##### 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, 2009



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

COMMISSION FILE NUMBER: 0-22955





BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)







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

100 SOUTH MAIN STREET, KILMARNOCK, VA 22482

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 435-1171

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)





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

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

2,399,541 shares of common stock on August 6, 2009









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##### Table of Contents

FORM 10-Q

For the interim period ending JUNE 30, 2009.

INDEX



|                                                                                                                       |  |   
|---------------------------------------------------------------------------------------------------------------------- |  | --
|PART I - FINANCIAL INFORMATION                                                                                         |  |   
|                                                                                                                       | 
|ITEM 1. FINANCIAL STATEMENTS                                                                                           |  |   
|                                                                                                                       | 
|CONSOLIDATED BALANCE SHEETS JUNE 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008                                            |  | 3 
|                                                                                                                       | 
|CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)         |  | 4 
|                                                                                                                       | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED) |  | 5 
|                                                                                                                       | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)                      |  | 6 
|                                                                                                                       | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                             |  | 7 
|                                                                                                                       | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                          |  | 14
|                                                                                                                       | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                     |  | 21
|                                                                                                                       | 
|ITEM 4. CONTROLS AND PROCEDURES                                                                                        |  | 21
|                                                                                                                       | 
|PART II - OTHER INFORMATION                                                                                            |  |   
|                                                                                                                       | 
|ITEM 1. LEGAL PROCEEDINGS                                                                                              |  | 21
|                                                                                                                       | 
|ITEM 1A. RISK FACTORS                                                                                                  |  | 21
|                                                                                                                       | 
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                    |  | 21
|                                                                                                                       | 
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                                |  | 21
|                                                                                                                       | 
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            |  | 22
|                                                                                                                       | 
|ITEM 5. OTHER INFORMATION                                                                                              |  | 22
|                                                                                                                       | 
|ITEM 6. EXHIBITS                                                                                                       |  | 22



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

CONSOLIDATED BALANCE
SHEETS



|                                                                                                                      |  |               |             |   |                   |   |             |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                      |  | June 30, 2009 |             |   | December 31, 2008 |  
|                                                                                                                      |  | (Unaudited)   |             |   |                   |  
|                                                                                                                      |  |              
|ASSETS                                                                                                                |  |               |             |   |                   |   |             |  
|Cash and due from banks                                                                                               |  | $             | 4,478,044   |   |                   | $ | 5,247,480   |  
|Interest-bearing deposits                                                                                             |  |               | 11,143,795  |   |                   |   | 363,425     |  
|Federal funds sold                                                                                                    |  |               | 9,121,461   |   |                   |   | 7,250,753   |  
|Securities available for sale, at fair value                                                                          |  |               | 36,747,280  |   |                   |   | 34,967,141  |  
|Securities held to maturity, at amortized cost (fair value, $497,300 and $490,815)                                    |  |               | 493,624     |   |                   |   | 486,097     |  
|Loans, net of allowance for loan losses of $2,460,068 and $2,552,091                                                  |  |               | 245,180,487 |   |                   |   | 249,699,647 |  
|Premises and equipment, net                                                                                           |  |               | 13,757,841  |   |                   |   | 13,317,619  |  
|Accrued interest receivable                                                                                           |  |               | 1,306,168   |   |                   |   | 1,300,324   |  
|Other real estate owned                                                                                               |  |               | 1,860,713   |   |                   |   | 1,004,475   |  
|Goodwill                                                                                                              |  |               | 2,807,842   |   |                   |   | 2,807,842   |  
|Other assets                                                                                                          |  |               | 1,364,266   |   |                   |   | 1,505,710   |  
|                                                                                                                      |  |               |             |   |                   |   |             |  
|Total assets                                                                                                          |  | $             | 328,261,521 |   |                   | $ | 317,950,513 |  
|                                                                                                                      |  |               |             |   |                   |   |             |  
|                                                                                                                      |  |              
|LIABILITIES                                                                                                           |  |               |             |   |                   |   |             |  
|Noninterest-bearing deposits                                                                                          |  | $             | 41,642,981  |   |                   | $ | 37,106,404  |  
|Savings and interest-bearing demand deposits                                                                          |  |               | 100,811,881 |   |                   |   | 95,106,834  |  
|Time deposits                                                                                                         |  |               | 120,138,041 |   |                   |   | 118,836,194 |  
|                                                                                                                      |  |               |             |   |                   |   |             |  
|Total deposits                                                                                                        |  | $             | 262,592,903 |   |                   | $ | 251,049,432 |  
|                                                                                                                      |  |              
|Federal funds purchased and securities sold under repurchase agreements                                               |  |               | 7,305,519   |   |                   |   | 8,341,848   |  
|Federal Home Loan Bank advances                                                                                       |  |               | 30,000,000  |   |                   |   | 30,000,000  |  
|Other liabilities                                                                                                     |  |               | 2,117,930   |   |                   |   | 2,271,003   |  
|Commitments and contingencies                                                                                         |  |               |            |   |                   |   |            |  
|                                                                                                                      |  |               |             |   |                   |   |             |  
|Total liabilities                                                                                                     |  | $             | 302,016,352 |   |                   | $ | 291,662,283 |  
|                                                                                                                      |  |               |             |   |                   |   |             |  
|                                                                                                                      |  |              
|SHAREHOLDERS EQUITY                                                                                                  |  |               |             |   |                   |   |             |  
|Common stock ($5 par value; authorized - 5,000,000 shares; outstanding- 2,399,541 and 2,387,272 shares, respectively) |  | $             | 11,997,707  |   |                   | $ | 11,936,362  |  
|Additional paid-in capital                                                                                            |  |               | 4,831,868   |   |                   |   | 4,776,604   |  
|Retained Earnings                                                                                                     |  |               | 10,574,671  |   |                   |   | 10,855,078  |  
|Accumulated other comprehensive (loss), net                                                                           |  |               | (1,159,077  | ) |                   |   | (1,279,814  | )
|                                                                                                                      |  |               |             |   |                   |   |             |  
|Total shareholders equity                                                                                            |  | $             | 26,245,169  |   |                   | $ | 26,288,230  |  
|                                                                                                                      |  |               |             |   |                   |   |             |  
|                                                                                                                      |  |              
|Total liabilities and shareholders equity                                                                            |  | $             | 328,261,521 |   |                   | $ | 317,950,513 |  
|                                                                                                                      |  |               |             |   |                   |   |             |  

