10-Q

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 September 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	(I.R.S. Employer
Incorporation or organization)	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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨.

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

As of October 31, 2003, there were 7,149,926 shares of common stock, $5.00 par value, outstanding.

VIRGINIA FINANCIAL GROUP, INC.

INDEX

		Page No.
	PART I – FINANCIAL INFORMATION
ITEM 1	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	22
ITEM 5	Other Information	22
ITEM 6	Exhibits and Reports on Form 8-K	23
	SIGNATURES	24

2

ITEM 1 – FINANCIAL STATEMENTS

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(000 OMITTED)

	SEPTEMBER 30, 2003		DECEMBER 31, 2002
	(unaudited)
ASSETS
Cash and due from depository institutions	$	62,464	$	44,790
Federal funds sold		8,840		26,270
Interest-bearing deposits in banks		351		487
Securities (cost: 2003, $379,706; 2002, $289,337)		386,182		299,262
Loans held for sale		7,536		17,228
Loans receivable, net		855,111		691,799
Bank premises and equipment, net		27,283		22,089
Interest receivable		6,004		5,618
Other real estate owned		1,233		894
Intangible assets		20,628		1,708
Other assets		6,908		4,760
Total Assets	$	1,382,540	$	1,114,905
LIABILITIES
Deposits:
Noninterest-bearing demand deposits	$	223,721	$	171,412
Savings and interest-bearing demand deposits		491,881		386,722
Time deposits		491,741		401,688
Total deposits		1,207,343		959,822
Securities sold under agreements to repurchase		34,345		19,155
Federal Home Loan Bank advances		9,160		12,220
Short-term borrowings		5,353		1,040
Interest payable		2,409		1,928
Other liabilities		6,193		6,369
Total Liabilities		1,264,803		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 7,149,926 in 2003 and 7,176,741 in 2002)		35,748		35,884
Capital surplus		7,482		8,143
Retained earnings		70,540		64,134
Accumulated other comprehensive income		3,967		6,210
Total Stockholders’ Equity		117,737		114,371
Total Liabilities and Stockholders’ Equity	$	1,382,540	$	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 SEPTEMBER 30,
	2003		2002
	(unaudited)		(unaudited)
Interest Income
Interest and fees on loans	$	12,167	$	12,533
Interest on deposits in other banks		29		—
Interest on investment securities:
Taxable		109		156
Interest and dividends on securities available for sale:
Taxable		2,066		2,275
Nontaxable		897		900
Dividends		96		57
Interest income on federal funds sold		25		117
Total Interest Income		15,389		16,038
Interest Expense
Interest on deposits		4,396		5,388
Interest on Federal Home Loan Bank advances		163		203
Interest on federal funds purchased and securities sold under agreements to repurchase		62		60
Interest on other short-term borrowings		1		2
Total Interest Expense		4,622		5,653
Net Interest Income		10,767		10,385
Less: Provision for loan losses		323		401
Net Interest Income after Provision for Loan Losses		10,444		9,984
Other Income
Service charges on deposit accounts		1,455		1,212
Commissions and fees from fiduciary activities		673		735
Investment fee income		103		67
Other operating income		272		372
Gains (losses) on securities available for sale		365		(38	)
Gains (losses) on other real estate owned		20		(2	)
Fees on mortgage loans sold		1,288		801
Total Other Income		4,176		3,147
Other Expense
Compensation and employee benefits		5,690		4,865
Net occupancy expense		561		507
Supplies and equipment		893		895
Data processing services		270		519
Professional fees		219		100
Other operating expenses		2,274		1,964
Total Other Expense		9,907		8,850
Income Before Income Tax Expense		4,713		4,281
Income tax expense		1,181		1,133
Net Income	$	3,532	$	3,148
Earnings per Share, basic and diluted	$	.49	$	.43
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)

