UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended     March 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
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 No.)
102 South Main Street, Culpeper, Virginia		22701
(Address of principal executive offices)		(Zip Code)
(Registrant’s telephone number, including area code) 540-829-1603
www. vfgi.net

          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 report(s), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x No   o

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

Yes   x No   o

          As of May 5, 2003, there were 7,161,159 shares of common stock, $5.00 par value, outstanding and the aggregate market value of common stock of Virginia Financial Group, Inc. held by nonaffiliates was approximately $218,415,350.

 

VIRGINIA FINANCIAL GROUP, INC.

INDEX

		Page No.
	PART I - FINANCIAL INFORMATION
ITEM 1	Consolidated Financial Statements:
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Changes in Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6-7
	Notes to Consolidated Financial Statements	8-11
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-17
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	18
ITEM 4	Controls and Procedures	18
	PART II - OTHER INFORMATION
ITEM 1	Legal Proceedings	18
ITEM 2	Change in Securities	18
ITEM 3	Defaults Upon Senior Securities	18
ITEM 4	Submission of Matters to a Vote of Security Holders	18
ITEM 5	Other Information	18
ITEM 6	Exhibits and Reports on Form 8-K	19
	SIGNATURES AND CERTIFICATIONS	20

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)

	MARCH 31, 2003		DECEMBER 31, 2002
	(unaudited)
ASSETS
Cash and due from depository institutions	$	40,753	$	44,790
Federal funds sold		22,629		26,270
Interest-bearing deposits in banks		320		487
Securities (market value: 2003, $316,319; 2002, $300,016)		315,633		299,262
Loans held for sale		14,747		17,228
Loans receivable, net		706,751		691,799
Bank premises and equipment, net		22,270		22,089
Interest receivable		5,556		5,618
Other real estate owned		894		894
Core deposit intangibles		1,669		1,708
Other assets		4,571		4,760
Total Assets	$	1,135,793	$	1,114,905
LIABILITIES
Deposits:
Noninterest-bearing demand deposits	$	181,807	$	171,412
Savings and interest-bearing demand deposits		395,605		386,722
Time deposits		402,800		401,688
Total deposits		980,212		959,822
Securities sold under agreements to repurchase		18,440		19,155
Federal Home Loan Bank advances		12,200		12,220
Short-term borrowings		438		1,040
Interest payable		1,845		1,928
Other liabilities		7,092		6,369
Total Liabilities		1,020,227		1,000,534
STOCKHOLDERS’ EQUITY
Preferred stock, no par value; (Authorized 5,000,000 shares, no shares outstanding)		—		—
Common stock, par value $5.00 per share; (Authorized 25,000,000 shares; issued and outstanding 7,160,334 in 2003 and 7,176,741 in 2002)		35,802		35,884
Capital surplus		7,775		8,143
Retained earnings		66,137		64,134
Accumulated other comprehensive income		5,852		6,210
Total Stockholders’ Equity		115,566		114,371
Total Liabilities and Stockholders’ Equity	$	1,135,793	$	1,114,905

See accompanying notes to consolidated financial statements.

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(000 OMITTED)

	THREE MONTHS ENDED MARCH 31,
	2003		2002
	(unaudited)		(unaudited)
Interest Income
Interest and fees on loans	$	12,208	$	12,685
Interest on deposits in other banks		2		2
Interest on investment securities:
Taxable		114		162
Interest and dividends on securities available for sale:
Taxable		1,920		2,095
Nontaxable		894		858
Dividends		55		72
Interest income on federal funds sold		79		144
Total Interest Income		15,272		16,018
Interest Expense
Interest on deposits		4,750		5,883
Interest on Federal Home Loan Bank advances		192		203
Interest on federal funds purchased and securities sold under agreements to repurchase		48		90
Interest on other short-term borrowings		1		3
Total Interest Expense		4,991		6,179
Net Interest Income		10,281		9,839
Less: Provision for loan losses		323		401
Net Interest Income after Provision for Loan Losses		9,958		9,438
Other Income
Service charges on deposit accounts		1,248		750
Commissions and fees from fiduciary activities		779		851
Investment fee income		233		153
Other operating income		312		381
Gains (losses) on securities available for sale		24		(6	)
Gains (losses) on other real estate owned		—		46
Fees on mortgage loans sold		1,063		686
Total Other Income		3,659		2,861
Other Expense
Compensation and employee benefits		5,258		4,716
Net occupancy expense		570		484
Supplies and equipment		948		728
Computer services		341		417
Professional fees		212		113
Other operating expenses		1,821		1,575
Total Other Expense		9,150		8,033
Income Before Income Tax Expense		4,467		4,266
Income tax expense		1,173		1,104
Net Income	$	3,294	$	3,162
Earnings per Share, basic and diluted	$	.46	$	.43
Dividends per Share	$	.18	$	.18

See accompanying notes to consolidated financial statements.

