10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File Number 000-22283

Virginia Financial Group, Inc.

(Exact name of registrant as specified in its charter)

Virginia	54-1829288
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification Number)
102 S. Main Street, Culpeper, Virginia	22701
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (540) 829-1603

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered:
None	None

Securities registered pursuant to section 12 (g) of the Act:

Common Stock, $5.00 par value per share

(Title of Class)

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2002 was $217,995,689.

As of March 17, 2003, there were 7,161,234 shares of common stock, $5.00 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

2002 Annual Report to Stockholders; and Notice of Annual Meeting and Proxy Statement dated March 31, 2003 - Part III

PART I

Item 1. Business

THE COMPANY

GENERAL

On January 18, 2002, Virginia Financial Corporation completed its merger of equals with Virginia Commonwealth Financial Corporation, creating Virginia Financial Group, Inc. (VFGI), currently one of the largest independent bank holding companies in the Commonwealth of Virginia with total assets of approximately $1.2 billion. The combined company also represents the fourth largest independent trust company based on assets managed of approximately $430 million. Affiliates of the Company include: Planters Bank & Trust Company of Virginia – in Staunton, Second Bank & Trust – in Culpeper, Virginia Heartland Bank – in Fredericksburg and Virginia Commonwealth Trust Company – in Culpeper. The organization has a network of twenty-eight branches serving a contiguous market throughout the Shenandoah Valley and central and northern central Virginia. Virginia Commonwealth Trust Company has offices in Culpeper, Fredericksburg and Harrisonburg.

VFGI’s affiliate banks are community-oriented and offer services customarily provided by full-service banks, including individual and commercial demand and time deposit accounts, commercial and consumer loans, residential mortgages, credit card services and deposit services. VFGI’s affiliate banks offer internet banking access for banking services, and online bill payment for both consumers and commercial customers. Lending is focused on individuals and small and middle-market businesses in the local market of VFGI’s affiliate banks. VFGI’s trust company provides a variety of wealth management and personal trust services including estate administration, employee benefit plan administration and planning specifically addressing the investment and financial management needs of its customers.

EMPLOYEES

At December 31, 2002, VFGI had 431 full time equivalent employees. No employees are represented by any collective bargaining unit. VFGI considers relations with its employees to be good.

COMPETITION

VFGI and its affiliates incur strong competition in each of its primary markets from large regional and national financial institutions, savings and loans, credit unions and other community banking organizations. In addition, consumer finance companies, asset managers and mortgage companies all provide competition. Out-of-state bank holding companies are providing increased competition through merger and acquisition of Virginia banks.

VFGI’s deposit market share at June 30, 2002 represented .87% of the total banking deposits in the Commonwealth of Virginia. Competition for deposits is influenced by rates paid, customer loyalty factors, product offerings and convenience of branch network.

No material part of the business of the affiliate banks is dependent upon a single or a few customers and the loss of one or more customers would not have a materially adverse effect upon the business of the banks. Management is not aware of any indications that the business of the banks or material portion thereof is, or may be, seasonal.

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REGULATION, SUPERVISION AND GOVERNMENT POLICY

Bank Holding Company

VFGI is registered as a bank holding company under the Federal Bank Holding Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and State Corporation Commission (“SCC”). As a bank holding company, VFGI is required to furnish to the Federal Reserve Board an annual report of its operations at the end of each fiscal year and to furnish such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board, FDIC and SCC also may conduct examinations of VFGI and/or its affiliates.

The Gramm-Leach-Bliley Act of 1999 (the “Act”) was enacted on November 12, 1999. The Act draws new lines between the types of activities that are financial in nature and permitted for banking organizations, and those activities that are commercial in nature and not permitted. The Act imposes Community Reinvestment requirements on financial service organizations that seek to qualify for the expanded powers to engage in broader financial activities and affiliations with financial companies that are permitted.

The Act creates a new form of financial organization called a financial holding company that may own bank’s, insurance companies and securities firms. A financial holding company is authorized to engage in any activity that is financial in nature, incidental to an activity that is financial in nature, or is a complimentary activity. These activities may include insurance, securities transactions, and traditional banking related activities. The Act establishes a consultative and cooperative procedure between the Federal Reserve and the Secretary of the Treasury for purposes of determination as to the scope of activities permitted by the Act.

A bank holding company must satisfy special criteria to qualify for the expanded powers authorized by the Act, including the maintenance of a well-capitalized and well-managed status for all affiliate banks and a satisfactory community reinvestment rating.

Capital Requirements

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory or possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2002, that the Company meets all capital adequacy requirements to which it is subject.

As of December 31, 2002, the most recent notification from the Federal Reserve Bank categorized the Company as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no conditions or events since notification that management believes have changed the institution’s category.

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Dividends

VFGI is a separate operating entity from its affiliates, and thus has liquidity needs that are funded primarily from the revenues of its affiliates. The parent company’s cash outflows consist of dividends to shareholders and unallocated corporate expenses. The main source of funding for the parent company is the dividends it receives from its banking and trust subsidiaries. Under the current supervisory regulation, prior approval from such agencies is required if the community bank pays cash dividends that exceed certain levels as defined During 2002, the banking subsidiaries and the non-bank subsidiary transferred $6.6 million to the Parent Corporation as working capital. As of December 31, 2002, the aggregate amount of additional unrestricted funds, which could be transferred from the banking subsidiaries to the Parent Corporation without prior regulatory approval totaled $25.9 million or 22.63% of the consolidated net assets.

Community Reinvestment Act

VFGI’s affiliate banks are subject to the requirements of the Community Reinvestment Act (CRA). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the needs of the local communities, including low and moderate income neighborhoods. Each bank’s efforts in meeting such goals are evaluated by regulatory agencies as defined above based on twelve assessment factors. Restrictions on operating activities may be imposed if unsatisfactory ratings are assessed.

LENDING ACTIVITIES

VFGI’s affiliate banks offer both commercial and consumer loans, but lending activity is generally focused on consumers and small to middle market businesses within the banks’ market region.

VFGI’s residential real estate loan portfolio (including home equity lines) represented approximately 31% of its total loan portfolio at December 31, 2002. The residential mortgage loans made by VFGI’s affiliate banks are made predominately for single family, owner-occupied residences within their market region. Residential mortgage loans offered by VFGI’s affiliate banks are either adjustable rate loans or fixed rate loans with 20 to 30 year amortization schedules that mature with a balloon payment on the third or fifth year anniversary of the loan. Collateral consists of the deed of trust on the financed property and the loan generally does not exceed 80% of the collateral value. In addition, VFGI’s affiliate banks sell into the secondary market permanent residential mortgage loans that conform to each agency’s underwriting guidelines. VFGI does not maintain the servicing rights on these sold loans.

The commercial real estate portfolio represents approximately 42% of the real estate portfolio. This category includes owner-occupied commercial loans collateralized by real estate. These loans are made at a maximum of 80% loan-to-value and are either fixed or adjustable rate loans. These loans are generally personally guaranteed by the principals of the business.

Approximately 9% of VFGI’s loan portfolio at December 31, 2002, was comprised of commercial loans. VFGI’s affiliate banks offer a variety of commercial loans within their market region, including revolving lines of credit, working capital loans, equipment financing loans, and letters of credit. Although VFGI’s affiliate banks typically look to the borrower’s cash flow as the principal source of repayment for such loans, assets, such as accounts receivable, inventory and equipment, secure many of the loans within this category. VFGI’s commercial loans generally bear a fixed rate of interest and many are made on a demand basis.

VFGI’s real estate construction portfolio historically has been a relatively small portion of the total loan portfolio. At December 31, 2002, construction loans represented 8% of the total loan portfolio. Generally, all construction loans are made to finance owner-occupied properties with permanent financing commitments in place. VFGI’s construction loans generally bear a floating rate of interest and mature in one year or less. Loan underwriting standards for such loans generally limit the loan amount to 75% of the finished appraised value of the project.

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Consumer loans were 8% of VFGI’s total loan portfolio at December 31, 2002. VFGI’s affiliate banks offer a wide variety of consumer loans, which include installment loans, credit card loans, and other secured and unsecured credit facilities. The performance of the consumer loan portfolio is directly tied to and dependent upon the general economic conditions in the banks’ respective market region.

Credit Policies and Procedures

VFGI has established guidelines governing, among other things, lending practices, credit analysis and approval procedures, and credit quality review.

VFGI’s loan approval policies provide for various levels of officer lending authority. When the aggregate outstanding loans to a single borrower exceed an individual officer’s lending authority, the loan request must be approved by an officer with a higher lending limit or by the bank’s loan review committee. Each bank’s loan review committee can make loans up to their legal lending limit. On a combined basis for all banks this was approximately $15 million at December 31, 2002. Borrower requests exceeding an individual affiliate bank’s legal lending limit will be made in participation with other affiliates, but only after review and approval by VFGI’s executive committee.

All loans to an individual borrower are reviewed each time the borrower requests a renewal or extension of any loan or requests an additional loan. All lines of credit are reviewed annually prior to renewal.

VFGI maintains its allowance for loan losses based on loss experience for each loan category over a period of years and adjusts the allowance for existing economic conditions as well as performance trends within specific areas, such as real estate and commercial. In addition, the affiliate banks periodically review significant individual credits and adjusts the allowance when deemed necessary. The allowance also is increased to support projected loan growth. Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Cash payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses.

An impaired loan is charged-off when management determines that the prospect of recovery of the principal of the loan has significantly diminished.

DEPOSITS

VFGI’s affiliate banks offer a number of programs to consumers and to small and middle market businesses at interest rates consistent with local market conditions.

VFGI’s affiliate banks control deposit flows primarily through pricing of deposits and, to a lesser extent, through promotional activities. VFGI’s affiliate banks establish deposit rates based on a variety of factors, including competitive conditions and liquidity needs. VFGI’s affiliate banks do not accept brokered deposits.

No material portion of the deposits of VFGI’s affiliate banks has been obtained from a single or a small group of customers, and the loss of any customer’s deposits or a small group of customers’ deposits would not have a material adverse effect on the business of VFGI’s affiliate banks.

ACCESS TO FILINGS

The Company’s Annual Report on Form 10-K, and previous filings on Form 10-Q and 8-K, are available at www.vfgi.net. A copy of the Company’s filings will be sent, without charge, to any shareholder upon written request to: Lee M. Kerns, Administrative Assistant, at 102 South Main Street, P. O. Box 71, Culpeper, Virginia 22701.

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Item 2. Properties

VFGI and its affiliates own or lease buildings that are used in the normal course of business. The Company’s headquarters is located at 102 S. Main Street in Culpeper, Virginia, but it also considers its office at 24 South Augusta Street in Staunton, Virginia as a headquarters location. Both buildings are owned by the Company. The Company’s affiliate banks own or lease twenty-eight branch locations in Virginia. Additional information regarding lease commitments can be found on page 37 of the 2002 Audited Financial Statements which is attached hereto as Exhibit 99.1 incorporated herein.

All of the Company’s properties are in good operating condition and are adequate for the Company’s present needs.

Item 3. Legal Proceedings

VFGI is party to various legal proceedings originating from the ordinary course of business. Management and counsel are of the opinion that settlement of these items will not have a material effect on the financial position of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

No matters have been submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company through a solicitation of proxies or otherwise.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

See “Stock and Dividend Information” on page 21 and “Shareholder Reference” on the inside back cover of the 2002 Annual Report which is attached hereto as Exhibit 13 incorporated by reference herein.

Item 6. Selected Financial Data

See “Selected Financial Data” on page 9 of the 2002 Annual Report which is attached hereto as Exhibit 13 incorporated by reference herein.

Item 7. Management’s Discussion and Analysis Of Financial Condition And Results Of Operations

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 10 through 21 of the 2002 Annual Report which is attached hereto as Exhibit 13 incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

See “Interest Rate Sensitivity” under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 20 and 21 of the 2002 Annual Report which is attached hereto as Exhibit 13 incorporated by reference herein.

ITEM 8. Financial Statements and Supplementary Data

Information with respect to the consolidated financial statements, notes and report of independent auditors can be found in the 2002 Annual Report which is attached hereto as Exhibit 13 incorporated by reference herein.

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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

PART III

ITEM 10. Directors and Executive Officers of the Registrant

Information with respect to Directors is incorporated by reference herein from pages 2 through 6 of the Company’s 2002 Proxy Statement, which is attached hereto as Exhibit 99, related to “Election of Directors.” The executive officers of the Company as of March 17, 2003 are as follows:

Name	Age	Current Position
Harry V. Boney, Jr.	69	Mr. Boney is Chairman of the Board of the Company. Mr. Boney previously served as President and Chief Executive Officer of Planters Bank & Trust. He has served as a director of the Company since 1975.
O.R. Barham, Jr.	52	Mr. Barham is President and Chief Executive Officer of the Company. Prior to January 18, 2002, he served as President and Chief Executive Officer of Virginia Commonwealth. He has served as a director of the Company since 1996.
Jeffrey W. Farrar	42	Mr. Farrar is Executive Vice President and Chief Financial Officer of Company. Mr. Farrar has served as Executive Vice President and Chief Financial Officer of Virginia Commonwealth Financial Corporation and its predecessor, Second National Financial Corporation, since 1996.

ITEM 11. Executive Compensation

Incorporated by reference herein from pages 8 through 11 of the Company’s 2002 Proxy Statement under the caption “Executive Compensation.”

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference hereto from page 3 and 6 of the Company’s 2002 Proxy Statement, under the caption “Security Interest of Certain Beneficial Owners and Management”, and page 8 of the Proxy Statement under the caption “Equity Compensation Plans”.

ITEM 13. Certain Relationships and Related Transactions

Incorporated by reference herein from page 13 of the Company’s 2002 Proxy Statement under the caption “Interest of Management and Board in Certain Transactions”.

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ITEM 14 – Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

PART IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports of Form 8-K

The following documents are filed as part of this report:

(a)(1) Financial Statements

Pages 22 through 43 of the 2002 Annual Report which is incorporated by reference herein.

(b)(2) Financial Statement Schedules

All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

(a)(3) Exhibits

The following exhibits either are filed as part of this Report or are incorporated herein by reference:

Exhibit No. 2	Agreement and Plan of Reorganization incorporated by reference to Agreement and Plan of Reorganization filed as Exhibit A to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216).
Exhibit No. 3.1	Articles of Incorporation incorporated by reference to Exhibit A to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216).
Exhibit No. 3.2	Bylaws incorporated by reference to Exhibit A to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216).
Exhibit No. 4	Stock Option Agreement is incorporated by reference to Exhibit B to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216).
Exhibit No. 4.1	Stock Incentive Plan is incorporated by reference to Form S-8 filed on February 26, 2002 (File No. 333-83410).
Exhibit No. 10	Employment contracts of certain officers incorporated by reference to Form S-4 Amendment No. 3 filed on December 3, 2001 (File No. 333-69216).

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Exhibit No. 11	Computation of per share earnings (incorporated by reference to note 1 of the consolidated financial statements incorporated by reference herein.
Exhibit No. 13	2002 Annual Report to Stockholders.
Exhibit No. 99	2002 Annual Proxy Statement.

(b) Current Reports on Form 8-K.

No reports on Form 8-K were required to be filed during the last quarter of 2002.

Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

Virginia Financial Group, Inc. Culpeper, Virginia	Virginia Financial Group, Inc. Culpeper, Virginia
/s/    O.R. BARHAM, JR.	/s/    JEFFREY W. FARRAR
O.R. Barham, Jr., President and Chief Executive Officer	Jeffrey W. Farrar, Executive Vice President and Principal Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities as of the dates indicated.

Signature	Capacity	Date
/s/    HARRY V. BONEY, JR.	Chairman of the Board of Directors	March 31, 2003
Harry V. Boney, Jr.
/s/    TAYLOR E. GORE	Director	March 31, 2003
Taylor E. Gore
/s/    LEE S. BAKER	Director	March 31, 2003
Lee S. Baker
/s/    BENHAM M. BLACK	Director	March 31, 2003
Benham M. Black
/s/    FRED D. BOWERS	Director	March 31, 2003

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Signature	Capacity	Date
Fred D. Bowers
/s/    E. PAGE BUTLER	Director	March 31, 2003
E. Page Butler
/s/    GREGORY L. FISHER	Director	March 31, 2003
Gregory L. Fisher
/s/    CHRISTOPHER M. HALLBERG	Director	March 31, 2003
Christopher M. Hallberg
/s/    JAN S. HOOVER	Director	March 31, 2003
Jan S. Hoover
/s/    W. ROBERT JEBSON, JR.	Director	March 31, 2003
W. Robert Jebson, Jr.
/s/    MARTIN F. LIGHTSEY	Director	March 31, 2003
Martin F. Lightsey
/s/    P.WILLIAM MOORE, JR.	Director	March 31, 2003
P. William Moore, Jr.
/s/    H. WAYNE PARRISH	Director	March 31, 2003
H. Wayne Parrish
/s/    THOMAS F. WILLIAMS, JR.	Director	March 31, 2003
Thomas F. Williams, Jr.

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Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, as the Chief Executive Officer and Chief Financial Officer of Virginia Financial Group, Inc., respectively, certify that the Annual Report on Form 10-K for the year ended December 31, 2002, which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Virginia Financial Group, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), and no purchaser or seller of securities or any other person shall be entitled to rely upon the foregoing certification for any purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.

/s/    O.R. BARHAM, JR.        

President and Chief Executive Officer

/s/    JEFFREY W. FARRAR        

Executive Vice President and Chief Financial Officer

CERTIFICATIONS

I, O. R. Barham, Jr., certify that:

1. I have reviewed this Annual Report on Form 10-K of Virginia Financial Group, Inc;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 we 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 annual 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 annual report (the “Evaluation Date”); and

c. presented in this annual 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 function):

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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 annual 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.

March 31, 2003

/s/    O. R. BARHAM, JR.        

O. R. Barham, Jr.

President and Chief Executive Officer

CERTIFICATIONS

I, Jeffrey W. Farrar, certify that:

1. I have reviewed this Annual Report on Form 10-K of Virginia Financial Group, Inc;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 we 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 annual 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 annual report (the “Evaluation Date”); and

c. presented in this annual 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 function):

d. 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

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e. 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 annual 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.

March 31, 2003

/s/    JEFFREY W. FARRAR        

Jeffrey W. Farrar

Executive Vice President and Chief Financial Officer

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EX-13

Building on Relationships

[GRAPHIC APPEARS HERE]

Virginia Financial Group, Inc.

Annual Report 2002

Community Locations

1.	Staunton
2.	Waynesboro
3.	Fishersville
4.	Stuarts Draft
5.	Verona
6.	Grottoes
7.	Lexington
8.	Natural Bridge
9.	Caroline
10.	Buena Vista
11.	Harrisonburg
12.	Madison
13.	Culpeper
14.	Orange
15.	Fredericksburg
16.	Stafford

[GRAPHIC APPEARS HERE]

Company Profile

     Virginia Financial Group, Inc. is a multi-bank holding company for financial enterprises serving individual and business customers in central, western and southern Virginia. Our three community banks—Planters Bank & Trust in Staunton, Second Bank & Trust in Culpeper and Virginia Heartland Bank in Fredericksburg—provide a full range of high quality retail and commercial banking products and services. Our fourth entity, Virginia Commonwealth Trust Company, offers wealth management, trust and estate-planning services through all three community banks. The size afforded by our combined assets of more than $1 billion enables us to provide sophisticated, technologically advanced products and services comparable to those of large money center banks, without sacrificing the hands-on, personal service which customers of our community banks have come to expect.

[GRAPHIC APPEARS HERE]

Total Assets
(in millions)
’99	$	889
’00	$	959
’01	$	1,041
’02	$	1,115
Total Deposits
(in millions)
’99	$	759
’00	$	815
’01	$	897
’02	$	960
Net Income
(in thousands)
’99	$	10,177
’00	$	11,114
’01	$	9,881
’02	$	12,335
Operating Income
(in thousands)
’99	$	10,177
’00	$	11,114
’01	$	11,241
’02	$	12,741

Financial Highlights

(in thousands)		2002			2001			Percent Increase (Decrease )
At year end
	Total assets	$	1,114,905		$	1,040,704			7.13	%
	Total loans		718,889			684,971			4.95	%
	Total deposits		959,822			897,459			6.95	%
	Total shareholders’ equity		114,371			106,707			7.18	%
For the year
	Net interest income	$	40,707		$	36,977			10.09	%
	Noninterest income		12,721			10,677			19.14	%
	Noninterest expense		35,115			32,081			9.46	%
	Net income		12,335			9,881			24.84	%
Per Common Share
	Book Value	$	15.94		$	14.64			8.88	%
	Net Income (Basic)	$	1.70		$	1.35			25.93	%
	Net Income (Diluted)	$	1.69		$	1.35			25.19	%
	Dividends	$	0.72		$	0.68			5.88	%
Performance Ratios
	Return on average assets*		1.19	%		1.14	%		4.39	%
	Return on average equity*		11.45	%		11.92	%		–3.94	%
	Net interest margin		4.30	%		4.23	%		1.65	%

*Excludes merger and integration charges

1

To Our Shareholders, Customers and Friends:

[PHOTO OF O. R. BARHAM, JR., PRESIDENT & CEO]

     Virginia Financial Group, Inc. turned in a strong performance in 2002, its first year in its present form. As the Financial Highlights table makes clear, we made gains in such key measures as assets, deposits, loans, net income, earnings per share, return on average assets and return on average equity, among others. We believe these results reflect the successful integration of our operating units’ separate cultures and systems into the overall holding company framework provided by Virginia Financial Group, Inc. (VFGI).

