##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

FOR THE QUARTERLY PERIOD ENDED June 30, 2008



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

COMMISSION FILE NUMBER: 0-22955





BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)







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

100 SOUTH MAIN STREET, KILMARNOCK, VA 22482

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 435-1171

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)





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

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



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

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

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

2,373,571 shares of common stock on August 7, 2008









---

##### Table of Contents

FORM 10-Q

For the interim period ending June 30, 2008.

INDEX



|                                                                                                                       |  |   
|---------------------------------------------------------------------------------------------------------------------- |  | --
|PART I - FINANCIAL INFORMATION                                                                                         |  |   
|                                                                                                                       | 
|ITEM 1. FINANCIAL STATEMENTS                                                                                           |  |   
|                                                                                                                       | 
|CONSOLIDATED BALANCE SHEETS JUNE 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007                                            |  | 3 
|                                                                                                                       | 
|CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)                          |  | 4 
|                                                                                                                       | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2008 and 2007
(UNAUDITED) |  | 5 
|                                                                                                                       | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)                      |  | 6 
|                                                                                                                       | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                             |  | 7 
|                                                                                                                       | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                          |  | 13
|                                                                                                                       | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                     |  | 19
|                                                                                                                       | 
|ITEM 4. CONTROLS AND PROCEDURES                                                                                        |  | 19
|                                                                                                                       | 
|PART II - OTHER INFORMATION                                                                                            |  |   
|                                                                                                                       | 
|ITEM 1. LEGAL PROCEEDINGS                                                                                              |  | 19
|                                                                                                                       | 
|ITEM 1A. RISK FACTORS                                                                                                  |  | 19
|                                                                                                                       | 
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                    |  | 19
|                                                                                                                       | 
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                                |  | 20
|                                                                                                                       | 
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            |  | 20
|                                                                                                                       | 
|ITEM 5. OTHER INFORMATION                                                                                              |  | 20
|                                                                                                                       | 
|ITEM 6. EXHIBITS                                                                                                       |  | 20



2



---

##### Table of Contents

PART I - FINANCIAL INFORMATION



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

CONSOLIDATED BALANCE
SHEETS



|                                                                                                                   |  |               |             |   |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                   |  | June 30, 2008 |             |   | December 31, 2007 |  
|                                                                                                                   |  | (Unaudited)   |             |   |                   |  
|ASSETS                                                                                                             |  |               |             |   |                   |   |             |  
|Cash and due from banks                                                                                            |  | $             | 5,149,827   |   |                   | $ | 5,015,762   |  
|Interest-bearing deposits                                                                                          |  |               | 350,399     |   |                   |   | 375,008     |  
|Federal funds sold                                                                                                 |  |               | 14,188,912  |   |                   |   | 1,392,554   |  
|Securities available for sale, at fair value                                                                       |  |               | 38,447,955  |   |                   |   | 43,618,174  |  
|Securities held to maturity at amortized cost (fair value, $479,095 and $465,896)                                  |  |               | 478,677     |   |                   |   | 471,371     |  
|Loans, net of allowance for loan losses of $2,353,010 and $2,347,244                                               |  |               | 248,116,861 |   |                   |   | 258,164,836 |  
|Premises and equipment, net                                                                                        |  |               | 11,551,217  |   |                   |   | 10,783,844  |  
|Accrued interest receivable                                                                                        |  |               | 1,298,058   |   |                   |   | 1,478,442   |  
|Other real estate owned                                                                                            |  |               | 787,100     |   |                   |   | 795,054     |  
|Goodwill                                                                                                           |  |               | 2,807,842   |   |                   |   | 2,807,842   |  
|Other assets                                                                                                       |  |               | 1,806,304   |   |                   |   | 1,360,963   |  
|                                                                                                                   |  |               |             |   |                   |   |             |  
|Total assets                                                                                                       |  | $             | 324,983,152 |   |                   | $ | 326,263,850 |  
|                                                                                                                   |  |               |             |   |                   |   |             |  
|LIABILITIES                                                                                                        |  |               |             |   |                   |   |             |  
|Noninterest-bearing deposits                                                                                       |  | $             | 42,359,642  |   |                   | $ | 38,476,633  |  
|Savings and interest-bearing demand deposits                                                                       |  |               | 100,849,085 |   |                   |   | 106,727,807 |  
|Time deposits                                                                                                      |  |               | 115,070,912 |   |                   |   | 114,363,000 |  
|                                                                                                                   |  |               |             |   |                   |   |             |  
|Total deposits                                                                                                     |  | $             | 258,279,639 |   |                   | $ | 259,567,440 |  
|Federal funds purchased and securities sold under repurchase agreements                                            |  |               | 7,936,183   |   |                   |   | 8,365,313   |  
|Federal Home Loan Bank advances                                                                                    |  |               | 30,000,000  |   |                   |   | 30,000,000  |  
|Other liabilities                                                                                                  |  |               | 1,592,132   |   |                   |   | 1,258,234   |  
|Commitments and contingencies                                                                                      |  |               |            |   |                   |   |            |  
|                                                                                                                   |  |               |             |   |                   |   |             |  
|Total liabilities                                                                                                  |  | $             | 297,807,954 |   |                   | $ | 299,190,987 |  
|                                                                                                                   |  |               |             |   |                   |   |             |  
|SHAREHOLDERS EQUITY                                                                                               |  |               |             |   |                   |   |             |  
|Common stock ($5 par value; authorized5,000,000 shares; outstanding2,373,571 and 2,363,917 shares, respectively) |  | $             | 11,867,853  |   |                   | $ | 11,819,583  |  
|Additional paid-in capital                                                                                         |  |               | 4,725,450   |   |                   |   | 4,643,827   |  
|Retained earnings                                                                                                  |  |               | 10,991,155  |   |                   |   | 10,959,793  |  
|Accumulated other comprehensive (loss), net                                                                        |  |               | (409,260    | ) |                   |   | (350,340    | )
|                                                                                                                   |  |               |             |   |                   |   |             |  
|Total shareholders equity                                                                                         |  | $             | 27,175,198  |   |                   | $ | 27,072,863  |  
|                                                                                                                   |  |               |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                         |  | $             | 324,983,152 |   |                   | $ | 326,263,850 |  
|                                                                                                                   |  |               |             |   |                   |   |             |  

See Notes to Consolidated Financial Statements.



