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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, 2006

OR



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

For the transition period from  to

Commission File Number 000-22283



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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



---

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 a large accelerated
filer, an accelerated filer or a non-accelerated filer. (See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈

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

As of May 1, 2006, there were 7,178,964 shares of common stock, $5.00 par value, issued and outstanding.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

INDEX



|        |  |                                                                                       |  |         
|------- |  | ------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                       |  | Page No.
|        |  |                                                                                      
|        |  | PART I - FINANCIAL INFORMATION                                                        |  |         
|ITEM 1  |  | Consolidated Financial Statements:                                                    |  |         
|        |  |                                                                                      
|        |  | Consolidated Balance Sheets                                                           |  | 3       
|        |  |                                                                                      
|        |  | Consolidated Statements of Income                                                     |  | 4       
|        |  |                                                                                      
|        |  | Consolidated Statements of Changes in Stockholders Equity                            |  | 5       
|        |  |                                                                                      
|        |  | Consolidated Statements of Cash Flows                                                 |  | 6-7     
|        |  |                                                                                      
|        |  | Notes to Consolidated Financial Statements                                            |  | 8-16    
|        |  |                                                                                      
|ITEM 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17-25   
|        |  |                                                                                      
|ITEM 3  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25      
|        |  |                                                                                      
|ITEM 4  |  | Controls and Procedures                                                               |  | 25-26   
|        |  |                                                                                      
|        |  | PART II - OTHER INFORMATION                                                           |  |         
|        |  |                                                                                      
|ITEM 1  |  | Legal Proceedings                                                                     |  | 26      
|        |  |                                                                                      
|ITEM 1a |  | Risk Factors                                                                          |  | 26      
|        |  |                                                                                      
|ITEM 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 26      
|        |  |                                                                                      
|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                                                                              |  | 27-30   



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1. Financial statements

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(000 OMITTED)



|                                                                                              |  |               |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                              |  | MARCH 31,2006 |           |   | DECEMBER 31,2005 |  
|                                                                                              |  | (unaudited)   |           |   |                  |  
|ASSETS                                                                                        |  |               |           |   |                  |   |           |  
|Cash and due from banks                                                                       |  | $             | 40,923    |   |                  | $ | 33,681    |  
|Federal funds sold                                                                            |  |               | 19,886    |   |                  |   | 9,103     |  
|Interest-bearing deposits in banks                                                            |  |               | 3,593     |   |                  |   | 5,232     |  
|Securities (market value: 2006, $231,828; 2005, $247,758)                                     |  |               | 231,783   |   |                  |   | 247,651   |  
|Loans held for sale                                                                           |  |               | 7,795     |   |                  |   | 9,223     |  
|Loans receivable, net of allowance for loan losses, 2006, $13,941; 2005, $13,581              |  |               | 1,175,305 |   |                  |   | 1,129,495 |  
|Bank premises and equipment, net                                                              |  |               | 34,740    |   |                  |   | 33,675    |  
|Interest receivable                                                                           |  |               | 6,485     |   |                  |   | 6,583     |  
|Core deposit intangibles, net                                                                 |  |               | 4,352     |   |                  |   | 4,449     |  
|Goodwill                                                                                      |  |               | 13,896    |   |                  |   | 13,896    |  
|Other real estate owned                                                                       |  |               | 79        |   |                  |   | 75        |  
|Other assets                                                                                  |  |               | 12,283    |   |                  |   | 12,121    |  
|                                                                                              |  |               |           |   |                  |   |           |  
|Total assets                                                                                  |  | $             | 1,551,120 |   |                  | $ | 1,505,184 |  
|                                                                                              |  |               |           |   |                  |   |           |  
|LIABILITIES                                                                                   |  |               |           |   |                  |   |           |  
|Deposits:                                                                                     |  |               |           |   |                  |   |           |  
|Noninterest-bearing                                                                           |  | $             | 256,910   |   |                  | $ | 249,775   |  
|Interest-bearing                                                                              |  |               | 1,016,142 |   |                  |   | 1,005,734 |  
|                                                                                              |  |               |           |   |                  |   |           |  
|Total deposits                                                                                |  |               | 1,273,052 |   |                  |   | 1,255,509 |  
|Federal funds purchased and securities sold under agreements to repurchase                    |  |               | 3,795     |   |                  |   | 15,890    |  
|Federal Home Loan Bank advances                                                               |  |               | 60,000    |   |                  |   | 40,000    |  
|Trust preferred capital notes                                                                 |  |               | 20,619    |   |                  |   | 20,619    |  
|Other borrowings                                                                              |  |               | 42,372    |   |                  |   | 25,322    |  
|Interest payable                                                                              |  |               | 2,883     |   |                  |   | 2,515     |  
|Other liabilities                                                                             |  |               | 9,112     |   |                  |   | 9,224     |  
|Commitments and contingent liabilities                                                        |  |               |          |   |                  |   |          |  
|                                                                                              |  |               |           |   |                  |   |           |  
|Total liabilities                                                                             |  |               | 1,411,833 |   |                  |   | 1,369,079 |  
|                                                                                              |  |               |           |   |                  |   |           |  
|STOCKHOLDERS EQUITY                                                                          |  |               |           |   |                  |   |           |  
|Preferred stock; no par value; 5,000,000 shares authorized; no shares issued and outstanding; |  |               |          |   |                  |   |          |  
|Common stock, $5 par value; 25,000,000 shares authorized;                                     |  |               |           |   |                  |   |           |  
|2006: 7,178,964 shares issued and outstanding;                                                |  |               |           |   |                  |   |           |  
|2005: 7,172,734 shares issued and outstanding;                                                |  |               | 35,895    |   |                  |   | 35,864    |  
|Surplus                                                                                       |  |               | 8,245     |   |                  |   | 8,193     |  
|Retained earnings                                                                             |  |               | 96,941    |   |                  |   | 94,061    |  
|Accumulated other comprehensive loss, net                                                     |  |               | (1,794    | ) |                  |   | (2,013    | )
|                                                                                              |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                    |  |               | 139,287   |   |                  |   | 136,105   |  
|                                                                                              |  |               |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                    |  | $             | 1,551,120 |   |                  | $ | 1,505,184 |  
|                                                                                              |  |               |           |   |                  |   |           |  

