BAY BANKS OF VIRGINIA INC - 10-Q Quarterly Report

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 MARCH 31, 2003

o 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 THE REGISTRANT AS SPECIFIED IN ITS CHARTER)

VIRGINIA		54-1838100
(STATE OF INCORPORATION)		(IRS EMP. ID NO.)

100 SOUTH MAIN STREET, KILMARNOCK, VA 22482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)

(804)435-1171
(REGISTRANTS 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

x Yes

o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

o Yes

x No

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

2,311,189 shares of common stock on April 30, 2003.

FORM 10-Q

For the interim period ending March 31, 2003.

INDEX

PART I	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS	3

	CONSOLIDATED BALANCE SHEETS MARCH 31, 2003 (UNAUDITED) AND DECEMBER 31, 2002	3

	CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)	4

	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)	5

	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 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	8

	FINANCIAL HIGHLIGHTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO MARCH 31, 2002 (UNAUDITED)	10

	NET INTEREST INCOME ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO MARCH 31, 2002 (UNAUDITED)	11

	INTEREST RATE SENSITIVITIY GAP ANALYSIS AS OF MARCH 31, 2003 (UNAUDITED)	12

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	15

	RATE SHOCK ANALYSIS OF NET INTEREST INCOME ON MARCH 31, 2003 (UNAUDITED)

ITEM 4.	CONTROLS AND PROCEDURES	15

PART II	OTHER INFORMATION	15

ITEM 1.	LEGAL PROCEEDINGS	15

ITEM 2.	CHANGES IN SECURITIES	15

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	15

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	15

ITEM 5.	OTHER INFORMATION	15

ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	15

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Bay Banks of Virginia, Inc.
Consolidated Balance Sheets

	Mar 31 2003		Dec 31 2002

	(Unaudited)
ASSETS
Cash and due from banks	$	13,950,944	$	9,875,840
Interest-bearing deposits		171,855		159,730
Federal funds sold		30,041,522		19,978,688
Securities available for sale, at fair value		46,679,597		50,151,265
Gross loans, net of allowance for loan losses of $1,735,510 and $1,696,914		167,625,004		168,442,156
Premises and equipment, net		8,093,563		7,968,469
Accrued interest receivable		1,367,152		1,453,952
Other real estate owned		495,431		580,167
Core deposit intangible		2,807,842		2,807,842
Other assets		1,390,926		1,642,040

Total assets	$	272,623,836	$	263,060,149

LIABILITIES
Demand deposits	$	30,024,963	$	25,731,769
Savings and NOW deposits		117,258,534		114,421,623
Other time deposits		94,201,062		91,362,789

Total deposits	$	241,484,559	$	231,516,181
Securities sold under repurchase agreements		3,874,987		4,481,764
Other liabilities		2,247,249		2,305,405

Total liabilities	$	247,606,795	$	238,303,350

SHAREHOLDERS’ EQUITY
Common stock - $5 par value;
Authorized - 5,000,000 shares;
Outstanding - 2,311,189 and 2,307,360 shares	$	11,555,944	$	11,536,800
Additional paid-in capital		4,141,469		4,080,693
Retained Earnings		7,599,651		7,514,790
Accumulated other comprehensive income		1,719,977		1,624,516

Total shareholders’ equity	$	25,017,041	$	24,756,799

Total liabilities and shareholders’ equity	$	272,623,836	$	263,060,149

See Notes to Consolidated Financial Statements.

Bay Banks of Virginia, Inc.
Consolidated Statements of Income
(Unaudited)

	Qtr ended Mar 31, 2003		Qtr ended Mar 31, 2002

INTEREST INCOME
Loans receivable (incl fees)	$	2,732,489	$	2,792,557
Securities:
Taxable		425,409		527,912
Tax-exempt		179,553		140,105
Federal funds sold		72,806		102,076

Total interest income	$	3,410,257	$	3,562,650

INTEREST EXPENSE
Deposits	$	1,258,978	$	1,414,676
Securities Sold to Repurchase		9,327		5,655