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(000 OMITTED)
(unaudited)

	Common Stock			Capital Surplus			Accumulated Other Comprehensive Income			Retained Earnings			Comprehensive Income			Total
Balance, January 1, 2002	$	36,436		$	11,329		$	1,882		$	57,060					$	106,707
Net income		—			—			—			3,162			3,162			3,162
Other Comprehensive Income, net of tax:
Unrealized losses on securities available for sale during the period, net of tax of $(188)		—			—			—			—			(373	)		—
Add: reclassification adjustment, net of tax of $2		—			—			—			—			4			—
Other comprehensive income		—			—			(369	)		—			(369	)		(369	)
Comprehensive income		—			—			—			—		$	2,793			—
Cash dividends		—			—			—			(1,311	)					(1,311	)
Stock options exercised		7			13			—			—						20
Fractional shares paid in cash		(4	)		(18	)		—			—						(22	)
Balance, March 31, 2002	$	36,439		$	11,324		$	1,513		$	58,911					$	108,187
Balance, January 1, 2003	$	35,884		$	8,143		$	6,210		$	64,134					$	114,371
Net income		—			—			—			3,294			3,294			3,294
Other Comprehensive Income, net of tax:
Unrealized losses on securities available for sale during the period, net of tax of $(120)		—			—			—			—			(342	)		—
Less: reclassification adjustment, net of tax of $(9)		—			—			—			—			(16	)		—
Other comprehensive income		—			—			(358	)		—			(358	)		(358	)
Comprehensive income		—			—			—			—		$	2,936			—
Cash dividends		—			—			—			(1,291	)					(1,291	)
Repurchase of common stock		(82	)		(368	)		—			—						(450	)
Balance, March 31, 2003	$	35,802		$	7,775		$	5,852		$	66,137					$	115,566

See accompanying notes to consolidated financial statements.

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 OMITTED)

	THREE MONTHS ENDED MARCH 31,
	2003			2002
	(unaudited)			(unaudited)
OPERATING ACTIVITIES
Net income	$	3,294		$	3,162
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		323			401
Deferred tax benefit		(77	)		(122	)
Depreciation and amortization		743			544
Pension expense		86			42
(Gain) loss on sale of securities available for sale		(24	)		6
(Gain) on sale of other real estate		—			(46	)
(Gain) on sale of fixed assets		(1	)		—
Amortization of premiums and discounts on securities		164			237
Fees on mortgage loans sold		(1,063	)		(686	)
Proceeds from sale of mortgage loans		62,498			46,286
Origination of loans for sale		(58,954	)		(36,737	)
Changes in assets and liabilities:
Decrease (increase) in interest receivable		62			(112	)
Decrease (increase) in other assets		230			(647	)
(Decrease) in interest payable		(83	)		(296	)
Increase in other liabilities		905			811
Net cash provided by operating activities		8,103			12,843
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		12,209			18,649
Proceeds from maturities of investment securities		—			—
Proceeds from maturities and principal payments of securities available for sale		47,445			15,147
Purchase of securities available for sale		(76,716	)		(35,372	)
Purchase of premises and equipment		(899	)		(300	)
Proceeds from sale of premises and equipment		15			—
Additions to other real estate		—			(11	)
Proceeds from sale of other real estate		—			356
(Increase) in cash surrender value of life insurance		(39	)		—
Net increase in loans		(15,275	)		(598	)
Net cash used in investing activities		(33,260	)		(2,129	)

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 OMITTED)

	THREE MONTHS ENDED MARCH 31,
	2003			2002
	(unaudited)			(unaudited)
FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits		19,278			9,051
Net increase (decrease) in time deposits		1,112			(1,903	)
Payments of Federal Home Loan Bank advances		(20	)		(20	)
Net (decrease) increase in repurchase agreements		(715	)		1,330
Net increase in federal funds purchased		—			180
Net decrease in short-term borrowings		(602	)		(66	)
Fractional shares paid		—			(22	)
Repurchase of common stock		(450	)		—
Stock options exercised		—			20
Cash dividends paid on common stock		(1,291	)		(1,311	)
Net cash provided by financing activities		17,312			7,259
(Decrease) increase in cash and cash equivalents		(7,845	)		17,973
CASH AND CASH EQUIVALENTS
Beginning of the period		71,547			84,625
End of the period	$	63,702		$	102,598
Supplemental Schedule of Noncash Investing Activities
Unrealized (loss) gain on securities available for sale	$	(551	)	$	561

See accompanying notes to consolidated financial statements.