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|--------------------------------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | --------- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | --------- | -
|                                                    |  | Quarter endedJune 30, 2009 |           |   | Quarter endedJune 30, 2008 |   |           | For the sixmonths endedJune 30, 2009 |  |   | For the sixmonths endedJune 30, 2008 |  
|                                                    |  |                            |           |  
|INTEREST INCOME                                     |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Loans, including fees                               |  | $                          | 3,812,122 |   |                            | $ | 4,098,463 |                                      |  | $ | 7,651,425                            |   |  | $ | 8,525,744 |  
|Securities:                                         |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Taxable                                             |  |                            | 174,845   |   |                            |   | 222,869   |                                      |  |   | 320,215                              |   |  |   | 498,596   |  
|Tax-exempt                                          |  |                            | 165,575   |   |                            |   | 193,066   |                                      |  |   | 344,460                              |   |  |   | 388,593   |  
|Federal funds sold                                  |  |                            | 2,340     |   |                            |   | 93,860    |                                      |  |   | 6,016                                |   |  |   | 137,599   |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total interest income                               |  |                            | 4,154,882 |   |                            |   | 4,608,258 |                                      |  |   | 8,322,116                            |   |  |   | 9,550,532 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|                                                    |  |                            |           |  
|INTEREST EXPENSE                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Deposits                                            |  |                            | 1,258,051 |   |                            |   | 1,626,732 |                                      |  |   | 2,568,468                            |   |  |   | 3,443,145 |  
|Federal funds purchased                             |  |                            | 40        |   |                            |   |          |                                      |  |   | 52                                   |   |  |   | 257       |  
|Securities sold under repurchase agreements         |  |                            | 3,270     |   |                            |   | 15,182    |                                      |  |   | 7,098                                |   |  |   | 52,010    |  
|FHLB advances                                       |  |                            | 345,990   |   |                            |   | 343,990   |                                      |  |   | 688,178                              |   |  |   | 689,980   |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total interest expense                              |  |                            | 1,607,351 |   |                            |   | 1,985,904 |                                      |  |   | 3,263,796                            |   |  |   | 4,185,392 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Net interest income                                 |  |                            | 2,547,531 |   |                            |   | 2,622,354 |                                      |  |   | 5,058,320                            |   |  |   | 5,365,140 |  
|Provision for loan losses                           |  |                            | 185,692   |   |                            |   | 62,000    |                                      |  |   | 280,693                              |   |  |   | 77,238    |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Net interest income after provision for loan losses |  |                            | 2,361,839 |   |                            |   | 2,560,354 |                                      |  |   | 4,777,627                            |   |  |   | 5,287,902 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|                                                    |  |                            |           |  
|NON-INTEREST INCOME                                 |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Income from fiduciary activities                    |  |                            | 151,205   |   |                            |   | 161,644   |                                      |  |   | 291,677                              |   |  |   | 329,890   |  
|Service charges and fees on deposit accounts        |  |                            | 169,686   |   |                            |   | 172,686   |                                      |  |   | 326,766                              |   |  |   | 337,800   |  
|VISA-related fees                                   |  |                            | 193,748   |   |                            |   | 230,971   |                                      |  |   | 355,581                              |   |  |   | 390,218   |  
|Other service charges and fees                      |  |                            | 190,918   |   |                            |   | 247,776   |                                      |  |   | 359,932                              |   |  |   | 422,202   |  
|Secondary market lending fees                       |  |                            | 74,909    |   |                            |   | 40,412    |                                      |  |   | 126,178                              |   |  |   | 97,689    |  
|Other real estate (losses)                          |  |                            |          |   |                            |   | (51,008   | )                                    |  |   |                                     |   |  |   | (51,008   | )
|Gains on sale of securities available for sale      |  |                            | 5,426     |   |                            |   | 20,800    |                                      |  |   | 7,417                                |   |  |   | 33,720    |  
|Net (losses) on other investments                   |  |                            |          |   |                            |   | (79,995   | )                                    |  |   |                                     |   |  |   | (79,995   | )
|Other income                                        |  |                            | 8,235     |   |                            |   | 7,490     |                                      |  |   | 9,414                                |   |  |   | 14,490    |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total non-interest income                           |  |                            | 794,127   |   |                            |   | 750,776   |                                      |  |   | 1,476,965                            |   |  |   | 1,495,006 |  
|                                                    |  |                            |           |  
|NON-INTEREST EXPENSES                               |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Salaries and employee benefits                      |  |                            | 1,546,670 |   |                            |   | 1,463,980 |                                      |  |   | 3,076,193                            |   |  |   | 2,999,181 |  
|Occupancy expense                                   |  |                            | 500,729   |   |                            |   | 415,358   |                                      |  |   | 960,839                              |   |  |   | 832,761   |  
|Bank franchise tax                                  |  |                            | 41,970    |   |                            |   | 51,789    |                                      |  |   | 83,940                               |   |  |   | 103,578   |  
|Visa expense                                        |  |                            | 158,354   |   |                            |   | 190,320   |                                      |  |   | 285,909                              |   |  |   | 323,428   |  
|Telephone expense                                   |  |                            | 41,861    |   |                            |   | 48,908    |                                      |  |   | 83,461                               |   |  |   | 96,984    |  
|FDIC Assessments                                    |  |                            | 230,453   |   |                            |   | 7,295     |                                      |  |   | 281,096                              |   |  |   | 14,844    |  
|Other expense                                       |  |                            | 654,552   |   |                            |   | 602,477   |                                      |  |   | 1,267,668                            |   |  |   | 1,262,815 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Total non-interest expenses                         |  |                            | 3,174,589 |   |                            |   | 2,780,127 |                                      |  |   | 6,039,106                            |   |  |   | 5,633,591 |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Net income (loss) before income taxes               |  |                            | (18,623   | ) |                            |   | 531,003   |                                      |  |   | 215,486                              |   |  |   | 1,149,317 |  
|Income tax expense (benefit)                        |  |                            | (68,654   | ) |                            |   | 146,890   |                                      |  |   | (53,678                              | ) |  |   | 279,591   |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|                                                    |  |                            |           |  
|Net income                                          |  | $                          | 50,031    |   |                            | $ | 384,113   |                                      |  | $ | 269,164                              |   |  | $ | 869,726   |  
|                                                    |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|                                                    |  |                            |           |  
|Basic Earnings Per Share                            |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Average basic shares outstanding                    |  |                            | 2,395,746 |   |                            |   | 2,367,890 |                                      |  |   | 2,391,716                            |   |  |   | 2,365,851 |  
|Earnings per share, basic                           |  | $                          | 0.02      |   |                            | $ | 0.16      |                                      |  | $ | 0.11                                 |   |  | $ | 0.37      |  
|                                                    |  |                            |           |  
|Diluted Earnings Per Share                          |  |                            |           |   |                            |   |           |                                      |  |   |                                      |   |  |   |           |  
|Average diluted shares outstanding                  |  |                            | 2,395,746 |   |                            |   | 2,367,890 |                                      |  |   | 2,391,716                            |   |  |   | 2,365,851 |  
|Earnings per share, diluted                         |  | $                          | 0.02      |   |                            | $ | 0.16      |                                      |  | $ | 0.11                                 |   |  | $ | 0.37      |  

See Notes to Consolidated Financial Statements.



4



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##### Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------ | ---------- | - |  | - | ---------- | -
|                                                                                                          |  | CommonStock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity |           
|                                                                                                          |  |             |            |   |                         
|Balance at January 1, 2008                                                                                |  | $           | 11,819,583 |   |                          | $ | 4,643,827 |                  |  | $ | 10,959,793                                 |   |  | $                        | (350,340   | ) |  | $ | 27,072,863 |  
|Comprehensive Income:                                                                                     |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                                |  |             |           |   |                          |   |          |                  |  |   | 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 |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|                                                                                                          |  |             |            |   |                         
|Balance at January 1, 2009                                                                                |  | $           | 11,936,362 |   |                          | $ | 4,776,604 |                  |  | $ | 10,855,078                                 |   |  | $                        | (1,279,814 | ) |  | $ | 26,288,230 |  
|                                                                                                          |  |             |            |   |                         
|Comprehensive Income:                                                                                     |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                                |  |             |           |   |                          |   |          |                  |  |   | 269,164                                    |   |  |                          |           |   |  |   | 269,164    |  
|Changes in unrealized holding gains On securities arising during the period, net of taxes of $64,720      |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | 125,632    |   |  |   | 125,632    |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($2,522)         |  |             |           |   |                          |   |          |                  |  |   |                                           |   |  |                          | (4,895     | ) |  |   | (4,895     | )
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|                                                                                                          |  |             |            |   |                         
|Total comprehensive income                                                                                |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 389,901    |  
|Cash dividends paid $0.23 per share                                                                      |  |             |           |   |                          |   |          |                  |  |   | (549,571                                   | ) |  |                          |           |   |  |   | (549,571   | )
|Stock-based compensation                                                                                  |  |             |           |   |                          |   | 11,961    |                  |  |   |                                           |   |  |                          |           |   |  |   | 11,961     |  
|Sale of common stock:                                                                                     |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Dividends Reinvested                                                                                      |  |             | 61,345     |   |                          |   | 43,303    |                  |  |   |                                           |   |  |                          |           |   |  |   | 104,648    |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|                                                                                                          |  |             |            |   |                         
|Balance at June 30, 2009                                                                                  |  | $           | 11,997,707 |   |                          | $ | 4,831,868 |                  |  | $ | 10,574,671                                 |   |  | $                        | (1,159,077 | ) |  | $ | 26,245,169 |  
|                                                                                                          |  |             |            |   |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  

See Notes to Consolidated Financial Statements.