Total interest expense	$	1,268,305	$	1,420,331

Net Interest Income	$	2,141,952	$	2,142,319

Provision for loan losses	$	78,000	$	79,000

Net interest income after provision for loan losses	$	2,063,952	$	2,063,319

NONINTEREST INCOME
Income from fiduciary activities	$	138,468	$	175,581
Service charges & fees on deposit accounts		138,294		120,635
Other miscellaneous fees		147,996		125,205
Secondary market brokerage income		92,288		53,784
Net securities gains		20,857		1,600
Other income		71,789		29,972

Total noninterest income	$	609,692	$	506,777

NONINTEREST EXPENSES
Salaries and employee benefits	$	1,044,609	$	834,805
Occupancy expense		261,496		199,460
Bank franchise tax		52,488		57,000
Deposit Insurance Premium		9,288		18,634
Visa Expense		71,366		62,809
Amortization of Intangibles		6,196		15,306
Other expense		598,048		483,956

Total noninterest expenses	$	2,043,491	$	1,671,970

Net Income before income taxes	$	630,153	$	898,126

Income tax expense		191,232		256,000

Net Income	$	438,921	$	642,126

Average basic shares outstanding		2,305,385		2,300,742
Earnings per share, basic		0.19		0.28
Average diluted shares outstanding		2,316,288		2,335,228
Earnings per share, diluted		0.19		0.27

See Notes to Consolidated Financial Statements.

Bay Banks of Virginia, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

	Quarter ended Mar 31, 2002			Quarter ended Mar 31, 2003

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	438,921		$	642,126
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		183,724			130,987
Net amortization and accretion of securities		5,587			10,516
Provision for Loan Losses		78,000			79,000
Net (Gain) / Loss on Sale of Securities		(20,857	)		(1,600	)
(Gain) / Loss on sale of other real estate owned		(34,911	)		0
Accrued income and other assets		337,914			53,390
Increase / (Decrease) in Other Liabilities		(107,332	)		35,857

Net Cash Provided by Operating Activities	$	881,046		$	950,276

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of Available-for-Sale Securities		3,797,835			752,493
Proceeds from sales of Available-for-Sale Securities		2,449,500			504,800
Purchases of Available-for-Sale Securities		(2,615,760	)		(2,187,348	)
(Increase) / Decrease in interest bearing deposits		(12,125	)		9,313
(Increase) / Decrease in Loans outstanding		739,152			(2,578,225	)
(Increase) / Decrease in Federal Funds Sold		(10,062,834	)		(126,884	)
Purchases of Premises and Equipment		(308,818	)		(230,776	)
(Increase) / Decrease in other real estate owned		119,647			(10,796	)

Net Cash (Used in) Investing Activities	$	(5,893,403	)	$	(3,867,423	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase / (Decrease) in Demand, Savings, & NOW deposits		7,130,105			1,745,405
Increase / (Decrease) in Time Deposits		2,838,273			1,290,624
Net (Decrease) in securities sold under repurchase agreements		(606,777	)		(254,564	)
Proceeds from issuance of Common Stock		102,685			97,451
Repurchase of Common Stock		(54,145	)		(226,927	)
Dividends paid		(322,680	)		(275,782	)

Net Cash Provided by Financing Activities	$	9,087,461		$	2,376,207

Net Increase / (Decrease) in Cash & Due from Banks		4,075,104			(599,151	)
Cash & Due From Banks at Beginning of period	$	9,875,840		$	9,290,717
Cash & Due From Banks at End of period	$	13,950,944		$	8,691,566

SUPPLEMENTAL DISCLOSURES:
Interest paid	$	1,240,402		$	1,422,390
Income taxes paid		17,129			27,552
Unrealized gain (loss) on investment securities		144,638			(201,044	)

See Notes to Consolidated Financial Statements.