See notes to consolidated financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 omitted)

(unaudited)



|                                                                                       |  |                             |        |   |      |   |       
|-------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------
|                                                                                       |  | THREE MONTHS ENDEDMARCH 31,
|                                                                                       |  | 2006                        |        |   | 2005
|Interest Income                                                                        |  |                             |        |   |      |   |       
|Interest and fees on loans                                                             |  | $                           | 19,433 |   |      | $ | 16,043
|Interest on deposits in other banks                                                    |  |                             | 35     |   |      |   | 4     
|Interest on investment securities:                                                     |  |                             |        |   |      |   |       
|Taxable                                                                                |  |                             | 103    |   |      |   |      
|Interest and dividends on securities available for sale:                               |  |                             |        |   |      |   |       
|Taxable                                                                                |  |                             | 1,396  |   |      |   | 1,806 
|Tax exempt                                                                             |  |                             | 815    |   |      |   | 656   
|Dividends                                                                              |  |                             | 115    |   |      |   | 67    
|Interest income on federal funds sold                                                  |  |                             | 276    |   |      |   | 8     
|                                                                                       |  |                             |        |   |      |   |       
|Total interest income                                                                  |  |                             | 22,173 |   |      |   | 18,584
|                                                                                       |  |                             |        |   |      |   |       
|Interest Expense                                                                       |  |                             |        |   |      |   |       
|Interest on deposits                                                                   |  |                             | 5,960  |   |      |   | 4,752 
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                             | 86     |   |      |   | 144   
|Interest on FHLB advances                                                              |  |                             | 582    |   |      |   | 180   
|Interest on trust preferred capital notes                                              |  |                             | 374    |   |      |   | 265   
|Interest on other borrowings                                                           |  |                             | 306    |   |      |   | 57    
|                                                                                       |  |                             |        |   |      |   |       
|Total interest expense                                                                 |  |                             | 7,308  |   |      |   | 5,398 
|                                                                                       |  |                             |        |   |      |   |       
|Net interest income                                                                    |  |                             | 14,865 |   |      |   | 13,186
|Provision for loan losses                                                              |  |                             | 510    |   |      |   | 546   
|                                                                                       |  |                             |        |   |      |   |       
|Net interest income after provision for loan losses                                    |  |                             | 14,355 |   |      |   | 12,640
|Noninterest Income                                                                     |  |                             |        |   |      |   |       
|Retail banking fees                                                                    |  |                             | 1,607  |   |      |   | 1,665 
|Commissions and fees from fiduciary activities                                         |  |                             | 811    |   |      |   | 724   
|Brokerage fee income                                                                   |  |                             | 227    |   |      |   | 181   
|Other operating income                                                                 |  |                             | 166    |   |      |   | 241   
|Loss on sale of securities available for sale                                          |  |                             | (181   | ) |      |   |      
|Gain on sale of branches                                                               |  |                             |       |   |      |   | 408   
|Gain on sale of mortgage loans                                                         |  |                             | 633    |   |      |   | 475   
|                                                                                       |  |                             |        |   |      |   |       
|Total noninterest income                                                               |  |                             | 3,263  |   |      |   | 3,694 
|                                                                                       |  |                             |        |   |      |   |       
|Noninterest Expense                                                                    |  |                             |        |   |      |   |       
|Compensation and employee benefits                                                     |  |                             | 6,601  |   |      |   | 6,047 
|Net occupancy expense                                                                  |  |                             | 766    |   |      |   | 751   
|Supplies and equipment expenses                                                        |  |                             | 977    |   |      |   | 1,114 
|Amortization-intangible assets                                                         |  |                             | 100    |   |      |   | 168   
|Marketing                                                                              |  |                             | 125    |   |      |   | 144   
|State franchise tax                                                                    |  |                             | 248    |   |      |   | 199   
|Data processing                                                                        |  |                             | 383    |   |      |   | 314   
|Telecommunications                                                                     |  |                             | 274    |   |      |   | 268   
|Professional fees                                                                      |  |                             | 130    |   |      |   | 130   
|Other operating expenses                                                               |  |                             | 1,579  |   |      |   | 1,399 
|                                                                                       |  |                             |        |   |      |   |       
|Total noninterest expense                                                              |  |                             | 11,183 |   |      |   | 10,534
|                                                                                       |  |                             |        |   |      |   |       
|Income before income taxes                                                             |  |                             | 6,435  |   |      |   | 5,800 
|Income tax expense                                                                     |  |                             | 1,971  |   |      |   | 1,787 
|                                                                                       |  |                             |        |   |      |   |       
|Net income                                                                             |  | $                           | 4,464  |   |      | $ | 4,013 
|                                                                                       |  |                             |        |   |      |   |       
|Earnings per share, basic                                                              |  | $                           | .62    |   |      | $ | .56   
|                                                                                       |  |                             |        |   |      |   |       
|Earnings per share, diluted                                                            |  | $                           | .62    |   |      | $ | .56   
|                                                                                       |  |                             |        |   |      |   |       

See notes to consolidated financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND
2005

(000 OMITTED)

(unaudited)



