UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended         June 30, 2003

OR

[    ] 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

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       .

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

As of July 31, 2003, there were 7,149,159 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 $229,655,623.

VIRGINIA FINANCIAL GROUP, INC.

INDEX

PART I—FINANCIAL INFORMATION

		Page No.
ITEM 1	Consolidated Financial Statements:
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4-5
	Consolidated Statements of Changes in Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7-8
	Notes to Consolidated Financial Statements	9-13
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-21
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	22
ITEM 4	Controls and Procedures	22
	PART II—OTHER INFORMATION
ITEM 1	Legal Proceedings	22
ITEM 2	Changes in Securities and Use of Proceeds	22
ITEM 3	Defaults Upon Senior Securities	22
ITEM 4	Submission of Matters to a Vote of Securities Holders	23
ITEM 5	Other Information	23
ITEM 6	Exhibits and Reports on Form 8-K	24
	SIGNATURES	25

2

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(000 OMITTED)

	JUNE 30, 2003		DECEMBER 31, 2002
	(unaudited)
ASSETS
Cash and due from depository institutions	$	40,551	$	44,790
Federal funds sold		8,885		26,270
Interest-bearing deposits in banks		325		487
Securities (cost: 2003, $313,853; 2002, $289,337)		326,466		299,262
Loans held for sale		9,707		17,228
Loans receivable, net		724,619		691,799
Bank premises and equipment, net		22,497		22,089
Interest receivable		5,410		5,618
Other real estate owned		1,051		894
Core deposit intangibles		1,629		1,708
Other assets		4,580		4,760
Total Assets	$	1,145,720	$	1,114,905
LIABILITIES
Deposits:
Noninterest-bearing demand deposits	$	186,024	$	171,412
Savings and interest-bearing demand deposits		398,728		386,722
Time deposits		403,681		401,688
Total deposits		988,433		959,822
Securities sold under agreements to repurchase		20,520		19,155
Federal Home Loan Bank advances		9,180		12,220
Short-term borrowings		83		1,040
Interest payable		1,783		1,928
Other liabilities		6,169		6,369
Total Liabilities		1,026,168		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 7,149,659 in 2003 and 7,176,741 in 2002)		35,748		35,884
Capital surplus		7,482		8,143
Retained earnings		68,365		64,134
Accumulated other comprehensive income		7,957		6,210
Total Stockholders’ Equity		119,552		114,371
Total Liabilities and Stockholders’ Equity	$	1,145,720	$	1,114,905

See accompanying notes to consolidated financial statements.

3

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)

	THREE MONTHS ENDED JUNE 30,
	2003		2002
	(unaudited)		(unaudited)
Interest Income
Interest and fees on loans	$	12,006	$	12,392
Interest on deposits in other banks		—		2
Interest on investment securities:
Taxable		114		188
Interest and dividends on securities available for sale:
Taxable		1,970		2,166
Nontaxable		940		851
Dividends		108		86
Interest income on federal funds sold		65		120
Total Interest Income		15,203		15,805
Interest Expense
Interest on deposits		4,535		5,651
Interest on Federal Home Loan Bank advances		178		200
Interest on federal funds purchased and securities sold under agreements to repurchase		49		63
Interest on other short-term borrowings		2		1
Total Interest Expense		4,764		5,915
Net Interest Income		10,439		9,890
Less: Provision for loan losses		322		400
Net Interest Income after Provision for Loan Losses		10,117		9,490
Other Income
Service charges on deposit accounts		1,440		1,063
Commissions and fees from fiduciary activities		710		742
Investment fee income		115		159
Other operating income		300		334
Gains (losses) on securities available for sale		46		237
Gains (losses) on other real estate owned		—		10
Fees on mortgage loans sold		1,259		560
Total Other Income		3,870		3,105
Other Expense
Compensation and employee benefits		5,326		5,082
Net occupancy expense		548		449
Supplies and equipment		999		788
Computer services		291		418
Professional fees		144		221
Other operating expenses		1,887		1,712
Total Other Expense		9,195		8,670
Income Before Income Tax Expense		4,792		3,925
Income tax expense		1,203		1,000
Net Income	$	3,589	$	2,925
Earnings per Share, basic and diluted	$	.50	$	.40
Dividends per Share	$	.19	$	.18

See accompanying notes to consolidated financial statements.

