10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended September 30, 2003

¨ TRANSITION REPORT UNDER 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 (State or other jurisdiction of incorporation or organization) 54-1838100 (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 checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes  x  No  ¨

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

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

2,321,474 shares of common stock on October 31, 2003.

FORM 10-Q

For the interim period ending September 30, 2003.

INDEX

PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIALSTATEMENTS
	CONSOLIDATED BALANCE SHEETS SEPTEMBER30,2003(UNAUDITED) AND DECEMBER 31, 2002	3
	CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)	4
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)	5
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)	6
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	9
	FINANCIAL HIGHLIGHTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002 (UNAUDITED)	11
	NET INTEREST INCOME ANALYSIS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002 (UNAUDITED)	12
	INTEREST RATE SENSITIVITIY GAP ANALYSIS AS OF SEPTEMBER 30, 2003 (UNAUDITED)	13
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16
ITEM 4.	CONTROLS AND PROCEDURES	16
PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	16
ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS	16
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	16
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	16
ITEM 5.	OTHER INFORMATION	16
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	16

2

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

Bay Banks Of Virginia, Inc.

Consolidated Balance Sheets

	September 30, 2003		December 31, 2002
	(Unaudited)
ASSETS
Cash and due from banks	$	13,729,857	$	9,875,840
Interest-bearing deposits		121,710		159,730
Federal funds sold		25,491,631		19,978,688
Securities available for sale, at fair value		53,430,950		50,151,265
Loans, net of allowance for loan losses of $1,852,322 and $1,696,914		176,589,873		168,442,156
Premises and equipment, net		8,325,161		7,968,469
Accrued interest receivable		1,325,491		1,453,952
Other real estate owned		28,021		580,167
Core deposit intangible		2,807,842		2,807,842
Other assets		1,225,993		1,642,040
Total assets	$	283,076,529	$	263,060,149
LIABILITIES
Demand deposits	$	33,369,748	$	25,731,769
Savings and NOW deposits		122,253,717		114,421,623
Time deposits		93,922,340		91,362,789
Total deposits	$	249,545,805	$	231,516,181
Securities sold under repurchase agreements		6,720,411		4,481,764
Other liabilities		1,851,576		2,305,405
Total liabilities	$	258,117,792	$	238,303,350
SHAREHOLDERS’ EQUITY
Common stock—$5 par value;
Authorized—5,000,000 shares;
Outstanding—2,321,474 and 2,307,360 shares	$	11,607,370	$	11,536,800
Additional paid-in capital		4,270,098		4,080,693
Retained Earnings		7,838,932		7,514,790
Accumulated other comprehensive income		1,242,337		1,624,516
Total shareholders’ equity	$	24,958,737	$	24,756,799
Total liabilities and shareholders’ equity	$	283,076,529	$	263,060,149

See Notes to Consolidated Financial Statements.

3

Bay Banks Of Virginia, Inc.

Consolidated Statements of Income

(Unaudited)

	Quarter ended				For the nine months ended
	September 30, 2003		September 30, 2002		September 30, 2003		September 30, 2002
INTEREST INCOME
Loans receivable (incl fees)	$	2,584,315	$	2,753,931	$	8,002,779	$	8,310,816
Securities:
Taxable	$	387,595	$	529,886	$	1,199,850	$	1,585,941
Tax-exempt		202,728		162,276		561,712		453,987
Federal funds sold		69,638		49,060		239,645		235,577
Total interest income	$	3,244,275	$	3,495,153	$	10,003,985	$	10,586,321
INTEREST EXPENSE
Deposits	$	1,132,578	$	1,313,819	$	3,608,827	$	4,067,659
Securities Sold to Repurchase		12,528		9,043		32,366		23,599
Total interest expense	$	1,145,106	$	1,322,862	$	3,641,193	$	4,091,258
Net Interest Income	$	2,099,169	$	2,172,291	$	6,362,792	$	6,495,063
Provision for loan losses	$	78,000	$	103,000	$	234,000	$	314,000
Net interest income after provision for loan losses	$	2,021,169	$	2,069,291	$	6,128,792	$	6,181,063
NONINTEREST INCOME
Income from fiduciary activities	$	162,949	$	147,722	$	450,291	$	481,708
Service charges & fees on deposit accounts		154,002		144,334		450,923		396,690
Other miscellaneous fees		187,994		190,794		496,458		470,047
Secondary market brokerage income		123,887		57,795		330,102		155,590
Gain/(loss) on sale of other real estate		0		0		191,959		(22,894	)
Net securities gains		29,702		0		54,545		2,800
Other income		21,540		9,928		71,291		53,367
Total noninterest income	$	680,074	$	550,573	$	2,045,569	$	1,537,308
NONINTEREST EXPENSES
Salaries and employee benefits	$	1,113,606	$	932,427	$	3,252,874	$	2,569,390
Occupancy expense		343,624		271,074		1,045,804		782,625
Bank franchise tax		53,563		96,534		155,955		153,534
Deposit Insurance Premium		9,094		9,361		27,566		27,995
Visa Expense		110,639		94,765		272,676		234,557
Amortization of Intangibles		4,620		12,180		16,169		41,576
Other expense		482,706		426,025		1,585,973		1,388,187
Total noninterest expenses	$	2,117,852	$	1,842,366	$	6,357,017	$	5,197,864
Net Income before income taxes	$	583,391	$	777,498	$	1,817,344	$	2,520,507
Income tax expense	$	119,627	$	214,668	$	475,937	$	731,668
Net Income	$	463,764	$	562,830	$	1,341,407	$	1,788,839
Average basic shares outstanding		2,341,860		2,301,241		2,319,558		2,300,905
Earnings per share, basic	$	0.20	$	0.24	$	0.58	$	0.78
Average diluted shares outstanding		2,372,754		2,337,911		2,342,434		2,337,575
Earnings per share, diluted	$	0.20	$	0.24	$	0.57	$	0.77

See Notes to Consolidated Financial Statements.

