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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 March 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period fromto



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 May 5, 2005, there were
7,164,096 shares of common stock, $5.00 par value, issued and outstanding.



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VIRGINIA FINANCIAL GROUP, INC.



INDEX



|       |  |                                                                                       |  |         
|------ |  | ------------------------------------------------------------------------------------- |  | --------
|       |  |                                                                                       |  | Page No.
|       |  | PART I - FINANCIAL INFORMATION                                                        |  |         
|       |  |                                                                                      
|ITEM 1 |  | Consolidated Financial Statements:                                                    |  |         
|       |  |                                                                                      
|       |  | Consolidated Balance Sheets                                                           |  | 3       
|       |  |                                                                                      
|       |  | Consolidated Statements of Income                                                     |  | 4       
|       |  |                                                                                      
|       |  | Consolidated Statements of Changes in Stockholders Equity                            |  | 5       
|       |  |                                                                                      
|       |  | Consolidated Statements of Cash Flows                                                 |  | 6-7     
|       |  |                                                                                      
|       |  | Notes to Consolidated Financial Statements                                            |  | 8-15    
|       |  |                                                                                      
|ITEM 2 |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16-24   
|       |  |                                                                                      
|ITEM 3 |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25      
|       |  |                                                                                      
|ITEM 4 |  | Controls and Procedures                                                               |  | 25      
|       |  |                                                                                      
|       |  | PART II - OTHER INFORMATION                                                           |  |         
|       |  |                                                                                      
|ITEM 1 |  | Legal Proceedings                                                                     |  | 25      
|       |  |                                                                                      
|ITEM 2 |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 25      
|       |  |                                                                                      
|ITEM 3 |  | Defaults Upon Senior Securities                                                       |  | 26      
|       |  |                                                                                      
|ITEM 4 |  | Submission of Matters to a Vote of Security Holders                                   |  | 26      
|       |  |                                                                                      
|ITEM 5 |  | Other Information                                                                     |  | 26      
|       |  |                                                                                      
|ITEM 6 |  | Exhibits                                                                              |  | 26-30   





2



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PART I  FINANCIAL INFORMATION

ITEM 1. Financial statements



VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(000 OMITTED)



|                                                                                                                                     |  |               |           |                  |   |          
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | ---------------- | - | ---------
|                                                                                                                                     |  | MARCH 31,2005 |           | DECEMBER 31,2004
|                                                                                                                                     |  | (unaudited)   |           |                 
|ASSETS                                                                                                                               |  |               |           |                  |   |          
|Cash and due from depository institutions                                                                                            |  | $             | 59,049    |                  | $ | 37,532   
|Federal funds sold                                                                                                                   |  |               | 523       |                  |   | 502      
|Interest-bearing deposits in banks                                                                                                   |  |               | 203       |                  |   | 1,292    
|Securities (market value: 2005, $248,968; 2004, $292,496)                                                                            |  |               | 248,627   |                  |   | 292,158  
|Loans held for sale                                                                                                                  |  |               | 9,752     |                  |   | 5,715    
|Loans receivable, net                                                                                                                |  |               | 1,073,427 |                  |   | 1,049,869
|Bank premises and equipment, net                                                                                                     |  |               | 27,474    |                  |   | 27,858   
|Interest receivable                                                                                                                  |  |               | 5,765     |                  |   | 5,716    
|Other real estate owned                                                                                                              |  |               | 55        |                  |   | 5        
|Core deposit intangibles, net                                                                                                        |  |               | 4,923     |                  |   | 5,553    
|Goodwill                                                                                                                             |  |               | 13,896    |                  |   | 14,033   
|Other assets                                                                                                                         |  |               | 9,685     |                  |   | 9,375    
|                                                                                                                                     |  |               |           |                  |   |          
|Total Assets                                                                                                                         |  | $             | 1,453,379 |                  | $ | 1,449,608
|                                                                                                                                     |  |               |           |                  |   |          
|LIABILITIES                                                                                                                          |  |               |           |                  |   |          
|Deposits:                                                                                                                            |  |               |           |                  |   |          
|Noninterest-bearing demand deposits                                                                                                  |  | $             | 239,660   |                  | $ | 238,735  
|Interest-bearing deposits                                                                                                            |  |               | 996,791   |                  |   | 1,018,429
|                                                                                                                                     |  |               |           |                  |   |          
|Total deposits                                                                                                                       |  |               | 1,236,451 |                  |   | 1,257,164
|                                                                                                                                     |  |              
|Federal funds purchased and securities sold under agreements to repurchase                                                           |  |               | 29,845    |                  |   | 21,155   
|Short-term borrowings                                                                                                                |  |               | 13,110    |                  |   | 815      
|Federal Home Loan Bank advances                                                                                                      |  |               | 14,040    |                  |   | 14,060   
|Trust preferred capital notes                                                                                                        |  |               | 20,619    |                  |   | 20,619   
|Interest payable                                                                                                                     |  |               | 2,172     |                  |   | 2,120    
|Other liabilities                                                                                                                    |  |               | 8,177     |                  |   | 6,586    
|Commitments and contingent liabilities                                                                                               |  |               |          |                  |   |         
|                                                                                                                                     |  |               |           |                  |   |          
|Total Liabilities                                                                                                                    |  |               | 1,324,414 |                  |   | 1,322,519
|                                                                                                                                     |  |               |           |                  |   |          
|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 7,163,735 and 7,161,499
respectively) |  |               | 35,819    |                  |   | 35,807   
|Surplus                                                                                                                              |  |               | 7,836     |                  |   | 7,774    
|Retained earnings                                                                                                                    |  |               | 84,449    |                  |   | 81,869   
|Accumulated other comprehensive income, net                                                                                          |  |               | 861       |                  |   | 1,639    
|                                                                                                                                     |  |               |           |                  |   |          
|Total Stockholders Equity                                                                                                           |  |               | 128,965   |                  |   | 127,089  
|                                                                                                                                     |  |               |           |                  |   |          
|Total Liabilities and Stockholders Equity                                                                                           |  | $             | 1,453,379 |                  | $ | 1,449,608
|                                                                                                                                     |  |               |           |                  |   |          



See accompanying notes to consolidated
financial statements.