4

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)

	SIX MONTHS ENDED JUNE 30,
	2003		2002
	(unaudited)		(unaudited)
Interest Income
Interest and fees on loans	$	24,214	$	25,077
Interest on deposits in other banks		2		4
Interest on investment securities:
Taxable		228		350
Interest and dividends on securities available for sale:
Taxable		3,890		4,261
Nontaxable		1,834		1,709
Dividends		163		158
Interest income on federal funds sold		144		264
Total Interest Income		30,475		31,823
Interest Expense
Interest on deposits		9,285		11,534
Interest on Federal Home Loan Bank advances		370		403
Interest on federal funds purchased and securities sold under agreements to repurchase		97		153
Interest on other short-term borrowings		3		4
Total Interest Expense		9,755		12,094
Net Interest Income		20,720		19,729
Less: Provision for loan losses		645		801
Net Interest Income after Provision for Loan Losses		20,075		18,928
Other Income
Service charges on deposit accounts		2,688		1,813
Commissions and fees from fiduciary activities		1,489		1,593
Investment fee income		348		312
Other operating income		612		715
Gains (losses) on securities available for sale		70		231
Gains (losses) on other real estate owned		—		56
Fees on mortgage loans sold		2,322		1,246
Total Other Income		7,529		5,966
Other Expense
Compensation and employee benefits		10,584		9,798
Net occupancy expense		1,118		933
Supplies and equipment		1,947		1,516
Computer services		632		835
Professional fees		356		334
Other operating expenses		3,708		3,287
Total Other Expense		18,345		16,703
Income Before Income Tax Expense		9,259		8,191
Income tax expense		2,376		2,104
Net Income	$	6,883	$	6,087
Earnings per Share, basic	$	.96	$	.84
Earnings per Share, diluted	$	.96	$	.83
Dividends per Share	$	.37	$	.36

See accompanying notes to consolidated financial statements.

5

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(000 OMITTED)

(unaudited)

	Common Stock			Capital Surplus			Accumulated Other Comprehensive Income		Retained Earnings			Comprehensive Income			Total
Balance, January 1, 2002	$	36,432		$	11,332		$	1,882	$	57,060					$	106,706
Net income		—			—			—		6,087			6,087			6,087
Other Comprehensive Income, net of tax:
Unrealized losses on securities available for sale during the period, net of tax of $1,146		—			—			—		—			2,225			—
Add: reclassification adjustment, net of tax of $79		—			—			—		—			(152	)		—
Other comprehensive income		—			—			2,073		—			2,073			2,073
Comprehensive income		—			—			—		—		$	8,160			—
Cash dividends		—			—			—		(2,639	)					(2,639	)
Stock options exercised		78			206			—		—						284
Fractional shares paid in cash					(22	)		—		—						(22	)
Balance, June 30, 2002	$	36,510		$	11,516		$	3,955	$	60,508					$	112,489
Balance, January 1, 2003	$	35,884		$	8,143		$	6,210	$	64,134					$	114,371
Net income		—			—			—		6,883			6,883			6,883
Other Comprehensive Income, net of tax:
Unrealized gain on securities available for sale during the period, net of tax of $965		—			—			—		—			1,792			—
Less: reclassification adjustment, net of tax of $24		—			—			—		—			(45	)		—
Other comprehensive income		—			—			1,747		—			1,747			1,747
Comprehensive income		—			—			—		—		$	8,628			—
Cash dividends		—			—			—		(2,652	)					(2,652	)
Stock options exercised		7			14			—		—						21
Repurchase of common stock		(143	)		(675	)		—		—						(818	)
Balance, June 30, 2003	$	35,748		$	7,482		$	7,957	$	68,365					$	119,552

See accompanying notes to consolidated financial statements.