	NINE MONTHS ENDED SEPTEMBER 30,
	2003		2002
	(unaudited)		(unaudited)
Interest Income
Interest and fees on loans	$	36,381	$	37,610
Interest on deposits in other banks		31		4
Interest on investment securities:
Taxable		337		506
Interest and dividends on securities available for sale:
Taxable		5,956		6,536
Nontaxable		2,731		2,609
Dividends		259		215
Interest income on federal funds sold		169		381
Total Interest Income		45,864		47,861
Interest Expense
Interest on deposits		13,681		16,922
Interest on Federal Home Loan Bank advances		533		606
Interest on federal funds purchased and securities sold under agreements to repurchase		159		213
Interest on other short-term borrowings		4		6
Total Interest Expense		14,377		17,747
Net Interest Income		31,487		30,114
Less: Provision for loan losses		968		1,202
Net Interest Income after Provision for Loan Losses		30,519		28,912
Other Income
Service charges on deposit accounts		4,143		3,025
Commissions and fees from fiduciary activities		2,162		2,328
Investment fee income		451		379
Other operating income		884		1,087
Gains (losses) on securities available for sale		435		193
Gains (losses) on other real estate owned		20		54
Fees on mortgage loans sold		3,610		2,047
Total Other Income		11,705		9,113
Other Expense
Compensation and employee benefits		16,274		14,663
Net occupancy expense		1,679		1,448
Supplies and equipment		2,840		2,412
Data processing services		902		1,354
Professional fees		575		435
Other operating expenses		5,982		5,242
Total Other Expense		28,252		25,553
Income Before Income Tax Expense		13,972		12,472
Income tax expense		3,557		3,237
Net Income	$	10,415	$	9,235
Earnings per Share, basic	$	1.46	$	1.27
Earnings per Share, diluted	$	1.45	$	1.26
Dividends per Share	$	.56	$	.54

See accompanying notes to consolidated financial statements.

5

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 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		—			—			—			9,235			9,235			9,235
Other Comprehensive Income, net of tax:
Unrealized gains on securities available for sale during the period, net of tax of $2,660		—			—			—			—			5,312			—
Less: reclassification adjustment, net of tax of $66		—			—			—			—			(127	)		—
Other comprehensive income		—			—			5,185			—			5,185			5,185
Comprehensive income		—			—			—			—		$	14,420			—
Cash dividends		—			—			—			(3,953	)					(3,953	)
Stock options exercised		91			226			—			—						317
Repurchase of common stock		(240	)		(1,192	)											(1,432	)
Fractional shares paid in cash					(22	)		—			—						(22	)
Balance, September 30, 2002	$	36,283		$	10,344		$	7,067		$	62,342					$	116,036
Balance, January 1, 2003	$	35,884		$	8,143		$	6,210		$	64,134					$	114,371
Net income		—			—			—			10,415			10,415			10,415
Other Comprehensive Income, net of tax:
Unrealized losses on securities available for sale during the period, net of tax of $(686)		—			—			—			—			(1,960	)		—
Less: reclassification adjustment, net of tax of $(152)		—			—			—			—			(283	)		—
Other comprehensive income		—			—			(2,243	)		—			(2,243	)		(2,243	)
Comprehensive income		—			—			—			—		$	8,172			—
Cash dividends		—			—			—			(4,009	)					(4,009	)
Stock options exercised		7			14			—			—						21
Repurchase of common stock		(143	)		(675	)		—			—						(818	)
Balance, September 30, 2003	$	35,748		$	7,482		$	3,967		$	70,540					$	117,737

See accompanying notes to consolidated financial statements.

6

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)

	NINE MONTHS ENDED SEPTEMBER 30,
	2003			2002
	(unaudited)			(unaudited)
OPERATING ACTIVITIES
Net income	$	10,415		$	9,235
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		968			1,202
Deferred tax benefit		(1,133	)		(371	)
Depreciation and amortization		2,194			1,757
Pension expense		256			185
(Gain) on sale of securities available for sale		(435	)		(193	)
(Gain) on sale of other real estate		(20	)		(54	)
(Gain) on sale of fixed assets		(24	)		—
Amortization of premiums and discounts on securities		503			338
Fees on mortgage loans sold		(3,610	)		(2,047	)
Proceeds from sale of mortgage loans		83,469			121,692
Origination of loans for sale		(70,167	)		(109,867	)
Changes in assets and liabilities:
(Increase) in interest receivable		(386	)		(32	)
(Increase) decrease in intangible assets		(18,920	)		119
Increase in other assets		(1,426	)		(1,501	)
Increase (decrease) in interest payable		481			(560	)
Increase in other liabilities		1,257			1,094
Net cash provided by operating activities		3,422			20,997
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		74,378			30,024
Proceeds from maturities of investment securities		—			750
Proceeds from maturities and principal payments of securities available for sale		160,192			47,596
Purchase of securities available for sale		(325,009	)		(125,000	)
Purchase of premises and equipment		(7,324	)		(3,210	)
Proceeds from sale of premises and equipment		58			35
Additions to other real estate		(527	)		(29	)
Proceeds from sale of other real estate		168			678
Increase in cash surrender value of life insurance		(128	)		—
Net increase in loans		(164,280	)		(18,482	)
Net cash used in investing activities		(262,472	)		(67,638	)