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND DECEMBER 31, 2002

1.	In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2003 and December 31, 2002, and the results of operations and cash flows for the three months ended March 31, 2003 and 2002.  The statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Annual Report for the year ended December 31, 2002.
2.	The results of operations for the three month period ended March 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to prior period balances to conform to the current presentation.
3.	The Company’s securities portfolio is composed of the following (000 omitted):

	Amortized Cost		Fair Value
	March 31, 2003
	(unaudited)
Securities Held to Maturity:
Obligations of States and Political Subdivisions	$	7,053	$	7,739
	December 31, 2002
Obligations of States and Political Subdivisions	$	7,050	$	7,804
	March 31, 2003
	(unaudited)
Securities Available for Sale:
U.S. Treasury securities	$	22,075	$	22,727
U.S. Government securities		120,899		123,863
State and municipals		87,615		91,552
Corporate bonds		13,534		14,250
Collateralized mortgage obligations		16,418		16,777
Mortgage-backed securities		22,630		23,447
Equity securities		2,951		2,881
Restricted stock		3,837		3,837
Other securities		9,246		9,246
	$	299,205	$	308,580

- 8 -

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND DECEMBER 31, 2002

	December 31, 2002
U.S. Treasury securities	$	10,090	$	10,810
U.S. Government securities		111,979		115,217
State and municipals		88,627		92,661
Corporate bonds		15,542		16,221
Collateralized mortgage obligations		20,275		20,727
Mortgage-backed securities		27,813		28,815
Equity securities		2,950		2,750
Restricted stock		3,634		3,634
Other securities		1,377		1,377
	$	282,287	$	292,212

4. The Company’s loan portfolio is composed of the following (000 omitted):

	March 31, 2003			December 31, 2002
	(unaudited)
Real estate loans:
Construction	$	60,829		$	57,032
Secured by 1 – 4 family residential		230,359			217,673
Commercial and multifamily		302,702			298,839
Commercial, financial and agricultural loans		66,733			64,146
Consumer loans		51,781			54,738
All other loans		4,368			9,233
		716,772			701,661
Less:
Deferred loan fees		(654	)		(682	)
Allowance for loan losses		(9,367	)		(9,180	)
	$	706,751		$	691,799

5. Activity in the allowance for loan losses is as follows (000 omitted):

	March 31, 2003			December 31, 2002			March 31, 2002
	(unaudited)						(unaudited)
Balance at January 1	$	9,180		$	8,266		$	8,266
Recoveries added to the allowance		39			275			54
Loan losses charged to the allowance		(175	)		(963	)		(276	)
Provision recorded to expense		323			1,602			401
Balance at end of period	$	9,367		$	9,180		$	8,445

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND DECEMBER 31, 2002

6.	Short-term Borrowings:
	Outstanding short-term borrowings consisted of (000’s omitted):

	March 31, 2003		December 31, 2002
	(unaudited)
Federal Reserve borrowings	$	438	$	1,040

	Second Bank & Trust has an agreement with the Federal Reserve where it can borrow funds deposited by its customers.  This agreement calls for variable interest and is payable on demand.  U. S. Government securities and U. S. Treasury notes are pledged as collateral.  The maximum amount available under this agreement is $1,000,000.
	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 agreement to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
	The average balance of short-term borrowings outstanding did not exceed 30 percent of stockholders’ equity for the three months ended March 31, 2003 or the year ended December 31, 2002.
7.	Federal Home Loan Bank Advances:
	The Corporation’s fixed-rate, long-term debt of $12,200,000 at March 31, 2003 matures through 2010.  At March 31, 2003, the interest rates on fixed-rate, long-term debt ranged from 4.73% to 7.07%.  One advance totaling $200 thousand at March 31, 2003 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 is 6.33% at March 31, 2003.
	The contractual maturities of long-term debt are as follows (000’s omitted):

2003	$	3,060
2004		80
2005		4,060
2010		5,000
	$	12,200

The advances are collateralized by a blanket lien on first mortgage loans of Second Bank and Trust and Virginia Heartland Bank.