6

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)

	SIX MONTHS ENDED JUNE 30,
	2003			2002
	(unaudited)			(unaudited)
OPERATING ACTIVITIES
Net income	$	6,883		$	6,087
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		645			801
Deferred tax benefit		(253	)		(323	)
Depreciation and amortization		1,499			1,067
Pension expense		174			114
(Gain) on sale of securities available for sale		(70	)		(231	)
(Gain) on sale of other real estate		—			(56	)
(Gain) on sale of fixed assets		(3	)		—
Amortization of premiums and discounts on securities		299			308
Fees on mortgage loans sold		(2,322	)		(1,246	)
Proceeds from sale of mortgage loans		132,496			91,384
Origination of loans for sale		(122,653	)		(79,680	)
Changes in assets and liabilities:
Decrease (increase) in interest receivable		208			(201	)
Increase in other assets		(101	)		(1,649	)
(Decrease) in interest payable		(145	)		(400	)
Increase (decrease) in other liabilities		(675	)		82
Net cash provided by operating activities		15,982			16,057
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		34,749			27,858
Proceeds from maturities of investment securities		—			250
Proceeds from maturities and principal payments of securities available for sale		120,465			27,509
Purchase of securities available for sale		(179,961	)		(87,111	)
Purchase of premises and equipment		(1,859	)		(707	)
Proceeds from sale of premises and equipment		33			34
Additions to other real estate		(157	)		(25	)
Proceeds from sale of other real estate		—			678
(Increase) in cash surrender value of life insurance		(103	)		—
Net increase in loans		(33,465	)		(1,682	)
Net cash used in investing activities		(60,298	)		(33,196	)

7

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)

	SIX MONTHS ENDED JUNE 30,
	2003			2002
	(unaudited)			(unaudited)
FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits		26,618			29,311
Net increase (decrease) in time deposits		1,993			(5,800	)
Payments of Federal Home Loan Bank advances		(3,040	)		(40	)
Net (decrease) increase in repurchase agreements		1,365			(105	)
Net (decrease) increase in federal funds purchased		—			(500	)
Net decrease in short-term borrowings		(957	)		(150	)
Fractional shares paid		—			(22	)
Repurchase of common stock		(818	)		—
Stock options exercised		21			284
Cash dividends paid on common stock		(2,652	)		(2,639	)
Net cash provided by financing activities		22,530			20,339
(Decrease) increase in cash and cash equivalents		(21,786	)		3,200
CASH AND CASH EQUIVALENTS
Beginning of the period		71,547			64,037
End of the period	$	49,761		$	67,237
Supplemental Schedule of Noncash Investing Activities
Unrealized gain on securities available for sale	$	2,688		$	3,169
Other real estate acquired in settlement of loans	$	157		$	150

See accompanying notes to consolidated financial statements.

8

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 June 30, 2003 and December 31, 2002, and the results of operations and cash flows for the six months ended June 30, 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 six month period ended June 30, 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
Securities Held to Maturity:
	June 30, 2003
	(unaudited)
Obligations of States and Political Subdivisions	$	7,056	$	7,959
	December 31, 2002
Obligations of States and Political Subdivisions	$	7,050	$	7,804
Securities Available for Sale:
	June 30, 2003
	(unaudited)
U.S. Treasury securities	$	9,070	$	9,792
U.S. Government securities		127,514		130,906
State and municipals		85,549		91,958
Corporate bonds		12,026		12,918
Collateralized mortgage obligations		13,385		13,606
Mortgage-backed securities		50,815		51,641
Equity securities		2,951		3,102
Restricted stock		4,257		4,257
Other securities		1,230		1,230
	$	306,797	$	319,410

9

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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):

	June 30, 2003			December 31, 2002
	(unaudited)
Real estate loans:
Construction	$	65,315		$	57,032
Secured by 1 – 4 family residential		235,608			217,673
Commercial and multifamily		313,155			298,839
Commercial, financial and agricultural loans		67,495			64,146
Consumer loans		49,595			54,738
All other loans		3,384			9,233
		734,552			701,661
Less:
Deferred loan fees		(589	)		(682	)
Allowance for loan losses		(9,344	)		(9,180	)
	$	724,619		$	691,799

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

	June 30, 2003			December 31, 2002			June 30, 2002
	(unaudited)						(unaudited)
Balance at January 1	$	9,180		$	8,266		$	8,266
Recoveries added to the allowance		110			275			157
Loan losses charged to the allowance		(591	)		(963	)		(410	)
Provision recorded to expense		645			1,602			801
Balance at end of period	$	9,344		$	9,180		$	8,814

10

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003 AND DECEMBER 31, 2002

6. Short-term Borrowings:

Outstanding short-term borrowings consisted of (000’s omitted):

	June 30, 2003		December 31, 2002
	(unaudited)
Federal Reserve borrowings	$	83	$	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 agreements 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 six months ended June 30, 2003 or the year ended December 31, 2002.