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								642,126						642,126
Net changes in unrealized gain of available- for-sale securities, net of taxes of ($68,355)											(132,689	)		(132,689	)

Total Comprehensive Income		—			—			642,126			(132,689	)		509,437
Dividends paid ($0.12/share)								(275,782	)					(275,782	)
Stock repurchases		(33,895	)		(73,252	)		(119,780	)					(226,927	)
Sale of common stock:
Dividends Reinvested		11,292			65,496			—			—			76,788
Stock Options exercised		14,875			24,346			(18,558	)		—			20,663

Balance on 3/31/02		5,758,677			3,957,310			12,591,060			413,923			22,720,970

Balance on 1/1/2003		11,536,800			4,080,693			7,514,790			1,624,516			24,756,799
Comprehensive Income:
Net Income								438,921						438,921
Net changes in unrealized gain of available- for-sale securities, net of taxes of ($49,177)											95,461			95,461

Total Comprehensive Income		—			—			438,921			95,461			534,382
Dividends paid ($0.14/share)								(322,680	)					(322,680	)
Stock repurchases		(17,500	)		(5,264	)		(31,381	)					(54,145	)
Sale of common stock:
Dividends Reinvested		31,645			63,290			—			—			94,935
Stock Options exercised		5,000			2,750			—			—			7,750

Balance on 3/31/03		11,555,944			4,141,469			7,599,651			1,719,977			25,017,041

See Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

Note 1:

	Bay Banks of Virginia, Inc. 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. This interim statement has not been audited. 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 reclassifications have been made to prior period balances to conform to the current presentation.

	At March 31, 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.

	Quarter ended March 31,

(Unaudited)	2003			2002

Net income, as reported	$	438,921		$	642,126
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(33,642	)		(23,676	)

Pro forma net income	$	405,279		$	618,450
Earnings per share:
Basic - as reported	$	0.19		$	0.28
Basic - pro forma	$	0.18		$	0.27
Diluted - as reported	$	0.19		$	0.27
Diluted - pro forma	$	0.18		$	0.26

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.

Note 2: Securities Available for Sale

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

March 31, 2003 (unaudited):	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

U.S. Government agencies	$	7,108,319	$	310,632	$	0		$	7,418,951
State and municipal securities		26,059,184		1,623,909		(1,326	)		27,681,767
Corporate bonds		9,596,968		676,680		(3,869	)		10,269,779
Restricted securities		1,309,100		0		0			1,309,100

	$	44,073,571	$	2,611,221	$	(5,195	)	$	46,679,597

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	)		13,854,0878
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:

	March 31, 2003			December 31, 2002

	(unaudited)
Mortgage loans on real estate:
Construction	$	20,990,850		$	19,130,837
Secured by farmland		173,034			179,291
Secured by 1-4 family residential		91,142,619			96,056,319
Other real estate loans		24,996,242			24,977,296
Loans to farmers (except those secured by real estate)		610,541			514,330
Commercial and industrial loans (not secured by real estate)		19,109,441			16,762,800
Consumer installment loans		9,749,886			9,995,591
All other loans		1,271,496			1,285,478
Net deferred loan costs and fees		1,316,405			1,237,128

Total loans	$	169,360,514		$	170,139,070
Allowance for loan losses		(1,735,510	)		(1,696,914	)

Loans, net	$	167,625,004		$	168,442,156

Loans upon which the accrual of interest has been discontinued totaled $318 thousand as of March 31, 2003, and $268 thousand as of December 31, 2002.

Note 4: Earnings per share

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

(Unaudited)	March 31, 2003				March 31, 2002

	Avg Shares		Per share Amount		Avg Shares		Per share Amount

Basic earnings per share		2,305,385	$	0.19		2,300,742	$	0.28
Effect of dilutive securities:
Stock options		10,903				34,486
Diluted earnings per share		2,316,288	$	0.19		2,335,228	$	0.27

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 March 31, 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 resulting adjustment to the March 31, 2002, income statement was elimination of amortization of $58,211.

The Company will be required to perform an annual impairment test to support the value reported.

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

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

CRITICAL ACCOUNTING POLICIES

GENERAL. The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the

ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one 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. There were no new Financial Accounting Standards Board promulgations in the first quarter of 2003 that will impact Bay Banks of VA, Inc.