|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|------------------------------------------------------------------------ |  | ----------- | ------ | -------------- | - | ---------------- |  | - | ------------------------------------------ | - |  | ------------------- | ------ | - | ----- | - | ----- | - |  | - | ------- | -
|                                                                         |  | CommonStock |        | CapitalSurplus |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | ComprehensiveIncome |        |   | Total |  
|Balance, January 1, 2005                                                 |  | $           | 35,807 |                | $ | 7,774            |  | $ | 81,869                                     |   |  | $                   | 1,639  |   |       |   |       |   |  | $ | 127,089 |  
|Net income                                                               |  |             |       |                |   |                 |  |   | 4,013                                      |   |  |                     |       |   |       | $ | 4,013 |   |  |   | 4,013   |  
|Other comprehensive income, net of tax:                                  |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Unrealized holding losses arising 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  | )
|Stock-based compensation expense                                         |  |             | 12     |                |   | 62               |  |   |                                           |   |  |                     |       |   |       |   |       |   |  |   | 74      |  
|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Balance, March 31, 2005                                                  |  | $           | 35,819 |                | $ | 7,836            |  | $ | 84,449                                     |   |  | $                   | 861    |   |       |   |       |   |  | $ | 128,965 |  
|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Balance, January 1, 2006                                                 |  | $           | 35,864 |                | $ | 8,193            |  | $ | 94,061                                     |   |  | $                   | (2,013 | ) |       |   |       |   |  | $ | 136,105 |  
|Net income                                                               |  |             |       |                |   |                 |  |   | 4,464                                      |   |  |                     |       |   |       | $ | 4,464 |   |  |   | 4,464   |  
|Other comprehensive income, net of tax:                                  |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Unrealized holding gains arising during the period (net of tax of $54)   |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   | 101   |   |  |   |        |  
|Reclassification adjustment (net of tax of $63)                          |  |             |       |                |   |                 |  |   |                                           |   |  |                     |       |   |       |   | 118   |   |  |   |        |  
|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Other comprehensive gain                                                 |  |             |       |                |   |                 |  |   |                                           |   |  |                     | 219    |   |       |   | 219   |   |  |   | 219     |  
|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Total comprehensive income                                               |  |             |       |                |   |                 |  |   |                                           |   |  |                     |       |   |       | $ | 4,683 |   |  |   |        |  
|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Cash dividends ($.22 per share)                                          |  |             |       |                |   |                 |  |   | (1,584                                     | ) |  |                     |       |   |       |   |       |   |  |   | (1,584  | )
|Stock-based compensation expense                                         |  |             | 26     |                |   | 22               |  |   |                                           |   |  |                     |       |   |       |   |       |   |  |   | 48      |  
|Exercise of stock options                                                |  |             | 5      |                |   | 30               |  |   |                                           |   |  |                     |       |   |       |   |       |   |  |   | 35      |  
|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  
|Balance, March 31, 2006                                                  |  | $           | 35,895 |                | $ | 8,245            |  | $ | 96,941                                     |   |  | $                   | (1,794 | ) |       |   |       |   |  | $ | 139,287 |  
|                                                                         |  |             |        |                |   |                  |  |   |                                            |   |  |                     |        |   |       |   |       |   |  |   |         |  

See notes to consolidated financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 omitted)