3



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|--------------------------------------------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ---------
|                                                                |  | Quarter endedJune 30, 2008 |           |   | Quarter endedJune 30, 2007 |   | For the sixmonths endedJune 30, 2008 |  |   | For the sixmonths endedJune 30, 2007
|INTEREST INCOME                                                 |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Loans, including fees                                           |  | $                          | 4,098,463 |   |                            | $ | 4,456,941                            |  | $ | 8,525,744                            |   |  | $ | 8,733,421
|Securities:                                                     |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Taxable                                                         |  |                            | 222,869   |   |                            |   | 226,631                              |  |   | 498,596                              |   |  |   | 456,107  
|Tax-exempt                                                      |  |                            | 193,066   |   |                            |   | 185,611                              |  |   | 388,593                              |   |  |   | 372,288  
|Federal funds sold                                              |  |                            | 93,860    |   |                            |   | 41,659                               |  |   | 137,599                              |   |  |   | 66,915   
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Total interest income                                           |  |                            | 4,608,258 |   |                            |   | 4,910,842                            |  |   | 9,550,532                            |   |  |   | 9,628,731
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|INTEREST EXPENSE                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Deposits                                                        |  |                            | 1,626,732 |   |                            |   | 1,779,176                            |  |   | 3,443,145                            |   |  |   | 3,509,753
|Federal funds purchased                                         |  |                            |          |   |                            |   | 61,485                               |  |   | 257                                  |   |  |   | 104,911  
|Securities sold under repurchase agreements                     |  |                            | 15,182    |   |                            |   | 26,607                               |  |   | 52,010                               |   |  |   | 35,451   
|Federal Home Loan Bank advances and other short term borrowings |  |                            | 343,990   |   |                            |   | 316,713                              |  |   | 689,980                              |   |  |   | 602,838  
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Total interest expense                                          |  |                            | 1,985,904 |   |                            |   | 2,183,981                            |  |   | 4,185,392                            |   |  |   | 4,252,953
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Net interest income                                             |  |                            | 2,622,354 |   |                            |   | 2,726,861                            |  |   | 5,365,140                            |   |  |   | 5,375,778
|Provision for loan losses                                       |  |                            | 62,000    |   |                            |   | 75,000                               |  |   | 77,238                               |   |  |   | 150,000  
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Net interest income after provision for loan losses             |  |                            | 2,560,354 |   |                            |   | 2,651,861                            |  |   | 5,287,902                            |   |  |   | 5,225,778
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|NON-INTEREST INCOME                                             |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Income from fiduciary activities                                |  |                            | 161,644   |   |                            |   | 158,818                              |  |   | 329,890                              |   |  |   | 333,265  
|Service charges and fees on deposit accounts                    |  |                            | 172,686   |   |                            |   | 193,525                              |  |   | 337,800                              |   |  |   | 368,086  
|Other service charges and fees                                  |  |                            | 478,747   |   |                            |   | 333,720                              |  |   | 812,420                              |   |  |   | 647,176  
|Secondary market lending fees                                   |  |                            | 40,412    |   |                            |   | 59,746                               |  |   | 97,689                               |   |  |   | 107,544  
|Other real estate (losses)                                      |  |                            | (51,008   | ) |                            |   |                                     |  |   | (51,008                              | ) |  |   |         
|Securities gains                                                |  |                            | 20,800    |   |                            |   |                                     |  |   | 33,720                               |   |  |   |         
|Net (losses) on other investments                               |  |                            | (79,995   | ) |                            |   |                                     |  |   | (79,995                              | ) |  |   |         
|Other income                                                    |  |                            | 7,490     |   |                            |   | 4,965                                |  |   | 14,490                               |   |  |   | 2,538    
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Total non-interest income                                       |  |                            | 750,776   |   |                            |   | 750,774                              |  |   | 1,495,006                            |   |  |   | 1,458,609
|NON-INTEREST EXPENSES                                           |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Salaries and employee benefits                                  |  |                            | 1,463,980 |   |                            |   | 1,486,200                            |  |   | 2,999,181                            |   |  |   | 2,990,271
|Occupancy expense                                               |  |                            | 415,358   |   |                            |   | 443,901                              |  |   | 832,761                              |   |  |   | 902,135  
|Bank franchise tax                                              |  |                            | 51,789    |   |                            |   | 46,361                               |  |   | 103,578                              |   |  |   | 92,722   
|Visa expense                                                    |  |                            | 190,320   |   |                            |   | 148,831                              |  |   | 323,428                              |   |  |   | 272,223  
|Telephone expense                                               |  |                            | 48,908    |   |                            |   | 44,896                               |  |   | 96,984                               |   |  |   | 94,836   
|Other expenses                                                  |  |                            | 609,772   |   |                            |   | 643,000                              |  |   | 1,277,659                            |   |  |   | 1,245,977
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Total non-interest expenses                                     |  |                            | 2,780,127 |   |                            |   | 2,813,189                            |  |   | 5,633,591                            |   |  |   | 5,598,164
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Net income before income taxes                                  |  |                            | 531,003   |   |                            |   | 589,446                              |  |   | 1,149,317                            |   |  |   | 1,086,223
|Income tax expense                                              |  |                            | 146,890   |   |                            |   | 147,516                              |  |   | 279,591                              |   |  |   | 265,367  
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Net income                                                      |  | $                          | 384,113   |   |                            | $ | 441,930                              |  | $ | 869,726                              |   |  | $ | 820,856  
|                                                                |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Basic Earnings Per Share                                        |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Average basic shares outstanding                                |  |                            | 2,367,890 |   |                            |   | 2,370,986                            |  |   | 2,365,851                            |   |  |   | 2,370,954
|Earnings per share, basic                                       |  | $                          | 0.16      |   |                            | $ | 0.19                                 |  | $ | 0.37                                 |   |  | $ | 0.35     
|                                                                |  |                            |           |  
|Diluted Earnings Per Share                                      |  |                            |           |   |                            |   |                                      |  |   |                                      |   |  |   |          
|Average diluted shares outstanding                              |  |                            | 2,367,890 |   |                            |   | 2,372,246                            |  |   | 2,365,851                            |   |  |   | 2,373,254
|Earnings per share, diluted                                     |  | $                          | 0.16      |   |                            | $ | 0.19                                 |  | $ | 0.37                                 |   |  | $ | 0.35     

See Notes to Consolidated Financial Statements.



4



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



|                                                                                                           |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|---------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------ | ---------- | - |  | - | ---------- | -
|                                                                                                           |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity |           
|Balance at January 1, 2007                                                                                 |  | $           | 11,873,633 |   |                          | $ | 4,722,592 |                  |  | $ | 10,726,121                                 |   |  | $                        | (954,462   | ) |  | $ | 26,367,884 |  
|Comprehensive Income:                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                                 |  |             |           |   |                          |   |          |                  |  |   | 820,856                                    |   |  |                          |           |   |  |   | 820,856    |  
|Changes in unrealized holding (losses) on securities arising during the Period, net of taxes of ($107,147) |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          | (207,991   | ) |  |   | (207,991   | )
|                                                                                                           |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 612,865    |  
|Cash dividends paid $0.33 per share                                                                       |  |             |           |   |                          |   |          |                  |  |   | (781,984                                   | ) |  |                          |           |   |  |   | (781,984   | )
|Stock repurchases                                                                                          |  |             | (38,000    | ) |                          |   | (73,034   | )                |  |   |                                           |   |  |                          |           |   |  |   | (111,034   | )
|Stock-based compensation                                                                                   |  |             |            |   |                          |   | 27,991    |                  |  |   |                                            |   |  |                          |            |   |  |   | 27,991     |  
|Sale of common stock:                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Stock Options exercised                                                                                    |  |             | 9,450      |   |                          |   | (2,050    | )                |  |   |                                           |   |  |                          |           |   |  |   | 7,400      |  
|                                                                                                           |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at June 30, 2007                                                                                   |  | $           | 11,845,083 |   |                          | $ | 4,675,499 |                  |  | $ | 10,764,993                                 |   |  | $                        | (1,162,453 | ) |  | $ | 26,123,122 |  
|                                                                                                           |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at January 1, 2008                                                                                 |  | $           | 11,819,583 |   |                          | $ | 4,643,827 |                  |  | $ | 10,959,793                                 |   |  | $                        | (350,340   | ) |  | $ | 27,072,863 |  
|Comprehensive Income:                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                                 |  |             |           |   |                          |   |          |                  |  |   | 869,726                                    |   |  |                          |           |   |  |   | 869,726    |  
|Changes in unrealized holding losses on securities arising during the Period, net of taxes of ($18,888)    |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          | (36,665    | ) |  |   | (36,665    | )
|Reclassification adjustment for securities gains included in net income, net of taxes of ($11,465)         |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          | (22,255    | ) |  |   | (22,255    | )
|                                                                                                           |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                                 |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 810,806    |  
|Effects of changing the pension plan measurement date pursuant to FAS158, net of tax benefit of ($17,731)  |  |             |            |   |                          |   |           |                  |  |   | (34,419                                    | ) |  |                          |            |   |  |   | (34,419    | )
|Cash dividends paid $0.34 per share                                                                       |  |             |           |   |                          |   |          |                  |  |   | (803,945                                   | ) |  |                          |           |   |  |   | (803,945   | )
|Stock repurchases                                                                                          |  |             | (17,080    | ) |                          |   | (25,706   | )                |  |   |                                           |   |  |                          |           |   |  |   | (42,786    | )
|Stock-based compensation                                                                                   |  |             |            |   |                          |   | 17,510    |                  |  |   |                                            |   |  |                          |            |   |  |   | 17,510     |  
|Sale of common stock:                                                                                      |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Dividends Reinvested                                                                                       |  |             | 65,350     |   |                          |   | 89,819    |                  |  |   |                                           |   |  |                          |           |   |  |   | 155,169    |  
|                                                                                                           |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at June 30, 2008                                                                                   |  | $           | 11,867,853 |   |                          | $ | 4,725,450 |                  |  | $ | 10,991,155                                 |   |  | $                        | (409,260   | ) |  | $ | 27,175,198 |  
|                                                                                                           |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  

See Notes to Consolidated Financial Statements.