4

Bay Banks Of Virginia, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended:	September 30, 2003			September 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	1,341,407		$	1,788,839
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	$	561,874		$	383,188
Net amortization and accretion of securities		26,359			25,913
Provision for Loan Losses		234,000			314,000
Net (Gain) / Loss on Sale of Securities		(54,545	)		(2,800	)
(Gain) / Loss on sale of other real estate owned		(191,959	)		0
Decrease in accrued income and other assets		544,509			1,249,164
Increase / (Decrease) in Other Liabilities		(256,948	)		(855,897	)
Net Cash Provided by Operating Activities	$	2,204,697		$	2,902,407
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of Available-for-Sale Securities	$	4,702,856		$	2,184,820
Proceeds from sales of Available-for-Sale Securities		8,030,375			3,768,400
Purchases of Available-for-Sale Securities		(16,563,789	)		(5,509,233	)
Decrease in interest bearing deposits		38,020			38,356
(Increase) in Loans outstanding		(8,381,717	)		(13,115,114	)
(Increase) / Decrease in Fed Sunds Sold		(5,512,943	)		5,743,183
Purchases of Premises and Equipment		(918,567	)		(941,049	)
Proceeds from sale of other real estate owned		744,105			11,330
Net Cash (Used in) Investing Activities	$	(17,861,660	)	$	(7,819,307	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Demand, Savings, & NOW deposits	$	15,470,072		$	9,035,668
Increase / (Decrease) in Time Deposits		2,559,551			(1,570,820	)
Net increase in securities sold under repurchase agreements		2,238,647			275,034
Proceeds from issuance of Common Stock		294,238			281,127
Repurchase of Common Stock		(81,344	)		(404,721	)
Dividends paid		(970,184	)		(828,247	)
Net Cash Provided by Financing Activities	$	19,510,980		$	6,788,041
Net Increase in Cash & Due from Banks	$	3,854,017		$	1,871,141
Cash & Due From Banks at Beginning of period	$	9,875,840		$	9,290,717
Cash & Due From Banks at End of period	$	13,729,857		$	11,161,858
SUPPLEMENTAL DISCLOSURES:
Interest paid	$	3,689,447		$	4,176,019
Income taxes paid		512,129			544,146
Unrealized gain (loss) on investment securities		(579,059	)		2,043,135
Loans transferred to other real estate owned		7,564			464,988

See Notes to Consolidated Financial Statements.

5

Bay Banks Of Virginia, Inc.

Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Shareholders Equity
Balance on 1/1/2002	$	5,766,405		$	3,940,720		$	12,363,054		$	546,612		$	22,616,791
Comprehensive Income:
Net Income								1,788,839						1,788,839
Net changes in unrealized gain of available- for-sale securities, net of taxes of ($694,666)											1,348,469			1,348,469
Total Comprehensive Income		—			—		$	1,788,839		$	1,348,469		$	3,137,308
Dividends paid ($0.36/share)								(828,247	)					(828,247	)
Stock repurchases		(74,645	)		(128,900	)		(201,176	)					(404,721	)
Sale of common stock:
Dividends Reinvested		59,562			184,403			—			—			243,965
2-for-1 stock split in the form of a 100% stock dividend		5,750,427						(5,750,427	)
Stock Options exercised		24,875			30,845			(18,558	)		—			37,162
Balance on 9/30/02	$	11,526,624		$	4,027,068		$	7,353,485		$	1,895,081		$	24,802,258
Balance on 1/1/2003	$	11,536,800		$	4,080,693		$	7,514,790		$	1,624,516		$	24,756,799
Comprehensive Income:
Net Income								1,341,407						1,341,407
Net changes in unrealized gain of available- for-sale securities, net of taxes of ($196,880)											(382,179	)		(382,179	)
Total Comprehensive Income		—			—		$	1,341,407		$	(382,179	)	$	959,228
Dividends paid ($0.42/share)								(970,184	)					(970,184	)
Stock repurchases		(26,000	)		(8,263	)		(47,081	)					(81,344	)
Sale of common stock:
Dividends Reinvested		91,570			194,918			—			—			286,488
Stock Options exercised		5,000			2,750			—			—			7,750
Balance on 9/30/03	$	11,607,370		$	4,270,098		$	7,838,932		$	1,242,337		$	24,958,737

See Notes to Consolidated Financial Statements.

6

Notes to Consolidated Financial Statements

(unaudited)

Note 1:

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

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

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

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

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

For the nine months ended September 30,	2003			2002
Net income, as reported	$	1,341,407		$	1,788,839
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(68,869	)		(71,028	)
Pro forma net income	$	1,272,538		$	1,717,811
Earnings per share:
Basic—as reported	$	0.58		$	0.78
Basic—pro forma	$	0.55		$	0.75
Diluted—as reported	$	0.57		$	0.77
Diluted—pro forma	$	0.54		$	0.74

Note 2: Securities Available for Sale

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

September 30, 2003:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agencies	$	12,269,769	$	245,277	$	(105,354	)	$	12,409,692
State and municipal securities		30,367,600		1,369,880		(220,576	)		31,516,904
Corporate bonds		7,587,653		593,101		0			8,180,754
Restricted securities		1,323,600		0		0			1,323,600
	$	51,548,622	$	2,208,258	$	(325,930	)	$	53,430,950

7

December 31, 2002:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agencies	$	7,511,155	$	358,248				$	7,869,403
State and municipal securities		25,712,115		1,410,938		(15,619	)		27,107,434
Corporate bonds		13,146,266		715,713		(7,892	)		13,854,087
Restricted securities		1,320,341		0		0			1,320,341
	$	47,689,877	$	2,484,899	$	(23,511	)	$	50,151,265

Note 3: Loans

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

	September 30, 2003			December 31, 2002
Construction	$	22,655,552		$	19,130,837
Secured by farmland		1,184,135			179,291
Secured by 1-4 family residential		96,132,839			96,056,319
Other real estate loans		23,758,739			24,977,296
Loans to farmers (except those secured by real estate)		71,479			514,330
Commercial and industrial loans (not secured by real estate)		20,944,445			16,762,800
Consumer installment loans		10,180,172			9,995,591
All other loans		2,114,312			1,285,478
Net deferred loan costs and fees		1,400,522			1,237,128
Total loans	$	178,442,195		$	170,139,070
Allowance for loan losses		(1,852,322	)		(1,696,914	)
Loans, net	$	176,589,873		$	168,442,156

Loans upon which the accrual of interest has been discontinued totaled $1,275 thousand as of September 30, 2003, and $269 thousand as of December 31, 2002.