7. Federal Home Loan Bank Advances:

The Company’s fixed-rate, long-term debt of $9.2 million at June 30, 2003 matures through 2010. At June 30, 2003, the interest rates on fixed-rate, long-term debt ranged from 6.60% to 7.07%. One advance totaling $180 thousand at June 30, 2003 requires quarterly principal payments totaling $80 thousand annually plus interest. The remainder of the advances require quarterly interest payments with principal due upon maturity. The average interest rate is 6.85% at June 30, 2003.

The contractual maturities of long-term debt are as follows (000’s omitted):

2003	$	40
2004		80
2005		5,060
2010		4,000
	$	9,180

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

11

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 June 30, 2003 and 2002.

	2003			2002
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	7,154,237	$	.50	7,291,941	$	.40
Effect of dilutive securities:
Stock options	35,597			26,946
Diluted earnings per share	7,189,834	$	.50	7,318,887	$	.40

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 six month periods ended June 30, 2003 and 2002.

	2003			2002
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	7,161,280	$	.96	7,289,346	$	.84
Effect of dilutive securities:
Stock options	34,497			23,727
Diluted earnings per share	7,195,777	$	.96	7,313,073	$	.83

9. Stock Compensation Plan:

At June 30, 2003, the Company has a stock-based employee compensation plan which is accounted for under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based compensation cost is reflected in net income, as all options granted under 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 six months ended June 30, 2003 and 2002 if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (000’s omitted).

12

	2003			2002
Net income, as reported	$	6,883		$	6,087
Deduct: total stock-based employee compensation expense determined based on fair value method for all awards		(21	)		(5	)
Pro forma net income	$	6,862		$	6.082
Earnings per share:
Basic – as reported	$	.96		$	.84
Basic – pro forma	$	.96		$	.83
Diluted – as reported	$	.96		$	.83
Diluted – pro forma	$	.95		$	.83

10. Pending Acquisitions:

The Company had previously announced that it signed a definitive agreement to acquire eight branches from the following First Virginia member banks: First Virginia Bank-Southwest, First Virginia Bank-Blue Ridge and First Virginia Bank-Colonial. The branches are located in Covington, Tazewell, Woodstock, Rocky Mount and Farmville. The branches are being divested in connection with the BB&T Corporation/First Virginia Banks Inc. merger.

The acquisition, which is subject to regulatory approval, includes all deposit accounts, and the purchase of selected loans, fixed assets and real estate. At May 15, 2003 the eight branches reported deposits of $226 million and loans of $79 million.

Using June 30, 2003 balance sheet information for the Company, proforma assets and deposits would equal $1.37 billion and $1.21 billion, respectively. The proposed transaction is expected to close in the third quarter.

13

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. (VFG or 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

14

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

particular loan category. Classified loans are assigned a higher allowance factor than non-rated 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.

Results of Operations

VFG’s consolidated net income for the second quarter ended June 30, 2003 amounted to $3.6 million or $.50 per diluted share, compared to earnings of $2.9 million or $.40 per diluted share for the same period in 2002. Net income increased 22.7% and diluted earnings per share increased 25.0% compared to second quarter 2002 results due to growth in noninterest income. VFGI’s earnings for the second quarter produced a return on average assets of 1.28% and a return on average equity of 12.41%, compared to prior year ratios of 1.12% and 10.74%, respectively.

VFG’s consolidated net income for the six months ended June 30, 2003 amounted to $6.9 million or $.96 per diluted share share, compared to earnings of $6.1 million or $.83 per diluted share for the same period in 2002. Net income increased 13.1% and diluted earnings per share increased 15.7% compared to the same period in 2002. VFG’s earnings for the second quarter produced a return on average assets of 1.24% and a return on average equity of 11.97%, compared to prior year ratios of 1.18% and 11.29%, respectively.