5



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Six months ended



|                                                                                                     |  |               |             |   |               |   |             |  
|---------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                                     |  | June 30, 2008 |             |   | June 30, 2007 |  
|Cash Flows From Operating Activities                                                                 |  |               |             |   |               |   |             |  
|Net Income                                                                                           |  | $             | 869,726     |   |               | $ | 820,856     |  
|Adjustments to reconcile net income to net cash provided by operating activities:                    |  |               |             |   |               |   |             |  
|Depreciation                                                                                         |  |               | 406,056     |   |               |   | 502,183     |  
|Net amortization and accretion of securities                                                         |  |               | 5,340       |   |               |   | 6,157       |  
|Loss on sale of fixed assets                                                                         |  |               |            |   |               |   | 8,325       |  
|Provision for loan losses                                                                            |  |               | 77,238      |   |               |   | 150,000     |  
|Stock-based compensation                                                                             |  |               | 17,510      |   |               |   | 27,991      |  
|Deferred income taxes                                                                                |  |               |            |   |               |   | 7,586       |  
|Net securities gains                                                                                 |  |               | (33,720     | ) |               |   |            |  
|Loss on sale of other real estate                                                                    |  |               | 51,008      |   |               |   |             |  
|Net loss on other investments                                                                        |  |               | 79,995      |   |               |   |            |  
|Increase in accrued income and other assets                                                          |  |               | (379,371    | ) |               |   | (224,651    | )
|Increase / (decrease) in other liabilities                                                           |  |               | 364,250     |   |               |   | (73,096     | )
|                                                                                                     |  |               |             |   |               |   |             |  
|Net cash provided by operating activities                                                            |  | $             | 1,458,032   |   |               | $ | 1,225,351   |  
|                                                                                                     |  |               |             |   |               |   |             |  
|Cash Flows From Investing Activities                                                                 |  |               |             |   |               |   |             |  
|Proceeds from maturities of available-for-sale securities                                            |  |               | 2,195,495   |   |               |   | 1,448,346   |  
|Proceeds from sales of available-for-sale securities                                                 |  |               | 9,745,800   |   |               |   | 340,400     |  
|Purchases of available-for-sale securities                                                           |  |               | (6,839,275  | ) |               |   | (468,890    | )
|Increase in interest bearing deposits in other banks                                                 |  |               | 24,609      |   |               |   | 31,807      |  
|Increase in federal funds sold                                                                       |  |               | (12,796,358 | ) |               |   | (6,887,173  | )
|Loan originations and principal collections, net                                                     |  |               | 9,593,570   |   |               |   | (6,797,914  | )
|Proceeds from sale of other real estate                                                              |  |               | 334,113     |   |               |   |            |  
|Purchases of premises and equipment                                                                  |  |               | (1,173,429  | ) |               |   | (666,289    | )
|                                                                                                     |  |               |             |   |               |   |             |  
|Net cash provided by (used in) investing activities                                                  |  | $             | 1,084,525   |   |               | $ | (12,999,715 | )
|                                                                                                     |  |               |             |   |               |   |             |  
|Cash Flows From Financing Activities                                                                 |  |               |             |   |               |   |             |  
|Decrease in demand, savings, and other interest-bearing deposits                                     |  |               | (1,995,713  | ) |               |   | (2,590,366  | )
|Net increase in time deposits                                                                        |  |               | 707,913     |   |               |   | 7,850,464   |  
|Net increase / (decrease) in securities sold under repurchase agreements and federal funds purchased |  |               | (429,130    | ) |               |   | 1,805,454   |  
|Increase in FHLB advances                                                                            |  |               |            |   |               |   | 5,000,000   |  
|Proceeds from issuance of common stock                                                               |  |               | 155,169     |   |               |   | 7,400       |  
|Dividends paid                                                                                       |  |               | (803,945    | ) |               |   | (781,984    | )
|Repurchase of common stock                                                                           |  |               | (42,786     | ) |               |   | (111,034    | )
|                                                                                                     |  |               |             |   |               |   |             |  
|Net cash provided by (used in) financing activities                                                  |  | $             | (2,408,492  | ) |               | $ | 11,179,934  |  
|                                                                                                     |  |               |             |   |               |   |             |  
|Net increase / (decrease) in cash and due from banks                                                 |  |               | 134,065     |   |               |   | (594,430    | )
|Cash and due from banks at beginning of period                                                       |  |               | 5,015,762   |   |               |   | 6,320,951   |  
|                                                                                                     |  |               |             |   |               |   |             |  
|Cash and due from banks at end of period                                                             |  | $             | 5,149,827   |   |               | $ | 5,726,521   |  
|                                                                                                     |  |               |             |   |               |   |             |  
|Supplemental Schedule of Noncash Investing and Financing Activities:                                 |  |               |             |   |               |   |             |  
|Interest paid                                                                                        |  | $             | 4,270,294   |   |               | $ | 4,223,454   |  
|                                                                                                     |  |               |             |   |               |   |             |  
|Income taxes paid                                                                                    |  |               | 222,624     |   |               |   | 253,985     |  
|                                                                                                     |  |               |             |   |               |   |             |  
|Unrealized gain/(loss) on investment securities                                                      |  |               | (89,273     | ) |               |   | (315,138    | )
|                                                                                                     |  |               |             |   |               |   |             |  
|Change in pension measurement date                                                                   |  |               | 52,150      |   |               |   |            |  
|                                                                                                     |  |               |             |   |               |   |             |  
|Loans transferred to other real estate owned                                                         |  |               | 377,167     |   |               |   | (250,867    | )
|                                                                                                     |  |               |             |   |               |   |             |  

See Notes to Consolidated Financial Statements.



6



---

##### Table of Contents

Notes to Consolidated Financial Statements

Note 1: General

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

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

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

These consolidated financial statements should be read in conjunction with the financial statements and notes to financial statements included in the
Companys 2007 Annual Report to Shareholders.

Note 2: Securities

The carrying amounts of debt and other securities and their approximate fair values at June 30, 2008, and December 31, 2007, follow:



|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|----------------------------------------------- |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | ----------
|Available-for-sale securities June 30, 2008     |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|U.S. Government agencies                        |  | $             | 2,134,278  |                      | $ | 2,113                   |  | $ | (13,558   | ) |  | $ | 2,122,833 
|State and municipal obligations                 |  |               | 34,090,030 |                      |   | 165,171                 |  |   | (184,179  | ) |  |   | 34,071,022
|Restricted securities                           |  |               | 2,254,100  |                      |   |                        |  |   |          |   |  |   | 2,254,100 
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  | $             | 38,478,408 |                      | $ | 167,284                 |  | $ | (197,737  | ) |  | $ | 38,447,955
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  |               |            |                     
|Available-for-sale securities December 31, 2007 |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|U.S. Government agencies                        |  | $             | 7,771,753  |                      | $ | 30,048                  |  | $ | (13,066   | ) |  | $ | 7,788,735 
|State and municipal obligations                 |  |               | 33,564,201 |                      |   | 201,435                 |  |   | (159,597  | ) |  |   | 33,606,039
|Restricted securities                           |  |               | 2,223,400  |                      |   |                        |  |   |          |   |  |   | 2,223,400 
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  | $             | 43,559,354 |                      | $ | 231,483                 |  | $ | (172,663  | ) |  | $ | 43,618,174
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           



