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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010



| ̈ | 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.    yes  x    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   ̈    no  x

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

2,605,855 shares of common stock on November 2, 2010









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##### Table of Contents



FORM
10-Q

For the interim period ending SEPTEMBER 30, 2010.

INDEX



|                                                                                                                              |  |  |    | 
|----------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I - FINANCIAL INFORMATION                                                                                                |  |  |    | 
|                                                                                                                              | 
|ITEM 1.  FINANCIAL STATEMENTS                                                                                                 |  |  |    | 
|                                                                                                                              | 
|CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009                                              |  |  | 3  | 
|                                                                                                                              | 
|CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)          |  |  | 4  | 
|                                                                                                                              | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND
 2009 (UNAUDITED) |  |  | 5  | 
|                                                                                                                              | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)                       |  |  | 6  | 
|                                                                                                                              | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                    |  |  | 7  | 
|                                                                                                                              | 
|ITEM 2.  
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                               |  |  | 15 | 
|                                                                                                                              | 
|ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                           |  |  | 23 | 
|                                                                                                                              | 
|ITEM 4.  CONTROLS AND PROCEDURES                                                                                              |  |  | 23 | 
|                                                                                                                              | 
|PART II - OTHER INFORMATION                                                                                                   |  |  |    | 
|                                                                                                                              | 
|ITEM 1.  LEGAL PROCEEDINGS                                                                                                    |  |  | 24 | 
|                                                                                                                              | 
|ITEM 1A.  RISK FACTORS                                                                                                        |  |  | 24 | 
|                                                                                                                              | 
|ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                          |  |  | 24 | 
|                                                                                                                              | 
|ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                                                      |  |  | 24 | 
|                                                                                                                              | 
|ITEM 4.  REMOVED AND RESERVED                                                                                                 |  |  | 24 | 
|                                                                                                                              | 
|ITEM 5.  OTHER INFORMATION                                                                                                    |  |  | 24 | 
|                                                                                                                              | 
|ITEM 6.  EXHIBITS                                                                                                             |  |  | 24 | 



2



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PART I
 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS



|                                                                                                                       |  |                    |             |  |                   |   |             | 
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- |  | ----------------- | - | ----------- | 
|                                                                                                                       |  | September 30, 2010 |             |  | December 31, 2009 |  
|                                                                                                                       |  | (Unaudited)        |             |  |                   |  
|ASSETS                                                                                                                 |  |                    |             |  |                   |   |             | 
|Cash and due from banks                                                                                                |  | $                  | 3,643,558   |  |                   | $ | 3,461,483   | 
|Interest-bearing deposits                                                                                              |  |                    | 21,013,445  |  |                   |   | 17,542,635  | 
|Federal funds sold                                                                                                     |  |                    | 4,725,813   |  |                   |   | 2,305,747   | 
|Securities available for sale, at fair value                                                                           |  |                    | 34,953,277  |  |                   |   | 34,020,705  | 
|Restricted securities                                                                                                  |  |                    | 2,358,500   |  |                   |   | 2,238,500   | 
|Loans, net of allowance for loan losses of $3,328,519 and $3,769,287                                                   |  |                    | 246,050,250 |  |                   |   | 247,411,853 | 
|Premises and equipment, net                                                                                            |  |                    | 12,857,856  |  |                   |   | 13,326,410  | 
|Accrued interest receivable                                                                                            |  |                    | 1,164,527   |  |                   |   | 1,323,492   | 
|Other real estate owned, net of valuation allowance                                                                    |  |                    | 4,009,719   |  |                   |   | 2,193,399   | 
|Goodwill                                                                                                               |  |                    | 2,807,842   |  |                   |   | 2,807,842   | 
|Other assets                                                                                                           |  |                    | 3,075,509   |  |                   |   | 3,640,146   | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 
|Total assets                                                                                                           |  | $                  | 336,660,296 |  |                   | $ | 330,272,212 | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 
|                                                                                                                       |  |                   
|LIABILITIES                                                                                                            |  |                    |             |  |                   |   |             | 
|Noninterest-bearing deposits                                                                                           |  | $                  | 47,769,633  |  |                   | $ | 40,552,937  | 
|Savings and interest-bearing demand deposits                                                                           |  |                    | 101,037,458 |  |                   |   | 101,577,758 | 
|Time deposits                                                                                                          |  |                    | 119,922,670 |  |                   |   | 122,382,055 | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 
|Total deposits                                                                                                         |  | $                  | 268,729,761 |  |                   | $ | 264,512,750 | 
|                                                                                                                       |  |                   
|Federal funds purchased and securities sold under repurchase agreements                                                |  |                    | 8,443,928   |  |                   |   | 7,488,793   | 
|Federal Home Loan Bank advances                                                                                        |  |                    | 30,000,000  |  |                   |   | 30,000,000  | 
|Other liabilities                                                                                                      |  |                    | 1,780,060   |  |                   |   | 1,372,078   | 
|Commitments and contingencies                                                                                          |  |                    |            |  |                   |   |            | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 
|Total liabilities                                                                                                      |  | $                  | 308,953,749 |  |                   | $ | 303,373,621 | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 
|                                                                                                                       |  |                   
|SHAREHOLDERS EQUITY                                                                                                   |  |                    |             |  |                   |   |             | 
|Common stock ($5 par value; authorized - 5,000,000 shares; outstanding - 2,605,855 and 2,409,471 shares,
respectively) |  | $                  | 13,029,277  |  |                   | $ | 12,047,357  | 
|Additional paid-in capital                                                                                             |  |                    | 4,963,084   |  |                   |   | 4,842,756   | 
|Retained earnings                                                                                                      |  |                    | 9,120,307   |  |                   |   | 9,912,781   | 
|Accumulated other comprehensive income, net                                                                            |  |                    | 593,879     |  |                   |   | 95,697      | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 
|Total shareholders equity                                                                                             |  | $                  | 27,706,547  |  |                   | $ | 26,898,591  | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 
|                                                                                                                       |  |                   
|Total liabilities and shareholders equity                                                                             |  | $                  | 336,660,296 |  |                   | $ | 330,272,212 | 
|                                                                                                                       |  |                    |             |  |                   |   |             | 

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents



CONSOLIDATED
STATEMENTS OF INCOME

(Unaudited)