5



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##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended



|                                                                                          |  |               |             |   |               |   |             |  
|----------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                          |  | June 30, 2009 |             |   | June 30, 2008 |  
|                                                                                          |  |              
|Cash Flows From Operating Activities                                                      |  |               |             |   |               |   |             |  
|Net Income                                                                                |  | $             | 269,164     |   |               | $ | 869,726     |  
|                                                                                          |  |              
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |               |             |   |               |   |             |  
|Depreciation                                                                              |  |               | 449,752     |   |               |   | 406,056     |  
|Net amortization and accretion of securities                                              |  |               | 9,710       |   |               |   | 5,340       |  
|Provision for loan losses                                                                 |  |               | 280,693     |   |               |   | 77,238      |  
|Stock-based compensation                                                                  |  |               | 11,961      |   |               |   | 17,510      |  
|Deferred income tax expense (benefit)                                                     |  |               | (10,710     | ) |               |   |            |  
|(Gain) on securities available-for-sale                                                   |  |               | (7,417      | ) |               |   | (33,720     | )
|Loss on sale of other real estate                                                         |  |               |            |   |               |   | 51,008      |  
|Net loss on other investments                                                             |  |               |            |   |               |   | 79,995      |  
|(Increase) decrease in accrued income and other assets                                    |  |               | 678,377     |   |               |   | (379,371    | )
|Increase (decrease) in other liabilities                                                  |  |               | (747,338    | ) |               |   | 364,250     |  
|                                                                                          |  |               |             |   |               |   |             |  
|Net cash provided by operating activities                                                 |  |               | 934,192     |   |               | $ | 1,458,032   |  
|                                                                                          |  |               |             |   |               |   |             |  
|                                                                                          |  |              
|Cash Flows From Investing Activities                                                      |  |               |             |   |               |   |             |  
|Proceeds from maturities of available-for-sale securities                                 |  |               | 3,697,161   |   |               |   | 2,195,495   |  
|Proceeds from sales of available-for-sale securities                                      |  |               | 1,544,499   |   |               |   | 9,745,800   |  
|Purchases of available-for-sale securities                                                |  |               | (6,848,684  | ) |               |   | (6,839,275  | )
|(Increase) decrease in interest bearing deposits in other banks                           |  |               | (10,780,370 | ) |               |   | 24,609      |  
|(Increase) in federal funds sold                                                          |  |               | (1,870,708  | ) |               |   | (12,796,358 | )
|Loan principal collections, net                                                           |  |               | 3,382,229   |   |               |   | 9,593,570   |  
|Proceeds from sale of other real estate                                                   |  |               |            |   |               |   | 334,113     |  
|Purchases of premises and equipment                                                       |  |               | (889,974    | ) |               |   | (1,173,429  | )
|                                                                                          |  |               |             |   |               |   |             |  
|Net cash provided by (used in) investing activities                                       |  | $             | (11,765,847 | ) |               | $ | 1,084,525   |  
|                                                                                          |  |               |             |   |               |   |             |  
|                                                                                          |  |              
|Cash Flows From Financing Activities                                                      |  |               |             |   |               |   |             |  
|Increase (decrease) in demand, savings, and other interest-bearing deposits               |  |               | 10,241,624  |   |               |   | (1,995,713  | )
|Net increase in time deposits                                                             |  |               | 1,301,847   |   |               |   | 707,913     |  
|Net (decrease) in securities sold under repurchase agreements and federal funds purchased |  |               | (1,036,329  | ) |               |   | (429,130    | )
|Proceeds from issuance of common stock                                                    |  |               | 104,648     |   |               |   | 155,169     |  
|Dividends paid                                                                            |  |               | (549,571    | ) |               |   | (803,945    | )
|Repurchase of common stock                                                                |  |               |            |   |               |   | (42,786     | )
|                                                                                          |  |               |             |   |               |   |             |  
|Net cash provided by (used in) financing activities                                       |  | $             | 10,062,219  |   |               | $ | (2,408,492  | )
|                                                                                          |  |               |             |   |               |   |             |  
|                                                                                          |  |              
|Net increase (decrease) in cash and due from banks                                        |  |               | (769,436    | ) |               |   | 134,065     |  
|                                                                                          |  |              
|Cash and due from banks at beginning of period                                            |  |               | 5,247,480   |   |               |   | 5,015,762   |  
|                                                                                          |  |               |             |   |               |   |             |  
|Cash and due from banks at end of period                                                  |  | $             | 4,478,044   |   |               | $ | 5,149,827   |  
|                                                                                          |  |               |             |   |               |   |             |  
|                                                                                          |  |              
|Supplemental Schedule of Cash Flow Information:                                           |  |               |             |   |               |   |             |  
|Interest paid                                                                             |  | $             | 3,314,061   |   |               | $ | 4,270,294   |  
|                                                                                          |  |               |             |   |               |   |             |  
|Income taxes paid                                                                         |  |               |            |   |               |   | 222,624     |  
|                                                                                          |  |               |             |   |               |   |             |  
|Unrealized gain (loss) on investment securities                                           |  |               | 182,935     |   |               |   | (89,273     | )
|                                                                                          |  |               |             |   |               |   |             |  
|Change in pension measurement date                                                        |  |               |            |   |               |   | 52,150      |  
|                                                                                          |  |               |             |   |               |   |             |  
|Loans transferred to other real estate owned                                              |  |               | 856,238     |   |               |   | 377,167     |  
|                                                                                          |  |               |             |   |               |   |             |  

See Notes to Consolidated Financial Statements.



6



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##### Table of Contents

Notes to Consolidated Financial Statements

Note 1: General

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

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

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

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

Note 2: Securities

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



|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|----------------------------------------------- |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | ----------
|Available-for-sale securities June 30, 2009     |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|(unaudited)                                     |  |               |            |                      |   |                         |  |   |          
|                                                |  |               |            |                     
|U.S. Government agencies                        |  | $             | 1,606,090  |                      | $ | 42,249                  |  | $ | (453      | ) |  | $ | 1,647,886 
|State and municipal obligations                 |  |               | 32,563,758 |                      |   | 489,785                 |  |   | (192,649  | ) |  |   | 32,860,894
|Corporate bonds                                 |  |               |           |                      |   |                        |  |   |          |   |  |   |          
|Restricted securities                           |  |               | 2,238,500  |                      |   |                        |  |   |          |   |  |   | 2,238,500 
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  | $             | 36,408,348 |                      | $ | 532,034                 |  | $ | (193,102  | ) |  | $ | 36,747,280
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  |               |            |                     
|Available-for-sale securities December 31, 2008 |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|                                                |  |               |            |                     
|U.S. Government agencies                        |  | $             | 1,622,084  |                      | $ | 52,279                  |  | $ | (1,426    | ) |  | $ | 1,672,937 
|State and municipal obligations                 |  |               | 30,934,959 |                      |   | 288,096                 |  |   | (182,951  | ) |  |   | 31,040,104
|Corporate bonds                                 |  |               |           |                      |   |                        |  |   |          |   |  |   |          
|Restricted securities                           |  |               | 2,254,100  |                      |   |                        |  |   |          |   |  |   | 2,254,100 
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  | $             | 34,811,143 |                      | $ | 340,375                 |  | $ | (184,377  | ) |  | $ | 34,967,141
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  |               |            |                     
|Held-to-maturity securities June 30, 2009       |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|(unaudited)                                     |  |               |            |                      |   |                         |  |   |          
|                                                |  |               |            |                     
|State and municipal obligations                 |  | $             | 493,624    |                      | $ | 3,676                   |  | $ |          |   |  | $ | 497,300   
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           
|                                                |  |               |            |                     
|Held-to-maturity securities December 31, 2008   |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|                                                |  |               |            |                     
|State and municipal obligations                 |  | $             | 486,097    |                      | $ | 4,718                   |  | $ |          |   |  | $ | 490,815   
|                                                |  |               |            |                      |   |                         |  |   |           |   |  |   |           



7



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##### Table of Contents

Securities with a market value of $11.5 million were pledged as collateral for repurchase agreements and
for other purposes as required by law as of June 30, 2009. The market value of pledged securities at year-end 2008 was $9.9 million.