Net Interest Income and Net Interest Margin

Net interest income on a fully taxable equivalent (“FTE”) basis increased $621 thousand or 5.9% to $11.0 million for the second quarter in 2003. This improvement can be attributed to growth in average earning assets. Average earning assets increased $71 million to $1.04 billion at June 30, 2003, an increase of 7.3% over $973.2 million at June 30, 2002. The increase in average earning assets can be attributed to higher levels of retail deposits used to fund loans and investments. The net interest margin for the second quarter in 2003 was 4.21%, compared to 4.27% for the same period in 2002. The net interest margin for the six month period ended June 30, 2003 was 4.24%, compared with 4.29% in the same period in 2002 As a result of continuing weakness in the economy, interest rates continued to trend downward during both periods. VFG is slightly asset sensitive, and declining yields on earning assets have slightly outpaced the decline in VFG’s interest-bearing liabilities, resulting in a slight decline in net interest margin.

The following table provides information on average earning assets and interest-bearing liabilities for the quarter ended June 30, 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 $586 thousand and $515 thousand for the three months ended June 30, 2003 and 2002, respectively.

15

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

	Quarter ended June 30,
	2003						2002
	Average Balance		Income/ Expense		Annual Yield/Rate		Average Balance		Income/ Expense		Annual Yield/Rate
	(in thousands)						(in thousands)
Securities:
Taxable	$	222,572	$	2,188	3.93	%	$	209,925	$	2,451	4.77	%
Tax-exempt (1)		78,652		1,458	7.42	%		74,279		1,289	7.02	%
Total securities		301,224		3,646	4.84	%		284,204		3,740	5.38	%
Loans, net (1)		724,539		12,078	6.69	%		664,316		12,458	7.63	%
Interest earning bank deposits		511		1	0.55	%		139		2	1.81	%
Federal funds sold		22,538		64	1.14	%		29,071		120	1.66	%
Total earning assets	$	1,048,812	$	15,789	6.03	%	$	977,730	$	16,320	6.80	%
Interest-bearing deposits:
Checking	$	127,182	$	237	0.75	%	$	115,684	$	309	1.08	%
Money market		159,828		465	1.17	%		127,030		601	1.90	%
Savings		111,359		275	0.99	%		100,329		396	1.58	%
Certificates of deposit:
Less than $100,000		311,831		2,683	3.45	%		328,030		3,426	4.19	%
$100,000 and more		90,714		875	3.87	%		85,289		919	4.31	%
Total interest-bearing deposits		800,914		4,535	2.27	%		756,362		5,651	3.00	%
Federal funds and repurchase agreements		20,940		49	0.93	%		17,719		63	1.43	%
Other short term borrowings		600		2	0.87	%		541		1	1.18	%
FHLB of Atlanta borrowings		10,912		178	6.57	%		12,423		200	6.46	%
Total interest-bearing liabilities	$	833,366	$	4,764	2.29	%	$	787,045	$	5,915	3.11	%
Net interest income			$	11,025					$	10,405
Interest rate spread					3.74	%					3.68	%
Interest expense as a percent of average earning assets					1.82	%					2.43	%
Net interest margin					4.21	%					4.27	%

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

The following table provides information on average earning assets and interest-bearing liabilities for the six months ended June 30, 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 $1.2 million and $1.0 million for the six months ended June 30, 2003 and 2002, respectively.

16

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

	Six Months Ended June 30,
	2003						2002
	Average Balance		Income/ Expense		Annual Yield/Rate		Average Balance		Income/ Expense		Annual Yield/Rate
	(in thousands)						(in thousands)
Securities:
Taxable	$	213,254	$	4,282	4.02	%	$	201,230	$	4,802	4.77	%
Tax-exempt (1)		79,119		2,834	7.16	%		73,755		2,589	7.02	%
Total securities		292,373		7,116	4.87	%		274,985		7,391	5.38	%
Loans, net		720,645		24,388	6.83	%		666,027		25,210	7.63	%
Interest earning bank deposits		499		2	0.92	%		193		2	1.81	%
Federal funds sold		24,981		144	1.16	%		32,258		266	1.66	%
Total earning assets	$	1,038,498	$	31,650	6.13	%	$	973,463	$	32,869	6.80	%
Interest-bearing deposits:
Checking	$	125,540	$	473	0.76	%	$	115,412	$	620	1.08	%
Money market		158,157		1,001	1.18	%		127,951		1,206	1.90	%
Savings		109,153		585	1.08	%		99,474		777	1.57	%
Certificates of deposit:
Less than $100,000		312,213		5,466	3.53	%		325,875		7,052	4.36	%
$100,000 and more		90,579		1,760	3.92	%		85,228		1,879	4.45	%
Total interest-bearing deposits		795,642		9,285	2.35	%		753,940		11,534	3.09	%
Federal funds and repurchase agreements		20,238		97	0.96	%		18,360		154	1.69	%
Other short term borrowings		527		3	1.06	%		542		4	1.59	%
FHLB of Atlanta borrowings		11,561		370	6.46	%		12,423		403	6.54	%
Total interest-bearing liabilities	$	827,968	$	9,755	2.93	%	$	785,265	$	12,095	3.11	%
Net interest income			$	21,895					$	20,774
Interest rate spread					3.76	%					3.69	%
Interest expense as a percent of average earning assets					1.89	%					2.51	%
Net interest margin					4.24	%					4.29	%

