Exhibit 10.2

1998 Non Employee Directors Stock Option Plan.

Purpose. The Plan will benefit the Company by promoting a greater identity of
interest between non-employee directors of the Company and its subsidiaries
(each referred to as a "Participant") and its stockholders by increasing each
participants proprietary interest in the Company through the aware of options to
purchase Company common stock (each referred to as an "Option").

Eligibility. Each non-employee director of the Company and any of its
subsidiaries is eligible to participate in the Plan. The Company and Bank
currently have ten non-employee directors. Each Participant will receive an
Option for 250 shares of Company common stock on May 18, 1998 and on each
succeeding anniversary (the "Grant Date") during the term of the Plan. If an
individual serves as a director of both the Company and the Bank or any other
subsidiary, that individual will be eligible only for a single grant under the
Plan in any one year.

Administration. The Plan will be administered by the Board of Directors. The
Board has no discretion in determining who will receive an Option or the number
of shares allocated to a Participant or the terms of any Option. The terms are
set forth in the Plan and are summarized below.

Options. A total of 25,000 shares of Company common stock may be issued upon the
exercise of Options granted under the Plan. The maximum number of shares that
may be issued under the Plan, and the terms of outstanding Options, will be
proportionately adjusted to reflect an future stock dividend, stock split, or
similar changes in the capitalization of the Company.

Terms of the Options. The exercise price per share of an Option will be the fair
market value of the common stock on the Grant Date. The price may be paid in
cash or by surrendering shares of Company common stock to the Company. Options
will first become exercisable six months after the Grand Date and will have a
term of ten years

Options are nontransferable except by will or the laws fo descent and
distribution. During the Participant's lifetime, the Participant's Options may
be exercised only by the Participant.

A Participant will not have any rights as a shareholder with respect to shares
covered by Options until the Option is exercised.

Federal Income Tax Consequences. No income is recognized by a Participant on
account of the grant of an Option. Income is recognized on the date that an
Option is exercised. The amount of income recognized by the Participant is equal
to the difference between the fair market value of the shares received upon such
exercise and the Options price. Any gain or loss that is recognized on a
subsequent disposition of the shares is taxed as a long or short term capital
gain or loss.

The Company is entitled to claim a federal income tax deduction upon the
exercise of an Option. The amount of the Company's deduction is equal to the
amount of income recognized by the Participant.

Amendments. The Board of Directors may amend or discontinue the Plan at any
time, provided that no amendment may impair the rights of any Option holder
without his or her consent, and further provided that any amendment shall be
subject to approval of stockholder if such approval is necessary to comply with
any tax or regulatory requirement.


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<PAGE>

Management's Discussion and Analysis of Financial Condition and Operations

        The following discussion is intended to assist readers in understanding
and evaluating the financial condition and results of operations of Bay Banks of
Virginia, Inc., (the "Company"). This discussion should be read in conjunction
with the financial statements and other financial information contained
elsewhere in this annual report.

        Bay Banks of Virginia, Inc. is a one-bank holding company, organized
under the laws of Virginia on February 10, 1997. As of July 1, 1997, Bay Banks
of Virginia, Inc. assumed ownership of 100% of the stock of the Bank of
Lancaster. Prior to this date the Company operated as the Bank of Lancaster.

1998 Compared to 1997

        Bay Banks of Virginia, Inc. recorded earnings for 1998 of $1,930,900 or
$1.67 per share as compared to 1997 earnings of $1,959,832 and $1.71 per share.
This decrease in net income of 1.5% was a result of certain anticipated
non-recurring expenses, which were directly related to branch acquisition, Year
2000 compliance, and further systems upgrades. Net interest income for 1998
increased to $6,429,975, up 8.2% as compared to $5,941,636 for 1997.
Non-interest income, before net securities gains, for 1998 increased to
$1,549,378, up 24.8% as compared to 1997 non-interest income of $1,241,180.
Other non-interest expenses increased to $5,487,747, up 25.4% over 1997 expenses
of $4,375,265.

1997 Compared to 1996

        Earnings for the Bank of Lancaster were $1,959,832 for 1997, up 7.0%
over 1996 earnings of $1,831,616. 1997 earnings per share were $1.71 as compared
to 1996 earnings per share of $1.64. Net interest income was $5,941,636 for 1997
as compared to $5,523,200 for 1996. This represents an increase of 7.6% over net
interest income for 1996. Non-interest income, before net securities gains, for
1997 was $1,241,180, up 14.2% over 1996 non-interest income of $1,086,443.
Non-interest expenses for 1997 were $4,375,265, up 9.8% as compared to 1996
expenses of $3,985,040.