3



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)



|                                                                                       |  |                             |        |             |   |       
|-------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ----------- | - | ------
|                                                                                       |  | THREE MONTHS ENDEDMARCH 31,
|                                                                                       |  | 2005                        |        | 2004       
|                                                                                       |  | (unaudited)                 |        | (unaudited)
|Interest Income                                                                        |  |                             |        |             |   |       
|Interest and fees on loans                                                             |  | $                           | 16,043 |             | $ | 14,055
|Interest on deposits in other banks                                                    |  |                             | 4      |             |   | 1     
|Interest and dividends on securities:                                                  |  |                             |        |             |   |       
|Taxable                                                                                |  |                             | 1,806  |             |   | 2,527 
|Tax Exempt                                                                             |  |                             | 656    |             |   | 748   
|Dividends                                                                              |  |                             | 67     |             |   | 46    
|Interest income on federal funds sold                                                  |  |                             | 8      |             |   | 2     
|                                                                                       |  |                             |        |             |   |       
|Total Interest Income                                                                  |  |                             | 18,584 |             |   | 17,379
|                                                                                       |  |                             |        |             |   |       
|Interest Expense                                                                       |  |                             |        |             |   |       
|Interest on deposits                                                                   |  |                             | 4,752  |             |   | 4,535 
|Interest on Federal Home Loan Bank advances                                            |  |                             | 180    |             |   | 154   
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                             | 144    |             |   | 72    
|Interest on short-term borrowings                                                      |  |                             | 57     |             |   | 98    
|Interest on trust preferred capital notes                                              |  |                             | 265    |             |   | 28    
|                                                                                       |  |                             |        |             |   |       
|Total Interest Expense                                                                 |  |                             | 5,398  |             |   | 4,887 
|                                                                                       |  |                             |        |             |   |       
|Net Interest Income                                                                    |  |                             | 13,186 |             |   | 12,492
|Less: Provision for loan losses                                                        |  |                             | 546    |             |   | 681   
|                                                                                       |  |                             |        |             |   |       
|Net Interest Income after Provision for Loan Losses                                    |  |                             | 12,640 |             |   | 11,811
|Noninterest Income                                                                     |  |                             |        |             |   |       
|Retail banking fees                                                                    |  |                             | 1,665  |             |   | 1,549 
|Commissions and fees from fiduciary activities                                         |  |                             | 724    |             |   | 776   
|Investment fee income                                                                  |  |                             | 181    |             |   | 198   
|Other operating income                                                                 |  |                             | 241    |             |   | 289   
|Gain on sale of branches                                                               |  |                             | 408    |             |   |      
|Gain on sale of mortgage loans                                                         |  |                             | 475    |             |   | 645   
|                                                                                       |  |                             |        |             |   |       
|Total Noninterest Income                                                               |  |                             | 3,694  |             |   | 3,457 
|                                                                                       |  |                             |        |             |   |       
|Noninterest Expense                                                                    |  |                             |        |             |   |       
|Compensation and employee benefits                                                     |  |                             | 6,047  |             |   | 5,860 
|Net occupancy expense                                                                  |  |                             | 751    |             |   | 706   
|Supplies and equipment expenses                                                        |  |                             | 1,114  |             |   | 1,044 
|Amortization-intangible assets                                                         |  |                             | 168    |             |   | 173   
|Data processing                                                                        |  |                             | 314    |             |   | 299   
|Telecommunications                                                                     |  |                             | 268    |             |   | 242   
|Professional fees                                                                      |  |                             | 130    |             |   | 201   
|Other operating expenses                                                               |  |                             | 1,742  |             |   | 1,910 
|                                                                                       |  |                             |        |             |   |       
|Total Noninterest Expense                                                              |  |                             | 10,534 |             |   | 10,435
|                                                                                       |  |                             |        |             |   |       
|Income Before Income Tax Expense                                                       |  |                             | 5,800  |             |   | 4,833 
|Income tax expense                                                                     |  |                             | 1,787  |             |   | 1,378 
|                                                                                       |  |                             |        |             |   |       
|Net Income                                                                             |  | $                           | 4,013  |             | $ | 3,455 
|                                                                                       |  |                             |        |             |   |       
|Earnings per Share, basic                                                              |  | $                           | .56    |             | $ | .48   
|                                                                                       |  |                             |        |             |   |       
|Earnings per Share, diluted                                                            |  | $                           | .56    |             | $ | .48   
|                                                                                       |  |                             |        |             |   |       



See accompanying notes to consolidated
financial statements.



4



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(000 OMITTED)

(unaudited)



|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------- | ------ | -------------- | - | ----------------------------------- |  | - | ---------------- | - |  | ------------------- | ------ | - | ----- | - | ----- | - |  | - | ------- | -
|                                                                                         |  | CommonStock |        | CapitalSurplus |   | AccumulatedOtherComprehensiveIncome |  |   | RetainedEarnings |   |  | ComprehensiveIncome |        |   | Total |  
|Balance, January 1, 2004                                                                 |  | $           | 35,764 |                | $ | 7,578                               |  | $ | 4,233            |   |  | $                   | 72,255 |   |       |   |       |   |  | $ | 119,830 |  
|Net income                                                                               |  |             |       |                |   |                                    |  |   |                 |   |  |                     | 3,455  |   |       |   | 3,455 |   |  |   | 3,455   |  
|Other Comprehensive Income, net of tax:                                                  |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Unrealized gains on securities available for sale during the period, net of tax of $788  |  |             |       |                |   |                                    |  |   |                 |   |  |                     |       |   |       |   | 1,463 |   |  |   |         |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Other comprehensive income                                                               |  |             |       |                |   |                                    |  |   | 1,463            |   |  |                     |       |   |       |   | 1,463 |   |  |   | 1,463   |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Total Comprehensive income                                                               |  |             |       |                |   |                                    |  |   |                 |   |  |                     |       |   |       | $ | 4,918 |   |  |   |        |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Cash dividends ($.19 per share)                                                          |  |             |       |                |   |                                    |  |   |                 |   |  |                     | (1,358 | ) |       |   |       |   |  |   | (1,358  | )
|Exercise of stock options                                                                |  |             | 14     |                |   | 25                                  |  |   |                 |   |  |                     |       |   |       |   |       |   |  |   | 39      |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Balance, March 31, 2004                                                                  |  | $           | 35,778 |                | $ | 7,603                               |  | $ | 5,696            |   |  | $                   | 74,352 |   |       |   |       |   |  | $ | 123,429 |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Balance, January 1, 2005                                                                 |  | $           | 35,807 |                | $ | 7,774                               |  | $ | 1,639            |   |  | $                   | 81,869 |   |       |   |       |   |  | $ | 127,089 |  
|Net income                                                                               |  |             |       |                |   |                                    |  |   |                 |   |  |                     | 4,013  |   |       |   | 4,013 |   |  |   | 4,013   |  
|Other Comprehensive Income, Net of tax:                                                  |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Unrealized losses on securities available for sale during the period, net of tax of $419 |  |             |       |                |   |                                    |  |   |                 |   |  |                     |       |   |       |   | (778  | ) |  |   |         |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Other comprehensive loss                                                                 |  |             |       |                |   |                                    |  |   | (778             | ) |  |                     |       |   |       |   | (778  | ) |  |   | (778    | )
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Total Comprehensive income                                                               |  |             |       |                |   |                                    |  |   |                 |   |  |                     |       |   |       | $ | 3,235 |   |  |   |        |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Cash dividends ($.20 per share)                                                          |  |             |       |                |   |                                    |  |   |                 |   |  |                     | (1,433 | ) |       |   |       |   |  |   | (1,433  | )
|Issuance of common stock                                                                 |  |             | 12     |                |   | 62                                  |  |   |                 |   |  |                     |       |   |       |   |       |   |  |   | 74      |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Balance, March 31, 2005                                                                  |  | $           | 35,819 |                | $ | 7,836                               |  | $ | 861              |   |  | $                   | 84,449 |   |       |   |       |   |  | $ | 128,965 |  
|                                                                                         |  |             |        |                |   |                                     |  |   |                  |   |  |                     |        |   |       |   |       |   |  |   |         |  



See accompanying notes to consolidated
financial statements.