Securities in an unrealized loss position at June 30, 2009 and December 31, 2008, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate movements as there is
minimal credit risk exposure in these investments. All securities are investment grade or better and all losses are considered temporary. Management does not intend to sell the securities and does not expect to be required to sell the securities.
Furthermore, they do expect to recover the entire amortized cost basis. Bonds with unrealized loss positions at June 30, 2009 included 17 municipal bonds, as shown below.



|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|------------------------------------- |  | ------------------- | --------- | ----------------- | - | --------- |  | -------------- | --------- | --------- | - | -------------- |  | - | --------- |  | - | -------
|                                      |  | Less than 12 months |           | 12 months or more |   | Total    
|June 30, 2009                         |  | FairValue           |           | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |           | FairValue |   | UnrealizedLoss
|(unaudited)                           |  |                     |           |                   |   |           |  |                |           |           |   |               
|                                      |  |                     |           |                   |   |          
|U.S. Government agencies              |  | $                   | 53,196    |                   | $ | 453       |  | $              |          |           | $ |               |  | $ | 53,196    |  | $ | 453    
|States and municipal obligations      |  |                     | 4,637,322 |                   |   | 103,541   |  |                | 1,214,905 |           |   | 89,108         |  |   | 5,852,227 |  |   | 192,649
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|Total temporarily impaired securities |  | $                   | 4,690,518 |                   | $ | 103,994   |  | $              | 1,214,905 |           | $ | 89,108         |  | $ | 5,905,423 |  | $ | 193,102
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|                                      |  |                     |          
|                                      |  | Less than 12 months |           | 12 months or more |   | Total    
|December 31, 2008                     |  | FairValue           |           | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |           | FairValue |   | UnrealizedLoss
|                                      |  |                     |           |                   |   |          
|U.S. Government agencies              |  | $                   |          |                   | $ |          |  | $              | 58,675    |           | $ | 1,426          |  | $ | 58,675    |  | $ | 1,426  
|States and municipal obligations      |  |                     | 8,850,276 |                   |   | 182,951   |  |                |          |           |   |               |  |   | 8,850,276 |  |   | 182,951
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        
|Total temporarily impaired securities |  | $                   | 8,850,276 |                   | $ | 182,951   |  | $              | 58,675    |           | $ | 1,426          |  | $ | 8,908,951 |  | $ | 184,377
|                                      |  |                     |           |                   |   |           |  |                |           |           |   |                |  |   |           |  |   |        

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

Note 3: Loans

The components of loans were as
follows:



|                                                             |  |               |             |   |                   |   |             |  
|------------------------------------------------------------ |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | June 30, 2009 |             |   | December 31, 2008 |  
|                                                             |  | (unaudited)   |             |   |                   |  
|Mortgage loans on real estate:                               |  |               |             |   |                   |   |             |  
|Construction                                                 |  | $             | 33,078,130  |   |                   | $ | 36,506,103  |  
|Secured by farmland                                          |  |               | 1,479,212   |   |                   |   | 80,313      |  
|Secured by 1-4 family residential                            |  |               | 139,239,831 |   |                   |   | 142,317,668 |  
|Other real estate loans                                      |  |               | 43,631,937  |   |                   |   | 43,669,144  |  
|Commercial and industrial loans (not secured by real estate) |  |               | 14,629,239  |   |                   |   | 13,913,946  |  
|Consumer installment loans                                   |  |               | 9,446,433   |   |                   |   | 8,602,716   |  
|All other loans                                              |  |               | 5,209,947   |   |                   |   | 6,304,383   |  
|Net deferred loan costs and fees                             |  |               | 925,826     |   |                   |   | 857,465     |  
|                                                             |  |               |             |   |                   |   |             |  
|                                                             |  |              
|Total loans                                                  |  | $             | 247,640,555 |   |                   | $ | 252,251,738 |  
|Allowance for loan losses                                    |  |               | (2,460,068  | ) |                   |   | (2,552,091  | )
|                                                             |  |               |             |   |                   |   |             |  
|                                                             |  |              
|Loans, net                                                   |  | $             | 245,180,487 |   |                   | $ | 249,699,647 |  
|                                                             |  |               |             |   |                   |   |             |  

Loans upon which the accrual of interest has been discontinued totaled $3.8 million as of
June 30, 2009 and $6.0 million as of December 31, 2008.



8



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##### Table of Contents

Note 4: Allowance for Loan Losses



|                           |  |               |           |   |                   |   |           |               |  |   |           |  
|-------------------------- |  | ------------- | --------- | - | ----------------- | - | --------- | ------------- |  | - | --------- | -
|                           |  | June 30, 2009 |           |   | December 31, 2008 |   |           | June 30, 2008 | 
|                           |  | (unaudited)   |           |   |                   |   |           | (unaudited)   | 
|Balance, beginning of year |  | $             | 2,552,091 |   |                   | $ | 2,347,244 |               |  | $ | 2,347,244 |  
|Provision for loan losses  |  |               | 280,693   |   |                   |   | 394,255   |               |  |   | 77,238    |  
|Recoveries                 |  |               | 78,188    |   |                   |   | 14,330    |               |  |   | 8,507     |  
|Loans charged off          |  |               | (450,904  | ) |                   |   | (203,738  | )             |  |   | (79,979   | )
|                           |  |               |           |   |                   |   |           |               |  |   |           |  
|                           |  |               |          
|Balance, end of year       |  | $             | 2,460,068 |   |                   | $ | 2,552,091 |               |  | $ | 2,353,010 |  
|                           |  |               |           |   |                   |   |           |               |  |   |           |  

Information about impaired loans is as follows:

for the six months and twelve months ended:



|                                                                                 |  |               |           |                   |   |          
|-------------------------------------------------------------------------------- |  | ------------- | --------- | ----------------- | - | ---------
|                                                                                 |  | June 30, 2009 |           | December 31, 2008
|                                                                                 |  | (unaudited)   |           |                  
|Impaired loans for which an allowance has been provided                          |  | $             | 4,512,357 |                   | $ | 3,093,247
|Impaired loans for which no allowance has been provided                          |  |               |          |                   |   |         
|                                                                                 |  |               |           |                   |   |          
|Total impaired loans                                                             |  | $             | 4,512,357 |                   | $ | 3,093,247
|                                                                                 |  |               |           |                   |   |          
|Allowance provided for impaired loans, included in the Allowance for loan losses |  | $             | 1,482,410 |                   | $ | 1,098,126
|                                                                                 |  |               |           |                   |   |          
|                                                                                 |  |              
|Average balance impaired loans                                                   |  | $             | 4,747,230 |                   | $ | 3,334,047
|                                                                                 |  |               |           |                   |   |          
|                                                                                 |  |              
|Interest income recognized (collected $42,817 and $128,439, respectively)        |  | $             | 47,036    |                   | $ | 147,292  
|                                                                                 |  |               |           |                   |   |          

At June 30, 2009 and December 31, 2008, 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 $1,683,970 and $4,285,607, respectively. If interest on these loans had been accrued, such
income would have approximated $65,366 during the six months ended June 30, 2009 and $219,460 during the year ended December 31, 2008.

Note
5: Earnings per share

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



|                                             |  |                    |  |                  |      |               |           |                 |   |               |  |                 |  |               |      |                 |           |  |   |     
|-------------------------------------------- |  | ------------------ |  | ---------------- | ---- | ------------- | --------- | --------------- | - | ------------- |  | --------------- |  | ------------- | ---- | --------------- | --------- |  | - | ----
|                                             |  | Three Months Ended |  | Six Months Ended
|                                             |  | June 30, 2009      |  | June 30, 2008    |      | June 30, 2009 |           | June 30, 2008  
|(Unaudited)                                  |  | AverageShares      |  | Per shareAmount  |      | AverageShares |           | Per shareAmount |   | AverageShares |  | Per shareAmount |  | AverageShares |      | Per shareAmount
|Basic earnings per share                     |  | 2,395,746          |  | $                | 0.02 |               | 2,367,890 |                 | $ | 0.16          |  | 2,391,716       |  | $             | 0.11 |                 | 2,365,851 |  | $ | 0.37
|                                             |  |                    |  |                  |      |               |           |                
|Effect of dilutive securities: Stock options |  |                   |  |                  |      |               |          |                 |   |               |  |                |  |               |      |                 |          |  |   |     
|                                             |  |                    |  |                  |      |               |           |                
|Diluted earnings per share                   |  | 2,395,746          |  | $                | 0.02 |               | 2,367,890 |                 | $ | 0.16          |  | 2,391,716       |  | $             | 0.11 |                 | 2,365,851 |  | $ | 0.37

As of June 30, 2009 and 2008, options on 186,026 and 149,408 shares, respectively, were not
included in computing diluted earnings per share, because their effects were anti-dilutive.