Net Interest Income

        The principal source of earnings for the Company is net interest income.
Net interest income is the difference between interest and fees generated by
earning assets and interest expense paid on deposits and other sources of
funding. It is affected by variations in interest rates, the volume and mix of
earning assets and interest-bearing liabilities, and the levels of
non-performing assets.

        Net interest income was $6.4 million in 1998, $5.9 million in 1997 and
$5.5 million in 1996. This represents an increase in net interest income of 8.2%
for 1998 over 1997 and 7.6% for 1997 over 1996. Competitive pressures on loan
and deposit rates continue to adversely affect the rate of growth in the net
interest margin. While loan balances increased, quoted rates have trended
downward. The result was a slower growth rate in the Company's net interest
margin. Net interest yield on a fully tax equivalent basis was 5.3%, 5.7% and
5.4% for 1998, 1997 and 1996 respectively.

Non-Interest Income

        Total non-interest income increased to $1.8 million for 1998 from $1.2
million in 1997 and $1.1 million in 1996. This represents an increase of 41.0%
for 1998 over 1997 and 9.1% for 1997 over 1996.

        Non-interest income is composed of income from fiduciary activities
(trust department), service charges on deposit accounts, other service charges
and fees, gains on securities, and other miscellaneous income. Trust income
declined by $43 thousand during 1998 for a decrease of 1% as compared to 1997.
Trust income increased by $131 thousand or 32% between 1997 and 1996. Service
charges on deposits increased by $89 thousand, while other service charges
increased by $124 thousand during 1998. Other miscellaneous income includes
lease income, gains on the sale of foreclosed property, gains on the sale of
fixed assets and other miscellaneous income.

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<PAGE>

Other income increased between 1998 and 1997 to $294 thousand from $157 thousand
for an increase of 87.7%. The majority of this improvement is due to increasing
success in the sale of non-deposit products, such as mutual funds and annuities,
and growth in secondary market mortgage origination fee income. Other income for
1996 was $159 thousand.

        While securities trading is not part of the core operating business of
the Company and is therefore not budgeted, the Company may sell a portion of
it's investment portfolio as a means to fund loan growth. Sales of securities
during 1998 resulted in net gains of $205 thousand. Management seized upon the
opportunities presented by a strong bond market to re-align the mix and maturity
schedule of the investment portfolio to better meet the strategic and cash flow
needs of the Company.

Non-Interest Expense

        During 1998, non-interest expense increased to $5.4 million from $4.4
million in 1997 and $4.0 million in 1996. This represents an increase of 25.4%
for 1998 over 1997 and 9.8% for 1997 over 1996. Non-interest expense is composed
of salaries and benefits, occupancy expense, FDIC assessments and other expense.
Salary and benefit expense is the major component of non-interest expense, and
has increased 22.6% and 6.4% for 1998 and 1997 respectively.

        Bay Banks of Virginia purchased two branches from another bank in
February 1998. Of the 22.6% increase in salary and benefit expense, 10.6% was
directly attributable to staffing increases resulting from the purchased
branches. The remaining 12.0% increase is a result of annual salary increases
and the hiring of several part-time tellers and full time loan department
personnel. Occupancy expense increased 14.2% during 1998 over 1997 as a direct
result of the purchase of the aforementioned branches, as well as systems
upgrades of the Company's data processing equipment. For the comparable period,
1997 over 1996, occupancy expenses decreased 2.0%. Other miscellaneous expenses
increased 33.3% during 1998 over 1997 and 20.7% during 1997 over 1996.

        Other miscellaneous expenses were impacted by numerous increases
throughout the expense schedules. Most notably by non-recurring expenses related
to the purchase of the two branches mentioned above. Certain legal and
consulting fees, extensive non-depreciable leasehold improvements related to the
branch purchase, as well as Year 2000 compliance have resulted in the majority
of the increase in other miscellaneous expense.

Assets

        As of December 31, 1998, the Company had total assets of $200.2 million
as compared to 1997 balances of $169.0 million. Total assets increased by 18.5%
for 1998 over 1997. Deposit growth and investments in securities were mainly
attributable to the purchase of two branches. With the purchase, deposits
increased $22.2 million, and were subsequently converted into loans and
investments. In addition, loan growth was strong during 1998, which further
contributed to asset growth.

Loans

        Loan demand was steady as balances increased by $9.8 million or 9.3%
during 1998. Year-end 1998 gross loan balances were $114.5 million as compared
to $104.8 million at year-end 1997. The loan portfolio is composed of mainly
residential first mortgages. Real estate mortgage loans in aggregate increased
to $84.2 million during 1998, from a total of $78.9 million for 1997. Commercial
loan balances increased to $11.7 million from $9.6 million, and consumer
installment loans increased to $18.7 million for 1998 as compared to $16.2
million for 1997. Of total loans, residential mortgages compose 73.5%,
commercial loans 10.2%, and consumer installment 16.3%.