5



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)



|                                                                                  |  |                             |         |   |             |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ----------- | - | ------- | -
|                                                                                  |  | THREE MONTHS ENDEDMARCH 31, |        
|                                                                                  |  | 2005                        |         |   | 2004        |  
|                                                                                  |  | (unaudited)                 |         |   | (unaudited) |  
|OPERATING ACTIVITIES                                                              |  |                             |         |   |             |   |         |  
|Net income                                                                        |  | $                           | 4,013   |   |             | $ | 3,455   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |             |   |         |  
|Provision for loan losses                                                         |  |                             | 546     |   |             |   | 681     |  
|Deferred tax benefit                                                              |  |                             | (182    | ) |             |   | (239    | )
|Depreciation                                                                      |  |                             | 793     |   |             |   | 764     |  
|Amortization of intangible assets                                                 |  |                             | 168     |   |             |   | 173     |  
|Write-downs of other real estate                                                  |  |                             | 33      |   |             |   |        |  
|Amortization of security premiums and accretion of discounts, net                 |  |                             | 170     |   |             |   | 181     |  
|Gain on sale of mortgage loans                                                    |  |                             | (475    | ) |             |   | (645    | )
|Proceeds from sale of mortgage loans                                              |  |                             | 32,960  |   |             |   | 33,808  |  
|Origination of mortgage loans for sale                                            |  |                             | (36.522 | ) |             |   | (35,844 | )
|Gain on sale of branches                                                          |  |                             | (408    | ) |             |   |        |  
|Changes in assets and liabilities:                                                |  |                             |         |   |             |   |         |  
|Increase in interest receivable                                                   |  |                             | (82     | ) |             |   | (16     | )
|Decrease in other assets                                                          |  |                             | 275     |   |             |   | 687     |  
|Increase (decrease) in interest payable                                           |  |                             | 92      |   |             |   | (19     | )
|Increase in other liabilities                                                     |  |                             | 1,649   |   |             |   | 1,563   |  
|                                                                                  |  |                             |         |   |             |   |         |  
|Net cash provided by operating activities                                         |  |                             | 3,030   |   |             |   | 4,549   |  
|                                                                                  |  |                             |         |   |             |   |         |  
|INVESTING ACTIVITIES                                                              |  |                             |         |   |             |   |         |  
|Proceeds from maturities and principal payments of securities available for sale  |  |                             | 41,543  |   |             |   | 39,445  |  
|Proceeds from sales and calls of securities available for sale                    |  |                             | 1,685   |   |             |   | 29      |  
|Purchase of securities available for sale                                         |  |                             | (1,064  | ) |             |   | (3,946  | )
|Net increase in loans                                                             |  |                             | (33,123 | ) |             |   | (42,594 | )
|Proceeds from sale of fixed assets                                                |  |                             | 3       |   |             |   |        |  
|Purchase of premises and equipment                                                |  |                             | (723    | ) |             |   | (566    | )
|Proceeds from sale of other real estate                                           |  |                             | 5       |   |             |   | 21      |  
|Additions to other real estate                                                    |  |                             |        |   |             |   | (657    | )
|Decrease in cash surrender value of life insurance                                |  |                             | 4       |   |             |   |        |  
|Sale of branches, net of cash                                                     |  |                             | (11,731 | ) |             |   |        |  
|                                                                                  |  |                             |         |   |             |   |         |  
|Net cash used in investing activities                                             |  | $                           | (3,401  | ) |             | $ | (8,268  | )
|                                                                                  |  |                             |         |   |             |   |         |  



6



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)



|                                                                                                     |  |                             |        |   |             |   |         |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ----------- | - | ------- | -
|                                                                                                     |  | THREE MONTHS ENDEDMARCH 31, |       
|                                                                                                     |  | 2005                        |        |   | 2004        |  
|                                                                                                     |  | (unaudited)                 |        |   | (unaudited) |  
|FINANCING ACTIVITIES                                                                                 |  |                             |        |   |             |   |         |  
|Net increase (decrease) in demand, money market and savings deposits                                 |  |                             | 385    |   |             |   | (5,822  | )
|Net increase in certificates of deposit                                                              |  |                             | 903    |   |             |   | 4,745   |  
|Proceeds from Federal Home Loan Bank advances                                                        |  |                             |       |   |             |   | 4,980   |  
|Principal payments on Federal Home Loan Bank advances                                                |  |                             | (20    | ) |             |   |         |  
|Net increase in repurchase agreements                                                                |  |                             |       |   |             |   | 125     |  
|Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase |  |                             | 8,690  |   |             |   | (15,000 | )
|Net increase in short-term borrowings                                                                |  |                             | 12,295 |   |             |   | 9,232   |  
|Issuance of trust preferred capital notes                                                            |  |                             |       |   |             |   | 20,619  |  
|Proceeds from exercise of stock options                                                              |  |                             |       |   |             |   | 39      |  
|Cash dividends paid on common stock                                                                  |  |                             | (1,433 | ) |             |   | (1,358  | )
|                                                                                                     |  |                             |        |   |             |   |         |  
|Net cash provided by financing activities                                                            |  |                             | 20,820 |   |             |   | 17,560  |  
|                                                                                                     |  |                             |        |   |             |   |         |  
|Increase in cash and cash equivalents                                                                |  |                             | 20,449 |   |             |   | 12,603  |  
|                                                                                                     |  |                            
|CASH AND CASH EQUIVALENTS                                                                            |  |                             |        |   |             |   |         |  
|Beginning of the period                                                                              |  |                             | 39,326 |   |             |   | 45,178  |  
|                                                                                                     |  |                             |        |   |             |   |         |  
|End of the period                                                                                    |  | $                           | 59,775 |   |             | $ | 57,781  |  
|                                                                                                     |  |                             |        |   |             |   |         |  
|Supplemental Schedule of Noncash Investing Activities                                                |  |                             |        |   |             |   |         |  
|Unrealized gain (losses) on securities available for sale                                            |  | $                           | (1,197 | ) |             | $ | 2,251   |  
|                                                                                                     |  |                             |        |   |             |   |         |  
|Other real estate acquired in settlement of loans                                                    |  | $                           | 59     |   |             | $ |        |  
|                                                                                                     |  |                             |        |   |             |   |         |  
|Restricted common stock issued                                                                       |  | $                           | 74     |   |             | $ |        |  
|                                                                                                     |  |                             |        |   |             |   |         |  



See accompanying notes to consolidated
financial statements.