9



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##### Table of Contents

Note 6: Stock-Based Compensation

Incremental stock-based compensation expense recognized was $12 thousand during the first six months of 2009. As of June 30, 2009, there was $9 thousand unrecognized compensation expense related to stock options.

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

Stock option plan activity for the three months ended June 30, 2009 is summarized below:



|                               |  |         |   |  |                               |       |                                                      |     |                             |   |  
|------------------------------ |  | ------- | - |  | ----------------------------- | ----- | ---------------------------------------------------- | --- | --------------------------- | - | -
|                               |  | Shares  |   |  | WeightedAverage ExercisePrice |       | Weighted AverageRemaining ContractualLife (in years) |     | AggregateIntrinsicValue (1)
|                               |  |         |   | 
|Options outstanding, January 1 |  | 176,481 |   |  | $                             | 14.75 |                                                      | 4.9 |                             | $ | 
|                               |  |         |   |  |                               |       |                                                      |     |                             |   |  
|                               |  |         |   | 
|Granted                        |  | 42,600  |   |  |                               | 8.09  |                                                      |     |                             |   |  
|Forfeited                      |  | (21,685 | ) |  |                               | 12.48 |                                                      |     |                             |   |  
|Exercised                      |  |        |   |  |                               |      |                                                      |    |                             |   |  
|Expired                        |  | (11,370 | ) |  |                               | 15.82 |                                                      |     |                             |   |  
|                               |  |         |   |  |                               |       |                                                      |     |                             |   |  
|Options outstanding, June 30   |  | 186,026 |   |  |                               | 13.42 |                                                      | 6.3 |                             | $ | 
|                               |  |         |   |  |                               |       |                                                      |     |                             |   |  
|                               |  |         |   | 
|Options exercisable, June 30   |  | 150,926 |   |  |                               | 14.69 |                                                      | 5.5 |                             | $ | 
|                               |  |         |   |  |                               |       |                                                      |     |                             |   |  



|(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, 2009. This amount changes based on changes in the market value of the Companys stock.
At June 30, 2009, the exercise price of all options outstanding exceeded the market value of the Companys stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 7:
Goodwill

The Company has goodwill recorded on the consolidated financial statements relating to the purchase of five branches during
the years 1994 through 2000. The balance of the goodwill at June 30, 2009 and December 31, 2008, as reflected on the consolidated balance sheets was $2,807,842. In accordance with SFAS Nos. 141 (SFAS 141), Business
Combinations, and 142 (SFAS 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 recorded in 2008.

Note 8: Employee Benefit Plans

Components of Net Periodic Benefit Cost



|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       
|----------------------------------------------- |  | ---------------- | -------- | - | ------------------------ | - | -------- | ---- |  | ---- | ------ |  | - | ------
|                                                |  | Pension Benefits |          |   | Post Retirement Benefits
|Six months ended June 30,                       |  | 2009             |          |   | 2008                     |   |          | 2009 |  | 2008
|Service cost                                    |  | $                | 154,487  |   |                          | $ | 156,879  |      |  | $    | 10,717 |  | $ | 9,444 
|Interest cost                                   |  |                  | 122,184  |   |                          |   | 124,335  |      |  |      | 14,816 |  |   | 13,666
|Expected return on plan assets                  |  |                  | (121,789 | ) |                          |   | (187,025 | )    |  |      |       |  |   |      
|Amortization of unrecognized prior service cost |  |                  | 2,333    |   |                          |   | 8,186    |      |  |      |       |  |   |      
|Amortization of unrecognized net loss           |  |                  | 52,990   |   |                          |   | 1,925    |      |  |      | 92     |  |   | 61    
|Amortization of transition obligation           |  |                  |         |   |                          |   |         |      |  |      | 1,457  |  |   | 1,456 
|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       
|Net periodic benefit cost                       |  | $                | 210,205  |   |                          | $ | 104,300  |      |  | $    | 27,082 |  | $ | 24,627
|                                                |  |                  |          |   |                          |   |          |      |  |      |        |  |   |       

The Company intends to contribute $450,000 to its pension plan and $20,149 to its post-retirement
benefit plan in 2009. The Company has made the pension plan contribution in full and has contributed $6,368 toward the post-retirement plan during the first six months of 2009.



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##### Table of Contents

Note 9: FHLB Advances

On June 30, 2009, 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 any of the advances on any quarterly payment date.

Advances on the FHLB line are secured by a blanket lien on qualified 1 to 4
family residential real estate loans. Total borrowing capacity is approximately $64 million. Remaining available credit is $32 million.

Note 10: Fair
Value Measurements

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

In February of 2008, the Financial Accounting Standards Board
(the FASB) issued Staff Position FSP No. 157-2 (FSP 157-2) which delayed the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities except for those items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. FSP 157-2 deferred the effective date of SFAS 157 for such nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years, until the second quarter of 2009. Thus, the Company has begun to fully apply SFAS 157.

In October of 2008, the
FASB issued FSP 157-3 to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was
effective upon issuance, including prior periods for which financials statements were not issued.

SFAS 157 specifies a hierarchy of
valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:



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

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

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



11



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##### Table of Contents

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



|                              |  |                            |            |                                                           |  |                                           |   |                                        |  | 
|----------------------------- |  | -------------------------- | ---------- | --------------------------------------------------------- |  | ----------------------------------------- | - | -------------------------------------- |  | 
|                              |  |                            |            | Fair Value Measurements at June 30, 2009 Using           
|Description                   |  | Balance as ofJune 30, 2009 |            | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level
1) |  | SignificantOtherObservableInputs(Level
2) |   | SignificantUnobservableInputs(Level 3)
|                              |  |                            |            |                                                          
|Available-for-sale securities |  | $                          | 34,508,780 |                                                           |  |                                           | $ | 34,508,780                             |  | 

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

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

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

Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at the
lower of their carrying value or fair value less cost to sell. Management believes that the fair value component in its valuation follows the provisions of SFAS No. 157. Management estimates the fair value of real estate acquired through
foreclosure at an estimated fair value less costs to sell. At or near the time of foreclosure, the bank obtains real estate appraisals on the properties acquired through foreclosure. The real estate is then valued at the lesser of the loan balance,
including interest receivable, or the appraised value at the time of foreclosure less an estimate of costs to sell the property.

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



|                                           |  |                           |           |                                                           |   |                                           |  |                                        |   |  |   |          
|------------------------------------------ |  | ------------------------- | --------- | --------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | ---------
|                                           |  |                           |           | Carrying value at June 30, 2009                          
|Description                                |  | Balance as ofJune 30,2009 |           | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|                                           |  |                           |           |                                                          
|Impaired Loans, net of valuation allowance |  | $                         | 3,029,947 |                                                           | $ |                                          |  | $                                      |  |  | $ | 3,029,947
|                                           |  |                           |           |                                                          
|Other real estate owned                    |  | $                         | 1,860,713 |                                                           | $ |                                          |  | $                                      |  |  | $ | 1,860,713