7



---

##### Table of Contents

|                                              |  |               |         |                      |   |                         |  |   |           |   |  |   |        
|--------------------------------------------- |  | ------------- | ------- | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | -------
|Held-to-maturity securities June 30, 2008     |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|State and municipal obligations               |  | $             | 478,677 |                      | $ | 418                     |  | $ |          |   |  | $ | 479,095
|                                              |  |               |         |                      |   |                         |  |   |           |   |  |   |        
|                                              |  |               |         |                     
|Held-to-maturity securities December 31, 2007 |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|State and municipal obligations               |  | $             | 471,371 |                      | $ |                        |  | $ | (5,475    | ) |  | $ | 465,896
|                                              |  |               |         |                      |   |                         |  |   |           |   |  |   |        

Securities with a market value of $9.9 million were pledged as collateral for public deposits,
repurchase agreements and for other purposes as required by law as of June 30, 2008. The market value of pledged securities at year-end 2007 was $11.8 million.

Securities in an unrealized loss position at June 30, 2008 and December 31, 2007, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate
movements as there is minimal credit risk exposure in these investments. All securities are investment grade or better and all losses are considered temporary. Management has the intent and demonstrated ability to hold securities to scheduled
maturity or call dates. Bonds with unrealized loss positions at June 30, 2008 included 3 federal agency and 42 municipal bonds, as shown below.



|                                      |  |                     |            |                   |   |           |  |                |            |           |   |                |  |   |            |  |   |        
|------------------------------------- |  | ------------------- | ---------- | ----------------- | - | --------- |  | -------------- | ---------- | --------- | - | -------------- |  | - | ---------- |  | - | -------
|                                      |  | Less than 12 months |            | 12 months or more |   | Total    
|June 30, 2008                         |  | FairValue           |            | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |            | FairValue |   | UnrealizedLoss
|U.S. Government agencies              |  | $                   | 1,487,344  |                   | $ | 8,845     |  | $              | 59,668     |           | $ | 4,713          |  | $ | 1,547,012  |  | $ | 13,558 
|States and municipal obligations      |  |                     | 13,786,818 |                   |   | 184,179   |  |                |           |           |   |               |  |   | 13,786,818 |  |   | 184,179
|                                      |  |                     |            |                   |   |           |  |                |            |           |   |                |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 15,274,162 |                   | $ | 193,024   |  | $              | 59,668     |           | $ | 4,713          |  | $ | 15,333,830 |  | $ | 197,737
|                                      |  |                     |            |                   |   |           |  |                |            |           |   |                |  |   |            |  |   |        
|                                      |  |                     |           
|                                      |  | Less than 12 months |            | 12 months or more |   | Total    
|December 31, 2007                     |  | FairValue           |            | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |            | FairValue |   | UnrealizedLoss
|U.S. Government agencies              |  | $                   |           |                   | $ |          |  | $              | 2,557,235  |           | $ | 13,066         |  | $ | 2,557,235  |  | $ | 13,066 
|States and municipal obligations      |  |                     | 3,255,691  |                   |   | 39,393    |  |                | 8,627,762  |           |   | 125,679        |  |   | 11,883,453 |  |   | 165,072
|                                      |  |                     |            |                   |   |           |  |                |            |           |   |                |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 3,255,691  |                   | $ | 39,393    |  | $              | 11,184,997 |           | $ | 138,745        |  | $ | 14,440,688 |  | $ | 178,138
|                                      |  |                     |            |                   |   |           |  |                |            |           |   |                |  |   |            |  |   |        



8



---

##### Table of Contents

Note 3: Loans

The components of loans were as follows:



|                                                             |  |               |             |   |                   |   |             |  
|------------------------------------------------------------ |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | June 30, 2008 |             |   | December 31, 2007 |  
|                                                             |  | (unaudited)   |             |   |                   |  
|Mortgage loans on real estate:                               |  |               |             |   |                   |   |             |  
|Construction                                                 |  | $             | 42,286,759  |   |                   | $ | 45,697,838  |  
|Secured by farmland                                          |  |               | 83,797      |   |                   |   | 87,206      |  
|Secured by 1-4 family residential                            |  |               | 138,528,866 |   |                   |   | 144,820,937 |  
|Other real estate loans                                      |  |               | 41,248,902  |   |                   |   | 40,975,279  |  
|Commercial and industrial loans (not secured by real estate) |  |               | 14,502,460  |   |                   |   | 18,253,801  |  
|Consumer installment loans                                   |  |               | 9,033,835   |   |                   |   | 9,423,071   |  
|All other loans                                              |  |               | 4,028,671   |   |                   |   | 498,617     |  
|Net deferred loan costs and fees                             |  |               | 756,581     |   |                   |   | 755,331     |  
|                                                             |  |               |             |   |                   |   |             |  
|Total loans                                                  |  | $             | 250,469,871 |   |                   | $ | 260,512,080 |  
|Allowance for loan losses                                    |  |               | (2,353,010  | ) |                   |   | (2,347,244  | )
|                                                             |  |               |             |   |                   |   |             |  
|Loans, net                                                   |  | $             | 248,116,861 |   |                   | $ | 258,164,836 |  
|                                                             |  |               |             |   |                   |   |             |  

Loans upon which the accrual of interest has been discontinued totaled $3.7 million as of
June 30, 2008, and $1.3 million as of December 31, 2007.

Note 4: Allowance for Loan Losses



|                           |  |               |           |   |                   |   |           |               |  |   |           |  
|-------------------------- |  | ------------- | --------- | - | ----------------- | - | --------- | ------------- |  | - | --------- | -
|                           |  | June 30, 2008 |           |   | December 31, 2007 |   |           | June 30, 2007 | 
|                           |  | (unaudited)   |           |   |                   |   |           | (unaudited)   | 
|Balance, beginning of year |  | $             | 2,347,244 |   |                   | $ | 2,235,544 |               |  | $ | 2,235,544 |  
|Provision for loan losses  |  |               | 77,238    |   |                   |   | 298,299   |               |  |   | 150,000   |  
|Recoveries                 |  |               | 8,507     |   |                   |   | 23,993    |               |  |   | 22,261    |  
|Loans charged off          |  |               | (79,979   | ) |                   |   | (210,592  | )             |  |   | (45,915   | )
|                           |  |               |           |   |                   |   |           |               |  |   |           |  
|Balance, end of year       |  | $             | 2,353,010 |   |                   | $ | 2,347,244 |               |  | $ | 2,361,890 |  
|                           |  |               |           |   |                   |   |           |               |  |   |           |  

Information about impaired loans is as follows:



|                                                                                 |             |               |           |                   |   |          
|-------------------------------------------------------------------------------- | ----------- | ------------- | --------- | ----------------- | - | ---------
|for the six months and twelve months ended:                                      |             | June 30, 2008 |           | December 31, 2007
|                                                                                 | (unaudited) |               |          
|Impaired loans for which an allowance has been provided                          |             | $             | 2,526,436 |                   | $ | 2,185,721
|Impaired loans for which no allowance has been provided                          |             |               |          |                   |   |         
|                                                                                 |             |               |           |                   |   |          
|Total impaired loans                                                             |             | $             | 2,526,436 |                   | $ | 2,185,721
|                                                                                 |             |               |           |                   |   |          
|Allowance provided for impaired loans, included in the allowance for loan losses |             | $             | 1,000,531 |                   | $ | 1,028,892
|                                                                                 |             |               |           |                   |   |          
|Average balance impaired loans                                                   |             | $             | 3,078,197 |                   | $ | 3,115,848
|                                                                                 |             |               |           |                   |   |          
|Interest income recognized (collected $52,153 and $113,255, respectively)        |             | $             | 61,429    |                   | $ | 112,912  
|                                                                                 |             |               |           |                   |   |          



9



---

##### Table of Contents

At June 30, 2008 and December 31, 2007, non-accrual loans excluded from impaired loan
disclosure under Statement of Financial Accounting Standard (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, totaled $2,602,933 and $1,190,000, respectively. If interest on these loans had been accrued, such
income would have approximated $45,713 in the first half of 2008 and $20,470 in 2007.