7

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)

	NINE MONTHS ENDED SEPTEMBER 30,
	2003			2002
	(unaudited)			(unaudited)
FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits		157,468			59,023
Net increase (decrease) in time deposits		90,053			(9,795	)
Payments of Federal Home Loan Bank advances		(3,060	)		(60	)
Net increase (decrease) in repurchase agreements		15,190			(2,325	)
Net (decrease) in federal funds purchased		—			(500	)
Net increase (decrease) in short-term borrowings		4,313			(97	)
Fractional shares paid		—			(22	)
Repurchase of common stock		(818	)		(1,432	)
Stock options exercised		21			317
Cash dividends paid on common stock		(4,009	)		(3,953	)
Net cash provided by financing activities		259,158			41,156
Increase (decrease) in cash and cash equivalents		108			(5,485	)
CASH AND CASH EQUIVALENTS
Beginning of the period		71,547			64,037
End of the period	$	71,655		$	58,552
Supplemental Schedule of Noncash Investing Activities
Unrealized gain (losses) on securities available for sale	$	(3,450	)	$	7,972
Other real estate acquired in settlement of loans	$	157		$	691

See accompanying notes to consolidated financial statements.

8

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 September 30, 2003 and December 31, 2002, and the results of operations and cash flows for the nine months ended September 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 nine month period ended September 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
	September 30, 2003
	(unaudited)
Securities Held to Maturity:
Obligations of States and Political Subdivisions	$	6,335	$	7,008
	December 31, 2002
Obligations of States and Political Subdivisions	$	7,050	$	7,804
	September 30, 2003
	(unaudited)
Securities Available for Sale:
U.S. Treasury securities	$	8,060	$	8,630
U.S. Government securities		167,401		168,908
State and municipals		80,845		84,519
Corporate bonds		11,514		12,191
Collateralized mortgage obligations		11,169		11,377
Mortgage-backed securities		87,855		87,803
Equity securities		1,188		1,080
Restricted stock		4,257		4,257
Other securities		1,082		1,082
	$	373,371	$	379,847

9

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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):

	September 30, 2003			December 31, 2002
	(unaudited)
Real estate loans:
Construction	$	75,099		$	57,032
Secured by 1 – 4 family residential		314,410			217,673
Commercial and multifamily		339,753			298,839
Commercial, financial and agricultural loans		75,119			64,146
Consumer loans		56,657			54,738
All other loans		4,214			9,233
		865,252			701,661
Less:
Deferred loan fees		(483	)		(682	)
Allowance for loan losses		(9,658	)		(9,180	)
	$	855,111		$	691,799

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

	September 30, 2003			December 31, 2002			September 30, 2002
	(unaudited)						(unaudited)
Balance at January 1	$	9,180		$	8,266		$	8,266
Recoveries added to the allowance		189			275			239
Loan losses charged to the allowance		(679	)		(963	)		(474	)
Provision recorded to expense		968			1,602			1,202
Balance at end of period	$	9,658		$	9,180		$	9,233

10

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

6. Short-term Borrowings:

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

	September 30, 2003		December 31, 2002
	(unaudited)
Line of Credit – SunTrust	$	5,000	$	—
Federal Reserve borrowings		353		1,040
	$	5,353	$	1,040

The Company has a line of credit agreement with SunTrust for general working capital needs. The note is unsecured, calls for variable interest payments and is payable on demand.

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 $2,500,000.

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 nine months ended September 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 September 30, 2003 matures through 2010. At September 30, 2003, the interest rates on fixed-rate, long-term debt ranged from 6.60% to 7.07%. One advance totaling $160 thousand at September 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 September 30, 2003.

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

2003	$	20
2004		80
2005		4,060
2010		5,000
	$	9,160

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

11

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 September 30, 2003 and 2002.

	2003			2002
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	7,149,926	$	.49	7,275,958	$	.43
Effect of dilutive securities:
Stock options	36,805			28,187
Diluted earnings per share	7,186,731	$	.49	7,304,145	$	.43

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 nine month periods ended September 30, 2003 and 2002.

