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 June 30, 2006

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) 540-829-1633

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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.    Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

As of August 1, 2006, there were 7,181,234 shares of common stock, $5.00 par value, issued and outstanding.

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
	Consolidated Statements of Changes in Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7-8
	Notes to Consolidated Financial Statements	9-19
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-31
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	31
ITEM 4	Controls and Procedures	32
PART II - OTHER INFORMATION
ITEM 1	Legal Proceedings	32
ITEM 1a	Risk Factors	32
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	32
ITEM 3	Defaults Upon Senior Securities	32
ITEM 4	Submission of Matters to a Vote of Security Holders	33
ITEM 5	Other Information	33
ITEM 6	Exhibits	33

2

PART I – FINANCIAL INFORMATION

ITEM 1. Financial statements

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(000 OMITTED)

	JUNE 30, 2006			DECEMBER 31, 2005
	(unaudited)
ASSETS
Cash and due from banks	$	50,251		$	33,681
Federal funds sold		33,458			9,103
Interest-bearing deposits in banks		516			5,232
Securities (market value: 2006, $250,011; 2005, $247,758)		249,990			247,651
Loans held for sale		4,723			9,223
Loans receivable, net of allowance for loan losses, 2006, $14,043; 2005, $13,581		1,185,382			1,129,495
Bank premises and equipment, net		31,798			33,675
Interest receivable		6,921			6,583
Deferred income tax asset		6,397			5,944
Core deposit intangibles, net		4,192			4,449
Goodwill		13,896			13,896
Other real estate owned		38			75
Other assets		6,687			6,177
Total assets	$	1,594,249		$	1,505,184
LIABILITIES
Deposits:
Noninterest-bearing	$	260,067		$	249,775
Interest-bearing		1,036,641			1,005,734
Total deposits		1,296,708			1,255,509
Federal funds purchased and securities sold under agreements to repurchase		—			15,890
Federal Home Loan Bank advances		75,000			40,000
Trust preferred capital notes		20,619			20,619
Other borrowings		48,872			25,322
Interest payable		3,249			2,515
Other liabilities		7,562			9,224
Commitments and contingent liabilities		—			—
Total liabilities		1,452,010			1,369,079
STOCKHOLDERS’ EQUITY
Preferred stock; no par value; 5,000,000 shares authorized; no shares issued and outstanding;		—			—
Common stock, $5 par value; 25,000,000 shares authorized; 2006: 7,181,185 shares issued and outstanding; 2005: 7,172,734 shares issued and outstanding;		35,906			35,864
Surplus		8,342			8,193
Retained earnings		100,530			94,061
Accumulated other comprehensive loss, net		(2,539	)		(2,013	)
Total stockholders’ equity		142,239			136,105
Total liabilities and stockholders’ equity	$	1,594,249		$	1,505,184

See notes to consolidated financial statements.

3

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)

	THREE MONTHS ENDED JUNE 30,
	2006			2005
	(unaudited)			(unaudited)
Interest Income
Interest and fees on loans	$	20,834		$	17,123
Interest on deposits in other banks		29			3
Interest on investment securities:
Taxable		52			158
Interest and dividends on securities available for sale:
Taxable		1,460			1,443
Tax exempt		845			641
Dividends		111			125
Interest income on federal funds sold		133			12
Total interest income		23,464			19,505
Interest Expense
Interest on deposits		6,594			4,868
Interest on federal funds purchased and securities sold under agreements to repurchase		64			144
Interest on FHLB advances		623			361
Interest on trust preferred capital notes		402			294
Interest on other borrowings		539			51
Total interest expense		8,222			5,718
Net interest income		15,242			13,787
Provision for loan losses		100			546
Net interest income after provision for loan losses		15,142			13,241
Noninterest Income
Retail banking fees		1,767			1,810
Commissions and fees from fiduciary activities		781			787
Brokerage fee income		170			180
Other operating income		246			329
Gain on sale of fixed assets		80			—
Gain (loss) on sale of securities available for sale		(18	)		295
Gain on sale of mortgage loans		853			684
Total noninterest income		3,879			4,085
Noninterest Expense
Compensation and employee benefits		6,596			6,049
Net occupancy expense		732			706
Supplies and equipment expenses		1,016			1,092
Amortization-intangible assets		157			159
Marketing		307			309
State franchise tax		216			223
Data processing		308			313
Telecommunications		272			229
Professional fees		148			267
Other operating expenses		1,703			1,454
Total noninterest expense		11,455			10,801
Income before income taxes		7,566			6,525
Income tax expense		2,326			2,054
Net income	$	5,240		$	4,471
Earnings per share, basic	$	.49		$	.42
Earnings per share, diluted	$	.48		$	.41

See notes to consolidated financial statements.

4

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)

	SIX MONTHS ENDED JUNE 30,
	2006			2005
	(unaudited)			(unaudited)
Interest Income
Interest and fees on loans	$	40,268		$	33,166
Interest on deposits in other banks		65			7
Interest on investment securities:
Taxable		154			158
Interest and dividends on securities available for sale:
Taxable		2,856			3,249
Tax exempt		1,659			1,297
Dividends		226			192
Interest income on federal funds sold		409			20
Total interest income		45,637			38,089
Interest Expense
Interest on deposits		12,556			9,620
Interest on federal funds purchased and securities sold under agreements to repurchase		148			288
Interest on FHLB advances		1,205			638
Interest on trust preferred capital notes		776			559
Interest on other borrowings		845			11
Total interest expense		15,530			11,116
Net interest income		30,107			26,973
Provision for loan losses		610			1,092
Net interest income after provision for loan losses		29,497			25,881
Noninterest Income
Retail banking fees		3,375			3,475
Commissions and fees from fiduciary activities		1,592			1,511
Brokerage fee income		396			361
Other operating income		416			566
Gain on sale of fixed assets		76			—
Gain (loss) on sale of securities available for sale		(199	)		296
Gain on sale of branches		—			411
Gain on sale of mortgage loans		1,486			1,159
Total noninterest income		7,142			7,779
Noninterest Expense
Compensation and employee benefits		13,197			12,096
Net occupancy expense		1,498			1,457
Supplies and equipment expenses		1,992			2,206
Amortization-intangible assets		257			327
Marketing		432			448
State franchise tax		463			454
Data processing		691			627
Telecommunications		547			497
Professional fees		279			397
Other operating expenses		3,282			2,826
Total noninterest expense		22,638			21,335
Income before income taxes		14,001			12,325
Income tax expense		4,297			3,841
Net income	$	9,704		$	8,484
Earnings per share, basic	$	.90		$	.79
Earnings per share, diluted	$	.89		$	.78