|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|--------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------- | - | --------- | ------------------------------------------ |  | - | ------------------------------------------ | - |  | - | ---------- | -
|                                                    |  | Quarter endedSeptember 30, 2010 |           |   | Quarter endedSeptember 30, 2009 |   |           | For the ninemonths
endedSeptember 30, 2010 |  |   | For the ninemonths
endedSeptember 30, 2009 |  
|INTEREST INCOME                                     |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Loans, including fees                               |  | $                               | 3,562,909 |   |                                 | $ | 3,735,491 |                                            |  | $ | 10,801,263                                 |   |  | $ | 11,386,916 |  
|Securities:                                         |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Taxable                                             |  |                                 | 221,794   |   |                                 |   | 228,386   |                                            |  |   | 699,626                                    |   |  |   | 533,629    |  
|Tax-exempt                                          |  |                                 | 66,791    |   |                                 |   | 156,211   |                                            |  |   | 251,011                                    |   |  |   | 500,671    |  
|Federal funds sold                                  |  |                                 | 3,058     |   |                                 |   | 1,833     |                                            |  |   | 5,527                                      |   |  |   | 7,849      |  
|Interest -bearing deposit accounts                  |  |                                 | 14,078    |   |                                 |   | 11,812    |                                            |  |   | 35,559                                     |   |  |   | 26,784     |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total interest income                               |  |                                 | 3,868,630 |   |                                 |   | 4,133,733 |                                            |  |   | 11,792,986                                 |   |  |   | 12,455,849 |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|INTEREST EXPENSE                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Deposits                                            |  |                                 | 1,033,103 |   |                                 |   | 1,158,947 |                                            |  |   | 3,155,011                                  |   |  |   | 3,727,415  |  
|Federal funds purchased                             |  |                                 |          |   |                                 |   | 56        |                                            |  |   | 131                                        |   |  |   | 108        |  
|Securities sold under repurchase agreements         |  |                                 | 4,271     |   |                                 |   | 4,053     |                                            |  |   | 10,280                                     |   |  |   | 11,151     |  
|FHLB advances                                       |  |                                 | 349,792   |   |                                 |   | 349,792   |                                            |  |   | 1,038,593                                  |   |  |   | 1,037,970  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total interest expense                              |  |                                 | 1,387,166 |   |                                 |   | 1,512,848 |                                            |  |   | 4,204,015                                  |   |  |   | 4,776,644  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Net interest income                                 |  |                                 | 2,481,464 |   |                                 |   | 2,620,885 |                                            |  |   | 7,588,971                                  |   |  |   | 7,679,205  |  
|Provision for loan losses                           |  |                                 | 130,948   |   |                                 |   | 492,008   |                                            |  |   | 523,792                                    |   |  |   | 772,701    |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                                 | 2,350,516 |   |                                 |   | 2,128,877 |                                            |  |   | 7,065,179                                  |   |  |   | 6,906,504  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|NON-INTEREST INCOME                                 |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Income from fiduciary activities                    |  |                                 | 151,739   |   |                                 |   | 147,354   |                                            |  |   | 437,908                                    |   |  |   | 439,031    |  
|Service charges and fees on deposit accounts        |  |                                 | 157,090   |   |                                 |   | 169,130   |                                            |  |   | 474,206                                    |   |  |   | 495,896    |  
|VISA-related fees                                   |  |                                 | 246,537   |   |                                 |   | 239,328   |                                            |  |   | 605,591                                    |   |  |   | 594,909    |  
|Other service charges and fees                      |  |                                 | 150,040   |   |                                 |   | 160,412   |                                            |  |   | 497,611                                    |   |  |   | 520,344    |  
|Secondary market lending fees                       |  |                                 | 103,137   |   |                                 |   | 56,021    |                                            |  |   | 182,450                                    |   |  |   | 182,199    |  
|Gains on sale of securities available for sale      |  |                                 | 49,420    |   |                                 |   | 6,019     |                                            |  |   | 188,262                                    |   |  |   | 13,436     |  
|Other real estate gains (losses)                    |  |                                 | (253,590  | ) |                                 |   | 11,343    |                                            |  |   | (221,329                                   | ) |  |   | 11,343     |  
|Net gains on other investments                      |  |                                 |          |   |                                 |   | 4,500     |                                            |  |   |                                           |   |  |   | 4,500      |  
|Other income                                        |  |                                 | 1,348     |   |                                 |   | 10,562    |                                            |  |   | 6,440                                      |   |  |   | 19,976     |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total non-interest income                           |  |                                 | 605,721   |   |                                 |   | 804,669   |                                            |  |   | 2,171,139                                  |   |  |   | 2,281,634  |  
|                                                    |  |                                 |           |  
|NON-INTEREST EXPENSES                               |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Salaries and employee benefits                      |  |                                 | 1,477,158 |   |                                 |   | 1,520,729 |                                            |  |   | 4,463,665                                  |   |  |   | 4,596,922  |  
|Occupancy expense                                   |  |                                 | 497,722   |   |                                 |   | 503,738   |                                            |  |   | 1,498,893                                  |   |  |   | 1,464,577  |  
|Bank franchise tax                                  |  |                                 | 41,115    |   |                                 |   | 42,467    |                                            |  |   | 123,345                                    |   |  |   | 126,407    |  
|Visa expense                                        |  |                                 | 209,947   |   |                                 |   | 195,275   |                                            |  |   | 503,446                                    |   |  |   | 481,184    |  
|Telephone expense                                   |  |                                 | 48,273    |   |                                 |   | 47,760    |                                            |  |   | 138,488                                    |   |  |   | 131,221    |  
|FDIC assessments                                    |  |                                 | 148,501   |   |                                 |   | 121,629   |                                            |  |   | 416,761                                    |   |  |   | 402,725    |  
|Other expense                                       |  |                                 | 551,970   |   |                                 |   | 551,362   |                                            |  |   | 1,815,875                                  |   |  |   | 1,819,030  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Total non-interest expenses                         |  |                                 | 2,974,686 |   |                                 |   | 2,982,960 |                                            |  |   | 8,960,473                                  |   |  |   | 9,022,066  |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|Net income (loss) before income taxes               |  |                                 | (18,449   | ) |                                 |   | (49,414   | )                                          |  |   | 275,845                                    |   |  |   | 166,072    |  
|Income tax (benefit)                                |  |                                 | (40,090   | ) |                                 |   | (84,220   | )                                          |  |   | (23,236                                    | ) |  |   | (137,898   | )
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Net income                                          |  | $                               | 21,641    |   |                                 | $ | 34,806    |                                            |  | $ | 299,081                                    |   |  | $ | 303,970    |  
|                                                    |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|                                                    |  |                                 |           |  
|Basic Earnings Per Share                            |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Average basic shares outstanding*                   |  |                                 | 2,605,855 |   |                                 |   | 2,595,625 |                                            |  |   | 2,605,855                                  |   |  |   | 2,589,826  |  
|Earnings per share, basic                           |  | $                               | 0.01      |   |                                 | $ | 0.01      |                                            |  | $ | 0.11                                       |   |  | $ | 0.12       |  
|                                                    |  |                                 |           |  
|Diluted Earnings Per Share                          |  |                                 |           |   |                                 |   |           |                                            |  |   |                                            |   |  |   |            |  
|Average diluted shares outstanding*                 |  |                                 | 2,605,855 |   |                                 |   | 2,595,625 |                                            |  |   | 2,605,855                                  |   |  |   | 2,589,826  |  
|Earnings per share, diluted                         |  | $                               | 0.01      |   |                                 | $ | 0.01      |                                            |  | $ | 0.11                                       |   |  | $ | 0.12       |  



|* | Adjusted for a 1-for-25 stock dividend on April 23, 2010 and August 27, 2010.
|- | -----------------------------------------------------------------------------

See Notes to Consolidated Financial Statements.



4



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##### Table of Contents



CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(unaudited)



|                                                                                                               |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- |  | ------------------------ | - | --------- | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------ | ---------- | - |  | - | ---------- | -
|                                                                                                               |  | CommonStock |            |  | AdditionalPaid-inCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity |           
|Balance at January 1, 2009                                                                                     |  | $           | 11,936,362 |  |                          | $ | 4,776,604 |                  |  | $ | 10,855,078                                 |   |  | $                        | (1,279,814 | ) |  | $ | 26,288,230 |  
|Comprehensive Income:                                                                                          |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net Income                                                                                                     |  |             |           |  |                          |   |          |                  |  |   | 303,970                                    |   |  |                          |           |   |  |   | 303,970    |  
|Changes in unrealized holding gains (losses) on securities arising during the period, net of taxes of $310,117 |  |             |           |  |                          |   |          |                  |  |   |                                           |   |  |                          | 601,992    |   |  |   | 601,992    |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($4,568)              |  |             |           |  |                          |   |          |                  |  |   |                                           |   |  |                          | (8,868     | ) |  |   | (8,868     | )
|                                                                                                               |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                                     |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 897,094    |  
|Cash dividends paid $0.29 per share                                                                           |  |             |           |  |                          |   |          |                  |  |   | (693,423                                   | ) |  |                          |           |   |  |   | (693,423   | )
|Stock-based compensation                                                                                       |  |             |           |  |                          |   | 14,627    |                  |  |   |                                           |   |  |                          |           |   |  |   | 14,627     |  
|Sale of common stock:                                                                                          |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|                                                                                                               |  |             |            |  |                         
|Dividends Reinvested                                                                                           |  |             | 85,250     |  |                          |   | 46,882    |                  |  |   |                                           |   |  |                          |           |   |  |   | 132,132    |  
|                                                                                                               |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at September 30, 2009                                                                                  |  | $           | 12,021,612 |  |                          | $ | 4,838,113 |                  |  | $ | 10,465,625                                 |   |  | $                        | (686,690   | ) |  | $ | 26,638,660 |  
|                                                                                                               |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|                                                                                                               |  |             |            |  |                         
|Balance at January 1, 2010                                                                                     |  | $           | 12,047,357 |  |                          | $ | 4,842,756 |                  |  | $ | 9,912,781                                  |   |  | $                        | 95,697     |   |  | $ | 26,898,591 |  
|Comprehensive Income:                                                                                          |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Net income                                                                                                     |  |             |           |  |                          |   |          |                  |  |   | 299,081                                    |   |  |                          |           |   |  |   | 299,081    |  
|Changes in unrealized holding gains on securities arising during the period, net of taxes of $320,648          |  |             |           |  |                          |   |          |                  |  |   |                                           |   |  |                          | 622,435    |   |  |   | 622,435    |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($64,009)             |  |             |           |  |                          |   |          |                  |  |   |                                           |   |  |                          | (124,253   | ) |  |   | (124,253   | )
|                                                                                                               |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Total comprehensive income                                                                                     |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   | 797,263    |  
|Stock-based compensation                                                                                       |  |             |           |  |                          |   | 11,903    |                  |  |   |                                           |   |  |                          |           |   |  |   | 11,903     |  
|Stock dividend                                                                                                 |  |             | 981,920    |  |                          |   | 108,425   |                  |  |   | (1,091,555                                 | ) |  |                          |           |   |  |   | (1,210     | )
|                                                                                                               |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  
|Balance at September 30, 2010                                                                                  |  | $           | 13,029,277 |  |                          | $ | 4,963,084 |                  |  | $ | 9,120,307                                  |   |  | $                        | 593,879    |   |  | $ | 27,706,547 |  
|                                                                                                               |  |             |            |  |                          |   |           |                  |  |   |                                            |   |  |                          |            |   |  |   |            |  

See Notes to Consolidated Financial Statements.