Note 4: Earnings per share

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

	September 30, 2003			September 30, 2002
	Average Shares	Per share Amount		Average Shares	Per share Amount
Basic earnings per share	2,319,558	$	0.58	2,300,905	$	0.78
Effect of dilutive securities:
Stock options	22,876			36,670
Diluted earnings per share	2,342,434	$	0.57	2,337,575	$	0.77

Note 5: Core Deposit Intangibles

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

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

8

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS. In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Interpretation requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of the Interpretation were effective beginning January 1, 2003. Management does not anticipate that the recognition requirements of this Interpretation will have a material impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This Interpretation provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a corporation’s consolidated financial statements. The Interpretation requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity’s activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities beginning in the fourth quarter of 2003. Management is currently evaluating the applicability of FIN 46 but the adoption of this Interpretation is not expected to have a material impact on the Company’s consolidated financial statements.

9

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

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

10

Bay Banks Of Virginia, Inc.

Financial Highlights

(Unaudited)

Nine months ended (Thousands)	9/30/2003			9/30/2002			Change
FINANCIAL CONDITION
Average Assets	$	273,993		$	249,488		9.8	%
Average Interest-earning Assets		246,937			228,147		8.2	%
Average Earning Assets to Total Average Assets		90.1	%		91.4	%	-1.4	%
Period-end Interest-bearing Liabilities	$	222,896		$	199,795		11.6	%
Average Interest-bearing Liabilities		217,300			201,959		7.6	%
Average Equity, including FAS 115 adjustment		25,405			23,622		7.5	%
Tier 1 Capital		20,909			20,099		4.0	%
Net Risk-weighted Assets		183,379			168,260		9.0	%
Tier 2 Capital		1,852			1,538		20.4	%
RESULTS OF OPERATIONS
Net Interest Income before Provision	$	6,363		$	6,495		-2.0	%
Net Income		1,341			1,789		-25.0	%
Annualized Yield on Average Interest-earning Assets		5.57	%		6.34	%	-12.1	%
Annualized Cost of Average Interest-bearing Liabilities		2.23	%		2.70	%	-17.4	%
Annualized Net Yield on Average Interest-earning Assets		3.60	%		3.94	%	-8.6	%
Annualized Net Interest Rate Spread		3.34	%		3.63	%	-8.0	%
RATIOS
Total Capital to Risk-weighted Assets (10% min)		12.4	%		12.9	%	-3.5	%
Tier 1 Capital to Risk-weighted Assets (6% min)		11.4	%		11.9	%	-4.5	%
Leverage Ratio (5% min)		7.7	%		8.1	%	-5.3	%
Annualized Return on Average Assets (ROA)		0.7	%		1.0	%	-31.7	%
Annualized Return on Average Equity (ROE)		7.0	%		10.1	%	-30.3	%
Period-end basic shares outstanding		2,321,474			2,305,325		0.7	%
Average basic shares outstanding		2,319,558			2,300,905		0.8	%
Average diluted shares outstanding		2,342,434			2,337,575		-0.8	%
PER SHARE DATA
Diluted earnings per average share (EPS) (nine months)	$	0.57		$	0.77		-24.5	%
Cash Dividends per average share (nine months)		0.42			0.36		16.2	%
Book Value per share
before Accumulated Comprehensive Income/Loss	$	10.22		$	9.86		3.6	%
after Accumulated Comprehensive Income/Loss		10.75			10.68		0.6	%
Book Value per average share
before Accumulated Comprehensive Income/Loss	$	10.22		$	9.88		3.5	%
after Accumulated Comprehensive Income/Loss		10.76			10.70		0.5	%

11

EARNINGS SUMMATION

For the nine months ended September 30, 2003, net income was $1.3 million as compared to $1.8 million for the comparable period in 2002, a decrease of 25.0%. Diluted earnings per average share for the first nine months of 2003 were $0.57 as compared to $0.77 for the first nine months of 2002. Annualized return on average equity was 7.0% for the first nine months of 2003 as compared to 10.1% for the first nine months of 2002, a decrease of 30.3%. Annualized return on average assets was 0.7% for the first nine months of 2003, compared to 1.0% for the first nine months of 2002, a decrease of 31.7%. Net interest income for the first nine months of 2003 was $6.4 million, compared to $6.5 million for the first nine months of 2002, a decrease of 2.0%. Average interest-earning assets totaled $246.9 million for the first nine months of 2003 as compared to $228.1 million for the first nine months of 2002, an increase of 8.2%. Average interest-bearing liabilities totaled $217.3 million for the first nine months of 2003 as compared to $202.0 million for the first nine months of 2002, an increase of 7.6%. The annualized yield on average interest-earning assets for the first nine months of 2003 was 5.57% as compared to 6.34% for the first nine months of 2002, a decrease of 12.1%. The annualized yield (cost) on interest-bearing liabilities for the first nine months of 2003 was 2.23% as compared to 2.70% for the first nine months of 2002, a decrease of 17.4%. Average interest-earning assets as a percent of total average assets was 90.1% for the first nine months of 2003 as compared to 91.4% for the comparable period of 2002, a decrease of 1.4%. Average total assets for the first nine months of 2003 were $274 million as compared to $249 million for the first nine months of 2002, an increase of 9.8%.

Bay Banks Of Virginia, Inc.

Net Interest Income Analysis

(Unaudited)

(Fully taxable equivalent basis)	Nine months ended 9/30/2003						Nine months ended 9/30/2002
(Thousands)	Average Balance		Income/ Expense		Annualized Yield/Rate		Average Balance		Income/ Expense		Annualized Yield/Rate
INTEREST EARNING ASSETS:
Investments (Book Value):
Taxable Investments	$	28,518	$	1,199	5.61	%	$	34,075	$	1,546	6.05	%
Tax-Exempt Investments (1)		17,805		851	6.37	%		13,868		688	6.61	%
Total Investments	$	46,323	$	2,050	5.90	%	$	47,943	$	2,234	6.21	%
Gross Loans (1) (2)	$	171,676	$	8,024	6.23	%	$	157,821	$	8,331	7.04	%
Interest-bearing Deposits		169		1	0.50	%		199		1	0.66	%
Fed Funds Sold		28,769		240	1.11	%		22,184		275	1.65	%
TOTAL INTEREST EARNING ASSETS	$	246,937	$	10,315	5.57	%	$	228,147	$	10,841	6.34	%
INTEREST-BEARING LIABILITIES:
Deposits:
Savings Deposits	$	61,585	$	815	1.76	%	$	59,544	$	1,013	2.27	%
NOW Deposits		40,962		244	0.80	%		31,713		307	1.29	%
CD’s >= $100,000		25,854		716	3.69	%		22,760		666	3.90	%
CD’s < $100,000		68,149		1,712	3.35	%		72,084		1,928	3.57	%
Money Market Deposit Accounts		16,403		122	0.99	%		12,673		153	1.61	%
Total Interest Bearing Deposits	$	212,953	$	3,609	2.26	%	$	198,774	$	4,067	2.73	%
Securities Sold to Repurchase		4,347		32	0.99	%		3,185		24	0.99	%
TOTAL INTEREST-BEARING LIABILITIES	$	217,300	$	3,641	2.23	%	$	201,959	$	4,091	2.70	%
Net Interest Income/Yield on Earning Assets			$	6,674	3.60	%			$	6,750	3.94	%
Net Interest Rate Spread					3.34	%					3.63	%

