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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2004



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



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Virginia Financial Group, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



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



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



As of October 30, 2004, there
were 7,160,417 shares of common stock, $5.00 par value, issued and outstanding.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.



INDEX



|                               |  |                                                                                       |  |         
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --------
|                               |  |                                                                                       |  | Page No.
|PART I - FINANCIAL INFORMATION
|                               |  |                                                                                      
|ITEM 1                         |  | Consolidated Financial Statements:                                                    |  |         
|                               |  |                                                                                      
|                               |  | Consolidated Balance Sheets                                                           |  | 3       
|                               |  |                                                                                      
|                               |  | Consolidated Statements of Income                                                     |  | 4-5     
|                               |  |                                                                                      
|                               |  | Consolidated Statements of Changes in Stockholders Equity                            |  | 6       
|                               |  |                                                                                      
|                               |  | Consolidated Statements of Cash Flows                                                 |  | 7-8     
|                               |  |                                                                                      
|                               |  | Notes to Consolidated Financial Statements                                            |  | 9-15    
|                               |  |                                                                                      
|ITEM 2                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16-25   
|                               |  |                                                                                      
|ITEM 3                         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 26      
|                               |  |                                                                                      
|ITEM 4                         |  | Controls and Procedures                                                               |  | 26      
|                              
|PART II - OTHER INFORMATION   
|                               |  |                                                                                      
|ITEM 1                         |  | Legal Proceedings                                                                     |  | 26      
|                               |  |                                                                                      
|ITEM 2                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 26      
|                               |  |                                                                                      
|ITEM 3                         |  | Defaults Upon Senior Securities                                                       |  | 27      
|                               |  |                                                                                      
|ITEM 4                         |  | Submission of Matters to a Vote of Security Holders                                   |  | 27      
|                               |  |                                                                                      
|ITEM 5                         |  | Other Information                                                                     |  | 27      
|                               |  |                                                                                      
|ITEM 6                         |  | Exhibits                                                                              |  | 27      



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1. Financial statements



VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(000 OMITTED)



|                                                                                                                                     |  |                   |           |                  |   |          
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | ---------------- | - | ---------
|                                                                                                                                     |  | SEPTEMBER 30,2004 |           | DECEMBER 31,2003
|                                                                                                                                     |  | (unaudited)       |           |                 
|ASSETS                                                                                                                               |  |                   |           |                  |   |          
|Cash and due from depository institutions                                                                                            |  | $                 | 49,135    |                  | $ | 43,719   
|Federal funds sold                                                                                                                   |  |                   | 3,395     |                  |   | 1,222    
|Interest-bearing deposits in banks                                                                                                   |  |                   | 132       |                  |   | 237      
|Securities (market value: 2004, $298,349; 2003, $364,926)                                                                            |  |                   | 297,942   |                  |   | 364,298  
|Loans held for sale                                                                                                                  |  |                   | 5,924     |                  |   | 5,174    
|Loans receivable, net                                                                                                                |  |                   | 1,022,208 |                  |   | 912,946  
|Bank premises and equipment, net                                                                                                     |  |                   | 26,748    |                  |   | 27,311   
|Interest receivable                                                                                                                  |  |                   | 5,669     |                  |   | 5,914    
|Other real estate owned                                                                                                              |  |                   | 5         |                  |   | 454      
|Core deposit intangibles, net                                                                                                        |  |                   | 5,726     |                  |   | 6,247    
|Goodwill                                                                                                                             |  |                   | 14,033    |                  |   | 14,033   
|Other assets                                                                                                                         |  |                   | 8,839     |                  |   | 5,656    
|                                                                                                                                     |  |                   |           |                  |   |          
|Total Assets                                                                                                                         |  | $                 | 1,439,756 |                  | $ | 1,387,211
|                                                                                                                                     |  |                   |           |                  |   |          
|LIABILITIES                                                                                                                          |  |                   |           |                  |   |          
|Deposits:                                                                                                                            |  |                   |           |                  |   |          
|Noninterest-bearing demand deposits                                                                                                  |  | $                 | 220,355   |                  | $ | 216,560  
|Interest-bearing deposits                                                                                                            |  |                   | 1,030,366 |                  |   | 994,214  
|                                                                                                                                     |  |                   |           |                  |   |          
|Total deposits                                                                                                                       |  |                   | 1,250,721 |                  |   | 1,210,774
|                                                                                                                                     |  |                  
|Federal funds purchased and securities sold under agreements to repurchase                                                           |  |                   | 20,160    |                  |   | 33,155   
|Short-term borrowings                                                                                                                |  |                   | 240       |                  |   | 6,526    
|Federal Home Loan Bank advances                                                                                                      |  |                   | 14,080    |                  |   | 9,140    
|Trust preferred capital notes                                                                                                        |  |                   | 20,000    |                  |   |         
|Interest payable                                                                                                                     |  |                   | 2,135     |                  |   | 2,223    
|Other liabilities                                                                                                                    |  |                   | 6,741     |                  |   | 5,563    
|Commitments and contingencies                                                                                                        |  |                   |          |                  |   |         
|                                                                                                                                     |  |                   |           |                  |   |          
|Total Liabilities                                                                                                                    |  |                   | 1,314,077 |                  |   | 1,267,381
|                                                                                                                                     |  |                   |           |                  |   |          
|STOCKHOLDERS EQUITY                                                                                                                 |  |                   |           |                  |   |          
|Preferred stock, no par value; (Authorized 5,000,000 shares, no shares outstanding)                                                  |  |                   |          |                  |   |         
|Common stock, par value $5.00 per share; (Authorized 25,000,000 shares; issued and outstanding 7,160,417 and 7,149,926
respectively) |  |                   | 35,802    |                  |   | 35,764   
|Capital surplus                                                                                                                      |  |                   | 7,742     |                  |   | 7,578    
|Retained earnings                                                                                                                    |  |                   | 79,232    |                  |   | 72,255   
|Accumulated other comprehensive income, net                                                                                          |  |                   | 2,903     |                  |   | 4,233    
|                                                                                                                                     |  |                   |           |                  |   |          
|Total Stockholders Equity                                                                                                           |  |                   | 125,679   |                  |   | 119,830  
|                                                                                                                                     |  |                   |           |                  |   |          
|Total Liabilities and Stockholders Equity                                                                                           |  | $                 | 1,439,756 |                  | $ | 1,387,211
|                                                                                                                                     |  |                   |           |                  |   |          



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)