7



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|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 March 31, 2005 and December 31, 2004, the results of operations for the
three months ended March 31, 2005 and 2004, and cash flows for the three months ended March 31, 2005 and 2004. 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, 2004.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | The results of operations for the three month period ended March 31, 2005 and 2004 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:                     |  |                   |         |            |   |        
|                                                 |  | March 31, 2005   
|                                                 |  | (unaudited)      
|                                                 |  |                  
|Obligations of States and Political Subdivisions |  | $                 | 5,853   |            | $ | 6,194  
|                                                 |  |                   |         |            |   |        
|                                                 | 
|                                                 |  | December 31, 2004
|Obligations of States and Political Subdivisions |  | $                 | 5,849   |            | $ | 6,187  
|                                                 |  |                   |         |            |   |        
|                                                 |  |                  
|Securities Available for Sale:                   |  |                   |         |            |   |        
|                                                 | 
|                                                 |  | March 31, 2005   
|                                                 |  | (unaudited)      
|U.S. Treasury securities                         |  | $                 | 7,013   |            | $ | 7,146  
|U.S. Government securities                       |  |                   | 81,235  |            |   | 80,354 
|State and municipals                             |  |                   | 66,560  |            |   | 69,203 
|Corporate bonds                                  |  |                   | 8,543   |            |   | 8,753  
|Collateralized mortgage obligations              |  |                   | 4,146   |            |   | 4,157  
|Mortgage-backed securities                       |  |                   | 65,437  |            |   | 64,887 
|Equity securities                                |  |                   | 1,273   |            |   | 1,539  
|Restricted stock                                 |  |                   | 6,010   |            |   | 6,010  
|Other securities                                 |  |                   | 725     |            |   | 725    
|                                                 |  |                   |         |            |   |        
|                                                 |  | $                 | 240,942 |            | $ | 242,774
|                                                 |  |                   |         |            |   |        





8



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|                                    |  |                   |         |  |   |        
|----------------------------------- |  | ----------------- | ------- |  | - | -------
|                                    |  | December 31, 2004
|U.S. Treasury securities            |  | $                 | 7,019   |  | $ | 7,196  
|U.S. Government securities          |  |                   | 117,279 |  |   | 116,938
|State and municipals                |  |                   | 68,903  |  |   | 71,816 
|Corporate bonds                     |  |                   | 9,052   |  |   | 9,317  
|Collateralized mortgage obligations |  |                   | 4,433   |  |   | 4,459  
|Mortgage-backed securities          |  |                   | 69,184  |  |   | 68,880 
|Equity securities                   |  |                   | 1,270   |  |   | 1,565  
|Restricted stock                    |  |                   | 5,406   |  |   | 5,406  
|Other securities                    |  |                   | 732     |  |   | 732    
|                                    |  |                   |         |  |   |        
|                                    |  | $                 | 283,278 |  | $ | 286,309
|                                    |  |                   |         |  |   |        



The following table is information
pertaining to securities with gross unrealized losses at March 31, 2005 and December 31, 2004. The aggregate unrealized loss is determined by summation of all the related securities that have a continuous loss as of those dates, and the length of
time that the loss has been unrealized is shown by terms of less than 12 months and 12 months or more. The fair value shown is the estimated market value as of those dates (Amounts in 000):



|                                                        |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|------------------------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | -------------- | ------ | ---------- | - | -------------- |  | - | ------- |  | - | -----
|                                                        |  | Less than 12 months |        | 12 months or more |   | Total    
|Description of Securities                               |  | FairValue           |        | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |        | Fair Value |   | UnrealizedLoss
|March 31, 2005                                          |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|U.S. Treasury securities and U.S. Government securities |  | $                   | 48,788 |                   | $ | 794       |  | $              | 9,631  |            | $ | 369            |  | $ | 58,419  |  | $ | 1,163
|Mortgage backed securities                              |  |                     | 23,809 |                   |   | 176       |  |                | 31,104 |            |   | 597            |  |   | 54,913  |  |   | 773  
|State and municipals                                    |  |                     | 4,590  |                   |   | 63        |  |                | 774    |            |   | 18             |  |   | 5,364   |  |   | 81   
|Collateralized mortgage obligations                     |  |                     | 1,732  |                   |   | 11        |  |                |       |            |   |               |  |   | 1,732   |  |   | 11   
|                                                        |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|Subtotal debt securities                                |  |                     | 78,919 |                   |   | 1,044     |  |                | 41,509 |            |   | 984            |  |   | 120,428 |  |   | 2,028
|                                                        |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|Common stock                                            |  |                     |       |                   |   |          |  |                |       |            |   |               |  |   |        |  |   |     
|Preferred stock                                         |  |                     |       |                   |   |          |  |                | 504    |            |   | 89             |  |   | 504     |  |   | 89   
|                                                        |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|Total temporarily impaired securities                   |  | $                   | 78,919 |                   | $ | 1,044     |  | $              | 42,013 |            | $ | 1,073          |  | $ | 120,932 |  | $ | 2,117
|                                                        |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      



There are a total of 70 securities
that have unrealized losses as of March 31, 2005, 26 U.S. Treasuries or agency securities, 28 U.S. Agency MBS securities, 14 municipal securities, one CMO, and one preferred stock security.



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



9



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|                                                                             |  |                     |        |                   |   |            |  |                 |        |            |   |                 |  |   |         |  |   |      
|---------------------------------------------------------------------------- |  | ------------------- | ------ | ----------------- | - | ---------- |  | --------------- | ------ | ---------- | - | --------------- |  | - | ------- |  | - | -----
|                                                                             |  | Less than 12 months |        | 12 months or more |   | Total     
|Description of Securities                                                    |  | Fair Value          |        | Unrealized Loss   |   | Fair Value |  | Unrealized Loss |        | Fair Value |   | Unrealized Loss
|December 31, 2004                                                            |  |                     |        |                   |   |            |  |                 |        |            |   |                 |  |   |         |  |   |      
|U.S. Treasury obligations and direct obligations of U.S. government agencies |  | $                   | 37,512 |                   | $ | 600        |  | $               | 9,834  |            | $ | 166             |  | $ | 47,346  |  | $ | 766  
|Federal Agency mortgage backed securities                                    |  |                     |        |                   |   |            |  |                 |        |            |   |                 |  |   |         |  |   |      
|                                                                             |  |                     | 10,523 |                   |   | 101        |  |                 | 32,845 |            |   | 517             |  |   | 43,368  |  |   | 618  
|Obligations of State, County and municipal entities                          |  |                     | 6,307  |                   |   | 60         |  |                 | 777    |            |   | 16              |  |   | 7,084   |  |   | 76   
|Collaterallized mortgage obligations                                         |  |                     | 1,793  |                   |   | 4          |  |                 |       |            |   |                |  |   | 1,793   |  |   | 4    
|                                                                             |  |                     |        |                   |   |            |  |                 |        |            |   |                 |  |   |         |  |   |      
|Subtotal debt securities                                                     |  |                     | 56,135 |                   |   | 765        |  |                 | 43,456 |            |   | 699             |  |   | 99,591  |  |   | 1,464
|Preferred stock                                                              |  |                     |       |                   |   |           |  |                 | 516    |            |   | 77              |  |   | 516     |  |   | 77   
|                                                                             |  |                     |        |                   |   |            |  |                 |        |            |   |                 |  |   |         |  |   |      
|Total temporarily impaired securities                                        |  | $                   | 56,135 |                   | $ | 765        |  | $               | 43,972 |            | $ | 776             |  | $ | 100,107 |  | $ | 1,541
|                                                                             |  |                     |        |                   |   |            |  |                 |        |            |   |                 |  |   |         |  |   |      