(unaudited)



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | THREE MONTHS ENDEDMARCH 31, |        
|                                                                                  |  | 2006                        |         |   | 2005 |  
|OPERATING ACTIVITIES                                                              |  |                             |         |   |      |   |         |  
|Net income                                                                        |  | $                           | 4,464   |   |      | $ | 4,013   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Depreciation                                                                      |  |                             | 700     |   |      |   | 793     |  
|Amortization of intangible assets                                                 |  |                             | 100     |   |      |   | 168     |  
|Provision for loan losses                                                         |  |                             | 510     |   |      |   | 546     |  
|Write-downs of other real estate                                                  |  |                             |        |   |      |   | 33      |  
|Deferred tax benefit                                                              |  |                             | (90     | ) |      |   | (182    | )
|Employee benefit plan payments                                                    |  |                             | 54      |   |      |   | 48      |  
|Stock-based compensation expense                                                  |  |                             | 48      |   |      |   | 74      |  
|Loss on sale of securities available for sale                                     |  |                             | 181     |   |      |   |        |  
|Gain on sale of branches                                                          |  |                             |        |   |      |   | (408    | )
|Gain on sale of mortgage loans                                                    |  |                             | (633    | ) |      |   | (475    | )
|Proceeds from sale of mortgage loans                                              |  |                             | 29,956  |   |      |   | 32,960  |  
|Origination of mortgage loans for sale                                            |  |                             | (27,895 | ) |      |   | (36,522 | )
|Amortization of security premiums and accretion of discounts, net                 |  |                             | 196     |   |      |   | 170     |  
|Changes in assets and liabilities:                                                |  |                             |         |   |      |   |         |  
|(Increase) decrease in interest receivable                                        |  |                             | 98      |   |      |   | (82     | )
|(Increase) decrease in other assets                                               |  |                             | (193    | ) |      |   | 205     |  
|Increase in interest payable                                                      |  |                             | 368     |   |      |   | 92      |  
|(Decrease) increase in other liabilities                                          |  |                             | (166    | ) |      |   | 1,601   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  | $                           | 7,698   |   |      | $ | 3,034   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|INVESTING ACTIVITIES                                                              |  |                             |         |   |      |   |         |  
|Proceeds from maturities and principal payments of securities available for sale  |  |                             | 26,779  |   |      |   | 41,543  |  
|Proceeds from sales and calls of securities available for sale                    |  |                             | 21,256  |   |      |   | 1,685   |  
|Purchase of securities available for sale                                         |  |                             | (32,207 | ) |      |   | (1,064  | )
|Net increase in loans                                                             |  |                             | (46,358 | ) |      |   | (33,123 | )
|Proceeds from sale of premises and equipment                                      |  |                             | 1,549   |   |      |   | 3       |  
|Purchase of premises and equipment                                                |  |                             | (3,314  | ) |      |   | (723    | )
|Proceeds from sale of other real estate                                           |  |                             | 34      |   |      |   | 5       |  
|Sale of branches, net of cash                                                     |  |                             |        |   |      |   | (11,731 | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                             |  | $                           | (32,261 | ) |      | $ | (3,405  | )
|                                                                                  |  |                             |         |   |      |   |         |  