5



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##### Table of Contents



CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended



|                                                                                                   |  |                    |             |   |                    |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ----------- | -
|                                                                                                   |  | September 30, 2010 |             |   | September 30, 2009 |  
|Cash Flows From Operating Activities                                                               |  |                    |             |   |                    |   |             |  
|Net Income                                                                                         |  | $                  | 299,081     |   |                    | $ | 303,970     |  
|Adjustments to reconcile net income to net cash provided by operating activities:                  |  |                    |             |   |                    |   |             |  
|Depreciation                                                                                       |  |                    | 666,412     |   |                    |   | 678,788     |  
|Net amortization and accretion of securities                                                       |  |                    | 44,328      |   |                    |   | 53,885      |  
|Provision for loan losses                                                                          |  |                    | 523,792     |   |                    |   | 772,701     |  
|Stock-based compensation                                                                           |  |                    | 11,903      |   |                    |   | 14,627      |  
|Deferred income tax (benefit)                                                                      |  |                    | (20,805     | ) |                    |   | (10,710     | )
|(Gain) on securities available-for-sale                                                            |  |                    | (188,262    | ) |                    |   | (13,436     | )
|OREO valuation allowance                                                                           |  |                    | 268,300     |   |                    |   |            |  
|(Gain) on sale of other real estate                                                                |  |                    | (46,971     | ) |                    |   | (11,342     | )
|Net (gain) on other investments                                                                    |  |                    |            |   |                    |   | (4,500      | )
|Decrease in accrued income and other assets                                                        |  |                    | 683,113     |   |                    |   | 835,684     |  
|Increase (decrease) in other liabilities                                                           |  |                    | 172,148     |   |                    |   | (949,611    | )
|                                                                                                   |  |                    |             |   |                    |   |             |  
|Net cash provided by operating activities                                                          |  | $                  | 2,413,039   |   |                    | $ | 1,670,056   |  
|                                                                                                   |  |                    |             |   |                    |   |             |  
|                                                                                                   |  |                   
|Cash Flows From Investing Activities                                                               |  |                    |             |   |                    |   |             |  
|Proceeds from maturities of available-for-sale securities                                          |  |                    | 1,564,634   |   |                    |   | 3,785,736   |  
|Proceeds from sales of available-for-sale securities                                               |  |                    | 11,814,708  |   |                    |   | 2,500,449   |  
|Purchases of available-for-sale securities                                                         |  |                    | (13,413,159 | ) |                    |   | (10,528,957 | )
|Purchase of restricted securities                                                                  |  |                    | (120,000    | ) |                    |   |            |  
|(Increase) in interest bearing deposits in other banks                                             |  |                    | (3,470,810  | ) |                    |   | (12,377,072 | )
|(Increase) decrease in federal funds sold                                                          |  |                    | (2,420,066  | ) |                    |   | 4,088,754   |  
|Loan (originations) and principal collections, net                                                 |  |                    | (1,674,233  | ) |                    |   | 1,506,178   |  
|Proceeds from sale of other real estate                                                            |  |                    | 514,884     |   |                    |   | 218,142     |  
|Purchases of premises and equipment                                                                |  |                    | (197,858    | ) |                    |   | (903,543    | )
|                                                                                                   |  |                    |             |   |                    |   |             |  
|Net cash (used in) investing activities                                                            |  | $                  | (7,401,900  | ) |                    | $ | (11,710,313 | )
|                                                                                                   |  |                    |             |   |                    |   |             |  
|                                                                                                   |  |                   
|Cash Flows From Financing Activities                                                               |  |                    |             |   |                    |   |             |  
|Increase in demand, savings, and other interest-bearing deposits                                   |  |                    | 6,676,396   |   |                    |   | 9,274,152   |  
|Net (decrease) in time deposits                                                                    |  |                    | (2,459,385  | ) |                    |   | (343,226    | )
|Net increase (decrease) in securities sold under repurchase agreements and
federal funds purchased |  |                    | 955,135     |   |                    |   | (1,337,771  | )
|Proceeds from issuance of common stock                                                             |  |                    |            |   |                    |   | 132,132     |  
|Dividends paid and cash in lieu                                                                    |  |                    | (1,210      | ) |                    |   | (693,423    | )
|                                                                                                   |  |                    |             |   |                    |   |             |  
|Net cash provided by financing activities                                                          |  | $                  | 5,170,936   |   |                    | $ | 7,031,864   |  
|                                                                                                   |  |                    |             |   |                    |   |             |  
|                                                                                                   |  |                   
|Net increase (decrease) in cash and due from banks                                                 |  |                    | 182,075     |   |                    |   | (3,008,393  | )
|Cash and due from banks at beginning of period                                                     |  |                    | 3,461,483   |   |                    |   | 5,247,480   |  
|                                                                                                   |  |                    |             |   |                    |   |             |  
|Cash and due from banks at end of period                                                           |  | $                  | 3,643,558   |   |                    | $ | 2,239,087   |  
|                                                                                                   |  |                    |             |   |                    |   |             |  
|                                                                                                   |  |                   
|Supplemental Schedule of Cash Flow Information                                                     |  |                    |             |   |                    |   |             |  
|Interest paid                                                                                      |  | $                  | 4,208,080   |   |                    | $ | 4,837,378   |  
|                                                                                                   |  |                    |             |   |                    |   |             |  
|Income taxes paid                                                                                  |  |                    |            |   |                    |   |            |  
|                                                                                                   |  |                    |             |   |                    |   |             |  
|Unrealized gain on investment securities                                                           |  |                    | 754,821     |   |                    |   | 898,673     |  
|                                                                                                   |  |                    |             |   |                    |   |             |  
|Loans transferred to other real estate owned                                                       |  |                    | 2,512,044   |   |                    |   | 1,243,438   |  
|                                                                                                   |  |                    |             |   |                    |   |             |  

See Notes to Consolidated Financial Statements.



6



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##### Table of Contents



Notes
to Consolidated Financial Statements (unaudited)

Note 1: General

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

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United
States of America 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 2009 Annual Report to Shareholders.

Note 2: Securities

The carrying amounts of debt and other securities and their approximate fair values at September 30, 2010 and December 31, 2009, follow:



|                                                 |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|------------------------------------------------ |  | ------------- | ---------- |  | -------------------- | - | --------- | ----------------------- |  | - | --------- | - |  | - | ---------- | 
|Available-for-sale securities
September 30, 2010 |  | AmortizedCost |            |  | GrossUnrealizedGains |   |           | GrossUnrealized(Losses) |  |   | FairValue |  
|                                                 |  |               |            | 
|U.S. Government agencies                         |  | $             | 8,318,302  |  |                      | $ | 60,358    |                         |  | $ | (14,441   | ) |  | $ | 8,364,219  | 
|State and municipal obligations                  |  |               | 25,425,379 |  |                      |   | 1,168,867 |                         |  |   | (5,188    | ) |  |   | 26,589,058 | 
|                                                 |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|                                                 |  | $             | 33,743,681 |  |                      | $ | 1,229,225 |                         |  | $ | (19,629   | ) |  | $ | 34,953,277 | 
|                                                 |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|                                                 |  |               |            | 
|Available-for-sale securities
December 31, 2009  |  | AmortizedCost |            |  | GrossUnrealizedGains |   |           | GrossUnrealized(Losses) |  |   | FairValue |  
|                                                 |  |               |            | 
|U.S. Government agencies                         |  | $             | 3,629,523  |  |                      | $ | 21,436    |                         |  | $ |          |   |  | $ | 3,650,959  | 
|State and municipal obligations                  |  |               | 29,936,407 |  |                      |   | 499,528   |                         |  |   | (66,189   | ) |  |   | 30,369,746 | 
|                                                 |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 
|                                                 |  | $             | 33,565,930 |  |                      | $ | 520,964   |                         |  | $ | (66,189   | ) |  | $ | 34,020,705 | 
|                                                 |  |               |            |  |                      |   |           |                         |  |   |           |   |  |   |            | 

Securities with a market value of $10.1 million were pledged as collateral for repurchase agreements and for
other purposes as required by law as of September 30, 2010. The market value of pledged securities at year-end 2009 was $11.5 million.

Securities in an unrealized loss position at September 30, 2010 and December 31, 2009, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to
interest rate movements as there is minimal credit risk exposure in these investments. All securities are investment grade or better and all losses are considered temporary. Management does not intend to sell the securities and does not expect to be
required to sell the securities. Furthermore, we do expect to recover the entire amortized cost basis. Bonds with unrealized loss positions at September 30, 2010 included three federal agencies and one municipal bond, as shown below.



7



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##### Table of Contents



|                                      |  |                     |           |  |                   |   |         |           |  |   |                |  |  |           |         |   |                |   |           |  |  |   |         |  
|------------------------------------- |  | ------------------- | --------- |  | ----------------- | - | ------- | --------- |  | - | -------------- |  |  | --------- | ------- | - | -------------- | - | --------- |  |  | - | ------- | -
|                                      |  | Less than 12 months |           |  | 12 months or more |   |         | Total     | 
|September 30, 2010 (unaudited)        |  | FairValue           |           |  | UnrealizedLoss    |   |         | FairValue |  |   | UnrealizedLoss |  |  | FairValue |         |   | UnrealizedLoss |  
|                                      |  |                     |           |  |                   |  
|U. S. Government agencies             |  | $                   | 1,459,160 |  |                   | $ | (14,441 | )         |  | $ |               |  |  | $         |        |   |                | $ | 1,459,160 |  |  | $ | (14,441 | )
|States and municipal obligations      |  |                     | 508,315   |  |                   |   | (5,188  | )         |  |   |               |  |  |           |        |   |                |   | 508,315   |  |  |   | (5,188  | )
|                                      |  |                     |           |  |                   |   |         |           |  |   |                |  |  |           |         |   |                |   |           |  |  |   |         |  
|                                      |  |                     |           |  |                   |  
|Total temporarily impaired securities |  | $                   | 1,967,475 |  |                   | $ | (19,629 | )         |  | $ |               |  |  | $         |        |   |                | $ | 1,967,475 |  |  | $ | (19,629 | )
|                                      |  |                     |           |  |                   |   |         |           |  |   |                |  |  |           |         |   |                |   |           |  |  |   |         |  
|                                      |  |                     |          
|                                      |  | Less than 12 months |           |  | 12 months or more |   |         | Total     | 
|December 31, 2009                     |  | FairValue           |           |  | UnrealizedLoss    |   |         | FairValue |  |   | UnrealizedLoss |  |  | FairValue |         |   | UnrealizedLoss |  
|                                      |  |                     |           |  |                   |  
|States and municipal obligations      |  | $                   | 4,241,593 |  |                   | $ | (56,052 | )         |  | $ | 772,235        |  |  | $         | (10,137 | ) |                | $ | 5,013,828 |  |  | $ | (66,189 | )
|                                      |  |                     |           |  |                   |   |         |           |  |   |                |  |  |           |         |   |                |   |           |  |  |   |         |  
|Total temporarily impaired securities |  | $                   | 4,241,593 |  |                   | $ | (56,052 | )         |  | $ | 772,235        |  |  | $         | (10,137 | ) |                | $ | 5,013,828 |  |  | $ | (66,189 | )
|                                      |  |                     |           |  |                   |   |         |           |  |   |                |  |  |           |         |   |                |   |           |  |  |   |         |  

The Companys investment in Federal Home Loan Bank of Atlanta (FHLB) stock totaled $1.9
million at September 30, 2010 and December 31, 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 FHLBs
or its member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLBs temporary suspension
of repurchases of excess capital stock beginning in 2009, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2010 and no impairment has been recognized. FHLB stock is shown in the restricted
securities line item on the consolidated balance sheets and is not a part of the available-for-sale securities portfolio.

