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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

| |  | EXCHANGE ACT OF 1934
| |  | --------------------



For the quarterly period ended June 30, 2003



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

| |  | EXCHANGE ACT OF 1934
| |  | --------------------



Commission File Number: 0-22955



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BAY BANKS OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)



|Virginia                                                       |  | 54-1838100                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



100 South Main
Street, Kilmarnock, VA 22482

(Address of principal executive offices) (Zip Code)



(804) 435-1171

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes ̈No  x



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



2,316,389 shares of common stock on August 11, 2003.



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##### Table of Contents

FORM 10-Q



For the interim period ending June 30, 2003.



INDEX



|                             | 
|---------------------------- | 
|PART I FINANCIAL INFORMATION | 
|                             | 
|ITEM 1.                      | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|ITEM 2.                      | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|                             | 
|ITEM 3.                      | 
|                             | 
|ITEM 4.                      | 
|                             | 
|PART II OTHER INFORMATION    | 
|                             | 
|ITEM 1.                      | 
|                             | 
|ITEM 2.                      | 
|                             | 
|ITEM 3.                      | 
|                             | 
|ITEM 4.                      | 
|                             | 
|ITEM 5.                      | 
|                             | 
|ITEM 6.                      | 



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



|Item  1. |  | FINANCIAL STATEMENTS.
|-------- |  | ---------------------



Bay Banks of Virginia, Inc.

Consolidated Balance Sheets



|                                                                                                         |  | June 30, 2003 |             | December 31, 2002
|-------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | -----------------
|                                                                                                         |  | (Unaudited)   |             |                  
|ASSETS                                                                                                   |  |               |             |                  
|Cash and due from banks                                                                                  |  | $             | 14,071,693  |                  
|Interest-bearing deposits                                                                                |  |               | 162,720     |                  
|Federal funds sold                                                                                       |  |               | 31,024,899  |                  
|Securities available for sale, at fair value                                                             |  |               | 50,107,196  |                  
|Loans, net of allowance for loan losses of $1,798,839 and $1,696,914                                     |  |               | 171,084,285 |                  
|Premises and equipment, net                                                                              |  |               | 8,232,311   |                  
|Accrued interest receivable                                                                              |  |               | 1,343,332   |                  
|Other real estate owned                                                                                  |  |               | 28,396      |                  
|Core deposit intangible                                                                                  |  |               | 2,807,842   |                  
|Other assets                                                                                             |  |               | 1,267,866   |                  
|                                                                                                         |  |               |             |                  
|Total assets                                                                                             |  | $             | 280,130,540 |                  
|LIABILITIES                                                                                              |  |               |             |                  
|Demand deposits                                                                                          |  | $             | 32,147,329  |                  
|Savings and NOW deposits                                                                                 |  |               | 121,837,215 |                  
|Time deposits                                                                                            |  |               | 93,566,278  |                  
|                                                                                                         |  |               |             |                  
|Total deposits                                                                                           |  | $             | 247,550,822 |                  
|Securities sold under repurchase agreements                                                              |  |               | 4,888,391   |                  
|Other liabilities                                                                                        |  |               | 2,262,252   |                  
|                                                                                                         |  |               |             |                  
|Total liabilities                                                                                        |  | $             | 254,701,465 |                  
|SHAREHOLDERS EQUITY                                                                                     |  |               |             |                  
|Common stock  $5 par value; Authorized  5,000,000 shares; Outstanding  2,316,889 and 2,307,360 shares |  | $             | 11,584,447  |                  
|Additional paid-in capital                                                                               |  |               | 4,205,692   |                  
|Retained Earnings                                                                                        |  |               | 7,710,634   |                  
|Accumulated other comprehensive income                                                                   |  |               | 1,928,302   |                  
|                                                                                                         |  |               |             |                  
|Total shareholders equity                                                                               |  | $             | 25,429,075  |                  
|Total liabilities and shareholders equity                                                               |  | $             | 280,130,540 |                  



See Notes to
Consolidated Financial Statements.



3



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##### Table of Contents

Bay Banks Of Virginia, Inc.