See 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, 2006 AND 2005

(000 OMITTED)

(unaudited)

	Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income			Total
Balance, January 1, 2005	$	35,807	$	7,774	$	81,869		$	1,639					$	127,089
Net income		—		—		8,484			—		$	8,484			8,484
Other comprehensive income, net of tax:
Unrealized holding losses arising during the period (net of tax of $669)		—		—		—			—			(1,242	)		—
Reclassification adjustment (net of tax of $104)		—		—		—			—			(192	)		—
Other comprehensive loss		—		—		—			(1,434	)		(1,434	)		(1,434	)
Total comprehensive income		—		—		—			—		$	7,050			—
Cash dividends ($.41 per share)		—		—		(2,940	)		—						(2,940	)
Stock-based compensation expense		13		164		—			—						177
Exercise of stock options		30		98		—			—						128
Balance, June 30, 2005	$	35,850	$	8,036	$	87,413		$	205					$	131,504
Balance, January 1, 2006	$	35,864	$	8,193	$	94,061		$	(2,013	)				$	136,105
Net income		—		—		9,704			—		$	9,704			9,704
Other comprehensive income, net of tax:
Unrealized holding losses arising during the period (net of tax of $353)												(655	)		—
Reclassification adjustment (net of tax of $70)		—		—		—			—			129			—
Other comprehensive loss		—		—		—			(526	)		(526	)		(526	)
Total comprehensive income		—		—		—			—		$	9,178			—
Cash dividends ($.45 per share)		—		—		(3,235	)		—						(3,235	)
Stock-based compensation expense		29		105		—			—						134
Exercise of stock options		13		44		—			—						57
Balance, June 30, 2006	$	35,906	$	8,342	$	100,530		$	(2,539	)				$	142,239

See notes to consolidated financial statements.

6

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)

	SIX MONTHS ENDED JUNE 30,
	2006			2005
	(unaudited)			(unaudited)
OPERATING ACTIVITIES
Net income	$	9,704		$	8,484
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,408			1,614
Amortization of intangible assets		257			327
Provision for loan losses		610			1,092
Write-downs of other real estate		—			15
Deferred tax benefit		(170	)		(367	)
Employee benefit plan expense		109			95
Stock-based compensation expense		134			177
Gain on sale of premises and equipment		(76	)		—
(Gain) loss on sale of securities available for sale		199			(296	)
Gain on sale of branches		—			(411	)
Gain on sale of mortgage loans		(1,487	)		(1,159	)
Proceeds from sale of mortgage loans		73,217			69,597
Origination of mortgage loans for sale		(67,230	)		(80,462	)
Amortization of security premiums and accretion of discounts, net		178			280
Changes in assets and liabilities:
Decrease (increase) in interest receivable		(338	)		42
Decrease (increase) in other assets		(510	)		850
Increase in interest payable		734			194
Decrease in other liabilities		(1,770	)		(48	)
Net cash provided by operating activities	$	14,969		$	24
INVESTING ACTIVITIES
Proceeds from maturities and principal payments of securities available for sale	$	41,122		$	56,378
Proceeds from sales and calls of securities available for sale		21,418			3,510
Purchase of securities available for sale		(66,066	)		(4,213	)
Net increase in loans		(56,534	)		(61,203	)
Proceeds from sale of premises and equipment		5,603			9
Purchase of premises and equipment		(5,058	)		(1,974	)
Proceeds from sale of other real estate		75			50
Additions to other real estate		—			(60	)
Sale of branches, net of cash		—			(11,731	)
Net cash used in investing activities	$	(59,440	)	$	(19,234	)

See notes to consolidated financial statements.

7

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)

	SIX MONTHS ENDED JUNE 30,
	2006			2005
	(unaudited)			(unaudited)
FINANCING ACTIVITIES
Net increase (decrease) in demand, money market and savings deposits	$	(36,105	)	$	6,684
Net increase in certificates of deposit		77,303			7,324
Net decrease in federal funds purchased and securities sold under agreement to repurchase		(15,890	)		(6,605	)
Proceeds from Federal Home Loan Bank advances		76,000			20,000
Principal payments on Federal Home Loan Bank advances		(41,000	)		(4,040	)
Net increase in other borrowings		23,550			10,311
Proceeds from exercise of stock options		57			128
Cash dividends paid		(3,235	)		(2,940	)
Net cash provided by financing activities	$	80,680		$	30,862
Increase in cash and cash equivalents	$	36,209		$	11,652
CASH AND CASH EQUIVALENTS
Beginning of the period		48,016			39,326
End of the period	$	84,225		$	50,978
Supplemental Schedule of Noncash Activities
Other real estate acquired in settlement of loans	$	38		$	—
Unrealized gain (loss) on securities available for sale	$	810		$	(2,207	)
Stock-based compensation expense	$	134		$	177

See notes to consolidated financial statements.

8

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Virginia Financial Group, Inc. (the “Company” or “VFG”) is a Virginia multi-bank holding company headquartered in Culpeper, Virginia. The Company owns Second Bank & Trust and its subsidiary, Second Service Company; Virginia Heartland Bank and its subsidiary, Virginia Heartland Service Corporation; Planters Bank & Trust Company of Virginia and its subsidiary, Planters Insurance Agency, Inc.; Virginia Commonwealth Trust Company, and VFG Limited Liability Trust. The consolidated statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2006 and December 31, 2005, the results of operations for the six months ended June 30, 2006 and 2005, and cash flows for the six months ended June 30, 2006 and 2005. The statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

2. The results of operations for the six month period ended June 30, 2006 and 2005 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):

Securities Held to Maturity:

	Amortized Cost		Fair Value
	June 30, 2006
	(unaudited)
Obligations of States and Political Subdivisions	$	3,323	$	3,344
	December 31, 2005
Obligations of States and Political Subdivisions	$	4,287	$	4,394
Securities Available for Sale:
	June 30, 2006
	(unaudited)
U.S. Government agencies	$	101,631	$	100,207
State and municipals		86,953		86,924
Corporate bonds		2,509		2,504
Collateralized mortgage obligations		1,414		1,356
Mortgage-backed securities		46,884		44,835
Equity securities		1,876		2,177
Restricted stock		8,558		8,558
Other securities		106		106
	$	249,931	$	246,667