     Our success and good prospects for continuing growth were recognized in the marketplace as well, as our share price rose to $29.80 at year-end, a gain of 33.9% from the end of 2001. This combined with dividends of $.72 per share, amounted to a 37.2% rate of return for shareholders.

     At a time when the banking industry nationally is consolidating and Virginia’s largest banking institutions are being acquired by out-of-state interests, we are often asked whether we intend to remain independent, and whether we can prosper if we do. Our answer is: yes, we can remain independent, and we have in place a strategy that will enable us to thrive as an independent community banking enterprise.

     We do not aspire to size for its own sake, nor have we forgotten our roots in the countryside. We believe the future is bright for community banking institutions that can effectively serve the cities, towns and rural areas of central, western and southern Virginia that out-of-state banking giants all too often ignore. By effectively, we mean providing the hands-on, personal service that has long been the hallmark of our four banking entities, coupled with the sophisticated products and services and expanded lending capacity that our overall size makes possible.

     Our three banks and our trust company know their customers and their communities extremely well. They are an integral part of the social fabric of their communities, strong contributors of time and money to community activities and causes.

     Those characteristics are reinforced by another feature that our customers value highly—local control. Our banking institutions are locally run, with strong local managements and local boards of directors that have the authority to make decisions about such

2

We do not aspire to size for its own sake,
nor have we forgotten
our roots in the countryside.

[PHOTO OF HARRY V. BONEY, JR., CHAIRMAN]

fundamental matters as loans, loan pricing and interest rates in their own markets. We consider local control to be a key part of our strategy. We rely on our local management teams to be skillful and enterprising in figuring out what is best for their community and for the bank. Our management incentive programs are heavily keyed to the performance of each institution, not based solely on distant, corporate measurements. We want each of our institutions to retain its own identity, its special personality.

     One of our major achievements of 2002 was an upgrade of our core processing system, providing significant additional capacity for future growth, facilitating product enhancements and enabling all four of our institutions to operate on a single, common system. The new system allows all the back office functions to be handled centrally, letting our community bankers focus on serving the customer.

     At the corporate level, in addition to core processing, we provide general oversight, development and execution of strategic initiatives, planning and execution of acquisitions, handling of matters relating to our stock, and overall finance, internal audit, credit review and human resources functions.

     We intend to grow, but carefully. We are receptive to adding new community banks to our Virginia banking family and will consider potential acquisitions in the central, western and southern regions of the state, but not, for example, in heavily over-banked northern Virginia. Meanwhile, we are encouraging our local managements to find ways to expand north or south along the I-81, Route 29 and I-95 corridors by adding new branches to our 30-branch network.

     Our outlook for the future is distinctly positive. As a larger, albeit decentralized, enterprise, we can make larger loans to business customers while providing the same services as large banks; yet we retain and value the personal touch and longtime relationships that reflect community banking at its best. Our management teams are local, knowledgeable, and energetic and—with our blessing—filled with entrepreneurial spirit. We think that is a winning formula for VFGI and for the communities it is our privilege to serve. Accordingly—and particularly if the economy improves—we look for further growth and another strong performance in 2003.

/s/ O. R. B ARHAM, J R	/s/ H ARRY V. B ONEY, J R
O. R. Barham, Jr. President & CEO	Harry V. Boney, Jr. Chairman of the Board

3

The VFGI Family of Banks

We take care
of the people who
do business with us.

“We do 95% of our business with Planters. It’s a hometown bank that is very friendly to everyone who walks through the door. The people are professional, courteous and quick to respond. Processing is fast, and I can reach every mortgage lender directly, without going through the switchboard—that’s value-added service.

—”Melvin E. Sweeney
real estate developer
and president of
RE/MAX Advantage,
a real estate brokerage in
Staunton and Waynesboro

[PHOTO OF WILLIAM D. STEGALL, PRESIDENT & CEO]

[PHOTO OF H.C. STUART COCHRAN, CHAIRMAN]

Serving Its Communities First

     Planters Bank & Trust has played a central role in the business, financial and civic life of Staunton and the Shenandoah Valley since its founding in 1914. The largest of VFGI’s banks, Planters occupies a key strategic position at the center of a strong, stable and diversified regional economy. Planters’ 15 branches—with a 16th branch under construction in Fishersville, Virginia—provide world class banking products with a hometown, personal touch to commercial and individual customers. The bank has built a strong reputation through quality service, local decision-making and consistent, caring community leadership.

     Aided by a local television station, the bank recently completed a highly successful “Coats for Kids” campaign, in which bank employees collected over 3,000 winter coats for distribution to needy children. Planters established a $50,000 revolving fund that provides no-interest loans to nonprofit civic organizations, and has further demonstrated its commitment by sponsoring or contributing to programs for Big Brothers Big Sisters, the YMCA and the Arts Council of the Valley, among others.

[PHOTO OF BRENDA C. WRIGHT, VAULT TELLER]

4

The VFGI Family of Banks

As the region’s oldest community bank,
personal service is what banking is about.

“They do all my banking and I’m extremely happy with them. They’re friendly and efficient and know you by name, and they go beyond what is expected. They initiated a refinancing for the golf course that is saving us money. “ They are just really nice people.”

— Bobby Lewis
Vice President
Meadows Farms Golf Course
Locust Grove, Virginia

[PHOTO OF PATRICIA A. BANKS, ASSISTANT VICE PRESIDENT, BRANCH SALES & SERVICE MANAGER]

Building Relationships Through Quality and Service

     Second Bank & Trust has been serving commercial and individual customers in the piedmont region for more than a century. Headquartered in Culpeper, it operates seven branches in its traditional markets of Culpeper, Madison and Orange counties, where the bulk of its customers are located and where it ranks among the top three in market share of deposits. Moving south along the Route 29 corridor, where much of its future growth is expected, the bank has gained a foothold in the vibrant Charlottesville market. A tradition of superior personal service, coupled now with increased loan capacity and advanced products comparable to those offered by the biggest banks, are enabling the bank to continue to expand its strong customer base.

     Second Bank’s strong community role is exemplified by its 100 Club program, in which bank employees were encouraged to give 100 hours a year to community service of some kind. A year after the program’s June 2001 start, bank employees had contributed over 9,900 hours and raised large sums for community causes, making the bank the United Way’s second largest corporate participant in the region. The bank subsequently received the Culpeper Chamber of Commerce’s Sam Walton Award for service to customers, employees and the community, and Madison County’s 2002 Business of the Year Award for customer service.

[PHOTO OF CHRISTOPHER J. HONENBERGER, PRESIDENT & CEO]

[PHOTO OF CHARLES K. GYORY, CHAIRMAN]

5

The VFGI Family of Banks

The community sees Heartland as its community bank,
where lending decisions are made locally
—that’s powerful.

 “I’ve been with Heartland since it was founded, and all my company and personal accounts are with them. They know me, and I know them—I’m not just a number. They treat me like family.”

— Jim Berry
President and owner
B & H Wood Products, Inc.
Hartwood, Virginia

[PHOTO OF RONALD E. DAVIS, PRESIDENT]

[PHOTO OF EDWARD V. ALLISON, CHAIRMAN & CEO]

Successfully Serving A High-Growing Region

     Virginia Heartland Bank, serving commercial and individual customers in Fredericksburg and vicinity for 15 years, is strategically located in a fast-growing area where controlling growth is a contentious local issue. Within commuting distance of Washington but retaining its rural lifestyle, the region is particularly attractive to federal workers and employees of government contractors. Viewed as the area’s principal community bank, Virginia Heartland has a strong presence in the City of Fredericksburg and adjacent Spotsylvania County, and in Caroline County, after a smooth merger with a local savings bank. It also has a branch in Stafford County.

     In a crowded banking marketplace, the bank competes effectively by providing big-bank services cost-effectively and with a hometown, personal touch. It is also a strong and supportive participant in community affairs, and its officers and employees are actively involved in local charitable or civic activities and causes.

[PHOTO OF CANDY K. GILLETTE, SENIOR CUSTOMER SERVICE ASSOCIATE]

6

The VFGI Family of Banks

“I like their personal touch. When you do have an issue, you’re talking not to a computer but to a person. And it’s not someone in North Carolina, it’s someone who’s right here. They take care of your concerns.”

—Frederick J. Getty
Attorney
Lake of the Woods

[PHOTO OF J. QUINTIN MULLINS, PRESIDENT & CEO]

[PHOTO OF W. ROBERT JEBSON, JR., CHAIRMAN]

Providing Comprehensive Wealth Management Services

     Virginia Commonwealth Trust Company, the trust arm of VFGI, provides comprehensive wealth management services with a local touch to help customers—primarily individuals—build, manage, preserve and pass on their assets. For VFGI bank clients, as well as outside clients, the company provides financial and estate-planning advice, along with the full range of services needed to reach their goals. Its focus is on helping identify each client’s problem, finding a solution, selecting an account officer to execute it, and following up to assure that goals are achieved. This requires a team effort, starting with trained and experienced financial and estate planners and investment managers, and may include outside attorneys and accountants. Often clients appoint the company as trustee or administrator for personal, retirement or trust assets, or executor of an estate. The company’s hands-on service and strong local presence in its communities, including Fredericksburg, Harrisonburg and Charlottesville, have helped to boost asset volumes. Virginia Commonwealth Trust has more than $400 million in assets under administration, and $80 million in brokerage assets.

We’re in the advice business,
and that’s our focus for the future.

[PHOTO OF RICHARD T. HARRINGTON, VICE PRESIDENT & TRUST OFFICER]

7

Committed to Virginia

[GRAPHIC APPEARS HERE]

In Memoriam

Dr. Lewis P. Armstrong (1953-2003) was a distinguished Culpeper dentist and businessman, a leader in his community and his profession, and a 13-year member of the Board of Directors of Second Bank & Trust. His leadership and wise counsel will be missed.

[PHOTO OF JEFFREY W. FARRAR, EXECUTIVE VICE PRESIDENT & CFO]

Strengthening Corporate Governance

     VFGI took important steps in 2002 to assure that our organization and its banking enterprises continue to meet the highest standards of accuracy and integrity in financial reporting and corporate governance.

     Banking is one of the country’s most highly regulated industries. Our activities are overseen by an alphabet soup of agencies and regulators, including the Federal Reserve, FDIC, SEC, State Banking Commission, NASDAQ and FASB. While we have long prided ourselves on our prudent financial controls and governance practices, our approach has been proactive in light of recent corporate accounting scandals.

     We have created a Governance Committee of the Board of Directors to focus on governance issues, and established a Code of Ethics for directors to prevent any semblance of conflicts of interest. We have also developed a governance handbook to guide our directors and employees. We hope that these steps will enhance the confidence of our shareholders, customers and the public in the integrity and character of our enterprise and its dedicated employees.

Appropriate controls and straightforward financial reporting
build investor and customer confidence
in our company’s integrity.

8

Virginia Financial Group, Inc.
Selected Financial Data

The following is selected financial data for the five-year period ending December 31, 2002.

		Years Ended December 31,
(In thousands, except per share data)		2002			2001			2000			1999			1998
Statement of Operations Data:
	Interest Income	$	63,808		$	69,132		$	68,404		$	61,278		$	60,094
	Interest Expense		23,101			32,155			32,110			27,282			27,335
	Net Interest Income		40,707			36,977			36,294			33,996			32,759
	Provision for Loan Losses		1,602			1,378			1,366			1,937			2,242
	Total Noninterest Income		12,721			10,677			8,258			8,068			6,889
	Total Noninterest Expense		35,115			32,081			27,785			25,888			21,832
	Net Income		12,335			9,881			11,114			10,177			10,795
Performance Ratios:
	Return on Average Assets		1.15	%		1.00	%		1.21	%		1.19	%		1.36	%
	Return on Average Equity		11.09	%		9.48	%		11.29	%		10.87	%		12.24	%
	Net Interest Margin		4.30	%		4.23	%		4.39	%		4.46	%		4.55	%
	Efficiency Ratio(1)		61.97	%		61.87	%		61.40	%		59.10	%		53.55	%
Per Share Data:
	Net Income—Primary	$	1.70		$	1.35		$	1.51		$	1.38		$	1.46
	Net Income—Diluted		1.69			1.35			1.51			1.38			1.46
	Cash Dividends.		0.72			0.68			0.68			0.65			0.61
	Book Value		15.94			14.64			13.80			12.63			12.44
	Cash Dividend Payout Ratio		42.65	%		55.20	%		43.68	%		46.80	%		39.05	%
Balance Sheet Data:
	Assets	$	1,114,905		$	1,040,704		$	959,023		$	888,960		$	830,693
	Loans, net of Unearned Income		700,979			666,682			633,828			567,413			522,923
	Securities		299,262			267,496			241,847			243,213			240,710
	Deposits		959,822			897,459			815,137			758,702			712,203
	Stockholders’ Equity		114,371			106,707			100,886			93,308			91,869
Asset Quality Ratios:
	Total allowance for loan losses to total loans outstanding		1.31	%		1.24	%		1.16	%		1.15	%		1.10	%
	Nonperforming assets to year-end loans and other property owned		1.19	%		0.76	%		0.45	%		0.47	%		0.70	%

1) Efficiency ratio is computed by dividing noninterest expense, net of nonrecurring expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income

9

Virginia Financial Group, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides management’s analysis of the consolidated financial results of operations, financial condition, liquidity and capital resources of Virginia Financial Group, Inc. and its affiliates (VFGI). This discussion and analysis should be read in conjunction with the audited financial statements and footnotes appearing elsewhere in this report. Critical accounting policies discussed in Note 1 include securities, loans and the allowance for loan losses.

     In addition to historical information, Management’s Discussion and Analysis contains forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, or those anticipated. The risks and uncertainties that may affect VFGI include, but are not limited to: the growth in the economy, interest rate movements, timely development by VFGI of technology enhancements for its products and operating systems, the impact of competitive products and the internet, services and pricing, customer needs and banking legislation. When we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date thereof.

Results of Operations

Overview

Net income for 2002 totaled $12.3 million or $1.69 per diluted share, an increase of 24.8% over 2001 earnings of $9.9 million or $1.35 per diluted share. Excluding nonrecurring after tax merger and system integration expenses to convert to a common core processing system of $406 thousand in 2002 and $1.4 million in 2001 in connection with the merger of equals with Virginia Commonwealth Financial Corporation, 2002 earnings amounted to $12.7 million or $1.75 per diluted share, an increase of 13.3% over 2001 operating earnings of $11.2 million or $1.54 per diluted share.

     Returns on average equity, excluding merger and integration charges, were 11.45% in 2002, 10.79% in 2001 and 11.35% in 2000. Returns on average assets, excluding merger and integration charges, totaled 1.19% in 2002, 1.14% in 2001 and 1.12% in 2000.

     The following table provides a reconciliation of GAAP earnings to recurring earnings:

		Year Ended December 31,
(In thousands)		2002		2001		2000
GAAP earnings		$	12,335	$	9,881	$	11,114
Nonrecurring expenses (net of tax):
	Charter and system conversions		406		—		—
	Merger expenses		—		1,359		56
Recurring earnings		$	12,741	$	11,240	$	11,170

Net Interest Income

The primary source of VFGI’s traditional banking revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Earning assets include loans, securities, and federal funds sold. Interest bearing funds include deposits and borrowings. To compare the tax-exempt yields to taxable yields, amounts are adjusted to pretax equivalents based on a 35% Federal corporate income tax rate.

     Net interest income is affected by changes in interest rates, volume of interest bearing assets and liabilities, and the composition of those assets and liabilities. The “interest rate spread” and “net interest margin” are two common statistics related to changes in net interest income. The interest rate spread represents the difference between the yields earned on interest earning assets and the rates paid for interest bearing liabilities. The net interest margin is defined as the percentage of net interest income to average earning assets. Earning assets obtained through noninterest bearing sources of funds such as regular demand deposits and stockholders’ equity result in a net interest margin that is higher than the interest rate spread.

10

     The following table presents net interest income on a fully taxable equivalent basis, interest rate spread and net interest margin for the years ending December 31, 2002, 2001 and 2000. The next table analyzes the changes in net interest income for the periods broken down by their rate and volume components.

			Year ended December 31, 2002
Dollars in thousands			Average Balance		Income/ Expense	Average Rate
Assets
Loans receivable, net(1)			675,416		50,425	7.47	%
Investment securities
	Taxable		213,592		9,680	4.53	%
	Tax exempt		76,501		5,307	6.94	%
Total investments			290,093		14,987	5.17	%
Interest bearing deposits			399		7	1.75	%
Federal funds sold			29,193		468	1.60	%
Total earning assets			995,101		65,887	6.62.	% Tax Eql
Allowance for loan losses			(8,799	)
Total nonearning assets			82,777
Total assets			1,069,079
Liabilities and Stockholders’ Equity
Interest bearing deposits
	Interest checking		119,041		1,196	1.00	%
	Money market		137,401		2,368	1.72	%
	Savings		102,220		1,533	1.50	%
	Time deposits
		Less than $100,000	322,346		13,273	4.12	%
		$100,000 and more	85,695		3,646	4.25	%
Total interest bearing deposits			766,703		22,016	2.87	%
Federal funds purchased & repurchase agreements			18,077		266	1.47	%
Other borrowings			804		8	1.00	%
Federal Home Loan Bank advances			12,332		811	6.58	%
Total interest bearing liabilities			797,916		23,101	2.90	%
Demand deposits			155,061
Other liabilities			4,847
Total liabilities			957,824
Stockholders’ equity			111,255
Total liabilities and stockholders’ equity			1,069,079
Net interest income (tax equivalent)					42,786
Average interest rate spread						3.72	%
	Interest expense as a percent of average earning assets					2.32	%
	Net interest margin					4.30	%

					Year ended December 31, 2001
Dollars in thousands					Average Balance		Income/ Expense	Average Rate
Assets
Loans receivable, net(1)					659,234		55,777	8.46	%
Investment securities
			Taxable		160,611		9,467	5.89	%
			Tax exempt		66,509		4,615	6.94	%
Total investments					227,120		14,082	6.20	%
Interest bearing deposits					1,582		75	4.74	%
Federal funds sold					29,817		1,052	3.53	%
Total earning assets					917,753		70,986	7.73	% Tax Eql.
Allowance for loan losses					(7,721	)
Total nonearning assets					78,413
Total assets					988,445
Liabilities and Stockholders’ Equity
Interest bearing deposits
			Interest checking		100,024		1,777	1.78	%
			Money market		107,962		3,189	2.95	%
			Savings		89,307		2,442	2.73	%
		Time deposits
				Less than $100,000	330,659		18,275	5.53	%
				$100,000 and more	85,757		4,880	5.69	%
Total interest bearing deposits					713,709		30,563	4.28	%
Federal funds purchased & repurchase agreements					16,782		608	3.62	%
Other borrowings					641		22	3.43	%
Federal Home Loan Bank advances					14,333		962	6.71	%
Total interest bearing liabilities					745,465		32,155	4.31	%
Demand deposits					132,211
Other liabilities					6,555
Total liabilities					884,231
Stockholders’ equity					104,214
Total liabilities and stockholders’ equity					988,445
Net interest income (tax equivalent)							38,831
Average interest rate spread								3.42	%
	Interest expense as a percent of  average earning assets							3.50	%
	Net interest margin							4.23	%

			Year ended December 31, 2000
Dollars in thousands			Average Balance		Income/ Expense	Average Rate
Assets
Loans receivable, net(1)			608,967		53,909	8.85	%
Investment securities
	Taxable		178,497		10,819	6.06	%
	Tax exempt		62,474		4,437	7.10	%
Total investments			240,971		15,256	6.33	%
Interest bearing deposits			3,982		258	6.48	%
Federal funds sold			11,464		720	6.28	%
Total earning assets			865,384		70,143	8.11	% Tax Eql.
Allowance for loan losses			(7,008	)
Total nonearning assets			65,199
Total assets			923,575
Liabilities and Stockholders’ Equity
Interest bearing deposits
	Interest checking		92,932		2,141	2.30	%
	Money market		103,562		3,672	3.55	%
	Savings		82,771		2,555	3.09	%
	Time deposits
		Less than $100,000	318,570		17,540	5.51	%
		$100,000 and more	72,245		3,991	5.52	%
Total interest bearing deposits			670,080		29,899	4.46	%
Federal funds purchased & repurchase agreements			15,222		890	5.85	%
Other borrowings			531		31	5.84	%
Federal Home Loan Bank advances			19,079		1,290	6.76	%
Total interest bearing liabilities			704,912		32,110	4.56	%
Demand deposits			115,441
Other liabilities			4,819
Total liabilities			825,172
Stockholders’ equity			98,403
Total liabilities and stockholders’ equity			923,575
Net interest income (tax equivalent)					38,033
Average interest rate spread						3.55	%
	Interest expense as a percent of  average earning assets					3.71	%
	Net interest margin					4.39	%

(1) Includes nonaccrual loans

11

Virginia Financial Group, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

					2002 vs. 2001 Increase (Decrease ) Due to changes in:									2001 vs. 2000 Increase (Decrease) Due to changes in:
(Dollars in thousands)					Volume			Rate			Total			Volume			Rate			Total
Interest Income:
Loans					$	1,412		$	(6,764	)	$	(5,352	)	$	4,026		$	(2,158	)	$	1,868
Securities, taxable						712			(499	)		213			(1,061	)		(291	)		(1,352	)
Securities, tax-exempt						693			(1	)		692			276			(98	)		178
Interest bearing bank deposits						(68	)		—			(68	)		(183	)		—			(183	)
Federal funds sold						(22	)		(562	)		(584	)		457			(125	)		332
			Total Interest Income		$	2,727		$	(7,826	)	$	(5,099	)	$	3,515		$	(2,672	)	$	843
Interest Expense:
Time and savings deposits:
	Interest checking				$	452		$	(1,033	)	$	(581	)	$	182		$	(546	)	$	(364	)
	Money market					1,556			(2,377	)		(821	)		165			(648	)		(483	)
	Savings					428			(1,337	)		(909	)		253			(366	)		(113	)
	Time deposits
			Less than $100,000			(449	)		(4,553	)		(5,002	)		668			67			735
			$100,000 and more			(4	)		(1,230	)		(1,234	)		766			123			889
		Total time and savings deposits				1,983			(10,530	)		(8,547	)		2,034			(1,370	)		664
Federal funds and repurchase agreements						51			(393	)		(342	)		104			(386	)		(282	)
Federal Home Loan Bank advances						(132	)		(19	)		(151	)		(319	)		(9	)		(328	)
Other short term borrowings						8			(22	)		(14	)		9			(18	)		(9	)
				Total Interest Expense	$	1,910		$	(10,964	)	$	(9,054	)	$	1,828		$	(1,783	)	$	45
Net Interest Income					$	817		$	3,138		$	3,955		$	1,687		$	(889	)	$	798

Note: the combined effect on interest due to changes in both volume and rate, which cannot be separately identified, has been allocated proportionately to the change due to volume and the change due to rate.