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

Noninterest Income

Total noninterest income was $3.9 million for the second quarter of 2003, an increase of 24.6% compared with the same period in 2002. Higher revenues from VFG’s mortgage and retail banking operations were the primary contributors to this growth.

Fees from retail banking operations totaled $1.4 million for the quarter, an increase of 35.5% compared with the same period in 2002. This increase resulted from growth in fee oriented deposit accounts, improved fee structure and higher transaction volume.

Mortgage banking income totaled $1.3 million for the second quarter of 2003, an increase of $699 thousand or greater than 100% compared to mortgage banking income from the second quarter last year. This substantial increase resulted from a record volume of mortgage origination activity during the quarter and resulting increases

17

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

in origination fee income. In the second quarter, VFG sold mortgages of $70.0 million, up 55.1% compared to $45.1 million in the same period last year.

Total noninterest income for the six month period was $7.5 million for 2003, an increase of 26.2% compared with the same period in 2002. This increase was primarily driven by fees associated with retail banking and mortgage banking operations.

Noninterest Expense

Noninterest expenses for the second quarter of 2003 was $9.2 million, an increase of $525 thousand or 6.1% compared to $8.7 million for the same period in 2002.

Personnel expense, the largest component of noninterest expense, was $5.3 million compared to $5.1 million in 2002, representing an increase of $244 thousand or 4.8%. Costs associated with performance compensation expenses and employee benefit plan expenses account for much of this increase.

Occupancy expense for the second quarter of 2003 was $548 thousand compared to $449 thousand for 2002, an increase of $99 thousand or 22.0%. The increase is attributable to increase costs associated with rent, real estate taxes and utilities, including a new loan production office in Charlottesville.

Supplies and equipment expense for the second quarter of 2003 was $999 thousand compared to $788 thousand in 2002, an increase of $211 thousand or 26.8%. This increase can be largely attributed to amortization and maintenance associated with hardware and software investments made in 2002 in conjunction with the conversion of our Planters Bank affiliate in October 2002. This increase is offset to a degree by the reduction in computer services expense, which amounted to $291 thousand for the second quarter of 2003 compared to $418 thousand in 2002. This decrease is the result of the reduction of data processing fees incurred by the Planters affiliate since conversion.

Noninterest expenses for the six months ended June 30, 2003 was $18.3 million, an increase of $1.6 million or 9.8% compared to $16.7 million for the same period in 2002. The increase for the six month period is consistent with the explanations for the three month period, with the exception of compensation and employee benefit expense, which increased at a higher rate in the first quarter compared to the second quarter due to increases in performance related compensation.

Asset Quality

Non-performing assets amounted to $7.0 million or .95% of loans and other property owned at June 30, 2003, compared to $8.5 million or 1.19% of loans and other property owned at December 31, 2002. VFG recorded a provision for loan losses of $322 thousand for the three month period ended June 30, 2003, compared to a provision of $400 thousand for the three month period ended June 30, 2002. Net charge-offs for the second quarter of 2003 were $346 thousand or .08% of average loans, compared to .02% for the first quarter of 2003.