|                                                                                       |  |                                 |        |             |   |       
|-------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ----------- | - | ------
|                                                                                       |  | THREE MONTHS ENDEDSEPTEMBER 30,
|                                                                                       |  | 2004                            |        | 2003       
|                                                                                       |  | (unaudited)                     |        | (unaudited)
|Interest Income                                                                        |  |                                 |        |             |   |       
|Interest and fees on loans                                                             |  | $                               | 14,969 |             | $ | 12,167
|Interest on deposits in other banks                                                    |  |                                 | 1      |             |   | 29    
|Interest on investment securities:                                                     |  |                                 |        |             |   |       
|Taxable                                                                                |  |                                 | 92     |             |   | 109   
|Interest and dividends on securities available for sale:                               |  |                                 |        |             |   |       
|Taxable                                                                                |  |                                 | 2,023  |             |   | 2,066 
|Nontaxable                                                                             |  |                                 | 696    |             |   | 897   
|Dividends                                                                              |  |                                 | 132    |             |   | 96    
|Interest income on federal funds sold                                                  |  |                                 | 23     |             |   | 25    
|                                                                                       |  |                                 |        |             |   |       
|Total Interest Income                                                                  |  |                                 | 17,936 |             |   | 15,389
|                                                                                       |  |                                 |        |             |   |       
|Interest Expense                                                                       |  |                                 |        |             |   |       
|Interest on deposits                                                                   |  |                                 | 4,322  |             |   | 4,396 
|Interest on Federal Home Loan Bank advances                                            |  |                                 | 181    |             |   | 163   
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                                 | 47     |             |   | 62    
|Interest on other short-term borrowings                                                |  |                                 | 5      |             |   | 1     
|Interest on trust preferred capital notes                                              |  |                                 | 220    |             |   |      
|                                                                                       |  |                                 |        |             |   |       
|Total Interest Expense                                                                 |  |                                 | 4,775  |             |   | 4,622 
|                                                                                       |  |                                 |        |             |   |       
|Net Interest Income                                                                    |  |                                 | 13,161 |             |   | 10,767
|Less: Provision for loan losses                                                        |  |                                 | 636    |             |   | 323   
|                                                                                       |  |                                 |        |             |   |       
|Net Interest Income after Provision for Loan Losses                                    |  |                                 | 12,525 |             |   | 10,444
|Noninterest Income                                                                     |  |                                 |        |             |   |       
|Retail banking fees                                                                    |  |                                 | 2,011  |             |   | 1,455 
|Fees from fiduciary activities                                                         |  |                                 | 676    |             |   | 673   
|Mortgage banking fees                                                                  |  |                                 | 534    |             |   | 1,288 
|Brokerage services                                                                     |  |                                 | 169    |             |   | 103   
|Other operating income                                                                 |  |                                 | 252    |             |   | 272   
|Gains on securities available for sale                                                 |  |                                 |       |             |   | 365   
|Gains on other real estate owned                                                       |  |                                 |       |             |   | 20    
|                                                                                       |  |                                 |        |             |   |       
|Total Noninterest Income                                                               |  |                                 | 3,642  |             |   | 4,176 
|                                                                                       |  |                                 |        |             |   |       
|Noninterest Expense                                                                    |  |                                 |        |             |   |       
|Compensation and employee benefits                                                     |  |                                 | 5,793  |             |   | 5,690 
|Net occupancy expense                                                                  |  |                                 | 697    |             |   | 561   
|Supplies and equipment                                                                 |  |                                 | 1,085  |             |   | 893   
|Amortization-intangible assets                                                         |  |                                 | 173    |             |   | 39    
|Computer services                                                                      |  |                                 | 350    |             |   | 270   
|Telecommunications                                                                     |  |                                 | 227    |             |   | 184   
|Marketing                                                                              |  |                                 | 165    |             |   | 169   
|Capital stock taxes                                                                    |  |                                 | 145    |             |   | 193   
|Professional fees                                                                      |  |                                 | 162    |             |   | 219   
|Other operating expenses                                                               |  |                                 | 1,636  |             |   | 1,689 
|                                                                                       |  |                                 |        |             |   |       
|Total Noninterest Expense                                                              |  |                                 | 10,433 |             |   | 9,907 
|                                                                                       |  |                                 |        |             |   |       
|Income Before Income Tax Expense                                                       |  |                                 | 5,734  |             |   | 4,713 
|Income tax expense                                                                     |  |                                 | 1,743  |             |   | 1,181 
|                                                                                       |  |                                 |        |             |   |       
|Net Income                                                                             |  | $                               | 3,991  |             | $ | 3,532 
|                                                                                       |  |                                 |        |             |   |       
|Earnings per Share, basic                                                              |  | $                               | .56    |             | $ | .49   
|                                                                                       |  |                                 |        |             |   |       
|Earnings per Share, diluted                                                            |  | $                               | .55    |             | $ | .49   
|                                                                                       |  |                                 |        |             |   |       



See accompanying notes
to consolidated financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)



|                                                                                       |  |                                |        |             |   |       
|-------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ----------- | - | ------
|                                                                                       |  | NINE MONTHS ENDEDSEPTEMBER 30,
|                                                                                       |  | 2004                           |        | 2003       
|                                                                                       |  | (unaudited)                    |        | (unaudited)
|Interest Income                                                                        |  |                                |        |             |   |       
|Interest and fees on loans                                                             |  | $                              | 43,263 |             | $ | 36,381
|Interest on deposits in other banks                                                    |  |                                | 3      |             |   | 31    
|Interest on investment securities:                                                     |  |                                |        |             |   |       
|Taxable                                                                                |  |                                | 279    |             |   | 337   
|Interest and dividends on securities available for sale:                               |  |                                |        |             |   |       
|Taxable                                                                                |  |                                | 6,580  |             |   | 5,956 
|Nontaxable                                                                             |  |                                | 2,158  |             |   | 2,731 
|Dividends                                                                              |  |                                | 256    |             |   | 259   
|Interest income on federal funds sold                                                  |  |                                | 32     |             |   | 169   
|                                                                                       |  |                                |        |             |   |       
|Total Interest Income                                                                  |  |                                | 52,571 |             |   | 45,864
|                                                                                       |  |                                |        |             |   |       
|Interest Expense                                                                       |  |                                |        |             |   |       
|Interest on deposits                                                                   |  |                                | 13,093 |             |   | 13,681
|Interest on Federal Home Loan Bank advances                                            |  |                                | 519    |             |   | 533   
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                                | 161    |             |   | 159   
|Interest on other short-term borrowings                                                |  |                                | 141    |             |   | 4     
|Interest on trust preferred capital notes                                              |  |                                | 442    |             |   |      
|                                                                                       |  |                                |        |             |   |       
|Total Interest Expense                                                                 |  |                                | 14,356 |             |   | 14,377
|                                                                                       |  |                                |        |             |   |       
|Net Interest Income                                                                    |  |                                | 38,215 |             |   | 31,487
|Less: Provision for loan losses                                                        |  |                                | 1,953  |             |   | 968   
|                                                                                       |  |                                |        |             |   |       
|Net Interest Income after Provision for Loan Losses                                    |  |                                | 36,262 |             |   | 30,519
|Noninterest Income                                                                     |  |                                |        |             |   |       
|Retail banking fees                                                                    |  |                                | 5,610  |             |   | 4,143 
|Fees from fiduciary activities                                                         |  |                                | 2,136  |             |   | 2,162 
|Mortgage banking fees                                                                  |  |                                | 2,015  |             |   | 3,610 
|Brokerage services                                                                     |  |                                | 514    |             |   | 451   
|Other operating income                                                                 |  |                                | 773    |             |   | 884   
|Gains on securities available for sale                                                 |  |                                |       |             |   | 435   
|Gains on other real estate owned                                                       |  |                                |       |             |   | 20    
|                                                                                       |  |                                |        |             |   |       
|Total Noninterest Income                                                               |  |                                | 11,048 |             |   | 11,705
|                                                                                       |  |                                |        |             |   |       
|Noninterest Expense                                                                    |  |                                |        |             |   |       
|Compensation and employee benefits                                                     |  |                                | 17,601 |             |   | 16,274
|Net occupancy expense                                                                  |  |                                | 2,073  |             |   | 1,679 
|Supplies and equipment                                                                 |  |                                | 3,224  |             |   | 2,840 
|Amortization-intangible assets                                                         |  |                                | 520    |             |   | 118   
|Computer services                                                                      |  |                                | 1,091  |             |   | 902   
|Telecommunications                                                                     |  |                                | 794    |             |   | 567   
|Marketing                                                                              |  |                                | 467    |             |   | 479   
|Capital stock taxes                                                                    |  |                                | 455    |             |   | 578   
|Professional fees                                                                      |  |                                | 653    |             |   | 575   
|Other operating expenses                                                               |  |                                | 4,624  |             |   | 4,240 
|                                                                                       |  |                                |        |             |   |       
|Total Noninterest Expense                                                              |  |                                | 31,502 |             |   | 28,252
|                                                                                       |  |                                |        |             |   |       
|Income Before Income Tax Expense                                                       |  |                                | 15,808 |             |   | 13,972
|Income tax expense                                                                     |  |                                | 4,677  |             |   | 3,557 
|                                                                                       |  |                                |        |             |   |       
|Net Income                                                                             |  | $                              | 11,131 |             | $ | 10,415
|                                                                                       |  |                                |        |             |   |       
|Earnings per Share, basic                                                              |  | $                              | 1.56   |             | $ | 1.46  
|                                                                                       |  |                                |        |             |   |       
|Earnings per Share, diluted                                                            |  | $                              | 1.55   |             | $ | 1.45  
|                                                                                       |  |                                |        |             |   |       



See accompanying notes to consolidated
financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(000 OMITTED)