See notes to consolidated financial statements.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 omitted)

(unaudited)



|                                                                                                     |  |                             |         |   |      |   |        |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                     |  | THREE MONTHS ENDEDMARCH 31, |        
|                                                                                                     |  | 2006                        |         |   | 2005 |  
|FINANCING ACTIVITIES                                                                                 |  |                             |         |   |      |   |        |  
|Net increase (decrease) in demand, money market and savings deposits                                 |  | $                           | (27,850 | ) |      | $ | 385    |  
|Net increase in certificates of deposit                                                              |  |                             | 45,393  |   |      |   | 903    |  
|Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase |  |                             | (12,095 | ) |      |   | 8,690  |  
|Proceeds from Federal Home Loan Bank advances                                                        |  |                             | 30,000  |   |      |   |       |  
|Principal payments on Federal Home Loan Bank advances                                                |  |                             | (10,000 | ) |      |   | (20    | )
|Net increase in other borrowings                                                                     |  |                             | 17,050  |   |      |   | 12,295 |  
|Proceeds from exercise of stock options                                                              |  |                             | 35      |   |      |   |       |  
|Cash dividends paid                                                                                  |  |                             | (1,584  | ) |      |   | (1,433 | )
|                                                                                                     |  |                             |         |   |      |   |        |  
|Net cash provided by financing activities                                                            |  | $                           | 40,949  |   |      | $ | 20,820 |  
|                                                                                                     |  |                             |         |   |      |   |        |  
|Increase in cash and cash equivalents                                                                |  | $                           | 16,386  |   |      | $ | 20,449 |  
|                                                                                                     |  |                            
|CASH AND CASH EQUIVALENTS                                                                            |  |                             |         |   |      |   |        |  
|Beginning of the period                                                                              |  |                             | 48,016  |   |      |   | 39,326 |  
|                                                                                                     |  |                             |         |   |      |   |        |  
|End of the period                                                                                    |  | $                           | 64,402  |   |      | $ | 59,775 |  
|                                                                                                     |  |                             |         |   |      |   |        |  
|Supplemental Schedule of Noncash Investing/Financing Activities                                      |  |                             |         |   |      |   |        |  
|Other real estate acquired in settlement of loans                                                    |  | $                           | 38      |   |      | $ | 59     |  
|                                                                                                     |  |                             |         |   |      |   |        |  
|Unrealized gain (loss) on securities available for sale                                              |  | $                           | 336     |   |      | $ | (1,197 | )
|                                                                                                     |  |                             |         |   |      |   |        |  
|Stock-based compensation expense                                                                     |  | $                           | 48      |   |      | $ | 74     |  
|                                                                                                     |  |                             |         |   |      |   |        |  