18

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

	June 30, 2003			December 31, 2002			June 30, 2002
Non accrual loans	$	1,257		$	940		$	2,938
Troubled debt restructurings		4,707			6,547			5,420
Other real estate owned		1,051			894			100
Total nonperforming assets	$	7,015		$	8,381		$	8,458
Loans past due as to principal or interest for 90 days or more accruing interest	$	512		$	104		$	33
Nonperforming assets to total assets		.61	%		.75	%		.79	%
Nonperforming assets to loans and other property		.95	%		1.19	%		1.27	%
Allowance for loan losses as a percentage of loans receivable		1.27	%		1.31	%		1.32	%
Allowance for loan losses as a percentage of nonperforming assets		133.20	%		109.53	%		104.21	%
Net charge-offs as a percentage of average loans receivable		.08	%		.10	%		.04	%

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 June 30, 2003 amounted to $9.3 million, compared to $9.2 million at December 31, 2002.

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 June 30, 2003 of $119.6 million increased $5.2 million or approximately 4.5% from $114.4 million at December 31, 2002. This increase is primarily attributable to net income earned for the six months ended June 30, 2003 and an increase of $1.7 million associated with accumulated other comprehensive income related to the unrealized gain on securities available for sale. 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 June 30, 2003, compared to 13.16% at December 31, 2002, placing the Company in a well capitalized position as defined by regulators.

19

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The following table includes information with respect to the VFG’s risk-based capital as of June 30, 2003 (000 omitted):

Tier 1 capital	$	109,551
Tier 2 capital		9,412
Total risk-based capital		119,099
Total risk-weighted assets		837,513
Average adjusted total assets		1,121,547
Capital ratios:
Tier 1 risk-based capital ratio		13.10	%
Total risk-based capital ratio		14.22	%
Leverage ratio (Tier 1 capital to average adjusted total assets)		9.78	%
Equity to assets ratio		10.43	%

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.

20

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Recent Accounting Pronouncements

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

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

21

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 10-K 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 principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures through 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 AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

22

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

The annual meeting of stockholders of Virginia Financial Group, Inc. was held on April 28, 2003.

The following directors were elected for terms expiring in 2006:

	FOR	AGAINST
Harry V. Boney, Jr.	4,866,671	55,231
Fred D. Bowers	4,786,088	135,814
Taylor E. Gore	4,856,500	65,402
Jan S. Hoover	4,865,142	56,760
W. Robert Jebson, Jr.	4,871,320	50,582
H. Wayne Parrish	4,855,703	66,199

The following directors’ term of office continued after the meeting:

Lee S. Baker	Christopher M. Hallberg
O.R. Barham, Jr.	Martin F. Lightsey
Benham M. Black	P. William Moore, Jr.
E. Page Butler	Thomas F. Williams, Jr.
Gregory L. Fisher

Votes were cast in ratification of the selection of Yount, Hyde & Barbour, P.C. as external auditors of the Company for fiscal 2003.

ITEM 5. OTHER INFORMATION.

Not applicable.

23

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	Purchase and Assumption Agreement dated June 11, 2003 among BB&T Corporation, First Virginia Bank – Southwest, First Virginia Bank – Colonial, First Virginia Bank – Blue Ridge; and Second Bank & Trust and Planters Bank & Trust Company of Virginia, affiliates of Virginia Financial Group, Inc.
Exhibit No. 3.1	Articles of Incorporation incorporated by reference to Exhibit 3.1 to Form 8-K filed January 30, 2002.
Exhibit No. 3.2	Bylaws incorporated by reference to Exhibit 3.2 to Form 8-K filed January 30, 2002.
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).
Exhibit 31	Section 302 Certifications
Exhibit 32	Section 906 Certifications
(b)    Reports on Form 8-K:
	Virginia Financial Group, Inc. filed a Form 8-K on April 21, 2003 announcing its first quarter earnings results.
	Virginia Financial Group, Inc. filed a Form 8-K on June 11, 2003 announcing the signing of a definitive agreement to acquire eight branches from several First Virginia member banks. The branches are located in Covington, Tazewell, Woodstock, Rocky Mount and Farmville, Virginia. The acquisition, which is subject to regulatory approval, includes all deposit accounts, and the purchase of selected loans, fixed assets and real estate. At May 15, 2003, the eight branches reported deposits of $226 million and loans of $79 million.

24

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

August 6, 2003

/s/    JEFFREY W. FARRAR        

Jeffrey W. Farrar, CPA

Executive Vice President and Chief Financial Officer

August 6, 2003

25