Provision/Allowance for Loan Losses

        The provision for loan losses is a charge against earnings necessary to
maintain the allowance for loan losses at a level consistent with management's
evaluation of the loan portfolio. The 1998 provision was $208 thousand as
compared to $203 thousand for 1997. Loans charged off during 1998 totaled $77
thousand and for 1997 $368 thousand. Recoveries were $20 thousand and $6
thousand for 1998 and 1997 respectively. Net loans

                                       11
<PAGE>

charged off to year-end total loans were .05% for 1998 and .4% for 1997. The
allowance for credit losses, as a percentage of year-end loans, was .9% for 1998
and .8% for 1997.

        As of December 31, 1998, loans upon which the accrual of interest had
been discontinued totaled $79 thousand as compared to $126 thousand for year-end
1997. Other Real Estate, including foreclosed property, at year-end 1998 was
$1.2 million as compared to $1.4 million for 1997. The Company maintains items
in other real estate at fair value and therefore expects no losses on any of the
properties.

        Loans still accruing interest but delinquent ninety days or more were
$231 thousand or .2% of total loans at December 31, 1998. These balances were
$593 thousand and .6% for the comparable period in 1997.

        The allowance for loan losses is analyzed for adequacy on a quarterly
basis to determine the required amount of provision. A loan-by-loan review is
conducted on all classified loans. Inherent losses on these individual loans are
determined and these losses are compared to historical loss data for that loan
type. Management then reviews the various analyses and determines the
appropriate allowance. As of December 31,1998, management considers the
allowance for loan losses to be a reasonable estimate of potential loss exposure
inherent in the loan portfolio.

Deposits

        As of December 31, 1998, the Company maintained total deposits of $178.9
million. This compares to $149.6 and $142.1 million for 1997 and 1996
respectively. Total deposit growth was 19.2% for 1998 over 1997, and 5.3% for
1997 over 1996. Non-interest bearing deposits increased to $19.6 million during
1998 from $11.7 million at year-end 1997. Savings and NOW account balances
increased to $105.3 million during 1998 from $90.9 million at year-end 1997.
Other time deposits grew to $53.7 million from $47 million at year-end 1997. The
comparable deposit balances for 1996 were, non-interest bearing $11.7 million,
savings and NOW $98.5 million, and other time deposits were $31.9 million.


Securities

        As of December 31, 1998, total investment securities were $59.0 million.
Year-end balances for 1997 were $44.1 million, and for 1996 $45.2 million. The
Company increased investment balances during 1998 as a result of the acquisition
of deposits with the purchase of the branches mentioned above. All of the
Company's securities are classified as available for sale. Available for sale
securities are eligible for sale for general liquidity needs, should loan demand
require funding, or if prepayment risk requires action. Available for sale
securities are carried at fair market value.

        Throughout 1998, the Company sold $10.3 million from the investment
portfolio, and purchased $37.5 million. This activity is greater than historical
activity for two reasons. First, management recognized early in 1998 that the
maturity structure and the mix of investment types needed attention. With the
acquisition of $22.3 million of excess deposits as related to the branch
acquisition, and the anticipated need to deploy those funds into the investment
portfolio, management conducted a year long analysis and re-structure of the
investment portfolio. The resulting balance changes between year-end 1998 and
1997 were as follows: U.S. Treasury balances decreased to $4.5 million from
$8.6; U.S. Agency balances increased to $17.1 million from $12.5 million; state
and municipal bonds increased to $25.4 million from $18.5 million, and other
bonds increased to $11.8 million from $4.5 million. The realignment resulted in
net gains on sale of securities totaling $205 thousand for 1998.

Liquidity, Interest Rate Sensitivity and Inflation

        Sources of liquidity include core deposits, the investment portfolio and
balances held as Federal Funds sold. Cash flows are managed to ensure
availability of liquidity to fund loan growth or unanticipated declines in
deposit balances. As of December 31, 1998, approximately 9.25% of the investment
portfolio will mature or reprice within one year or less. This compares to a
14.6% maturity and repricing ratio for 1997. The loan portfolio of the


                                       12
<PAGE>

Company also provides a source of liquidity. As of December 31, 1998, 34.46% of
all fixed and variable rate loans mature or reprice within one year or less.
This compares to 38.6% in 1997.

        At year-end 1998, the Company had approximately $5.4 million in
securities with maturities of one year or less and Federal Funds sold balances
of $12.0 million. Additional liquidity sources include overnight lines of credit
with corresponding banks equaling $12 million.