9

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 2005
U.S. Treasury	$	2,498	$	2,505
U.S. Government agencies		87,534		85,017
State and municipals		80,627		81,836
Corporate bonds		6,022		6,062
Collateralized mortgage obligations		3,314		3,270
Mortgage-backed securities		57,233		55,821
Equity securities		1,396		1,659
Restricted stock		6,619		6,619
Other securities		575		575
	$	245,818	$	243,364

The following tables show information pertaining to securities with gross unrealized losses at June 30, 2006 and December 31, 2005. The aggregate unrealized loss is determined by summation of all the related securities that have a continuous loss as of those dates, and the length of time that the loss has been unrealized is shown by terms of “less than 12 months” and “12 months or more”. The fair value shown is the estimated market value as of those dates (Amounts in 000):

	Less than 12 months				12 Months or more				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Description of Securities
June 30, 2006
U.S. Government agencies	$	52,583	$	273	$	31,792	$	1,229	$	84,375	$	1,502
Mortgage backed securities		12,135		446		31,668		1,617		43,803		2,063
State and municipals		37,390		955		4,615		135		42,005		1,090
Corporate bonds		480		17		—		—		480		17
Collateralized mortgage obligations		—		—		1,356		58		1,356		58
Subtotal debt securities		102,588		1,691		69,431		3,039		172,019		4,730
Preferred stock		—		—		486		107		486		107
Total temporarily impaired securities	$	102,588	$	1,691	$	69,917	$	3,146	$	172,505	$	4,837

There are a total of 179 securities that have unrealized losses as of June 30, 2006, 33 U.S. Treasuries or agency securities, 49 U.S. Agency MBS securities, 93 municipal securities, 1 corporate bond, 1 CMO and 2 preferred stock securities.

The debt securities are obligations of entities that are excellent credit risks. The impairment as noted is the result of interest rate market conditions and does not reflect on the ability of the issuers to repay the debt obligations. VFG has the ability to hold these securities until maturity.

10

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The preferred stock category has two issues that are showing losses. The issuer is the Federal Home Loan Mortgage Corporation (Freddie Mac). The impairment is the result of interest rate market conditions and there is a high probability of full recovery of investment. The fixed income nature of this investment causes significant movement in value in relation to the fixed income market. However, there is no change in the dividend stream or credit quality of the issue as a result.

	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Description of Securities
December 31, 2005
U.S. Treasury and
U.S. government agencies	$	19,309	$	192	$	43,699	$	2,356	$	63,008	$	2,548
Mortgage backed securities		16,313		402		32,971		1,109		49,284		1,511
State and municipals		24,923		246		3,764		106		28,687		352
Corporate bonds		2,910		47						2,910		47
Collaterallized mortgage obligations		991		5		—		—		991		5
Subtotal debt securities		64,446		892		80,434		3,571		144,880		4,463
Preferred stock		—		—		514		79		514		79
Total temporarily impaired securities	$	64,446	$	892	$	80,948	$	3,650	$	145,394	$	4,542

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

	June 30, 2006			December 31, 2005
	(unaudited)
Real estate loans:
Construction	$	178,835		$	115,944
Secured by 1 – 4 family residential		300,935			310,719
Commercial and multifamily		574,285			593,396
Commercial, financial and agricultural loans		102,220			78,110
Consumer loans		35,597			40,876
All other loans		6,937			3,486
		1,198,809			1,142,531
Deferred loan costs		616			545
Allowance for loan losses		(14,043	)		(13,581	)
	$	1,185,382		$	1,129,495

11

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	June 30, 2006			December 31, 2005			June 30, 2005
	(unaudited)						(unaudited)
Balance, January 1	$	13,581		$	11,706		$	11,706
Recoveries		78			315			185
Loan charged off		(226	)		(452	)		(319	)
Provision for loan losses		610			2,012			1,092
Balance, ending	$	14,043		$	13,581		$	12,664

Information about impaired loans as of the periods indicated is as follows (000 omitted):

	June 30, 2006		December 31, 2005
	(unaudited)
Impaired loans for which an allowance has been provided	$	1,475	$	1,710
Impaired loans for which an allowance has not been provided		5,971		3,705
Total impaired loans		7,446		5,415
Allowance provided for impaired loans, included in the allowance for loan losses	$	401	$	684

6. Federal Home Loan Bank Advances:

The Company has advances with the Federal Home Loan Bank of Atlanta of $75 million at June 30, 2006 maturing through 2016. The advances include $15 million in fixed rate credits, $40 million in convertible credits and $20 million in prime based credits. These advances require either monthly or quarterly interest payments with principal due upon maturity. At June 30, 2006, the interest rates on this debt ranged from 3.91% to 6.69%. The average interest rate was 4.69% at June 30, 2006 with an average balance outstanding of $55.5 million for the second quarter 2006.

The banking subsidiaries have available a combined $310 million line of credit with the Federal Home Loan Bank of Atlanta. Advances on the line are secured by a blanket lien on loan portfolios of Second Bank & Trust, Virginia Heartland Bank and Planters Bank & Trust Company of Virginia. The blanket lien covers the 1 to 4 family dwelling loans, multifamily loans, home equity loans, and commercial loans. As of June 30, 2006 the 1 to 4 family, multifamily, home equity and commercial real estate loans pledged as collateral totaled $513 million. At December 31, 2005 only 1 to 4 family loans were pledged totaling $175 million.

12

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The contractual maturities of debt are as follows (000 omitted):

2007	$	10,000
2008		25,000
2010		10,000
2011		10,000
2016		20,000
	$	75,000

7. Trust Preferred Capital Notes:

During the first quarter of 2004, VFG Limited Liability Trust, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable Capital Securities (commonly referred to as Trust Preferred Capital Notes). On March 18, 2004, $20 million of Trust Preferred Capital Notes were issued through a private transaction. The Trust issued $619 thousand in common equity to the Company. The securities have a LIBOR-indexed floating rate of interest which adjusts, and is payable, quarterly. The interest rate at June 30, 2006 was 7.70%. The securities may be redeemed at par beginning in June, 2009 and each quarterly anniversary of such date until the securities mature on June 17, 2034. The principal asset of the Trust is $20.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Capital Securities.