Note 5: Earnings per share

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



|                               |               |                    |                 |                  |               |               |                 |               |               |      |                 |           |               |   |                 |  |           |  |   |     
|------------------------------ | ------------- | ------------------ | --------------- | ---------------- | ------------- | ------------- | --------------- | ------------- | ------------- | ---- | --------------- | --------- | ------------- | - | --------------- |  | --------- |  | - | ----
|                               |               | Three Months Ended |                 | Six Months Ended
|(Unaudited)                    |               | June 30, 2008      |                 | June 30, 2007    |               | June 30, 2008 |                 | June 30, 2007
|                               | AverageShares |                    | Per shareAmount |                  | AverageShares |               | Per shareAmount |               | AverageShares |      | Per shareAmount |           | AverageShares |   | Per shareAmount
|Basic earnings per share       |               | 2,367,890          |                 | $                | 0.16          |               | 2,370,986       |               | $             | 0.19 |                 | 2,365,851 |               | $ | 0.37            |  | 2,370,954 |  | $ | 0.35
|                               |               |                    |                 |                  |               |               |                 |              
|Effect of dilutive securities: |               |                    |                 |                  |               |               |                 |               |               |      |                 |           |               |   |                 |  |           |  |   |     
|Stock options                  |               |                   |                 |                  |               |               | 1,260           |               |               |      |                 |          |               |   |                 |  | 2,300     |  |   |     
|                               |               |                    |                 |                  |               |               |                 |              
|Diluted earnings per share     |               | 2,367,890          |                 | $                | 0.16          |               | 2,372,246       |               | $             | 0.19 |                 | 2,365,851 |               | $ | 0.37            |  | 2,373,254 |  | $ | 0.35

As of June 30, 2008 and 2007, options on 149,408 shares and 170,237 shares, respectively,
were not included in computing diluted earnings per share, because their effects were anti-dilutive.

Note 6: Stock-Based Compensation

Incremental stock-based compensation expense recognized was $18 thousand during the first six months of 2008. As of June 30, 2008, there was $11
thousand unrecognized compensation expense related to stock options.

Stock option compensation expense is the estimated fair value of
options granted using the Black-Scholes Model amortized on a straight-line basis over the vesting period of the award. There were 40,500 options granted and no options exercised during the six month period ended June 30, 2008.

Stock option plan activity for the six months ended June 30, 2008 is summarized below:



|                               |  |         |   |  |                                |       |                                                      |     |                             |   |  
|------------------------------ |  | ------- | - |  | ------------------------------ | ----- | ---------------------------------------------------- | --- | --------------------------- | - | -
|                               |  | Shares  |   |  | Weighted AverageExercise Price |       | Weighted AverageRemaining Contractual Life(in years) |     | AggregateIntrinsic Value(1)
|Options outstanding, January 1 |  | 194,161 |   |  | $                              | 15.38 |                                                      | 5.7 |                             | $ | 
|                               |  |         |   |  |                                |       |                                                      |     |                             |   |  
|Granted                        |  | 40,500  |   |  | $                              | 12.05 |                                                      |     |                             |   |  
|Forfeited                      |  | (41,355 | ) |  | $                              | 15.35 |                                                      |     |                             |   |  
|Exercised                      |  |        |   |  |                                |       |                                                      |     |                             |   |  
|Expired                        |  | (10,898 | ) |  | $                              | 13.89 |                                                      |     |                             |   |  
|Options outstanding, June 30   |  | 182,408 |   |  | $                              | 14.74 |                                                      | 6.1 |                             | $ | 
|                               |  |         |   |  |                                |       |                                                      |     |                             |   |  
|Options exercisable, June 30   |  | 149,408 |   |  | $                              | 15.35 |                                                      | 5.3 |                             | $ | 
|                               |  |         |   |  |                                |       |                                                      |     |                             |   |  



|(1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock
exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2008. This amount changes based on changes in the market value of the Companys stock.
At June 30, 2008, the exercise price of all options outstanding exceeded the market value of the Companys stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



---

##### Table of Contents

Note 7: Goodwill

The Company has goodwill recorded on the consolidated financial statements relating to the purchase of five branches during the years 1994 through 2000. The balance of the goodwill at June 30, 2008 and
December 31, 2007, as reflected on the consolidated balance sheets was $2,807,842. In accordance with SFAS Nos. 141, Business Combinations, and 142, Goodwill and Other Intangible Assets, management determined that these purchases
qualified as acquisitions of businesses and that the related unidentifiable intangibles were goodwill. Therefore, amortization was discontinued effective January 1, 2002. The goodwill balance is tested for impairment at least annually, and
there was no impairment in 2008 or 2007.

Note 8: Employee Benefit Plans

Components of Net Periodic Benefit Cost



|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       
|----------------------------------------------- |  | ---------------- | -------- | - | ------------------------ | - | -------- | ---- |  | ---- | ------ |  | - | ------
|                                                |  | Pension Benefits |          |   | Post Retirement Benefits
|Six months ended June 30,                       |  | 2008             |          |   | 2007                     |   |          | 2008 |  | 2007
|Service cost                                    |  | $                | 156,879  |   |                          | $ | 155,124  |      |  | $    | 9,444  |  | $ | 9,241 
|Interest cost                                   |  |                  | 124,335  |   |                          |   | 114,081  |      |  |      | 13,666 |  |   | 15,176
|Expected return on plan assets                  |  |                  | (187,025 | ) |                          |   | (129,996 | )    |  |      |       |  |   |      
|Amortization of unrecognized prior service cost |  |                  | 8,186    |   |                          |   | 8,186    |      |  |      |       |  |   |      
|Amortization of unrecognized net loss           |  |                  | 1,925    |   |                          |   | 18,729   |      |  |      | 61     |  |   | 2,772 
|Amortization of transition obligation           |  |                  |         |   |                          |   |         |      |  |      | 1,456  |  |   | 1,456 
|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       
|Net periodic benefit cost                       |  | $                | 104,300  |   |                          | $ | 166,124  |      |  | $    | 24,627 |  | $ | 28,645
|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       

Employer Contributions

The Company disclosed in its Annual Report on Form 10-K for the year ended December 31, 2007, that it expected to contribute $314,109 to its pension plan and $17,519 to its post-retirement benefit plan in 2008.
The Company has made the pension plan contribution in full and has contributed $5,657 toward the post-retirement plan during the first six months of 2008.

Note 9: FHLB Advances

On June 30, 2008, the Bank had Federal Home Loan Bank of Atlanta (FHLB) debt
consisting of three advances, one for $15.0 million, which was acquired on May 18, 2006, one for $10.0 million, which was acquired on September 12, 2006, and one for $5.0 million, which was acquired on May 18, 2007. The interest rate
on the $15 million advance is fixed at 4.81%, payable quarterly and matures on May 18, 2011. The interest rate on the $10 million advance is fixed at 4.23%, payable quarterly and matures on September 12, 2016. The interest rate on the $5
million advance is fixed at 4.485%, payable quarterly and matures on May 18, 2012. The FHLB holds an option to terminate the $15 million advance on any quarterly payment date. They also hold an option to terminate the $10 million advance on any
quarterly payment date. Lastly, they hold an option to terminate the $5 million advance on May 19, 2008, or any subsequent quarterly payment date.

Advances on the FHLB lines are secured by a blanket lien on qualified 1 to 4 family residential real estate loans totaling approximately $71 million. Remaining available credit is $65 million.