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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND DECEMBER 31, 2002

8.	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 for the three month periods ended March 31, 2003 and 2002.

	2003				2002
	Shares		Per Share Amount		Shares		Per Share Amount
Basic earnings per share		7,168,741	$	.46		7,286,723	$	.43
Effect of dilutive securities:
Stock options		34,112				20,507
Diluted earnings per share		7,202,853	$	.46		7,307,230	$	.43

9.

Stock Compensation Plan:

At March 31, 2003, the Corporation has a stock-based employee compensation plan which is accounted for under the recognition and measurement principles of APB Opinion 23, Accounting for Stock Issued to Employees, and related interpretations.  No stock-based 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 for the three months ended March 31, 2003 and 2002 if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (000’s omitted).

	2003			2002
Net income, as reported	$	3,294		$	3,162
Deduct: total stock-based employee compensation expense determined based on fair value method for all awards		(8	)		—
Pro forma net income	$	3,286		$	3.162
Earnings per share:
Basic – as reported	$	.46		$	.43
Basic – pro forma	$	.46		$	.43
Diluted – as reported	$	.46		$	.43
Diluted – pro forma	$	.46		$	.43

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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the major components of the results of operations, financial condition, liquidity and capital resources of Virginia Financial Group, Inc. (the Company). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and supplemental financial data.

In addition to historical information, statements contained in this report that are not historical facts may be construed as 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date thereof.

Critical Accounting Policies

General

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

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio.  The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The Company’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 (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 non-rated loans within a

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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Results of Operations

Virginia Financial Group, Inc.’s consolidated net income for the quarter ended March 31, 2003 amounted to $3.3 million or $.46 per share, compared to earnings of $3.2 million or $.43 per share for the quarter ended March 31, 2002.  Net income increased 4.2% and diluted earnings per share increased 7.0% compared to first quarter 2002 results due to growth in noninterest income.  VFGI’s earnings for the first quarter produced a return on average assets of 1.20% and a return on average realized equity of 12.35%, compared to prior year ratios of 1.24% and 12.19%, respectively.

Net Interest Income

Net interest income increased $442 thousand or 4.5% to $10.3 million for the three months ended March 31, 2003.  This improvement can be attributed to growth in average earning assets.  The net interest margin for the three months ended March 31, 2003 was 4.27%, compared to 4.30% for the year ended December 31, 2002. Average earning assets increased $60 million to $1.03 billion at March 31, 2003, an increase of 6.2% over $968.2 million at March 31, 2002. The increase in average earning assets can be attributed to higher levels of retail deposits used to fund loans and investments.  Maturities of longer term interest-bearing deposits also continue to reprice at current low interest rate levels and positively impact net interest margin.

The following table provides information on average earning assets and interest-bearing liabilities for the three months ended March 31, 2003 and 2002 as well as amounts and rates of tax equivalent interest earned and interest paid.  The tax equivalent adjustment, utilizing a federal statutory rate of 35%, amounted to $589 thousand and $528 thousand in 2003 and 2002, respectively.

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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	Quarter ended March 31,
	2003							2002
	Average Balance		Income/ Expense		Annual Yield/Rate			Average Balance		Income/ Expense		Annual Yield/Rate
	(in thousands)							(in thousands )
Securities
Taxable	$	203,826	$	2,083		4.11	%	$	189,934	$	2,348		4.94	%
Tax-exempt (1)		79,592		1,380		6.92	%		73,018		1,300		7.12	%
Total securities		283,418		3,469		4.90	%		262,952		3,648		5.55	%
Loans, net (1)		716,687		12,310		6.97	%		668,167		12,752		7.74	%
Interest earning bank deposits		487		2		1.67	%		309		2		2.62	%
Federal funds sold		27,426		79		1.17	%		36,787		144		1.59	%
Total earning assets	$	1,028,018	$	15,860		6.24	%	$	968,215	$	16,546		6.91	%
Interest-bearing deposits:
Checking	$	123,864	$	236		0.77	%	$	114,531	$	312		1.10	%
Money market		156,452		536		1.39	%		126,487		604		1.94	%
Savings		106,919		310		1.18	%		97,867		380		1.57	%
Certificates of deposit:
Less than $100,000		312,594		2,783		3.61	%		327,055		3,627		4.50	%
$100,000 and more		90,441		885		3.97	%		84,437		960		4.61	%
Total interest-bearing deposits		790,270		4,750		2.44	%		750,377		5,883		3.18	%
Federal funds and repurchase agreements		19,522		48		1.00	%		19,092		90		1.91	%
Other short term borrowings		454		1		0.89	%		727		3		1.67	%
FHLB of Atlanta borrowings		12,218		192		6.37	%		12,508		203		6.58	%
Total interest-bearing liabilities	$	822,464	$	4,991		2.46	%	$	782,704	$	6,179		3.20	%
Net interest income			$	10,869						$	10,367
Interest rate spread						3.78	%						3.71	%
Interest expense as a percent of average earning assets						1.97	%						2.59	%
Net interest margin						4.27	%						4.32	%