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



|                                             |  |               |           |   |                  |   |           |  
|-------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                             |  | March 31,2005 |           |   | December 31,2004 |  
|                                             |  | (unaudited)   |           |   |                  |  
|Real estate loans:                           |  |               |           |   |                  |   |           |  
|Construction                                 |  | $             | 127,248   |   |                  | $ | 116,888   |  
|Secured by 1  4 family residential          |  |               | 310,062   |   |                  |   | 315,648   |  
|Commercial and multifamily                   |  |               | 517,913   |   |                  |   | 495,549   |  
|Commercial, financial and agricultural loans |  |               | 85,745    |   |                  |   | 85,256    |  
|Consumer loans                               |  |               | 40,942    |   |                  |   | 44,379    |  
|All other loans                              |  |               | 3,205     |   |                  |   | 3,448     |  
|                                             |  |               |           |   |                  |   |           |  
|                                             |  |               | 1,085,115 |   |                  |   | 1,061,168 |  
|                                             |  |              
|Deferred loan costs                          |  |               | 493       |   |                  |   | 407       |  
|Allowance for loan losses                    |  |               | (12,181   | ) |                  |   | (11,706   | )
|                                             |  |               |           |   |                  |   |           |  
|                                             |  | $             | 1,073,427 |   |                  | $ | 1,049,869 |  
|                                             |  |               |           |   |                  |   |           |  



10



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|                                     |  |               |        |   |                  |   |        |               |  |   |        |  
|------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ------ | ------------- |  | - | ------ | -
|                                     |  | March 31,2005 |        |   | December 31,2004 |   |        | March 31,2004 | 
|                                     |  | (unaudited)   |        |   |                  |   |        | (unaudited)   | 
|Balance at January 1                 |  | $             | 11,706 |   |                  | $ | 9,743  |               |  | $ | 9,743  |  
|                                     |  |               |       
|Recoveries added to the allowance    |  |               | 118    |   |                  |   | 231    |               |  |   | 35     |  
|Loan losses charged to the allowance |  |               | (189   | ) |                  |   | (802   | )             |  |   | (176   | )
|Provision recorded to expense        |  |               | 546    |   |                  |   | 2,534  |               |  |   | 681    |  
|                                     |  |               |        |   |                  |   |        |               |  |   |        |  
|Balance at end of period             |  | $             | 12,181 |   |                  | $ | 11,706 |               |  | $ | 10,283 |  
|                                     |  |               |        |   |                  |   |        |               |  |   |        |  



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



|                                                                                 |  |               |       |                  |   |      
|-------------------------------------------------------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                                                                                 |  | March 31,2005 |       | December 31,2004
|                                                                                 |  | (unaudited)   |       |                 
|Impaired loans for which an allowance has been provided                          |  | $             | 1,967 |                  | $ | 3,410
|Impaired loans for which an allowance has not been provided                      |  |               | 4,823 |                  |   | 4,905
|                                                                                 |  |               |       |                  |   |      
|Total impaired loans                                                             |  |               | 6,790 |                  |   | 8,315
|                                                                                 |  |               |       |                  |   |      
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $             | 842   |                  | $ | 1,166
|                                                                                 |  |               |       |                  |   |      



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



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



|                                    |  |               |        |                  |   |    
|----------------------------------- |  | ------------- | ------ | ---------------- | - | ---
|                                    |  | March 31,2005 |        | December 31,2004
|                                    |  | (unaudited)   |        |                 
|Federal Home Loan Bank Advances     |  | $             | 12,000 |                  | $ |   
|Line of credit  Correspondent bank |  |               | 500    |                  |   |   
|Federal Reserve borrowings          |  |               | 610    |                  |   | 815
|                                    |  |               |        |                  |   |    
|                                    |  | $             | 13,110 |                  | $ | 815
|                                    |  |               |        |                  |   |    



11



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 $235 million line of credit with the Federal Home Loan Bank of Atlanta. Advances on the line are secured by a blanket lien on loan portfolios of Second Bank & Trust, Virginia Heartland Bank and Planters Bank & Trust Company of
Virginia. The blanket lien covers the 1 to 4 family dwelling loans, home equity loans, and commercial loans. As of March 31, 2005 and December 31, 2004, only 1 to 4 family loans were pledged totaling $122 million and $119 million, respectively.



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 targeted threshold maximum amount available under this agreement is $7.0 million.



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



The average balance of short-term borrowings outstanding did not exceed 30
percent of stockholders equity for the three months ended March 31, 2005 or the year ended December 31, 2004.



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



The Company has outstanding fixed-rate, long-term debt with the Federal Home Loan Bank of Atlanta of $14.10 million at March 31, 2005 that matures through
2010. At March 31, 2005, the interest rates on the fixed-rate, long-term advances ranged from 1.96% to 7.07%. One advance totaling $40 thousand at March 31, 2005 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 5.19% at March 31, 2005 with an average balance outstanding of $14.1 million.



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



|     |  |   |       
|---- |  | - | ------
|2005 |  | $ | 4,040 
|2006 |  |   | 5,000 
|2010 |  |   | 5,000 
|     |  |   |       
|     |  | $ | 14,040
|     |  |   |       





12



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|8. | Trust Preferred Capital Notes:
|-- | ------------------------------



During the first quarter of 2004, VFG Limited Liability Trust, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable
Capital Securities (commonly referred to as Trust Preferred Capital Notes). On March 18, 2004, $20 million of Trust Preferred Capital Notes were issued through a private transaction. The Trust issued $619 thousand in common equity to the
Corporation. The securities have a LIBOR-indexed floating rate of interest which adjusts, and is payable, quarterly. The interest rate at March 31, 2005 was 5.29%. The securities may be redeemed at par beginning in June, 2009 and each quarterly
anniversary of such date until the securities mature on June 17, 2034. The principal asset of the Trust is $20.6 million of the Companys junior subordinated debt securities with like maturities and like interest rates to the Capital
Securities.



The Trust Preferred Capital Notes may be included
in Tier I capital for regulatory capital adequacy determination purposes up to 25% of Tier I capital after its inclusion. The portion of the Trust Preferred not considered as Tier I capital may be included in Tier II capital.



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



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



|9. | Earnings Per Share:
|-- | -------------------



The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of
diluted potential common stock for the three month periods ended March 31, 2005 and 2004. Potential dilutive stock had no effect on income available to common stockholders.



|                               |  |           |  |                 |      |        |           |                 |   |     
|------------------------------ |  | --------- |  | --------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | 2005      |  | 2004           
|                               |  | Shares    |  | PerShare Amount |      | Shares |           | PerShare Amount
|Basic earnings per share       |  | 7,163,198 |  | $               | 0.56 |        | 7,153,348 |                 | $ | 0.48
|                               |  |           |  |                 |      |        |           |                 |   |     
|Effect of dilutive securities: |  |           |  |                 |      |        |           |                 |   |     
|Restricted shares              |  | 18,655    |  |                 |      |        | 17,853    |                 |   |     
|Stock options                  |  | 28,995    |  |                 |      |        | 31,727    |                 |   |     
|                               |  |           |  |                 |      |        |           |                 |   |     
|Diluted earnings per share     |  | 7,210,848 |  | $               | 0.56 |        | 7,202,928 |                 | $ | 0.48
|                               |  |           |  |                 |      |        |           |                 |   |     



In 2005 and 2004,
stock options representing 8,260 and 6,283 shares, respectively, were not included in the calculation of earnings per share as their effect would have been anti-dilutive.