11



---

##### Table of Contents

Note 10: Fair Value Measurements

SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:



|         |  |                                                                                                                                                                                                                                                                       
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.                                                                                                                                             
|         | 
|Level 2: |  | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.
|         | 
|Level 3: |  | Inputs to the valuation methodology are unobservable and significant to the fair value measurement.                                                                                                                                                                   

Following is a description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities.Where quoted prices are
available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not
available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities,
obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3
of the valuation hierarchy. Currently, all of the Companys securities are considered to be Level 2 securities.

Loans held for sale.Loans held for sale are required to be measured at the lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the
purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2008, the Company held no loans available for sale.

Impaired loans.SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS
No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loans collateral (if the loan is collateral dependent). Fair
value of the loans collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Other Real Estate Owned.Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value
component in its valuation follows the provisions of SFAS No. 157.



12



---

##### Table of Contents

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

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

EXECUTIVE SUMMARY

Interest margins continue to be one of managements primary challenges. For the first time in two years, the yield curve is exhibiting a positive
slope since the Federal Open Market Committee (FOMC) has cut the Fed Funds target rate by 225 basis points (2.25 percentage points) during the first four months of 2008. This has allowed management to reduce the Banks cost of
deposits. However, because the Wall Street Prime rate is tied to the Fed Funds target rate, variable rate prime-based loans are earning less interest income. Therefore, although the cost of funds is down due to reduced deposit rates, the yield on
loans is down more, creating pressure on net interest margin.

Also, origination volume of new loans has slowed. So, although the Bank is
experiencing normal levels of loan payoffs, the size of the loan portfolio is shrinking, contributing to a reduction in interest income.

At the same time, successful management efforts are mitigating the effects of margin compression on the Companys net earnings. Focus is continuing on growth in the types of loans that earn higher rates. Also, during the last two
years, in preparation for falling rates, time deposits were taken on shorter maturities, which are now allowing these deposits to renew sooner at lower rates, reducing the Companys cost of funds faster.

A number of key indicators are improving. For example, for June 30, 2008 compared to December 31, 2007, liquidity has increased to $52.5
million from $37.0 million; the ratio of loans to funding sources has decreased to 84.6% from 87.4%; and the allowance for loan losses as a percentage of loans has increased to 0.94% from 0.90%. The availability of credit for the Bank has not been
affected by recent credit market issues.

Recent public concerns related to subprime loans, which surfaced in early 2007, and their impact
on lenders and homebuilders, have been discussed previously. Let us reiterate that the Company and Bank have not experienced negative impact and management anticipates no direct impact to the Company and the Bank and minimal, if any, to homebuilders
served by the Bank. A rigorous formal set of guidelines and controls is followed in our lending process, and both the Bank and area homebuilders serve a public steeped in a tradition of honoring obligations. It has always been managements
philosophy to plan long term for our customers and investors, rather than allowing short to intermediate term influences alter the Companys steady and measured growth policy.

Below the net interest income line, management has made efforts to improve non-interest income and control non-interest expense. The Score-to-Win program
was launched early in 2007 to promote growth in checking accounts and use of the Banks more cost-efficient service channels, like Online Advantage and receipt of account statements electronically through eVue Advantage. Score-to-Win awards
points for credit card and debit card usage which can be redeemed for merchandise. The program also awards bonus points for opening a checking account with a Check-N-Advantage debit card, and for adding Online Advantage, eVue Advantage, online
bill-pay, and a savings account. Increased interchange income has been the result of the related increase in debit card usage.

Another
innovative product introduction in 2007 was eDeposit. This product allows commercial customers who deposit large numbers of checks or are not geographically convenient to a Bank office to make their deposits remotely via a secure internet
connection.

In the non-interest expense area, management continues to control increases in salaries and benefits expense by restructuring
responsibilities among existing employees as attrition occurs. To the extent advisable, continuing education remains available to employees. Management continues to delay capital expenditures, along with their related depreciation expense, as
appropriate for non-mission-critical projects.

However, management remains focused on responsible growth, and believes investments made in
technology and related infrastructure over the last several years will allow this growth to reap benefits sooner than might otherwise be expected.

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



13



---

##### Table of Contents

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

ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio.
The allowance is based on two basic principles of accounting: (1) 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 allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The use of these values is
inherently subjective and actual losses could be greater or less than the estimates.

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

EARNINGS SUMMATION

For the six months ended June 30, 2008, net income was $870 thousand as compared to $821 thousand for the comparable period in 2007,
an increase of 6.0%. Diluted earnings per average share for the six months ended June 30, 2008 were $0.37 as compared to $0.35 for the six months ended June 30, 2007. Annualized return on average assets was 0.5% for the six months ended
June 30, 2008 compared to 0.6% for the six months ended June 30, 2007. Annualized return on average equity was 6.3% for the six months ended June 30, 2008, up from 6.2% for the similar period ended June 30, 2007.

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest
expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, and the volume
of non-performing assets have an effect on net interest income, the net interest margin, and net income. Net interest income before provision for loan losses for the six months ended June 30, 2008 was $5.4 million, a negligible decrease of 0.2%
compared to the six months ended June 30, 2007. Net interest income after the provision for loan losses is up 1.2% for the same period comparison as a result of the reduced provision for loan losses.

Although interest income on loans declined by $208 thousand for the year-to-date period ended June 30, 2008 compared to the same period in 2007, all
other categories of interest income increased by $129 thousand, mitigating the decrease in interest income to $78 thousand. Decreases in interest expense of $67 thousand for the same period comparison nearly mitigated the decrease in interest
income, leaving net interest income (before the provision for loan losses) down only $11 thousand.

The $208 thousand decrease in interest
income on loans was driven mainly by reduced loan yields on variable-rate loans tied to the Wall Street Prime rate, which has declined by 3.25 percentage points since the first half of 2007. The $67 thousand decrease in interest expense was
primarily due to reductions in rates on checking and savings accounts.



14



---

##### Table of Contents

Bay Banks of Virginia, Inc.

Net Interest Income Analysis (unaudited)