(unaudited)



|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | ----------- | ------ | - | -------------- | - | ----- | ----------------------------------- |  | - | ---------------- | - |  | ------------------- | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|                                                                                             |  | CommonStock |        |   | CapitalSurplus |   |       | AccumulatedOtherComprehensiveIncome |  |   | RetainedEarnings |   |  | ComprehensiveIncome |        |   | Total |  
|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 $(1,085) |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       |   | (1,960 | ) |  |   |        |  
|Add: reclassification adjustment, net of tax of $(152)                                       |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       |   | (283   | ) |  |   |        |  
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Other comprehensive loss                                                                     |  |             |       |   |                |   |      |                                     |  |   | (2,243           | ) |  |                     |       |   |       |   | (2,243 | ) |  |   | (2,243  | )
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Comprehensive income                                                                         |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       | $ | 8,172  |   |  |   |        |  
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Cash dividends ($.56 per share)                                                              |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     | (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 |  
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Balance, January 1, 2004                                                                     |  | $           | 35,764 |   |                | $ | 7,578 |                                     |  | $ | 4,233            |   |  | $                   | 72,255 |   |       |   |        |   |  | $ | 119,830 |  
|Net income                                                                                   |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     | 11,131 |   |       |   | 11,131 |   |  |   | 11,131  |  
|Other Comprehensive Income, net of tax:                                                      |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Unrealized losses on securities available for sale during the period, net of tax of $(716)   |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       |   | (1,330 | ) |  |   |         |  
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Other comprehensive loss                                                                     |  |             |       |   |                |   |      |                                     |  |   | (1,330           | ) |  |                     |       |   |       |   | (1,330 | ) |  |   | (1,330  | )
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Comprehensive income                                                                         |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       | $ | 9,801  |   |  |   |        |  
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Cash dividends ($.58 per share)                                                              |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     | (4,154 | ) |       |   |        |   |  |   | (4,154  | )
|Restricted stock awards                                                                      |  |             | 24     |   |                |   | 139   |                                     |  |   |                 |   |  |                     |       |   |       |   |        |   |  |   | 163     |  
|Stock option exercise                                                                        |  |             | 14     |   |                |   | 25    |                                     |  |   |                 |   |  |                     |       |   |       |   |        |   |  |   | 39      |  
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Balance, September 30, 2004                                                                  |  | $           | 35,802 |   |                | $ | 7,742 |                                     |  | $ | 2,903            |   |  | $                   | 79,232 |   |       |   |        |   |  | $ | 125,679 |  
|                                                                                             |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  



See accompanying notes to consolidated
financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)



|                                                                                  |  |                                |          |   |             |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ----------- | - | -------- | -
|                                                                                  |  | NINE MONTHS ENDEDSEPTEMBER 30, |         
|                                                                                  |  | 2004                           |          |   | 2003        |  
|                                                                                  |  | (unaudited)                    |          |   | (unaudited) |  
|OPERATING ACTIVITIES                                                              |  |                                |          |   |             |   |          |  
|Net income                                                                        |  | $                              | 11,131   |   |             | $ | 10,415   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |          |   |             |   |          |  
|Provision for loan losses                                                         |  |                                | 1,953    |   |             |   | 968      |  
|Deferred tax benefit                                                              |  |                                | (729     | ) |             |   | (1,133   | )
|Depreciation and amortization                                                     |  |                                | 2,783    |   |             |   | 2,194    |  
|(Gain) on sale of securities available for sale                                   |  |                                |         |   |             |   | (435     | )
|(Gain) on sale of other real estate                                               |  |                                |         |   |             |   | (20      | )
|(Gain) on sale of fixed assets                                                    |  |                                | (5       | ) |             |   | (24      | )
|Amortization of premiums and discounts on securities                              |  |                                | 609      |   |             |   | 503      |  
|Fees on mortgage loans sold                                                       |  |                                | (2,015   | ) |             |   | (3,610   | )
|Proceeds from sale of mortgage loans                                              |  |                                | 121,809  |   |             |   | 213,644  |  
|Origination of loans for sale                                                     |  |                                | (120,544 | ) |             |   | (200,342 | )
|Changes in assets and liabilities:                                                |  |                                |          |   |             |   |          |  
|Decrease (increase) in interest receivable                                        |  |                                | 245      |   |             |   | (386     | )
|(Increase) in intangible assets                                                   |  |                                |         |   |             |   | (18,920  | )
|(Increase) in other assets                                                        |  |                                | (647     | ) |             |   | (1,426   | )
|Increase (decrease) in interest payable                                           |  |                                | (87      | ) |             |   | 481      |  
|Increase in other liabilities                                                     |  |                                | 567      |   |             |   | 1,513    |  
|                                                                                  |  |                                |          |   |             |   |          |  
|Net cash provided by operating activities                                         |  |                                | 15,070   |   |             |   | 3,422    |  
|                                                                                  |  |                                |          |   |             |   |          |  
|INVESTING ACTIVITIES                                                              |  |                                |          |   |             |   |          |  
|Proceeds from sale of securities available for sale                               |  |                                | 38       |   |             |   | 74,378   |  
|Proceeds from maturities and principal payments of securities available for sale  |  |                                | 87,342   |   |             |   | 160,192  |  
|Purchase of securities available for sale                                         |  |                                | (23,679  | ) |             |   | (325,009 | )
|Purchase of premises and equipment                                                |  |                                | (1,743   | ) |             |   | (7,324   | )
|Proceeds from sale of premises and equipment                                      |  |                                | 48       |   |             |   | 58       |  
|Additions to other real estate                                                    |  |                                |         |   |             |   | (527     | )
|Proceeds from sale of other real estate                                           |  |                                | 131      |   |             |   | 168      |  
|Increase in cash surrender value of life insurance                                |  |                                |         |   |             |   | (128     | )
|Net increase in loans                                                             |  |                                | (111,214 | ) |             |   | (164,280 | )
|                                                                                  |  |                                |          |   |             |   |          |  
|Net cash used in investing activities                                             |  |                                | (49,077  | ) |             |   | (262,472 | )
|                                                                                  |  |                                |          |   |             |   |          |  



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CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)



|                                                          |  |                                |         |   |             |   |         |  
|--------------------------------------------------------- |  | ------------------------------ | ------- | - | ----------- | - | ------- | -
|                                                          |  | NINE MONTHS ENDEDSEPTEMBER 30, |        
|                                                          |  | 2004                           |         |   | 2003        |  
|                                                          |  | (unaudited)                    |         |   | (unaudited) |  
|FINANCING ACTIVITIES                                      |  |                                |         |   |             |   |         |  
|Net increase in demand, money market and savings deposits |  |                                | 25,290  |   |             |   | 157,468 |  
|Net increase in time deposits                             |  |                                | 14,657  |   |             |   | 90,053  |  
|Proceeds (repayment) of Federal Home Loan Bank advances   |  |                                | 4,940   |   |             |   | (3,060  | )
|Net increase in repurchase agreements                     |  |                                | 2,005   |   |             |   | 15,190  |  
|Net (decrease) in federal funds purchased                 |  |                                | (15,000 | ) |             |   |        |  
|Net increase (decrease) in short-term borrowings          |  |                                | (6,286  | ) |             |   | 4,313   |  
|Issuance of trust preferred capital notes                 |  |                                | 20,000  |   |             |   |        |  
|Repurchase of common stock                                |  |                                |        |   |             |   | (818    | )
|Proceeds from exercise of stock options                   |  |                                | 39      |   |             |   | 21      |  
|Cash dividends paid on common stock                       |  |                                | (4,154  | ) |             |   | (4,009  | )
|                                                          |  |                                |         |   |             |   |         |  
|Net cash provided by financing activities                 |  |                                | 41,491  |   |             |   | 259,158 |  
|                                                          |  |                                |         |   |             |   |         |  
|Increase in cash and cash equivalents                     |  |                                | 7,484   |   |             |   | 108     |  
|                                                          |  |                               
|CASH AND CASH EQUIVALENTS                                 |  |                                |         |   |             |   |         |  
|Beginning of the period                                   |  |                                | 45,178  |   |             |   | 71,547  |  
|                                                          |  |                                |         |   |             |   |         |  
|End of the period                                         |  | $                              | 52,662  |   |             | $ | 71,655  |  
|                                                          |  |                                |         |   |             |   |         |  
|Supplemental Schedule of Noncash Investing Activities     |  |                                |         |   |             |   |         |  
|Unrealized gain (losses) on securities available for sale |  | $                              | 2,046   |   |             | $ | (3,450  | )
|                                                          |  |                                |         |   |             |   |         |  
|Other real estate acquired in settlement of loans         |  | $                              |        |   |             | $ | 157     |  
|                                                          |  |                                |         |   |             |   |         |  
|Restricted common stock issued                            |  | $                              | 163     |   |             | $ |        |  
|                                                          |  |                                |         |   |             |   |         |  