Bay Banks of Virginia, Inc.
Financial Highlights
(Unaudited)

(Thousands)	Quarter ended 3/31/03			Quarter ended 3/31/02			Change

FINANCIAL CONDITION
Average Assets	$	265,998		$	245,832			8.2	%
Average Interest-earning Assets		238,489			223,559			6.7	%
Average Earning Assets to Total Average Assets		89.7	%		90.9	%		-1.3	%
Period-end Interest-bearing Liabilities		215,335			210,266			2.4	%
Average Interest-bearing Liabilities		212,184			196,861			7.8	%
Average Equity, including FAS 115 adjustment		24,929			22,640			10.1	%
Tier 1 Capital		20,489			19,499			5.1	%
Net Risk-weighted Assets		178,026			159,671			11.5	%
Tier 2 Capital		1,736			1,528			13.6	%

RESULTS OF OPERATIONS
Net Interest Income before Provision	$	2,142		$	2,142			-0.0	%
Net Income		439			642			-31.6	%
Annualized Yield on Average Interest-earning Assets		5.87	%		6.47	%		-9.3	%
Annualized Cost of Average Interest-bearing Liabilities		2.39	%		2.89	%		-17.3	%
Annualized Net Yield on Average Interest-earning Assets		3.74	%		3.93	%		-4.8	%
Annualized Net Interest Rate Spread		3.48	%		3.58	%		-2.8	%

RATIOS
Total Capital to Risk-weighted Assets (10% min)		12.5	%		13.2	%		-5.3	%
Tier 1 Capital to Risk-weighted Assets (6% min)		11.5	%		12.2	%		-5.8	%
Leverage Ratio (5% min)		7.8	%		8.0	%		-2.5	%
Annualized Return on Average Assets (ROA)		0.7	%		1.0	%		-30.0	%
Annualized Return on Average Equity (ROE)		7.0	%		11.3	%		-38.1	%

Period-end basic shares outstanding*		2,311,189			2,303,470			0.3	%
Average basic shares outstanding*		2,305,385			2,300,742			0.2	%
Average diluted shares outstanding*		2,316,288			2,335,228			-0.8	%

PER SHARE DATA
Diluted earnings per average share (EPS) (three months)*	$	0.19		$	0.27			-29.6	%
Cash Dividends per average share (three months)*		0.14			0.12			16.7	%
Book Value per share, basic*
before Accumulated Comprehensive Income/Loss	$	10.08		$	9.66			4.4	%
after Accumulated Comprehensive Income/Loss		10.82			9.84			10.0	%
Book Value per average share, basic*
before Accumulated Comprehensive Income/Loss	$	10.11		$	9.67			4.5	%
after Accumulated Comprehensive Income/Loss		10.85			9.85			10.2	%

* Shares outstanding and Per Share data for 2002 is adjusted for a 2-for-1 split which occurred on 6/7/02.

EARNINGS SUMMATION

For the three months ended March 31, 2003, net income was $439 thousand as compared to $642 thousand for the comparable period in 2002, a decrease of 31.6%. Diluted earnings per average share for the first three months of 2003 were $0.19 as compared to $0.27 for the first three months of 2002. Annualized return on average equity was 7.0% for the first three months of 2003 as compared to 11.3% for the first three months of 2002, a decrease of 38.1%. Annualized return on average assets was 0.7% for the first three months of 2003, compared to 1.0% for the first three months of 2002, a decrease of 30.0%. Net interest income for the first three months of 2003 and 2002 was $2.1 million. Average interest-earning assets totaled $238 million for the first three months of 2003 as compared to $224 million for the first three months of 2002, an increase of 6.7%. Average interest-bearing liabilities totaled $212 million for the first three months of 2003 as compared to $197 million for the first three months of 2002, an increase of 7.8%. The annualized yield on average interest-earning assets for the first three months of 2003 was 5.87% as compared to 6.47% for the first three months of 2002, a decrease of 9.3%. The annualized yield (cost) on interest-bearing liabilities for the first three months of 2003 was 2.39% as compared to 2.89% for the first three months of 2002, a decrease of 17.3%. Average interest-earning assets as a percent of total average assets was 89.7% for the first three months of 2003 as compared to 90.9% for the comparable period of 2002, a decrease of 1.3%. Average total assets for the first three months of 2003 were $266 million as compared to $246 million for the first three months of 2002, growth of 8.2%.