The Trust Preferred Capital Notes may be included in Tier I capital for regulatory capital adequacy determination purposes up to 25% of Tier I capital after its inclusion. The portion of the Trust Preferred not considered as Tier I capital may be included in Tier II capital. All of VFG’s trust preferred capital notes are included in Tier 1 capital.

The obligations of the Company with respect to the issuance of the capital securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the capital securities.

Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related capital securities.

8. Other Borrowings:

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 has an unused line of credit agreement with a correspondent bank for general working capital needs. The $15 million line is unsecured, calls for variable interest payments and is payable on demand. There were no balances outstanding at June 30, 2006 and December 31, 2005, respectively.

13

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

One of the Company’s affiliates 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 are pledged as collateral. The targeted threshold maximum amount available under this agreement is $6.0 million.

In 2005 the Company initiated a commercial paper program whereby customers of the affiliate banks can invest in unrated commercial paper of VFG. Terms include a daily maturity and floating rate of interest. The balance outstanding was $48.9 million and $24.5 million at June 30, 2006 and December 31, 2005, respectively.

Selected information on other borrowings is as follows:

	Three Months Ended June 30,
	2006			2005
	(unaudited)			(unaudited)
End of period balance	$	48,872		$	4,126
Average balance		48,919			1,197
Weighted average rate		4.42	%		2.29	%
Maximum balance of any month-end during the period		57,109			4,126
	Six Months Ended June 30,
	2006			2005
	(unaudited)			(unaudited)
End of period balance	$	48,872		$	4,126
Average balance		39,937			807
Weighted average rate		4.27	%		2.26	%
Maximum balance of any month-end during the period		57,109			4,126

9. 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, 2006 and 2005. Potential dilutive stock had no effect on income available to common stockholders.

14

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	2006			2005
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	10,770,557	$	.49	10,750,454	$	.42
Effect of dilutive securities:
Restricted shares	28,455			30,140
Stock options	50,492			40,664
Diluted earnings per share	10,849,504	$	.48	10,821,258	$	.41

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, 2006 and 2005. Potential dilutive stock had no effect on income available to common stockholders.

	2006			2005
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	10,767,905	$	.90	10,747,692	$	.79
Effect of dilutive securities:
Restricted shares	29,436			29,061
Stock options	50,501			42,078
Diluted earnings per share	10,847,842	$	.89	10,818,831	$	.78

In 2006 and 2005, stock options representing 17,258 and 12,390 shares, respectively, were not included in the calculation of earnings per share as their effect would have been anti-dilutive.

10. Stock-Based Compensation:

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, the value of restricted stock awards was expensed by the Company over the restriction period, and no compensation expense was recognized for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant.

SFAS 123R also requires that new awards to employees eligible for retirement prior to the award becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. The Company had no such awards granted during the period.

15

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included within compensation and employee benefits expense for the three month and six month period ended June 30, 2006 is $86 thousand and $134 thousand of stock-based compensation. As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $50 thousand ($35 thousand after tax) and $80 thousand ($55 thousand after tax) for the three and six months ended June 30, 2006. Basic earnings per share was reduced by $.01 per share for the six month period. Stock based compensation had no effect on any other per share data presented.

The following illustrates the effect on net income and earnings per share if the Company had applied the fair value method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), prior to January 1, 2006.

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income, as reported	$	4,471		$	8,484
Less: pro forma stock option compensation expense, net of tax		(20	)		(42	)
Pro forma net income	$	4,451		$	8,442
Earnings per share:
Basic - as reported	$	0.42		$	0.79
Basic - pro forma		0.41			0.79
Diluted - as reported		0.41			0.78
Diluted - pro forma		0.41			0.78

Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The weighted average estimated fair value of stock options granted in the three months and six months ended June 30, 2006 was $7.83 and $7.47, respectively. Fair value is estimated using the Black-Scholes option pricing model with the following assumptions: option term until exercise of approximately 6.3 years, volatility of approximately 28.5%, risk-free interest rate ranging from 4.3% to 5.0% and an expected dividend yield of 2.4%.

During 2006, the Company took into consideration guidance under SFAS 123R and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The weighted average expected option term for 2006 reflects the application of the simplified method set out in SAB 107, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

16

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted stock award activity for the six months ended June 30, 2006 is summarized below:

	Shares		Weighted Average Grant Date Fair Value Per Award
Restricted stock awards, January 1	26,640		$	22.65
Granted	11,417			25.51
Vested	(7,202	)		22.83
Canceled or expired	(1,419	)		21.31
Restricted stock awards, June 30	29,436

Stock option plan activity for the six months ended June 30, 2006 is summarized below:

	Shares		Weighted Average Exercise Price		Average Remaining Contractual Life (in years)	Value Unexercised In-The-Money Options (in thousands)
Options outstanding, January 1	149,145		$	17.41
Granted	66,645			27.06
Exercised	(3,900	)		14.67
Canceled or expired	(4,350	)		21.25
Options outstanding, June 30	207,540			20.49	6.7	$	1,599
Options exercisable, June 30	109,308			15.95	5.2		1,344

The total value of in-the-money options exercised during three and six months ended June 30, 2006 was $44 thousand and $103 thousand, respectively.

As of June 30, 2006, there was $589 thousand and $672 thousand of total unrecognized compensation expense related to nonvested restricted stock awards and options, respectively, which will be recognized over the remaining requisite service period.

Prior to the adoption of SFAS 123R, the Company presented the benefit of all tax deductions resulting from the exercise of stock options and restricted stock awards as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires the benefits of tax deductions in excess of grant-date fair value be reported as financing cash flow, rather than as an operating cash flow. Cash proceeds received from options exercised for the six months ended June 30, 2006 and 2005 were $57 thousand and $128 thousand, respectively.