|                                            |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|------------------------------------------- |  | -------------------------- | ------- | -------------- | -------------------------- | -------------------- |  | ---- | -------------- |  | -------------- | ------- | -------------------- | - | ----- |  | ---- | -
|(Fully taxable equivalent basis)            |  | Six months ended 6/30/2008 |         |                | Six months ended 6/30/2007 |                     
|(Dollars in thousands)                      |  | AverageBalance             |         | Income/Expense |                            | AnnualizedYield/Rate |  |      | AverageBalance |  | Income/Expense |         | AnnualizedYield/Rate |  
|INTEREST EARNING ASSETS:                    |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Taxable investments                         |  | $                          | 19,281  |                | $                          | 490                  |  | 5.08 | %              |  | $              | 18,778  |                      | $ | 450   |  | 4.79 | %
|Tax-exempt investments (1)                  |  |                            | 20,872  |                |                            | 589                  |  | 5.65 | %              |  |                | 19,710  |                      |   | 564   |  | 5.72 | %
|                                            |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Total Investments                           |  |                            | 40,153  |                |                            | 1,079                |  | 5.38 | %              |  |                | 38,488  |                      |   | 1,014 |  | 5.27 | %
|                                            |  |                            |         |                |                            |                     
|Gross loans (2)                             |  |                            | 253,907 |                |                            | 8,526                |  | 6.72 | %              |  |                | 249,470 |                      |   | 8,733 |  | 7.00 | %
|Interest-bearing deposits in other banks    |  |                            | 369     |                |                            | 9                    |  | 4.88 | %              |  |                | 163     |                      |   | 6     |  | 5.45 | %
|Federal funds sold                          |  |                            | 12,723  |                |                            | 138                  |  | 2.17 | %              |  |                | 2,631   |                      |   | 67    |  | 5.09 | %
|                                            |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|TOTAL INTEREST EARNING ASSETS               |  | $                          | 307,152 |                | $                          | 9,752                |  | 6.35 | %              |  | $              | 290,752 |                      | $ | 9,820 |  | 6.75 | %
|                                            |  |                            |         |                |                            |                     
|INTEREST-BEARING LIABILITIES:               |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Savings deposits                            |  | $                          | 56,859  |                | $                          | 628                  |  | 2.21 | %              |  | $              | 55,176  |                      | $ | 855   |  | 3.10 | %
|NOW deposits                                |  |                            | 34,258  |                |                            | 140                  |  | 0.82 | %              |  |                | 37,989  |                      |   | 200   |  | 1.05 | %
|Time deposits >= $100,000                   |  |                            | 47,555  |                |                            | 1,068                |  | 4.49 | %              |  |                | 37,107  |                      |   | 857   |  | 4.62 | %
|Time deposits < $100,000                    |  |                            | 64,311  |                |                            | 1,372                |  | 4.27 | %              |  |                | 62,779  |                      |   | 1,365 |  | 4.35 | %
|Money market deposit accounts               |  |                            | 18,782  |                |                            | 235                  |  | 2.50 | %              |  |                | 15,785  |                      |   | 232   |  | 2.94 | %
|                                            |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|Total interest bearing deposits             |  | $                          | 221,765 |                | $                          | 3,443                |  | 3.10 | %              |  | $              | 208,836 |                      | $ | 3,509 |  | 3.36 | %
|                                            |  |                            |         |                |                            |                     
|Federal funds purchased                     |  |                            | 56      |                |                            |                     |  | 3.66 | %              |  |                | 1,290   |                      |   | 35    |  | 5.50 | %
|Securities sold to repurchase               |  |                            | 7,083   |                |                            | 52                   |  | 1.47 | %              |  |                | 5,180   |                      |   | 105   |  | 2.03 | %
|FHLB advances                               |  |                            | 30,000  |                |                            | 690                  |  | 4.60 | %              |  |                | 26,215  |                      |   | 603   |  | 4.60 | %
|                                            |  |                            |         |                |                            |                      |  |      |                |  |                |         |                      |   |       |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES          |  | $                          | 258,903 |                | $                          | 4,185                |  | 3.23 | %              |  | $              | 241,521 |                      | $ | 4,252 |  | 3.52 | %
|                                            |  |                            |         |                |                            |                     
|Net interest income/yield on earning assets |  |                            |         |                | $                          | 5,567                |  | 3.63 | %              |  |                |         |                      | $ | 5,568 |  | 3.83 | %
|Net interest rate spread                    |  |                            |         |                |                            |                      |  | 3.12 | %              |  |                |         |                      |   |       |  | 3.23 | %

Notes:



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

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

The
annualized net interest margin was 3.63% for the six months ended June 30, 2008, compared to 3.83% for the same period in 2007. The main reason for this decline is reductions in the Wall Street Prime rate, as mentioned earlier, which reduces
the yield on variable rate prime-based loans. Although reductions in the federal funds target rate have provided some relief by allowing the Bank to reduce the cost of deposits, the cost of funds has not declined as much as the yield on earning
assets. Management anticipates that the cost of deposits will continue to decline as certificates of deposit mature or renew at lower current rates, creating a positive effect on the net interest margin going forward.

Average interest-earning assets increased 5.6% to $307 million for the six months ended June 30, 2008 as compared to $291 million for the six months
ended June 30, 2007. Average interest-earning assets as a percent of total average assets was 93.7% for the six months ended June 30, 2008 as compared to 94.5% for the comparable period of 2007. As shown above, for the six months ended
June 30, 2008, the loan portfolio with $253.9 million is the largest category of interest-earning assets.

Average interest-bearing
liabilities increased 7.2% to $258.9 million for the six months ended June 30, 2008, as compared to $241.5 million for the six months ended June 30, 2007. The largest category of interest-bearing liabilities is time deposits, with combined
average balances of $112 million for the six months ended June 30, 2008.



15



---

##### Table of Contents

The net interest spread, which is the difference between the annualized yield on earning assets and the
annualized cost of interest-bearing liabilities, was 3.12% for the six months ended June 30, 2008 and 3.23% for the same period in 2007.

LIQUIDITY

The Company maintains adequate short-term assets to meet its 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, 2008, federal funds sold totaled $14.2 million and securities maturing in one year or less totaled $14.3 million, for a total pool
of $28.5 million. The liquidity ratio as of June 30, 2008 was 16.1% as compared to 11.3% as of December 31, 2007. The Company determines this ratio by dividing the sum of cash and cash equivalents, investment securities maturing in one
year or less, loans maturing in one year or less and federal funds sold, by total assets. In addition, as noted earlier, the Company has $65 million available on lines of credit with the FHLB, plus federal funds lines with several correspondent
banks.

OFF BALANCE SHEET ITEMS

There
have been no material changes to the off balance sheet items disclosed in Managements Discussion and Analysis in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

CONTRACTUAL OBLIGATIONS

There have been no material
changes outside the ordinary course of business to the contractual obligations disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

CAPITAL RESOURCES

From December 31, 2007 to
June 30, 2008, total shareholders equity increased to $27.2 million from $27.1 million or 0.4%. Several factors impact shareholders equity, including the Companys commitment to returning earnings to its shareholders through
dividends while meeting regulatory capital requirements.

The Companys capital resources are also impacted by net unrealized gains or
losses on securities. The securities portfolio is marked to market monthly and unrealized gains or losses, net of taxes, are recognized as accumulated other comprehensive income or loss on the balance sheet and statement of changes in
shareholders equity. Another factor effecting Accumulated Other Comprehensive Income or Loss is changes in the fair value of the Companys pension and post-retirement benefit plans. Shareholders equity before accumulated other
comprehensive loss was $27.6 million on June 30, 2008 compared to $27.4 million on December 31, 2007. Accumulated other comprehensive loss increased by $59 thousand between December 31, 2007 and June 30, 2008.

Book value per share, basic, on June 30, 2008, compared to June 30, 2007, increased to $11.45 from $11.03, or 3.8%. Book value per share,
basic, before accumulated comprehensive loss on June 30, 2008, compared to December 31, 2007, increased to $11.62 from $11.60. Cash dividends paid for the six months ended June 30, 2008, were $0.34 per share, compared to $0.33 per
share, for the comparable period ended June 30, 2007, an increase of 3.0%. Of the 5,000,000 common shares authorized, 2,373,571 are outstanding.

The Company began a share repurchase program in August of 1999 and has continued the program into 2008. Repurchases of shares reduced equity by $43 thousand during the first six months of 2008, compared to a $111
thousand reduction during the comparable period in 2007.

The Bank is subject to minimum regulatory capital ratios as defined by Federal
Financial Institutions Examination Council guidelines. These ratios continue to be well in excess of regulatory minimums. As of June 30, 2008, the Bank maintained Tier 1 capital of $23.6 million, net risk weighted assets of $242.9 million, and
Tier 2 capital of $2.4 million. On June 30, 2008, the Tier 1 capital to risk weighted assets ratio was 9.7%, the total capital ratio was 10.7%, and the Tier 1 leverage ratio was 7.2%.



16



---

##### Table of Contents

FINANCIAL CONDITION

Total assets decreased by 0.4% to $325.0 million during the six months ended June 30, 2008. Cash and cash equivalents, which produce no income, increased to $5.1 million on June 30, 2008, from $5.0 million
at year-end 2007.

During the six months ended June 30, 2008, gross loans decreased by $10.0 million or 3.9%, to $250.5 million from
$260.5 million at year-end 2007. The largest component of this decrease was real estate mortgage loans secured by 1-4 family residential collateral, with a 4.3% decline to $138.5 million.