(1) income and yields are reported on a taxable-equivalent basis

Noninterest Income

Noninterest income increased $798 thousand to $3.7 million for the three months ended March 31, 2003, an increase of 27.9% over the comparative period in 2002.  Income from service charges on deposit accounts totaled $1.3 million for the quarter, an increase of 66.4% over 2002.  Growth in deposit accounts, improved fee structure and higher transaction volume led to the increase in service charges.  Mortgage operations also remained strong from continued low interest rates and mortgage originations for 2003 of $59.0 million, up 60.5% from the first quarter of 2002.  Fee income from gains on sale of secondary market mortgages amounted to $1.1 million for the first quarter, an increase of $377 thousand or 55.0% compared to $686 thousand in 2002. 

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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Noninterest Expense

Operating expenses increased $1.1 million, or 13.9% to $9.2 million for the three months ended March 31, 2003, compared to $8.0 million for the same period in 2002.  Of this increase, approximately $542 thousand represents increases in compensation and benefits associated with increased incentive plan accruals, pension and 401k plan costs, higher health insurance costs and a larger compensation base. Other increases included additional costs associated with professional fees related to human resources and corporate governance, telecommunication costs, postage and supplies.

Asset Quality

Non-performing assets, including loans past due 90 days and still accruing interest, amounted to $9.0 million or 1.26% of loans and other property owned at March 31, 2003, compared to $ 8.4 million or 1.19% of loans and other property owned at December 31, 2002. The Company recorded a provision for loan losses of $323 thousand for the three month period ended March 31, 2003, compared to a provision of $401 thousand for the three month period ended March 31, 2002. 

The following table provides information on asset quality statistics for the periods presented (000 omitted):

	March 31, 2003			December 31, 2002			March 31, 2002
Non accrual loans	$	1,085		$	940		$	2,748
Troubled debt restructurings		7,041			6,547			2,858
Other real estate owned		894			894			247
Total nonperforming assets	$	9,020		$	8,381		$	5,853
Loans past due as to principal or interest for 90 days or more accruing interest	$	46		$	104		$	213
Nonperforming assets to total assets		.79	%		.75	%		.56	%
Nonperforming assets to loans and other property		1.26	%		1.19	%		.88	%
Allowance for loan losses as a percentage of loans receivable		1.31	%		1.31	%		1.27	%
Allowance for loan losses as a percentage of nonperforming assets		103.85	%		109.53	%		144.28	%
Net charge-offs as a percentage of average loans receivable		.02	%		.10	%		.03	%

Troubled debt restructurings consist primarily of three loans, each of which is well secured and performing in accordance with revised terms. The allowance for loan losses at March 31, 2003 amounted to $9.4 million, compared to $9.2 million at December 31, 2002.

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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Company’s capital base provides the resource and ability to support the assets of the Company and provide capital for future expansion.  Stockholders’ equity as of March 31, 2003 of $115.6 million increased $1.2 million or approximately 1% from $114.4 million at December 31, 2002.  This increase is primarily attributable to net income earned for the three months ended March 31, 2003.  The Company’s Tier I capital consists primarily of common stockholder’s equity.  Risk weighted assets are determined by assigning various risk levels to each asset type. The Company’s Tier 1 risk based capital ratio was 12.86% at March 31, 2003, compared to 13.16% at December 31, 2002, placing the Company in a well capitalized position as defined by regulators.