13



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. | Stock Compensation Plan:
|--- | ------------------------



At March 31, 2005, 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 three months ended March 31, 2005 and 2004 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).



|                                                                                                             |  |      |       |   |      |   |       |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                                                             |  | 2005 |       |   | 2004 |  
|Net income, as reported                                                                                      |  | $    | 4,013 |   |      | $ | 3,455 |  
|Deduct: total stock-based employee compensation expense determined based on fair value method for all awards |  |      | (22   | ) |      |   | (18   | )
|                                                                                                             |  |      |       |   |      |   |       |  
|Pro forma net income                                                                                         |  | $    | 3,991 |   |      | $ | 3,437 |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Earnings per share:                                                                                          |  |      |       |   |      |   |       |  
|Basic  as reported                                                                                          |  | $    | 0.56  |   |      | $ | 0.48  |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Basic  pro forma                                                                                            |  | $    | 0.56  |   |      | $ | 0.48  |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Diluted  as reported                                                                                        |  | $    | 0.56  |   |      | $ | 0.48  |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Diluted  pro forma                                                                                          |  | $    | 0.55  |   |      | $ | 0.48  |  
|                                                                                                             |  |      |       |   |      |   |       |  



|11. | Employee Benefit Plan:
|--- | ----------------------



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



|                                   |  |                              |     |   |      |   |     |  
|---------------------------------- |  | ---------------------------- | --- | - | ---- | - | --- | -
|                                   |  | Three Months Ended March 31, |    
|                                   |  | 2005                         |     |   | 2004 |  
|Service cost                       |  | $                            | 50  |   |      | $ | 49  |  
|Interest cost                      |  |                              | 64  |   |      |   | 68  |  
|Expected return on plan assets     |  |                              | (65 | ) |      |   | (76 | )
|Amortization of prior service cost |  |                              | 8   |   |      |   | 8   |  
|Amortization of net (gain) loss    |  |                              | 15  |   |      |   | 4   |  
|                                   |  |                              |     |   |      |   |     |  
|Net periodic benefit cost          |  | $                            | 72  |   |      | $ | 53  |  
|                                   |  |                              |     |   |      |   |     |  



The Company made a
quarterly cash contribution of $32 thousand to the plan during the second quarter of 2005, and anticipates making quarterly installments for the remainder of the year.



14



---

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|12. | Sale of Branches:
|--- | -----------------



On February 16, 2005, the Company through its subsidiary, Planters Bank & Trust Company of Virginia, sold two branches located in Tazewell County,
Virginia to the Bank of Tazewell County, an affiliate of National Bankshares, Inc. headquartered in Blacksburg, Virginia.



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



|                                            |  |   |       
|------------------------------------------- |  | - | ------
|Premium received on deposits transferred    |  | $ | 1,304 
|                                            |  |   |       
|Liabilities transfered (at fair value):     |  |   |       
|Deposit accounts                            |  | $ | 22,001
|Other liabilities                           |  |   | 39    
|                                            |  |   |       
|Total liabilities transferred               |  | $ | 22,040
|                                            |  |   |       
|Assets sold (at fair value):                |  |   |       
|Cash                                        |  | $ | 228   
|Loans                                       |  |   | 8,844 
|Real estate and personal property           |  |   | 311   
|Other assets                                |  |   | 32    
|                                            |  |   |       
|Total assets sold                           |  |   | 9,415 
|                                            |  |   |       
|Net liabilities transferred                 |  | $ | 11,321
|                                            |  |   |       
|Premium received on deposits transferred    |  | $ | 1,304 
|Less: Write-off of core deposit intangibles |  |   | 465   
|Write-off of goodwill                       |  |   | 138   
|Write-off of loan premium                   |  |   | 115   
|Transaction costs                           |  |   | 178   
|                                            |  |   |       
|Net Gain on Sale                            |  | $ | 408   
|                                            |  |   |       



15



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VIRGINIA FINANCIAL GROUP, INC.

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



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



| |  |  | expected cost savings from VFGs acquisitions and dispositions,
| | - |  | ---------------------------------------------------------------



| |  |  | competitive pressure in the banking industry or in VFGs markets may increase significantly,
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | changes in the interest rate environment may reduce margins,
| | - |  | ------------------------------------------------------------



| |  |  | general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes may occur in banking legislation and regulation, or VFG may not be released from its supervisory agreement with the Federal Reserve related to Bank Secrecy Compliance within
anticipated timeframes,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes may occur in general business conditions, and
| | - |  | -----------------------------------------------------



| |  |  | changes may occur in the securities markets.
| | - |  | --------------------------------------------



OVERVIEW



Virginia Financial Group, Inc. (VFG) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. Currently, VFG is one of the largest independent bank holding companies headquartered in the
Commonwealth of Virginia. VFGs trust affiliate, Virginia Commonwealth Trust Company, is currently one of the largest independent trust companies headquartered in the Commonwealth of Virginia. Affiliates of VFG include: Planters Bank &
Trust Company of Virginia - in Staunton, Second Bank & Trust - in Culpeper, Virginia Heartland Bank - in Fredericksburg and Virginia Commonwealth Trust Company - in Culpeper. The organization has a network of thirty-five 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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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 an eight point grading system for each
non-homogeneous loan in the portfolio. Loans meeting the criteria for impairment are segregated for analysis from performing loans within the portfolio. Loans are then grouped by loan type and, in the case of commercial loans, by risk rating. Each
loan type is assigned an allowance factor based on historical loss experience, economic conditions, and overall portfolio quality including delinquency rates. The total of specific reserves required for impaired classified loans and the calculated
reserves by loan category are then compared to the recorded allowance for loan losses. This is the methodology used to determine the sufficiency of the allowance for loan losses and the amount of the provision for loan losses. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.



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



Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are
subject to a restructuring agreement.



17



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VIRGINIA FINANCIAL GROUP, INC.

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



Goodwill



The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS 142), effective January 1, 2002. Accordingly, goodwill is no longer subject to
amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are
separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets
related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed
fifteen years. Amortization expense charged to operations was $168 thousand and $173 thousand for the three months ended March 31, 2005 and 2004, respectively.



Non-GAAP Financial Measures



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



Results of Operations



Virginia
Financial Group, Inc.s consolidated net income for the quarter ended March 31, 2005 amounted to $4.0 million or $.56 per diluted share, compared to earnings of $3.5 million or $.48 per diluted share for the quarter ended March 31, 2004. Net
income increased 16.2% and diluted earnings per share increased 16.7% compared to first quarter 2004 results. The Companys earnings for the first quarter produced an annualized return on average assets (ROA) of 1.13% and return on average
equity (ROE) of 12.74%, compared to prior year ratios of 0.99% and 11.51%, respectively.