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##### Table of Contents

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



|                                            |  |                |             |                   |   |                |  |            |             |  |   |            
|------------------------------------------- |  | -------------- | ----------- | ----------------- | - | -------------- |  | ---------- | ----------- |  | - | -----------
|                                            |  | June 30, 2009  |             | December 31, 2008
|                                            |  | CarryingAmount |             | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial Assets:                           |  |                |             |                   |   |                |  |            |             |  |   |            
|Cash and due from banks                     |  | $              | 4,478,044   |                   | $ | 4,478,044      |  | $          | 5,247,480   |  | $ | 5,247,480  
|Interest-bearing deposits                   |  |                | 11,143,795  |                   |   | 11,143,795     |  |            | 363,425     |  |   | 363,425    
|Federal funds sold                          |  |                | 9,121,461   |                   |   | 9,121,461      |  |            | 7,250,753   |  |   | 7,250,753  
|Securities available-for-sale               |  |                | 36,747,280  |                   |   | 36,747,280     |  |            | 34,967,141  |  |   | 34,967,141 
|Securities held-to-maturity                 |  |                | 493,624     |                   |   | 497,300        |  |            | 486,097     |  |   | 490,815    
|Loans, net                                  |  |                | 245,265,487 |                   |   | 244,820,577    |  |            | 249,699,647 |  |   | 249,574,054
|Accrued interest receivable                 |  |                | 1,306,168   |                   |   | 1,306,168      |  |            | 1,300,324   |  |   | 1,300,324  
|                                            |  |                |             |                  
|Financial Liabilities:                      |  |                |             |                   |   |                |  |            |             |  |   |            
|Non-interest-bearing liabilities            |  | $              | 41,642,981  |                   | $ | 41,642,981     |  | $          | 37,106,404  |  | $ | 37,106,404 
|Savings and other interest-bearing deposits |  |                | 100,811,881 |                   |   | 100,811,881    |  |            | 95,106,834  |  |   | 95,106,834 
|Time deposits                               |  |                | 120,138,041 |                   |   | 123,347,347    |  |            | 118,836,194 |  |   | 120,829,776
|Securities sold under repurchase agreements |  |                | 7,305,519   |                   |   | 7,305,519      |  |            | 8,341,848   |  |   | 8,341,848  
|FHLB advances                               |  |                | 30,000,000  |                   |   | 27,744,446     |  |            | 30,000,000  |  |   | 27,025,520 
|Accrued interest payable                    |  |                | 344,858     |                   |   | 344,858        |  |            | 395,123     |  |   | 395,123    

The above presentation of fair values is required by SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The fair values shown do not necessarily represent the amounts which would be received on immediate settlement of the instruments. SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

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

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

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

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

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

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

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

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



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##### Table of Contents

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

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

EXECUTIVE SUMMARY

All banks holding federally insured deposits in the United States will be experiencing dramatic increases in FDIC insurance premiums. This is because the
FDICs Deposit Insurance Fund has fallen below 1.15% of insurable domestic deposits, which compels the FDIC to increase the cost of deposit insurance. As a result, not only has the FDIC doubled the insurance premiums for most banks, but it will
be collecting a special assessment in September of 2009, and could levy additional special assessments as the year progresses. For the Bank, this special assessment is estimated to be $152 thousand and has been posted in its entirety in the month of
June 2009. Including the special assessment, management currently estimates total FDIC expense for 2009 to be $550 thousand.

Interest
margins remain one of managements primary challenges in 2009. In December of 2008 the Federal Open Market Committee reduced the Federal funds target rate to an historic low range of 0.00% to 0.25%. As a result, loan yields deteriorated as
existing loan rates adjusted downward and mortgage holders flocked to refinance at historically low rates, creating material reductions in interest income. Management has proactively reduced deposit rates, thereby reducing interest expense. However,
reductions in interest expense have not been sufficient to offset reductions in interest income.

Another primary challenge that remains
into 2009 is minimal loan growth. Although the Bank originates millions of dollars in new loans each month, overall demand for loans has fallen as consumers and businesses trim their spending and delay expansion plans. Additionally, the Bank
continues to be prudent by not reaching for loan growth by reducing underwriting standards. The result is that increases in loan volumes are not available to mitigate the effect of reductions in loan yields, preventing growth in interest income.

However, the Companys liquidity, core capital levels and regulatory ratios remain strong. The Bank remains well capitalized. Given
the challenging economic environment, management is closely guarding the Companys liquidity and capital. The Company is experiencing the effects of what has become a lengthy economic recession. Loans defined as impaired are greater than the
levels the Company has traditionally experienced and greater than December 2008. However, non-accrual loans, which no longer provide interest income, are 37% lower than on December 2008. Additionally, loans past due 30 days or more are lower than
those in a similar position on December 31, 2008. Finally, recoveries on previously charged off loans have increased. As supported by the reduction in the non-accrual and delinquent loans, Bank staff works diligently with borrowers who are
experiencing financial difficulties to help them through these challenging times. For a more detailed discussion of non-performing loans and the allowance for loan losses, please refer to the Financial Condition section.

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

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

However, management is not sacrificing future growth for present challenges. Investments made in technology and the Banks two new branch offices
position the Company to take advantage of growth potential when the economy improves.

Although media coverage continues on woes of the
financial industry, the Company is proud of its conservative philosophy and service to its community. The Bank does not invest in exotic debt securities, nor does it have programs that originate Sub-Prime, Alt-A or other risky types of mortgages.
All employees pay their civic rent and the Bank is committed to investing in the communities in its market. Although earnings have not been at traditional levels, management is confident that the Company has a bright future once the dust
from the Great Recession settles.

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



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##### Table of Contents

CRITICAL ACCOUNTING POLICIES

GENERAL. The Companys financial statements are prepared in accordance with 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 collectability of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The use of these values is inherently
subjective and actual losses could be greater or less than the estimates.

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

EARNINGS SUMMATION

For the six months ended June 30, 2009, net income was $269 thousand, a decrease of 69.1% compared to the $870 thousand for the similar period in
2008. Diluted earnings per average share for the six months ended June 30, 2009 were $0.11 as compared to $0.37 for the six months ended June 30, 2008. Annualized return on average assets was 0.2% and 0.5% for the six-month periods ended
June 30, 2009 and 2008, respectively. Annualized return on average equity was 2.0% for the six months ended June 30, 2009, down from 6.3% for the similar period ended June 30, 2008.

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest
expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, and the volume
of non-performing assets have an effect on net interest income, the net interest margin, and net income. Net interest income before provision for loan losses for the six months ended June 30, 2009 was $5.1 million, a decrease of 5.72% compared
to the six months ended June 30, 2008. Net interest income after the provision for loan losses is down 9.6% for the same period comparison.

Although interest income declined by $1.2 million for the year-to-date period ended June 30, 2009 compared to the same period in 2008, decreases in interest expense of $922 thousand for the same period comparison helped to minimize the
decrease in net interest income, leaving net interest income (before the provision for loan losses) down only $307 thousand. The $1.2 million decrease in interest income was driven mainly by reduced loan yields, a result of reductions in the Wall
Street Prime Rate, which affects adjustable and variable-rate loans. The $922 thousand decrease in interest expense was primarily due to reductions in rates.



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##### Table of Contents

Net Interest Income Analysis (unaudited)