Note 3: Loans

The components of loans were as follows:



|                                                             |  |                    |             |   |                   |   |             |  
|------------------------------------------------------------ |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                             |  | September 30, 2010 |             |   | December 31, 2009 |  
|                                                             |  | (unaudited)        |             |   |                   |  
|Mortgage loans on real estate:                               |  |                    |             |   |                   |   |             |  
|Construction                                                 |  | $                  | 32,059,217  |   |                   | $ | 33,028,228  |  
|Secured by farmland                                          |  |                    | 1,395,231   |   |                   |   | 1,446,405   |  
|Secured by 1-4 family residential                            |  |                    | 145,986,616 |   |                   |   | 140,839,355 |  
|Other real estate loans                                      |  |                    | 42,875,474  |   |                   |   | 46,383,094  |  
|Commercial and industrial loans (not secured by real estate) |  |                    | 11,789,322  |   |                   |   | 12,293,307  |  
|Consumer installment loans                                   |  |                    | 8,749,958   |   |                   |   | 9,620,893   |  
|All other loans                                              |  |                    | 5,633,702   |   |                   |   | 6,622,901   |  
|Net deferred loan costs and fees                             |  |                    | 889,249     |   |                   |   | 946,957     |  
|                                                             |  |                    |             |   |                   |   |             |  
|                                                             |  |                   
|Total loans                                                  |  | $                  | 249,378,769 |   |                   | $ | 251,181,140 |  
|Allowance for loan losses                                    |  |                    | (3,328,519  | ) |                   |   | (3,769,287  | )
|                                                             |  |                    |             |   |                   |   |             |  
|                                                             |  |                   
|Loans, net                                                   |  | $                  | 246,050,250 |   |                   | $ | 247,411,853 |  
|                                                             |  |                    |             |   |                   |   |             |  

Loans upon which the accrual of interest has been discontinued totaled $4.2 million as of September 30,
2010, and $5.3 million as of December 31, 2009.



8



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##### Table of Contents



Note 4: Allowance for Loan Losses



|                           |  |                    |            |   |                   |   |            |                    |  |   |           |  
|-------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | ------------------ |  | - | --------- | -
|                           |  | September 30, 2010 |            |   | December 31, 2009 |   |            | September 30, 2009 | 
|                           |  | (unaudited)        |            |   |                   |   |            | (unaudited)        | 
|Balance, beginning of year |  | $                  | 3,769,287  |   |                   | $ | 2,552,091  |                    |  | $ | 2,552,091 |  
|Provision for loan losses  |  |                    | 523,792    |   |                   |   | 2,101,875  |                    |  |   | 772,701   |  
|Recoveries                 |  |                    | 198,851    |   |                   |   | 140,269    |                    |  |   | 80,457    |  
|Loans charged off          |  |                    | (1,163,411 | ) |                   |   | (1,024,948 | )                  |  |   | (893,471  | )
|                           |  |                    |            |   |                   |   |            |                    |  |   |           |  
|                           |  |                    |           
|Balance, end of period     |  | $                  | 3,328,519  |   |                   | $ | 3,769,287  |                    |  | $ | 2,511,778 |  
|                           |  |                    |            |   |                   |   |            |                    |  |   |           |  

Information about impaired loans is as follows:

for the nine months and twelve months ended:



|                                                                                 |  |                    |           |  |                   |   |           | 
|-------------------------------------------------------------------------------- |  | ------------------ | --------- |  | ----------------- | - | --------- | 
|                                                                                 |  | September 30, 2010 |           |  | December 31, 2009 |  
|                                                                                 |  | (unaudited)        |           |  |                   |  
|                                                                                 |  |                   
|Impaired loans for which an allowance has been provided                          |  | $                  | 5,144,328 |  |                   | $ | 6,204,160 | 
|                                                                                 |  |                    |           |  |                   |   |           | 
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $                  | 788,488   |  |                   | $ | 1,615,993 | 
|                                                                                 |  |                    |           |  |                   |   |           | 
|                                                                                 |  |                   
|Average balance impaired loans                                                   |  | $                  | 5,200,188 |  |                   | $ | 6,189,204 | 
|                                                                                 |  |                    |           |  |                   |   |           | 
|                                                                                 |  |                   
|Interest income recognized (collected $158,141 and $213,117, respectively)       |  | $                  | 165,131   |  |                   | $ | 233,653   | 
|                                                                                 |  |                    |           |  |                   |   |           | 

At September 30, 2010 and December 31, 2009, adversely risk rated loans evaluated for impairment
in which no allowance was deemed necessary totaled $4,786,419 and $4,188,562, respectively.

At September 30, 2010 and
December 31, 2009, non-accrual loans excluded from impaired loan disclosure totaled $1,314,892 and $1,559,174, respectively. If interest on these loans had been accrued, such income would have approximated $34,825 during the nine months ended
September 30, 2010 and $87,155 during the year ended December 31, 2009.

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 |           |  | Nine Months Ended  |  
|                                             |  | September 30, 2010 |           |  | September 30, 2009 |   |      | September 30, 2010 |  |  | September 30, 2009 | 
|(Unaudited)                                  |  | AverageShares      |           |  | Per shareAmount    |   |      | AverageShares      |  |  | Per shareAmount    |  |  | AverageShares |      |  | Per shareAmount |  |           | AverageShares |  |   | Per shareAmount | 
|                                             |  |                    |           |  |                    |   |      |                   
|Basic earnings per share                     |  |                    | 2,605,855 |  |                    | $ | 0.01 |                    |  |  | 2,595,625          |  |  | $             | 0.01 |  |                 |  | 2,605,855 |               |  | $ | 0.11            |  |  |  | 2,589,826 |  |  | $ | 0.12 | 
|                                             |  |                    |           |  |                    |   |      |                    |  |  |                    |  |  |               |      |  |                 |  |           |               |  |   |                 |  |  |  |           |  |  |   |      | 
|Effect of dilutive securities: Stock options |  |                    |          |  |                    |   |      |                    |  |  |                   |  |  |               |      |  |                 |  |          |               |  |   |                 |  |  |  |          |  |  |   |      | 
|                                             |  |                    |           |  |                    |   |      |                    |  |  |                    |  |  |               |      |  |                 |  |           |               |  |   |                 |  |  |  |           |  |  |   |      | 
|                                             |  |                    |           |  |                    |   |      |                   
|Diluted earnings per share                   |  |                    | 2,605,855 |  |                    | $ | 0.01 |                    |  |  | 2,595,625          |  |  | $             | 0.01 |  |                 |  | 2,605,855 |               |  | $ | 0.11            |  |  |  | 2,589,826 |  |  | $ | 0.12 | 
|                                             |  |                    |           |  |                    |   |      |                    |  |  |                    |  |  |               |      |  |                 |  |           |               |  |   |                 |  |  |  |           |  |  |   |      | 

As of September 30, 2010 and 2009, options on 213,594 and 183,056 shares, respectively, were not
included in computing diluted earnings per share, because their effects were anti-dilutive.



9



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Note 6: Stock-Based Compensation

Incremental stock-based compensation expense recognized was $12 thousand during the first nine months of 2010 and $15
thousand for the same period in 2009. As of September 30, 2010, there was $5 thousand of 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 44,512
options granted and no options exercised during the nine month period ended September 30, 2010.

Stock option plan
activity for the nine months ended September 30, 2010, is summarized below:



|                                  |  |        |         |   |                               |   |       |                                                       |  |  |                             |  |  |   |   | 
|--------------------------------- |  | ------ | ------- | - | ----------------------------- | - | ----- | ----------------------------------------------------- |  |  | --------------------------- |  |  | - | - | 
|                                  |  | Shares |         |   | Weighted AverageExercisePrice |   |       | Weighted AverageRemaining 
ContractualLife (in years) |  |  | AggregateIntrinsicValue (1) | 
|                                  |  |        |         |  
|Options outstanding, January 1    |  |        | 198,002 |   |                               | $ | 12.39 |                                                       |  |  | 5.8                         |  |  | $ |  | 
|                                  |  |        |         |   |                               |   |       |                                                       |  |  |                             |  |  |   |   | 
|                                  |  |        |         |  
|Granted                           |  |        | 44,512  |   |                               |   | 5.50  |                                                       |  |  |                             |  |  |   |   | 
|Forfeited                         |  |        | (21,618 | ) |                               |   | 8.10  |                                                       |  |  |                             |  |  |   |   | 
|Exercised                         |  |        |        |   |                               |   |      |                                                       |  |  |                            |  |  |   |   | 
|Expired                           |  |        | (7,302  | ) |                               |   | 13.87 |                                                       |  |  |                             |  |  |   |   | 
|                                  |  |        |         |   |                               |   |       |                                                       |  |  |                             |  |  |   |   | 
|Options outstanding, September 30 |  |        | 213,594 |   |                               | $ | 11.34 |                                                       |  |  | 5.9                         |  |  | $ |  | 
|                                  |  |        |         |   |                               |   |       |                                                       |  |  |                             |  |  |   |   | 
|                                  |  |        |         |  
|Options exercisable, September 30 |  |        | 176,882 |   |                               | $ | 12.57 |                                                       |  |  | 5.1                         |  |  | $ |  | 
|                                  |  |        |         |   |                               |   |       |                                                       |  |  |                             |  |  |   |   | 



|(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 September 30, 2010. This amount changes based on changes in the market value of the
Companys stock. At September 30, 2010, the exercise price of all options outstanding exceeded the market value of the Companys stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted average fair value of incentive stock options granted during 2010 and 2009 was $0.55 and $1.41, respectively. The weighted average fair value of non-employee directors stock options
granted during 2010 and 2009 was $0.59 and $.72, respectively.