Bay Banks of Virginia, Inc.
Net Interest Income Analysis
(Unaudited)

	Three months ended 3/31/2003							Three months ended 3/31/2002

(Fully taxable equivalent basis) (Thousands)	Average Balance		Income/ Expense		Annualized Yield/Rate			Average Balance		Income/ Expense		Annualized Yield/Rate

INTEREST EARNING ASSETS:
Investments (Amortized cost ):
Taxable Investments		27,958		425		6.08	%		34,100		510		5.99	%
Tax-Exempt Investments (1)		16,515		272		6.59	%		12,047		212		7.05	%

Total Investments		44,473		697		6.27	%		46,147		722		6.25	%

Gross Loans (2)		169,256		2,732		6.46	%		152,282		2,793		7.34	%
Interest-bearing Deposits		135		0		0.79	%		216		0		0.91	%
Fed Funds Sold		24,625		73		1.18	%		24,915		102		1.64	%

TOTAL INTEREST EARNING ASSETS		238,489		3,502		5.87	%		223,559		3,617		6.47	%

INTEREST-BEARING LIABILITIES:
Deposits:
Savings Deposits		60,134		286		1.90	%		58,419		334		2.29	%
NOW Deposits		39,367		103		1.04	%		30,541		96		1.26	%
CD’s >= $100,000		25,226		232		3.68	%		23,938		245		4.09	%
CD’s < $100,000		67,556		581		3.44	%		68,351		687		4.02	%
Money Market Deposit Accounts		16,144		59		1.45	%		13,328		53		1.60	%

Total Interest Bearing Deposits		208,427		1,261		2.42	%		194,577		1,415		2.91	%
Securities Sold to Repurchase		3,757		9		0.98	%		2,284		6		0.99	%
TOTAL INTEREST-BEARING LIABILITIES		212,184		1,270		2.39	%		196,861		1,421		2.89	%

Net Interest Income/Yield on Earning Assets				2,232		3.74	%				2,196		3.93	%
Net Interest Rate Spread						3.48	%						3.58	%

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 3.74% from 3.93% for the first three months of 2003 compared to the first three months of 2002. This has been driven mainly by a reduction in real estate loan yields due to competitive market forces and mortgage refinancings.

The Company has reclassified loan fee income for 2002 to conform to Financial Accounting Standards Board’s Statement No. 91, which addresses accounting for loan fees and costs. The reclassification reduced loan fee income by $263 thousand in the first quarter of 2002. The corresponding entries reduced salary expense by the same amount, as discussed later in the Non-Interest Expense section.

Through the three months ended March 31, 2003, average interest-earning assets were comprised mainly of the loan portfolio with $169.3 million and the investment portfolio with $44.5 million. For the three month period ended March 31, 2003, compared to the same period in 2002, on a fully tax equivalent basis, tax-exempt investment yields declined to 6.59% from 7.05%, and taxable investment yields increased to 6.08% from 5.99%. Total investment yield increased slightly to 6.27% from 6.25%. In the first three months of 2003, gross loans on average volumes yielded 6.46% as compared to 7.34% for the same period in 2002.

Yields on average interest-bearing deposits comparing the first three months of 2003 to the same period in 2002, were as follows. Savings yields were down to 1.90% compared to 2.29%, NOW accounts were down to 1.04% compared to 1.26%, money market demand accounts were down to 1.45% compared to 1.60%, certificates of deposit greater than $100 thousand were down to 3.68% compared to 4.09%, and certificates of deposit less than $100 thousand were down to 3.44% compared to 4.02%. The resulting total yield on deposits through March 31, 2003, was down to 2.42% compared to 2.91% for the three months ended March 31, 2002.