     Tax equivalent net interest income in 2002 was $42.8 million compared to $38.8 million in 2001 and $38.0 million in 2000. VFGI has been able to increase its net interest income in 2002 versus 2001 primarily due to margin and spread improvement, whereas the increase in 2001 over 2000 was through an increase in average earning assets. The interest rate spread and net interest margin improved in 2002 as compared to 2001, and experienced compression in 2001 as compared to 2000. The average interest rate spread was 3.72% in 2002, up from 3.42% in 2001 versus 3.55% in 2000. The net interest margin was 4.30% in 2002, up from 4.23% in 2001 and down from 4.39% in 2000. Several factors influenced this change. First, VFGI was in an asset sensitive interest rate risk position during the period, and in a rapidly falling rate environment like that experienced in 2001, interest earning assets tend to reprice quicker than interest bearing liabilities, as a greater portion of assets are variable rate. Therefore, VFGI experienced a drop in both spread and margin in 2001 compared to 2000. As rates stabilized in 2002, VFGI’s cost of funds was able to absorb the rate declines and thus lowered more rapidly than asset yields, improving both spread and margin over 2001.

     Average earning assets increased $77.3 million to $995.1 million at December 31, 2002, an increase of 8.4% over $917.8 million in 2001. Average earning assets in 2001 increased 6.1% from $865.4 million in 2000. The increase in average earning assets can be attributed to loan and securities growth funded with retail deposit growth and short-term borrowings.

12

Noninterest Income

Noninterest income increased to $12.7 million in 2002, an increase of $2.0 million or 19.1% compared to 2001. For 2001, noninterest income increased to $10.7 million, an increase of $2.4 million or 29.3% compared to 2000.

     Service charges from deposit accounts increased to $4.3 million, an increase of $825 thousand or 23.7% from 2001. For 2001, service charges on deposit accounts increased to $3.5 million, an increase of $270 thousand or 8.4%. Increased fees associated with deposit growth and improved fee structure associated with new products accounted for this increase.

     Gain on sale of mortgage loans from mortgage banking activities increased to $3.2 million, an increase of $528 thousand or 20.1%. Mortgage banking income has been favorably influenced by rate and volume trends in the financial services industry, which has seen record volume in mortgage loan originations/refinancing. This volume is a direct result of lower interest rates in 2002 versus 2001 and 2001 versus 2000. This lower rate environment has also accelerated prepayment speeds.

Noninterest Expense

The following table presents the components of noninterest expense:

	2002 vs. 2001							2001 vs. 2000
(In thousands)	2002		2001		%			2001		2000		%
Compensation and employee benefits	$	20,019	$	17,624		13.6	%	$	17,624	$	15,596		13.0	%
Net occupancy		1,939		1,761		10.1	%		1,761		1,537		14.6	%
Supplies and equipment		3,457		3,177		8.8	%		3,177		3,660		–13.2	%
Data processing		959		1,081		–11.3	%		1,081		1,106		–2.3	%
Merger and integration costs		548		1,359		–59.7	%		1,359		56		100	%
Other		8,193		7,079		15.7	%		7,079		5,830		21.4	%
Total	$	35,115	$	32,081		9.5	%	$	32,081	$	27,785		15.5	%

     Commissions and fees from fiduciary activities associated with our trust and wealth management activities increased to $3.0 million in 2002, an increase of $110 thousand or 3.8% from 2001. 2001 fees of $2.9 million represented an increase of $636 thousand or 28.4% over 2000. The rate of revenue growth in 2002 was impacted by the broad decline in equity market valuations witnessed in 2002, which affected the valuation of assets under management. Brokerage services, which function as a division of the trust operations, experienced an increase in fees to $453 thousand in 2002, an increase of $121 thousand or 36.4% over 2001.

     Other operation income increased to $1.5 million in 2002, an increase of $233 thousand or 18.0% compared to 2001. For 2001, income was $1.3 million, a decrease of $35 thousand or 2.6% compared to 2000. The increase in 2002 is attributable to increased customer debit card usage, fees from cash management services and fees from noncustomer ATM charges

     Noninterest expenses increased to $35.1 million in 2002 an increase of $3.0 million or 9.5% associated primarily with increases in compensation and benefits. The increase in salaries and benefits during 2002 is attributable to the following factors:

• Merit increases for employees.

• Increased cost of $509 thousand associated with VFGI incentive plan initiated in 2002.

• Restricted share awards of $187 thousand which vested in connection with merger of equals with Virginia Commonwealth.

• Increased overtime and temporary help incurred as a result of efforts required to convert one bank and upgrade systems for two banks to a common platform system.

• Increases in employee benefit costs, particularly pension and health and welfare plans, consistent with the increase in health care cost trends nationwide.

     Noninterest expenses increased to $32.1 million in 2001, an increase of $4.3 million or 15.5% associated primarily with merger and merger related costs of $1.3 million in connection with the merger of equals with Virginia Commonwealth.

     Net occupancy expenses increased to $1.9 million in 2002, an increase of $178 thousand or 10.1% associated primarily with increased costs from branch openings, renovations to existing branches and increases associated with utilities.

     Included in 2002 merger and integration costs are nonrecurring integration expenses of $548 thousand consisting of costs associated with professional fees, termination fees related to service contracts and asset write-offs related to conversion of the banking subsidiaries into a common core processing system. VFGI expects to achieve net operating savings during 2003 from this system conversion and resulting reduction in workforce. Merger expenses in 2001 were almost exclusively professional fees associated with legal, accounting, investment banking and filing fees associated with the Virginia Commonwealth merger.

     Other operating expenses increased $1.1 million or 15.7% to $8.2 million in 2002, after increasing $1.2 million or 21.4% in 2001. Significant components in this line item include bank franchise taxes,

13

Virginia Financial Group, Inc
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

marketing and advertising, and postage, all of which experienced increases year to year due primarily to the growth of VFGI.

Income Taxes

For the year ended December 31, 2002, income taxes were $4.4 million, compared $4.3 million in 2001 and $4.3 million in 2000. VFGI’s effective tax rate for the period was 26.2% in 2002, 30.4% in 2001 and 27.8% in 2000. The increase in taxes in 2001 was attributable to $1.4 million in nondeductible merger expenses. The improvement in 2002 is also attributable to more effective use of tax-exempt securities.

Allowance for Loan Losses

VFGI’s affiliate Banks conduct an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review process generally begins with lenders identifying problem loans to be reviewed on an individual basis for impairment. In addition to loans identified by lenders, all commercial loans also meet the Banks’ criteria for individual impairment testing. Impairment testing includes consideration of the current collateral value of the loan, as well as any known internal or external factors that may affect collectibility. When a loan has been identified as impaired, then a specific reserve may be established based on the Banks’ calculation of the loss embedded in the individual loan. In addition to impairment testing, the Banks have a seven point grading system for each loan in the portfolio. The loans meeting the criteria for special mention, substandard, doubtful and loss, as well as, impaired loans are segregated from performing loans within the portfolio. Loans are then grouped by loan type (i.e. commercial, installment) and by risk rating (i.e. substandard, doubtful). Each loan type is assigned an allowance factor based on the associated risk, complexity and size of the individual loans within the particular loan category. Classified loans are assigned a higher allowance factor than nonrated loans within a particular loan type due to management’s concerns regarding collectibility or management’s knowledge of particular elements surrounding the borrower. Allowance factors grow with the degree of classification. Allowance factors used for unclassified loans are based on management’s analysis of charge-off history and management’s judgment based on the overall analysis of the lending environment including the general economic conditions. The total of specific reserves, the calculated reserve required for classified loans, by category, and the general reserves for each portfolio type is then compared to the recorded allowance for loan losses. This is the methodology used to determine the sufficiency of the allowance for loan losses and the amount of the provision for loan losses.

     The allowance for loan losses is an estimate of an amount, by management, to provide for losses inherent in the loan portfolio. Various factors, including charge-off experience, change in the mix and volume of loans, the level of under-performing loans, the ratio of outstanding loan balances to total loans and the perceived economic conditions in the primary trade area are taken into consideration in determining the amount of the provision for loan losses and the total amount of the loan loss reserve.

The following table summarizes activity in the allowance for loan losses for the years indicated.

				December 31,
(In thousands)				2002			2001			2000			1999			1998
Allowance for loan losses, January 1				$	8,266		$	7,383		$	6,550		$	5,750		$	5,965
		Loans Charged Off
			Real estate—construction		6			—			—			—			—
			Real estate—mortgage		200			414			95			21			713
			Commercial, financial and agricultural		330			143			55			400			973
			Consumer loans		427			546			565			317			942
			All other loans		—			—			—			562			—
		Total Loans Charged Off			963			1,103			715			1,300			2,628
	Recoveries
			Real estate—construction		—			—			—			—			—
			Real estate—mortgage		89			13			44			12			2
			Commercial, financial and agricultural		14			350			25			25			10
			Consumer loans		172			245			113			126			159
			All other loans		—			—			—			—			—
	Total Recoveries				275			608			182			163			171
	Net Charge-Off’s				688			495			533			1,137			2,457
	Provision for Loan Losses				1,602			1,378			1,366			1,937			2,242
Allowance for loan losses, December 31				$	9,180		$	8,266		$	7,383		$	6,550		$	5,750
Ratio of allowance for loan losses to total loans outstanding at end of year					1.31	%		1.24	%		1.16	%		1.15	%		1.10	%
Ratio of net charge offs (recoveries) to average loans outstanding during the year					0.10	%		0.08	%		0.09	%		0.21	%		0.49	%

14

     The reserve for loan losses was 1.31% of outstanding loans as of December 31, 2002. 1.24% as of December 31, 2001 and 1.16% as of December 31, 2000. Net charge-offs were $688 thousand during 2002. $495 thousand during 2001 and $533 thousand during 2000. The percentage of net charge-offs to year-end loans was 0.10% for 2002. 08% for 2001 and 0.09% for 2000. The balance of the reserve for loan losses was $9.2 million as of December 31, 2002, compared to $8.3 million in 2001 and $7.4 million in 2000. The increase in the allowance for loan losses as a percentage of loans during 2002 is attributable to increased levels of impaired loans from $5.9 million at December 31, 2001 to $8.3 million at December 31, 2002 (as described more fully in Note 6 of the Consolidated Financial Statements) and also due to general economic conditions.

     The following table summarizes the allocation of the allowance for loan losses by loan type.

(In thousands)		December 31,
			2002			2001			2000			1999			1998
Allocation of allowance for possible loan  losses, end of year
	Real estate—construction	$	319		$	415		$	454		$	48		$	168
	Real estate—mortgage		4,759			2,050			1,745			1,187			1,962
	Commercial, financial and agricultural		2,603			2,592			1,869			959			546
	Consumer Loans		710			2,004			1,558			1,305			471
	All Other Loans		47			65			—			8			12
	Unallocated		465			920			1,757			3,043			2,351
	Off balance sheet items		277			220			—			—			240
Total allowance for loan losses		$	9,180		$	8,266		$	7,383		$	6,550		$	5,750
Ratio of loans to total year-end loans
	Real estate—construction		8.13	%		9.27	%		7.98	%		5.13	%		8.16	%
	Real estate—mortgage		73.61	%		68.73	%		68.41	%		70.61	%		65.79	%
	Commercial, financial and agricultural		9.14	%		11.64	%		11.14	%		10.54	%		11.07	%
	Consumer Loans		7.80	%		9.01	%		11.05	%		13.08	%		14.15	%
	All Other Loans		1.32	%		1.35	%		1.42	%		0.64	%		0.83	%
			100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

     The largest allowance allocation is to the real estate-mortgage loan portfolio, which represents approximately 51.8% of the allowance balance at December 31, 2002. The increase in 2002 is a result of risk rating changes which necessitated an increased allocation. The real estate—mortgage category represents 73.6% of total loans outstanding, and 42% of this category is a nonhomogeneous portfolio consisting of loans collateralized by commercial real estate.

     The following table presents information concerning the aggregate amount of nonperforming assets.

(In thousands)	December 31,
	2002			2001			2000			1999			1998
Nonaccrual loans	$	940		$	3,185		$	1,873		$	1,463		$	2,646
Troubled-debt restructurings		6,547			1,307			—			—			—
Real estate owned		894			547			1,009			1,230			1,041
Total nonperforming assets	$	8,381		$	5,039		$	2,882		$	2,693		$	3,687
Loans past due 90 days accruing interest	$	104		$	121		$	936		$	853		$	1,639
Nonperforming assets to total assets		0.75	%		0.48	%		0.30	%		0.30	%		0.44	%
Nonperforming assets to year-end loans and other property owned		1.19	%		0.76	%		0.45	%		0.47	%		0.70	%

15

Virginia Financial Group, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

     Nonperforming assets consist of VFGI’s nonaccrual loans, troubled-debt restructurings, and real estate owned. Loans are generally placed on nonaccrual status when the collection of principal and interest is ninety days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. For those loans, which are carried on nonaccrual status, interest is recognized on a cash basis. At December 31, 2002, total nonperforming assets totaled $8.4 million, an increase of $3.3 million from 2001. The increase is due to the restructuring of $5.2 million in loans during 2002 and the reduction of $2.2 million in nonaccrual loans. All restructured loans are performing as agreed. The decrease in nonaccrual loans is primarily the result of two larger credits that moved out of nonaccrual status during 2002. One credit paid off and the other has performed according to terms for much of 2002.

     As of December 31, 2002, VFGI had no potential problem loans not reflected in nonperforming assets in which management has serious doubts regarding the borrowers ability to comply with the present loan repayment terms.

16

Financial Condition

Securities

The following table shows the maturities of available for sale debt and equity securities at amortized cost as of December 31, 2002 and approximate weighted average yields of such securities. Yields on states and political subdivision securities are shown on a tax equivalent basis, assuming a 35% federal income tax rate. VFGI attempts to maintain diversity in its portfolio, maintain durations that are consistent with its asset/liability management and hold a significant allocation of securities in states and political subdivisions that provide tax benefits. Please see Note 4 to the Consolidated Financial Statements for further information on gross unrealized gains and losses on both securities being held to maturity and securities available for sale.

(Dollars in thousands)		Book Value		Market Value		Weighted Average Maturity		Weighted Average TE Yield
US Treasury Securities
	Within one year	$	1,001	$	1,008		.16 years		5.03	%
	After one year to five years		9,089		9,802		2.86 years		5.21	%
	After five years to ten years		—		—
	After ten years		—		—
	Total		10,090		10,810		2.59 years		5.19	%
Federal Agencies
	Within one year	$	43,925	$	44,282		.29 years		2.88	%
	After one year to five years		68,054		70,935		2.37 years		4.18	%
	After five years to ten years		—		—
	After ten years		—		—
	Total		111,979		115,217		1.55 years		3.67	%
Collateralized Mortgage Obligations
	Within one year	$	6,626	$	6,688		.35 years		2.22	%
	After one year to five years		13,649		14,039		1.99 years		4.86	%
	After five years to ten years		—		—
	After ten years		—		—
	Total		20,275		20,727		1.45 years		4.00	%
Mortgage Backed Securities
	Within one year	$	14	$	14		.83 years		6.41	%
	After one year to five years		3,191		3,307		3.48 years		5.34	%
	After five years to ten years		11,048		11,921		7.07 years		4.81	%
	After ten years		13,560		13,573		19.11 years		5.77	%
	Total		27,813		28,815		12.53 years		5.34	%
State and Municipals
	Within one year	$	2,354	$	2,400		.61 years		6.44	%
	After one year to five years		24,771		26,095		2.95 years		6.48	%
	After five years to ten years		57,868		60,668		7.18 years		6.40	%
	After ten years		10,684		11,302		13.47 years		7.05	%
	Total		95,677		100,465		6.62 years		6.49	%
Corporate Bonds
	Within one year	$	5,492	$	5,557		.43 years		6.44	%
	After one year to five years		8,544		9,069		2.72 years		5.41	%
	After five years to ten years		1,506		1,595		5.40 years		5.27	%
	After ten years		—		—
	Total		15,542		16,221		2.17 years		5.76	%
Total Fixed Income Securities
	Within one year	$	59,412	$	59,949		.14 years		3.31	%
	After one year to five years		127,298		133,247		1.53 years		4.89	%
	After five years to ten years		70,422		74,184		3.75 years		6.13	%
	After ten years		24,244		24,875		7.19 years		6.34	%
	Total		281,376		292,255		2.28 years		5.00	%
Equity Securities			2,950		2,750
Restricted Stock			3,634		3,634
Other Securities			1,377		1,377
Total Securities		$	289,337	$	300,016

17

Virginia Financial Group, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

     There is no issuer of securities in which the aggregate book value of that issuer, other than securities of the U.S. Treasury, U.S. Government agencies or corporations, exceeds 10% of stockholders, equity.

Loan Portfolio

At December 31, 2002, loans, net of unearned income and the allowance for loan losses, totaled $691.8 million, an increase of $33.4 million or 5.1% from $658.4 million in 2001. The commercial real estate portfolio, which is a component of the real estate—mortgage portfolio, experienced strong growth during the period. This portfolio amounted to $295.8 million at December 31, 2002 and now represents 42% of the total portfolio. At December 31, 2002, off balance sheet unused loan commitments and standby letters of credit amounted to $171.5 million. These commitments may be secured or unsecured. On December 31, 2002, VFGI had no concentration of loans to any one industry in excess of 10% of its loan portfolio.

    The following table summarizes the loan receivable portfolio by loan type:

December 31,
(In thousands)	2002			2001			2000			1999			1998
Real estate—construction	$	57,032		$	61,899		$	50,654		$	29,171		$	42,752
Real estate—mortgage		516,512			458,795			434,258			401,286			344,504
Commercial, financial and agricultural		64,146			77,672			70,709			59,909			57,971
Consumer loans		54,738			60,180			70,128			74,329			74,099
All other loans		9,233			9,041			9,009			3,647			4,361
Total loans before deduction of unearned income		701,661			667,587			634,758			568,342			523,687
Less: Unearned Income		(682	)		(905	)		(930	)		(929	)		(764	)
Total loans before allowance for loan losses		700,979			666,682			633,828			567,413			522,923
Less: allowance for loan losses		(9,180	)		(8,266	)		(7,383	)		(6,550	)		(5,750	)
Net loans	$	691,799		$	658,416		$	626,445		$	560,863		$	517,173

     The following tables set forth the maturity of the loan portfolio as of December 31, 2002:

(In thousands)	One year or less		After one but less than  five years		After five years		Total
Real estate—construction	$	35,686	$	11,612	$	9,734	$	57,032
Real estate—mortgage		61,800		161,006		293,706		516,512
Commercial, financial and agricultural		24,661		31,526		7,959		64,146
Consumer loans		9,647		40,412		4,679		54,738
All other loans		2,465		1,723		5,045		9,233
Total loans(1)	$	134,259	$	246,279	$	321,123	$	701,661

(1) Excluding loans held for sale and before deduction of unearned income

For maturities over one year:
	Fixed rates	$	370,873
	Variable rates		196,529
		$	567,402

Deposits

Deposits at December 31, 2002 amounted to $959.8 million, an increase of $62.4 million or 6.9% from $897.5 million in 2002. Funds provided by the increase in deposits allowed VFGI to fund its balance sheet growth with retail deposits, limit the use of short term assets and higher cost borrowings, and better leverage its capital base in 2002. Noninterest bearing deposits increased by $24.6 million or 16.7% in 2002, which helped offset the drop in asset yields during the period. The over all cost of deposit funds decreased to 2.87% in 2002, compared to 4.28% in 2001 and 4.46% in 2000.

18

The following table illustrates average outstanding deposits and rates paid.