The fair value of each grant is estimated at the grant date
using the Black-Scholes Option-Pricing Model with the following weighted average assumptions:



|                        |  |                             |         |   |                              |  |         |      |  |  |         |   |  |  |         |  
|----------------------- |  | --------------------------- | ------- | - | ---------------------------- |  | ------- | ---- |  |  | ------- | - |  |  | ------- | -
|                        |  | Incentive Stock Option Plan |         |   | Non-qualified Directors Plan | 
|December 31,            |  | 2010                        |         |   | 2009                         |  |         | 2009 |  |  | 2009    |  
|                        |  |                             |         |  
|Dividend yield          |  |                             | 4.73    | % |                              |  | 3.54    | %    |  |  | 4.73    | % |  |  | 3.54    | %
|Expected life           |  |                             | 5 years |   |                              |  | 5 years |      |  |  | 5 years |   |  |  | 5 years |  
|Expected volatility     |  |                             | 19.45   | % |                              |  | 12.21   | %    |  |  | 19.45   | % |  |  | 12.21   | %
|Risk-free interest rate |  |                             | 2.17    | % |                              |  | 3.10    | %    |  |  | 2.13    | % |  |  | 3.25    | %

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 September 30, 2010 and December 31, 2009, as reflected on the consolidated balance sheets was $2,807,842. Management determined that these purchases qualified as acquisitions of businesses and
that the related unidentifiable intangibles were goodwill. Therefore, amortization was discontinued effective January 1, 2002. The goodwill balance is tested for impairment at least annually. No impairment was recorded during the nine months
ended September 30, 2010.



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Note 8: Employee Benefit Plans

The Company has a non-contributory, defined benefit pension plan for all full-time employees over 21 years of age.
Historically, benefits were generally based upon years of service and average compensation for the five highest-paid consecutive years of service. Effective December 31, 2009, this plan was converted to a cash balance plan for all full-time
employees over 21 years of age. Under the cash balance plan, benefits earned by participants under the prior defined benefit pension plan through December 31, 2009 were converted to an opening account balance for each participant. This account
balance for each participant will grow each year with annual pay credits based on age and years of service and monthly interest credits based on an amount established each year by the Companys Board of Directors. The Company funds pension
costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

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

Components of Net Periodic Benefit Cost

(Unaudited)



|                                                |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 
|----------------------------------------------- |  | ---------------- | -------- | - | ------------------------ | - | -------- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                |  | Pension Benefits |          |   | Post Retirement Benefits |  
|Nine months ended September 30,                 |  | 2010             |          |   | 2009                     |   |          | 2010 |  |   | 2009   | 
|Service cost                                    |  | $                | 186,109  |   |                          | $ | 231,731  |      |  | $ | 15,481 |  |  | $ | 16,075 | 
|Interest cost                                   |  |                  | 146,400  |   |                          |   | 183,276  |      |  |   | 23,517 |  |  |   | 22,223 | 
|Expected return on plan assets                  |  |                  | (241,801 | ) |                          |   | (182,684 | )    |  |   |       |  |  |   |       | 
|Amortization of unrecognized prior service cost |  |                  | (40,471  | ) |                          |   | 3,499    |      |  |   |       |  |  |   |       | 
|Amortization of unrecognized net loss           |  |                  | 32,200   |   |                          |   | 79,486   |      |  |   |       |  |  |   | 139    | 
|Amortization of transition obligation           |  |                  |         |   |                          |   |         |      |  |   | 2,185  |  |  |   | 2,185  | 
|                                                |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 
|                                                |  |                  |          |  
|Net periodic benefit cost                       |  | $                | 82,437   |   |                          | $ | 315,308  |      |  | $ | 41,183 |  |  | $ | 40,622 | 
|                                                |  |                  |          |   |                          |   |          |      |  |   |        |  |  |   |        | 

The Company estimates no contribution to its pension plan and $22,419 to its post-retirement benefit plan in
2010. The Company has contributed $10,154 toward the post-retirement plan during the first nine months of 2010.

Note 9: Long Term Debt

On September 30, 2010, the Bank had FHLB debt consisting of three advances. The FHLB holds an option to terminate any
of the advances on any quarterly payment date. All advances have an early conversion option which gives the FHLB the option to convert, in whole only, into one-month LIBOR-based floating rate advances, effective on any quarterly payment date. If the
FHLB elects to convert, the Company may elect to terminate, in whole or in part, without a prepayment fee.

Advances on the
FHLB lines are secured by a blanket lien on qualified 1 to 4 family residential real estate loans with a lendable collateral value of $57.6 million. Immediate available credit, as of September 30, 2010, was $25.6 million. With additional
collateral, the total line of credit is worth $66.7 million, with $34.7 million available.

The three advances are shown in
the following table.



|            |  |         |            |  |          |  |           |                      |  |  |              |   |  |  |           | 
|----------- |  | ------- | ---------- |  | -------- |  | --------- | -------------------- |  |  | ------------ | - |  |  | --------- | 
|Description |  | Balance |            |  | Acquired |  |           | CurrentInterest Rate |  |  | MaturityDate |  
|            |  |         |            | 
|Convertible |  | $       | 15,000,000 |  |          |  | 5/18/2006 |                      |  |  | 4.81         | % |  |  | 5/18/2011 | 
|Convertible |  |         | 10,000,000 |  |          |  | 9/12/2006 |                      |  |  | 4.23         | % |  |  | 9/12/2016 | 
|Convertible |  |         | 5,000,000  |  |          |  | 5/18/2007 |                      |  |  | 4.49         | % |  |  | 5/18/2012 | 
|            |  |         |            |  |          |  |           |                      |  |  |              |   |  |  |           | 
|            |  | $       | 30,000,000 |  |          |  |           |                      |  |  |              |   |  |  |           | 
|            |  |         |            |  |          |  |           |                      |  |  |              |   |  |  |           | 



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Note 10: Fair Value Measurements

The Company uses fair value to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. Authoritative accounting guidance clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants.

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



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

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

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

The following table presents the balances of financial
assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009:



|                              |  |                                 |            |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |   | 
|----------------------------- |  | ------------------------------- | ---------- |  | --------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | - | 
|                              |  |                                 |            |  | Fair Value Measurements at September 30, 2010 Using       |  
|Description (unaudited)       |  | Balance as ofSeptember 30, 2010 |            |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|                              |  |                                 |            | 
|Available-for-sale securities |  | $                               | 34,953,277 |  |                                                           | $ |  |                                           |  | $ | 34,953,277                             |  |  | $ |  | 
|                              |  |                                
|                              |  |                                 |            |  | Fair Value Measurements at December 31, 2009 Using        |  
|Description                   |  | Balance as ofDecember 31, 2009  |            |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|                              |  |                                 |            | 
|Available-for-sale securities |  | $                               | 34,020,705 |  |                                                           | $ |  |                                           |  | $ | 34,020,705                             |  |  | $ |  | 
|                              |  |                                 |            |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |   | 

Certain assets are measured at fair value on a nonrecurring basis in accordance with accounting principles
generally accepted in the United States. 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.



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

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

Other Real Estate Owned: Certain assets such as other real estate owned are measured at the lower of their carrying value or fair
value less cost to sell. 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 assets that were measured at fair value on a nonrecurring basis during the period.



|                                           |  |                                |           |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |           | 
|------------------------------------------ |  | ------------------------------ | --------- |  | --------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | --------- | 
|                                           |  |                                |           |  | Fair value measurements at September 30, 2010 using       |  
|Description (unaudited)                    |  | Balance as ofSeptember 30,2010 |           |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|                                           |  |                                |           | 
|Impaired Loans, net of valuation Allowance |  | $                              | 4,355,840 |  |                                                           | $ |  |                                           |  | $ |                                       |  |  | $ | 4,355,840 | 
|                                           |  |                                |           |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |           | 
|Other real estate owned                    |  | $                              | 4,009,719 |  |                                                           | $ |  |                                           |  | $ |                                       |  |  | $ | 4,009,719 | 
|                                           |  |                                |           |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |           | 
|                                           |  |                               
|                                           |  |                                |           |  | Fair value measurements at December 31, 2009 using        |  
|Description                                |  | Balance as ofDecember 31,2009  |           |  | Quoted Pricesin
ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|                                           |  |                                |           | 
|Impaired Loans, net of valuation Allowance |  | $                              | 4,588,167 |  |                                                           | $ |  |                                           |  | $ |                                       |  |  | $ | 4,588,167 | 
|                                           |  |                                |           |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |           | 
|Other real estate owned                    |  | $                              | 2,193,399 |  |                                                           | $ |  |                                           |  | $ |                                       |  |  | $ | 2,193,399 | 
|                                           |  |                                |           |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |           | 