17

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Employee Benefit Plan:

The Company has a noncontributory pension plan which conforms to the Employee Retirement Income Security Act of 1974 (ERISA). The amount of benefits payable under the plan is determined by an employee’s period of credited service. The amount of normal retirement benefit will be determined based on a Pension Equity Credit formula. The employee receives credits based on their age and years of service. The plan provides for early retirement for participants with five years of service and the attainment of age 55. The benefits are payable in single or joint/survivor annuities as well as a lump sum payment upon retirement or separation of service. The Company froze participation in this plan during 2003, and has approximately one hundred twenty-six participants remaining in the plan. The components of net periodic benefit cost are as follows:

	Six Months Ended June 30,
	2006			2005
Service cost	$	86		$	100
Interest cost		122			128
Expected return on plan assets		(124	)		(130	)
Amortization of prior service cost		16			16
Amortization of net loss		32			30
Net periodic benefit cost	$	132		$	144

The Company made quarterly cash contributions of $32 thousand and $48 thousand to the plan during the first and second quarters of 2006, respectively, and anticipates making quarterly contributions consistent with these amounts for the remainder of the year.

12. Sale of Branches:

On February 16, 2005, the Company through its subsidiary, Planters Bank & Trust Company of Virginia, sold two branches located in Tazewell County, Virginia to the Bank of Tazewell County, an affiliate of National Bankshares, Inc. headquartered in Blacksburg, Virginia. The sale included the assumption of certain deposit accounts and purchase of selected loans, fixed assets and real estate as follows:

Premium received on deposits transferred	$	1,304
Liabilities transfered (at fair value):
Deposit accounts	$	22,001
Other liabilities		39
Total liabilities transferred	$	22,040
Assets sold (at fair value):
Cash	$	228
Loans		8,844
Real estate and personal property		311
Other assets		32
Total assets sold		9,415
Net liabilities transferred	$	11,321
Premium received on deposits transferred	$	1,304
Less: Write-off of core deposit intangibles		465
Write-off of goodwill		138
Write-off of loan premium		115
Transaction costs		175
Net Gain on Sale	$	411

18

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Subsequent Event:

On July 19, 2006 the Company’s Board of Directors announced a three-for-two stock split in the form of a 50% stock dividend. Holders of record of the Company’s common stock, par value $5.00 per share, at the close of business on August 14, 2006 will receive one additional share of common stock for every two shares held on that date. The stock dividend will be distributed on September 6, 2006 and the Company’s stock is expected to begin trading on a split adjusted basis September 7, 2006. With the exception of the share data in the consolidated balance sheets, all share and per share amounts for all periods presented in the consolidated financial statements and notes thereto have been retroactively adjusted to reflect the effect of the three-for two split. The number of shares issued and outstanding in the consolidated balance sheets presented does not reflect the stock dividend as this adjustment will be recorded in the period in which the split is consummated.

19

VIRGINIA FINANCIAL GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion provides management’s analysis of the consolidated financial results of operations, financial condition, liquidity and capital resources of Virginia Financial Group, Inc. (VFG) and its affiliates. This discussion and analysis should be read in conjunction with the financial statements and footnotes appearing elsewhere in this report.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, Management’s Discussion and Analysis contains forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, or those anticipated. When we use words such as “believes”, “expects”, “anticipates” or similar expressions, we are making forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date thereof. VFG wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect VFG’s actual results, causing actual results to differ materially from those in any forward looking statement. These factors include:

• Expected cost savings from VFG’s acquisitions and dispositions,

• Competitive pressure in the banking industry or in VFG’s markets may increase significantly,

• Changes in the interest rate environment may reduce margins,

• General economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration,

• Changes may occur in banking legislation and regulation,

• Changes may occur in general business conditions, and

• Changes may occur in the securities markets.

OVERVIEW

Virginia Financial Group, Inc. (VFG) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. Currently, VFG is one of the largest independent bank holding companies headquartered in the Commonwealth of Virginia. VFG’s trust affiliate, Virginia Commonwealth Trust Company, is currently one of the largest independent trust companies headquartered in the Commonwealth of Virginia. Affiliates of VFG include: Planters Bank & Trust Company of Virginia - in Staunton, Second Bank & Trust - in Culpeper, Virginia Heartland Bank - in Fredericksburg and Virginia Commonwealth Trust Company - in Culpeper. The organization has a network of thirty-seven branches serving a contiguous market throughout central, south central and southwest Virginia. Virginia Commonwealth Trust Company has offices in Culpeper, Charlottesville, Fredericksburg, Harrisonburg and Staunton.

VFG’s affiliate banks are community-oriented and offer services customarily provided by full-service banks, including individual and commercial demand and time deposit accounts, commercial and consumer loans, residential mortgages, credit card services and deposit services. VFG’s affiliate banks offer internet banking access for banking services, and online bill payment for both consumers and commercial customers. Lending is focused on individuals and small and middle-market businesses in the local market of VFG’s affiliate banks. VFG’s trust company provides a variety of wealth management and personal trust services including estate administration, employee benefit plan administration and planning specifically addressing the investment and financial management needs of its customers. Each affiliate is run autonomously, with the holding company providing common services such as corporate finance, marketing, human resources, loan and deposit operations, information technology, compliance, audit and loan review.

20

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

The 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. When a loan has been identified as impaired, a specific reserve may be established based on management’s calculation of the loss embedded in the individual loan. In addition to impairment testing, the Banks have an eight point grading system for each non-homogeneous loan in the portfolio. Loans meeting the criteria for impairment are segregated for analysis from performing loans within the portfolio. Loans are then grouped by loan type and, in the case of commercial and construction loans, by risk rating. Each loan type is assigned an allowance factor based on historical loss experience, economic conditions, and overall portfolio quality including delinquency rates. The total of specific reserves required for impaired classified loans and the calculated reserves by loan category are then compared to the recorded allowance for loan losses. This is the methodology used to determine the sufficiency of the allowance for loan losses and the amount of the provision for loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment.

21

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a restructuring agreement.

Goodwill

The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years. Amortization expense charged to operations was $257 thousand and $327 thousand for the six months ended June 30, 2006 and 2005, respectively.

Non-GAAP Financial Measures

This report refers to the efficiency ratio, which is computed by dividing noninterest expense (excluding foreclosed property expense) by the sum of net interest income on a tax equivalent basis and noninterest income (excluding gain (loss) on sale of securities). This is a non-GAAP financial measure that we believe provides investors with important information regarding our operational efficiency. Such information is not in accordance with generally accepted accounting principles (GAAP) and should not be construed as such. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. VFG, in referring to its net income, is referring to income under generally accepted accounting principles, or “GAAP”.