(In thousands)			2002					2001					2000
			Amount		Rate			Amount		Rate			Amount		Rate
Noninterest bearing demand deposits			$	155,061		—		$	132,211		—		$	115,441		—
Interest bearing deposits:
	Interest checking			119,041		1.01	%		100,024		1.78	%		92,932		2.30	%
	Money market			137,401		1.72	%		107,962		2.95	%		103,562		3.55	%
	Savings			102,220		1.50	%		89,307		2.73	%		82,771		3.09	%
	Time deposits:
		Less than $100,000		322,346		4.12	%		330,659		5.53	%		318,570		5.51	%
		$100,000 and more		85,695		4.25	%		85,757		5.69	%		72,245		5.52	%
Total interest bearing  deposits				766,703		2.87	%		713,709		4.28	%		670,080		4.46	%
Total average deposits			$	921,764				$	845,920				$	785,521

Maturities of time deposits of $100,000 and over:

(In thousands)
At December 31, 2002
Within three months	$	12,069
Three to six months		9,510
Six to twelve months		11,573
Over twelve months		54,941
	$	88,093

Capital Adequacy

The management of capital in a regulated financial services industry must properly balance return on equity to stockholders while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Additionally, capital management must also consider acquisition opportunities that may exist, and the resulting accounting treatment. VFGI’s capital management strategies have been developed to provide attractive rates of returns to stockholders, while maintaining its “well-capitalized” position at each of the banking subsidiaries.

     The primary source of additional capital to VFGI is earnings retention, which represents net income less dividends declared. During 2002, VFGI retained $7.1 million, or 57.3%, of its net income. Stockholders’ equity also increased as a result of $4.3 million in other comprehensive income, which relates primarily to unrealized gains on securities available-for-sale.

     During the first quarter of 2002, the Board of Directors of VFGI authorized the repurchase of up to 365,000 shares of its outstanding common stock. Through December 31, 2002, approximately 130,000 shares have been repurchased under this program at an average price of $31.15.

     VFGI and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on VFGI and the subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, VFGI and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require VFGI and its banking subsidiaries to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. Management believes, as of December 31, 2002, and 2001 that VFGI and the subsidiary banks met all minimum capital adequacy requirements to which they are subject and are categorized as “well capitalized.” There are no conditions or events since the notification that management believes have changed the subsidiary banks’ category.

Liquidity

Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. These events may occur daily or other short-term intervals in the normal operation of the business. Experience helps management predict time cycles in the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits, quality of assets, economy of market served, concentrations of business and industry, competition, and VFGI’s overall financial condition. VFGI’s primary source of liquidity is cash, due from banks, Federal funds sold and securities in our available for sale portfolio. In addition, the Banks have substantial lines of credit from their correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank of Atlanta to support liquidity as conditions dictate.

     The liquidity of the parent company also represents an important aspect of liquidity management. The parent company’s cash outflows consist of dividends to shareholders and unallocated corporate expenses. The main source of funding for the parent company is the dividends it

19

Virginia Financial Group, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

receives from its banking and trust subsidiaries. During 2002, the banking subsidiaries and the nonbank subsidiary transferred $6.6 million to the Parent Corporation as working capital. As of December 31, 2002, the aggregate amount of additional unrestricted funds, which could be transferred from the banking subsidiaries to the Parent Corporation without prior regulatory approval totaled $25.9 million or 22.63% of the consolidated net assets.

     In the judgment of management, VFGI maintains the ability to generate sufficient amounts of cash to cover normal requirements and any additional needs, which may arise, within realistic limitations.

Interest Rate Sensitivity

Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of an organization. These risks involve interest rate risk, foreign currency exchange risk, commodity price risk and equity market price risk. VFGI’s primary market risk is interest rate risk. Interest rate risk is inherent because as a financial institution, VFGI derives a significant amount of its operating revenue from “purchasing” funds (customer deposits and borrowings) at various terms and rates. These funds are then invested into earning assets (loans, leases, investments, etc.) at various terms and rates. This risk is further discussed below.

     Equity market risk is not a significant risk to VFGI as equity investments on a cost basis comprise less than 1% of corporate assets. VFGI does not have any exposure to foreign currency exchange risk or commodity price risk.

     Interest rate risk is the exposure to fluctuations in VFGI’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specified time period as a result of scheduled maturities and repayment and contractual interest rate changes.

     The primary objective of VFGI’s asset/liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate, yet is not essential to VFGI’s profitability. Thus the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at a tolerable level.

     Management endeavors to control the exposures to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The corporate and bank subsidiaries asset/liability committees are responsible for these decisions. VFGI primarily uses the securities portfolios and FHLB advances to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives. At present, the use of off-balance sheet instruments is not significant.

     The committees operate under management policies defining guidelines and limits on the level of risk. These policies are approved by the Boards of Directors.

     VFGI uses simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of VFGI’s interest rate risk exposure. These modeling techniques involve assumptions and estimates that inherently cannot be measured with complete precision. Key assumptions in the analyses include maturity and repricing characteristics of both assets and liabilities, prepayments on amortizing assets, other imbedded options, nonmaturity deposit sensitivity and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of VFGI’s interest rate risk position over time.

Earnings at Risk

Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of VFGI’s shorter-term interest rate risk. The analysis utilizes a “static” balance sheet approach. The measurement date balance sheet composition (or mix) is maintained over the simulation time period with maturing and repayment dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied to modify volumes and pricing under the various rate scenarios. These include prepayment assumptions on mortgage assets, the sensitivity of nonmaturity deposit rates, and other factors deemed significant.

     The simulation analysis results are presented in the following table. These results, as of December 31, 2002, indicate that VFGI would expect net interest income to increase over the next twelve months by 1.5% assuming an immediate upward shift in market interest rates of 200 basis points and to decrease by 6.9% if rates shifted downward in the same manner. This profile reflects an asset sensitive position and is well within the guidelines set by policy.

Value at Risk

The net present value analysis provides information on the risk inherent in the balance sheet that might not be taken into account in the simulation analysis due to the shorter time horizon used in that analysis. The net present value of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.

20

     The net present value analysis results are presented in the graph. These results as of December 31, 2002 indicate that the net present value would decrease 1.8% assuming an immediate upward shift in market interest rates of 200 basis points and to decrease7% if rates shifted downward in the same manner. The risk position of VFGI is within the guidelines set by policy.

Net Interest Income Projections				Present Value Equity
Changes in Basis Points	% Change			Changes in Basis Point		%Change
–200		–6.9	%		–200	–.7	%
0		–0	–		0	–0	–
200		1.5	%		200	–1.8	%

Virginia Financial Group, Inc.
Stock and Dividend Information

     On January 22, 2002, the Company’s stock began trading on the Nasdaq National Market, and currently trades under the trading symbol VFGI. Prior to that date, shares of Company Common Stock traded on the OTC Bulletin Board and thus were not traded on a national or regional exchange. Trading was generally as a result of private negotiation. Listed below are the high and low prices for the common stock and dividends paid for the last eight quarters ended December 31, 2002.

	Sales Price								Dividends Per Share
	2002				2001				2002		2001
	High		Low		High		Low
1st Quarter	$	22.95	$	20.15	$	29.50	$	22.00	$	0.18	$	0.17
2nd Quarter		32.79		22.05		26.50		22.00		0.18		0.17
3rd Quarter		33.39		27.60		25.25		20.50		0.18		0.17
4th Quarter		33.34		28.50		24.00		20.50		0.18		0.17

21

Virginia Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2002 and 2001

(Dollars in Thousands)			2002		2001
Assets
Cash and due from banks		$	44,790	$	42,454
Federal funds sold			26,270		20,908
Interest bearing deposits in banks			487		343
Securities (market value: 2002, $300,016; 2001, $267,805)			299,262		267,496
Loans held for sale			17,228		17,384
Loans, net of allowance for loan losses, 2002, $9,180; 2001, $8,266			691,799		658,416
Bank premises and equipment, net			22,089		20,703
Interest receivable			5,618		5,655
Core deposit intangibles			1,708		1,866
Other real estate owned			894		547
Other assets.			4,760		4,932
	Total assets.	$	1,114,905	$	1,040,704
Liabilities and Stockholders’ Equity
Liabilities
Noninterest bearing		$	171,412	$	146,850
Interest bearing			788,410		750,609
	Total deposits	$	959,822	$	897,459
Federal funds purchased and securities sold under agreement to repurchase			19,155		16,930
Short-term borrowings			1,040		1,052
Federal Home Loan Bank advances			12,220		12,300
Interest payable			1,928		2,579
Other liabilities			6,369		3,677
Commitments and contingent liabilities			—		—
	Total liabilities	$	1,000,534	$	933,997
Stockholders’ Equity
Preferred stock; no par value; 5,000,000 shares authorized: no shares issued and outstanding:		$	—	$	—
Common stock: $5 par value; 25,000,000 shares authorized; 2002: 7,176,741 shares issued and outstanding; 2001: 7,287,269 shares issued and outstanding			35,884		36,436
Surplus			8,143		11,329
Retained earnings			64,134		57,060
Accumulated other comprehensive income			6,210		1,882
	Total stockholders’ equity	$	114,371	$	106,707
	Total liabilities and stockholders’ equity	$	1,114,905	$	1,040,704

See Notes to Consolidated Financial Statements

22

Virginia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Years Ended December 31, 2002

(Dollars in Thousands, except per share data)			2002		2001			2000
Interest Income
Interest and fees on loans			$	50,170	$	55,525		$	53,728
Interest on deposits in other banks				7		75			258
Interest on investment securities:
	Taxable			655		641			3,050
	Tax-exempt			—		—			1,527
Interest and dividends on securities available for sale:
	Taxable			8,692		8,406			7,521
	Tax-exempt			3,502		3,046			1,352
	Dividends			314		387			248
Interest income on federal funds sold				468		1,052			720
		Total interest income	$	63,808	$	69,132		$	68,404
Interest Expense
Interest on deposits			$	22,016	$	30,563		$	29,899
Interest on federal funds purchased and securities sold under agreements to repurchase				266		608			890
Interest on FHLB advances				811		962			1,290
Interest on short-term borrowings				8		22			31
		Total interest expense	$	23,101	$	32,155		$	32,110
		Net interest income	$	40,707	$	36,977		$	36,294
Provision for loan losses				1,602		1,378			1,366
		Net interest income after provision for loan losses	$	39,105	$	35,599		$	34,928
Noninterest Income
Service charges on deposit accounts			$	4,300	$	3,475		$	3,205
Commissions and fees from fiduciary activities				2,988		2,878			2,242
Investment fee income				453		332			541
Other operating income				1,524		1,291			1,326
Gain (loss) on sale of fixed assets				11		(84	)		—
Gain on sale of securities available for sale				231		219			151
Gain (loss) on sale of other real estate owned				55		(65	)		(284	)
Gain on sale of mortgage loans				3,159		2,631			1,077
		Total noninterest income	$	12,721	$	10,677		$	8,258
Noninterest Expense
Compensation and employee benefits			$	20,019	$	17,624		$	15,596
Net occupancy expense				1,939		1,761			1,537
Supplies and equipment expenses				3,457		3,177			3,660
Data processing				959		1,081			1,106
Merger and integration expenses				548		1,359			56
Other operating expense				8,193		7,079			5,830
		Total noninterest expense	$	35,115	$	32,081		$	27,785
		Income before income taxes	$	16,711	$	14,195		$	15,401
Provision for income taxes				4,376		4,314			4,287
		Net income	$	12,335	$	9,881		$	11,114
Earnings per share, basic			$	1.70	$	1.35		$	1.51
Earnings per share, assuming dilution			$	1.69	$	1.35		$	1.51

See Notes to Consolidated Financial Statements.

23

Virginia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Years Ended December 31, 2002

(Dollars in Thousands)				2002			2001			2000
Cash Flows from Operating Activities
	Net income			$	12,335		$	9,881		$	11,114
	Adjustments to reconcile net income to net cash provided by operating  activities:
	Depreciation and amortization				2,620			2,372			2,283
	Provision for loan losses				1,602			1,378			1,366
	Write-downs of other real estate				—			30			—
	Deferred tax benefit				(584	)		(401	)		(394	)
	Pension expense				257			112			32
	(Gain) loss on other real estate owned				(55	)		65			284
	(Gain) loss on sale of fixed assets				(11	)		84			—
	(Gain) on sale of securities available for sale				(231	)		(219	)		(151	)
	Gain on sale of mortgage loans				(3,159	)		(2,631	)		(1,077	)
	Proceeds from sale of mortgage loans				169,298			153,595			57,586
	Origination of mortgage loans for sale				(165,983	)		(157,868	)		(57,875	)
	Amortization of security premiums and accretion of discounts, net				500			294			(179	)
	Changes in assets and liabilities:
		Decrease (increase) in interest receivable			37			1,437			(583	)
		Decrease (increase) in other assets			23			564			(468	)
		(Decrease) increase in interest payable			(651	)		(894	)		1,064
		Increase in other liabilities			857			793			583
			Net cash provided by operating activities	$	16,855		$	8,592		$	13,585
Cash Flows from Investing Activities
	Proceeds from maturities and calls of investment securities			$	750		$	15,815		$	10,029
	Proceeds from maturities and principal payments of securities available for sale				86,813			86,921			14,575
	Proceeds from sales and calls of securities available for sale				39,001			14,890			6,655
	Purchases of investment securities				—			(2,619	)		(1,463	)
	Purchases of securities available for sale				(151,546	)		(136,887	)		(24,771	)
	Net increase in loans				(35,676	)		(33,667	)		(71,569	)
	Proceeds from sale of fixed assets				65			188			—
	Purchase of premises and equipment				(4,248	)		(4,010	)		(2,357	)
	Proceeds from sale of other real estate				774			685			712
	Additions to other real estate				(375	)		—			—
	(Increase) in cash surrender value of life insurance				(68	)		(6	)		(35	)
	Purchase of other assets				—			(127	)		(443	)
			Net cash used in investing activities	$	(64,510	)	$	(58,817	)	$	(68,667	)

See Notes to Consolidated Financial Statements.

24

Virginia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Three Years Ended December 31, 2002

(Dollars in Thousands)			2002			2001			2000
Cash Flows from Financing Activities
	Net increase in demand, money market and savings deposits		$	74,317		$	78,670		$	16,602
	Net (decrease) increase in certificates of deposit			(11,954	)		3,652			39,831
	Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase			2,225			(1,565	)		4,474
	Net (decrease) increase in short-term borrowings			(12	)		284			(139	)
	Proceeds from Federal Home Loan Bank advances			—			—			12,000
	Principal payments on Federal Home Loan Bank advances			(80	)		(5,080	)		(12,100	)
	Acquisition of common stock			(4,033	)		(793	)		(1,479	)
	Proceeds from exercise of stock options			130			159			—
	Restricted common stock issued			187			—			—
	Cash paid in lieu of fractional shares			(22	)		—			(19	)
	Cash dividends paid			(5,261	)		(5,107	)		(5,084	)
		Net cash provided by financing activities	$	55,497		$	70,220		$	54,086
	Increase (decrease) in cash and cash equivalents			7,842			19,995			(996	)
Cash and Cash Equivalents
	Beginning			63,705			43,710			44,706
	Ending		$	71,547		$	63,705		$	43,710
Supplemental Disclosures of Cash Flow Information
	Cash payments for:
		Interest	$	23,752		$	33,050		$	31,047
		Income taxes	$	5,075		$	4,510		$	4,420
Supplemental Schedule of Noncash Activities
	Other real estate acquired in settlement of loans		$	691		$	318		$	468
	Unrealized gain on securities available for sale		$	7,031		$	2,548		$	4,616
	Transfer of securities from held to maturity to available for sale		$	—		$	69,646		$	—
	Restricted common stock issued		$	187		$	—		$	—
	Minimum pension liability adjustment		$	(372	)	$	—		$	—

See Notes to Consolidated Financial Statements.

25

Virginia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Years Ended December 31, 2002

(Dollars in Thousands)				Common Stock			Capital Surplus			Retained  Earnings			Accumulated  Other  Comprehensive Income (Loss)			Comprehensive Income			Total
Balance, December 31, 1999				$	36,942		$	12,955		$	46,256		$	(2,845	)				$	93,308
Comprehensive income:
	Net income				—			—			11,114			—		$	11,114			11,114
		Other comprehensive income, net of tax:
			Unrealized holding gains arising during the period (net of tax, $1,621)		—			—			—			—			3,146			—
			Reclassification adjustment (net of tax, $51)		—			—			—			—			(100	)		—
			Other comprehensive income		—			—			—			3,046		$	3,046			3,046
		Total comprehensive income			—			—			—			—		$	14,160			—
	Cash dividends				—			—			(5,084	)		—						(5,084	)
	Cash paid in lieu of shares				(1	)		(18	)		—			—						(19	)
	Repurchase of common stock				(380	)		(1,099	)		—			—						(1,479	)
Balance, December 31, 2000				$	36,561		$	11,838		$	52,286		$	201					$	100,886
Comprehensive income:
	Net income				—			—			9,881			—		$	9,881			9,881
		Other comprehensive income, net of tax:
			Unrealized holding gains arising during the period (net of tax, $941)		—			—			—			—			1,826			—
			Reclassification adjustment (net of tax, $74)		—			—			—			—			(145	)		—
			Other comprehensive income		—			—			—			1,681		$	1,681			1,681
		Total comprehensive income			—			—			—			—		$	11,562			—
	Cash dividends				—			—			(5,107	)		—						(5,107	)
	Exercise of stock options				69			90			—			—						159
	Repurchase of common stock				(194	)		(599	)		—			—						(793	)
Balance, December 31, 2001				$	36,436		$	11,329		$	57,060		$	1,882					$	106,707
Comprehensive income:
	Net income										12,335					$	12,335			12,335
		Other comprehensive income, net of tax:
			Unrealized holding gains arising during the period (net of tax, $2,542)		—			—			—			—			4,720			—
			Reclassification adjustment (net of tax, $81)		—			—			—			—			(150	)		—
			Minimum pension liability adjustment (net of tax of $130)		—			—			—			—			(242	)		—
			Other comprehensive income		—			—			—			4,328		$	4,328			4,328
		Total comprehensive income			—			—			—			—		$	16,663			—
	Cash dividends				—			—			(5,261	)		—						(5,261	)
	Issuance of common stock				42			145			—			—						187
	Exercise of stock options				49			81			—			—						130
	Cash paid in lieu of shares				(4	)		(18	)		—			—						(22	)
	Repurchase of common stock				(639	)		(3,394	)		—			—						(4,033	)
	Balance, December 31, 2002			$	35,884		$	8,143		$	64,134		$	6,210					$	114,371

See Notes to Consolidated Financial Statements.

26

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands, except per share data)

Note 1. Significant Accounting Policies

General

Virginia Financial Group, Inc. (the “Corporation”) is a Virginia multi-bank holding company headquartered in Culpeper and Staunton, Virginia. The Corporation owns Second Bank & Trust and its subsidiary, Second Service Company; Virginia Heartland Bank and its subsidiaries, Virginia Heartland Service Corporation and Caroline Financial Services Corporation; Planters Bank & Trust Company of Virginia and its subsidiary, Planters Insurance Agency, Inc.; and Virginia Commonwealth Trust Company. The consolidated statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated.

     The Corporation, through its member banks, provides a full array of banking services through twenty eight retail offices serving the counties of Augusta, Culpeper, Orange, Madison, Rockbridge, Rockingham, Spotsylvania, Caroline and Stafford. Among such services are those traditionally offered by banks including commercial and consumer demand and time deposit accounts, mortgage, commercial and consumer loans. The Corporation also provides a network of automated transaction locations, phone banking and a transactional internet banking product.

     Virginia Commonwealth Trust Company provides comprehensive wealth management, financial and estate-planning services through all three community banks.

     In June 2002, all branches of Caroline Savings Bank, a former banking subsidiary of the Corporation, were merged into Virginia Heartland Bank.

Risks and Uncertainties

In its normal course of business, the Corporation encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Corporation is subject to interest rate risk to the degree that its interest bearing liabilities mature or reprice more rapidly or on a different basis than its interest-earning assets. Credit risk is the risk of default on the Corporation’s loan portfolio that results from the borrowers’ inability or unwillingness to make contractually-required payments. Market risk reflects changes in the value of collateral underlying loans receivable, securities and the valuation of real estate held by the Corporation.

     The determination of the allowance for loan losses and the valuation of real estate are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that, as of December 31, 2002, the allowance for loan losses and the valuation of real estate are adequate based on information currently available. A worsening or protracted economic decline or substantial increase in interest rates would increase the likelihood of losses due to credit and market risks and could create the need for substantial increases in the allowance for loan losses.

     The Corporation is subject to the regulations of various regulatory agencies, which can change significantly from year to year. In addition, the Corporation undergoes periodic examinations by regulatory agencies, which may subject it to further changes based on the regulators’ judgments about information available to them at the time of their examinations.

Basis of Presentation

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America and to accepted practice within the banking industry. The following is a description of the more significant of those policies and practices.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

     Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans

The Corporation, through its banking subsidiaries, grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Corporation’s market area.

     Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

     The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Installment loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

     All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-

27

Virginia Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in Thousands, except per share data)

recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

     The Corporation’s affiliate Banks conduct an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review process generally begins with lenders identifying problem loans to be reviewed on an individual basis for impairment. In addition to loans identified by lenders, all commercial loans also meet the Banks’ criteria for individual impairment testing. Impairment testing includes consideration of the current collateral value of the loan, as well as any known internal or external factors that may affect collectibility. When a loan has been identified as impaired, then a specific reserve may be established based on the Bank’s calculation of the loss embedded in the individual loan. In addition to impairment testing, the Banks have a seven point grading system for each loan in the portfolio. The loans meeting the criteria for special mention, substandard, doubtful and loss, as well as, impaired loans are segregated from performing loans within the portfolio. Loans are then grouped by loan type (i.e. commercial, installment) and by risk rating. Each loan type is assigned an allowance factor based on the associated risk, complexity and size of the individual loans within the particular loan category. Classified loans are assigned a higher allowance factor than nonrated loans within a particular loan type due to management’s concerns regarding collectibility or management’s knowledge of particular elements surrounding the borrower. Allowance factors grow with the degree of classification. Allowance factors used for unclassified loans are based on management’s analysis of charge-off history and management’s judgment based on overall analysis of the lending environment including the general economic conditions. The total of specific reserves, the calculated reserve required for classified loans, by category, and the general reserves for each portfolio type is then compared to the recorded allowance for loan losses. This is the methodology used to determine the sufficiency of the allowance for loan losses and the amount of the provision for loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

     A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Loans Held For Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate.

Bank Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives ranging from three years to thirty-nine years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Software is amortized over three years. Depreciation and amortization are recorded on the straight-line method.

     Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate. Gains and losses on routine dispositions are reflected in current operations.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Retirement Plans

The VCFC affiliates, Second Bank & Trust and Virginia Heartland Bank and their subsidiaries, and Virginia Commonwealth Trust Company have a noncontributory, defined benefit pension plan covering all employees meeting certain age and service requirements. The Corporation computes the net periodic pension cost of the plan in accordance with FASB No. 87, “Employers’ Accounting for Pensions.”

     The VFC affiliates, Planters Bank & Trust Company of Virginia and its subsidiary, have a defined contribution retirement plan which covers substantially all full-time salaried employees. Contributions are at the discretion of the Board of Directors.

28

Stock Compensation Plan

At December 31, 2002, the Corporation has a stock-based employee compensation plan which is described more fully in Note 11. The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion 25. Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the 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 Corporation had applied the fair value recognition provisions of FASB Statement No. 123. Accounting for Stock-Based Compensation, to stock-based compensation.

			2002			2001			2000
Net income, as reported		$	12,335		$	9,881		$	11,114
Deduct: Total stock-based employee compensation expense determined based on fair value for all awards			(10	)		(197	)		(99	)
Pro forma net income		$	12,325		$	9,684		$	11,015
Earnings per share:
	Basic—as reported	$	1.70		$	1.35		$	1.51
	Basic—pro forma	$	1.70		$	1.33		$	1.50
	Diluted—as reported	$	1.69		$	1.35		$	1.51
	Diluted—pro forma	$	1.69		$	1.32		$	1.49

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common stock had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and restricted stock and are determined using the treasury method.

Dividend Reinvestment Plan

The Corporation has in effect a Dividend Reinvestment Plan, which provides an automatic conversion of dividends into common stock for enrolled stockholders. It is based on the stock’s fair market value on each dividend record date, and allows for voluntary contributions to purchase stock.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one day periods.

Trust Assets

Securities and other property held by the Virginia Commonwealth Trust Company in a fiduciary or agency capacity are not assets of the Corporation and are not included in the accompanying consolidated financial statements.

Other Real Estate

Real estate acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of the loan balance or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation are included in other operating expenses.

Deposit Intangibles

The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years. Amortization expense charged to operations was $158 thousand in 2002, and $157 thousand in 2001 and 2000.

Advertising

The Corporation follows the policy of charging the costs of advertising to expense as incurred. Advertising expense of $519 thousand, $444 thousand, and $388 thousand were incurred in 2002, 2001 and 2000, respectively.

Reclassifications

Certain reclassifications have been made to prior period balances to conform to the current year presentation.

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets.

Recent Accounting Pronouncements

In December 2001, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others, to reconcile and conform the accounting and financial reporting provisions established by various AICPA industry audit guides. This Statement is effective for annual and interim financial statements issued for fiscal years beginning after

29

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)

December 15, 2001, and did not have a material impact on the Corporation’s consolidated financial statements.

     On March 13, 2002, the Financial Accounting Standard Board determined that commitments for the origination of mortgage loans that will be held for sale must be accounted for as derivatives instruments, effective for fiscal quarters beginning after April 10, 2002. The Corporation enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding. Such rate lock commitments on mortgage loans to be sold in the secondary market are considered derivatives. Accordingly, these commitments, including any fees received from the potential borrower, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, also considers the difference between current levels of interest rates and the committed rates. The cumulative effect of adopting Statement No. 133 for rate lock commitments as of December 31, 2002, was not material. The Corporation originally adopted Statement No. 133, Accounting for Derivative Instruments and Hedging Activities on January 1, 2001.

     In April 2002, the Financial Accounting Standards Board issued Statement 145, Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The amendment to Statement 13 eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002, with early application encouraged.

     In June 2002, the Financial Accounting Standards Board issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recognition of a liability, when incurred, for costs associated with an exit or disposal activity. The liability should be measured at fair value. The provisions of the Statement are effective for exit or disposal activities initiated after December 31, 2002.

     Effective January 1, 2002, the Corporation adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, Statement 142 requires that acquired intangible assets (such as core deposit intangibles) be separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their estimated useful life. Branch acquisition transactions were outside the scope of the Statement and therefore any intangible asset arising from such transactions remained subject to amortization over their estimated useful life.

     In October 2002, the Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement amends 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 to branch acquisitions if such transactions meet the definition of a business combination. The provisions of the Statement do not apply to transactions between two or more mutual enterprises. In addition, the Statement amends Statement No. 144, Accounting for the Impairment of Long-Lived Assets, to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used.

     The adoption of Statement No. 145, 146 and 147 did not have a material impact on the Corporation’s consolidated financial statements.

     The Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of Statement No. 123, in December 2002. The Statement amends Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about the effects of stock options in interim financial information. The amendments to Statement No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The amendments to APB No. 28 are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Early application is encouraged for both amendments. The Corporation continues to record stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees, and has not adopted the alternative methods allowable under Statement No. 148.

Note 2. Business Combination

On January 18, 2002, the Corporation effected a business combination with Virginia Commonwealth Financial Corporation (VCFC) by exchanging approximately 3,307,786 shares of its common stock for all of the common stock of VCFC. VCFC was the holding company for Second Bank and Trust, Virginia Heartland Bank, Caroline Savings Bank and Virginia Commonwealth Trust Company. Immediately following the merger, the Corporation changed its name from Virginia Financial

30

Corporation to Virginia Financial Group, Inc. The combination has been accounted for as a pooling of interests and, accordingly, all prior financial statements have been restated to include Virginia Commonwealth Financial Corporation. The results of operations of the separate companies for periods prior to the combination are summarized as follows:

	Total Assets		Net Interest  Income		Net Income
As of and for the year ended December 31, 2001
Virginia Financial Corporation	$	535,531	$	18,433	$	4,903
Virginia Commonwealth Financial Corporation		505,173		18,544		4,978
	$	1,040,704	$	36,977	$	9,881
As of and for the year ended December 31, 2000
Virginia Financial Corporation	$	499,802	$	18,653	$	6,203
Virginia Commonwealth Financial Corporation		459,221		17,641		4,911
	$	959,023	$	36,294	$	11,114

Note 3. Restrictions on Cash

To comply with Federal Reserve Regulations, the subsidiary banks are required to maintain certain average reserve balances. The daily average reserve requirement was $10.9 million and $13.3 million for December 31, 2002 and 2001, respectively.

Note 4. Securities

The amortized cost and estimated fair value of the securities being held to maturity, with gross unrealized gains and losses, as of December 31, 2002 and 2001, are as follows:

	2002
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value
State and municipal	$	7,050	$	754	$	—	$	7,804

		2001
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
U. S. Treasury		$	2,497	$	92	$	—		$	2,589
State and municipal			7,789		234		(17	)		8,006
	Total	$	10,286	$	326	$	(17	)	$	10,595

     The amortized cost and estimated fair value of the securities being held to maturity as of December 31, 2002, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

		2002
		Amortized Cost		Estimated Fair Value
Due in one year or less		$	225	$	231
Due after one year through five years			2,737		3,017
Due after five years through ten years			3,125		3,372
Due after ten years			963		1,184
	Total	$	7,050	$	7,804

		2002
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
U. S. Treasury		$	10,090	$	720	$	—		$	10,810
U. S. Government agencies			111,979		3,240		(2	)		115,217
State and municipals			88,627		4,059		(25	)		92,661
Corporate bonds			15,542		689		(10	)		16,221
Collateralized mortgage obligations			20,275		464		(12	)		20,727
Mortgage backed securities			27,813		1,002		—			28,815
Equity securities			2,950		200		(400	)		2,750
Restricted stock			3,634		—		—			3,634
Other			1,377		—		—			1,377
	Total	$	282,287	$	10,374	$	(449	)	$	292,212

31

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)

		2001
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
U. S. Treasury		$	8,459	$	435	$	—		$	8,894
U. S. Government agencies			46,562		1,313		(22	)		47,853
State and municipals			78,493		1,091		(491	)		79,093
Corporate bonds			12,964		242		(67	)		13,139
Collateralized mortgage obligations			48,632		173		(132	)		48,673
Mortgage backed securities			32,351		359		(133	)		32,577
Equity securities			2,596		443		(340	)		2,699
Restricted stock			2,182		—		—			2,182
Other			22,100		—		—			22,100
	Total	$	254,339	$	4,056	$	(1,185	)	$	257,210

     The amortized cost and estimated fair value of the securities available for sale as of December 31, 2002, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

		2002
		Amortized Cost		Estimated Fair Value
Due in one year or less		$	59,173	$	59,704
Due after one year through five years			121,370		126,923
Due after five years through ten years			56,249		58,891
Due after ten years			9,721		10,118
Equity securities			2,950		2,750
Mortgage-backed securities			27,813		28,815
Restricted stock			3,634		3,634
Other			1,377		1,377
	Total	$	282,287	$	292,212

     Proceeds from sales and calls of securities available for sale were $39.0 million, $14.9 million and $6.7 million for the years ended December 31, 2002, 2001 and 2000 respectively. Gross gains of $275 thousand, $230 thousand and $213 thousand and gross losses of $44 thousand, $11 thousand and $62 thousand were realized on these sales during 2002, 2001 and 2000 respectively. The tax provision applicable to these net realized gains amounted to $81 thousand, $74 thousand, and $51 thousand, respectively.

     There were no sales of securities held to maturity during 2002, 2001 or 2000.

     The book value of securities pledged to secure deposits and for other purposes amounted to $42.7 million and $41.9 million at December 31, 2002 and 2001, respectively.

Note 5. Loans

A summary of the balances of loans follows:

				December 31,
				2002		2001
Mortgage loans on real estate:
	Construction and land development			$	57,032	$	61,899
	Farmland				3,004		2,698
	1-4 family residential				217,673		248,877
	Multifamily, nonresidential and junior liens				295,835		207,220
Loans to farmers (except those secured by real estate)					1,655		2,615
Commercial and industrial loans (except those secured by real estate)					62,491		75,057
Consumer installment loans					54,738		60,180
Deposit overdrafts					1,283		1,480
All other loans					7,950		7,561
		Total loans		$	701,661	$	667,587
	Less: Unearned income				682		905
			Allowance for loan losses		9,180		8,266
		Net loans		$	691,799	$	658,416

Note 6. Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 were as follows:

		2002			2001			2000
Balance, beginning		$	8,266		$	7,383		$	6,550
Recoveries			275			608			182
Provisions for loan losses			1,602			1,378			1,366
	Total	$	10,143		$	9,369		$	8,098
Loans charged off			(963	)		(1,103	)		(715	)
Balance, ending		$	9,180		$	8,266		$	7,383

32

     Information about impaired loans as of and for the years ended December 31, 2002, 2001 and 2000, is as follows:

		2002		2001		2000
Impaired loans for which an allowance has been provided		$	8,299	$	5,936	$	4,299
Impaired loans for which no allowance has been provided			89		542		288
	Total impaired loans	$	8,388	$	6,478	$	4,587
Allowance provided for impaired loans, included in the allowance for loan losses		$	1,836	$	1,155	$	1,319
Average balance in impaired loans		$	7,977	$	4,842	$	4,427
Interest income recognized on impaired loans		$	579	$	342	$	323
Interest income recognized on a cash basis on impaired loans		$	553	$	344	$	317

     Nonaccrual loans excluded from the impaired loan disclosure under FASB 114 amounted to $443 thousand, $814 thousand and $1.8 million at December 31, 2002, 2001 and 2000, respectively. If interest on these loans had been accrued, such income would have approximated $37 thousand, $121 thousand and $204 thousand for 2002, 2001 and 2000, respectively.

     Loans past due greater than 90 days and still accruing interest were $104 thousand, $121 thousand and $1.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Note 7. Bank Premises and Equipment

A summary of the cost and accumulated depreciation and amortization of bank premises, equipment and software follows:

	2002		2001
Land	$	3,897	$	3,429
Buildings and leasehold improvements		17,718		17,400
Furniture, equipment and software		18,981		16,086
Construction in progress		35		21
Total	$	40,631	$	36,936
Less accumulated depreciation and amortization		18,542		16,233
Total	$	22,089	$	20,703

     Depreciation and amortization expense amounted to $2.5 million in 2002, $2.2 million in 2001 and $2.1 million in 2000.

Note 8. Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was $88.1 million and $87.1 million, respectively.

     At December 31, 2002, the scheduled maturities of time deposits were as follows:

2003	$	178,187
2004		63,793
2005		77,047
2006		37,484
2007		45,161
Total	$	401,672

Note 9. Short-Term Borrowings

Second Bank & Trust has an agreement with the Federal Reserve Bank where it can borrow funds deposited by customers. This agreement calls for variable interest and is payable on demand. U.S. Government securities are pledged as collateral. The targeted threshold maximum amount available under this agreement is $1.0 million. The balance outstanding at December 31, 2002 and 2001 was $1.0 million and $1.1 million, respectively.

     The Corporation, through its subsidiary banks, has uncollateralized, unused lines of credit totaling $58.7 million with nonaffiliated banks at December 31, 2002.

     Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. Additional collateral may be required based on the fair value of the underlying securities.

     Federal funds purchased generally mature within one to four days from the transaction date. There were no federal funds purchased at December 31, 2002. At December 31, 2001, there were federal funds purchased of $500 thousand.

Note 10. Federal Home Loan Bank Advances

The Corporation’s fixed-rate, long-term debt of $12.2 million at December 31, 2002 matures through 2010. At December 31, 2002, the interest rates on fixed-rate, long-term debt ranged from 4.93% to 7.07%. One advance totaling $220 thousand at December 31, 2002 requires quarterly principal payments totaling $80 thousand annually plus interest. The remainder of the advances requires quarterly interest payments with principal due upon maturity. The average interest rate was 6.38% at December 31, 2001 with a balance outstanding of $12.3 million.

     The banking subsidiaries have available a combined $123.7 million line of credit with the Federal Home Loan Bank of Atlanta. Advances on the line are secured by a blanket lien on the 1 to 4 family dwelling loan portfolios of Second Bank & Trust, Virginia Heartland Bank and Planters Bank & Trust Company of Virginia, which totaled $217.7 million at December 31, 2002.

33

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)

     The contractual maturities of long-term debt are as follows:

2003	$	3,080
2004		80
2005		4,060
2010		5,000
Total	$	12,220

Note 11. Stock-Based Compensation

In 2002, the Corporation adopted an incentive stock option plan under which options may be granted to key employees and directors for purchase of the Corporation’s common stock. The plan reserves for issuance 750,000 shares of the Corporation’s common stock with a ten-year term. The plan requires that options be granted at an exercise price equal to at least 100% of the fair market value of the common stock on the date of the grant. Such options vest over a five-year period. The options will expire in no more than ten years after the date of grant.

     Options associated with VCFC were adjusted to reflect the merger exchange. VCFC’s plan was terminated through the merger and the options are reflected in the Corporation’s plan.

     The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2002 and 2000, respectively: price volatility of 31.40% and 23.80%, risk-free interest rates of 4.12% and 6.49%, dividend rate of 2.30% and 3.52% and expected lives of 10 years. There were no options granted in 2001.

     A summary of the status of the plan at December 31, 2002, 2001 and 2000 and changes during the years ended on those dates is as follows:

	2002					2001					2000
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at beginning of year		63,093		$	14.32		88,371		$	13.95		16,032	$	11.35
Granted		14,600			31.48		—			—		72,339		14.55
Forfeited		—			—		(11,570	)		—		—		—
Exercised		(9,818	)		13.58		(13,708	)		11.67		—		—
Outstanding at end of year		67,875		$	18.12		63,093		$	14.32		88,371	$	13.95
Exercisable at end of year		53,275					63,093					40,141
Weighted-average fair value per option of options granted during the year	$	10.86				$	—				$	4.09

     A further summary about the options outstanding and exercisable at December 31, 2002 is as follows:

Options Outstanding				Options Exercisable
Weighted Average Remaining Contractual Life	Range of Exercise Price	Number Outstanding		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
9 years	$28.95–$32.80		14,600	$	31.48		—	$	—
7.75 years	$13.90–$14.99		52,583	$	14.51		52,583	$	14.51
5 years	$10.82		692	$	10.82		692	$	10.82

34

Note 12. Employee Benefit Plans

The Corporation and its banking subsidiaries maintain several tax qualified and nonqualified employee benefit plans for employees, which benefit plans are described below.

     The VCFC affiliates have a noncontributory pension plan which conforms to the Employee Retirement Income Security Act of 1974 (ERISA). The amount of benefits payable under the plan is determined

     Information about the plan follows:

	2002			2001			2000
Change in Benefit Obligation
Benefit obligation, beginning	$	3,470		$	3,147		$	3,198
Service cost		320			259			192
Interest cost		254			229			209
(Gain) due to Plan Amendment		(56	)		—			(172	)
Actuarial (gain) loss		156			89			(82	)
Benefits paid		(261	)		(254	)		(198	)
Benefit obligation, ending	$	3,883		$	3,470		$	3,147
Change in Plan Assets
Fair value of plan assets, beginning	$	3,772		$	4,210		$	4,110
Actual return on plan assets		(471	)		(184	)		298
Benefits paid		(261	)		(254	)		(198	)
Fair value of plan assets, ending	$	3,040		$	3,772		$	4,210
Funded status	$	(843	)	$	302		$	1,063
Unrecognized net actuarial gain		895			(46	)		(687	)
Unrecognized net obligation at transition		(43	)		(86	)		(129	)
Unrecognized prior service cost		135			227			263
Prepaid benefit cost included in other assets	$	144		$	397		$	510
Amount Recognized in Consolidated Balance Sheets
Prepaid benefit cost	$	144		$	397		$	510
Accrued benefit liability		(507	)		—			—
Intangible asset		135			—			—
Deferred tax asset		130			—			—
Accumulated other comprehensive income, net		242			—			—
Net amount recognized	$	144		$	397		$	510
Components of Net Periodic Benefit Cost
Service cost	$	320		$	259		$	192
Interest cost		254			229			209
Expected return on plan assets		(313	)		(350	)		(341	)
Amortization of prior service cost		36			36			36
Amortization of net obligation at transition		(43	)		(43	)		(43	)
Recognized net actuarial gain		—			(19	)		(17	)
Net periodic benefit cost	$	254		$	112		$	36
Weighted-Average Assumptions as of December 31
Discount rate		7.00	%		7.50	%		7.50	%
Expected return on plan assets		8.50	%		8.50	%		8.50	%
Rate of compensation increase		4.00	%		5.00	%		5.00	%

by an employee’s period of credited service. The amount of normal retirement benefit will be determined based on a Pension Equity Credit formula. The employee receives credits based on their age and years of service. The plan provides for early retirement for participants with five years of service and the attainment of age 55. A participant who terminates employment with 2 or more years of service will be entitled to a benefit. The benefits are payable in single or joint/survivor annuities as well as a lump sum payment upon retirement or separation of service.

     The VFC affiliates have a defined contribution retirement plan. Contributions amounted to $473 thousand, $518 thousand, and $455 thousand in 2002, 2001 and 2000, respectively.

     The VCFC affiliates have a 401(k) Savings Plan. The plan’s primary purpose is to allow employees to save for retirement on a pre-tax basis. The plan provides for matching contributions by the Corporation equal to 50% of the first 6% of salary reduction contributions made by the employee. The plan also provides for discretionary contributions to be made by the Corporation and allocated to participant accounts in proportion to the participant’s compensation. The Corporation contributed a matching contribution of $158 thousand, $150 thousand and $106 thousand for the years ended December 31, 2002, 2001 and 2000, respectively. Effective January 1, 2003, all employees of the Corporation are eligible to participate in the 401 (k) Savings Plan with matching contributions equal to 5% of the first 6% of salary reduction contributions made by the employee.

     The VCFC affiliates have an Employee Stock Ownership Plan (“ESOP”) under section 401(e) of the Internal Revenue Code. Funds contributed by the Corporation to the plan are allocated to participants in the plan using the ratio in which the compensation of each participant bears to the total compensation of all the participants. Effective October 17, 2002, the ESOP plan was terminated and participants will receive distributions in 2003.