Consolidated Statements of Income



|(Unaudited)                                         |  | Quarterended June 30, 2003 |           | Quarterended June 30, 2002 |   |           | For the sixmonths ended June 30, 2003 |  | For the sixmonths ended June 30, 2002
|--------------------------------------------------- |  | -------------------------- | --------- | -------------------------- | - | --------- | ------------------------------------- |  | -------------------------------------
|INTEREST INCOME                                     |  |                            |           |                            |   |           |                                       |  |                                      
|Loans receivable (incl fees)                        |  | $                          | 2,685,975 |                            | $ | 2,764,328 |                                       |  | $                                    
|Securities:                                         |  |                            |           |                            |   |           |                                       |  |                                      
|Taxable                                             |  |                            | 386,846   |                            |   | 528,143   |                                       |  |                                      
|Tax-exempt                                          |  |                            | 179,431   |                            |   | 151,606   |                                       |  |                                      
|Federal funds sold                                  |  |                            | 97,201    |                            |   | 84,441    |                                       |  |                                      
|                                                    |  |                            |           |                            |   |           |                                       |  |                                      
|Total interest income                               |  | $                          | 3,349,453 |                            | $ | 3,528,518 |                                       |  | $                                    
|                                                    |  |                            |           |                           
|INTEREST EXPENSE                                    |  |                            |           |                            |   |           |                                       |  |                                      
|Deposits                                            |  | $                          | 1,217,271 |                            | $ | 1,339,164 |                                       |  | $                                    
|Securities Sold to Repurchase                       |  |                            | 10,511    |                            |   | 8,901     |                                       |  |                                      
|                                                    |  |                            |           |                            |   |           |                                       |  |                                      
|Total interest expense                              |  | $                          | 1,227,782 |                            | $ | 1,348,065 |                                       |  | $                                    
|Net Interest Income                                 |  | $                          | 2,121,671 |                            | $ | 2,180,453 |                                       |  | $                                    
|Provision for loan losses                           |  | $                          | 78,000    |                            |   | 132,000   |                                       |  | $                                    
|Net interest income after provision for loan losses |  | $                          | 2,043,671 |                            | $ | 2,048,453 |                                       |  | $                                    
|                                                    |  |                            |           |                           
|NONINTEREST INCOME                                  |  |                            |           |                            |   |           |                                       |  |                                      
|Income from fiduciary activities                    |  | $                          | 148,874   |                            | $ | 158,405   |                                       |  | $                                    
|Service charges & fees on deposit accounts          |  |                            | 158,627   |                            |   | 131,721   |                                       |  |                                      
|Other miscellaneous fees                            |  |                            | 160,468   |                            |   | 154,048   |                                       |  |                                      
|Secondary market brokerage income                   |  |                            | 113,927   |                            |   | 44,011    |                                       |  |                                      
|Net securities gains                                |  |                            | 3,986     |                            |   | 1,200     |                                       |  |                                      
|Other income                                        |  |                            | 169,921   |                            |   | (9,427    | )                                     |  |                                      
|                                                    |  |                            |           |                            |   |           |                                       |  |                                      
|Total noninterest income                            |  | $                          | 755,803   |                            |   | 479,958   |                                       |  |                                      
|                                                    |  |                            |           |                           
|NONINTEREST EXPENSES                                |  |                            |           |                            |   |           |                                       |  |                                      
|Salaries and employee benefits                      |  | $                          | 1,094,659 |                            | $ | 802,157   |                                       |  | $                                    
|Occupancy expense                                   |  |                            | 344,685   |                            |   | 265,324   |                                       |  |                                      
|Bank franchise tax                                  |  |                            | 49,904    |                            |   | 57,000    |                                       |  |                                      
|Deposit Insurance Premium                           |  |                            | 9,184     |                            |   | 0         |                                       |  |                                      
|Visa Expense                                        |  |                            | 90,671    |                            |   | 76,983    |                                       |  |                                      
|Amortization of Intangibles                         |  |                            | 5,353     |                            |   | 14,090    |                                       |  |                                      
|Other expense                                       |  |                            | 601,218   |                            |   | 467,973   |                                       |  |                                      
|                                                    |  |                            |           |                            |   |           |                                       |  |                                      
|Total noninterest expense                           |  | $                          | 2,195,674 |                            |   | 1,683,527 |                                       |  |                                      
|Net Income before income taxes                      |  | $                          | 603,800   |                            | $ | 844,884   |                                       |  | $                                    
|Income tax expense                                  |  | $                          | 165,078   |                            | $ | 261,000   |                                       |  | $                                    
|NET INCOME                                          |  | $                          | 438,722   |                            | $ | 583,884   |                                       |  | $                                    
|Average basic shares outstanding (1)                |  |                            | 2,311,052 |                            |   | 2,300,726 |                                       |  |                                      
|Earnings per share, basic                           |  |                            | 0.19      |                            |   | 0.25      |                                       |  |                                      
|Average diluted shares outstanding (1)              |  |                            | 2,337,883 |                            |   | 2,337,976 |                                       |  |                                      
|Earnings per share, diluted                         |  |                            | 0.19      |                            |   | 0.25      |                                       |  |                                      



(1) Average 2002 basic and diluted
shares outstanding are adjusted for a 2-for-1 stock split on 6/7/02.





See Notes to Consolidated Financial Statements.



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Bay Banks of Virginia, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



|Six months ended:                                                                 |  | June 30, 2003 |             |   | June 30, 2002 |  
|--------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------- | -
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |               |             |   |               |  
|Net Income                                                                        |  | $             | 877,643     |   |               | $
|Adjustments to reconcile net income to net cash provided by operating activities: |  |               |             |   |               |  
|Depreciation                                                                      |  |               | 371,086     |   |               |  
|Net amortization and accretion of securities                                      |  |               | 11,740      |   |               |  
|Provision for Loan Losses                                                         |  |               | 156,000     |   |               |  
|Net (Gain) on Sale of Securities                                                  |  |               | (24,843     | ) |               |  
|(Gain) on sale of other real estate owned                                         |  |               | (191,959    | ) |               |  
|Decrease in other assets                                                          |  |               | 484,794     |   |               |  
|(Decrease) in Other Liabilities                                                   |  |               | (199,648    | ) |               |  
|                                                                                  |  |               |             |   |               |  
|Net Cash Provided by Operating Activities                                         |  | $             | 1,484,813   |   |               | $
|                                                                                  |  |              
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |               |             |   |               |  
|Proceeds from maturities of Available-for-Sale Securities                         |  | $             | 3,831,853   |   |               | $
|Proceeds from sales of Available-for-Sale Securities                              |  |               | 5,237,000   |   |               |  
|Purchases of Available-for-Sale Securities                                        |  |               | (8,551,399  | ) |               |  
|Increase / (Decrease) in interest bearing deposits                                |  |               | (2,990      | ) |               |  
|(Increase) in Loans outstanding                                                   |  |               | (2,798,129  | ) |               |  
|(Increase) / Decrease in Fed Funds Sold                                           |  |               | (11,046,211 | ) |               |  
|Purchases of Premises and Equipment                                               |  |               | (634,928    | ) |               |  
|Proceeds from sale of other real estate owned                                     |  |               | 743,730     |   |               |  
|                                                                                  |  |               |             |   |               |  
|Net Cash (Used in) Investing Activities                                           |  | $             | (13,221,074 | ) |               | $
|                                                                                  |  |              
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |               |             |   |               |  
|Increase in Demand, Savings, & NOW deposits                                       |  | $             | 13,831,152  |   |               | $
|Increase / (Decrease) in Time Deposits                                            |  |               | 2,203,489   |   |               |  
|Net increase / (decrease) in securities sold under repurchase agreements          |  |               | 406,627     |   |               |  
|Proceeds from issuance of Common Stock                                            |  |               | 198,793     |   |               |  
|Repurchase of Common Stock                                                        |  |               | (61,770     | ) |               |  
|Dividends paid                                                                    |  |               | (646,177    | ) |               |  
|                                                                                  |  |               |             |   |               |  
|Net Cash Provided by Financing Activities                                         |  | $             | 15,932,114  |   |               | $
|Net Increase in Cash & Due from Banks                                             |  | $             | 4,195,853   |   |               | $
|Cash & Due From Banks at Beginning of period                                      |  | $             | 9,875,840   |   |               | $
|Cash & Due From Banks at End of period                                            |  | $             | 14,071,693  |   |               | $
|                                                                                  |  |              
|SUPPLEMENTAL DISCLOSURES:                                                         |  |               |             |   |               |  
|Interest paid                                                                     |  | $             | 2,515,266   |   |               | $
|Income taxes paid                                                                 |  |               | 342,129     |   |               |  
|Unrealized gain on investment securities                                          |  |               | 460,282     |   |               |  
|Loans transferred to other real estate owned                                      |  |               | 7,564       |   |               |  