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



|                                             |  |                    |             |  |                   |   |             |                |  |   |             |  |  |   |             | 
|-------------------------------------------- |  | ------------------ | ----------- |  | ----------------- | - | ----------- | -------------- |  | - | ----------- |  |  | - | ----------- | 
|                                             |  | September 30, 2010 |             |  | December 31, 2009 |  
|                                             |  | CarryingAmount     |             |  | Fair Value        |   |             | CarryingAmount |  |   | Fair Value  | 
|Financial Assets:                            |  |                    |             |  |                   |   |             |                |  |   |             |  |  |   |             | 
|Cash and due from banks                      |  | $                  | 3,643,558   |  |                   | $ | 3,643,558   |                |  | $ | 3,461,483   |  |  | $ | 3,461,483   | 
|Interest-bearing deposits                    |  |                    | 21,013,445  |  |                   |   | 21,013,445  |                |  |   | 17,542,635  |  |  |   | 17,542,635  | 
|Federal funds sold                           |  |                    | 4,725,813   |  |                   |   | 4,725,813   |                |  |   | 2,305,747   |  |  |   | 2,305,747   | 
|Securities available-for-sale                |  |                    | 34,953,277  |  |                   |   | 34,953,277  |                |  |   | 34,020,705  |  |  |   | 34,020,705  | 
|Restricted securities                        |  |                    | 2,358,500   |  |                   |   | 2,358,500   |                |  |   | 2,238,500   |  |  |   | 2,238,500   | 
|Loans, net                                   |  |                    | 246,050,250 |  |                   |   | 246,041,944 |                |  |   | 247,411,853 |  |  |   | 247,907,067 | 
|Accrued interest receivable                  |  |                    | 1,164,527   |  |                   |   | 1,164,527   |                |  |   | 1,323,492   |  |  |   | 1,323,492   | 
|                                             |  |                    |             | 
|Financial Liabilities:                       |  |                    |             |  |                   |   |             |                |  |   |             |  |  |   |             | 
|Non-interest-bearing deposits                |  | $                  | 47,769,633  |  |                   | $ | 47,769,633  |                |  | $ | 40,552,937  |  |  | $ | 40,552,937  | 
|Savings and interest-bearing demand deposits |  |                    | 101,037,458 |  |                   |   | 101,037,458 |                |  |   | 101,577,758 |  |  |   | 101,577,758 | 
|Time deposits                                |  |                    | 119,922,670 |  |                   |   | 121,655,529 |                |  |   | 122,382,055 |  |  |   | 124,762,890 | 
|Securities sold under repurchase agreements  |  |                    | 8,443,928   |  |                   |   | 8,443,928   |                |  |   | 7,488,793   |  |  |   | 7,488,793   | 
|FHLB advances                                |  |                    | 30,000,000  |  |                   |   | 32,230,166  |                |  |   | 30,000,000  |  |  |   | 32,083,525  | 
|Accrued interest payable                     |  |                    | 317,412     |  |                   |   | 317,412     |                |  |   | 321,477     |  |  |   | 321,477     | 

The fair values shown
do not necessarily represent the amounts which would be received on immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded 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 FHLB advances are 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 September 30, 2010 and December 31, 2009, the fair value of loan commitments and standby letters of credit was immaterial. Therefore, they are not included in the table above.



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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.

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

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

EXECUTIVE SUMMARY

The
Company has not been immune to the continued challenges presented by the current economic and financial regulatory environment. However, management is pleased to report a net after-tax profit for the third quarter even though pre-tax operations
resulted in a loss, because the provision for income taxes was reduced, creating a tax benefit. A material cause of the pre-tax loss was the write-down of one of the foreclosed properties owned by the Bank. We believe our conservative philosophy is
contributing to positive results relative to the community banking industry generally. We are proud of this conservative philosophy and service to our community. The Bank does not invest in non-traditional debt securities, nor does it have programs
that originate Sub-Prime, Alt-A, or other types of mortgages that have a high risk profile. Additionally, our employees will participate in over 75 community events this year, not including the community programs and partnerships supported by the
Company. All employees pay their civic rent and the Bank is committed to investing in the communities it serves. Management is confident that our Company has a bright future as the economy continues its recovery from the Great
Recession.

Management has successfully improved the quality of the Banks loan portfolio, as evidenced by a 30%
reduction in past due and non-performing loans, to 2.3% of total loans as of September 30, 2010 compared to 3.3% as of December 31, 2009. Further, this 2.3% compares favorably to the most recently published national peer group average of
4.5%. Balances in other real estate owned (OREO) have increased by $1.8 million to $4.0 million during the nine months of 2010 and net loan charge-offs are historically high at $968 thousand for the first nine months of 2010, both due
materially to one large credit. Nearly all of the charge-offs recorded in 2010 were included in the Allowance for Loan Losses (ALL) as specific reserves on impaired loans at December 31, 2009. Although these actions have contributed
to an improvement in overall loan quality, in consideration of the large degree of economic uncertainty, historically high charge-offs, and anticipated fourth quarter events, management is maintaining a conservative level of ALL at $3.3 million, an
increase of $134 thousand over the prior quarter. Net charge-offs during the third quarter were actually negative because recoveries exceeded charge-offs. Management is cautiously optimistic that the worst of the foreclosures and charge-off levels
is behind us for Bank clients. For a more detailed discussion of past due and non-performing loans and non-performing assets, see the Financial Condition section later in this Item.

Like all financial institutions holding insured domestic deposits, insurance premiums for those deposits remain historically high as the
Federal Deposit Insurance Corporation (FDIC) rebuilds the Deposit Insurance Fund. As a result, the Bank continues to experience elevated levels of FDIC assessment expense in 2010.

Interest margins continue to remain a challenge, but they are being managed effectively. Although interest rates remain at historic lows,
declines in net interest income during 2010 have been greatly minimized by reductions in interest expense. Loan yields remain low, contributing to reduced interest income, which is also negatively impacted to a lesser degree by nonaccrual loans.
However, management has systematically reduced deposit rates to reflect the current rate environment, creating compensating reductions in costs of funds and interest expense, and therefore minimizing declines in net interest income as noted
previously. Looking forward, as time deposits mature and new instruments are issued at lower rates, reductions in interest expense are expected to continue. The result should be continued improvements in net interest income during the remainder of
2010.

The loan portfolio has declined slightly since December 31, 2009. Although the Bank originates millions of dollars
in new loans each month, the level of originations has not been sufficient to mitigate loan pay downs, prepayments and foreclosures. This has also contributed to the decline in interest income. Demand for construction loans and commercial loans
remains below historical levels.

The Companys liquidity, core capital levels and regulatory ratios remain good.
According to the Banks regulators, the Bank remains well capitalized. Given the challenging economic environment, management is closely guarding the Companys liquidity and capital. Protection of shareholder value is paramount, as
evidenced by the payment of stock dividends instead of cash dividends in 2010.



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Management continues
to diligently manage controllable expenses. Evidence of this is the conversion to a cash balance pension plan, which is saving the Company approximately $310 thousand in benefit costs in 2010, while retaining a valuable retirement benefit for
employees.

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

CRITICAL ACCOUNTING POLICIES

GENERAL. The Companys financial statements are prepared in accordance with 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. Historical loss factors are one factor in determining the inherent loss that may be
present in the loan portfolio. Actual losses could differ significantly from the historical factors used. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of transactions would be
the same, the timing of events that would impact those transactions could change.

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

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

During the first quarter of 2010, management enhanced the ALL
calculation by increasing the number of homogenous pools, modifying the scope of loans evaluated for impairment to eliminate those with smaller balances but to include more relationships than only those with poor grades, increasing the discount
factors applied to some forms of collateral, and shortening the historical average charge-off factor time frame to five quarters. These modifications are included in the ALL calculation process description which follows.

The ALL calculation has three main elements. First, large loan relationships with an adverse risk rating grade, in bankruptcy,
nonaccruing, or more than 30 days past due are evaluated for impairment. For these loans, a specific allowance is provided when the loan balance exceeds its collateral value.

Second, for loans not evaluated for impairment, a historical loss factor is applied to their balances as divided into homogenous pools of loans. The historical loss factor for each pool is calculated by
averaging the losses over the prior five quarters.

Finally, a set of environmental factors, such as the economy, underwriting
standards, changes in levels of loan quality, and experience of lending personnel, is used to estimate the value of intrinsic risk in each of the homogenous pools.

The summation of these three elements results in the total estimated ALL. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.



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EARNINGS SUMMATION

For the nine months ended September 30, 2010, net income was $299 thousand, a decrease of 1.6% compared to the $304 thousand for the
similar period in 2009. Diluted earnings per average share for the nine months ended September 30, 2010 were $0.11 as compared to $0.12 for the nine months ended September 30, 2009. Annualized return on average assets was 0.1% for both the
nine-month periods ended September 30, 2010 and 2009. Annualized return on average equity was 1.5% for the nine months ended September 30, 2010, up from 1.2% for the similar period ended September 30, 2009.

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 nine months ended September 30, 2010 was $7.6 million
and was $7.7 million for the same period in 2009. Due to decreased provision expense, net interest income after the provision for loan losses is up 2.3%, from $6.9 million to $7.1 million, for the same period comparison.

Although interest income declined by $663 thousand for the year-to-date period ended September 30, 2010 compared to the same period
in 2009, decreases in interest expense of $573 thousand for the same period comparison nearly compensated, resulting in a decrease in net interest income (before provision for loan losses) of only $90 thousand. The $663 thousand decrease in interest
income was driven mainly by reduced loan yields. The $573 thousand decrease in interest expense was primarily due to reductions in time deposit rates.



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Net Interest Income Analysis
(unaudited)