See notes to consolidated financial statements.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|2. | The results of operations for the three month period ended March 31, 2006 and 2005 are not necessarily indicative of the results to be expected for the full year. Certain
reclassifications have been made to prior period balances to conform to the current presentation.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | The Companys securities portfolio is composed of the following (000 omitted):
|-- | ------------------------------------------------------------------------------



|                                                 |  |                   |         |            |   |        
|------------------------------------------------ |  | ----------------- | ------- | ---------- | - | -------
|                                                 |  | AmortizedCost     |         | Fair Value
|                                                 | 
|Securities Held to Maturity:                     |  | March 31, 2006   
|                                                 |  | (unaudited)      
|Obligations of States and Political Subdivisions |  | $                 | 3,320   |            | $ | 3,365  
|                                                 |  |                   |         |            |   |        
|                                                 | 
|                                                 |  | December 31, 2005
|Obligations of States and Political Subdivisions |  | $                 | 4,287   |            | $ | 4,394  
|                                                 |  |                   |         |            |   |        
|                                                 | 
|Securities Available for Sale:                   |  | March 31, 2006   
|                                                 |  | (unaudited)      
|U.S. Government agencies                         |  | $                 | 77,020  |            | $ | 75,536 
|State and municipals                             |  |                   | 88,536  |            |   | 89,461 
|Corporate bonds                                  |  |                   | 4,011   |            |   | 4,021  
|Collateralized mortgage obligations              |  |                   | 1,482   |            |   | 1,419  
|Mortgage-backed securities                       |  |                   | 49,790  |            |   | 47,872 
|Equity securities                                |  |                   | 1,396   |            |   | 1,810  
|Restricted stock                                 |  |                   | 7,763   |            |   | 7,763  
|Other securities                                 |  |                   | 581     |            |   | 581    
|                                                 |  |                   |         |            |   |        
|                                                 |  | $                 | 230,579 |            | $ | 228,463
|                                                 |  |                   |         |            |   |        



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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



|                                         |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|---------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | -------------- | ------ | ---------- | - | -------------- |  | - | ------- |  | - | -----
|                                         |  | Less than 12 months |        | 12 Months or more |   | Total    
|Description of Securities March 31, 2006 |  | FairValue           |        | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |        | Fair Value |   | UnrealizedLoss
|U.S. Government agencies                 |  | $                   | 28,906 |                   | $ | 91        |  | $              | 38,620 |            | $ | 1,404          |  | $ | 67,526  |  | $ | 1,495
|Mortgage backed securities               |  |                     | 8,297  |                   |   | 132       |  |                | 38,266 |            |   | 1,804          |  |   | 46,563  |  |   | 1,936
|State and municipals                     |  |                     | 29,256 |                   |   | 323       |  |                | 3,922  |            |   | 131            |  |   | 33,178  |  |   | 454  
|Corporate bonds                          |  |                     | 1,485  |                   |   | 12        |  |                |       |            |   |               |  |   | 1,485   |  |   | 12   
|Collateralized mortgage obligations      |  |                     |       |                   |   |          |  |                | 1,419  |            |   | 63             |  |   | 1,419   |  |   | 63   
|                                         |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|Subtotal debt securities                 |  |                     | 67,944 |                   |   | 558       |  |                | 82,227 |            |   | 3,402          |  |   | 150,171 |  |   | 3,960
|                                         |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|Preferred stock                          |  |                     |       |                   |   |          |  |                | 513    |            |   | 80             |  |   | 513     |  |   | 80   
|                                         |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      
|Total temporarily impaired securities    |  | $                   | 67,944 |                   | $ | 558       |  | $              | 82,740 |            | $ | 3,482          |  | $ | 150,684 |  | $ | 4,040
|                                         |  |                     |        |                   |   |           |  |                |        |            |   |                |  |   |         |  |   |      

There are a total of 151 securities that have unrealized losses as of March 31, 2006, 32 U.S. Treasuries or
agency securities, 42 U.S. Agency MBS securities, 71 municipal securities, 3 corporate bonds, two CMOs 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. VFG has the ability to
hold these securities until maturity.