See Notes to Consolidated Financial Statements.



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Bay Banks of Virginia, Inc.

Consolidated Statement of Changes in Shareholders Equity

(Unaudited)



|                                                                                            |  | Common Stock |            |   | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   | TotalShareholdersEquity |  
|------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ------------------------ | - | --------- | ---------------- |  | - | ----------------------------------- | - | ----------------------- | -
|Balance on 1/1/2002                                                                         |  | $            | 5,766,405  |   |                          | $ | 3,940,720 |                  |  | $ | 12,363,054                          |   |                         | $
|Comprehensive Income:                                                                       |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Net Income                                                                                  |  |              |            |   |                          |   |           |                  |  |   | 1,226,009                           |   |                         |  
|Net changes in unrealized gain of available-for-sale securities, net of taxes of ($279,934) |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|                                                                                            |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Total Comprehensive Income                                                                  |  |              |           |   |                          |   |          |                  |  |   | 1,226,009                           |   |                         |  
|Dividends paid ($0.24/share)                                                                |  |              |            |   |                          |   |           |                  |  |   | (551,979                            | ) |                         |  
|Stock repurchases                                                                           |  |              | (54,645    | ) |                          |   | (107,289  | )                |  |   | (172,736                            | ) |                         |  
|Sale of common stock:                                                                       |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Dividends Reinvested                                                                        |  |              | 33,823     |   |                          |   | 125,204   |                  |  |   |                                    |   |                         |  
|2-for-1 stock split in the form of a 100% stock dividend                                    |  |              | 5,750,427  |   |                          |   |           |                  |  |   | (5,750,427                          | ) |                         |  
|Stock Options exercised                                                                     |  |              | 14,875     |   |                          |   | 24,346    |                  |  |   | (18,558                             | ) |                         |  
|                                                                                            |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Balance on 6/30/02                                                                          |  | $            | 11,510,885 |   |                          | $ | 3,982,981 |                  |  | $ | 7,095,363                           |   |                         | $
|                                                                                            |  |              |            |   |                         
|Balance on 1/1/2003                                                                         |  | $            | 11,536,800 |   |                          | $ | 4,080,693 |                  |  | $ | 7,514,790                           |   |                         | $
|Comprehensive Income:                                                                       |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Net Income                                                                                  |  |              |            |   |                          |   |           |                  |  |   | 877,643                             |   |                         |  
|Net changes in unrealized gain of available-for-sale securities, net of taxes of ($156,496) |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|                                                                                            |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Total Comprehensive Income                                                                  |  |              |           |   |                          |   |          |                  |  |   | 877,643                             |   |                         |  
|Dividends paid ($0.28/share)                                                                |  |              |            |   |                          |   |           |                  |  |   | (646,176                            | ) |                         |  
|Stock repurchases                                                                           |  |              | (20,000    | ) |                          |   | (6,147    | )                |  |   | (35,623                             | ) |                         |  
|Sale of common stock:                                                                       |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Dividends Reinvested                                                                        |  |              | 62,647     |   |                          |   | 128,396   |                  |  |   |                                    |   |                         |  
|Stock Options exercised                                                                     |  |              | 5,000      |   |                          |   | 2,750     |                  |  |   |                                    |   |                         |  
|                                                                                            |  |              |            |   |                          |   |           |                  |  |   |                                     |   |                         |  
|Balance on 6/30/03                                                                          |  | $            | 11,584,447 |   |                          | $ | 4,205,692 |                  |  | $ | 7,710,634                           |   |                         | $





See Notes to Consolidated Financial Statements.



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##### Table of Contents

Notes to Consolidated Financial Statements

(unaudited)



Note 1:



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



The accounting and reporting policies of the registrant conform to accounting
principles generally accepted by 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 financial statements have been reclassified to conform
with current year presentations.



These consolidated financial
statements should be read in conjunction with the financial statements and notes to financial statements included in the registrants 2002 Annual Report to Shareholders.