Net Interest Income



Net interest
income increased $694 thousand or 5.6% to $13.2 million for the first quarter of 2005. This improvement can be attributed to an expanding net interest margin, and continuing growth in average earning assets. The net interest margin for the first
quarter of 2005 was 4.15%, compared to 4.09% for the first quarter of 2004. 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 following tables provide information on average earning assets and interest-bearing
liabilities for the three months ended March 31, 2005 and 2004 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 $407 thousand and
$462 thousand for the three months ended March 31, 2005 and March 31, 2004, respectively.



18



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VIRGINIA FINANCIAL GROUP, INC.

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



|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|-------------------------------------------------------- |  | ----------------------------- | --------- | --------------- | ---- | ------------- |  | ---- | -------------- |  | --------------- | --------- | ------------ | - | ------ |  | ---- | -
|                                                         |  | Three months Ending March 31, |          
|                                                         |  | 2005                          |           |                 | 2004 |              
|Dollars in thousands                                     |  | AverageBalance                |           | InterestInc/Exp |      | Average Rates |  |      | AverageBalance |  | InterestInc/Exp |           | AverageRates |  
|Assets                                                   |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|                                                         |  |                               |           |                 |      |              
|Loans receivable, net                                    |  | $                             | 1,071,992 |                 | $    | 16,096        |  | 6.09 | %              |  | $               | 942,969   |              | $ | 14,114 |  | 6.02 | %
|Investment securities                                    |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Taxable                                                  |  |                               | 191,766   |                 |      | 1,873         |  | 3.96 | %              |  |                 | 257,816   |              |   | 2,574  |  | 3.99 | %
|Tax exempt                                               |  |                               | 62,326    |                 |      | 1,010         |  | 6.57 | %              |  |                 | 70,909    |              |   | 1,152  |  | 6.50 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Total Investments                                        |  |                               | 254,092   |                 |      | 2,883         |  | 4.60 | %              |  |                 | 328,725   |              |   | 3,726  |  | 4.53 | %
|                                                         |  |                               |           |                 |      |              
|Interest bearing deposits                                |  |                               | 521       |                 |      | 4             |  | 3.11 | %              |  |                 | 549       |              |   | 1      |  | 0.73 | %
|Federal funds sold                                       |  |                               | 1,122     |                 |      | 8             |  | 2.89 | %              |  |                 | 859       |              |   | 2      |  | 0.94 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|                                                         |  |                               | 255,735   |                 |      | 2,895         |  | 4.59 | %              |  |                 | 330,133   |              |   | 3,729  |  | 4.54 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Total Earning Assets                                     |  |                               | 1,327,727 |                 |      | 18,991        |  | 5.80 | %              |  |                 | 1,273,102 |              |   | 17,843 |  | 5.64 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Non-Earning Assets                                       |  |                               | 118,536   |                 |      |               |  |      |                |  |                 | 130,579   |              |   |        |  |      |  
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Total Assets                                             |  |                               | 1,446,263 |                 |      |               |  |      |                |  |                 | 1,403,681 |              |   |        |  |      |  
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Liabilities and Stockholders Equity                     |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Time and savings deposits                                |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Interest-bearing transaction accounts                    |  | $                             | 198,834   |                 | $    | 195           |  | 0.40 | %              |  | $               | 196,532   |              | $ | 385    |  | 0.79 | %
|Money market deposit accounts                            |  |                               | 174,238   |                 |      | 481           |  | 1.12 | %              |  |                 | 169,229   |              |   | 406    |  | 0.96 | %
|Passbook savings accounts                                |  |                               | 135,578   |                 |      | 223           |  | 0.67 | %              |  |                 | 137,019   |              |   | 249    |  | 0.73 | %
|Certificates of deposit >$100k                           |  |                               | 128,145   |                 |      | 1,092         |  | 3.46 | %              |  |                 | 115,852   |              |   | 987    |  | 3.43 | %
|Certificates of deposit <$100k                           |  |                               | 369,507   |                 |      | 2,761         |  | 3.03 | %              |  |                 | 372,340   |              |   | 2,508  |  | 2.71 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Total Time and Savings Deposits                          |  |                               | 1,006,302 |                 |      | 4,752         |  | 1.92 | %              |  |                 | 990,972   |              |   | 4,535  |  | 1.84 | %
|                                                         |  |                               |           |                 |      |              
|Federal funds purchased and repos                        |  |                               | 23,018    |                 |      | 144           |  | 2.54 | %              |  |                 | 32,569    |              |   | 72     |  | 0.89 | %
|Trust Preferred Securities                               |  |                               | 20,619    |                 |      | 265           |  | 5.21 | %              |  |                 | 3,077     |              |   | 28     |  | 3.66 | %
|Other short term borrowings                              |  |                               | 9,618     |                 |      | 57            |  | 2.40 | %              |  |                 | 26,414    |              |   | 98     |  | 1.49 | %
|Federal Home Loan Bank advances                          |  |                               | 14,058    |                 |      | 180           |  | 5.19 | %              |  |                 | 9,521     |              |   | 154    |  | 6.54 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|                                                         |  |                               | 67,313    |                 |      | 646           |  | 3.89 | %              |  |                 | 71,581    |              |   | 352    |  | 1.98 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Total Interest - Bearing Liabilities                     |  |                               | 1,073,615 |                 |      | 5,398         |  | 2.04 | %              |  |                 | 1,062,553 |              |   | 4,887  |  | 1.85 | %
|Non-Interest- Bearing Liabilities                        |  |                               | 244,897   |                 |      |               |  |      |                |  |                 | 220,396   |              |   |        |  |      |  
|Total Stockholders Equity                               |  |                               | 127,751   |                 |      |               |  |      |                |  |                 | 120,732   |              |   |        |  |      |  
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Total Liabilities and Stockholders Equity               |  |                               | 1,446,263 |                 |      |               |  |      |                |  |                 | 1,403,681 |              |   |        |  |      |  
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Net interest income (tax equivalent)                     |  |                               |           |                 | $    | 13,593        |  |      |                |  |                 |           |              | $ | 12,956 |  |      |  
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Average interest rate spread                             |  |                               |           |                 |      |               |  | 3.76 | %              |  |                 |           |              |   |        |  | 3.79 | %
|Interest expense as percentage of average earning assets |  |                               |           |                 |      |               |  | 1.65 | %              |  |                 |           |              |   |        |  | 1.54 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  
|Net interest margin                                      |  |                               |           |                 |      |               |  | 4.15 | %              |  |                 |           |              |   |        |  | 4.09 | %
|                                                         |  |                               |           |                 |      |               |  |      |                |  |                 |           |              |   |        |  |      |  





19



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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 $3.7 million for the first quarter of 2005, an increase of 6.9% compared to $3.5 million for the first quarter of 2004. Included in the 2005 results is a net gain of $408 thousand in
connection with the sale of two branches located in Tazewell County. Retail banking fees increased $116 thousand or 7.5% to $1.7 million, compared to $1.5 million in the first quarter of 2004. VFG experienced lower revenues from mortgage operations,
with mortgage banking fees amounting to $475 thousand, a decrease of $170 thousand or 26.4%, as compared to $645 thousand for the first quarter of 2004. While revenues were down, closings and mortgage pipelines showed solid growth. Mortgage loans
available for sale increased to $9.7 million, an increase of $4.0 million or 70% from December 31, 2004. In addition, the pipeline of mortgage loans in process increased $37.1 million or 52.4% from December 31, 2004. Trust and brokerage revenues
were down $69 thousand or 7.1% compared to the first quarter of 2004, with brokerage and estate related fees showing declines for the quarter.