Results of Operations

VFG’s consolidated net income for the quarter ended June 30, 2006 amounted to $5.2 million or $.48 per diluted share, compared to earnings of $4.5 million or $.41 per diluted share for the quarter ended June 30, 2005. Net income increased 17.2% and diluted earnings per share increased 16.1% compared to second quarter 2005 results. The Company’s earnings for the second quarter produced an annualized return on average assets (ROA) of 1.35% and return on average equity (ROE) of 14.74%, compared to prior year ratios of 1.22% and 13.80%, respectively.

For the first six months of 2006, net income was $9.7 million, up 14.4% from $8.5 million for the same period in 2005. Net income per diluted share was $.89, up 13.6% from $.78 for the first six months of 2005. ROA and ROE for the six month period was 1.27% and 13.93%, respectively, compared to 1.18% and 13.28% for the same period in 2005.

Net Interest Income

Total revenue, comprised of net interest income and noninterest income, was $19.1 million for the second quarter of 2006, an increase of $1.2 million or 7.0% over $17.9 million in 2005. The largest component, net interest income, amounted to $15.2 million for the second quarter, up $1.4 million or 10.6% compared with $13.8 million for the same quarter in 2005. For the six months ended June 30, 2006, net interest income was $30.1 million, an increase of $3.1 million or 11.6% from $27.0 million for the same period in 2005.

22

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Improvements in the growth and mix of average earning assets, coupled with net interest margin expansion, were the primary contributors to this growth. The net interest margin for the three months ended June 30, 2006 was 4.35%, up twelve basis points when compared to 4.23% for the second quarter of 2005. As interest rates have continued to increase over the past year, interest costs associated with interest bearing liabilities have accelerated. The average rate paid on interest bearing liabilities for the second quarter was 2.84%, up 24 basis points sequentially compared to 2.60% for the first quarter of 2006, and up 70 basis points when compared to the second quarter of 2005. The net interest margin for the six month period ended June 30, 2006 was 4.35%, compared to 4.19% for the same period in 2005. Management anticipates the net interest margin to contract slightly in the second half of the year as continuing pressures on deposit pricing and slowing loan growth in VFG’s markets are anticipated.

The following tables provide information on average earning assets and interest-bearing liabilities for the three and six months ended June 30, 2006 and 2005 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 $506 thousand and $392 thousand for the three months ended June 30, and $964 thousand and $799 thousand for the six months ended June 30, 2006 and 2005, respectively.

23

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

	Three months ended June 30,
	2006						2005
Dollars in thousands	Average Balance		Interest Inc/Exp		Average Rates		Average Balance		Interest Inc/Exp		Average Rates
Assets
Loans receivable, net	$	1,188,071	$	20,886	7.05	%	$	1,102,991	$	17,171	6.24	%
Investment securities
Taxable		154,145		1,622	4.22	%		179,428		1,726	3.86	%
Tax exempt		84,328		1,300	6.18	%		61,415		985	6.43	%
Total investments		238,473		2,922	4.91	%		240,843		2,711	4.52	%
Interest bearing deposits		3,842		29	3.03	%		220		3	5.47	%
Federal funds sold		22,605		133	2.36	%		1,368		12	3.52	%
		264,920		3,084	4.67	%		242,431		2,726	4.52	%
Total earning assets		1,452,991		23,970	6.62	%		1,345,422		19,897	5.93	%
Total nonearning assets		106,274						120,149
Total assets	$	1,559,265					$	1,465,571
Liabilities and Stockholders’ Equity
Interest-bearing deposits
Interest checking	$	175,080	$	243	0.56	%	$	195,952	$	204	0.42	%
Money market		156,687		679	1.74	%		166,521		461	1.11	%
Savings		109,907		173	0.63	%		132,431		221	0.67	%
Time deposits:
Less than $ 100,000		392,281		3,609	3.69	%		363,045		2,827	3.12	%
$100,000 and more		184,713		1,890	4.10	%		134,441		1,155	3.45	%
Total interest-bearing deposits		1,018,668		6,594	2.60	%		992,390		4,868	1.97	%
Federal funds purchased and securities sold under agreements to repurchase		18,884		64	1.36	%		21,397		144	2.70	%
Federal Home Loan Bank advances		55,496		623	4.50	%		20,389		249	4.90	%
Trust preferred capital notes		20,619		402	7.82	%		20,619		294	5.72	%
Other borrowings		48,919		539	4.42	%		19,165		163	3.41	%
		143,918		1,628	4.54	%		81,570		850	4.18	%
Total interest-bearing liabilities		1,162,586		8,222	2.84	%		1,073,960		5,718	2.14	%
Total noninterest-bearing liabilities		254,096						261,639
Total liabilities		1,416,682						1,335,599
Stockholders’ equity		142,583						129,972
Total liabilities and stockholders’ equity	$	1,559,265					$	1,465,571
Net interest income (tax equivalent)			$	15,748					$	14,179
Average interest rate spread					3.78	%					3.79	%
Interest expense as percentage of average earning assets					2.27	%					1.70	%
Net interest margin					4.35	%					4.23	%

24

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

	Six Months ended June 30,
	2006						2005
Dollars in thousands	Average Balance		Interest Inc/Exp		Average Rates		Average Balance		Interest Inc/Exp		Average Rates
Assets
Loans receivable, net	$	1,173,227	$	40,338	6.93	%	$	1,087,577	$	33,267	6.17	%
Investment securities
Taxable		153,548		3,236	4.25	%		185,563		3,599	3.91	%
Tax exempt		82,485		2,553	6.24	%		61,868		1,995	6.50	%
Total investments		236,033		5,789	4.95	%		247,431		5,594	4.56	%
Interest bearing deposits		4,895		65	2.68	%		370		7	3.82	%
Federal funds sold		26,627		409	3.10	%		1,246		20	3.24	%
		267,555		6,263	4.72	%		249,047		5,621	4.55	%
Total earning assets		1,440,782		46,601	6.52	%		1,336,624		38,888	5.87	%
Total nonearning assets		101,616						119,347
Total assets	$	1,542,398					$	1,455,971
Liabilities and Stockholders’ Equity
Interest-bearing deposits
Interest checking	$	177,160	$	443	0.50	%	$	197,385	$	399	0.41	%
Money market		161,649		1,380	1.72	%		170,358		943	1.12	%
Savings		114,970		369	0.65	%		133,996		443	0.67	%
Time deposits:
Less than $ 100,000		382,272		6,794	3.58	%		366,258		5,588	3.08	%
$100,000 and more		180,040		3,570	4.00	%		131,310		2,247	3.45	%
Total interest-bearing deposits		1,016,091		12,556	2.49	%		999,307		9,620	1.94	%
Federal funds purchased and securities sold under agreements to repurchase		17,281		148	1.73	%		22,203		288	2.62	%
Federal Home Loan Bank advances		55,959		1,205	4.34	%		17,241		428	5.01	%
Trust preferred capital notes		20,619		776	7.59	%		20,619		559	5.47	%
Other borrowings		39,937		845	4.27	%		14,418		221	3.09	%
		133,796		2,974	4.48	%		74,481		1,496	4.05	%
Total interest-bearing liabilities		1,149,887		15,530	2.72	%		1,073,788		11,116	2.09	%
Total noninterest-bearing liabilities		252,026						253,315
Total liabilities		1,401,913						1,327,103
Stockholders’ equity		140,485						128,868
Total liabilities and stockholders’ equity	$	1,542,398					$	1,455,971
Net interest income (tax equivalent)			$	31,071					$	27,772
Average interest rate spread					3.80	%					3.78	%
Interest expense as percentage of average earning assets					2.17	%					1.68	%
Net interest margin					4.35	%					4.19	%