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



|For the six months ended June 30,                                                                                         |  | 2003 |         |   | 2002 |  
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|Net income, as reported                                                                                                   |  | $    | 877,643 |   |      | $
|Total stock-based compensation expense determinedunder fair value based method for all awards, net of related tax
effects |  |      | (20,027 | ) |      |  
|                                                                                                                          |  |      |         |   |      |  
|Pro forma net income                                                                                                      |  | $    | 857,616 |   |      | $
|Earnings per share:                                                                                                       |  |      |         |   |      |  
|Basicas reported                                                                                                         |  | $    | 0.38    |   |      | $
|Basicpro forma                                                                                                           |  | $    | 0.37    |   |      | $
|Dilutedas reported                                                                                                       |  | $    | 0.38    |   |      | $
|Dilutedpro forma                                                                                                         |  | $    | 0.37    |   |      | $



Note
2: Securities Available for Sale



The carrying amounts of debt
and other securities and their approximate fair values at June 30, 2003, and December 31, 2002, follow:



|June 30, 2003:                 |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|------------------------------ |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ----------
|U.S. Government agencies       |  | $             | 9,470,954  |                      | $ | 292,746               |  | $ | (1        
|State and municipal securities |  |               | 27,298,451 |                      |   | 1,892,343             |  |   | (91,526   
|Corporate bonds                |  |               | 9,092,521  |                      |   | 828,108               |  |   | 0         
|Restricted securities          |  |               | 1,323,600  |                      |   | 0                     |  |   | 0         
|                               |  |               |            |                      |   |                       |  |   |           
|                               |  | $             | 47,185,526 |                      | $ | 3,013,197             |  | $ | (91,527   
|                               |  |               |            |                     
|December 31, 2002:             |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government agencies       |  | $             | 7,511,155  |                      | $ | 358,248               |  |   | 0         
|State and municipal securities |  |               | 25,712,115 |                      |   | 1,410,938             |  |   | (15,619   
|Corporate bonds                |  |               | 13,146,266 |                      |   | 715,713               |  |   | (7,892    
|Restricted securities          |  |               | 1,320,341  |                      |   | 0                     |  |   | 0         
|                               |  |               |            |                      |   |                       |  |   |           
|                               |  | $             | 47,689,877 |                      | $ | 2,484,899             |  | $ | (23,511   



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##### Table of Contents

Note 3: Loans



The components of loans in the balance sheets were as follows:



|                                                             |  | June 30, 2003 |             |   | December 31, 2002 |  
|------------------------------------------------------------ |  | ------------- | ----------- | - | ----------------- | -
|Mortgage loans on real estate:                               |  |               |             |   |                   |  
|Construction                                                 |  | $             | 22,677,116  |   |                   | $
|Secured by farmland                                          |  |               | 1,193,253   |   |                   |  
|Secured by 1-4 family residential                            |  |               | 92,255,748  |   |                   |  
|Other real estate loans                                      |  |               | 23,874,193  |   |                   |  
|Loans to farmers (except those secured by real estate)       |  |               | 71,479      |   |                   |  
|Commercial and industrial loans (not secured by real estate) |  |               | 20,039,881  |   |                   |  
|Consumer installment loans                                   |  |               | 10,234,857  |   |                   |  
|All other loans                                              |  |               | 1,156,385   |   |                   |  
|Net deferred loan costs and fees                             |  |               | 1,380,212   |   |                   |  
|                                                             |  |               |             |   |                   |  
|Total loans                                                  |  | $             | 172,883,124 |   |                   | $
|Allowance for loan losses                                    |  |               | (1,798,839  | ) |                   |  
|                                                             |  |               |             |   |                   |  
|Loans, net                                                   |  | $             | 171,084,285 |   |                   | $



Loans upon which the accrual of
interest has been discontinued totaled $404 thousand as of June 30, 2003, and $269 thousand as of December 31, 2002.



Note 4: Earnings per share



The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of
diluted potential common stock, as adjusted for a 2-for-1 stock split in the form of a 100% stock dividend issued on June 7, 2002.



|                               |  | June 30, 2003 |  | June 30, 2002  
|------------------------------ |  | ------------- |  | ---------------
|                               |  | Avg Shares    |  | Per shareAmount
|Basic earnings per share       |  | 2,308,234     |  | $              
|Effect of dilutive securities: |  |               |  |                
|Stock options                  |  | 18,867        |  |                
|Diluted earnings per share     |  | 2,327,101     |  | $              



Note 5: Core Deposit Intangibles



The Company has core deposit intangibles recorded on the financial statements
relating to the purchase of five branches. The balance of the intangibles at June 30, 2003, as reflected on the Consolidated Balance Sheet, was $2,807,842. Management has determined that these purchases qualified as acquisitions of businesses, as is
allowed under FASB No. 147, and therefore has discontinued amortization, effective January 1, 2002.



The Company performs an annual impairment test to support the value reported.



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



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



CRITICAL ACCOUNTING POLICIES



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



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previously acceptable method to another method. Although the economics of our transactions would be the same, the timing
of events that would impact our transactions could change.



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



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



RECENT ACCOUNTING PRONOUNCEMENTS.In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives)
and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an
impact on the Companys consolidated financial statements.



In May 2003,
the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Companys consolidated financial statements.



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Bay Banks of Virginia, Inc.

Financial Highlights

(Unaudited)