     The Corporation has a Nonqualified Directors Deferred Compensation Plan. This plan allows for the deferral of pre-tax income associated with payment of director fees. Directors may elect to defer all or a portion of their annual directors fees. Monthly board fees are contributed directly to a trust with various investment options, and are held until such time the director is entitled to receive a distribution.

     The Corporation also has a nonqualified Executive Deferred Compensation Plan for key employees. Pursuant to the plan, the President and any other employees selected by the Board of Directors may defer receipt of a certain amount of pre-tax income and cash incentive compensation for a period of no less than three years or until retirement, subject to termination of employment or certain other events, including an imminent change in control. The Board may make contributions at its discretion. The deferred compensation charged to expense totaled $25 thousand, $11 thousand and $12 thousand for the three years ended December 31, 2002, respectively.

35

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)

     The Corporation implemented an incentive plan in 2002 under which employees receive compensation directly related to affiliate and Corporation profitability and budget performance. Compensation under the plan is calculated under pre-determined guidelines set by the Holding Company Board of Directors. The amount charged to operations was $1.3 million in 2002. Amounts paid under affiliate profit sharing plans for 2001 and 2000 were $582 thousand and $435 thousand, respectively.

     Virginia Heartland Bank has entered into supplemental retirement agreements with the Bank’s former Chairman and President which provide benefits payable over fifteen years to begin at age sixty and sixty-five, respectively. The agreement calls for Virginia Heartland Bank to pay each $45,000 for fifteen years upon retirement. The present value of the estimated liability under the agreements is being accrued using a discount rate of 10% and 7.5%, respectively, ratably over the remaining years to the date of eligibility for benefits. The deferred compensation expense charged to expense totaled $149 thousand, $16 thousand and $38 thousand for the three years ended December 31, 2002.

Note 13. Income Taxes

The components of the net deferred tax asset (liability), included in the Consolidated Balance Sheets, are as follows:

		December 31,
		2002			2001
Deferred tax assets:
	Allowance for loan losses	$	2,607		$	2,157
	Nonaccrual loan interest		50			29
	Deferred compensation		497			384
	Minimum pension liability		130			—
	Other		32			150
		$	3,316		$	2,720
Deferred tax liabilities:
	Accrued pension asset	$	50		$	136
	Premises and equipment		371			395
	Securities available for sale		3,474			994
	FHLB stock dividend		59			57
	Other		62			65
		$	4,016		$	1,647
Net deferred tax (liability) asset		$	(700	)	$	1,073

     The income tax expense charged to operations for the years ended December 31, 2002, 2001 and 2000 consists of the following:

	2002			2001			2000
Current tax expense	$	4,960		$	4,715		$	4,681
Deferred tax benefit		(584	)		(401	)		(394	)
	$	4,376		$	4,314		$	4,287

     The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income due to the following:

		2002						2001						2000
		Amount			Rate			Amount			Rate			Amount			Rate
Computed “expected” tax expense		$	5,849			35.0	%	$	4,827			34.0	%	$	5,236			34.0	%
Increase (decrease) in income taxes resulting from:
	Tax-exempt interest income, net		(1,320	)		–7.9	%		(1,049	)		–7.4	%		(948	)		–6.2	%
	Merger expenses		—			—			462			3.3	%		19			0.1	%
	Other		15			0.1	%		74			0.5	%		(20	)		–0.1	%
	Reduction for taxable income <$10 million		(168	)		–1.0	%		—			—			—			—
Actual tax expense		$	4,376			26.2	%	$	4,314			30.4	%	$	4,287			27.8	%

36

Note 14. Related Party Transactions

In the ordinary course of business, the Banks grant loans to principal officers, directors and affiliates of the Corporation.

     Aggregate loan transactions with related parties were as follows:

	2002			2001
Beginning balance	$	10,671		$	7,796
New loans		15,070			7,586
Repayments		(15,965	)		(4,711	)
Ending balance	$	9,776		$	10,671

Note 15. 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. Weighted average number of shares for all years reported have been restated giving effect to the business combination with Virginia Commonwealth Financial Corporation explained in Note 2. Potential dilutive common stock had no effect on income available to common stockholders.

		2002				2001					2000
		Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount
Basic earnings per share			7,268,797	$	1.70		7,301,257	$	1.35		7,369,814	$	1.51
Effect of dilutive securities:
	Restricted stock		1,949				—				—
	Stock options		26,280				19,517				5,782
Diluted earnings per share			7,297,026	$	1.69		7,320,774	$	1.35		7,375,596	$	1.51

     In 2002 and 2000, stock options representing 2,400 and 34,639 shares, respectively, were not included in the calculation of earnings per share as their effect would have been anti-dilutive. None of the stock options were anti-dilutive during the year ended December 31, 2001.

Note 16. Commitments and Contingent Liabilities

The Corporation has noncancellable leases covering certain premises and equipment.

     Total rent expense applicable to operating leases was $327 thousand, $360 thousand and $299 thousand for 2002, 2001 and 2000, respectively, and was included in occupancy expense.

     The following is a schedule by year of future minimum lease requirements required under the long-term noncancellable lease agreements:

2003		$	322
2004			325
2005			335
2006			283
2007			246
Thereafter			2,111
	Total	$	3,622

     In the normal course of business there are outstanding various commitments and contingent liabilities, which are not reflected in the accompanying financial statements. Management does not anticipate any material losses as a result of these transactions.

     See Note 18 with respect to financial instruments with off-balance sheet risk.

Note 17. Restrictions on Transfers to Parent

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Banks to the Corporation.

     During 2002, the banking subsidiaries and the nonbank subsidiary transferred $6.6 million to the Parent Corporation as working capital. As of December 31, 2002, the aggregate amount of additional unrestricted funds, which could be transferred from the banking subsidiaries to the Parent Corporation without prior regulatory approval totaled $25.9 million or 22.63% of the consolidated net assets.

     In addition, dividends paid by the Banks to the Corporation would be prohibited if the effect thereof would cause the Banks’ capital to be reduced below applicable minimum capital requirements.

Note 18. Financial Instruments With Off-Balance-Sheet Risk

The Corporation, through its banking subsidiaries, is party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheet. The contract amount of those instruments reflects the extent of involvement the Corporation has in particular classes of financial instruments.

     The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

37

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)

     At December 31, 2002 and 2001 the following financial instruments were outstanding whose contract amounts represent credit risk:

	2002		2001
Commitments to extend credit	$	161,080	$	131,745
Standby letters of credit		10,454		9,925
Mortgage loans sold with potential recourse		70,223		78,585

     Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management’s credit evaluation of the customer.

     Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are usually uncollateralized and do not always contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is committed.

     Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments, if deemed necessary.

     The Corporation, through its banking subsidiaries, originates loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. In 2002, the Corporation originated $166.0 million and sold $166.1 million to investors, compared to $157.9 million originated and $151.0 million sold in 2001. Most contracts with investors contain certain recourse language which may vary from 90 days up to nine months. The Corporation may have an obligation to repurchase a loan if the mortgagor has defaulted early in the loan term. Mortgages subject to recourse are collateralized by single-family residences, have loan-to-value ratios of 80% or less, or have private mortgage insurance or are insured or guaranteed by an agency of the United States government.

     The Corporation maintains cash accounts in other commercial banks. The amount on deposit at December 31, 2002 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $24.2 million.

Note 19. Fair Value of Financial Instruments and Interest Rate Risk

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

     The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities

For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held for Sale

Loans originated or intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Loans

For variable-rate loans that reprice frequently and with no significant changes in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered.

Deposit Liabilities

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

38

Short-Term Borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Federal Home Loan Bank Advances

The fair values of the Corporation’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

     The estimated fair values of the Corporation’s financial instruments are as follows:

		2002				2001
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
	Cash and short-term investments	$	71,547	$	71,547	$	63,705	$	63,705
	Securities		299,262		300,016		267,495		267,805
	Loans held for sale		17,228		17,228		17,384		17,384
	Loans, net		691,799		707,191		658,416		684,028
	Interest receivable		5,618		5,618		5,655		5,655
Financial liabilities:
	Deposits	$	959,822	$	954,621	$	897,459	$	881,454
	Federal funds purchased and securities sold under agreements to repurchase		19,155		19,155		16,430		16,430
	Short-term borrowings		1,040		1,040		1,532		1,531
	Federal Home Loan Bank advances		12,220		13,623		12,300		12,806
	Interest payable		1,928		1,928		2,579		2,579

     The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Corporation’s overall interest rate risk.

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

     The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

     At December 31, 2002 and 2001, the carrying amounts of loan commitments and stand-by letters of credit approximate fair value.

Note 20. Regulatory Matters

The Corporation (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

39

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)

     Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the subsidiary banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002 and 2001, that the Corporation and subsidiary banks met all capital adequacy requirements to which they are subject.

     As of December 31, 2002, the most recent notification from the Federal Reserve Bank and the Federal Deposit Insurance Corporation categorized the subsidiary banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the institutions must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the institutions’ category.

				Actual					Minimum Capital Requirement					Minimum To Be Well- Capitalized Under Prompt Corrective Action Provisions
(Amount in Thousands)				Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2002:
	Total Capital (to Risk Weighted Assets):
			Consolidated	$	115,256		14.30	%	$	64,500		8.0	%		N/A
			Second Bank & Trust	$	36,843		16.07	%	$	18,337		8.0	%	$	22,921		10.0	%
		Virginia Heartland Bank		$	19,339		12.70	%	$	12,178		8.0	%	$	15,222		10.0	%
		Planters Bank & Trust		$	46,063		11.11	%	$	33,170		8.0	%	$	41,463		10.0	%
	Tier 1 Capital (to Risk Weighted Assets):
		Consolidated		$	106,076		13.16	%	$	32,250		4.0	%		N/A
		Second Bank & Trust		$	34,053		14.86	%	$	9,168		4.0	%	$	13,753		6.0	%
		Virginia Heartland Bank		$	17,384		11.42	%	$	6,089		4.0	%	$	9,133		6.0	%
		Planters Bank & Trust		$	41,671		10.05	%	$	16,585		4.0	%	$	24,878		6.0	%
	Tier 1 Capital (to Average Assets):
		Consolidated		$	106,076		9.63	%	$	44,048		4.0	%		N/A
		Second Bank & Trust		$	34,053		10.02	%	$	13,590		4.0	%	$	16,988		5.0	%
		Virginia Heartland Bank		$	17,384		9.04	%	$	7,694		4.0	%	$	9,618		5.0	%
		Planters Bank & Trust		$	41,671		7.51	%	$	22,183		4.0	%	$	27,729		5.0	%
As of December 31, 2001:
	Total Capital (to Risk Weighted Assets):
		Consolidated		$	111,060		15.10	%	$	58,832		8.0	%		N/A
		Second Bank & Trust		$	34,110		15.66	%	$	17,431		8.0	%	$	21,789		10.0	%
		Virginia Heartland Bank		$	17,896		12.79	%	$	11,193		8.0	%	$	13,992		10.0	%
		Planters Bank & Trust		$	43,275		11.30	%	$	30,526		8.0	%	$	38,157		10.0	%
	Tier 1 Capital (to Risk Weighted Assets):
		Consolidated		$	102,793		13.98	%	$	29,416		4.0	%		N/A
		Second Bank & Trust		$	31,807		14.60	%	$	8,715		4.0	%	$	13,073		6.0	%
		Virginia Heartland Bank		$	16,041		11.46	%	$	5,597		4.0	%	$	8,395		6.0	%
		Planters Bank & Trust		$	39,004		10.20	%	$	15,263		4.0	%	$	22,894		6.0	%
	Tier 1 Capital (to Average Assets):
			Consolidated	$	102,793		10.05	%	$	40,929		4.0	%		N/A
			Second Bank & Trust	$	31,807		10.16	%	$	12,525		4.0	%	$	15,656		5.0	%
			Virginia Heartland Bank	$	16,041		8.74	%	$	7,340		4.0	%	$	9,175		5.0	%
			Planters Bank & Trust	$	39,004		7.60	%	$	20,604		4.0	%	$	25,756		5.0	%

40

Note 21. Parent Corporation Only Financial Statements

Virginia Financial Group, Inc. (Parent Corporation Only)
Balance Sheets
December 31, 2002 and 2001

		2002		2001
Assets
Cash and due from banks		$	461	$	758
Securities available for sale			9,581		15,006
Investment in subsidiaries			102,438		91,589
Premises and equipment, net			2,055		121
Income taxes receivable			219		195
Accrued interest receivable			126		119
Other assets			1,819		896
	Total assets	$	116,699	$	108,684
Liabilities
Other liabilities		$	2,328	$	1,977
Stockholders’ Equity
Preferred stock		$	—	$	—
Common stock			35,884		36,436
Surplus			8,143		11,329
Retained earnings			64,134		57,060
Accumulated other comprehensive income			6,210		1,882
	Total stockholders’ equity	$	114,371	$	106,707
	Total liabilities and stockholders’ equity	$	116,699	$	108,684

Virginia Financial Group, Inc. (Parent Corporation Only)
Statements of Income
Years Ended December 31, 2002, 2001 and 2000

				2002			2001		2000
Income
	Dividends from subsidiaries			$	6,555		$	7,355	$	6,950
	Interest on investments
		Taxable			162			160		399
		Nontaxable			184			164		164
		Dividends			82			266		95
	Interest on loans				—			—		5
	Management fee income				2,018			324		—
	Miscellaneous income				—			1		—
	(Loss) gain on sale of securities				(37	)		5		46
	Total			$	8,964		$	8,275	$	7,659
Expenses
	Salaries and employee benefits			$	2,164		$	914	$	355
	Supplies and equipment				507			52		93
	Professional fees				185			139		91
	Integration expense				140			51		—
	Director fees				261			143		99
	Merger expense				—			1,359		43
	Other				441			303		197
	Total			$	3,698		$	2,961	$	878
			Net income before income tax benefit and undistributed equity of subsidiaries	$	5,266		$	5,314	$	6,781
	Income tax benefit				604			273		133
			Net income before undistributed equity in subsidiaries	$	5,870		$	5,587	$	6,914
	Undistributed equity in subsidiaries				6,465			4,294		4,200
			Net income	$	12,335		$	9,881	$	11,114

41

Virginia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)

Virginia Financial Group, Inc. (Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000

				2002			2001			2000
Cash Flows from Operating Activities
	Net income			$	12,335		$	9,881		$	11,114
	Adjustments to reconcile net income to net cash provided by operating activities:
		Accretion of discounts on securities purchased, net			24			(170	)		(188	)
		Depreciation and amortization expense			389			14			—
		Deferred tax benefit			(242	)		(8	)		(46	)
		Loss on other real estate			—			3			—
		Loss (gain) on sale of securities			37			(5	)		(46	)
		(Undistributed) earnings of subsidiaries			(6,465	)		(4,294	)		(4,200	)
		(Increase) in taxes receivable			(24	)		(35	)		(39	)
		(Increase) decrease in accrued interest			(7	)		49			(2	)
		(Increase) decrease in other assets			(250	)		27			(460	)
		(Decrease) in due to subsidiary			—			(6	)		(10	)
		(Decrease) increase in taxes payable			—			(8	)		8
		(Decrease) increase in other liabilities			(15	)		784			157
			Net cash provided by operating activities	$	5,782		$	6,232		$	6,288
Cash Flows from Investing Activities
	Proceeds from maturities and calls of securities available for sale			$	—		$	3,247		$	2,514
	Proceeds from sales of securities available for sale				5,990			3,668			3,296
	Purchases of securities available for sale				(429	)		(7,258	)		(6,050	)
	Purchase of other real estate				(318	)		—			(147	)
	Purchase of furniture and equipment				(2,337	)		(135	)		—
	Proceeds from sale of equipment				14			—			—
	Proceeds from sale of other real estate				—			143			—
			Net cash provided by (used in) investing activities	$	2,920		$	(335	)	$	(387	)
Cash Flows from Financing Activities
	Cash dividends paid			$	(5,261	)	$	(5,107	)	$	(5,084	)
	Cash paid in lieu of fractional shares				(22	)		—			(6	)
	Proceeds from exercise of stock options				317			159			—
	Acquisition of common stock				(4,033	)		(793	)		(1,479	)
			Net cash (used in) financing activities	$	(8,999	)	$	(5,741	)	$	(6,569	)
		Increase (decrease) in cash and cash equivalents		$	(297	)	$	156		$	(668	)
Cash and Cash Equivalents
	Beginning				758			602			1,270
	Ending			$	461		$	758		$	602

42

Note 22. Unaudited Interim Financial Information

The results of operations for each of the quarters during the two years ended December 31, 2002 and 2001 are summarized below:

			2002 Quarter Ended
			March 31,		June 30,		September 30,		December 31,
Interest income			$	16,018	$	15,805	$	16,038	$	15,947
Interest expense				6,179		5,915		5,653		5,354
	Net interest income			9,839		9,890		10,385		10,593
Provision for loan losses				401		400		401		400
	Total net interest income after provision			9,438		9,490		9,984		10,193
Noninterest income				2,861		3,105		3,147		3,608
Noninterest expense				8,033		8,670		8,850		9,562
	Income before income taxes			4,266		3,925		4,281		4,239
Provision for income taxes				1,104		1,000		1,133		1,139
	Net income			3,162		2,925		3,148		3,100
	Net income per share
		basic		0.43		0.41		0.43		0.43
		diluted		0.43		0.40		0.43		0.43
			2001 Quarter Ended
			March 31,		June 30,		September 30,		December 31,
Interest income			$	17,612	$	17,414	$	17,335	$	16,771
Interest expense				8,422		8,378		8,049		7,306
	Net interest income			9,190		9,036		9,286		9,465
Provision for loan losses				355		461		322		240
	Total net interest income after provision			8,835		8,575		8,964		9,225
Noninterest income				2,342		2,708		2,829		2,798
Noninterest expense				7,270		7,741		7,956		9,114
	Income before income taxes			3,907		3,542		3,837		2,909
Provision for income taxes				1,082		951		1,243		1,038
	Net income			2,825		2,591		2,594		1,871
	Net income per share
		basic		0.39		0.35		0.35		0.26
		diluted		0.39		0.35		0.35		0.26

43

Independent Auditor’s Report

To the Stockholders and Directors
Virginia Financial Group, Inc.
and Subsidiaries
Culpeper and Staunton, Virginia

     We have audited the accompanying consolidated balance sheets of Virginia Financial Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the three years ended December 31, 2002. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Virginia Financial Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the three years ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/ Yount Hyde & Barbour, P.C.

Winchester, Virginia
January 31, 2003

Virginia Financial Group, Inc.
Shareholder Reference

Board of Directors

Lee S. Baker
Manager/Owner,
Staunton Tractor, Inc.

O. R. Barham, Jr.
President & CEO,
Virginia Financial Group, Inc.

Benham M. Black
Attorney-at-Law,
Black, Noland & Read, P.L.C.

Harry V. Boney, Jr.
Chairman,
Virginia Financial Group, Inc.

Fred D. Bowers
Secretary,
Virginia Financial Group, Inc.

E. Page Butler
President,
Butler Construction Co., Inc.

Gregory L. Fisher
President/Owner,
Eddins Ford, Inc.

Taylor E. Gore
Vice-Chairman,
Virginia Financial Group, Inc.

Christopher M. Hallberg
President,
Hallberg & O’Malley Financial Group

Jan S. Hoover
Vice President & Treasurer,
Arehart Associates Ltd.

W. Robert Jebson, Jr.
President,
Environmental Systems Service Ltd.

Martin F. Lightsey
Chairman,
Specialty Blades, Inc.

P. William Moore, Jr.
Chairman,
Moore Brothers Co., Inc.

H. Wayne Parrish
Owner,
Parrish Appraisal Service

James S. Quarforth
Chairman & CEO,
Ntelos, Inc.

Thomas F. Williams, Jr.
Partner,
Franklin, Williams & Cowan

Principal Officers

Harry V. Boney, Jr.
Chairman

O. R. Barham, Jr.
President & CEO

Jeffrey W. Farrar
Executive Vice President & CFO

Corporate Headquarters

102 South Main Street
Culpeper, Virginia  22701

24 South Augusta Street
Staunton, Virginia  24401

540) 829-1633
(540) 825-0834 (Fax)

www.vfgi.net

Investor Relations
Shareholders, analysts, and others seeking information about Virginia Financial Group, Inc. are invited to contact:

Lee M. Kerns
Administrative Assistant
(540) 829-1633
(540) 825-0834 (Fax)
mcnemar-kernsl@vfgi.net

Copies of the Company’s earnings releases and other financial publications, including the Annual Report on SEC Form 10-K filed with the U.S. Securities and Exchange Commission, are available without charge upon request.

Information about the Company’s financial performance may also be found at www.vfgi.net. Earnings releases, dividend announcements, and other press releases are typically available at this site within 10 minutes of issuance. In addition, shareholders wishing to receive e-mail notification each time a news release, corporate event, or SEC filing has been posted may arrange to do so by visiting the web site and following the instructions listed under “E-mail Notification.”

Shareholder Account Inquiries
To expedite changes of address, the transfer of shares, the consolidation of accounts, or the replacement of stock certificates or dividend checks, shareholders are asked to contact the Company’s stock registrar, transfer agent, and dividend disbursement agent directly:

Registrar and Transfer Company
Attention: Investor Relations
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
info@rtco.com
www.rtco.com

In all correspondence with Registrar and Transfer Company, be sure to mention Virginia Financial Group, Inc. and to provide your name as it appears on your stock certificate, along with your social security number, daytime phone number, and current address.