See accompanying notes to consolidated
financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003



|1. | Virginia Financial Group, Inc. (the Company) 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 September 30, 2004 and December 31, 2003, the results of operations for
the three months and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and 2003. 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, 2003.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | The results of operations for the three month and nine month periods ended September 30, 2004 and 2003 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):
|-- | ------------------------------------------------------------------------------



|                                                 |  |                    |         |            |   |        
|------------------------------------------------ |  | ------------------ | ------- | ---------- | - | -------
|                                                 |  | AmortizedCost      |         | Fair Value
|Securities Held to Maturity:                     |  |                    |         |            |   |        
|                                                 |  | September 30, 2004
|                                                 |  | (unaudited)       
|Obligations of States and Political Subdivisions |  | $                  | 5,846   |            | $ | 6,253  
|                                                 |  |                    |         |            |   |        
|                                                 | 
|                                                 |  | December 31, 2003 
|Obligations of States and Political Subdivisions |  | $                  | 5,837   |            | $ | 6,465  
|                                                 |  |                    |         |            |   |        
|                                                 |  |                   
|Securities Available for Sale:                   |  |                    |         |            |   |        
|                                                 | 
|                                                 |  | September 30, 2004
|                                                 |  | (unaudited)       
|U.S. Treasury securities                         |  | $                  | 7,025   |            | $ | 7,287  
|U.S. Government securities                       |  |                    | 112,865 |            |   | 112,886
|State and municipals                             |  |                    | 71,035  |            |   | 74,637 
|Corporate bonds                                  |  |                    | 9,061   |            |   | 9,435  
|Collateralized mortgage obligations              |  |                    | 4,718   |            |   | 4,773  
|Mortgage-backed securities                       |  |                    | 73,296  |            |   | 73,300 
|Equity securities                                |  |                    | 2,722   |            |   | 2,869  
|Restricted stock                                 |  |                    | 6,182   |            |   | 6,182  
|Other securities                                 |  |                    | 727     |            |   | 727    
|                                                 |  |                    |         |            |   |        
|                                                 |  | $                  | 287,631 |            | $ | 292,096
|                                                 |  |                    |         |            |   |        



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003



|                                    |  |                   |         |  |   |        
|----------------------------------- |  | ----------------- | ------- |  | - | -------
|                                    |  | December 31, 2003
|U.S. Treasury securities            |  | $                 | 33,048  |  | $ | 33,552 
|U.S. Government securities          |  |                   | 127,418 |  |   | 128,571
|State and municipals                |  |                   | 79,818  |  |   | 83,747 
|Corporate bonds                     |  |                   | 10,004  |  |   | 10,605 
|Collateralized mortgage obligations |  |                   | 6,453   |  |   | 6,585  
|Mortgage-backed securities          |  |                   | 88,876  |  |   | 88,849 
|Equity securities                   |  |                   | 1,575   |  |   | 1,794  
|Restricted stock                    |  |                   | 4,257   |  |   | 4,257  
|Other securities                    |  |                   | 501     |  |   | 501    
|                                    |  |                   |         |  |   |        
|                                    |  | $                 | 351,950 |  | $ | 358,461
|                                    |  |                   |         |  |   |        



The following table is a presentation
of the aggregate amount of unrealized loss in investment securities at September 30, 2004. The aggregate is determined by summation of all the related securities that have a continuous loss at September 30, 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 at September 30, 2004 (000 omitted):



|                                                        |  |                     |        |                   |   |           |  |                      |     |  |   |     |  |   |        |  |   |      
|------------------------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | -------------------- | --- |  | - | --- |  | - | ------ |  | - | -----
|                                                        |  | Less than 12 months |        | 12 months or more |   | FairValue |  | Total UnrealizedLoss
|Description of Securities                               |  | FairValue           |        | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss       |     | 
|U.S. Treasury securities and U.S. Government securities |  | $                   | 43,431 |                   | $ | 650       |  | $                    |    |  | $ |    |  | $ | 43,431 |  | $ | 650  
|Mortgage backed securities                              |  |                     | 41,633 |                   |   | 449       |  |                      |    |  |   |    |  |   | 41,633 |  |   | 449  
|State and municipals                                    |  |                     | 5,507  |                   |   | 48        |  |                      |    |  |   |    |  |   | 5,507  |  |   | 48   
|Collateralized mortgage obligations                     |  |                     |       |                   |   |          |  |                      |    |  |   |    |  |   |       |  |   |     
|                                                        |  |                     |        |                   |   |           |  |                      |     |  |   |     |  |   |        |  |   |      
|Subtotal debt securities                                |  |                     | 90,571 |                   |   | 1,147     |  |                      |    |  |   |    |  |   | 90,571 |  |   | 1,147
|                                                        |  |                     |        |                   |   |           |  |                      |     |  |   |     |  |   |        |  |   |      
|Common stock                                            |  |                     |       |                   |   |          |  |                      | 70  |  |   | 233 |  |   | 70     |  |   | 233  
|Preferred stock                                         |  |                     |       |                   |   |          |  |                      | 524 |  |   | 68  |  |   | 524    |  |   | 68   
|                                                        |  |                     |        |                   |   |           |  |                      |     |  |   |     |  |   |        |  |   |      
|Total temporarily impaired securities                   |  | $                   | 90,571 |                   | $ | 1,147     |  | $                    | 594 |  | $ | 301 |  | $ | 91,165 |  | $ | 1,448
|                                                        |  |                     |        |                   |   |           |  |                      |     |  |   |     |  |   |        |  |   |      



There are a total of fifty-four
securities that have unrealized losses as of September 30, 2004, seventeen U.S. Treasuries or agency securities, eighteen U.S. Agency MBS securities, fourteen municipal securities, four common stock securities, and one preferred stock security.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003



The debt securities
are obligations of entities that are excellent credit risks. The impairment as noted is the result of market conditions and does not reflect on the ability of the issuers to repay the debt obligations. All debt securities have continuous losses at
quarter end less than 12 months.



The common stock category includes four
issuers that have shown a loss for more than one year. All the stocks are within the technology sector and prices of the stocks have had a strong correlation with the significant drop in the overall valuation level of this industry over the last
several years. None of the issuers have entered into bankruptcy proceedings and the market for each of the stocks is active and liquid. The impairment does not represent a significant financial impact to the Company, and therefore the positions can
be maintained indefinitely.



The preferred stock category has one issue that is
showing a loss of more than 12 months. The issuer is the Federal Home Loan Mortgage Corporation (Freddie Mac). The impairment is the result of interest rate market conditions. 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 as a result.



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



|                                             |  |                   |           |   |                  |   |         |  
|-------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | ------- | -
|                                             |  | September 30,2004 |           |   | December 31,2003 |  
|                                             |  | (unaudited)       |           |   |                  |  
|Real estate loans:                           |  |                   |           |   |                  |   |         |  
|Construction                                 |  | $                 | 106,356   |   |                  | $ | 94,372  |  
|Secured by 1  4 family residential          |  |                   | 316,425   |   |                  |   | 283,631 |  
|Commercial and multifamily                   |  |                   | 479,760   |   |                  |   | 414,476 |  
|Commercial, financial and agricultural loans |  |                   | 82,307    |   |                  |   | 73,852  |  
|Consumer loans                               |  |                   | 45,587    |   |                  |   | 48,154  |  
|All other loans                              |  |                   | 2,740     |   |                  |   | 8,585   |  
|                                             |  |                   |           |   |                  |   |         |  
|                                             |  |                   | 1,033,175 |   |                  |   | 923,070 |  
|                                             |  |                  
|Deferred loan costs (fees)                   |  |                   | 333       |   |                  |   | (381    | )
|Allowance for loan losses                    |  |                   | (11,300   | ) |                  |   | (9,743  | )
|                                             |  |                   |           |   |                  |   |         |  
|                                             |  | $                 | 1,022,208 |   |                  | $ | 912,946 |  
|                                             |  |                   |           |   |                  |   |         |  