|                                                        |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|------------------------------------------------------- | -------------- | -------------------------- | -------------- |  | -------------------------- | ----- |  | -------------- | - | -------------- | - | -------------------- |  | - | ----- |  | ---- | -
|(Fully taxable equivalent basis) (Dollars in thousands) |                | Six months ended 6/30/2009 |                |  | Six months ended 6/30/2008 |      
|                                                        | AverageBalance |                            | Income/Expense |  | AnnualizedYield/Rate       |       |  | AverageBalance |   | Income/Expense |   | AnnualizedYield/Rate | 
|                                                        |                |                            |                |  |                            |       |  |                |   |                |   |                      | 
|                                                        |                |                            |                |  |                            |      
|INTEREST EARNING ASSETS:                                |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Taxable investments                                     |                | $                          | 14,899         |  | $                          | 305   |  | 4.09           | % |                | $ | 19,281               |  | $ | 490   |  | 5.08 | %
|Tax-exempt investments (1)                              |                |                            | 19,283         |  |                            | 521   |  | 5.41           | % |                |   | 20,872               |  |   | 589   |  | 5.65 | %
|                                                        |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Total Investments                                       |                |                            | 34,182         |  |                            | 826   |  | 4.83           | % |                |   | 40,153               |  |   | 1,079 |  | 5.38 | %
|                                                        |                |                            |                |  |                            |      
|Gross loans (2)                                         |                |                            | 251,559        |  |                            | 7,651 |  | 6.10           | % |                |   | 253,907              |  |   | 8,526 |  | 6.72 | %
|Interest-bearing deposits                               |                |                            | 9,890          |  |                            | 15    |  | 0.36           | % |                |   | 369                  |  |   | 9     |  | 4.88 | %
|Fed funds sold                                          |                |                            | 6,178          |  |                            | 6     |  | 0.23           | % |                |   | 12,723               |  |   | 138   |  | 2.17 | %
|                                                        |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|TOTAL INTEREST EARNING ASSETS                           |                | $                          | 301,809        |  | $                          | 8,498 |  | 5.63           | % |                | $ | 307,152              |  | $ | 9,752 |  | 6.35 | %
|                                                        |                |                            |                |  |                            |      
|INTEREST-BEARING LIABILITIES:                           |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Savings deposits                                        |                | $                          | 45,162         |  | $                          | 209   |  | 0.93           | % |                | $ | 56,859               |  | $ | 628   |  | 2.21 | %
|NOW deposits                                            |                |                            | 34,024         |  |                            | 80    |  | 0.47           | % |                |   | 34,258               |  |   | 140   |  | 0.82 | %
|Time deposits >= $100,000                               |                |                            | 52,986         |  |                            | 925   |  | 3.52           | % |                |   | 47,555               |  |   | 1,068 |  | 4.49 | %
|Time deposits < $100,000                                |                |                            | 70,080         |  |                            | 1,219 |  | 3.51           | % |                |   | 64,311               |  |   | 1,372 |  | 4.27 | %
|Money market deposit accounts                           |                |                            | 18,174         |  |                            | 135   |  | 1.50           | % |                |   | 18,782               |  |   | 235   |  | 2.50 | %
|                                                        |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|Total interest bearing deposits                         |                | $                          | 220,426        |  | $                          | 2,568 |  | 2.35           | % |                | $ | 221,765              |  | $ | 3,443 |  | 3.10 | %
|                                                        |                |                            |                |  |                            |      
|Fed funds purchased                                     |                |                            | 17             |  |                            |      |  | 0.25           | % |                |   | 56                   |  |   |      |  | 3.66 | %
|Securities sold to repurchase                           |                |                            | 6,016          |  |                            | 7     |  | 0.23           | % |                |   | 7,083                |  |   | 52    |  | 1.47 | %
|FHLB advances                                           |                |                            | 30,000         |  |                            | 688   |  | 4.62           | % |                |   | 30,000               |  |   | 690   |  | 4.60 | %
|                                                        |                |                            |                |  |                            |       |  |                |   |                |   |                      |  |   |       |  |      |  
|TOTAL INTEREST-BEARING LIABILITIES                      |                | $                          | 256,459        |  | $                          | 3,263 |  | 2.57           | % |                | $ | 258,903              |  | $ | 4,185 |  | 3.23 | %
|                                                        |                |                            |                |  |                            |      
|Net interest income/yield on earning assets             |                |                            |                |  | $                          | 5,235 |  | 3.47           | % |                |   |                      |  | $ | 5,567 |  | 3.63 | %
|Net interest rate spread                                |                |                            |                |  |                            |       |  | 3.06           | % |                |   |                      |  |   |       |  | 3.12 | %



Notes:



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

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

The
annualized net interest margin was 3.47% for the six months ended June 30, 2009, compared to 3.63% for the same period in 2008. The main reason for this decline is reductions in loan yield, as mentioned earlier. Although Bank management has
been able to reduce deposit rates, the cost of funding has not declined as much as the yield on earning assets. Further reductions in the cost of funds are anticipated as time deposits mature and are replaced at lower rates.

Average interest-earning assets decreased 1.7% to $301.8 million for the six months ended June 30, 2009 as compared to $307.2 million for the six
months ended June 30, 2008. Average interest-earning assets as a percent of total average assets was 93.4% for the six months ended June 30, 2009 as compared to 93.7% for the comparable period of 2008. As shown above, for the six months
ended June 30, 2009, the loan portfolio with $251.6 million is the largest category of interest-earning assets.

Average
interest-bearing liabilities decreased 0.9% to $256.5 million for the six months ended June 30, 2009, as compared to $258.9 million for the six months ended June 30, 2008. The largest category of interest-bearing liabilities is time
deposits, with combined average balances of $123.1 million for the six months ended June 30, 2009.

The net interest spread, which is
the difference between the annualized yield on earning assets and the annualized cost of interest-bearing liabilities, was 3.06% for the six months ended June 30, 2009 and 3.12% for the same period in 2008.



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##### Table of Contents

LIQUIDITY

The Company maintains adequate short-term assets to meet its liquidity needs as anticipated by management. Federal funds sold, interest-bearing deposits at the Federal Reserve, and investments that mature in one year or less provide the
major sources of funding for liquidity needs. On June 30, 2009, federal funds sold totaled $9.1 million, interest-bearing deposits at the Federal Reserve totaled $11.1 million, and securities maturing in one year or less totaled $7.9 million,
for a total pool of $28.1million. The liquidity ratio as of June 30, 2009 was 15.4% as compared to 12.4% as of December 31, 2008. The Company determines this ratio by dividing the sum of cash and cash equivalents, investment securities
maturing in one year or less, loans maturing in one year or less and federal funds sold, by total assets. In addition, as noted earlier, the Company has a line of credit with the FHLB worth $64 million, plus federal funds lines of credit with
several correspondent banks.

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

CONTRACTUAL OBLIGATIONS

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

CAPITAL
RESOURCES

From December 31, 2008 to June 30, 2009, total shareholders equity declined slightly from $26.3 million to
$26.2 million. Several factors impact shareholders equity, including the Companys commitment to returning earnings to its shareholders through dividends while meeting regulatory capital requirements.

The Companys capital resources are also impacted by net unrealized gains or losses on securities. The 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 $27.4 million on June 30, 2009 compared to
$27.6 million on December 31, 2008. Accumulated other comprehensive loss decreased by $121 thousand between December 31, 2008 and June 30, 2009, a result of unrealized gains in the investment portfolio.

Book value per share, basic, on June 30, 2009, compared to December 31, 2008, decreased by less than 1.0% to $10.94 from $11.01. Book value per
share, basic, before accumulated comprehensive loss on June 30, 2009, compared to December 31, 2008, decreased to $11.42 from $11.55. Cash dividends paid were $0.23 for the six-month period ended June 30, 2009, and $0.34 per share for
the comparable period ended June 30, 2008. Of the 5,000,000 common shares authorized, 2,399,541 were outstanding on June 30, 2009.

The Company began a share repurchase program in August of 1999 and has continued the program into 2009. No repurchases were made during the first six months of 2009, compared to shares repurchased at a cost of $43 thousand during the
comparable period in 2008.

The Bank is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions
Examination Council guidelines. These ratios continue to be well in excess of regulatory minimums. As of June 30, 2009, the Bank maintained Tier 1 capital of $24.0 million, net risk weighted assets of $241.4 million, and Tier 2 capital of $2.5
million. On June 30, 2009, the Tier 1 capital to risk weighted assets ratio was 10.0%, the total capital ratio was 11.0%, and the Tier 1 leverage ratio was 7.4%.

FINANCIAL CONDITION

Total assets increased by 3.2% to $328.3 million during the six months ended
June 30, 2009. Cash and cash equivalents, which produce no income, decreased to $4.5 million on June 30, 2009 from $5.2 million at year-end 2008.

During the six months ended June 30, 2009, gross loans decreased by $4.6 million or 1.8%, to $247.6 million from $252.3 million at year-end 2008. The largest component of this decrease was construction loans with
a 9.4% decrease to $33.1 million.



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Compared to the first quarter of 2009, when the Company charged off loans totaling $208 thousand, net of
recoveries, the $165 thousand of net charge-offs during the second quarter of 2009 is improved. However, the $373 thousand of net charge-offs during the first half of 2009 is noticeably higher than the $71 thousand for the first half of 2008. Except
for $3 thousand, the $373 thousand in net charge-offs has been expected, provided for and entirely covered by specific reserves established in the allowance for loan loss reserves.

In anticipation of these expected charge-offs, management began increasing provision expense in the second half of 2008. The provision for loan losses
amounted to $281 thousand during the six months ended June 30, 2009, compared to $77 thousand for the similar period of 2008. The allowance for loan losses, as a percentage of total loans, decreased to 0.99% at June 30, 2009, compared to
1.01% at December 31, 2008. To determine the necessary provision, the allowance for loan losses is analyzed quarterly for adequacy on a loan-by-loan basis for adversely classified loans, plus with a set of weighted factors addressing such
considerations as the national and local economies, changes in non-performing assets, competition and trends in growth, among others. Management adjusts provision expense, as needed, to maintain the allowance indicated by this quarterly process.