|Six months ended (Thousands)                            |  | 6/30/2003 |           |   | 6/30/2002 |   |           | Change | 
|------------------------------------------------------- |  | --------- | --------- | - | --------- | - | --------- | ------ | 
|FINANCIAL CONDITION                                     |  |           |           |   |           |   |           |        | 
|Average Assets                                          |  | $         | 270,348   |   |           | $ | 247,553   |        | 
|Average Interest-earning Assets                         |  |           | 242,326   |   |           |   | 225,322   |        | 
|Average Earning Assets to Total Average Assets          |  |           | 89.6      | % |           |   | 91.0      | %      | 
|Period-end Interest-bearing Liabilities                 |  |           | 220,292   |   |           |   | 194,486   |        | 
|Average Interest-bearing Liabilities                    |  |           | 214,983   |   |           |   | 197,309   |        | 
|Average Equity, including FAS 115 adjustment            |  |           | 25,078    |   |           |   | 22,877    |        | 
|Tier 1 Capital                                          |  |           | 20,693    |   |           |   | 19,665    |        | 
|Net Risk-weighted Assets                                |  |           | 179,605   |   |           |   | 163,805   |        | 
|Tier 2 Capital                                          |  |           | 1,799     |   |           |   | 1,458     |        | 
|                                                        |  |           |          
|RESULTS OF OPERATIONS                                   |  |           |           |   |           |   |           |        | 
|Net Interest Income before Provision                    |  | $         | 4,264     |   |           | $ | 4,323     |        | 
|Net Income                                              |  |           | 878       |   |           |   | 1,226     |        | 
|Annualized Yield on Average Interest-earning Assets     |  |           | 5.74      | % |           |   | 6.44      | %      | 
|Annualized Cost of Average Interest-bearing Liabilities |  |           | 2.32      | % |           |   | 2.81      | %      | 
|Annualized Net Interest margin                          |  |           | 3.68      | % |           |   | 3.98      | %      | 
|Annualized Net Interest Rate Spread                     |  |           | 3.42      | % |           |   | 3.63      | %      | 
|                                                        |  |           |          
|RATIOS                                                  |  |           |           |   |           |   |           |        | 
|Total Capital to Risk-weighted Assets (10% min)         |  |           | 12.5      | % |           |   | 12.9      | %      | 
|Tier 1 Capital to Risk-weighted Assets (6% min)         |  |           | 11.5      | % |           |   | 12.0      | %      | 
|Leverage Ratio (5% min)                                 |  |           | 7.7       | % |           |   | 8.0       | %      | 
|Annualized Return on Average Assets (ROA)               |  |           | 0.6       | % |           |   | 1.0       | %      | 
|Annualized Return on Average Equity (ROE)               |  |           | 7.0       | % |           |   | 10.7      | %      | 
|Period-end basic shares outstanding*                    |  |           | 2,316,889 |   |           |   | 2,302,177 |        | 
|Average basic shares outstanding*                       |  |           | 2,308,234 |   |           |   | 2,300,733 |        | 
|Average diluted shares outstanding*                     |  |           | 2,327,101 |   |           |   | 2,336,609 |        | 
|                                                        |  |           |          
|PER SHARE DATA                                          |  |           |           |   |           |   |           |        | 
|Diluted earnings per average share (EPS) (six months)*  |  |           | 0.38      |   |           |   | 0.52      |        | 
|Cash Dividends per average share (six months)*          |  |           | 0.28      |   |           |   | 0.24      |        | 
|Book Value per share*                                   |  |           |           |   |           |   |           |        | 
|before Accumulated Comprehensive Income                 |  |           | 10.14     |   |           |   | 9.76      |        | 
|after Accumulated Comprehensive Income                  |  |           | 10.98     |   |           |   | 10.24     |        | 
|Book Value per average basic share*                     |  |           |           |   |           |   |           |        | 
|before Accumulated Comprehensive Income                 |  |           | 10.18     |   |           |   | 9.77      |        | 
|after Accumulated Comprehensive Income                  |  |           | 11.02     |   |           |   | 10.24     |        | 



|* |  | Adjusted for a 2-for-1 stock split on 6/7/02.
|- |  | ---------------------------------------------



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EARNINGS SUMMATION



For the six months ended June 30, 2003, net income was $878 thousand as compared to $1,226 thousand for the comparable
period in 2002, a decrease of 28.4%. Diluted earnings per average share for the first six months of 2003 were $0.38 as compared to $0.52 for the first six months of 2002. Annualized return on average equity was 7.0% for the first six months of 2003
as compared to 10.7% for the first six months of 2002, a decrease of 34.7%. Annualized return on average assets was 0.6% for the first six months of 2003, compared to 1.0% for the first six months of 2002, a decrease of 34.5%. Net interest income
for the first six months of 2003 was $4.3 million, essentially unchanged compared to the same period in 2002. Average interest-earning assets totaled $242 million for the first six months of 2003 as compared to $225 million for the first six months
of 2002, an increase of 7.5%. Average interest-bearing liabilities totaled $215 million for the first six months of 2003 as compared to $197 million for the first six months of 2002, an increase of 9.0%. The annualized yield on average
interest-earning assets for the first six months of 2003 was 5.74% as compared to 6.44% for the first six months of 2002, a decrease of 10.9%. The annualized yield (cost) on interest-bearing liabilities for the first six months of 2003 was 2.32% as
compared to 2.81% for the first six months of 2002, a decrease of 17.4%. Average interest-earning assets as a percent of total average assets was 89.6% for the first six months of 2003 as compared to 91.0% for the comparable period of 2002, a
decrease of 1.5%. Average total assets for the first six months of 2003 were $270 million as compared to $248 million for the first six months of 2002, growth of 9.2%.



Bay Banks of Virginia, Inc.

Net Interest Income Analysis

(Unaudited)



|(Fully taxable equivalent basis)   |  | Six months ended 6/30/2003 |         |                | Six months ended 6/30/2002 |                     
|---------------------------------- |  | -------------------------- | ------- | -------------- | -------------------------- | --------------------
|(Thousands)                        |  | AverageBalance             |         | Income/Expense |                            | AnnualizedYield/Rate
|INTEREST EARNING ASSETS:           |  |                            |         |                |                            |                     
|Investments (Book Value):          |  |                            |         |                |                            |                     
|Taxable Investments                |  | $                          | 26,563  |                | $                          | 812                 
|Tax-Exempt Investments (1)         |  |                            | 16,802  |                |                            | 544                 
|                                   |  |                            |         |                |                            |                     
|Total Investments                  |  | $                          | 43,365  |                | $                          | 1,356               
|Gross Loans (1)(2)                 |  | $                          | 170,311 |                | $                          | 5,432               
|Interest-bearing Deposits          |  |                            | 177     |                |                            | 1                   
|Fed Funds Sold                     |  |                            | 28,473  |                |                            | 170                 
|                                   |  |                            |         |                |                            |                     
|TOTAL INTEREST EARNING ASSETS      |  | $                          | 242,326 |                | $                          | 6,958               
|                                   |  |                            |         |                |                            |                     
|INTEREST-BEARING LIABILITIES:      |  |                            |         |                |                            |                     
|Deposits:                          |  |                            |         |                |                            |                     
|Savings Deposits                   |  | $                          | 60,685  |                | $                          | 567                 
|NOW Deposits                       |  |                            | 40,326  |                |                            | 181                 
|CDs >= $100,000                   |  |                            | 25,377  |                |                            | 477                 
|CDs < $100,000                    |  |                            | 67,997  |                |                            | 1,153               
|Money Market Deposit Accounts      |  |                            | 16,593  |                |                            | 98                  
|                                   |  |                            |         |                |                            |                     
|Total Interest Bearing Deposits    |  | $                          | 210,978 |                | $                          | 2,477               
|Securities Sold to Repurchase      |  | $                          | 4,005   |                | $                          | 20                  
|Other Short Term Borrowings        |  |                            |        |                |                            |                    
|                                   |  |                            |         |                |                            |                     
|TOTAL INTEREST-BEARING LIABILITIES |  | $                          | 214,983 |                | $                          | 2,497               
|Net Interest Margin                |  |                            |         |                | $                          | 4,461               
|Net Interest Rate Spread           |  |                            |         |                |                            |                     