The following table includes information with respect to the Company’s risk-based capital as of March 31, 2003 (000 omitted):

Tier 1 capital	$	107,667
Tier 2 capital		9,367
Total risk-based capital		117,034
Total risk-weighted assets		836,996
Average adjusted total assets		1,105,895
Capital ratios:
Tier 1 risk-based capital ratio		12.86	%
Total risk-based capital ratio		13.98	%
Leverage ratio (Tier 1 capital to average adjusted total assets)		9.74	%
Equity to assets ratio		10.17	%

Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand.  These events may occur daily or at 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 markets served, concentrations of business and industry, competition, and the Company’s overall financial condition. 

The Company’s primary sources of liquidity are cash, due from banks, fed funds sold and securities in our available for sale portfolio.  In addition, the affiliate banks have substantial lines of credit from their correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank to support liquidity.  The Company does not solicit brokered deposits, and is of the belief that predominantly all deposits are from established core depositors.

In the judgment of management, the Company maintains the ability to generate sufficient amounts of cash to cover normal requirements and any additional funds as needs may arise.

Effects of Inflation

The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. Interest rates and thus the Company’s asset liability management is impacted by changes in inflation, but there is not a direct correlation between the two measures. Management monitors the impact of inflation on the financial markets.

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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Recent Accounting Pronouncements

The Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 in October 2002.  FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions.  Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.  Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions with the scope of this Statement.  In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship assets and credit cardholder intangible assets.  Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. 

Paragraph 5 of this Statement, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002.  The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002.  Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted. 

This Statement clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill.

The transition provisions state that if the transaction that gave rise to the unidentifiable intangible asset was a business combination, the carrying amount of that asset shall be reclassified to goodwill as of the later of the date of acquisition or the date Statement 142 was first applied (fiscal years beginning after December 15, 2001).   Any previously issued interim statements that reflect amortization of the unidentifiable intangible asset subsequent to the Statement 142 application date shall be restated to remove that amortization expense.  The carrying amounts of any recognized intangible assets that meet the recognition criteria of Statement 141 that have been included in the amount reported as an unidentifiable intangible asset and for which separate accounting records have been maintained shall be reclassified and accounted for as assets apart from the unidentifiable intangible asset and shall not be reclassified to goodwill.

The Corporation is currently in the process of evaluating the impact, if any, arising from the adoption of Statement 147.

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VIRGINIA FINANCIAL GROUP, INC.
PART I – FINANCIAL INFORMATION

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to the quantitative and qualitative market risk disclosures in the Company’s Form 10K for the year ended December 31, 2002.

ITEM 4 – CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principle financial officer, we have evaluation the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly 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 II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS.
	There are no material legal proceedings to which the Registrant or any of its subsidiaries, directors, or officers is a party or by which they, or any of them, are threatened.  Any legal proceeding presently pending or threatened against Virginia Financial Group, Inc. and its subsidiaries are either not material in respect to the amount in controversy or fully covered by insurance.
ITEM 2.	CHANGES IN SECURITIES.
	None.
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.
	None.
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
	None.
ITEM 5.	OTHER INFORMATION.
	Not applicable.

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VIRGINIA FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION

ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K.
	(a)        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).
	(b)	Reports on Form 8K:
			None.

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SIGNATURES

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

VIRGINIA FINANCIAL GROUP, INC.
	/s/ O.R. BARHAM, JR.
	O.R. Barham, Jr. President and Chief Executive Officer
	May 14, 2003
	/s/ JEFFREY W. FARRAR
	Jeffrey W. Farrar, CPA Executive Vice President and Chief Financial Officer
	May 14, 2003

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CERTIFICATIONS

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

1.	I have reviewed this Quarterly Report on Form 10-Q of Virginia Financial Group, Inc;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules (13a-14 and 15d-14) for the registrant and 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 quarterly report is being prepared;
	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c.	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b.	any fraud whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 14, 2003
	/s/ O. R. BARHAM, JR.
	O. R. Barham, Jr. President and Chief Executive Officer

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I, Jeffrey W. Farrar, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Virginia Financial Group, Inc;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules (13a-14 and 15d-14) for the registrant and 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 quarterly report is being prepared;
	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c.	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent 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
	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.

May 14, 2003
	/s/ JEFFREY W. FARRAR
	Jeffrey W. Farrar Executive Vice President and Chief Financial Officer

- 22 -

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 Quarterly Report on Form 10-Q for the period ended March 31, 2003, 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