25

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Noninterest Income

Total noninterest income was $3.9 million for the second quarter of 2006, an increase of $616 thousand or 18.9% sequentially over the $3.3 million for the first quarter of 2006, and a decrease of $206 thousand or 5.0% compared to $4.1 million for the second quarter of 2005. The first quarter 2006 results include a loss of $181 thousand on sale of securities available for sale associated with branch realignment within the Company. Included in the 2005 results was a net gain on sale of securities available for sale of $295 thousand. Retail banking fees increased $160 thousand or 10.0% to $1.8 million sequentially, and decreased $43 thousand or 2.4% for the second quarter of 2005. Trust and brokerage fee income declined to $951 thousand for the second quarter of 2006, a decrease of $16 thousand or 1.7% over the same period in 2005. Gross mortgage banking fees amounted to $853 thousand, an increase of $169 thousand or 24.7% when compared to $684 thousand for the second quarter of 2005, and up sequentially $220 thousand or 34.8% from the first quarter of 2006.

Total noninterest income was $7.1 million for the six months ended June 30, 2006, a decrease of $637 thousand or 8.2% compared to $7.8 million for the same period in 2005. Included in the 2005 results is a gain of $318 thousand in connection with the sale of a community bank stock investment, and a gain of $411 thousand realized on the sale of two branches in Tazewell County, Virginia during the first quarter. Trust and brokerage fee income amounted to $2.0 million for the first six months of 2006, a decrease of $116 thousand or 6.2% over the same period in 2005. Gross mortgage banking fees amounted to $1.5 million, an increase of $327 thousand or 28.2% when compared to $1.2 million for the first six months of 2005.

Noninterest Expense

Noninterest expense for the second quarter of 2006 totaled $11.5 million, up $654 thousand or 6.1% from $10.8 million for the same period in 2005. Compensation and employee benefits increased $547 thousand or 9.0% over the same quarter a year ago. These increases reflect new positions for the openings of the Seminole Trail, Graves Mill and Mill Creek branches during the past six months. VFG’s efficiency ratio was 58.5% for the quarter, compared to 60.0% for the same quarter in 2005.

For the six month period ended June 30, 2006, noninterest expense amounted to $22.6 million, an increase of $1.3 million or 6.1% over $21.3 million the same period in 2005. These increases reflect new positions for the openings of the Seminole Trail, Graves Mill and Mill Creek branches during the past six months as well as increased incentive accruals during the current period. Management anticipates some increase in operating expenses as two new branches open in the third quarter of 2006. For the six month period ended June 30, 2006, the efficiency ratio was 59.0%, compared to 60.4% for the same period in 2005.

Income Taxes

Income tax expense for the second quarter of 2006 was $2.3 million resulting in an effective tax rate of 30.7% compared to $2.1 million, or 31.5%, for the second quarter of 2005. For the six month period ended June 30, 2006, income tax expense amounted to $4.3 million, resulting in an effective tax rate of 30.7% compared to $3.8 million, or 31.2% for the same period in 2005. The decrease in the effective tax rate for the quarter and six month period is a result of an increase in earnings from tax-exempt assets as a percentage of total income. The average balance of tax-exempt securities for the second quarter of 2006 increased by $22.9 million over the same period last year, resulting in an increase in related tax-exempt interest income.

26

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Asset Quality

Asset quality remains strong, with VFG’s ratio of non-performing assets as a percentage of total assets amounting to .16% at June 30, 2006, compared to .11% at June 30, 2005 and .12% at December 31, 2005. Net charge-offs as a percentage of average loans receivable amounted to none for the quarter and .01% for the six month period ended June 30, 2006, compared to .01% and .01% for the same periods in 2005. At June 30, 2006, the allowance for loan losses was approximately six times the level of non-performing assets, while the allowance as a percentage of total loans amounted to 1.17%, down slightly from 1.19% at December 31, 2005. The Company decreased its provision for loan losses by $446 thousand or 81.7%, from $546 thousand for the three months ended June 30, 2005 compared to $100 thousand for the three months ended June 30, 2006. For the six month period ended June 30, 2006, the provision for loan losses was $610 thousand, a decrease of $482 thousand or 44.1% compared to the same period in 2005. These decreases are consistent with a decreased rate of loan growth and continued strong asset quality.

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

	June 30, 2006			December 31, 2005			June 30, 2005
Non accrual loans	$	2,339		$	1,604		$	1,347
Troubled debt restructurings		113			154			193
Other real estate owned		38			75			—
Loans past due as to principal or interest for 90 days or more accruing interest		—			—			—
Total nonperforming assets	$	2,490		$	1,833		$	1,540
Nonperforming assets to total assets		.16	%		.12	%		.11	%
Nonperforming assets to loans and other property		.21	%		.16	%		.14	%
Allowance for loan losses as a percentage of loans receivable		1.17	%		1.19	%		1.14	%
Allowance for loan losses as a percentage of nonperforming assets		563.98	%		740.92	%		822.34	%
Net charge-offs as a percentage of average loans receivable		.01	%		.01	%		.01	%

27

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Liquidity and Capital Resources

Capital Resources

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

The primary source of additional capital to the Company is earnings retention, which represents net income less dividends declared. During the six months ended June 30, 2006, the Company retained $6.5 million, or 66.7% of its net income. Stockholders’ equity increased by $6.1 million, reflecting the earnings retention and a decrease of $526 thousand in accumulated comprehensive income net of tax, after sales and reinvestment of securities related to branch realignment within the Company.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. Management believes, as of June 30, 2006, that the Company and the subsidiary banks met all minimum capital adequacy requirements to which they are subject and are categorized as “well capitalized.” There are no conditions or events that management believes have changed the subsidiary banks’ well capitalized position.