Notes:

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

(2)Includes Visa Program & nonaccrual loans.



This Net Interest Income Analysis table shows net interest margin decreasing to 3.68% from 3.98% for the first six months of 2003 compared to the first six months of 2002. This has been driven



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mainly by a reduction in real estate loan yields due to competitive market forces and mortgage refinancings.



The Company has reclassified loan fee income for 2002 to conform to
Financial Accounting Standards Boards Statement No. 91, which addresses accounting for loan fees and costs. The reclassification reduced loan fee income by $591 thousand in the first six months of 2002. The corresponding entries reduced salary
expense by the same amount, as discussed later in the Non-Interest Expense section.



Through the six months ended June 30, 2003, average interest-earning assets were comprised mainly of the loan portfolio with $170.3 million and the investment portfolio with $43.4 million. For the six month period
ended June 30, 2003, compared to the same period in 2002, on a fully tax equivalent basis, tax-exempt investment yields declined to 6.47% from 6.69%, and taxable investment yields decreased to 6.11% from 6.28%, resulting in a decrease in total
investment yield to 6.25% from 6.40%. In the first six months of 2003, gross loans on average volumes yielded 6.38% as compared to 7.17% for the same period in 2002.



Yields on average interest-bearing deposits comparing the first six months of 2003 to the same period in 2002, were as
follows. Savings yields were down to 1.87% compared to 2.28%, NOW accounts were down to 0.90% compared to 1.27%, money market demand accounts were down to 1.18% compared to 1.61%, certificates of deposit greater than or equal to $100 thousand were
down to 3.76% compared to 4.00%, and certificates of deposit less than $100 thousand were down to 3.39% compared to 3.86%. The resulting total yield on deposits through June 30, 2003, was down to 2.35% compared to 2.83% for the six months ended June
30, 2002.



Table XIII

Interest Rate Sensitivity Analysis

as of 6/30/2003



|(Thousands)                        |  | Within 3months |   |  | 3-12Months |   |  | 1-5Years |  | Over 5Years |  | Total  
|---------------------------------- |  | -------------- | - |  | ---------- | - |  | -------- |  | ----------- |  | -------
|Interest-Bearing Due From Banks    |  | 163            |   |  | 0          |   |  | 0        |  | 0           |  | 163    
|Fed Funds Sold                     |  | 31,025         |   |  | 0          |   |  | 0        |  | 0           |  | 31,025 
|Investments (Book Value)           |  | 1,004          |   |  | 6,968      |   |  | 20,625   |  | 18,588      |  | 47,185 
|Loans                              |  | 47,229         |   |  | 47,022     |   |  | 65,096   |  | 13,536      |  | 172,883
|                                   |  |                |   |  |            |   |  |          |  |             |  |        
|Total Earning Assets               |  | 79,421         |   |  | 53,990     |   |  | 85,721   |  | 32,124      |  | 251,256
|NOW Accounts                       |  | 41,988         |   |  | 0          |   |  | 0        |  | 0           |  | 41,988 
|MMDAs                             |  | 17,345         |   |  | 0          |   |  | 0        |  | 0           |  | 17,345 
|Savings                            |  | 42,416         |   |  | 0          |   |  | 0        |  | 19,693      |  | 62,109 
|CDs < $100,000                    |  | 8,847          |   |  | 15,250     |   |  | 43,511   |  | 4           |  | 67,612 
|CDs >= $100,000                   |  | 2,444          |   |  | 4,689      |   |  | 18,821   |  | 0           |  | 25,954 
|                                   |  |                |   |  |            |   |  |          |  |             |  |        
|Total Interest Bearing Deposits    |  | 113,040        |   |  | 19,939     |   |  | 62,332   |  | 19,697      |  | 215,008
|Fed Funds Purchased                |  | 0              |   |  | 0          |   |  | 0        |  | 0           |  | 0      
|Securities Sold to Repurchase      |  | 4,888          |   |  | 0          |   |  | 0        |  | 0           |  | 4,888  
|                                   |  |                |   |  |            |   |  |          |  |             |  |        
|Total Interest Bearing Liabilities |  | 117,928        |   |  | 19,939     |   |  | 62,332   |  | 19,697      |  | 219,896
|Rate Sensitive Gap                 |  | (38,507        | ) |  | 34,051     |   |  | 23,389   |  | 12,427      |  | 31,360 
|Cumulative Gap                     |  | (38,507        | ) |  | (4,456     | ) |  | 18,933   |  | 31,360      |  |        



As of June 30, 2003,
the Company had interest-earning assets that mature within 3 months totaling $79.4 million, in 3-12 months totaling $54.0 million, in 1-5 years totaling $85.7 million, and over 5 years totaling $32.1 million. In comparison, interest-bearing
liabilities maturing within 3 months totaled $117.9 million, in 3-12 months totaled $19.9 million, in 1-5 years totaled $62.3 million, and $19.7 thousand over 5 years. Management is continually reviewing loan and deposit products to modify or
develop offerings that are less subject to interest rate risk.