	2003			2002
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	7,157,482	$	1.46	7,284,835	$	1.27
Effect of dilutive securities:
Stock options	35,326			25,213
Diluted earnings per share	7,192,808	$	1.45	7,310,048	$	1.26

9. Stock Compensation Plan:

At September 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 nine months ended September 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

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

	2003			2002
Net income, as reported	$	10,415		$	9,235
Deduct: total stock-based employee compensation expense determined based on fair value method for all awards		(32	)		(8	)
Pro forma net income	$	10,383		$	9.227
Earnings per share:
Basic – as reported	$	1.46		$	1.27
Basic – pro forma	$	1.45		$	1.27
Diluted – as reported	$	1.45		$	1.26
Diluted – pro forma	$	1.44		$	1.26

10. Acquisition of Eight Branches

On September 26, 2003, VFGI purchased 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 were divested in connection with the BB&T Corporation/First Virginia Banks Inc. merger. The purchase price of $19.0 million represented a 9.5% premium on the deposits assumed at the date of consummation.

The acquisition included the assumption of certain deposit accounts and purchase of selected loans, fixed assets and real estate as follows:

Assets Purchased (at fair value):
Cash	$	1,490,005
Loans		78,889,483
Real estate and personal property		4,447,412
Goodwill		13,784,992
Core deposit intangible		4,829,666
Other assets		7,724
Total assets acquired		103,449,282
Liabilities Assumed (at fair value):
Deposit accounts		201,506,829
Other liabilities		41,794
Total liabilities assumed		201,548,623
Net Liabilities Assumed:	$	98,099,341

Of the $19.0 million of acquired intangible assets, $4.8 million was assigned to core deposit intangibles to be amortized over a nine year period. In addition, $1.1 million was assigned as a premium on the certificates of deposit assumed, while $1.5 million was assigned as a premium on the loans purchased. Weighted average lives for the certificates of deposit and loans receivable are one year and seven years, respectively.

13

VIRGINIA FINANCIAL GROUP, INC.

ITEM 2 – 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. (VFGI or the Company). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereon.

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 of this report.

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

14

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

loans within the 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

VFGI’s consolidated net income for the third quarter ended September 30, 2003 amounted to $3.5 million or $.49 per diluted share, compared to earnings of $3.1 million or $.43 per diluted share for the same period in 2002. Net income increased 12.2% and diluted earnings per share increased 14.0% compared to third quarter 2002 results due primarily to growth in noninterest income. VFGI’s earnings for the third quarter produced a return on average assets of 1.24% and a return on average equity of 12.09%, compared to prior year ratios of 1.12% and 11.61%, respectively.

VFGI’s consolidated net income for the nine months ended September 30, 2003 amounted to $10.4 million or $1.45 per diluted share, compared to earnings of $9.2 million or $1.26 per diluted share for the same period in 2002. Net income increased 12.8% and diluted earnings per share increased 15.1% compared to the same period in 2002. VFGI’s earnings for the nine month period produced a return on average assets of 1.22% and a return on average equity of 11.93%, compared to prior year ratios of 1.17% and 11.20%, respectively.

Net Interest Income and Net Interest Margin

Tax equivalent net interest income amounted to $11.3 million for the quarter, an increase of $395 thousand or 3.6% over the same period in 2002. This improvement was attributable to growth in average earning assets, which offset the effects of a decreased net interest margin. Average earning assets grew to $1.089 billion compared to $1.007 billion in the third quarter of 2002. VFGI’s net interest margin decreased to 4.12% for the quarter, compared to 4.33% for the third quarter of 2002 and 4.21% for the second quarter of 2003. Yields on average loans and total earning assets were 6.43% and 5.81% for the quarter, compared to a cost of funds of 2.12%. Yields on average loans and total earning assets were 6.69% and 6.03% for the second quarter of 2003, compared to a cost of funds of 2.29%. Assets yields were impacted by the last Federal Reserve rate cut, while declines in VFGI’s cost of funds moderated. VFGI is asset sensitive, and thus experienced some contraction in its net interest margin.

For the nine month period, tax equivalent net interest income amounted to $33.2 million, an increase of $1.5 million or 4.8% over $31.7 million the same period in 2002. This improvement was also attributable to growth in average earning assets, which offset the effects of a decreased net interest margin. Average earning assets increased by $66.7 million or 6.8% to $1.052 billion compared to $985.3 million for the same period in 2002.