Notes:

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

(2) - Includes Visa Program & nonaccrual loans.

This Net Interest Income Analysis table shows net interest margin decreasing to 3.60% from 3.94% for the first nine months of 2003 compared to the first nine months of 2002. This has been

12

driven mainly by a reduction in real estate loan yields due to competitive market forces and mortgage refinancings. Management has partially offset this reduction in yield on earning assets with reductions in the yield (cost) of interest-bearing liabilities.

Through the nine months ended September 30, 2003, average interest-earning assets were comprised mainly of the loan portfolio with $171.7 million and the investment portfolio with $46.3 million. For the nine month period ended September 30, 2003, compared to the same period in 2002, on a fully tax equivalent basis, tax-exempt investment yields declined to 6.37% from 6.61%, and taxable investment yields decreased to 5.61% from 6.05%, resulting in a decrease in total investment yield to 5.90% from 6.21%. In the first nine months of 2003, gross loans on average volumes yielded 6.23% as compared to 7.04% for the same period in 2002, for reasons described in the previous paragraph.

Management has reduced the yields (costs) on average interest-bearing deposits during the first nine months of 2003, compared to the same period in 2002, as follows. Savings yields were reduced to 1.76% compared to 2.27%, NOW accounts were reduced to 0.80% compared to 1.29%, money market demand accounts were reduced to 0.99% compared to 1.61%, certificates of deposit greater than or equal to $100 thousand were reduced to 3.69% compared to 3.90%, and certificates of deposit less than $100 thousand were reduced to 3.35% compared to 3.57%. The resulting total yield on deposits through September 30, 2003, was reduced to 2.26% compared to 2.73% for the same period a year ago.

The Company has reclassified loan fee income for 2002 to conform to Financial Accounting Standards Board’s Statement No. 91, which addresses accounting for loan fees and costs. The reclassification reduced loan fee income by $804 thousand in the first nine months of 2002. The corresponding entries reduced salary expense by the same amount, as discussed later in the Non-Interest Expense section.

Interest Rate Sensitivity Analysis as of September 30, 2003

(Thousands)	Within 3 months			3-12 Months			1-5 Years		Over 5 Years		Total
Interest-Bearing Due From Banks	$	122		$	0		$	0	$	0	$	122
Fed Funds Sold		25,492			0			0		0		25,492
Investments (Market Value)		2,713			6,513			21,443		22,762		53,431
Loans		43,539			50,969			72,448		11,486		178,442
Total Earning Assets	$	71,866		$	57,482		$	93,891	$	34,248	$	257,487
NOW Accounts		41,806		$	0			0		0		41,806
MMDA’s		16,605		$	0			0		0		16,605
Savings		59,040		$	0			0		0		59,040
CD’s < $100,000		8,795			14,548			43,268		4		66,615
CD’s >= $100,000		2,804			5,746			18,757		0		27,307
Total Interest Bearing Deposits	$	129,050		$	20,294		$	62,025	$	4	$	211,373
Fed Funds Purchased		0			0			0		0		0
Securities Sold to Repurchase		6,720			0			0		0		6,720
Total Interest Bearing Liabilities	$	135,770		$	20,294		$	62,025	$	4	$	218,093
Rate Sensitive Gap	$	(63,904	)	$	37,188		$	31,866	$	34,244	$	39,394
Cumulative Gap		(63,904	)		(26,716	)		5,150		39,394

As of September 30, 2003, the Company had interest-earning assets that mature within 3 months totaling $71.9 million, in 3-12 months totaling $57.5 million, in 1-5 years totaling $93.9 million, and over 5 years totaling $34.2 million. In comparison, interest-bearing liabilities maturing within 3 months totaled $135.8 million, in 3-12 months totaled $20.3 million, in 1-5 years totaled $62.0 million, and $4 thousand over 5 years. This table indicates that the Company is liability-sensitive for the first three months, becoming asset-sensitive within nine to twelve months and forward. Management believes this will position the Company favorably in a rising rate environment. Management is continually reviewing loan and deposit products to modify or develop offerings that are less subject to interest rate risk.

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LIQUIDITY

The Company maintains adequate short-term assets to meet the Company’s liquidity needs as anticipated by management. Federal funds sold and investments that mature in one year or less provide the major sources of funding for liquidity needs. On September 30, 2003, federal funds sold totaled $25.5 million and securities maturing in one year or less totaled $9.2 million, for a total pool of $34.7 million. The liquidity ratio as of September 30, 2003 was 32.3% as compared to 33.6% as of December 31, 2002. The Company determines this ratio by dividing the sum of cash and cash equivalents, unpledged investment securities and Federal Funds Sold, by net liabilities. Management, through historical analysis, has deemed 15% an adequate liquidity ratio.

CAPITAL RESOURCES

From December 31, 2002, to September 30, 2003, total shareholder’s equity has grown by 0.8%. It is impacted by net unrealized gains on securities in the amount of $1.2 million as of September 30, 2003. Unrealized gains or losses, net of taxes, are recognized as accumulated comprehensive income or loss on the balance sheet and statement of changes in shareholders’ equity. Shareholders’ equity before unrealized gains or losses was $23.7 million on September 30, 2003, and $23.1 million on December 31, 2002. This represents an increase of $584 thousand or 2.5% during the nine-month period.