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



|                                     |  |                   |        |   |                   |   |       |                   |  |   |       |  
|------------------------------------ |  | ----------------- | ------ | - | ----------------- | - | ----- | ----------------- |  | - | ----- | -
|                                     |  | September 30,2004 |        |   | December 31, 2003 |   |       | September 30,2003 | 
|                                     |  | (unaudited)       |        |   |                   |   |       | (unaudited)       | 
|Balance at January 1                 |  | $                 | 9,743  |   |                   | $ | 9,180 |                   |  | $ | 9,180 |  
|                                     |  |                   |       
|Recoveries added to the allowance    |  |                   | 142    |   |                   |   | 229   |                   |  |   | 189   |  
|Loan losses charged to the allowance |  |                   | (538   | ) |                   |   | (956  | )                 |  |   | (679  | )
|Provision recorded to expense        |  |                   | 1,953  |   |                   |   | 1,290 |                   |  |   | 968   |  
|                                     |  |                   |        |   |                   |   |       |                   |  |   |       |  
|Balance at end of period             |  | $                 | 11,300 |   |                   | $ | 9,743 |                   |  | $ | 9,658 |  
|                                     |  |                   |        |   |                   |   |       |                   |  |   |       |  



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003



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



|                                                                                 |  |                   |       |                  |   |      
|-------------------------------------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                                                 |  | September 30,2004 |       | December 31,2003
|                                                                                 |  | (unaudited)       |       |                 
|Impaired loans for which an allowance has been provided                          |  | $                 | 5,545 |                  | $ | 3,128
|Impaired loans for which an allowance has not been provided                      |  |                   | 3,773 |                  |   | 3,474
|                                                                                 |  |                   |       |                  |   |      
|Total impaired loans                                                             |  |                   | 9,318 |                  |   | 6,602
|                                                                                 |  |                   |       |                  |   |      
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $                 | 1,278 |                  | $ | 1,281
|                                                                                 |  |                   |       |                  |   |      



|6. | Short-term Borrowings:
|-- | ----------------------



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



|                                    |  |                   |     |                  |   |      
|----------------------------------- |  | ----------------- | --- | ---------------- | - | -----
|                                    |  | September 30,2004 |     | December 31,2003
|                                    |  | (unaudited)       |     |                 
|Federal Home Loan Bank Advances     |  | $                 |    |                  | $ |     
|Line of credit  Correspondent bank |  |                   |    |                  |   | 6,500
|Federal Reserve borrowings          |  |                   | 240 |                  |   | 26   
|                                    |  |                   |     |                  |   |      
|                                    |  | $                 | 240 |                  | $ | 6,526
|                                    |  |                   |     |                  |   |      



The Company utilizes
overnight advances from the Federal Home Loan Bank of Atlanta for short term funding needs. The banking subsidiaries have available a combined $187.9 million line of credit with the Federal Home Loan Bank of Atlanta. Advances on the line are secured
by a blanket lien on the 1 to 4 family dwelling loan portfolios of the affiliate banks, which totaled $322.4 million at September 30, 2004.



The Company has a 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.



Second
Bank & Trust has an agreement with the Federal Reserve where it can borrow funds deposited by its customers. This agreement calls for variable interest and is payable on demand. U. S. Government securities and U. S. Treasury notes are pledged as
collateral. The maximum amount available under this agreement is $1,000,000.



Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreement to repurchase are
reflected at the amount of cash received in connection with the transaction.



The average balance of short-term borrowings outstanding did not exceed 30 percent of stockholders equity for the nine months ended September 30, 2004 or the year ended December 31, 2003.



|7. | Long-term Debt:
|-- | ---------------



The Company has outstanding fixed-rate, long-term debt with the Federal Home Loan Bank of Atlanta of $14.1 million at September 30, 2004 that matures
through 2010. At September 30, 2004, the interest rates on



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003



the
fixed-rate, long-term advances ranged from 1.96% to 7.07%. One advance totaling $80 thousand at September 30, 2004 requires quarterly principal payments totaling $20 thousand plus interest. The remainder of the advances requires quarterly interest
payments with principal due upon maturity. The average interest rate was 5.12% at September 30, 2004 with an average balance outstanding of $9.6 million.



The Company also has outstanding $20 million of floating rate trust preferred securities. Under the terms of the Trust Preferred transaction, the
securities will mature in 30 years and are redeemable, in whole or in part, without penalty, at the option of the Company after five years. The securities have a floating rate, which will be reset quarterly, with a current rate of 4.75%.



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



|     |  |   |       
|---- |  | - | ------
|2004 |  | $ | 20    
|2005 |  |   | 4,060 
|2006 |  |   | 5,000 
|2010 |  |   | 5,000 
|2034 |  |   | 20,000
|     |  |   |       
|     |  | $ | 34,080
|     |  |   |       



|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, 2004 and 2003.



|                               |  |           |  |                 |     |        |           |                 |   |    
|------------------------------ |  | --------- |  | --------------- | --- | ------ | --------- | --------------- | - | ---
|                               |  | 2004      |  | 2003           
|                               |  | Shares    |  | PerShare Amount |     | Shares |           | PerShare Amount
|Basic earnings per share       |  | 7,160,417 |  | $               | .56 |        | 7,149,926 |                 | $ | .49
|                               |  |           |  |                 |     |        |           |                 |   |    
|Effect of dilutive securities: |  |           |  |                 |     |        |           |                 |   |    
|Stock options                  |  | 41,224    |  |                 |     |        | 36,805    |                 |   |    
|                               |  |           |  |                 |     |        |           |                 |   |    
|Diluted earnings per share     |  | 7,204,399 |  | $               | .55 |        | 7,186,731 |                 | $ | .49
|                               |  |           |  |                 |     |        |           |                 |   |    



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003



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, 2004 and 2003.



|                               |  |           |  |                 |      |        |           |                 |   |     
|------------------------------ |  | --------- |  | --------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | 2004      |  | 2003           
|                               |  | Shares    |  | PerShare Amount |      | Shares |           | PerShare Amount
|Basic earnings per share       |  | 7,157,833 |  | $               | 1.56 |        | 7,157,482 |                 | $ | 1.46
|                               |  |           |  |                 |      |        |           |                 |   |     
|Effect of dilutive securities: |  |           |  |                 |      |        |           |                 |   |     
|Stock options                  |  | 43,982    |  |                 |      |        | 35,326    |                 |   |     
|                               |  |           |  |                 |      |        |           |                 |   |     
|Diluted earnings per share     |  | 7,201,815 |  | $               | 1.55 |        | 7,192,808 |                 | $ | 1.45
|                               |  |           |  |                 |      |        |           |                 |   |     



In 2004 and 2003,
stock options representing 17,383 and 11,100 shares, respectively, were not included in the calculation of earnings per share as their effect would have been anti-dilutive.



|9. | Stock Compensation Plan:
|-- | ------------------------



At September 30, 2004, 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, 2004 and 2003 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).



|                                                                                                             |  |      |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                             |  | 2004 |        |   | 2003 |  
|Net income, as reported                                                                                      |  | $    | 11,131 |   |      | $ | 10,415 |  
|Deduct: total stock-based employee compensation expense determined based on fair value method for all awards |  |      | (53    | ) |      |   | (32    | )
|                                                                                                             |  |      |        |   |      |   |        |  
|Pro forma net income                                                                                         |  | $    | 11,078 |   |      | $ | 10,383 |  
|                                                                                                             |  |      |        |   |      |   |        |  
|Earnings per share:                                                                                          |  |      |        |   |      |   |        |  
|Basic  as reported                                                                                          |  | $    | 1.56   |   |      | $ | 1.46   |  
|                                                                                                             |  |      |        |   |      |   |        |  
|Basic  pro forma                                                                                            |  | $    | 1.55   |   |      | $ | 1.45   |  
|                                                                                                             |  |      |        |   |      |   |        |  
|Diluted  as reported                                                                                        |  | $    | 1.55   |   |      | $ | 1.45   |  
|                                                                                                             |  |      |        |   |      |   |        |  
|Diluted  pro forma                                                                                          |  | $    | 1.54   |   |      | $ | 1.44   |  
|                                                                                                             |  |      |        |   |      |   |        |  



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003



|10. | 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 components of net periodic benefit cost are as
follows:



|                                   |  |                             |      |   |      |   |      |  
|---------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                   |  | Nine Months Ended Sept. 30, |     
|                                   |  | 2004                        |      |   | 2003 |  
|Service cost                       |  | $                           | 147  |   |      | $ | 171  |  
|Interest cost                      |  |                             | 203  |   |      |   | 201  |  
|Expected return on plan assets     |  |                             | (228 | ) |      |   | (189 | )
|Amortization of prior service cost |  |                             | 24   |   |      |   | 24   |  
|Amortization of net (gain) loss    |  |                             | 13   |   |      |   | (3   | )
|                                   |  |                             |      |   |      |   |      |  
|Net periodic benefit cost          |  | $                           | 159  |   |      | $ | 204  |  
|                                   |  |                             |      |   |      |   |      |  



The Company made an
annual cash contribution of $129 thousand to the plan during the second quarter of 2004, and no further contributions are anticipated for this year.