The following table provides information on average earning assets and interest-bearing liabilities for the quarter ended September 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 $522 thousand and $510 thousand for the three months ended September 30, 2003 and 2002, respectively.

15

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

	Quarter ended September 30,
	2003						2002
	Average Balance		Income/ Expense		Annual Yield/Rate		Average Balance		Income/ Expense		Annual Yield/Rate
	(in thousands)						(in thousands)
Securities
Taxable	$	239,450	$	2,274	3.80	%	$	228,061	$	2,471	4.33	%
Tax-exempt (1)		77,260		1,354	7.01	%		77,968		1,365	7.00	%
Total securities		316,710		3,628	4.58	%		306,029		3,836	5.01	%
Loans, net (1)		755,222		12,233	6.43	%		673,149		12,595	7.48	%
Interest earning bank deposits		313		26	32.63	%		505		2	1.58	%
Federal funds sold		16,946		25	0.59	%		27,762		115	1.66	%
Total earning assets	$	1,089,191	$	15,912	5.81	%	$	1,007,445	$	16,548	6.57	%
Interest-bearing deposits:
Checking	$	134,876	$	217	0.64	%	$	119,242	$	292	0.97	%
Money market		163,710		421	1.02	%		142,870		599	1.66	%
Savings		114,982		235	0.81	%		103,868		394	1.50	%
Certificates of deposit:
Less than $100,000		315,843		2,642	3.32	%		322,286		3,217	3.96	%
$100,000 and more		93,177		881	3.75	%		84,788		886	4.15	%
Total interest-bearing deposits		822,588		4,396	2.12	%		773,054		5,388	2.77	%
Federal funds and repurchase agreements		40,377		63	0.62	%		16,481		60	1.44	%
Other short term borrowings		403		1	1.46	%		818		2	0.97	%
FHLB of Atlanta borrowings		9,178		163	7.03	%		12,260		203	6.57	%
Total interest-bearing liabilities	$	872,546	$	4,623	2.10	%	$	802,613	$	5,653	2.79	%
Net interest income			$	11,289					$	10,895
Interest rate spread					3.71	%					3.78	%
Interest expense as a percent of average earning assets					1.68	%					2.24	%
Net interest margin					4.12	%					4.33	%

⁽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 nine months ended September 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 $1.7 million and $1.6 million for the nine months ended September 30, 2003 and 2002, respectively.

16

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

	Nine Months Ended September 30,
	2003						2002
	Average Balance		Income/ Expense		Annual Yield/Rate		Average Balance		Income/ Expense		Annual Yield/Rate
	(in thousands)						(in thousands)
Securities
Taxable	$	222,299	$	6,555	3.93	%	$	210,626	$	7,276	4.61	%
Tax-exempt (1)		78,492		4,188	7.12	%		75,202		3,954	7.01	%
Total securities		300,791		10,743	4.76	%		285,828		11,230	5.24	%
Loans, net		732,297		36,621	6.69	%		668,398		37,805	7.56	%
Interest earning bank deposits		436		28	8.59	%		336		4	1.68	%
Federal funds sold		18,408		169	1.23	%		30,693		381	1.66	%
Total earning assets	$	1,051,932	$	47,561	6.04	%	$	985,255	$	49,420	6.70	%
Interest-bearing deposits:
Checking	$	128,687	$	690	0.72	%	$	116,701	$	912	1.05	%
Money market		160,028		1,422	1.19	%		132,901		1,805	1.82	%
Savings		111,117		820	0.99	%		100,944		1,171	1.55	%
Certificates of deposit:
Less than $100,000		313,436		8,108	3.46	%		324,660		10,269	4.23	%
$100,000 and more		91,454		2,641	3.86	%		85,022		2,765	4.35	%
Total interest-bearing deposits		804,722		13,681	2.27	%		760,228		16,922	2.98	%
Federal funds and repurchase agreements		22,206		159	0.96	%		17,730		213	1.60	%
Other short term borrowings		486		4	1.17	%		635		6	1.34	%
FHLB of Atlanta borrowings		10,758		533	6.62	%		12,363		606	6.55	%
Total interest-bearing liabilities	$	838,172	$	14,377	2.29	%	$	790,956	$	17,747	3.00	%
Net interest income			$	33,184					$	31,673
Interest rate spread					3.75	%					3.70	%
Interest expense as a percent of average earning assets					1.83	%					2.41	%
Net interest margin					4.21	%					4.29	%

