys common stock through the Stock Repurchase Program. Through additional authorizations made in November of 1999, November of 2000, and February of 2004, and adjusted for a 2-for-1 stock split in June of 2002, the board has
authorized the repurchase of a total of 180,000 shares. Cumulatively, the Company has repurchased 139,558 of its shares. The stock may be purchased in the open market and/or in privately negotiated transactions as management and the board of
directors determine prudent.



ITEM 3. DEFAULT UPON SENIOR SECURITIES



None to
report



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



The Company held its Annual Meeting of Stockholders on May 17, 2004 at which time stockholders were asked to consider two proposals, as follows:



|1. | Election of three Class III directors to serve for a term of three years.
|-- | -------------------------------------------------------------------------



|2. | Ratification of the Board of Directors appointment of Yount, Hyde & Barbour, P. C. as independent auditors of the Company for 2004.
|-- | ------------------------------------------------------------------------------------------------------------------------------------



The vote tabulation was as follows:



|1. | Election of three Class III directors to serve for a term of three years (there were no abstentions):
|-- | -----------------------------------------------------------------------------------------------------



|                       |  |           |  |               
|---------------------- |  | --------- |  | --------------
|Director               |  | Votes For |  | Votes Withheld
|Robert C. Berry        |  | 1,932,588 |  | 35,571        
|Ammon G. Dunton, Jr.   |  | 1,920,236 |  | 69,645        
|Richard A. Farmar, III |  | 1,951,475 |  | 11,982        



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



Austin L. Roberts, III

A. Wayne Saunders

Weston F. Conley, Jr.

Thomas A. Gosse



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



|                |  |          
|--------------- |  | ---------
|Votes for       |  | 1,959,193
|Votes withheld  |  | 1,009    
|Votes abstained |  | 7,956    



ITEM 5. OTHER INFORMATION



None to report



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) | Exhibit Index:
|--- | --------------



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



|(b) | Reports on Form 8-K:
|--- | --------------------



One report on Form 8-K was filed with the Securities and Exchange Commission on May 5, 2004, announcing the second quarter dividend.



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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)                         
|         | 
|08/12/04 |  | /s/ Austin L. Roberts, III           
|         |  | Austin L. Roberts, III               
|         |  | President and Chief Executive Officer
|         |  | (principal executive officer)        
|         | 
|08/12/04 |  | /s/ Richard C. Abbott                
|         |  | Richard C. Abbott                    
|         |  | Treasurer                            
|         |  | (principal financial officer)        



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