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

Book value per share, basic, on September 30, 2003, compared to September 30, 2002, grew to $10.75 from $10.68, an increase of 0.6%. Book value per share, basic, before accumulated comprehensive income on September 30, 2003, compared to September 30, 2002, grew to $10.22 from $9.86, an increase of 3.6%. Cash dividends paid for the nine months ended September 30, 2003, were $970 thousand, or $0.42 per share, compared to $828 thousand, or $0.36 per share, for the comparable period ended September 30, 2002, an increase of 17.1%. Average basic shares outstanding for the nine months ended September 30, 2003, were 2,319,558 compared to 2,300,905 for the comparable period ended September 30, 2002. The Company began a share repurchase program in August of 1999 and has continued the program into 2003. The plan authorizes a total of 115,000 shares for repurchase.

The Company is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council guidelines. As of September 30, 2003 the Company maintained Tier 1 capital of $20.9 million, net risk weighted assets of $183.4 million, and Tier 2 capital of $1.9 million. On September 30, 2003, the Tier 1 capital to risk weighted assets ratio was 11.4%, the total capital ratio was 12.4%, and the tier 1 leverage ratio was 7.7%. These ratios continue to be well in excess of regulatory minimums.

FINANCIAL CONDITION

As of September 30, 2003, total assets have increased 7.6% since December 31, 2002, from $263.1 million to $283.1 million. Cash and cash equivalents totaled $13.9 million on September 30, 2003, compared to $10.0 million at year-end 2002.

During the nine months ended September 30, 2003, gross loans increased by 4.9%, from $170.1 million to $178.4 million. The components of this increase were real estate mortgage loans with 2.4% growth to $143.7 million, commercial loans with 24.9% growth to $20.9 million, and installment and other loans with 9.0% growth to $12.3 million.

For the nine months ended September 30, 2003, the Company charged off loans totaling $88.7 thousand. For the comparable period in 2002, total loans charged off were $288 thousand. The Company maintained $28 thousand of other real estate owned (“OREO”) as of September 30, 2003. As of year-end 2002, the balance was $580 thousand. The Company actively markets all OREO properties, and expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of book or market value.

The provision for loan losses amounted to $234 thousand through the first nine months, and the allowance for loan losses as of September 30, 2003, was $1.9 million. The allowance for loan losses, as a percentage of average total loans through the first nine months of 2003 was 1.1%.

As of September 30, 2003, $1.3 million of loans were on non-accrual status. There were $62 thousand of loans on non-accrual status as of September 30, 2002. Loans still accruing interest but delinquent for 90 days or more were $602 thousand on September 30, 2003, as compared to $657 thousand on September 30, 2002.

The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the necessary provision. A loan by loan review is conducted of all loan classes and inherent losses on

14

these individual loans are determined. This valuation is then compared to historical data in an effort to determine the prevailing trends. A third component of the process is the analysis of a tabular presentation of loss allocation percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As of September 30, 2003, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio.

As of September 30, 2003, securities available for sale totaled $53.4 million at market value. This compares with December 2002 market value of $50.2 million, growth of 6.5% for the nine months. The investment portfolio represents 18.9% of total assets and 20.7% of earning assets. The Company’s investment portfolio is classified as available-for-sale, and therefore management has elected to mark the entire investment portfolio to market. The resulting accumulated adjustment to book value as of September 30, 2003 was an unrealized gain of $1.9 million. The corresponding accumulated adjustment to shareholders’ equity was $1.2 million. These gains or losses are booked monthly as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold. Management does not anticipate the realization of net losses on investments during 2003.

As of September 30, 2003, total deposits were $249.5 million. Compared to $231.5 at year-end 2002, this represents growth in balances of 7.8% during the nine months. Components of this growth include non-interest-bearing demand deposits at 29.7% growth to $33.4 million, savings and NOW accounts at 6.8% growth to $122.3 million, and time deposits at 2.8% growth to $93.9 million.

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the first nine months of 2003 totaled $2.0 million compared to $1.5 million for the same period in 2002, an increase of 33.1%. This increase is due mainly to secondary mortgage market brokerage fees and gains on sales of other real estate. Non-interest income includes income from fiduciary activities, service charges on deposit accounts, other miscellaneous fees, gains on the sale of securities, and other income. Of these categories, fiduciary activities contributed $450.3 thousand, service charges on deposit accounts contributed $450.9 thousand, other miscellaneous fees contributed $496.5 thousand, secondary market brokerage income contributed $330.1 thousand, and other income, including gains, contributed $317.8 thousand. For the first nine months of 2002, these totals were $481.7 thousand, $396.7 thousand, $470.0 thousand, $155.6 thousand, and $33.3 thousand, respectively.

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

NON-INTEREST EXPENSE

Non-interest expenses totaled $6.4 million during the first nine months of 2003 as compared to $5.2 million for the same period in 2002, an increase of 22.3%. The largest components of non-interest expense are salaries and benefits, and occupancy expense. Through the nine months ended September 30, 2003, salary and benefit expense was $3.3 million, and occupancy expense was $1.0 million. For the same period in 2002, these totals were $2.6 million, and $782.6 thousand, respectively. The increase in salary and benefit expense is due mainly to additional employees.

In the fourth quarter of 2002, the Company adopted Financial Accounting Standards Board Statement No. 147, Acquisitions of Certain Financial Institutions. This statement amended previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Upon adoption of Statement No. 147, the Bank was able to recover the non-cash expense allocated to the amortization of the core deposit intangible that was associated with each of the branch acquisition transactions previously executed. The result was a reduction in other expense of $174.6 thousand in the first nine months of 2002.

Also in the fourth quarter of 2002, the Company reclassified salary expense to conform to Financial Accounting Standards Board’s Statement No. 91, which addresses accounting for loan fees and costs. Salary expense was reduced due to this reclassification by $803.8 thousand in the first nine months of 2002. As discussed earlier, the corresponding entries reduced loan fee income by the same amount.

15

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 Company’s actual results could differ significantly from those discussed in the forward looking statements. Some of the factors that could cause or contribute to such differences are discussed herein, but also include changes in economic conditions in the Company’s or Bank’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Bank’s market area, and competition. Any of these factors could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM  4. CONTROLS AND PROCEDURES.

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

PART II—OTHER INFORMATION

ITEM  1. LEGAL PROCEEDINGS.

None to report.

ITEM  2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None to report.

ITEM  3. DEFAULT UPON SENIOR SECURITIES.

None to report.

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

None to report.

ITEM  5. OTHER INFORMATION.

None to report.