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

Noninterest Income

Total noninterest income was $4.2 million for the third quarter of 2003; an increase of 32.7% compared with $3.1 million the same period in 2002. Higher revenues from VFGI’s mortgage and retail banking operations were the primary contributors to this growth. In addition, the Company recorded during the third quarter of 2003 nonrecurring income of $365 thousand associated with the sale of investments. This sale represented the liquidation of investments by the holding company to increase the capitalization of its Planters Bank affiliate in contemplation of the branch acquisition. Excluding this gain, noninterest income growth would have been 21.1% for the third quarter compared to the same period in 2002.

Fees from retail banking operations totaled $1.4 million for the quarter, an increase of 20.1% compared with the same period in 2002. This increase resulted from growth in fee oriented deposit accounts, improved fee structure and higher transaction volume.

17

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Mortgage banking income totaled $1.3 million for the third quarter of 2003, an increase of $487 thousand or 60.8% compared to mortgage banking income from the third quarter last year. This increase resulted from continuing record volumes of mortgage origination activity during the quarter. VFGI began to see a reduction in mortgage activity late in the third quarter, and expects the level of revenue from mortgage operations to decrease in the fourth quarter.

Total noninterest income for the nine month period was $11.7 million for 2003, an increase of $2.6 million or 28.4% compared with $9.1 million for the same period in 2002. This increase was primarily driven by fees associated with retail banking and mortgage banking operations, as well as aforementioned gains on sale of securities.

Noninterest Expense

Noninterest expense for the third quarter of 2003 amounted to $9.9 million, an increase of $1.1 million or 11.94% over the same period in 2002. Included in this increase are nonrecurring expenses of $340 thousand associated with integration of the First Virginia Branches. Compensation and benefit expense, the largest component of noninterest expense, was $5.7 million compared to $4.9 million in 2002, representing an increase of $825 thousand or 17.0%. This increase represents higher costs associated with the establishment of loan production offices in Charlottesville and Lynchburg, mortgage originator commissions, medical and pension benefits, and other incentive related accruals.

Occupancy expense for the third quarter of 2003 was $561 thousand compared to $507 thousand for 2002, an increase of $54 thousand or 10.7%. The increase is attributable to increased costs associated with rent, real estate taxes and utilities, including new loan production offices in Charlottesville and Lynchburg.

Computer services expense amounted to $270 thousand for the third quarter of 2003 compared to $519 thousand in 2002. This decrease is the result of the reduction of data processing fees incurred by the Planters affiliate since conversion.

Noninterest expense for the nine months ended September 30, 2003 was $28.3 million, an increase of $2.7 million or 10.6% compared to $25.6 million for the same period in 2002. The increase for the nine 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 third quarter compared to the first six months of 2003 due to increases in performance related compensation.

Asset Quality

VFGI’s ratio of non-performing assets as a percentage of total assets amounted to .55% at the end of the quarter, down from .61% for the previous quarter. VFGI’s ratio of non-performing assets to loans and other real estate owned amounted to .88% at the end of the quarter, compared to ..95% for the previous quarter. Net charge-offs as a percentage of average loans receivable amounted to less than .1% for the quarter, compared to

18

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

.08% for the previous quarter. At September 30, 2003, the allowance for loan losses as a percentage of non-performing assets was 126.6%, while the allowance as a percentage of total loans amounted to 1.12%. This percentage decline is due primarily to the addition of $77.4 million in loans purchased in connection with the branch purchase discussed in Note 10 to the financial statements. VFGI chose to not record a special provision for these loans mainly due to the fact that much of this portfolio was 1-4 family residential loans, representing a low risk profile. In addition, VFGI has implemented a more rigorous methodology to calculate the required allowance, and historical loss ratios support a lower coverage ratio.