For several reasons, managements estimate of the allowance for loan losses is felt to be reasonable. First, non-performing loans, as
defined by loans past due by 90 days or more plus loans on which the accrual of interest has been discontinued (non-accruing loans), have declined from $6.3 million on December 31, 2008 to $4.5 million on June 30, 2009. This
corresponds to a decrease in non-performing loans as a percentage of total loans from 2.5% on December 31, 2008 to 1.8% on June 30, 2009. Of the $2.1 million reduction in non-accruing loans, $1.2 million is attributable to working with
borrowers to return their loans to a performing as-agreed status. The remainder of the reduction in non-accruing loans is related to expected charge-offs, which were already incorporated in the allowance for loan losses, as noted above. Only two
loans totaling $265 thousand were added to non-accruing loans during the first six months of 2009. Second, although impaired loans have increased, when the level of impaired loans which are not already considered non-performing are added to
non-performing loans, this total has also declined, from $8.0 million on December 31, 2008 to $6.9 million on June 30, 2009. Finally, the non-specific portion of the allowance for loan losses represents 27% of the total allowance on
June 30, 2009. Since the non-specific portion represents managements estimate of intangible factors such as the economy, and since there are numerous signals of economic stabilization, management believes this 28% level is adequate.

Also, in order to reduce potential charge-offs, management has been proactively addressing troubled assets to obtain additional
collateral, as appropriate.

Due to increased foreclosures, the Company now maintains $1.9 million of OREO as of June 30, 2009,
compared to $1.0 million at year-end 2008. All properties maintained as OREO are valued at the lesser of cost or fair value less estimated expense to sell and are actively marketed.

As of June 30, 2009, $4.5 million of loans were considered impaired, of which $2.2 million were on non-accrual status. Compared to December 31,
2008, impaired loan balances have increased by $1.4 million. Impaired loans are identified based on SFAS No. 114. Specific reserves established on impaired loans increased by $374 thousand from December 31, 2008.

Loans no longer accruing interest totaled $3.8 million as of June 30, 2009, down from $6.0 million as of year-end 2008. Loans still accruing
interest but delinquent for 90 days or more totaled $677 thousand on June 30, 2009, as compared to $383 thousand on December 31, 2008. Management has reviewed these credits and the underlying collateral and expects no additional loss above
that which is specifically reserved in the allowance for loan losses.

As of June 30, 2009, securities available for sale at market
value totaled $36.7 million as compared to $35.0 million on December 31, 2008. This represents a net increase of $1.8 million or 5.1% for the six months. Securities classified as held-to-maturity at book value were $494 thousand as of
June 30, 2009, compared to $486 thousand at December 31, 2008. As of June 30, 2009, the investment portfolio represented 11.4% of total assets and 12.2% of earning assets. The greater portion of the Companys investment portfolio
is classified as available-for-sale and marked to market on a monthly basis. These gains or losses are booked as an adjustment to shareholders equity based upon market conditions, and are not realized as an adjustment to earnings until the
securities are actually sold or an other than temporary impairment occurs. Management does not consider any of the unrealized losses to be other than temporarily impaired.

As of June 30, 2009, total deposits were $262.6 million compared to $251.0 million at year-end 2008. This represents an increase in balances of
$11.5 million or 4.6% during the six months. Components of this increase include savings and interest-bearing demand deposits with a 6.0% increase to $100.8 million, non-interest bearing deposits with a 12.2% increase to $41.6 million and time
deposits with a 1.1% increase to $120.1 million.

The Banks newest retail office, in Colonial Beach, Virginia, was opened on
March 11, 2009. This is the Banks 9th retail office and the 2nd in Westmoreland County, another strategic extension of its market to that countys western end.



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##### Table of Contents

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

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the six
months ended June 30, 2009, is down by a slight $18 thousand compared to the six months ended June 30, 2008. However, if the non-recurring losses in 2008 related to other real estate sales and other investments are excluded, non-interest
income would be down by $149 thousand. Declines were due partially to declines in income from Investment Advantage, which was down to $196 thousand from $256 thousand for the same period of 2008, a difference of $63 thousand. Investment Advantage
contributes the majority of income to other service charges and fees. VISA-related fees declined by $35 thousand in the first half of 2009 compared to the similar period in 2008. Income from fiduciary activities was down by $38 thousand for the
first half of 2009 compared to the first half of 2008. Because the Trust Company earns fiduciary income mainly from fees based on a percentage of assets under management, declines in the value of the stock market have driven declines in this fee
income.

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

NON-INTEREST EXPENSE

For the six months ended June 30, 2009, non-interest expenses were $6.0million, an increase of 7.2% compared to the same period in 2008, due mainly to a $266 thousand increase in FDIC insurance expense.
Management currently estimates total FDIC insurance expense to be a substantial $550 thousand for the full year 2009. These FDIC premium assessments are effecting all institutions holding federally insured deposits. The largest components of
non-interest expense are salaries and benefits, and occupancy expense. Occupancy expense is up by 15.4% to $961 thousand, due mainly to the Banks two new retail offices in Burgess and Colonial Beach. During this continued economic downturn,
management continues to actively manage all expenses.

Other non-interest expenses include bank franchise taxes
decreasing to $84 thousand for the first six months of 2009 compared to $104 thousand for the same period in 2008; expenses related to the Visa® program down decreasing to $286 thousand for the first six months of 2009 compared to $323 thousand for the same period in 2008; and telephone expenses decreasing to
$83 thousand for the current period compared to $97 thousand for the same period in 2008. Telephone expenses include the cost of the Companys Customer Care Center and data network communications.

Recent Accounting Pronouncements

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

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



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

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

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

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

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets  an
amendment of FASB Statement No. 140. SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. SFAS 166 must be applied as of the beginning of
the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 166 to have a material
impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. SFAS 167 will be effective as of the beginning of the first annual reporting period that
begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial
statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162. SFAS 168 establishes the FASB Accounting Standards Codification, which will become the source of authoritative U.S.
generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of SFAS 168 to have a material impact on its
consolidated financial statements.

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



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##### Table of Contents

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

Not
required.



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

EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES

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

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

PART II  OTHER INFORMATION



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

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



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

Not required.



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

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



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

None to report.



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##### Table of Contents

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

The Company held its Annual Meeting of Stockholders on May 18, 2009. The stockholders were asked to consider two proposals, as follows:



| | 1. | Election of two Class II directors to serve a three-year term; and
| | -- | ------------------------------------------------------------------



| | 2. | Ratification of Yount, Hyde & Barbour, P.C., independent registered public accounting firm, as auditors
| | -- | -------------------------------------------------------------------------------------------------------

of the Company for the year ending December 31, 2009.

The vote tabulation was as follows:



|                                                                               |  |           |  |                |  |              
|------------------------------------------------------------------------------ |  | --------- |  | -------------- |  | -------------
|                                                                               |  | Votes For |  | Votes Withheld |  | Votes Against
|1.      Election of two Class II directors to serve for a term of three years: |  |           |  |                |  |              
|                                                                               |  |           | 
|Director                                                                       |  |           |  |                |  |              
|Walter C. Ayers                                                                |  | 1,947,877 |  | 28,119         |  |             
|Julien G. Patterson                                                            |  | 1,930,691 |  | 45,305         |  |              
|                                                                               |  |           | 
|                                                                               |  | Votes For |  | Votes Abstain  |  | Votes Against
|2.      Yount, Hyde & Barbour, P.C.                                            |  | 1,967,047 |  | 8,088          |  | 860          

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

Robert C. Berry, Jr.

Richard A. Farmar, III

Robert F. Hurliman

Robert J. Wittman

Austin L. Roberts, III



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

None to report.



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



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



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##### 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 6, 2009 |  | By:                         |  | /s/ Austin L. Roberts, III           
|               |  |                             |  | Austin L. Roberts, III               
|               |  |                             |  | President and Chief Executive Officer
|               |  |                             |  | (Principal Executive Officer)        
|               |  |                            
|               |  | By:                         |  | /s/ Deborah M. Evans                 
|               |  |                             |  | Deborah M. Evans                     
|               |  |                             |  | Treasurer                            
|               |  |                             |  | (Principal Financial Officer)        



23