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

(a) Exhibit Index:

3.0	Articles of Incorporation and Bylaws of Bay Banks of Virginia, Inc. (Incorporated by reference to previously filed Form 10-K for the year ended December 31, 2002).
10.1	1994 Incentive Stock option plan (Incorporated by reference to the previously filed Form S-4EF, Commission File number 333-22579 dated February 28, 1997.)
10.2	1998 Non-Employee Directors Stock Option Plan (incorporated by reference to the previously filed Annual Report on Form 10-K for the year ended December 31, 1999.)

16

10.3	2003 Incentive Stock Option Plan.
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

(b) Reports on Form 8-K:

One report on Form 8-K was filed with the Securities and Exchange Commission on August 26, 2003, announcing the third quarter dividend.

17

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)
11/14/03	/s/    Austin L. Roberts, III
	Austin L. Roberts, III
	President and Chief Executive Officer
	(principal executive officer)

11/14/03	/s/    Richard C. Abbott
	Richard C. Abbott
	Treasurer
	(principal financial officer)

18

EX-10.3

Exhibit 10.3

BAY BANKS OF VIRGINIA

2003 INCENTIVE STOCK OPTION PLAN

ARTICLE I

Establishment, Purpose, and Duration

1.1 Establishment of the Plan. Bay Banks of Virginia, Inc., a Virginia corporation (the “Company”), hereby establishes an incentive compensation plan for the Company and its Subsidiaries to be known as the “Bay Banks of Virginia 2003 Incentive Stock Option Plan” (the “Plan”), as set forth in this document. Unless otherwise defined herein, all capitalized terms shall have the meanings set forth in Section 2.1 herein. The Plan permits the grant of Incentive Stock Options to Officers and Key Employees of the Company or its Subsidiaries.

The Plan was adopted by the Board of Directors of the Company on March 19, 2003, and shall become effective on May 19, 2003 (the “Effective Date”), subject to the approval by vote of shareholders of the Company in accordance with applicable laws.

1.2 Purpose of the Plan. The purpose of the Plan is to promote the success of the Company by providing greater incentive to employees to associate their interests with the long-term financial success of the Company. Additionally, the Plan is intended to provide a financial reward by means of ownership of Company Stock for those employees who achieve specified goals which in turn are likely to enhance the value of the Company’s Stock for the benefit of the shareholders. The Plan is designed to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees upon whose judgment, interest, and special effort the successful conduct of the Company’s operations largely depends.

1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1 herein, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article X herein, until April 30, 2013, at which time it shall terminate except with respect to Awards made prior to, and outstanding on, that date which shall remain valid in accordance with their terms.

ARTICLE II

Definitions

2.1 Definitions. Except as otherwise defined in the Plan, the following terms shall have the meanings set forth below:

(a) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(b) “Agreement” means a written Agreement implementing the grant of each Award signed by an authorized officer of the Company and by the Participant.

(c) “Award” means, individually or collectively, a grant under this Plan of Incentive Stock Options.

(d) “Award Date” or “Grant Date” means the date on which an Award is made by the Committee under this Plan.

(e) “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act.

(f) “Board” or “Board of Directors” means the Board of Directors of the Company, unless otherwise indicated.

(g) “Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:

(i) any Person (other than the Company, any Subsidiary, a trustee or other fiduciary holding securities under any employee benefit Plan of the Company, or its Subsidiaries), who or which, together with all Affiliates and Associates of such Person, is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company

19

representing 33% or more of the combined voting power of the Company’s then outstanding securities; or

(ii) if, at any time after the Effective Date, the composition of the Board of Directors of the Company shall change such that a majority of the Board of the Company shall no longer consist of Continuing Directors; or

(iii) if at any time, (1) the Company shall consolidate with, or merge with, any other Person and the Company shall not be the continuing or surviving corporation, (2) any Person shall consolidate with or merge with the Company, and the Company shall be the continuing or surviving corporation and, in connection therewith, all or part of the outstanding Stock shall be changed into or exchanged for Stock or other securities of any other Person or cash or any other property, (3) the Company shall be a party to a statutory share exchange with any other Person after which the Company is a Subsidiary of any other Person, or (4) the Company shall sell or otherwise transfer 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons.

(h) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

(i) “Committee” means the Compensation Committee of the Board of Directors appointed by the Company to administer the Plan pursuant to Article III herein, the majority of the members of which shall be “disinterested persons” as defined in Rule 16b-3, as amended, under the Exchange Act or any similar or successor rule. Unless otherwise determined by the Board of Directors of the Company, the members of the Committee responsible for executive compensation who are not employees of the Company or its Subsidiaries shall constitute the Committee.

(j) “Company” means Bay Banks of Virginia, or any successor thereto as provided in Article XII herein.

(k) “Continuing Director” means an individual who was a member of the Board of Directors of the Corporation on the Effective Date or whose subsequent nomination for election or re-election to the Board of Directors of the Corporation was recommended or approved by the affirmative vote of two-thirds of the Continuing Directors then in office.

(l) “Disabled” means a disability within the meaning of Code Section 22(e)(3).

(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(n) “Fair Market Value” of a Share means the Fair Market Value as quoted on a recognized Stock quotation system, exchange or bulletin Board or, in the alternative, as determined pursuant to a reasonable method adopted by the Committee in good faith for such purpose.

(o) “Incentive Stock Option” or “ISO” means an Option to purchase Stock, granted under Article VI herein, which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code.

(p) “Key Employee” means an officer or other Key Employee of the Company or its Subsidiaries, who, in the opinion of the Committee, can contribute significantly to the growth and profitability of, or perform services of major importance to, the Company and its Subsidiaries.

(q) “Option” means an Incentive Stock Option.

(r) “Participant” means a Key Employee who is granted an Award under the Plan.

(s) “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d).

(t) “Plan” means the Bay Banks of Virginia 2003 Incentive Stock Plan, as described and as hereafter from time to time amended.

(u) “Stock” or “Shares” means the common stock of the Company.

(v) “Subsidiary” shall mean a corporation at least 50% of the total combined voting power of all classes of Stock of which is owned by the Company, either directly or through one or more of its Subsidiaries.