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##### Table of Contents

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. (the Company). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and supplemental financial data.



In addition to historical information, statements contained in this report that are not historical facts may be construed as
forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, or those anticipated. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect managements analysis only as of the date thereof.



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 on 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, compliance, audit and loan review.



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.



16



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



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 a 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 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 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.



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



17



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



being amortized over their estimated lives not to
exceed fifteen years. Amortization expense charged to operations was $173 thousand and $39 thousand for the three months ended September 30, 2004 and 2003, and $520 thousand and $118 thousand for the nine months ended September 30, 2004 and 2003,
respectively.



Results of Operations



Virginia Financial Group, Inc.s consolidated net income for the quarter ended
September 30, 2004 amounted to $4.0 million or $.55 per diluted share, compared to earnings of $3.5 million or $.49 per diluted share for the quarter ended September 30, 2003. Net income increased 13.0% and diluted earnings per share increased 12.2%
compared to third quarter 2003 results. The Companys earnings for the third quarter produced an annualized return on average assets (ROA) of 1.11% and return on average equity (ROE) of 12.99%, compared to prior year ratios of 1.20% and 12.09%,
respectively.



For the first nine months of 2004, net income was $11.1 million,
up 6.9% from $10.4 million for the same period in 2003. Net income per diluted share was $1.55, up 6.9% from $1.45 for the first nine months of 2003. ROA and ROE for the nine month period were 1.05% and 12.24%, compared to 1.22% and 11.97% for the
same period in 2003, respectively.



Net Interest Income



Net interest income increased $2.4 million or 22.2% to $13.2 million for the three months
ended September 30, 2004. This improvement can be attributed to an expanding net interest margin, and continuing growth in average earning assets. The net interest margin for the three months ended September 30, 2004 was 4.14%, compared to 4.05% for
the quarter ended June 30, 2004 and 4.12% for the quarter ended September 30, 2003. The increase is largely due to the increase in short term rates and the resulting impact on loan yields which are indexed to the prime rate. The net interest margin
for the nine month period ended September 30, 2004 was 4.10%, compared to 4.21% for the same period in 2003.



The following tables provide information on average earning assets and interest-bearing liabilities for the three months and nine months ended September 30, 2004 and 2003 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 $436 thousand and $549 thousand for the three months ended September 30, and $1.3 million and $1.7 million for the nine months
ended September 30, 2004 and 2003, respectively.



18



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|-------------------------------------------------------- |  | --------------------------- | ------------- | ---------------- | ---- | ------------- |  | ---- | --------------- |  | ---------------- | ------------- | ------------- | - | ---------- |  | ----- | -
|                                                         |  | Quarter Ended September 30, |              
|                                                         |  | 2004                        |               |                  | 2003 |              
|Dollars in thousands                                     |  | Average Balance             |               | Interest Inc/Exp |      | Average Rates |  |      | Average Balance |  | Interest Inc/Exp |               | Average Rates |  
|Assets                                                   |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Loans receivable, net                                    |  | $                           | 1,009,098,814 |                  | $    | 15,027,427    |  | 5.92 | %               |  | $                | 755,222,127   |               | $ | 12,233,073 |  | 6.43  | %
|Investment securities                                    |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Taxable                                                  |  |                             | 226,490,641   |                  |      | 2,249,404     |  | 3.95 | %               |  |                  | 239,450,228   |               |   | 2,273,723  |  | 3.80  | %
|Tax exempt                                               |  |                             | 65,267,961    |                  |      | 1,071,656     |  | 6.53 | %               |  |                  | 77,260,040    |               |   | 1,354,470  |  | 7.01  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Total Investments                                        |  |                             | 291,758,602   |                  |      | 3,321,060     |  | 4.53 | %               |  |                  | 316,710,268   |               |   | 3,628,193  |  | 4.58  | %
|                                                         |  |                             |               |                  |      |              
|FHLB int bearing                                         |  |                             | 323,067       |                  |      | 1,289         |  | 1.59 | %               |  |                  | 313,263       |               |   | 25,768     |  | 32.63 | %
|Federal funds sold                                       |  |                             | 5,962,083     |                  |      | 22,108        |  | 1.48 | %               |  |                  | 16,946,229    |               |   | 51,037     |  | 1.19  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|                                                         |  |                             | 298,043,752   |                  |      | 3,344,457     |  | 4.46 | %               |  |                  | 333,969,760   |               |   | 3,704,998  |  | 4.44  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Total Earning Assets                                     |  |                             | 1,307,142,566 |                  |      | 18,371,884    |  | 5.59 | %               |  |                  | 1,089,191,887 |               |   | 15,938,071 |  | 5.82  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Non-Earning Assets                                       |  |                             | 118,197,929   |                  |      |               |  |      |                 |  |                  | 92,465,731    |               |   |            |  |       |  
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Total Assets                                             |  |                             | 1,425,340,495 |                  |      |               |  |      |                 |  |                  | 1,181,657,618 |               |   |            |  |       |  
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Liabilities and Stockholders' Equity                     |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Time and savings deposits                                |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Interest-bearing transaction accounts                    |  | $                           | 196,014,562   |                  | $    | 184,026       |  | 0.37 | %               |  | $                | 134,876,643   |               | $ | 216,835    |  | 0.64  | %
|Money market deposit accounts                            |  |                             | 181,754,438   |                  |      | 413,743       |  | 0.91 | %               |  |                  | 163,709,661   |               |   | 421,622    |  | 1.02  | %
|Passbook savings accounts                                |  |                             | 144,072,154   |                  |      | 233,693       |  | 0.65 | %               |  |                  | 114,981,891   |               |   | 235,237    |  | 0.81  | %
|Certificates of deposit >$100k                           |  |                             | 122,270,427   |                  |      | 1,020,227     |  | 3.32 | %               |  |                  | 93,176,952    |               |   | 880,914    |  | 3.75  | %
|Certificates of deposit <$100k                           |  |                             | 369,100,912   |                  |      | 2,469,840     |  | 2.66 | %               |  |                  | 315,843,023   |               |   | 2,641,615  |  | 3.32  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Total Time and Savings Deposits                          |  |                             | 1,013,212,493 |                  |      | 4,321,529     |  | 1.70 | %               |  |                  | 822,588,170   |               |   | 4,396,223  |  | 2.12  | %
|                                                         |  |                             |               |                  |      |              
|Federal funds purchased                                  |  |                             | 21,754,651    |                  |      | 46,208        |  | 0.85 | %               |  |                  | 40,377,100    |               |   | 88,252     |  | 0.87  | %
|Trust Preferred Securities                               |  |                             | 19,999,999    |                  |      | 220,609       |  | 4.39 | %               |  |                  |              |               |   |           |  |       |  
|Other short term borrowings                              |  |                             | 1,293,478     |                  |      | 5,132         |  | 1.58 | %               |  |                  | 403,325       |               |   | 1,485      |  | 1.46  | %
|Federal Home Loan Bank advances                          |  |                             | 13,504,525    |                  |      | 181,461       |  | 5.35 | %               |  |                  | 9,177,826     |               |   | 162,608    |  | 7.03  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|                                                         |  |                             | 56,552,653    |                  |      | 453,410       |  | 3.19 | %               |  |                  | 49,958,251    |               |   | 252,345    |  | 2.00  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Total Interest- Bearing Liabilities                      |  |                             | 1,069,765,146 |                  |      | 4,774,939     |  | 1.78 | %               |  |                  | 872,546,421   |               |   | 4,648,568  |  | 2.11  | %
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Non-Interest- Bearing Liabilities                        |  |                             | 233,345,465   |                  |      |               |  |      |                 |  |                  | 191,875,534   |               |   |            |  |       |  
|                                                         |  |                             |               |                  |      |              
|Total Stockholders' Equity                               |  |                             | 122,229,884   |                  |      |               |  |      |                 |  |                  | 117,235,663   |               |   |            |  |       |  
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Total Liabilities and Stockholders' Equity               |  |                             | 1,425,340,495 |                  |      |               |  |      |                 |  |                  | 1,181,657,618 |               |   |            |  |       |  
|                                                         |  |                             |               |                  |      |              
|Net interest income (tax equivalent)                     |  |                             |               |                  | $    | 13,596,945    |  |      |                 |  |                  |               |               | $ | 11,289,503 |  |       |  
|                                                         |  |                             |               |                  |      |               |  |      |                 |  |                  |               |               |   |            |  |       |  
|Average interest rate spread                             |  |                             |               |                  |      |               |  | 3.82 | %               |  |                  |               |               |   |            |  | 3.70  | %
|Interest expense as percentage of average earning assets |  |                             |               |                  |      |               |  | 1.45 | %               |  |                  |               |               |   |            |  | 1.69  | %
|Net interest margin                                      |  |                             |               |                  |      |               |  | 4.14 | %               |  |                  |               |               |   |            |  | 4.12  | %