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

	September 30, 2003			December 31, 2002			September 30, 2002
Non accrual loans	$	1,824		$	940		$	527
Troubled debt restructurings		4,572			6,547			5,420
Other real estate owned		1,233			894			643
Total nonperforming assets	$	7,629		$	8,381		$	6,590
Loans past due as to principal or interest for 90 days or more accruing interest	$	11		$	104		$	2
Nonperforming assets to total assets		.55	%		.75	%		.60	%
Nonperforming assets to loans and other property		.88	%		1.19	%		.96	%
Allowance for loan losses as a percentage of loans receivable		1.12	%		1.31	%		1.35	%
Allowance for loan losses as a percentage of nonperforming assets		126.60	%		109.53	%		140.11	%
Net charge-offs as a percentage of average loans receivable		.06	%		.10	%		.04	%

Troubled debt restructurings consist primarily of two relationships, each of which is well secured and performing in accordance with revised terms. The allowance for loan losses at September 30, 2003 amounted to $9.7 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 September 30, 2003 of $117.7 million increased $3.4 million or approximately 2.9% from $114.4 million at December 31, 2002. This increase is primarily attributable to net income earned for the nine months ended September 30, 2003, less $4.0 million in dividends paid and a decrease of $2.2 million associated with accumulated other comprehensive income related to the

19

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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 9.68% at September 30, 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 VFGI’s risk-based capital as of September 30, 2003 (000 omitted):

Tier 1 capital	$	92,760
Tier 2 capital		9,658
Total risk-based capital		102,418
Total risk-weighted assets		958,070
Average adjusted total assets		1,159,069
Capital ratios:
Tier 1 risk-based capital ratio		9.68	%
Total risk-based capital ratio		10.69	%
Leverage ratio (Tier 1 capital to average adjusted total assets)		8.00	%
Equity to assets ratio		8.52	%

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

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

In April 2003, the FASB 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 FASB, 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS

INTERNET ACCESS TO CORPORATE DOCUMENTS

The Company provides access to its SEC filings through the corporate website at www.vfgi.net. After accessing the website, the filings are available upon selecting the SEC Filings & Other Documents icon. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.

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

We maintain a system of disclosure controls and procedures designed to ensure that material information relating to the Company and its consolidated subsidaries is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within the Company, particularly during the period in which this report is being prepared. The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, and based on that evaluation, concluded that the Company’s disclosure controls and procedures are operating effectively. There were no significant changes in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no material legal proceedings to which the Company 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.

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

None.

ITEM 5. OTHER INFORMATION.

Not applicable.

22

VIRGINIA FINANCIAL GROUP, INC.

PART II – OTHER INFORMATION

I TEM 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. incorporated by reference to Exhibit 2.1 to Form 8-K filed September 29, 2003.
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 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 incorporated by reference to Exhibit 99 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 August 6, 2003 announcing its second quarter earnings results.

Virginia Financial Group, Inc. filed a Form 8-K on September 29, 2003, announcing that two banking affiliates of Virginia Financial Group, Inc. acquired certain assets and assumed certain deposit liabilities relating to eight former branch offices of First Virginia Banks, Inc. The newly acquired branches in aggregate represent the acquisition of loans of $79 million, real estate of $4 million and the assumption of deposits of $202 million. VFGI’s Planters Bank & Trust Company of Virginia affiliate acquired seven of these branches, while VFGI’s Second Bank & Trust affiliate acquired one of these branches. The branches are located in Covington, Tazewell, Woodstock, Rocky Mount and Farmville, Virginia.

23

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.

(Registrant)                            

/s/ O.R. Barham, Jr.

O.R. Barham, Jr.

President and Chief Executive Officer

Principal Executive Officer

November 12, 2003

/s/ Jeffrey W. Farrar

Jeffrey W. Farrar, CPA

Executive Vice President and Chief Financial Officer

Principal Financial Officer

November 12, 2003

24

EX-31

Exhibit 31

Section 302 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—15(e) and 15d—15(e)) for the registrant and we have:

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

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

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

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

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

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

Date: November 12, 2003

/s/ O. R. Barham, Jr.

O. R. Barham, Jr.

President and Chief Executive Officer

25

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—15(e) and 15d—15(e)) for the registrant and we have:

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

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

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

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

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

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

Date: November 12, 2003

/s/ Jeffrey W. Farrar

Jeffrey W. Farrar, CPA

Executive Vice President and Chief Financial Officer

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EX-32

Exhibit 32

Section 1350 Certifications

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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 September 30, 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 shall not be relied upon for any other purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.

Date: November 12, 2003	/s/ O. R. Barham, Jr.
	President and Chief Executive Officer
Date: November 12, 2003	/s/ Jeffrey W. Farrar
	Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowleding, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to Virginia Financial Group, Inc. and will be retained by Virginia Financial Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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