In addition, individual investors may report a change of address, request a shareholder account transcript, place a stop on a certificate, or obtain a variety of forms, including a duplicate 1099, by logging onto www.rtco.com and clicking on “Investor Services.”

Dividend Reinvestment and Stock Purchase Plan
Under the Company’s Dividend Reinvestment and Stock Purchase Plan, registered shareholders may purchase additional shares of Virginia Financial Group, Inc. by reinvesting their cash dividends and by making optional cash contributions up to twelve times a year. For more information about the Plan, contact the Plan Administrator, Registrar and Transfer Company, at (800) 368-5948 or log onto www.vfgi.net and click on “Stock Purchase Program” to download the Plan Prospectus and an enrollment form.

Annual Meeting of Shareholders
The Company’s Annual Meeting of Shareholders will be held at 10:00 a.m. Eastern Time on Monday, April 28, 2003, at the Omni Hotel, 235 West Main Street, Charlottesville, Virginia. Shareholders of record as of March 17, 2003 are eligible to vote.

Independent Auditors
Yount, Hyde & Barbour, P.C.
50 South Cameron Street
Winchester, Virginia 22601

Stock Listing
Shares of Virginia Financial Group, Inc. are traded under the symbol “VFGI” on The Nasdaq National Market^®. Price information appears daily in major regional newspapers under similar abbreviations of the Company’s name and can be viewed at www.vfgi.net.

Designed by Curran and Connors, Inc. / www.curran-connors.com

[GRAPHIC APPEARS HERE]

EX-99

Exhibit 99

[LOGO OF VIRGINIA FINANCIAL GROUP, INC.]

24 South Augusta Street	102 S. Main Street
P.O. Box 1309	P.O. Box 71
Staunton, Virginia 24402	Culpeper, Virginia 22701

Dear Fellow Shareholders:

          You are cordially invited to attend the 2003 Annual Meeting of Shareholders of Virginia Financial Group, Inc.  The meeting will be held on Monday, April 28, 2003, at 10:00 a.m. at the Omni Hotel, 235 West Main Street, Charlottesville, Virginia.  The accompanying Notice and Proxy Statement describe the matters to be presented at the meeting.  Enclosed is our Annual Report to Shareholders that will be reviewed at the Annual Meeting.

          Please complete, sign, date, and return the enclosed proxy card as soon as possible. Whether or not you will be able to attend the Annual Meeting, it is important that your shares be represented and your vote recorded.  The proxy may be revoked at any time before it is voted at the Annual Meeting.

          We appreciate your continuing loyalty and support of Virginia Financial Group, Inc. and its affiliated companies.

Sincerely,

/s/ HARRY V. BONEY, JR.

Harry V. Boney, Jr.
Chairman of the Board

/s/ O. R. BARHAM, JR.

O. R. Barham, Jr.
President & Chief Executive Officer

March 31, 2003

[LOGO OF VIRGINIA FINANCIAL GROUP, INC.]

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 28, 2003

To Our Shareholders:

          The Annual Meeting of Shareholders of Virginia Financial Group, Inc. will be held on Monday, April 28, 2003, at 10:00 a.m. at the Omni Hotel, 235 West Main Street, Charlottesville, Virginia, for the following purposes:

1.	To elect six (6) directors to serve until the 2006 Annual Meeting of Shareholders, or until their successors are elected and qualified;
2.	To ratify the appointment of Yount, Hyde & Barbour, P.C., as external auditors for the fiscal year ending December 31, 2003; and
3.	To transact such other business as may properly come before the meeting.

          Shareholders of record at the close of business on March 17, 2003, will be entitled to notice of, and to vote at, the Annual Meeting and any adjournments thereof.

By Order of the Board of Directors,

/s/ FRED D. BOWERS

Fred D. Bowers
Secretary

March 31, 2003

IMPORTANT NOTICE

          Please complete, sign, date, and return the enclosed proxy card in the accompanying postage-paid envelope so that your shares will be represented at the meeting.  Shareholders attending the meeting may personally vote on all matters which are considered, in which event the signed proxies are revoked.

VIRGINIA FINANCIAL GROUP, INC.
24 South Augusta Street
Post Office Box 1309
Staunton, Virginia 24402-1309

102 South Main Street
Post Office Box 71
Culpeper, Virginia  22701

PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 28, 2003

GENERAL INFORMATION

          The enclosed proxy is solicited by and on behalf of the Board of Directors of Virginia Financial Group, Inc. (the “Company”) for the Annual Meeting of Shareholders of the Company (the “Annual Meeting”) to be held on Monday, April 28, 2003, at 10:00 a.m. at the Omni Hotel, 235 West Main Street, Charlottesville, Virginia, for the purposes set forth in the accompanying Notice of Annual Meeting.  The approximate mailing date of this Proxy Statement and accompanying proxy is March 31, 2003.

Revocation and Voting of Proxies

          Execution of a proxy will not affect a shareholder’s right to attend the Annual Meeting and to vote in person.  Any shareholder who has executed and returned a proxy may revoke it at any time before the proxy is exercised by submitting a written notice of revocation or a duly executed proxy bearing a later date to the Company at its office located at 102 South Main Street, P.O. Box 71, Culpeper, Virginia 22701.  Shareholders also may revoke their proxies by attending the Annual Meeting and voting in person.  Proxies will extend to, and will be voted at, any properly adjourned session of the Annual Meeting.  If a shareholder specifies how the proxy is to be voted with respect to any proposal for which a choice is provided, the proxy will be voted in accordance with such specifications.  If a shareholder fails to specify with respect to a proposal, the proxy will be voted FOR the director nominees named inproposal 1 and FOR proposal 2, as set forth in the accompanying notice and further described herein.

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Voting Rights of Shareholders

          Only shareholders of record at the close of business on March 17, 2003 are entitled to notice of and to vote at the Annual Meeting or any adjournment thereof.  As of the close of business on the record date, 7,175,299 shares of Company common stock, par value $5.00 per share, were outstanding and entitled to vote at the Annual Meeting.  The Company has no other class of stock outstanding.

          Each share of Company common stock entitles the holder thereof to one vote upon each matter to be voted upon at the Annual Meeting.  Shareholders of the Company are not entitled to cumulative voting rights.  The presence, in person or by proxy, of a majority of the votes entitled to be cast will constitute a quorum for the transaction of business at the Annual Meeting.

          With regard to the election of directors, votes may be cast in favor or withheld.  If a quorum is present, the nominees receiving the greatest number of votes cast (even if less than a majority) will be elected directors; therefore, votes withheld will have no effect.  The ratification of Yount, Hyde & Barbour, P.C. as the Company’s external auditors requires the affirmative vote of a majority of the shares cast on the matter.  Thus, although abstentions and broker non-votes (shares held by customers which may not be voted on certain matters because the broker has not received specific instructions from the customers) are counted for purposes of determining the presence or absence of a quorum for the transaction of business, they are generally not counted for purposes of determining whether such a proposal has been approved, and therefore have no effect.

Solicitation of Proxies

          The expenses of soliciting proxies will be borne by the Company.  Proxies are being solicited by mail, and also may be solicited by directors, officers and employees of the Company in person, by telephone, or by mail.  Officers, directors and employees of the Company will not receive special compensation for their solicitation activities.  The Company may reimburse banks, brokerage firms, and other custodians, nominees, and fiduciaries for their reasonable expenses in sending proxy materials to beneficial owners of Company common stock.

Security Ownership of Certain Beneficial Owners and Management

          The following table sets forth certain information, as of March 17, 2003, about the beneficial ownership of the Company’s common stock of each director, director nominee, certain executive officers and for all directors, director nominees, and executive officers of the Company as a group.  To the Company’s knowledge, no shareholder of the Company owns more than 5% of the Company’s outstanding common stock.

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Name	Number of Shares Beneficially Owned (1)		Percentage of Common Stock Outstanding
Directors
Lee S. Baker	22,156	(2)	*
O.R. Barham, Jr.	32,517	(3)	*
Benham M. Black	19,432	(4)	*
Harry V. Boney, Jr.	25,042	(5)	*
Fred D. Bowers	9,100	(6)	*
E. Page Butler	25,000	(7)	*
Gregory L. Fisher	2,566		*
Taylor E. Gore	9,954		*
Christopher M. Hallberg	12,106		*
Jan S. Hoover	1,100	(8)	*
W. Robert Jebson, Jr.	7,882	(11)	*
Martin F. Lightsey	1,050		*
P. William Moore, Jr.	8,242	(9) (10)	*
H. Wayne Parrish	11,018		*
Thomas F. Williams, Jr.	18,753	(12)	*
Non-Director Executive Officer
Jeffrey W. Farrar	10,996	(3)	*
All directors and executive officers as a group (16 persons)	216,914		3.0	%

*	Represents less than 1% of the total outstanding shares of the Company’s common stock.
(1)	For purposes of this table, beneficial ownership has been determined in accordance with the provision of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person is deemed to be the beneficial owner of a security if he or she has or shares the power to vote or direct the voting of the security or has or shares the power to dispose of or direct the disposition of the security, or has the right to acquire beneficial ownership of the security within 60 days.
(2)	Includes 17,192 shares registered in the name of corporations and 1,000 shares registered in Mr. Baker’s spouse’s name, as to which shares Mr. Baker disclaims beneficial ownership.
(3)	Includes 20,950 shares and 8,156 shares for Mr. Barham and Mr. Farrar, respectively, that are subject to presently exercisable options. Also includes 1,035 shares and 360 shares for Mr. Barham and Mr. Farrar, respectively, of restricted stock that vest in equal one-third installments commencing on December 2, 2003.
(4)	Includes 18,318 shares registered in the name of a trustee.  Also includes 200 shares registered in Mr. Black’s spouse’s name, as to which shares Mr. Black disclaims beneficial ownership.  In addition, Mr. Black is a trustee of P.W. Moore Trust U/A, which owns 2% of the voting common stock and 100% of the nonvoting common stock of Mocomp, Inc. (“Mocomp”), which, in turn, owns 254,672 shares of the Company’s common stock.  Mr. Black also is one of five directors of Mocomp.  Mr. Black refrains from voting as a Mocomp director on any matter relating to the Company.  Mr. Black does not have any ownership interest in P.W. Moore Trust U/A and does not own any shares of Mocomp. Mr. Black disclaims beneficial ownership of the shares of Company common stock held directly by Mocomp and indirectly by P.W. Moore Trust U/A, and none of those shares are reflected in this table.
(5)	Includes 300 shares registered in Mr. Boney’s spouse’s name and 15,500 shares registered in the name of trustees, as to which shares Mr. Boney disclaims beneficial ownership. Also includes 6,402 shares of restricted stock that vest in equal one-third installments commencing on December 2, 2003.

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(6)	Includes 8,100 shares registered in Mr. Bowers’ spouse’s name, as to which shares Mr. Bowers disclaims beneficial ownership.
(7)	Includes 1,265 shares that are subject to presently exercisable stock options.  Also includes 6,999 shares held in the name of corporations and 434 shares held in Mr. Butler’s spouse’s name.
(8)	Includes 300 shares registered in Ms. Hoover’s child’s name, as to which shares Ms. Hoover disclaims beneficial ownership.
(9)	Includes 800 shares registered in Mr. Moore’s spouse’s name and 3,500 shares registered in the name of Moore Brothers Company Incorporated, of which Mr. Moore is President.
(10)	Mr. Moore is a trustee of P.W. Moore Trust U/A, which owns 2% of the voting common stock and 100% of the nonvoting common stock of Mocomp, Inc. (“Mocomp”), which, in turn, owns 254,672 shares of the Company’s common stock.  Mr. Moore also is one of five directors of Mocomp.  Mr. Moore refrains from voting as a Mocomp director on any matter relating to the Company.  Mr. Moore disclaims beneficial ownership of the shares of Company common stock held directly by Mocomp and indirectly by P.W. Moore Trust U/A, and none of those shares are reflected in this table.
(11)	Includes 753 shares registered in Mr. Jebson’s spouse’s name, as to which shares Mr. Jebson disclaims beneficial ownership.
(12)	Includes 5,004 shares registered in Mr. Williams’ spouse’s name and 571 shares owned by Investors Ten Partnership, as to which shares Mr. Williams disclaims beneficial ownership.

PROPOSAL ONE
ELECTION OF DIRECTORS

          The Board of Directors of the Company is divided into three classes of directors (Class I, Class II and Class III).  The term of office for the Class II directors will expire at the Annual Meeting.  The first six persons in the table below, all of who currently serve as Class II directors of the Company, will be nominated to serve as Class II directors.  If elected, the Class II directors will serve for a term of three years until the 2006 Annual Meeting, or until their retirement or successors are duly elected and qualify.

          The persons named in the proxy will vote for the election of the nominees named below unless authority is withheld.  If any of the persons named below is unavailable to serve for any reason, an event that the Board of Directors does not anticipate, proxies will be voted for the remaining nominees and such other person or persons as the Board of Directors may designate.  In the alternative, the Board may reduce the size of a class of directors to the number of remaining nominees, if any, for whom the proxies will be voted.

          The following table sets forth certain information concerning the nominees for election at the Annual Meeting as directors, as well as certain information about the remaining Class I and Class III directors, who will continue in office after the Annual Meeting until the 2005 and 2004 Annual Meetings, respectively.  The Board of Directors recommends that the shareholders vote FOR election of the directors who have been nominated.

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NOMINEES FOR ELECTION

CLASS II DIRECTORS

(Term to Expire at 2006 Annual Meeting of Shareholders)

Name of Director	Age and Principal Occupation During Past Five Years
Harry V. Boney, Jr.	Mr. Boney, 69, is Chairman of the Board of the Company.  Mr. Boney previously served as President and Chief Executive Officer of Planters Bank & Trust.  He has served as a director of the
	Company since 1975.  (1)(3)
Fred D. Bowers	Mr. Bowers, 66, is Secretary of the Company.  Mr. Bowers previously served as Executive Vice President and Chief Financial Officer of Planters Bank & Trust.  Mr. Bowers has served as a director of the Company since 2001. (3)
Taylor E. Gore	Mr. Gore, 64, is Vice Chairman and previously served as Executive Vice President and General Manager of Culpeper Farmers’ Co-op, Inc., Culpeper, Virginia.  He has served as a director of the Company since 1975. (2)
Jan S. Hoover	Mrs. Hoover, 46, is Vice President and Treasurer of Arehart Associates, Ltd., an accounting services and financial consulting company.  She has served as a director of the Company since 1995. (3)
W. Robert Jebson, Jr.	Mr. Jebson, 69, is the President of Environmental Systems Service, Ltd., an environmental services company located in Culpeper, Virginia.  He has served as a director of the Company since 1990. (2)
H. Wayne Parrish	Mr. Parrish, 59, is owner of Parrish Appraisal Service located in Fredericksburg, Virginia.  Mr. Parrish has served as a director of the Company since 1988. (2)

CLASS I DIRECTORS
(Serving until 2005 Annual Meeting of Shareholders)

Name of Director	Age and Principal Occupation During Past Five Years
E. Page Butler	Mr. Butler, 55, is the President of Butler Construction of Va., Inc., a commercial construction company located in Spotsylvania, Virginia.  He has served as a director of the Company since 1996. (2)
Gregory L. Fisher	Mr. Fisher, 53, is the President of Eddins Ford, Inc., an automobile dealership in Madison, Virginia. He has served as a director of the Company since 1992. (2)
Christopher M. Hallberg	Mr. Hallberg, 53, is the owner of Hallberg and O’Malley Financial Group, Inc., a financial services advisory firm located in Fredericksburg, Virginia.  He has served as a director of the Company since 1988. (2)
Martin F. Lightsey	Mr. Lightsey, 60, is the Chairman of the Board of Specialty Blades, Inc., a specialty blades manufacturer in Staunton, Virginia.  He has served as a director of the Company since 1995. (3)

-5-

CLASS III DIRECTORS

(Serving Until 2004 Annual Meeting of Shareholders)

Name of Director	Age and Principal Occupation During Past Five Years
Lee S. Baker	Mr. Baker, 52, is the owner and manager of Staunton Tractor, Inc., Staunton, Virginia.  Mr. Baker has served as a director of the Company since 1984. (1)(3)
O. R. Barham, Jr.	Mr. Barham, 52, is President and Chief Executive Officer of the Company.  Prior to January 18, 2002, he served as President and Chief Executive Officer of Virginia Commonwealth. He has served as a director of the Company since 1996. (2)
Benham M. Black	Mr. Black, 68, is a partner in the law firm of Black, Noland & Read, P.L.C., Staunton, Virginia.  He has served as a director of the Company since 1969. (1)(3)
P. William Moore, Jr.	Mr. Moore, 61, is Chairman of Moore Brothers Co., Inc., a commercial construction company.  He has served as a director of the Company since 2001. (3)
Thomas F. Williams, Jr.	Mr. Williams, 64, is a partner in the law firm of Franklin, Williams and Cowan in Fredericksburg, Virginia.  He has served as a director of the Company since 1988. (2)

(1)	Includes term as a director of Planters Bank & Trust Company of Virginia before it formed Virginia Financial Corporation in 1997 as a one-bank holding company.
(2)	Includes term as a director of Virginia Commonwealth Financial Corporation (“Virginia Commonwealth”) before it became Virginia Financial Group, Inc. on January 18, 2002.
(3)	Includes term as a director of Virginia Financial Corporation (“Virginia Financial”) before it became Virginia Financial Group, Inc. on January 18, 2002.

Board of Directors and Committees

          The Company’s Board of Directors met monthly in 2002.  In 2002, all directors attended at least 75% of the regular, special, and committee meetings of the Board of Directors, which he or she was required to attend. 

          The Audit Committee consists of Messrs. Black, Fisher, Parrish (Chairman) and Mrs. Hoover.  The principal responsibilities of the committee are to ensure that the Board receives objective information regarding policies, procedures, and activities with respect to auditing, accounting, internal controls, financial reporting, regulatory

-6-

matters, and such other activities as may be directed by the Board.  The committee met four times in 2002.

          The Company has an Executive Committee consisting of Messrs. Barham, Boney (Chairman), Gore (Vice-Chairman) and Lightsey.  This committee is authorized, between meetings of the Board, to perform duties and exercise certain authorities of the Board. The committee met four times in 2002.

          The Company has a Personnel and Compensation Committee consisting of Messrs. Baker, Bowers (Chairman), Butler and Williams. This committee reviews employee benefit plans and the level of compensation for each officer and director of the affiliates.  This committee met nine times during 2002.

          The Company has a Trust Committee consisting of Messrs. Hallberg, Jebson (Chairman), Lightsey, Moore, Parrish and Mrs. Hoover. This committee also functions as a Board of Directors for Virginia Commonwealth Trust Company. This committee met eight times during 2002.

          The Company has a Corporate Governance Committee responsible for review and establishment of corporate governance and policy.  This committee consists of Messrs. Barham, Black (Chairman), Bowers, Fisher and Williams. This committee met four times in 2002.

          The Board of Directors has no separate nominating committee.  The entire Board makes nominations and considers the qualifications of any candidates for membership on the Board.  In its capacity as the nominating committee, the Board will accept for consideration shareholder nominations for directors if made in writing.  In accordance with the Company’s bylaws, a shareholder nomination must include sufficient background information with respect to the nominee and sufficient identification of the nominating shareholder, as well as the nominee’s written consent.  To be considered for the 2004 Annual Meeting of Shareholders, the Company’s Secretary at 102 South Main Street, P.O. Box 71, Culpeper, Virginia 22701 must receive nominations by December 1, 2003.

          There are no family relationships among any of the Company’s directors or executive officers, and none of the directors serve as a director of any other company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934. 

Section 16(a) Beneficial Ownership Reporting Compliance

          Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), directors and executive officers of the Company are required to file reports with the Securities and Exchange Commission indicating their holdings of and transactions in the Company’s equity securities. Based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that its officers and directors complied with all filing requirements under Section 16(a) during 2002, with the exception of Messrs. Barham, Boney and Farrar, who each reported a December 2, 2002 award of restricted stock on a year-end Form 5.

Securities Authorized For Issuance Under Equity Compensation Plans 

          The following table sets forth information as of December 31, 2002 with respect to certain compensation plans under which equity securities of the Company are authorized for issuance.

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Equity Compensation Plan Information

		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Plan Category
Equity compensation plans approved by shareholders (1)			67,875	$	18.12		682,125	(1)
Equity compensation plans not approved by shareholders			-0-		-0-		-0-
	Total		67,875	$	18.12		682,125

(1)      Represents the Company Stock Incentive Plan.

EXECUTIVE COMPENSATION

          Summary of Cash and Certain Other Compensation.  The following table shows the cash compensation earned by Harry V. Boney, Jr., Chairman of the Board, Mr. O. R. Barham, Jr., President and Chief Executive Officer of the Company, and Mr. Jeffrey W. Farrar, Executive Vice President and Chief Financial Officer of the Company, during 2002, 2001, and 2000. During 2002, no other executive officer of the Company received compensation in excess of $100,000.