Noninterest Expense



Noninterest expense for the first quarter of 2005 amounted to $10.5 million, an increase of $99 thousand or 1.0% compared to $10.4 million for the same period in 2004. Compensation and benefits increased $187 thousand
or 3.2%, but was partially offset by a decrease in professional fees of $71 thousand or 35.3%. Included in noninterest expense for the first quarter of 2005 were $120 thousand in non-recurring expenses associated with compensation benefits and
conversion costs associated with Virginia Commonwealth Trust Company. VFGs efficiency ratio was 60.8% for the quarter, compared to 63.5% for the same quarter in 2004.



Income Taxes



Income tax expense for the first quarter of 2005 amounted to $1.8 million resulting in an effective tax rate of 30.8% compared to $1.4 million, or 28.5%, for the first
quarter of 2004. The increase in the effective tax rate for the quarter is a result of a decrease in earnings from tax-exempt assets as a percentage of total income. 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.



20



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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 first quarter was $546 thousand, a decrease of $135 thousand or 19.8% from the same period in 2004, consistent with a slightly decreased rate of growth and general
improvement in asset quality during the period. Non-performing assets and net charge-offs were at improved levels, with non-performing assets as a percentage of total assets of .15% at March 31, 2005 compared to .28% at December 31, 2004. Net
charge-offs for the first quarter were $71 thousand, compared to net charge-offs of $141 thousand for the same period in 2004. Net charge-offs as a percentage of average loans were .01% for the first quarter, compared to .01% for the quarter ended
March 31, 2004. At March 31, 2005, the allowance for loan losses as a percentage of non-performing assets was 556.21%. The allowance for loan losses as a percentage of total loans amounted to 1.12%, up slightly from 1.10% at December 31, 2004, and
consistent with changes in asset risk ratings and growth in the commercial real estate component of the portfolio during the period.



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



|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|-------------------------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | ------------- |  | - | ------ | -
|                                                                                 |  | March 31,2005 |        |   | December 31,2004 |   |        | March 31,2004 | 
|Non accrual loans                                                                |  | $             | 1,917  |   |                  | $ | 2,552  |               |  | $ | 2,121  |  
|Troubled debt restructurings                                                     |  |               | 218    |   |                  |   | 1,451  |               |  |   | 4,483  |  
|Other real estate owned                                                          |  |               | 55     |   |                  |   | 5      |               |  |   | 241    |  
|Loans past due as to principal or interest for 90 days or more accruing interest |  |               |       |   |                  |   |       |               |  |   | 78     |  
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Total nonperforming assets                                                       |  | $             | 2,190  |   |                  | $ | 4,008  |               |  | $ | 6,923  |  
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Nonperforming assets to total assets                                             |  |               | .15    | % |                  |   | .28    | %             |  |   | .49    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Nonperforming assets to loans and other property                                 |  |               | .20    | % |                  |   | .38    | %             |  |   | .72    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Allowance for loan losses as a percentage of loans receivable                    |  |               | 1.12   | % |                  |   | 1.10   | %             |  |   | 1.07   | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Allowance for loan losses as a percentage of nonperforming assets                |  |               | 556.21 | % |                  |   | 292.07 | %             |  |   | 148.53 | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Net charge-offs as a percentage of average loans receivable                      |  |               | .01    | % |                  |   | .06    | %             |  |   | .01    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  



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



21



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VIRGINIA FINANCIAL GROUP, INC.

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



requirements. Additionally, capital management must also consider acquisition opportunities that may exist, and the resulting accounting treatment. The Companys
capital management strategies have been developed to provide attractive rates of returns to stockholders, while maintaining its well-capitalized position at each of the banking subsidiaries.



The primary source of additional capital to the Company is earnings retention, which
represents net income less dividends declared. During the first quarter ended March 31, 2005, the Company retained $2.6 million, or 64.3% of its net income. Stockholders equity increased by $1.9 million, reflecting the earnings retention and a
decrease of $778 thousand 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
March 31, 2005 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 March 31, 2005 (000 omitted):



|                                                                 |  |   |           |  
|---------------------------------------------------------------- |  | - | --------- | -
|Tier 1 capital                                                   |  | $ | 129,126   |  
|Tier 2 capital                                                   |  |   | 12,301    |  
|Total risk-based capital                                         |  |   | 141,427   |  
|Total risk-weighted assets                                       |  |   | 1,145,253 |  
|Average adjusted total assets                                    |  |   | 1,425,786 |  
|Capital ratios:                                                  |  |   |           |  
|Tier 1 risk-based capital ratio                                  |  |   | 11.28     | %
|Total risk-based capital ratio                                   |  |   | 12.35     | %
|Leverage ratio (Tier 1 capital to average adjusted total assets) |  |   | 9.06      | %
|Equity to assets ratio                                           |  |   | 8.87      | %
|Tangible equity to assets ratio                                  |  |   | 7.58      | %



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, compliance and loan review functions. It also includes outflows associated with dividends to shareholders. The main sources of funding for the parent company
are the management fees and dividends it receives from its banking and trust subsidiaries, a working line of credit with a correspondent bank, and availability of the trust preferred security market as deemed necessary. The Companys capital
base provides the resource and ability to support the assets of the Company and provide capital for future expansion.



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



Off Balance Sheet Items



There have been no material changes to the off balance sheet items disclosed in
Managements Discussion and Analysis in VFGs annual report on Form 10-K for the fiscal year ended December 31, 2004.



Contractual Obligations



There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in VFGs annual report on Form 10-K for the fiscal year ended December 31, 2004.



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 December 16, 2004, the Financial Accounting Standards Board issued
Statement No. 123R (revised 2004), Share-Based Payment, (FAS 123R) that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the Company
or liabilities that are based on the fair value of the Companys equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using
the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual periods
beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Companys results of operations at the present time.



In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain
SEC rules and regulations and provides the SEC staffs view regarding the valuation of share-based payment arrangements for public companies. SAB 107 does not impact the Companys results of operations at the present time.



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VIRGINIA FINANCIAL GROUP, INC.

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



Access to Filings



The Company provides access to their SEC filings through the corporate 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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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, 2004.



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 March 31,
2005 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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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.                                                                                                                                                        
|                 | 
|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 10-K filed on March 15, 2005.                                                                                              
|                 | 
|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 OfficerMay 6, 2005/s/ Jeffrey W. FarrarJeffrey W. Farrar, CPAExecutive Vice President and Chief Financial OfficerMay 6, 2005




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