LIQUIDITY



The Company maintains adequate short-term assets to meet the Companys liquidity needs as anticipated by management. Federal funds sold and
investments that mature in one year or less provide the major sources of funding for liquidity needs. On June 30, 2003, federal funds sold totaled $31.0 million and securities maturing in one year or less totaled $8.0 million, for a total pool of
$39.0 million. The liquidity ratio as of June 30, 2003 was 35.2% as compared to 33.6% as of December 31, 2002. The Company determines this ratio by dividing the sum of cash and cash equivalents, unpledged



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investment securities and Federal Funds Sold, by net liabilities. Management, through historical analysis, has deemed 15%
an adequate liquidity ratio.





CAPITAL RESOURCES



From December 31, 2002, to June 30, 2003, total shareholders equity has grown by 2.7%. It is impacted by net unrealized gains on securities in the
amount of $1.9 million as of June 30, 2003. There were net unrealized gains on June 30, 2003 of $2.9 million. Unrealized gains or losses, net of taxes, are recognized as accumulated comprehensive income or loss on the balance sheet and statement of
changes in shareholders equity. Shareholders equity before unrealized gains or losses was $23.5 million on June 30, 2003, and $23.1 million on December 31, 2002. This represents an increase of $368 thousand or 1.6% during the six-month
period.



The Company paid a 2-for-1 stock split in the form of
a 100% stock dividend on June 7, 2002. All share information has been adjusted to reflect the split for all periods presented.



Book value per share, basic, on June 30, 2003, compared to June 30, 2002, grew to $10.98 from $10.24, an increase of 7.2%. Book value per share, basic,
before accumulated comprehensive income on June 30, 2003, compared to June 30, 2002, grew to $10.14 from $9.76, an increase of 3.9%. Cash dividends paid for the six months ended June 30, 2003, were $646 thousand, or $0.28 per share, compared to $552
thousand, or $0.24 per share, for the comparable period ended June 30, 2002, an increase of 16.7%. Average basic shares outstanding for the six months ended June 30, 2003, were 2,308,234 compared to 2,300,733 for the comparable period ended June 30,
2002. The Company began a share repurchase program in August of 1999 and has continued the program into 2003. The plan authorizes a total of 115,000 shares for repurchase.



The Company is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council
guidelines. As of June 30, 2003 the Company maintained Tier 1 capital of $20.7 million, net risk weighted assets of $179.6 million, and Tier 2 capital of $1.8 million. On June 30, 2003, the Tier 1 capital to risk weighted assets ratio was 11.5%, the
total capital ratio was 12.5%, and the tier 1 leverage ratio was 7.7%. These ratios continue to be well in excess of regulatory minimums.





FINANCIAL CONDITION



As of June 30, 2003, total assets have increased 6.5% since December 31,
2002, from $263.0 million to $280.1 million. Cash and cash equivalents totaled $14.2 million on June 30, 2003, compared to $10.0 million at year-end 2002.



During the six months ended June 30, 2003, gross loans increased by 1.6%, from $170.1 million to $172.9 million. During the same six-month period, real
estate mortgage loans decreased 0.2% to $140.0 million, commercial loans increased 19.5% to $20.0 million, and installment and other loans decreased by 2.8% to $11.5 million.



For the six months ended June 30, 2003, the Company charged off loans totaling $60 thousand. For the comparable period in
2002, total loans charged off were $257 thousand. The Company maintained $28 thousand of other real estate owned (OREO) as of June 30, 2003. As of year-end 2002, the balance was $580 thousand. The Company actively markets all OREO
properties, and expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of book or market value.



The provision for loan losses amounted to $156 thousand through the first six months, and the allowance for loan losses as
of June 30, 2003, was $1.8 million. The allowance for loan losses, as a percentage of average total loans through the first six months of 2003 was 1.1%.



As of June 30, 2003, $404 thousand of loans were on on non-accrual status. There were $474 thousand of loans on non-accrual status as of June 30, 2002.
Loans still accruing interest but delinquent for 90 days or more were $1.5 million on June 30, 2003, as compared to $541 thousand on June 30, 2002.



The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the necessary provision. A loan by loan review is conducted of
all loan classes and inherent losses on these individual loans are determined. This valuation is then compared to historical data in an effort to determine the prevailing trends. A third component of the process is the analysis of a tabular
presentation of loss allocation percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As of June 30, 2003, management deemed the loan loss reserve reasonable for the loss risk
identified in the loan portfolio.



As of June 30, 2003,
securities available for sale totaled $50.1 million at market value. This compares with December 2002 market value of $50.2 million, essentially unchanged. The investment



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portfolio represents 17.9% of total assets and 19.7% of earning assets. The Companys investment portfolio is
classified as available-for-sale, and therefore management has elected to mark the entire investment portfolio to market. The resulting accumulated adjustment to book value as of June 30, 2003 was an unrealized gain of $2.9 million. The
corresponding accumulated adjustment to shareholders equity was $1.9 million. These gains or losses are booked monthly as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the
securities are actually sold. Management does not anticipate the realization of net losses on investments during 2003.



As of June 30, 2003, total deposits were $247.5 million. Compared to $231.5 at year-end 2002, balances have increased 6.9%. Comparing types of deposit
balances on June 30, 2003, to year-end 2002 results in the following, non-interest-bearing demand deposits increased by 24.9% to $32.1 million, savings and NOW accounts increased by 6.5% to $121.8 million, and time deposits increased by 2.4% to
$93.6 million.