SUMMARY COMPENSATION TABLE

			Annual Compensation						Long Term Compensation Awards
Name and Principal Position	Year		Salary		Bonus		Other Annual (1) Compensation		Restricted Stock Awards($) (2)		Securities Underlying Options(#) (3)		All Other Compensation (4)
O.R. Barham, Jr. President/Chief Executive Officer		2002	$	250,000	$	74,500		—	$	33,948		7,100	$	12,500
		2001		190,000		15,168		—		—		—		9,500
		2000		180,000		14,053		—		31,122		9,624		9,000
Harry V. Boney, Jr.  Chairman of the Board		2002		90,000		—		—		209,986		—		8,459
		2001		176,129		16,278		—		—		—		17,739
		2000		—		—		—		—		—		—
Jeffrey W. Farrar  Executive Vice President/CFO		2002		130,000		37,664		—		11,808		2,500		2,651
		2001		100,000		8,158		—		—		—		2,055
		2000		93,000		5,000		—		12,600		3,930		2,870

(1) The amount of compensation in the form of perquisites or other personal benefits properly categorized in this column according to the disclosure rules adopted by the Securities and Exchange Commission did not exceed the lesser of either $50,000, or 10% of the total annual salary and bonus reported for the named executive officers in any of the three years reported.

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(2)	Based on the closing price of the Company’s common stock on December 31, 2002, Mr. Barham held 1,035 shares of Company restricted stock, having an aggregate value of $30,843, Mr. Boney held 6,402 shares of restricted stock, having an aggregate value of $190,780, and Mr. Farrar held 360 shares of Company restricted stock having an aggregate value of $10,728.  All restricted shares of the Company’s common stock are entitled to dividends at the same rate as unrestricted shares of the Company’s common stock.
(3)	Issued under the Company’s Stock Incentive Plan.
(4)	Amounts disclosed in this column include payment of Company’s contributions under the 401k plans and officers deferred compensation plans. In 2002, the Company made a 401(k) matching contribution of $8,456 and $2,651 on behalf of Messrs. Boney and Farrar, respectively, and a contribution of $12,500 to Mr. Barham’s deferred compensation plan.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

	Individual Grants									Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
Name	Number of Securities Underlying Options Granted (#) (1)		% of Total Options Granted to Employees in Fiscal Year			Exercise or Base Price ($/Sh)		Expiration Date		5% ($)		10% ($)
O.R. Barham, Jr.		7,100		74	%	$	32.80		12/2/12	$	133,062	$	337,204
Harry V. Boney, Jr.		—		—			—		—		—		—
Jeffrey W. Farrar		2,500		26	%		32.80		12/2/12		48,853		118,734

⁽¹⁾       Options vest in one-fifth installments commencing on December 2, 2003.

FISCAL YEAR-END OPTION VALUES

Name	Number of Securities Underlying Unexercised Options  at FY-End (#) Exercisable/Unexercisable		Value of Unexercised In-the-Money Options at FY-End ($) Exercisable/Unexercisable
O.R. Barham, Jr.		13,850/7,100	$	210,659/$0
Harry V. Boney, Jr.		—		—
Jeffrey W. Farrar		5,656/2,500	$	86,028/$0

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Employment Agreements

          The Company has employment agreements with Messrs. Barham, Boney and Farrar, which are for three-year terms and thereafter automatically renew for one-year terms unless terminated, except for Mr. Boney’s agreement, which expires in 2004.  Each of the contracts provides base pay, opportunities for Messrs. Barham and Farrar to earn incentive bonuses based on performance criteria set by the Board, annual incentive stock options or restricted stock awards, health insurance and other benefits, such as a car or vehicle allowance, country club dues, and reimbursement for costs of attending professional meetings.  Mr. Boney’s contract is based on the assumption that, as Chairman, he will work no more than 20 hours per week on average.  Under these agreements, if the Company terminates the employee without cause or the employee terminates his employment for good reason (as defined in the contracts), the Company is obligated to pay the employee’s annual base salary and maintain the employee’s welfare benefits for an additional 18 months.  These employment agreements also provide for three years continued employment in the event of a change in control (as defined in the agreement) of the Company. If, however, following a change in control, the Company terminates the employee without cause or the employee terminates his employment for good reason, the Company is obligated to maintain the employee’s welfare benefits for an additional 36 months and to pay the employee a lump-sum cash payment equaling 2.99 times his combined annual base salary at the time of termination and his highest annual bonus during the two most recently completed years.

Retirement Benefits

          Effective January 18, 2002, Virginia Commonwealth merged with and into Virginia Financial under the new name Virginia Financial Group, Inc. (the “Merger”).  Prior to the Merger, Virginia Commonwealth and Virginia Financial and several of their affiliates each maintained various tax qualified and non-qualified employee benefit plans for their employees. Except with respect to the Company’s retirement plans or as otherwise noted below, all plans described below have been combined to cover employees from both former companies.  Any employees hired by the Company’s affiliates after June 30, 2002, participate in the Company’s defined contribution retirement plan, which covers certain full-time salaried employees.  Contributions are made at the discretion of the Board of Directors.

          For former Virginia Commonwealth employees, the Company has a noncontributory pension plan which conforms to the Employee Retirement Income Security Act of 1974 (“ERISA”).  The amount of benefits payable under the plan is determined by an employee’s period of credited service.  The amount of normal retirement benefit will be determined based on a pension equity credit formula. The employee receives credits based on age and years of service.  The plan provides for early retirement for participants with five years of credited service and the attainment of age 55. A participant who terminates employment with two or more years of credited service will be entitled to a benefit.  The benefits are payable in single or joint/survivor annuities, as well as a lump sum payment upon retirement or separation of service.

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          The following table shows the estimated annual benefits payable upon retirement based on the specified remuneration and years of credited service classifications, assuming continuation of the present plan and retirement on January 1, 2002, at age 65 (normal retirement date):

PENSION PLAN TABLE

			Years of Service
Average Compensation			10		15		20		25
$	10,000		$	1,264	$	1,669	$	1,973	$	2,200
	25,000			3,160		4,173		4,933		5,500
	50,000			6,320		8,346		9,866		11,000
	75,000			9,480		12,520		14,799		16,500
	100,000			12,640		16,693		19,732		22,000
	125,000			15,800		20,866		24,665		27,500
	150,000			18,960		25,039		29,598		32,999
	175,000			22,120		29,212		34,531		38,499
	200,000	and above		25,280		33,385		39,464		43,999

          Compensation is limited to $200,000 in 2002 by the Internal Revenue Code. The estimated annual benefit payable under the Retirement Plan upon retirement is $32,617 and $26, 639 and for Messrs. Barham and Farrar, respectively, with Mr. Barham credited with 23 years of service, and Mr. Farrar credited with 30 years of service.

          The Company has a 401(k) Savings Plan. The plan’s primary purpose is to allow employees to save for retirement on a pre-tax basis.  The plan provides for matching contributions by the Company equal to 4% of the first 5% of salary reduction contributions made by the employee. The plan also provides for discretionary contributions to be made by the Company and allocated to participant accounts in proportion to the participant’s compensation.

          The Company has a Stock Incentive Plan under which options for the purchase of the Company’s stock, stock appreciation rights and restricted stock may be granted to key employees and directors of either former company.  The plan has reserved for issuance 750,000 shares of the Company’s common stock.  The plan requires that options be granted at an exercise price equal to 100% of the fair market value of the common stock on the date of grant.

          Virginia Commonwealth maintained an Employee Stock Ownership Plan (“ESOP”) under section 4975(e)(7) of the Internal Revenue Code.  Funds contributed by Virginia Commonwealth to the plan were allocated to participants using the ratio that the compensation of each participant bears to the total compensation of all the participants.  Effective October 17, 2002, the ESOP plan was terminated, and participants will receive distributions in 2003.

          The Company has a Non-Qualified Directors Deferred Compensation Plan.  This plan allows for the deferral of pre-tax income associated with payment of director fees. Directors may elect to defer all or a portion of their annual directors fees under this plan.  If so elected, monthly board fees are contributed directly to a trust with various investment options, and are held until such time as the director is entitled to receive a distribution. 

          The Company has a Non-Qualified Executive Deferred Compensation Plan for key employees.  Pursuant to the plan, the President and select employees of the Company or its affiliates may defer receipt of a certain amount of pre-tax income and cash incentive compensation, for a period of not less than three years or until retirement, subject

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to termination of employment or certain other events, including an imminent change in control as defined in the plan.  The Company may elect to make matching contributions from time to time at the Board’s discretion.

          The Company’s Virginia Heartland Bank affiliate entered into supplemental retirement agreements with the bank’s former Chairman and President which provide benefits payable over fifteen years to begin at age sixty and sixty-five, respectively.  The agreements call for Virginia Heartland Bank to pay them each $45,000 for fifteen years upon retirement.

          The Company implemented an Executive Incentive Plan in 2002 under which key employees are eligible to receive incentive awards directly related to affiliate and Company profitability and budget performance. Compensation under the plan is calculated under pre-determined guidelines set by the Company’s Board of Directors.

Compensation of Directors

          During 2002, independent outside directors of the Company received a monthly fee of $1,000, and an additional $500 for each monthly board meeting attended. Directors received a fee of $200 for each committee meeting, and an additional fee of $400 for attendance at such meeting. If such committee meeting was held on the same day of the monthly board meeting, Directors receive a committee meeting fee of $200 and an additional $300 for attendance at such meeting.

Interest of Management and Board in Certain Transactions

          As of December 31, 2002, borrowings from the Company and its affiliates by all policy-making officers, directors, their immediate families, and affiliated companies in which they are shareholders amounted to approximately $9.72 million.  This amount represented 8.5% of the total equity capital and .9% of the total assets of the Company as of December 31, 2002.  These loans were made in the ordinary course of the Company’s business, on the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with others, and do not involve greater than normal risks of collectibility.  The Company expects to have similar banking transactions with directors, officers, principal shareholders and their associates in the future.

          During the year 2002, the Company paid $89,741 for legal services provided to an affiliate to the firm of Black, Noland and Read, P.L.C. of which Mr. Black is a partner. In addition, the Company paid $33,000 to Mr. Parrish for appraisal services provided to an affiliate.

Compensation Committee Interlocks and Insider Participation

          No member of the Board’s Personnel and Compensation Committee serves as an officer or employee of the Company or any of its affiliates.  No member of the Board’s Personnel and Compensation Committee has participated in the Company’s employee benefit plans, or was at any time within one year prior to his appointment eligible to participate in such plans. The Company paid $11,506 to the firm of Franklin, Williams and Cowan of which Mr. Williams is a partner.

Compensation Committee Report on Executive Compensation

          The Personnel & Compensation Committee of the Board of Directors (the “Committee”) administers the Company’s executive compensation program and establishes the compensation levels of the Company’s executive officers.  The Committee consists of only non-employee Directors, who are appointed by the Board.

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Compensation Philosophy

          The general philosophy of the Committee is to provide executive compensation that will enhance shareholder value, including annual compensation, consisting of salary and bonus awards, and long-term compensation, consisting of stock options and other equity based compensation.  To this end, the Committee designs compensation plans and incentives to tie executive compensation to the Company’s performance and link the financial interests of the Company’s executive officers to the interests of its shareholders, to encourage support of the Company’s long-term goals, to attract and retain talented leadership and to encourage significant ownership of the Company’s common stock by executive officers.

          In making decisions affecting executive compensation, the Committee reviews the nature and scope of the executive officer’s responsibilities as well as his or her effectiveness in supporting the Company’s long-term goals.  The Committee also considers the compensation practices of other bank holding companies.  Based upon these and other factors which it considers relevant, and in light of the Company’s overall long-term performance, the Committee has considered it appropriate, and in the best interest of the shareholders, to set the overall executive compensation slightly above the average of companies in the comparison group to enable the Company to continue to attract, retain and motivate the highest level of executive personnel.

          There are two primary types of compensation provided to the Company’s executive officers:

• Annual compensation, which includes base salary, intended to provide a stable annual salary at a level consistent with individual contributions, and annual performance bonuses intended to link officers’ compensation to the Company’s performance.

• Long-term compensation, which includes stock or other equity based compensation and long-term incentive awards intended to encourage actions that maximize shareholder value.

Annual Compensation

Base Salary

          Consistent with its stated philosophy, the Committee aims to position base salaries for the Company’s executive officers annually at levels that are slightly higher than the industry, with consideration of the performance of the Company, individual performance of each executive and the executive’s scope of responsibility in relation to other officers and key executives within the Company.  In selected cases, other factors may also be considered.

Annual Incentive Bonuses

          The Company’s Executive Incentive Plan provides for the payment of cash bonuses based on the Company’s performance in relation to predetermined objectives and individual executive performance for the year then ended.  Prior to the beginning of the fiscal year, the Committee establishes performance objectives related to the Company’s earnings, balance sheet growth and efficiency.  Based on the Company’s performance during 2002, compared with these objectives, $112,000 was paid under the Executive Incentive Plan.

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Long-term Compensation

          The Committee is committed to long-term incentive programs for executives that promote the long-term growth of the Company.  The Committee believes that management employees should be rewarded with a proprietary interest in the Company for continued long-term performance and to attract, motivate and retain qualified and capable executives.

Equity Based Compensation

          The Committee grants to executive officers options to purchase shares of the Company’s common stock under the Company’s Stock Incentive Plan adopted by the Company and its shareholders in 2002.  In 2002, the Committee granted options to Company executives to purchase an aggregate of 9,600 shares of the Company’s common stock.  These options were granted at an exercise price equal to the fair market value of the common stock on the date of grant, become exercisable in five cumulative annual installments commencing one year after the date of grant and expire ten years from the date of grant.

Compensation of Chief Executive Officer

          During 2002, the Company’s Chief Executive Officer received a base salary of $250,000, which represents a 31.6% increase over the annual base salary paid to him in 2001 as Chief Executive Officer of Virginia Commonwealth. This increase can be attributed to the Committee’s and Board’s perceived value of the position for the combined company.

          The Company’s Chief Executive Officer is eligible to participate in all of the Company’s long-term incentive programs.  During 2002, the Chief Executive Officer received stock options to purchase 7,100 shares of the Company’s common stock as shown on the Summary Compensation Table.  In addition, the Chairman of the Board and the Chief Executive Officer each received restricted share awards consisting of 6,402 and 1,035 shares that vest in three equal installments commencing one year after the date of grant.  The Summary Compensation Table includes additional information regarding the other compensation and benefits paid to the Company’s Chairman and Chief Executive Officer.

          Submitted on March 17, 2003 by the members of the Personnel and Compensation Committee of the Company’s Board of Directors.

Lee S. Baker

Fred D. Bowers, Chairman

E. Page Butler

Thomas F. Williams, Jr.

Audit Committee Report

          The Audit Committee of the Board of Directors (the “Audit Committee”) is composed of independent directors as required by and in compliance with the current listing standards of the NASDAQ National Market.  The Audit Committee operates pursuant to a written charter adopted by the Board of Directors.

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          The Audit Committee has reviewed the relevant requirements of the Sarbanes-Oxley Act, the proposed rules of the U.S. Securities and Exchange Commission and the proposed new listing standards of the NASDAQ National Market regarding audit committee policies.  The Board of Directors will amend the audit committee charter, make any required membership changes, and any other changes if necessary, when the rules and standards are finalized to reflect additional requirements or changes from the proposals.

          The Audit Committee is responsible for overseeing the Company’s financial reporting process on behalf of the Board of Directors.  Management of the Company has the primary responsibility for the Company’s financial reporting process, principles and internal controls as well as preparation of its financial statements.  The Company’s independent auditors are responsible for performing an audit of the Company’s financial statements and expressing an opinion as to the conformity of such financial statements with accounting principles generally accepted in the United States.

          The Audit Committee has reviewed and discussed the Company’s audited financial statements as of and for the year ended December 31, 2002 with management and the independent auditors.  The Audit Committee has discussed with the independent auditors the matters required to be discussed under auditing standards generally accepted in the United States, including those matters set forth in Statement on Auditing Standards No. 61 (Communication with Audit Committees), as currently in effect. The Audit Committee has discussed with management, the independent auditors and the Company’s internal auditors the adequacy of the Company’s system of internal controls. The independent auditors have provided to the Audit Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as currently in effect, and the Audit Committee has discussed with the auditors their independence from the Company.  The Audit Committee has also considered whether the independent auditors’ provision of information technology and other non-audit services to the Company is compatible with maintaining the auditors’ independence.  The Audit Committee has concluded that the independent auditors are independent from the Company and its management.

          The following fees were billed by Yount, Hyde & Barbour, P.C., the Company’s Certified Public Accountants, for services provided for the fiscal year ended December 31, 2002:

Audit Fees including reviews of Form 10-Qs	$	92,219
Financial Information Systems Design and Implementation Fees		None
All Other Fees	$	44,154

          Based on the reports and discussions described above, the Audit Committee has recommended to the Board of Directors that the Company’s audited financial statements be included in its Annual Report on Form 10-K for the year ended December 31, 2002 for filing with the Securities and Exchange Commission.

          Submitted on March 17, 2003 by the members of the Audit Committee of the Company’s Board of Directors.

Benham M. Black

Gregory L. Fisher

Jan S. Hoover

H. Wayne Parrish, Chairman

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STOCK PERFORMANCE GRAPH

          The following graph compares the Company’s shareholder return with the return of certain indices for the period beginning January 1, 1997 and ending December 31, 2002. 

	Period Ending
Index	12/31/97	12/31/98	12/31/99	12/31/00	12/31/01	12/31/02
Virginia Financial Group, Inc.	100.00	110.29	143.30	116.23	95.75	131.68
S&P 500	100.00	128.55	155.60	141.42	124.63	96.95
SNL $1B-$5B Bank Index	100.00	99.77	91.69	104.05	126.42	145.94

          Shares of the Company’s common stock traded on the OTC Bulletin Board during 1996-2001, and thus were not traded on a national or regional exchange.  Trading was generally the result of private negotiation.  Accordingly, this graph is not necessarily indicative of how the Company’s common stock would have performed if it had traded on an exchange for the entire period.  On January 22, 2002, the Company’s common stock began trading on the Nasdaq National Market, and currently trades under the trading symbol VFGI. 

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PROPOSAL TWO
RATIFICATION OF SELECTION OF EXTERNAL AUDITORS

          The Board of Directors has appointed Yount, Hyde & Barbour, P.C., as the external auditors for the Company for the fiscal year ending December 31, 2003.  Yount, Hyde & Barbour, P.C. rendered audit services to the Company during 2002.  These services consisted primarily of the examination and audit of the Company’s financial statements, tax reporting assistance, and other audit and accounting matters.  Representatives of Yount, Hyde & Barbour, and P.C. are expected to attend the Annual Meeting and will have the opportunity to make a statement and to answer questions if they desire to do so.  The Board of Directors recommends that the shareholders vote FOR the appointment of Yount, Hyde & Barbour, P.C.

2004 ANNUAL MEETING OF SHAREHOLDERS

In accordance with the Company’s bylaws, the Company need not include an otherwise appropriate shareholder proposal in its proxy statement or form of proxy for the 2004 Annual Meeting unless the proposal is received in writing by the Company’s Secretary at its office at 102 South Main Street, P.O. Box 71, Culpeper, Virginia 22701 on or before December 1, 2003.  In addition, if a shareholder intends to present a proposal for action at the 2004 Annual Meeting, the shareholder must notify the Company of this intention on or before December 1, 2003.

ANNUAL REPORTS TO SHAREHOLDERS

          The Company’s Annual Report to Shareholders for the year ended December 31, 2002, which includes the Company’s audited financial statements prepared in conformity with generally accepted accounting principles, is included herein.  A copy of the Company’s Annual Report on Form 10-K will be sent, without charge, to any shareholder upon written request to: Lee M. Kerns, Administrative Assistant, at 102 South Main Street, P. O. Box 71, Culpeper, Virginia  22701.

OTHER MATTERS

          Management knows of no other business to be brought before the Annual Meeting.  Should any other business properly be presented for action at the meeting, the shares represented by the enclosed proxy will be voted by the persons named therein in accordance with their best judgment and in the best interests of the Company.

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REVOCABLE PROXY

Virginia Financial group, inc.

PLEASE MARK VOTES

AS IN THIS EXAMPLE

Annual Meeting of Shareholders

April 28, 2003

THIS PROXY IS SOLICITED on behalf OF

THE BOARD OF DIRECTORS

With-    For All

For    hold      Except

1. To elect six (6) Class II directors to serve until the 2006 Annual Meeting of Shareholders, or until their successors are elected and qualified, as instructed below.

Nominees:

Harry V. Boney, Jr.	Fred D. Bowers
Taylor E. Gore	Jan S. Hoover
W. Robert Jebson, Jr.	H. Wayne Parrish

INSTRUCTION: To withhold authority to vote for any individual nominee, mark “For All Except” and write that nominee’s name in the space provided below.

For    Against    Abstain

Please be sure to sign and date

this Proxy in the box below.

Stockholder sign above

Co-holder (if any) sign above

2. To ratify the appointment of Yount, Hyde & Barbour, P.C., as external auditors for the fiscal year ending December 31, 2003.

3. To transact such other business as may properly come before the Annual meeting or any adjournment thereof.

PLEASE CHECK BOX IF YOU PLAN TO ATTEND THE MEETING.

This proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. If no direction is made, this proxy will be voted for the election of all director nominees and for approval of Proposal Two. If any other matter shall be brought before the meeting, the shares represented by this proxy will be voted in the discretion of the proxy agents.

Detach above card, sign, date and mail in postage paid envelope provided.

Virginia Financial group, inc.

NOTE: Please sign your name(s) exactly as shown imprinted hereon. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please sign full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person.

Please Act promptly

Sign, Date and mail your proxy card today.

If your address has changed, please correct the address in the space provided below and return this portion with the proxy in the envelope provided.