|                                            |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |   |        |  |  |  |      |  
|------------------------------------------- |  | ------------------------------------------------------ | ------- |  | --------------------------- | - | ------ | ---------- |  |  | -------------- | - |  | -------------- | ------- |  | ---------- | - | ------ |  |  |  | ---- | -
|                                            |  | Average Balances, Income and Expense, Yields and Rates |        
|(Fully taxable equivalent basis)            |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |  
|                                            |  | Nine months ended 9/30/2010                            |         |  | Nine months ended 9/30/2009 |  
|(Dollars in Thousands)                      |  | AverageBalance                                         |         |  | Income/Expense              |   |        | Yield/Cost |  |  | AverageBalance |   |  | Income/Expense |         |  | Yield/Cost |  
|INTEREST EARNING ASSETS:                    |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |   |        |  |  |  |      |  
|Taxable investments                         |  | $                                                      | 26,081  |  |                             | $ | 700    |            |  |  | 3.58           | % |  | $              | 17,087  |  |            | $ | 534    |  |  |  | 4.17 | %
|Tax-exempt investments (1)                  |  |                                                        | 9,052   |  |                             |   | 380    |            |  |  | 5.60           | % |  |                | 18,278  |  |            |   | 759    |  |  |  | 5.53 | %
|                                            |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |   |        |  |  |  |      |  
|Total investments                           |  |                                                        | 35,133  |  |                             |   | 1,080  |            |  |  | 4.10           | % |  |                | 35,365  |  |            |   | 1,293  |  |  |  | 4.87 | %
|                                            |  |                                                        |         |  |                             |  
|Gross loans (2)                             |  |                                                        | 249,862 |  |                             |   | 10,801 |            |  |  | 5.77           | % |  |                | 250,013 |  |            |   | 11,387 |  |  |  | 6.08 | %
|Interest-bearing deposits                   |  |                                                        | 18,367  |  |                             |   | 36     |            |  |  | 0.26           | % |  |                | 11,803  |  |            |   | 27     |  |  |  | 0.31 | %
|Federal funds sold                          |  |                                                        | 4,012   |  |                             |   | 6      |            |  |  | 0.18           | % |  |                | 5,672   |  |            |   | 8      |  |  |  | 0.19 | %
|                                            |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |   |        |  |  |  |      |  
|Total Interest Earning Assets               |  | $                                                      | 307,374 |  |                             | $ | 11,923 |            |  |  | 5.17           | % |  | $              | 302,853 |  |            | $ | 12,715 |  |  |  | 5.60 | %
|                                            |  |                                                        |         |  |                             |  
|INTEREST-BEARING LIABILITIES:               |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |   |        |  |  |  |      |  
|Savings deposits                            |  | $                                                      | 45,706  |  |                             | $ | 296    |            |  |  | 0.87           | % |  | $              | 45,215  |  |            | $ | 312    |  |  |  | 0.92 | %
|NOW deposits                                |  |                                                        | 36,033  |  |                             |   | 79     |            |  |  | 0.29           | % |  |                | 34,698  |  |            |   | 113    |  |  |  | 0.44 | %
|Time deposits => $100,000                   |  |                                                        | 52,580  |  |                             |   | 1,130  |            |  |  | 2.87           | % |  |                | 51,530  |  |            |   | 1,322  |  |  |  | 3.43 | %
|Time deposits < $100,000                    |  |                                                        | 71,003  |  |                             |   | 1,519  |            |  |  | 2.86           | % |  |                | 70,120  |  |            |   | 1,788  |  |  |  | 3.41 | %
|Money market deposit accounts               |  |                                                        | 19,991  |  |                             |   | 130    |            |  |  | 0.87           | % |  |                | 19,222  |  |            |   | 192    |  |  |  | 1.34 | %
|                                            |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |   |        |  |  |  |      |  
|Total Deposits                              |  | $                                                      | 225,313 |  |                             | $ | 3,155  |            |  |  | 1.87           | % |  | $              | 220,785 |  |            | $ | 3,727  |  |  |  | 2.26 | %
|                                            |  |                                                        |         |  |                             |  
|Federal funds purchased                     |  | $                                                      | 22      |  |                             | $ |       |            |  |  | 0.66           | % |  |                | 24      |  |            | $ |       |  |  |  | 0.25 | %
|Securities sold under repurchase agreements |  |                                                        | 6,388   |  |                             |   | 10     |            |  |  | 0.21           | % |  |                | 6,418   |  |            |   | 11     |  |  |  | 0.23 | %
|FHLB advances                               |  |                                                        | 30,000  |  |                             |   | 1,039  |            |  |  | 4.63           | % |  |                | 30,000  |  |            |   | 1,038  |  |  |  | 4.63 | %
|                                            |  |                                                        |         |  |                             |   |        |            |  |  |                |   |  |                |         |  |            |   |        |  |  |  |      |  
|Total Interest-Bearing Liabilities          |  | $                                                      | 261,723 |  |                             | $ | 4,204  |            |  |  | 2.15           | % |  | $              | 257,227 |  |            | $ | 4,776  |  |  |  | 2.48 | %
|                                            |  |                                                        |         |  |                             |  
|Net interest income and net interest margin |  |                                                        |         |  |                             | $ | 7,719  |            |  |  | 3.35           | % |  |                |         |  |            | $ | 7,939  |  |  |  | 3.50 | %
|Net interest rate spread                    |  |                                                        |         |  |                             |   |        |            |  |  | 3.03           | % |  |                |         |  |            |   |        |  |  |  | 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 3.35% for the nine months ended September 30, 2010, compared to 3.50% for the same period in 2009. The main reason for this decline is reductions in loan yield,
as mentioned earlier. However, deposit rates have declined to reduce the cost of funding and hence interest expense, mitigating most of the potential decline in net interest income. Further reductions in the cost of funds are anticipated as time
deposits and Federal Home Loan Bank advances mature and are replaced at lower rates. This trend is expected to continue and to have positive effects on the net interest margin.

Average interest-earning assets increased 1.5% to $307.4 million for the nine months ended September 30, 2010 as compared to $302.9
million for the nine months ended September 30, 2009. Average interest-earning assets as a percent of total average assets was 92.2% for the nine months ended September 30, 2010 as compared to 92.9% for the comparable period of 2009. As
shown in the table above, for the nine months ended September 30, 2010, the loan portfolio, with $249.9 million, is the largest category of interest-earning assets.

Average interest-bearing liabilities increased 1.7% to $261.7 million for the nine months ended September 30, 2010, as compared to $257.2 million for the nine months ended September 30, 2009.
The largest category of interest-bearing liabilities is time deposits, with combined average balances of $123.6 million for the nine months ended September 30, 2010, up from $121.7 million for the similar period in 2009. Noticeable increases in
average balances occurred in NOW and money market account deposits.



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The net interest
spread, which is the difference between the annualized yield on earning assets and the annualized cost of interest-bearing liabilities, decreased to 3.03% for the nine months ended September 30, 2010 compared to 3.12% for the same period in
2009.

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 Bank of Richmond, and
investments that mature in one year or less provide the major sources of funding for liquidity needs. On September 30, 2010, federal funds sold totaled $4.7 million, interest-bearing deposits at the Federal Reserve Bank totaled $21.0 million,
and securities maturing in one year or less totaled $9.0 million. The liquidity ratio as of September 30, 2010 was 17.3% as compared to 13.7% as of December 31, 2009. 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, external sources of liquidity include the Banks line of credit with the Federal Home Loan Bank of Atlanta (FHLB) worth $66.7 million, with $34.7 million
available, plus federal funds lines of credit with correspondent banks totaling $20.3 million.

Examples of liquidity needs
include maturities of time deposits and maturities of FHLB advances. Management plans for these liquidity needs by monitoring maturity dates. For instance, there are approximately $15 million in special 60-month certificates of deposits maturing
between November, 2010 and January, 2011. These time deposits have an automatic renewal feature which management anticipates will be used by the majority of the customers holding them. However, should some of these customers desire to withdraw their
certificates cash value when it matures, there will be ample sources of funds available to accommodate them.

Similarly,
one of the Banks FHLB advances matures in May, 2011. This will require a payment to the FHLB of $15 million. Management is allowing excess liquidity to accumulate so that the Bank may replace only as many funds as necessary with a new
borrowing.

OFF BALANCE SHEET COMMITMENTS

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



|                                   |  |                                |        |  |                   |   |        | 
|---------------------------------- |  | ------------------------------ | ------ |  | ----------------- | - | ------ | 
|                                   |  | Off Balance Sheet Arrangements |       
|                                   |  | September 30, 2010             |        |  | December 31, 2009 |  
|(Dollars in Thousands)             |  |                                |        |  |                   |  
|Total Loan Commitments Outstanding |  | $                              | 33,781 |  |                   | $ | 36,714 | 
|Standby-by Letters of Credit       |  |                                | 441    |  |                   |   | 617    | 

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

There have
been no material changes to the off balance sheet items disclosed in Managements Discussion and Analysis of Financial Condition and Results of Operation in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2009.



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CONTRACTUAL OBLIGATIONS

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in
the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

CAPITAL RESOURCES

From December 31, 2009 to September 30, 2010, total shareholders equity increased from $26.9 million to $27.7 million.
Several factors impact shareholders equity, including earnings returned to shareholders through dividends and regulatory capital requirements.

The Companys capital resources are also impacted by net unrealized gains or losses on securities. The available-for-sale securities portfolio is marked to market monthly and unrealized gains or
losses, net of taxes, are recognized as accumulated other comprehensive income 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 income was $27.1 million on September 30, 2010 compared to $26.9 on December 31, 2009.
Accumulated other comprehensive income increased $498 thousand between December 31, 2009 and September 30, 2010, a result of unrealized gains in the investment portfolio.

Book value per share, basic, decreased by 4.7% to $10.63 on September 30, 2010 from $11.16 on December 31, 2009. Book value per
share, basic, before accumulated comprehensive income/(loss) on September 30, 2010, compared to December 31, 2009, decreased to $10.40 from $11.12. No cash dividends were paid for the nine-month period ended September 30, 2010, and
cash dividends of $0.29 per share were paid for the comparable period ended September 30, 2009. Of the 5,000,000 common shares authorized, 2,605,855 were outstanding on September 30, 2010, which includes 196,384 shares issued in stock
dividends on April 23, 2010 and August 27, 2010 at one share for every 25 shares owned.

The Company began a share
repurchase program in August of 1999 and has continued the program into 2010. No repurchases were made during the first nine months of 2010 nor during the comparable period in 2009.

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 September 30, 2010, the Bank maintained Tier 1 capital of $24.0 million, net risk weighted assets of $237.1 million, and Tier 2 capital of $3.0 million. On
September 30, 2010, the Tier 1 capital to risk weighted assets ratio was 10.1%, the total capital ratio was 11.4%, and the Tier 1 leverage ratio was 7.2%.

FINANCIAL CONDITION

Total assets increased by 1.9 % to $336.7 million
during the nine months ended September 30, 2010. Cash and cash equivalents, which produce no income, increased to $3.6 million on September 30, 2010 from $3.5 million at year-end 2009.

During the nine months ended September 30, 2010, gross loans declined by $1.8 million or 0.7%, to $249.4 million from $251.2 million
at year-end 2009. The largest component of this decrease was in other real estate loans with a 7.6% decrease to $42.9 million.