Table XIII
Interest Rate Sensitivity Analysis
as of 3/31/2003

(Thousands) (Unaudited)	Within 3 months			3-12 Months			1-5 Years			Over 5 Years		Total

Interest-Bearing Due From Banks		172			0			0			0		172
Fed Funds Sold		30,042			0			0			0		30,042
Investments (Market Value)		142			4,563			23,466			18,509		46,680
Loans		38,938			33,868			73,450			23,104		169,360

Total Earning Assets		69,294			38,431			96,916			41,613		246,254

NOW Accounts		39,829			0			0			0		39,829
MMDA’s		17,058			0			0			0		17,058
Savings		60,372			0			0			0		60,372
CD’s < $100,000		8,241			17,754			42,067			20		68,082
CD’s >= $100,000		3,087			3,825			19,207			0		26,119

Total Interest Bearing Deposits		128,587			21,579			61,274			20		211,460
Fed Funds Purchased		0			0			0			0		0
Securities Sold to Repurchase		3,875			0			0			0		3,875

Total Interest Bearing Liabilities		132,462			21,579			61,274			20		215,335

Rate Sensitive Gap		(63,168	)		16,852			35,642			41,593		30,919
Cumulative Gap		(63,168	)		(46,316	)		(10,674	)		30,919

As of March 31, 2003, the Bank had interest-earning assets that mature within 3 months totaling $69.3 million, in 3-12 months totaling $38.4 million, in 1-5 years totaling $96.9 million, and over 5 years totaling $41.6 million. In comparison, interest-bearing liabilities maturing within 3 months totaled $132.5 million, in 3-12 months totaled $21.6 million, in 1-5 years totaled $61.2 million, and $20 thousand over 5 years. Management is continually reviewing loan and deposit products to modify or develop offerings that are less subject to interest rate risk.

LIQUIDITY

The Company maintains adequate short-term assets to meet the Company’s liquidity needs as anticipated by management. Federal funds sold and investments that mature in one year or less provide the major sources of funding for liquidity needs. On March 31, 2003, federal funds sold totaled $30.0 million and securities maturing in one year or less totaled $4.7 million, for a total pool of $34.7 million. The liquidity ratio as of March 31, 2003 was 34.0% as compared to 31.0% 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 March 31, 2003, total shareholder’s equity has grown by 1.0%. It is impacted by net unrealized gains on securities in the amount of $1.7 million as of March 31, 2003. There were net unrealized gains on December 31, 2002 of $1.6 million. Unrealized gains or losses, net of taxes, are recognized as accumulated comprehensive income or loss on the balance sheet and statement of changes in shareholders’ equity. Shareholders’ equity before unrealized gains or losses was $23.3 million on March 31, 2003, and $23.1 million on December 31, 2002. This represents an increase of $165 thousand or 0.7% during the three-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 March 31, 2003, compared to March 31, 2002, grew to $10.82 from $9.84, an increase of 10.0%. Book value per share, basic, before accumulated comprehensive income on March 31, 2003, compared to March 31, 2002, grew to $10.08 from $9.66, an increase of 4.4%. Cash dividends paid for the three months ended March 31, 2003, were $323 thousand, or $0.14 per average share, basic, compared to $276 thousand, or $0.12 per average share, for the comparable period ended March 31, 2002, an increase of 17.0%. Average basic shares outstanding for the three months ended March 31, 2003, were 2,305,385 compared to 2,300,742 for the comparable period ended March 31, 2002. The Company began a share repurchase program in August of 1999 and has continued the program into 2003. The total number of shares authorized for repurchase is 115,000 shares.

The Company is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council guidelines. As of March 31, 2003 the Company maintained Tier 1 capital of $20.5 million, net risk weighted assets of $178.0 million, and Tier 2 capital of $1.7 million. On March 31, 2003, the Tier 1 capital to risk weighted assets ratio was 11.5%, the total capital ratio was 12.5%, and the tier 1 leverage ratio was 7.8%. These ratios continue to be well in excess of regulatory minimums.

FINANCIAL CONDITION

As of March 31, 2003, total assets have increased 3.6% since December 31, 2002, from $263.1 million to $272.6 million. Cash and cash equivalents totaled $14.1 million on March 31, 2003, compared to $10.0 million at year-end 2002.