RESULTS OF OPERATIONS



NON-INTEREST INCOME



Non-interest income for the first six months of 2003 totaled $1.4 million compared to $987 thousand for the same period in 2002. This is an increase of
38.4%. This increase is due mainly to secondary mortgage market brokerage fees and gains on sales of other real estate. Non-interest income includes income from fiduciary activities, service charges on deposit accounts, other miscellaneous fees,
gains on the sale of securities, and other income. Of these categories, fiduciary activities contributed $287 thousand. Service charges on deposit accounts contributed $297 thousand. Other miscellaneous fees contributed $308 thousand. Secondary
market brokerage income contributed $206 thousand. Other income, including gains, contributed to the balance with $267 thousand. For the first six months of 2002, these totals were $334 thousand, $252 thousand, $279 thousand, $98 thousand, and $23
thousand, respectively.



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





NON-INTEREST EXPENSE



Non-interest expenses totaled $4.2 million during the first six months of 2003 as compared to $3.4 million for the same period in 2002, an increase of 26.3%. The largest components of non-interest expense are salaries and benefits, and
occupancy expense. Through the six months ended June 30, 2003, salary and benefit expense was $2.1 million, and occupancy expense was $702 thousand. For the same period in 2002, these totals were $1.6 million, and $512 thousand, respectively. The
increase in salary and benefit expense is due mainly to additional employees.



In the fourth quarter of 2002, the Company adopted Financial Accounting Standards Board Statement No. 147, Acquisitions of Certain Financial Institutions. This statement amended previous interpretive guidance
on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Upon adoption of Statement No. 147, the Bank was able to recover the non-cash expense allocated to the amortization of the core deposit intangible that was associated with each of the branch acquisition transactions previously executed. The result
was a reduction in other expense of $116 thousand in the first six months of 2002.



Also in the fourth quarter of 2002, the Company reclassified salary expense to conform to Financial Accounting Standards Boards Statement No. 91, which addresses accounting for loan fees and costs. Salary
expense was reduced due to this reclassification by $591 thousand in the first six months of 2002. As discussed earlier, the corresponding entries reduced loan fee income by the same amount.





FORWARD LOOKING STATEMENT



In
addition to the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the operations of the Bank, and the Companys actual results could differ
significantly from those discussed in the forward looking statements. Some of the factors that could cause or contribute to such differences are discussed herein, but also include changes in economic conditions in the Companys or Banks
market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Banks market area, and competition. Any of these factors could cause actual results to differ materially from historical earnings
and those presently anticipated or projected.



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



There have been no significant changes from the quantitative and qualitative disclosures made in the Companys report on Form 10-K for the year ended
December 31, 2002.





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



Within the 90 days prior to the six month period ended June 30,2003, the Company has carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation,
the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Companys periodic Securities and Exchange Commission filings. There have been no significant changes in the Companys internal controls or in other factors that could significantly
affect internal controls subsequent to the date the Company carried out its evaluation.





PART IIOTHER INFORMATION



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



None to report.





|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS.
|------- |  | ------------------------------------------



None to report.





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



None
to report.





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



The Company held its Annual Meeting of Stockholders on May 19, 2003 at which time stockholders were asked to consider three proposals, as follows:



1. Election of two Class II directors to serve for a term of three years.

2. Approval of the Companys 2003 Incentive Stock Option Plan.

3. Ratification of the Board of Directors
appointment of Yount, Hyde & Barbour, P.C. as independent auditors of the Company for 2003.



The vote tabulation was as follows:



1.
Election of Class II directors to the Board of Directors:



|Director              |  | Votes For |  | Votes Withheld
|--------------------- |  | --------- |  | --------------
|Weston F. Conley, Jr. |  | 1,980,165 |  | 1,878         
|Thomas A. Gosse       |  | 1,967,309 |  | 14,317        



The following directors were not up
for re-election at the Companys 2003 Annual Meeting, and their terms of office continued after the meeting: William A. Creager; Ammon G. Dunton, Jr.; Austin L. Roberts, III; A. Wayne Saunders.



2. Approval of the Companys 2003 Incentive Stock Option Plan:



|Votes For |  | Votes Against |  | Abstentions |  | Broker Non-Votes
|--------- |  | ------------- |  | ----------- |  | ----------------
|1,518,648 |  | 43,230        |  | 420,165     |  | 0               



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##### Table of Contents

3. Ratification of the Board of Directors appointment of Yount, Hyde & Barbour, P.C. as independent auditors of
the Company for 2003:



|Votes For |  | Votes Against |  | Abstentions
|--------- |  | ------------- |  | -----------
|1,977,955 |  | 302           |  | 3,786      





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



None to report.





|ITEM 6: |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------



(a)
Exhibit Index:



3.0

Articles of Incorporation and Bylaws of Bay Banks of Virginia, Inc. (Incorporated by reference to previously filed Form 10-K for the year ended December 31, 2002).10.1

1994 Incentive Stock option plan (Incorporated by reference to the previously filed Form S-4EF, Commission File number 333-22579 dated February 28, 1997.)10.2

1998 Non-Employee Directors Stock Option Plan (incorporated by reference to the previously filed Annual Report on Form 10-K for the year ended December 31, 1999.)31.1

Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




(b) Reports on Form 8-K:



One report on Form 8-K was filed with the Securities and
Exchange Commission on May 19, 2003, announcing the second quarter dividend and results of the annual shareholders meeting.





SIGNATURES



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



|         |  | BAY BANKS OF VIRGINIA,
INC. (Registrant)
|-------- |  | ----------------------------------------
|         | 
|08/14/03 |  | /s/    AUSTIN L. ROBERTS,
III           
|         |  | Austin L. Roberts, III                  
|         |  | President and Chief Executive Officer   
|         |  | (principal executive officer)           
|         | 
|08/14/03 |  | /s/    RICHARD C.
ABBOTT                
|         |  | Richard C. Abbott                       
|         |  | Treasurer                               
|         |  | (principal financial officer)           



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