As of September 30, 2010, loans valued at $9.9 million were adversely risk rated and evaluated for impairment, compared to $12.7
million on December 31, 2009. Of those, $5.1 million were considered impaired as of September 31, 2010, whereas $6.2 million were considered impaired as of December 31, 2009, a decrease of $1.1 million. This is a direct result of
managements efforts to improve the quality of the Banks loan portfolio. Management has reviewed these credits and the underlying collateral and expects no additional losses above those which are specifically reserved in the ALL.

Risk rating grades are assigned conservatively, causing some homogenous loans, like residential mortgages, to fall into the
pool of adversely risk rated loans and thereby evaluated for impairment, even though they may be performing as agreed and therefore not impaired. Management anticipates the development of an expanded set of risk rating grades to be complete by
December, 2010, which should address the current discrepancy between adversely risk rated loans and impaired loans.



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Past Due and Non-performing Loans
(unaudited)



|                                              |  |                    |           |  |                   |  |     |   |  |   |           |  |  |  |     |  
|--------------------------------------------- |  | ------------------ | --------- |  | ----------------- |  | --- | - |  | - | --------- |  |  |  | --- | -
|                                              |  | September 30, 2010 |           |  | December 31, 2009 | 
|(percentages are as a percent of total loans) |  | $                  |           |  | %                 |  |     | $ |  |   | %         | 
|Loans past due 30 to 89 days                  |  | $                  | 1,020,036 |  |                   |  | 0.4 | % |  | $ | 2,890,441 |  |  |  | 1.2 | %
|Loans past due 90 days or more                |  | $                  | 382,922   |  |                   |  | 0.2 | % |  | $ | 153,468   |  |  |  | 0.1 | %
|Non-accruing loans                            |  | $                  | 4,206,628 |  |                   |  | 1.7 | % |  | $ | 5,261,283 |  |  |  | 2.1 | %
|                                              |  |                    |           |  |                   |  |     |   |  |   |           |  |  |  |     |  
|Total past due and non-performing loans       |  | $                  | 5,609,586 |  |                   |  | 2.3 | % |  | $ | 8,305,192 |  |  |  | 3.3 | %

Past due and
non-performing loans as a percentage of total loans declined to 2.3% as of September 30, 2010 compared to 3.3% as of December 31, 2009. Past due and non-performing loans include loans no longer accruing interest (non-accruing loans) and
loans past due more than 30 days. Non-accruing loans totaled $4.2 million as of September 30, 2010, down from $5.3 million as of year-end 2009. Loans still accruing interest but delinquent for 90 days or more totaled $383 thousand on
September 30, 2010, as compared to $153 thousand on December 31, 2009. Loans past due for 30 days, but less than 90 days, totaled $1.0 million on September 30, 2010, up from $2.9 million on December 31, 2009.

Loans charged off during the first nine months of 2010, net of recoveries, totaled $968 thousand compared to $813 thousand for the
comparable period in 2009. Materially all of these charge-offs were anticipated and specific reserves had been provided for them in the ALL in 2009. These charge-offs have had the expected effect of reducing the ALL. However, the general quality of
the Banks loan portfolio has also improved, as evidenced by the noticeable reduction in past due and non-performing loans. Therefore, management believes the reduction in the ALL is directionally consistent with declines in past due,
non-accruing, and impaired loans, with the ALL declining to 1.33% of total loans as of September 30, 2010, from 1.50% as of December 31, 2009.

The Company now maintains $4.0 million of OREO as of September 30, 2010, compared to $2.2 million at year-end 2009. OREO consists of three residences, nine separate lots, two former restaurants, one
former lodging property and one former convenience store. In 2010, three OREO properties with a book value of $209 thousand have been sold for gains of $47 thousand, and seven properties with a total value of $2.5 million from three borrowers have
been added through foreclosure. All properties maintained as OREO are valued at the lesser of carrying value or fair value less estimated costs to sell and are actively marketed.

As of September 30, 2010, securities available-for-sale at market value totaled $35.0 million as compared to $34.0 million on
December 31, 2009. This represents a net increase of $932.6 thousand or 2.7% for the nine months. As of September 30, 2010, these securities represented 10.4% of total assets and 11.3% of earning assets. The Companys entire
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 securities to be other than temporarily impaired.

As of September 30, 2010, total deposits were $268.7 million compared to $264.5 million at year-end 2009. This represents an
increase in balances of $4.2 million or 1.6% during the nine months. This increase was due materially to non-interest bearing deposits with a 17.8% increase to $47.8 million.

Since the Banks Colonial Beach office was opened on March 11, 2009, increases in depreciation and related expense are reflected in the first nine months of 2010 when compared to the same period
in 2009. 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 and is establishing the same long-term personal relationships provided to customers in the other eight modern and full-service offices.

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the nine months ended September 30, 2010, was down by $110 thousand, or 4.8%, compared to
the nine months ended September 30, 2009. The main driver of this decrease is losses of $221 thousand on OREO, due mainly to write-downs in value of two properties. Gains on sales of securities of $188 thousand mitigated most of those
write-downs. Income from Investment Advantage was down to $171 thousand from $266 thousand for the same period of 2009, a difference of $95 thousand. Investment Advantage contributes the majority of income to other service charges and fees, and
since this income is commission-based, declines in investment activity will cause declines in the Companys income.
VISA® related fees increased by $11 thousand in the first nine months of 2010 compared to the similar period in
2009. Secondary market lending fees are derived from the origination and sale of mortgages to brokers or to the Federal National Mortgage Corporation (FNMA). Ongoing fees are earned for servicing of the loans sold to FNMA. These
servicing fees are immaterial to the balances of the loans serviced and risks related to these servicing activities are minimal.



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The Companys
fiduciary income is derived from the operations of its subsidiary, Bay Trust Company, which offers a broad range of trust and related fiduciary services. Among these are estate settlement and testamentary trusts, revocable and irrevocable personal
trusts, managed agency, custodial accounts, and rollover IRAs, both self-directed and managed. Fiduciary income is largely affected by changes in the performance of the stock and bond market, which directly impacts the market value of the accounts
upon which fees are earned. Income from fiduciary activities was down by an immaterial $1 thousand for the first nine months of 2010 compared to the similar period of 2009.

NON-INTEREST EXPENSE

For the nine months ended September 30, 2010,
non-interest expenses totaled $9.0 million, a decrease of $62 thousand, or 0.7%, compared to the same period in 2009, due mainly to the $133 thousand decrease in salaries and employee benefits expense, which is the largest component of non-interest
expense. Salaries and benefits expense is down to $4.5 million for the first nine months of 2010 compared to $4.6 million for the same period in 2009. This is due primarily to decreases in compensation expense of $128 thousand and decreases in
defined benefit plan expense of $221 thousand. Unfortunately, credits related to deferral of loan origination costs are detrimental to salaries and benefits by $202 thousand due to a reduced amount of real estate loan originations.

Other non-interest expenses include bank franchise taxes, which decreased to $123 thousand for the first nine months
of 2010 compared to $126 thousand for the same period in 2009; expenses related to the Visa® program, which
increased to $503 thousand for the first nine months of 2010 compared to $481 thousand for the same period in 2009; other expense, which decreased by $4 thousand to $1.8 million for the first nine months of 2010 compared to the same period in 2009;
and telephone expenses, which increased to $138 thousand for the current period compared to $131 thousand for the same period in 2009. Telephone expenses include the cost of the Companys Customer Care Center and data network communications.

Recent Accounting Pronouncements

In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (ASU) 2009-16. The new standard provides guidance to improve the relevance,
representational faithfulness, and comparability of the information that an 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. ASU 2009-16 was effective for transfers on or after January 1, 2010. The adoption of the new guidance did not have a material impact on the Companys
consolidated financial statements.

In June 2009, the FASB issued new guidance relating to variable interest entities. The new
guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises
involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 was effective as of January 1, 2010. The adoption of the new guidance did not have a material
impact on the Companys consolidated financial statements.

In October 2009, the FASB issued ASU 2009-15,
Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in
contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years.
The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In
January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics  Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent
investments, termination of an interest rate swap, issuance of financial statementssubsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses,
and selections of discount rate used for measuring defined benefit obligation. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU
2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Companys consolidated financial
statements.



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In February 2010, the
FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SECs reporting requirements
and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective
immediately. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance will
significantly expand the existing requirements and will lead to greater transparency into a companys exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period
will become effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and
modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company is currently assessing the impact that ASU 2010-20 will have on its consolidated financial statements.

On September 15, 2010, the SEC issued Release No. 33-9142, Internal Control Over Financial Reporting In Exchange Act
Periodic Reports of Non-Accelerated Filers. This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated
filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.

On September 17, 2010, the SEC issued Release No. 33-9144, Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Managements Discussion and
Analysis. This interpretive release is intended to improve discussion of liquidity and capital resources in Managements Discussion and Analysis of Financial Condition and Results of Operations in order to facilitate understanding by
investors of the liquidity and funding risks facing the registrant. This release was issued in conjunction with a proposed rule, Short-Term Borrowings Disclosures, that would require public companies to disclose additional information to
investors about their short-term borrowing arrangements. Release No. 33-9144 was effective on September 
28, 2010.

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 Securities Exchange Act of 1934. In designing and evaluating its disclosure controls and procedures, management recognizes 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 September 30, 2010.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There was no change to the Companys internal control over financial reporting during the quarter ended September 30, 2010 that
materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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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 2010. There are a total of 280,000
shares authorized for repurchase under the program. No shares were repurchased during the quarter ended September 
30, 2010.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None to report.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

None to report.

ITEM 6. EXHIBITS



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



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SIGNATURES

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



|                 |  |                                       |  | 
|---------------- |  | ------------------------------------- |  | 
|                 |  | Bay Banks of Virginia, Inc.           |  | 
|                 |  | (Registrant)                          |  | 
|                 |  |                                      
|November 5, 2010 |  | 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)         |  | 



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