        The Company employs a variety of measurement techniques to identify and
manage its exposure to changing interest rates and subsequent changes in
liquidity. The company employs an advanced simulation model that estimates
interest income volatility and interest rate risk, and regularly investigates
potential external influences. The Company has, in addition, utilized an Asset
Liability Committee composed of appointed members of management and Board of
Directors. The end result is significant managerial attention to interest income
volatility that may result from changes in the level of interest rates, basic
interest rate spreads, the shape of the yield curve and changing product
patterns.

        The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money, over time, due to inflation.

        Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same magnitude as the prices of goods and services.
Another impact of inflation is on non-interest expenses, which tend to rise
during periods of general inflation. The values of real estate held as
collateral by the Company for loans and foreclosed property could be affected by
inflation or changing prices due to market conditions.

        Management believes the most significant impact on financial results is
the Company's ability to react to changes in interest rates. As discussed
previously, management attempts to maintain a favorable position between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations.

Capital Resources

        Equity growth in the Company is supported by three methods; retained
earnings, dividend reinvestment and the exercise of stock options granted to
officers. The primary method of supporting growth is achieved through retained
earnings. During 1998, the Company paid dividends to stockholders totaling 41.9%
of net income. This pay out ratio was 36.9% in 1997 and 35.1% in 1996. Based
upon this ratio, earnings retained by the Company fall in the range of 58.1% to
64.9% for the three-year period.

        In addition, the Company employs a dividend reinvestment plan in which
each stockholder has the option of participation. The plan provides the
Company's stockholders an opportunity to use dividends received to purchase
authorized but unissued shares at 95% of the current market price and with no
commission.

        Total capital, or shareholders' equity, as of December 31, 1998 was
$20.5 million. This is an increase of 9.7% over the 1997 capital position of
$18.7 million.

        The Company accounts for unrealized gains or losses in the investment
portfolio by adjusting capital for any after tax effect of that gain or loss at
the end of a given accounting period. Net unrealized gains were $627 thousand at
December 31, 1998. This compares to unrealized gains of $271 thousand at
year-end 1997.

        The Company is required to maintain minimum amounts of capital to total
"risk weighted" assets as defined by Federal Reserve Capital Guidelines.
According to "Capital Guidelines for Bank Holding Companies," the Company is
required to maintain a minimum Total Capital to Risk Weighted Asset ratio of
6.0%, a Tier 1 Capital to Risk Weighted Asset ratio of 5.5% and a Tier 1 Capital
to Adjusted Average Asset ratio of 3%. As of December 31,


                                       13
<PAGE>

1998, the Company maintained these ratios at 16.9%, 15.1%, and 9.0%
respectively. The Company's Leverage Ratio for this period was 10.0%.

        As of May 1996, the Company declared a 2 for 1 stock split. All per
share data for prior years will reflect the effects of the split. Year-end book
value per share of common stock was $17.60 at December 31, 1998, $16.24 in 1997,
and $14.81 in 1996. Cash dividends paid during 1998 were $810 thousand or $.70
per share, and for 1997 and 1996 cash dividends were $724 thousand and $642
thousand respectively. Total shares outstanding at December 31, 1998 and 1997
were 1,164,728 and 1,150,826 respectively.

Year 2000 Issues

        The Year 2000 issue is a significant business issue that relates to the
fact that many computer programs use a two-digit code to recognize and store the
years' date. These programs were written to assume that the century is 1900;
subsequently, some programs will not recognize the date change that occurs with
the new millennium. The Company recognizes Year 2000 planning and compliance as
a major business and operations issue. The Board of Directors is informed on an
ongoing basis of all steps taken to insure a smooth transition into the year
2000. Further, management has developed a plan and timeline to evaluate the
risks and exposures that the Company faces on a technological and operational
level. This plan is a five-part approach, which includes making all necessary
parties aware of the situation, assessing all impacts, renovation of operating
systems, validation of all changes for effectiveness, and implementation of the
necessary policies and procedures to ensure compliance. A Year 2000 team
composed of senior management and key operational officers has been in place for
over one year. Among the tasks accomplished to date are the identification and
cataloging of all software, hardware, maintenance contracts and third-party
vendors. Each identified party has been contacted and a dialogue established to
ensure the necessary compliance with regulatory time constraints. Testing of all
hardware and software will be completed well before June of 1999. Additionally,
operating and capital budgets incorporate anticipated expenditures necessary to
ensure compliance. The Company expects to be in conformity with the FFEIC Y2K
Statement and be fully compliant prior to December 31, 1999.

Forward-Looking Statements

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