19



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|-------------------------------------------------------- |  | -------------------------------- | ------------- | ---------------- | ---- | ------------ |  | ---- | --------------- |  | ---------------- | ------------- | ------------ | - | ---------- |  | ---- | -
|                                                         |  | Nine months Ending September 30, |              
|                                                         |  | 2004                             |               |                  | 2003 |             
|Dollars in thousands                                     |  | Average Balance                  |               | Interest Inc/Exp |      | AverageRates |  |      | Average Balance |  | Interest Inc/Exp |               | AverageRates |  
|Assets                                                   |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Loans receivable, net                                    |  | $                                | 976,363,428   |                  | $    | 43,438,782   |  | 5.94 | %               |  | $                | 732,297,011   |              | $ | 36,621,327 |  | 6.69 | %
|Investment securities                                    |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Taxable                                                  |  |                                  | 242,745,631   |                  |      | 7,114,635    |  | 3.91 | %               |  |                  | 222,299,115   |              |   | 6,555,320  |  | 3.93 | %
|Tax exempt                                               |  |                                  | 67,586,427    |                  |      | 3,328,619    |  | 6.58 | %               |  |                  | 78,492,230    |              |   | 4,188,248  |  | 7.11 | %
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Total Investments                                        |  |                                  | 310,332,058   |                  |      | 10,443,254   |  | 4.50 | %               |  |                  | 300,791,345   |              |   | 10,743,568 |  | 4.76 | %
|                                                         |  |                                  |               |                  |      |             
|FHLB int bearing                                         |  |                                  | 458,136       |                  |      | 3,334        |  | 0.97 | %               |  |                  | 436,258       |              |   | 28,032     |  | 8.59 | %
|Federal funds sold                                       |  |                                  | 3,356,694     |                  |      | 31,571       |  | 1.26 | %               |  |                  | 18,407,982    |              |   | 168,928    |  | 1.23 | %
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|                                                         |  |                                  | 314,146,888   |                  |      | 10,478,159   |  | 4.46 | %               |  |                  | 319,635,585   |              |   | 10,940,528 |  | 4.56 | %
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Total Earning Assets                                     |  |                                  | 1,290,510,316 |                  |      | 53,916,941   |  | 5.58 | %               |  |                  | 1,051,932,596 |              |   | 47,561,855 |  | 6.04 | %
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Non-Earning Assets                                       |  |                                  | 121,417,205   |                  |      |              |  |      |                 |  |                  | 89,880,649    |              |   |            |  |      |  
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Total Assets                                             |  |                                  | 1,411,927,521 |                  |      |              |  |      |                 |  |                  | 1,141,813,245 |              |   |            |  |      |  
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Liabilities and Stockholders' Equity                     |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Time and savings deposits                                |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Interest-bearing transaction accounts                    |  | $                                | 193,990,441   |                  | $    | 753,997      |  | 0.52 | %               |  | $                | 128,686,454   |              | $ | 689,997    |  | 0.72 | %
|Money market deposit accounts                            |  |                                  | 173,922,313   |                  |      | 1,194,696    |  | 0.92 | %               |  |                  | 160,028,427   |              |   | 1,422,557  |  | 1.19 | %
|Passbook savings accounts                                |  |                                  | 140,716,072   |                  |      | 717,736      |  | 0.68 | %               |  |                  | 111,117,410   |              |   | 820,018    |  | 0.99 | %
|Certificates of deposit >$100k                           |  |                                  | 119,364,249   |                  |      | 3,000,241    |  | 3.36 | %               |  |                  | 91,454,193    |              |   | 2,640,905  |  | 3.86 | %
|Certificates of deposit <$100k                           |  |                                  | 370,699,992   |                  |      | 7,426,262    |  | 2.68 | %               |  |                  | 313,436,061   |              |   | 8,107,623  |  | 3.46 | %
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Total Time and Savings Deposits                          |  |                                  | 998,693,067   |                  |      | 13,092,932   |  | 1.75 | %               |  |                  | 804,722,545   |              |   | 13,681,100 |  | 2.27 | %
|                                                         |  |                                  |               |                  |      |             
|Federal funds purchased                                  |  |                                  | 25,919,258    |                  |      | 161,052      |  | 0.83 | %               |  |                  | 22,206,170    |              |   | 159,193    |  | 0.96 | %
|Trust Preferred Securities                               |  |                                  | 14,379,562    |                  |      | 442,475      |  | 4.11 | %               |  |                  |              |              |   |           |  |      |  
|Other short term borrowings                              |  |                                  | 12,798,175    |                  |      | 140,670      |  | 1.47 | %               |  |                  | 485,475       |              |   | 4,251      |  | 1.17 | %
|Federal Home Loan Bank advances                          |  |                                  | 12,584,818    |                  |      | 519,013      |  | 5.51 | %               |  |                  | 10,758,022    |              |   | 532,950    |  | 6.62 | %
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|                                                         |  |                                  | 65,681,813    |                  |      | 1,263,210    |  | 2.57 | %               |  |                  | 33,449,667    |              |   | 696,394    |  | 2.78 | %
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Total Interest- Bearing Liabilities                      |  |                                  | 1,064,374,880 |                  |      | 14,356,142   |  | 1.80 | %               |  |                  | 838,172,212   |              |   | 14,377,494 |  | 2.29 | %
|                                                         |  |                                  |               |                  |      |             
|Non-Interest-Bearing Liabilities                         |  |                                  | 226,080,678   |                  |      |              |  |      |                 |  |                  | 187,256,629   |              |   |            |  |      |  
|                                                         |  |                                  |               |                  |      |             
|Total Stockholders' Equity                               |  |                                  | 121,471,963   |                  |      |              |  |      |                 |  |                  | 116,384,404   |              |   |            |  |      |  
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Total Liabilities and Stockholders' Equity               |  |                                  | 1,411,927,521 |                  |      |              |  |      |                 |  |                  | 1,141,813,245 |              |   |            |  |      |  
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Net interest income (tax equivalent)                     |  |                                  |               |                  | $    | 39,560,799   |  |      |                 |  |                  |               |              | $ | 33,184,361 |  |      |  
|                                                         |  |                                  |               |                  |      |              |  |      |                 |  |                  |               |              |   |            |  |      |  
|Average interest rate spread                             |  |                                  |               |                  |      |              |  | 3.78 | %               |  |                  |               |              |   |            |  | 3.75 | %
|Interest expense as percentage of average earning assets |  |                                  |               |                  |      |              |  | 1.49 | %               |  |                  |               |              |   |            |  | 1.83 | %
|Net interest margin                                      |  |                                  |               |                  |      |              |  | 4.10 | %               |  |                  |               |              |   |            |  | 4.21 | %



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



Noninterest Income



Total noninterest income was $3.6 million for the third quarter of 2004, a decrease of 12.8%
compared to $4.2 million for the same period in 2003. Excluding securities gains of $365 thousand in 2003, the decrease in 2004 as compared to 2003 amounted to $169 thousand or 4.4%. VFG continued to see a decrease in mortgage refinance activity,
with total mortgage revenue decreasing $754 thousand or 58.5% to $534 thousand for the third quarter of 2004. VFGs mortgage operation originations for the quarter constituted 66.3% purchase loan activity. Fees from retail banking operations
amounted to $2.0 million for the third quarter of 2004, an increase of $566 thousand or 39.2%. Such increase can be attributed to deposit growth and fee initiatives such as overdraft protection privilege and new product alignment. Fees from trust
and investment services for the third quarter of 2004 amounted to $845 thousand, an increase of $69 thousand or 8.9% compared to the same quarter in 2003.