During the three months ended March 31, 2003, gross loans decreased by 0.5%, from $170.1 million to $169.4 million. During the same three-month period, real estate mortgage loans decreased 2.2% to $137.3 million, commercial loans increased 14.0% to $19.1 million, and installment and other loans decreased by 2.3% to $11.0 million.

For the three months ended March 31, 2003, the Company charged off loans totaling $43 thousand. For the comparable period in 2002, total loans charged off were $48.6 thousand. The Company maintained $495 thousand of other real estate owned (“OREO”) as of March 31, 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 $78 thousand through the first three months, and the allowance for loan losses as of March 31, 2003, was $1.7 million. The allowance for loan losses, as a percentage of average total loans through the first three months of 2003 was 1.0%.

As of March 31, 2003, $318 thousand of loans were on on non-accrual status. There were $268 thousand of loans on non-accrual status as of March 31, 2002. Loans still accruing interest but delinquent for 90 days or more were $889 thousand on March 31, 2003, as compared to $877 thousand on March 31, 2002.

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

individual loans are determined. This valuation is then compared to historical data in an effort to determine the prevailing trends. A third component of the process is the analysis of a tabular presentation of loss allocation percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As of March 31, 2003, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio.

As of March 31, 2003, securities available for sale totaled $46.7 million at market value. This compares with December 2002 market value of $50.2 million. This represents a decrease of 6.9% during the three months ended March 31, 2003. The investment portfolio represents 17.1% of total assets and 19.1% 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 March 31, 2003 was an unrealized gain of $2.6 million. The corresponding accumulated adjustment to shareholders’ equity was $1.7 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 March 31, 2003, total deposits were $241.5 million. Compared to $231.5 at year-end 2002, balances have increased 4.3%. Comparing types of deposit balances on March 31, 2003, to year-end 2002 results in the following, non-interest-bearing demand deposits increased by 16.6% to $30.0 million, savings and NOW accounts increased by 2.5% to $117.3 million, and other time deposits increased by 3.1% to $94.2 million.

RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income for the first three months of 2003 totaled $610 thousand compared to $507 thousand for the same period in 2002. This is an increase of 20.3%. 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 the majority at $138 thousand. Service charges on deposit accounts contributed $138 thousand. Other miscellaneous fees contributed $148 thousand. Other income contributed to the balance with $185 thousand. For the first three months of 2002, these totals were $176 thousand, $121 thousand, $125 thousand, and $85 thousand, respectively.

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

NON-INTEREST EXPENSE

Non-interest expenses totaled $2.0 million during the first three months of 2003 as compared to $1.7 million for the same period in 2002, an increase of 22.2%. Non-interest expenses include salaries and benefits, occupancy expense, and other operating expense. Of these categories, salaries and benefits are the major expense. Through the three months ended March 31, 2003, salary and benefit expense was $1.0 million, occupancy expense was $261 thousand, and other operating expense was $737 thousand. For the same period in 2002, the totals were $835 thousand, $199 thousand, and $638 thousand, respectively.

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 for 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 $58 thousand in the first quarter 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 $263 thousand in the first quarter of 2002. As discussed earlier, the corresponding entries reduced loan fee income by the same amount.

FORWARD LOOKING STATEMENT

In addition to the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the operations of the

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, 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 & 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.

ITEM 1. LEGAL PROCEEDINGS

None to report.

ITEM 2. CHANGES IN SECURITIES

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.)

	11.0	Statement re: Computation of per share earnings. (Incorporated by reference to Note 1 of the 2002 Annual Report to Shareholders.)

	99.1	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 March 4, 2003, announcing the first quarter dividend.

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)

05/14/03	/s/ AUSTIN L. ROBERTS, III

	Austin L. Roberts, III President and Chief Executive Officer (principal executive officer)

05/14/03	/s/ RICHARD C. ABBOTT

	Richard C. Abbott Treasurer (principal financial officer)

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-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ AUSTIN L. ROBERTS, III		Dated: May 14, 2003

Austin L. Roberts, III President and Chief Executive Officer

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.;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

/s/ RICHARD C. ABBOTT		Dated: May 14, 2003

Richard C. Abbott Treasurer

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