20

ARTICLE III

Administration

3.1 The Committee. The Plan shall be administered by the Compensation Committee which shall have all powers necessary or desirable for such administration. The express grant in this Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. In addition to any other powers and, subject to the provisions of the Plan, the Committee shall have the following specific powers: (i) to determine the terms and conditions upon which the Awards may be made and exercised; (ii) to determine all terms and provisions of each Agreement, which need not be identical; (iii) to construe and interpret the Agreements and the Plan; (iv) to establish, amend or waive rules or regulations for the Plan’s administration; (v) to accelerate the exercisability of any Award or the termination of any Period of Restriction; and (vi) to make all other determinations and take all other actions necessary or advisable for the administration of the Plan.

3.2 Selection of Participants. The Committee shall have the authority to grant Awards under the Plan, from time to time, to such Key Employees as may be selected by it. Each Award shall be evidenced by an Agreement.

3.3 Decisions Binding. All determinations and decisions made by the Board or the Committee pursuant to the provisions of the Plan shall be final, conclusive and binding.

3.4 Rule 16b-3 Requirements. Notwithstanding any other provision of the Plan, the Board or the Committee may impose such conditions on any Award, and amend the Plan in any such respects, as may be required to satisfy the requirements of Rule 16b-3, as amended (or any successor or similar rule), under the Exchange Act.

3.5 Indemnification of Committee. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against reasonable expenses, including attorneys’ fees, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted or made hereunder, and against all amounts reasonably paid by them in settlement thereof or paid by them in satisfaction of a judgment in any such action, suit or proceeding, if such members acted in good faith and in a manner which they believed to be in, and not opposed to, the best interests of the Company and its Subsidiaries.

ARTICLE IV

Stock Subject to the Plan

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3 herein, the maximum aggregate number of Shares that may be issued pursuant to Awards made under the Plan shall not exceed 175,000. Except as provided in Sections 4.2 herein, the issuance of Shares in connection with the exercise of, or as other payment for Awards, under the Plan shall reduce the number of Shares available for future Awards under the Plan.

4.2 Lapsed Awards or Forfeited Shares. If any Award granted under this Plan (for which no material benefits of ownership have been received, including dividends) expires or lapses, or if Shares issued pursuant to Awards (for which no material benefits of ownership have been received, including dividends) are forfeited, any Stock subject to such Award again shall be available for the grant of an Award under the Plan.

4.3 Capital Adjustments. The number of Shares subject to each outstanding Award, the Option Price and the aggregate number of Shares for which Awards thereafter may be made shall be subject to such adjustment, if any, as the Committee in its sole discretion deems appropriate to reflect such events as Stock dividends, Stock splits, recapitalizations, mergers, consolidations or reorganizations of or by the Company. To the extent required to avoid a charge to earnings for financial accounting purposes, adjustments made by the Committee pursuant to this Section 4.3 to outstanding Awards shall be made so that that both (i) the aggregate intrinsic value of an Award immediately after the adjustment is not greater than or less than the Award’s aggregate intrinsic value before the adjustment and (ii) the ratio of the Option Price to the market value per Share is not reduced.

4.4 Per-Employee Limit. The maximum number of Shares with respect to which an Award may be granted in any calendar year to any Key Employee during such calendar year shall be 50,000.

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ARTICLE V

Eligibility

Persons eligible to participate in the Plan include all employees of the Company and its Subsidiaries who, in the opinion of the Committee, are Key Employees.

ARTICLE VI

Stock Options

6.1 Grants to Key Employees. Subject to the terms and provisions of the Plan, Options may be granted to Key Employees at any time and from time to time as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Shares subject to Options granted to each Participant, provided, however, that the aggregate Fair Market Value (determined at the time the Award is made) of Shares with respect to which any Participant may first exercise ISO’s granted under the Plan during any calendar year may not exceed $100,000 or such amount as shall be specified in Section 422 of the Code and rules and regulation there-under.

6.2 Option Agreement. Each Option grant shall be evidenced by an Agreement that shall specify the conditions upon which the Option or portions thereof, shall be deemed earned, the Option Price (as hereinafter defined), the duration of the Option, the number of Shares to which the Option pertains, any conditions imposed upon the exercisability of Options in the event of retirement, death, disability or other termination of employment, and such other provisions as the Committee shall determine. The Agreement shall specify that the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code.

6.3 Option Price. The exercise price per share of Stock covered by an Option (“Option Price”) shall be determined by the Committee subject to the following limitations. The price for the Shares of Stock to be issued upon the exercise of the Option shall be at least 100% of the Fair Market Value of the common Stock on the date on which the grant is made; provided, however, that in the case of an Incentive Stock Option granted to an individual who may own more than 10% of the total voting power of the Company, the Option price shall be at least 110% of the Fair Market Value at the time of the grant of the Option.

6.4 Duration of Options. Each Option shall expire at such time as the Committee shall determine at the time of grant provided, however, that no ISO shall be exercisable later than the tenth (10th) anniversary date of its Award Date.

6.5 Notification of Status of Options. The Compensation Committee shall notify the Participants if all, or a portion, of the Optioned Stock shall have been deemed earned in accordance with the terms and conditions of the Option Agreement.

6.6 Exercisability. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine, which need not be the same for all Participants. (i) The Option shall not be exercisable after the expiration of ten (10) years from the date such Option is granted; provided, however, the Committee may impose a shorter term for any Participant, and shall require that any Participant who owns more that 10% of the total voting power of the Company shall not have an Option exercisable after the expiration of five years from the date such Option is granted; (ii) the Option price is not less than the Fair Market Value of the Stock at the time such Option is granted.

6.7 Method of Exercise. Options shall be exercised by the delivery of a written notice to the Company in the form prescribed by the Committee setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. No Participant shall sell Stock of the Company obtained through the exercise of an Option within two years of the date of grant of the Option or within one year after the date of exercise, whichever shall be later, unless the Company shall be notified and shall consent. No Participant shall, as a result of receiving an Option, have any rights as a Stockholder until the date such Participant exercises the Option. No Option may be exercised unless the Participant has achieved the performance objectives specified in the Option Agreement, within the time specified therein, and is then employed by the Company or its subsidiaries and shall have been continuously employed since the date of grant of the Option, except as specified in this Section 6.7.

Any unexercised portion of any Option shall automatically and without notice terminate and become null and void on the earlier to occur of the following: (i) the expiration of the three months from the date of termination of the Participant’s employment with the Company, except in the case of Disability or death; (ii) the expiration of one-year following the death of the Participant, if his or her death occurs during their employment with the Company or during the three month period following the date of termination of such employment because of Disability; (iii) the expiration of one-year

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from the date of termination of employment with the Company solely resulting from the Disability of the Participant; (iv) immediately upon termination of the Participant’s employment with the Company if the Committee determines that such termination is attributable to the Participant’s commission of a felony or misdemeanor or deliberate gross misconduct against the Company; (v) such time as may be specified in the Option Agreement.