The following table includes information with respect to the Company’s risk-based capital as of June 30, 2006 (000 omitted):

Tier 1 capital	$	146,468
Tier 2 capital		14,179
Total risk-based capital		160,647
Total risk-weighted assets		1,299,431
Average adjusted total assets		1,541,176
Capital ratios:
Tier 1 risk-based capital ratio		11.27	%
Total risk-based capital ratio		12.36	%
Leverage ratio (Tier 1 capital to average adjusted total assets)		9.50	%
Equity to assets ratio		8.92	%
Tangible equity to assets ratio		7.88	%

28

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Liquidity

Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. These events may occur daily or other short-term intervals in the normal operation of the business. Experience helps management predict time cycles in the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits, quality of assets, economy of markets served, concentrations of business and industry, competition, and the Company’s overall financial condition. The Company’s primary sources of liquidity are cash, securities in our available for sale portfolio and a $15 million line of credit with a correspondent bank. In addition, the Banks have substantial lines of credit from their correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank of Atlanta to support liquidity as conditions dictate.

The liquidity of the Parent Company also represents an important aspect of liquidity management. The Parent Company’s cash outflows consist of overhead associated with corporate expenses, executive management finance, marketing, human resources, loan and deposit operations, information technology, audit, compliance and loan review functions. It also includes outflows associated with dividends to shareholders. The main sources of funding for the Parent Company are the management fees and dividends it receives from its banking and trust subsidiaries, a working line of credit with a correspondent bank, and availability of the trust preferred security market as deemed necessary. The Company’s capital base provides the resource and ability to support the assets of the Company and provide capital for future expansion.

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.

Off Balance Sheet Items

There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis” in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2005.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2005. Federal Home Loan Bank Advances rose from $40 million to $75 million during first half of the year. These advances were incurred in order to manage the Company’s liquidity.

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.

29

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement 140” (Statement 156). Statement 156 amends Statement 140 with respect to separately recognized servicing assets and liabilities. Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and liabilities to be initially measured at fair value, if practicable. Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method. Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing. Under the fair value measurement method, servicing assets are measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs.

Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequent to September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements.

The Company does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.

In November 2005, FASB Staff Position (FSP) 115-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” was issued. The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. The FSP applies to investments in debt and equity securities and cost-method investments. The application guidance within the FSP includes items to consider in determining whether an investment is impaired, in evaluating if an impairment is other than temporary and recognizing impairment losses equal to the difference between the investment’s cost and its fair value when an impairment is determined. The FSP is required for all reporting periods beginning after December 15, 2005. Implementation of this FSP had no material effect on the Company’s financial statements.

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, (“SFAS No. 154”) “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement. “The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Initial implementation of this standard had no material effect on the Company’s financial statements.

30

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Access to Filings

The Company provides access to their 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, 2005.

ITEM 4 – CONTROLS AND PROCEDURES

We are required to include in our periodic reports information regarding our controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports 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.

31

VIRGINIA FINANCIAL GROUP, INC.

PART I – FINANCIAL INFORMATION

We have established disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officer and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. Our principal executive officer and principal financial officer evaluated the effectiveness of these disclosure controls and procedures as of the end of the period covered by this report and, based on their evaluation, concluded that our disclosure controls and procedures are operating effectively.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that our disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the organization to disclose material information otherwise required to be set forth in our period reports.

Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of our assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our internal control over financial reporting or control of assets during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or control of assets.

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 1a. RISK FACTORS.

There have been no changes to the identified risk factors as disclosed in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The Company has a stock repurchase program authorized that is not currently active, with 210,000 shares remaining available for repurchase.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

32

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

The annual meeting of stockholders of Virginia Financial Group, Inc. was held on April 18, 2006.

The following directors were elected for terms expiring in 2009, with the following votes:

	For	Withheld
Fred D. Bowers	4,775,631	597,394
Taylor E. Gore	5,282,164	90,861
Jan S. Hoover	5,281,141	91,884
H. Wayne Parrish	5,141,043	231,982

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

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

Votes were cast in favor of ratification of the appointment of Yount, Hyde & Barbour, P.C. as external auditors of the Company for fiscal 2006.

ITEM 5. OTHER INFORMATION.

Not applicable.

ITEM 6. EXHIBITS:

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

Exhibit No. 2	Agreement and Plan of Reorganization incorporated by reference to Agreement and Plan of Reorganization filed as Exhibit A to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216).
Exhibit No. 3.1	Articles of Incorporation, incorporated by reference to Exhibit 3.1 to Form 8-K filed on January 30, 2002.
Exhibit No. 3.2	Bylaws, incorporated by reference to Exhibit 3.2 to Form 8-K filed on January 30, 2002.
Exhibit No. 31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
Exhibit No. 31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
Exhibit No. 32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

33

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 8, 2006

/s/ Jeffrey W. Farrar

Jeffrey W. Farrar, CPA

Executive Vice President and Chief Financial Officer

August 8, 2006

34

EX-31.1

Exhibit 31.1

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 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 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: August 8, 2006

/s/ O. R. Barham, Jr.

O. R. Barham, Jr.

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

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 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 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: August 8, 2006

/s/ Jeffrey W. Farrar

Jeffrey W. Farrar

Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

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

The undersigned, as the Chief Executive Officer and Chief Financial Officer of Virginia Financial Group, Inc., respectively, certify that the Quarterly Report on Form 10-Q for the period ended June 30, 2006, which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Virginia Financial Group, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), and no purchaser or seller of securities or any other person shall be entitled to rely upon the foregoing certification for any purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.

Date: August 8, 2006	/s/ O. R. Barham, Jr.
	President and Chief Executive Officer
Date: August 8, 2006	/s/ Jeffrey W. Farrar
	Executive Vice President and Chief Financial Officer