During the six months ended June 30, 2008, the Company charged off loans totaling $80 thousand. For the comparable period in 2007, total loans
charged off were $46 thousand. The Company maintained $787 thousand of other real estate owned (OREO) as of June 30, 2008, compared to $795 thousand at year-end 2007. All properties maintained as OREO are actively marketed.

The provision for loan losses amounted to $77 thousand through the six months ended June 30, 2008 and the allowance for loan losses
as of June 30, 2008 was $2.4 million. The allowance for loan losses, as a percentage of total loans, was 0.94% at June 30, 2008, compared to 0.90% at December 31, 2007. The allowance for loan losses is analyzed for adequacy on a
quarterly basis to determine the necessary provision. As part of the second quarter 2008 analysis, the factors which reflect changes in the local economy and increases in nonaccrual and impaired loans were adjusted. Combined with the reduction in
total loan balances, these adjustments contributed to the increased allowance.

As of June 30, 2008, $2.5 million of loans were
considered impaired, of which $1.1 million were on non-accrual status. There were $1.3 million of loans on non-accrual status as of year-end 2007. Impaired loans are identified based on SFAS No 114. Loans still accruing interest but delinquent for
90 days or more were $972 thousand on June 30, 2008, as compared to $1.1 million on June 30, 2007. Management has reviewed these credits 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, 2008, securities available for sale at market value totaled $38.4 million as
compared to $43.6 million on December 31, 2007. This represents a net decrease of $5.2 million or 11.8% for the six months. Securities classified as held-to-maturity at book value were $479 thousand as of June 30, 2008, compared to $471
thousand at December 31, 2007. As of June 30, 2008, the investment portfolio represented 12.0% of total assets and 12.8% of earning assets. The greater portion of the Companys investment portfolio is classified as available-for-sale
and marked to market on a monthly basis. These gains or losses are booked as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold or an other than
temporary impairment occurs. Management does not consider any of the unrealized losses to be other than temporarily impaired.

As of
June 30, 2008, total deposits were $258.3 million compared to $259.6 million at year-end 2007. This represents a decrease in balances of $1.3 million or 0.5% during the six months. Components of this decrease include savings and
interest-bearing demand deposits with a 5.5% decrease to $100.8 million. However, noninterest-bearing deposits increased by 10.1% to $42.4 million and time deposits increased 0.6% increase to $115.1 million.

On June 4, 2008, the Bank opened a new branch office in Burgess, Northumberland County,
Virginia. This is the Banks 8thretail office and a strategic extension of its market into the financially attractive eastern region of that
county.

The Bank has also received approval to establish a retail office in Colonial Beach, Virginia. Purchase of land for this
office remains under contract, the closing of which has been further delayed as the seller works through terms related to water and sewer hook-ups. Colonial Beach is an incorporated town within Westmoreland County. This will be the Banks 9th
banking office and the 2nd in Westmoreland County, another strategic extension of its market to that countys western end.

These new
offices will result in increases to depreciation and related expense. Management believes that improvements in customer service, efficiency and an expanded market footprint will reap benefits well in excess of costs over time, and are essential
to the continued growth of the Company.



17



---

##### Table of Contents

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the six months ended June 30, 2008 and 2007 each totaled $1.5 million. The
combination of three one-time events reduced the 2008 figure by $131 thousand. First, the sale of one OREO property generated a loss of $51 thousand. Second, due to the sale of Bankers Investment Group to Infinex, the Banks investment in that
entity suffered a loss of $118 thousand. Finally, due to the sale of Bankers Title of Fredericksburg to Bankers Title of Shenandoah, the Banks investment in that entity enjoyed a gain of $38 thousand. Other noteworthy elements of non-interest
income include fee income generated by the Banks Investment Advantage program, which increased by 66% to $256 thousand for the first six months of 2008, compared to $154 thousand for the similar period in 2007. Visa® income was $390
thousand for the first six months of 2008, as compared to $352 thousand for the same period in 2007, an increase of 11%.

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

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

NON-INTEREST EXPENSE

For both the six months ended June 30, 2008 and 2007, non-interest
expenses were $5.6 million. The largest components of non-interest expense are salaries and benefits, and occupancy expense. For the six months ended June 30, 2008, compared to the same period in 2007, management has controlled the increase of
salary and benefit expense to 0.3%. Similarly, occupancy expense has been reduced by 7.7% to $833 thousand from $902 thousand. This reduction in occupancy expense positions the Company well for expected increases related to the two new retail
offices described earlier.

Other expenses include bank franchise taxes which totaled $104 thousand through six months of 2008 and $93
thousand for the same period in 2007; expenses related to the Visa® program which were $323 thousand through six months of 2008 and $272 thousand through six months of 2007; telephone expenses which were $97 thousand for the current period and
$95 thousand through six months of 2007; and other operating expenses which totaled $1.3 million for the current period versus $1.2 million for the six months ended June 30, 2007. Telephone expenses include the cost of the Companys
Customer Care Center and data network communications.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a
business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finders fees, advisory, legal, accounting
valuation and other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The Company does not expect the
implementation to have a material impact on its consolidated financial statements.

In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 requires the Company to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133(SFAS 161). SFAS
161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under



18



---

##### Table of Contents

Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position,
financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the implementation of SFAS 161 to have a material
impact on its consolidated financial statements.



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

Not
Required.



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

EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and
with the participation of the Companys management, including the Companys Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures
pursuant to Rule 13a-14 of the Exchange Act. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential conditions. Based upon their evaluation, the Companys Chief Executive Officer and Principal Financial Officer concluded that the Companys disclosure
controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic SEC filings as of June 30, 2008.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There was no change to the Companys internal control over financial reporting during the quarter ended June 30, 2008 that materially affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.

PART II - OTHER INFORMATION



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

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



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

Not required.



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

The Company began a share repurchase program in August of 1999 and has continued the program into 2008. There are a total of 280,000 shares authorized for repurchase under the program.



19



---

##### Table of Contents

The status of the Companys stock repurchase program is shown in the table below.



|            |  |                                |  |                            |       |                                                                                |       |                                                                              |       
|----------- |  | ------------------------------ |  | -------------------------- | ----- | ------------------------------------------------------------------------------ | ----- | ---------------------------------------------------------------------------- | ------
|            |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |       | Total Number of Shares Purchasedas Part of Publicly AnnouncedPlans or Programs |       | Maximum Number of Sharesthat May Yet Be
PurchasedUnder the Plans or Programs
|April, 2008 |  | 200                            |  | $                          | 13.00 |                                                                                | 200   |                                                                              | 82,428
|May, 2008   |  | 1,000                          |  | $                          | 12.44 |                                                                                | 1,000 |                                                                              | 81,428
|June, 2008  |  | 616                            |  | $                          | 11.32 |                                                                                | 616   |                                                                              | 80,812
|            |  |                                |  |                            |       |                                                                                |       |                                                                              |       
|Total       |  | 1,816                          |  | $                          | 12.12 |                                                                                | 1,816 |                                                                              |       
|            |  |                                |  |                            |       |                                                                                |       |                                                                              |       



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

None to report.



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

There were no
matters submitted to a vote of security holders during the quarter ended June 30, 2008.



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

None to report.



|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



20



---

##### Table of Contents

SIGNATURES

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



|                |  |                             |  |                                      
|--------------- |  | --------------------------- |  | -------------------------------------
|                |  | Bay Banks of Virginia, Inc.
|                |  | (Registrant)               
|                |  |                            
|August 12, 2008 |  | By:                         |  | /s/ Austin L. Roberts, III           
|                |  |                             |  | Austin L. Roberts, III               
|                |  |                             |  | President and Chief Executive Officer
|                |  |                             |  | (Principal Executive Officer)        
|                |  |                            
|                |  | By:                         |  | /s/ Deborah M. Evans                 
|                |  |                             |  | Deborah M. Evans                     
|                |  |                             |  | Treasurer                            
|                |  |                             |  | (Principal Financial Officer)        



21