Notwithstanding the foregoing, the Option will terminate immediately after termination of employment unless the Participant (i) refrains from becoming or serving as an officer, director, or employee of a financial services business (or its Affiliates and/or subsidiaries) in competition with the Company in its trading area as determined by the Committee in its sole discretion; (ii) makes their self available, if requested by the Company, to consult with and supply information to and otherwise cooperate with the Company; and (iii) refrains from engaging in deliberate actions that are reasonably likely to cause substantial harm to the interests of the Company, all as determined by the Committee in its sole discretion. If these conditions are not fulfilled, the Participant shall forfeit all rights to any unexercised Option as of the date of the breach of the condition. Additionally, if the Participant’s employment with the Company is terminated for any reason, and if they accept employment as an officer, director, or employee of a financial service business (or any of its Affiliates or subsidiaries) in competition with the Company in its trading area, or engage in deliberate actions that are reasonably likely to cause harm to the Company, all as determined by the Committee in its sole discretion, within one year after the issuance of certificates pursuant to this Option, the Participant will immediately return the Stock issued hereunder to the Company in exchange for the funds provided as the full Exercise Price.

6.8 Restrictions on Stock Transferability. The Committee shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under the applicable Federal securities law, under the requirements of the National Association of Securities Dealers, Inc. or any Stock exchange upon which such Shares are then listed and under any blue sky or state securities laws applicable to such Shares.

6.9 Non-transferability of Options. In general, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative. Unless otherwise specifically provided in the Option Agreement, any payment of the Option Price paid by delivery of Company Stock acquired directly or indirectly from the Company shall be paid only with Shares of Company Stock that have been held by the Participant for more than six months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes).

ARTICLE VII

Change in Control

In the event of a Change in Control of the Company, the Committee, as constituted before such Change in Control, in its sole discretion may, at the time the Award is made, take any one or more of the following actions: (i) provide for the acceleration of any time periods relating to the exercise or realization of any such Award so that such Award may be exercised or realized in full on or before a date initially fixed by the Committee; (ii) provide for the purchase or settlement of any such Award by the Company, upon a Participant’s request, for an amount of cash equal to the amount which could have been obtained upon the exercise of such Award or realization of such Participant’s rights had such Award been currently exercisable or payable; (iii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change in Control; or (iv) cause any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation in such Change in Control.

ARTICLE VIII

Modification, Extension and Renewals of Awards

Subject to the terms and conditions and within the limitations of the Plan, the Committee may modify, extend or renew outstanding Awards, or, if authorized by the Board, accept the surrender of outstanding Awards (to the extent not yet exercised) granted under the Plan and authorize the granting of new Awards pursuant to the Plan in substitution therefor, and the substituted Awards may specify a lower exercise price than the surrendered Awards, a longer term than the surrendered Awards or may contain any other provisions that are authorized by the Plan. The Committee may also modify the terms of any outstanding Agreement. Notwithstanding the foregoing, however, no modification of an Award, shall, without the consent of the Participant, adversely affect the rights or obligations of the Participant.

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ARTICLE IX

Amendment, Modification and Termination of the Plan

9.1 Amendment, Modification and Termination. At any time and from time to time, the Committee may terminate, amend, or modify the Plan. Such amendment or modification may be without shareholder approval except to the extent that such approval is required by the Code, pursuant to the rules under Section 16 of the Exchange Act, by any national securities exchange or system on which the Stock is then listed or reported, by any regulatory body having jurisdiction with respect thereto or under any other applicable laws, rules or regulations. Unless the Stockholders of the Company shall consent, no amendment shall be made which will; (i) increase the total number of Shares reserved for Options under the Plan (except for adjustments as provided in Section 4.3), (ii) change the minimum Option price hereinabove specified; (iii) change any provision relating to eligibility of employees, or; (iv) extend the maximum period of exercise beyond the date specified.

9.2 Awards Previously Granted. No termination, amendment or modification of the Plan other than pursuant to Section 4.3 herein shall in any manner adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant.

ARTICLE X

Withholding

10.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, State and local taxes (including the Participant’s FICA obligation) required by law to be withheld (based on the minimum applicable statutory withholding rates) with respect to any grant, exercise, or payment made under or as a result of this Plan.

ARTICLE XI

Successors

All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company.

ARTICLE XII

General

12.1 Requirements of Law. The granting of Awards and the issuance of Shares of Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies as may be required.

12.2 Effect of Plan. The establishment of the Plan shall not confer upon any Key Employee any legal or equitable right against the Company, a Subsidiary or the Committee, except as expressly provided in the Plan. The Plan does not constitute an inducement or consideration for the employment of any Key Employee, nor is it a contract between the Company or any of its Subsidiaries and any Key Employee. Participation in the Plan shall not give any Key Employee any right to be retained in the service of the Company or any of its Subsidiaries.

12.3 Creditors. The interests of any Participant under the Plan or any Agreement are not subject to the claims of creditors and may not, in any way, be assigned, alienated or encumbered.

12.4 Governing Law. The Plan, and all Agreements hereunder, shall be governed, construed and administered in accordance with and governed by the laws of the Commonwealth of Virginia and the intention of the Company is that ISOs granted under the Plan qualify as such under Section 422 of the Code.

12.5 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

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EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Section 302 Certification

I, Austin L. Roberts, III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bay Banks of Virginia, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(c) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/    Austin L. Roberts, III	Dated: November 14, 2003
Austin L. Roberts, III
President and Chief Executive Officer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 will be retained by Bay Banks Of Virginia, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Section 302 Certification

I, Richard C. Abbott, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bay Banks of Virginia, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(c) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and ;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/    Richard C. Abbott	Dated: November 14, 2003
Richard C. Abbott Treasurer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 will be retained by Bay Banks Of Virginia, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Bay Banks of Virginia, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Treasurer (principal financial officer) of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge and belief: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

/s/    Austin L. Roberts, III

Austin L. Roberts, III,

Chief Executive Officer

/s/    Richard C. Abbott

Richard C. Abbott,

Treasurer

November 14, 2003

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