Total noninterest income was $11.0 million for the nine months ended September 30, 2004, down $657 thousand or 5.6% from the same period in 2003. The decline in revenue
from mortgage operations and increase in increase in retail banking fees were similar trends for the nine month period.



Noninterest Expense



Noninterest expense for the third quarter of 2004 amounted to $10.4 million, an increase of $526 thousand or 5.3% for the same quarter in 2003. Excluding nonrecurring expenses in 2003 of $340 thousand associated with
integration of the First Virginia branches, noninterest expenses increased $866 thousand or 9.1%. Components of this increase are higher operating costs associated with the loan production office in Lynchburg, amortization of intangibles,
tele-communication costs and professional fees. These expenses were offset somewhat by decreases in costs associated with mortgage related commissions, medical benefits, and other incentive related accruals. VFGs efficiency ratio was 60.25%
for the third quarter of 2004, compared to 63.22% for the same quarter in 2003.



Noninterest expense for the nine month period of 2004 amounted to $31.5 million, up $3.3 million or 11.5% from the same period in 2003. The increases are largely attributable to the Companys expansion efforts, and the incremental
operating costs and intangible amortization associated with the eight purchased branches, loan production offices in Charlottesville and Lynchburg and a de novo branch in Fishersville, Virginia. Also contributing to the period increase were
professional fees associated with governance initiatives, consulting for an operations review and Sarbanes Oxley compliance, and placement fees for executive recruitment.



Income Taxes



Income tax expense for the three months ended September 30, 2004 amounted to $1.7 million resulting in an effective tax rate of 30.4% compared to $1.2 million, or 25.1%,
for the three months ended September 30, 2003. For the nine months ended September 30, 2004 income tax expense was $4.7 million resulting in an effective rate of 29.6%, compared to $3.6 million or 25.5% for the same period in 2003. The increase in
the effective tax rate for the quarter and nine month period is a result of a decrease in earnings from tax-exempt assets as a percentage of total income, and an increase in the Companys statutory rate. The rate of loan growth has resulted in
a decrease in the securities component of the Companys balance sheet, resulting in less municipal security holdings and related tax exempt interest.



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



Asset Quality



The Companys provision for loan losses for the third quarter was $636 thousand, up
$313 thousand or almost 100% from the same period in 2003. For the nine month period, the provision for loan losses was $2.0 million, up $985 thousand or over 100% from the same period in 2003. The increases are directly attributed to the
aforementioned higher rates of loan growth for each period, particularly commercial real estate growth in our new markets of Charlottesville and Lynchburg. Nonperforming assets and net charge-offs were at improved levels, with non-performing assets
as a percentage of total assets of .28% at September 30, 2004, compared to .55% at September 30, 2003. Net charge-offs for the third quarter were $135 thousand, compared to net charge-offs of $9 thousand for the same period in 2003. Net charge-offs
as a percentage of average loans were .01% for the third quarter and .04% for the nine month period, compared to .01% and .06% for the same periods in 2003. At September 30, 2004, the allowance for loan losses as a percentage of non-performing
assets was 278.4%, while the allowance as a percentage of total loans amounted to 1.09%, up slightly from 1.06% at December 31, 2003.



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



|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|-------------------------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | ------------- |  | - | ------ | -
|                                                                                 |  | Sept. 30,2004 |        |   | December 31,2003 |   |        | Sept. 30,2003 | 
|Non accrual loans                                                                |  | $             | 2,116  |   |                  | $ | 2,677  |               |  | $ | 1,824  |  
|Troubled debt restructurings                                                     |  |               | 1,937  |   |                  |   | 4,525  |               |  |   | 4,572  |  
|Other real estate owned                                                          |  |               | 5      |   |                  |   | 454    |               |  |   | 1,233  |  
|Loans past due as to principal or interest for 90 days or more accruing interest |  |               | 1      |   |                  |   | 25     |               |  |   | 11     |  
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Total nonperforming assets                                                       |  | $             | 4,059  |   |                  | $ | 7,681  |               |  | $ | 7,083  |  
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Nonperforming assets to total assets                                             |  |               | .28    | % |                  |   | .55    | %             |  |   | .55    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Nonperforming assets to loans and other property                                 |  |               | .39    | % |                  |   | .83    | %             |  |   | .88    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Allowance for loan losses as a percentage of loans receivable                    |  |               | 1.09   | % |                  |   | 1.06   | %             |  |   | 1.12   | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Allowance for loan losses as a percentage of nonperforming assets                |  |               | 278.39 | % |                  |   | 126.85 | %             |  |   | 126.60 | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Net charge-offs as a percentage of average loans receivable                      |  |               | .04    | % |                  |   | .09    | %             |  |   | .06    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  



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.



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



The primary source of additional capital to the
Company is earnings retention, which represents net income less dividends declared. During the nine months ended September 30, 2004, the Company retained $7.0 million, or 62.7% of its net income. Stockholders equity increased by $5.8 million,
reflecting the earnings retention and a decrease of $1.3 million in accumulated comprehensive income net of tax, which relates primarily to a universal decline in bond market valuations, resulting in a decrease in unrealized gains on securities
available-for-sale during the period.



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 September 30, 2004 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 September 30, 2004 (000 omitted):



|                                                                 |  |   |           |  
|---------------------------------------------------------------- |  | - | --------- | -
|Tier 1 capital                                                   |  | $ | 123,113   |  
|Tier 2 capital                                                   |  |   | 11,366    |  
|Total risk-based capital                                         |  |   | 134,479   |  
|Total risk-weighted assets                                       |  |   | 1,083,706 |  
|Average adjusted total assets                                    |  |   | 1,403,868 |  
|Capital ratios:                                                  |  |   |           |  
|Tier 1 risk-based capital ratio                                  |  |   | 11.36     | %
|Total risk-based capital ratio                                   |  |   | 12.41     | %
|Leverage ratio (Tier 1 capital to average adjusted total assets) |  |   | 8.77      | %
|Equity to assets ratio                                           |  |   | 8.73      | %
|Tangible equity to assets ratio                                  |  |   | 7.36      | %



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



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



occur daily or other short-term intervals in the
normal operation of the business. Experience helps management predict time cycles in the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits, quality of assets, economy
of market served, concentrations of business and industry, competition, and the Companys overall financial condition. The Companys primary source of liquidity is 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, audit and 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.



The Company completed the issuance of $20 million of floating rate trust preferred securities
during the first quarter of 2004 in a privately negotiated transaction. The proceeds from the sale of the securities will be used for general corporate purposes which may include capital management for its affiliates, acquisitions, retirement of
indebtedness, repurchase of the Companys common stock and other investments.



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.



Recent Accounting Pronouncements



On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105,
Application of Accounting Principles to Loan Commitments(SAB 105). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments
(IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion of the
values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The Company has adopted
the provisions of SAB 105. Since the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, management does not anticipate that this guidance will have a material adverse effect on either the Companys
consolidated financial position or consolidated results of operations.



Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments(EITF 03-1) was issued. EITF 03-1 provides



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



guidance for determining the meaning of
other-than-temporarily impaired and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity
Securities(SFAS No. 115) and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be
recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines that an investment with a fair value less than cost is not other-than-temporarily impaired.



On September 30, 2004, the Financial Accounting Standards Board decided to
delay the effective date for the measurement and recognition guidance contained in Issue 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure
guidance in Issue 03-1 was not delayed.



Access to Filings



The Company provides access to their SEC filings through the corporate Web site at
www.vfgi.net. After accessing the Web site, 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.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

PART I  FINANCIAL INFORMATION



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



There have been no significant changes to the quantitative and qualitative market risk disclosures in the Companys Form 10-K for the year ended December 31, 2003.



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.



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 September 30, 2004 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 | 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.



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##### Table of Contents

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



None.



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



None.



ITEM 5. OTHER INFORMATION.



Not
applicable.



|ITEM | 6. EXHIBITS:
|---- | ------------



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

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



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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 OfficerNovember 5, 2004/s/ Jeffrey W. FarrarJeffrey W. Farrar, CPAExecutive Vice President and Chief Financial OfficerNovember 5, 2004




28