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



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



|                                             |  |               |           |   |                  |   |           |  
|-------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                             |  | March 31,2006 |           |   | December 31,2005 |  
|                                             |  | (unaudited)   |           |   |                  |  
|Real estate loans:                           |  |               |           |   |                  |   |           |  
|Construction                                 |  | $             | 166,924   |   |                  | $ | 115,944   |  
|Secured by 1  4 family residential          |  |               | 303,639   |   |                  |   | 310,719   |  
|Commercial and multifamily                   |  |               | 586,054   |   |                  |   | 593,396   |  
|Commercial, financial and agricultural loans |  |               | 93,503    |   |                  |   | 78,110    |  
|Consumer loans                               |  |               | 36,909    |   |                  |   | 40,876    |  
|All other loans                              |  |               | 1,558     |   |                  |   | 3,486     |  
|                                             |  |               |           |   |                  |   |           |  
|                                             |  |               | 1,188,587 |   |                  |   | 1,142,531 |  
|Deferred loan costs                          |  |               | 659       |   |                  |   | 545       |  
|Allowance for loan losses                    |  |               | (13,941   | ) |                  |   | (13,581   | )
|                                             |  |               |           |   |                  |   |           |  
|                                             |  | $             | 1,175,305 |   |                  | $ | 1,129,495 |  
|                                             |  |               |           |   |                  |   |           |  



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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 31,2006 |        |   | December 31 ,2005 |   |        | March 31,2005 | 
|                          |  | (unaudited)   |        |   |                   |   |        | (unaudited)   | 
|Balance, January 1        |  | $             | 13,581 |   |                   | $ | 11,706 |               |  | $ | 11,706 |  
|                          |  |               |       
|Recoveries                |  |               | 23     |   |                   |   | 315    |               |  |   | 118    |  
|Loan charged off          |  |               | (173   | ) |                   |   | (452   | )             |  |   | (189   | )
|Provision for loan losses |  |               | 510    |   |                   |   | 2,012  |               |  |   | 546    |  
|                          |  |               |        |   |                   |   |        |               |  |   |        |  
|Balance, ending           |  | $             | 13,941 |   |                   | $ | 13,581 |               |  | $ | 12,181 |  
|                          |  |               |        |   |                   |   |        |               |  |   |        |  

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



|                                                                                 |  |               |       |                  |   |      
|-------------------------------------------------------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                                                                                 |  | March 31,2006 |       | December 31,2005
|                                                                                 |  | (unaudited)   |       |                 
|Impaired loans for which an allowance has been provided                          |  | $             | 1,516 |                  | $ | 1,710
|Impaired loans for which an allowance has not been provided                      |  |               | 4,725 |                  |   | 3,705
|                                                                                 |  |               |       |                  |   |      
|Total impaired loans                                                             |  |               | 6,241 |                  |   | 5,415
|                                                                                 |  |               |       |                  |   |      
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $             | 421   |                  | $ | 684  
|                                                                                 |  |               |       |                  |   |      



|6. | Federal Home Loan Bank Advances:
|-- | --------------------------------

The Company has advances
with the Federal Home Loan Bank of Atlanta of $60 million at March 31, 2006 maturing through 2016. The advances include $15 million in fixed rate credits and $45 million in convertible credits. These advances require either monthly or quarterly
interest payments with principal due upon maturity. At March 31, 2006, the interest rates on this debt ranged from 3.81% to 6.69%. The average interest rate was 4.31% at March 31, 2006 with an average balance outstanding of $56.4 million
for the first quarter 2006.

The banking subsidiaries have available a combined $244 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, 2006 the 1 to 4 family, home equity and commercial loans were pledged as collateral totaling $209 million. At December 31, 2005 only 1 to 4 family loans were pledged totaling
$175 million.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



|     |  |   |       
|---- |  | - | ------
|2006 |  |   | 5,000 
|2008 |  |   | 10,000
|2010 |  |   | 15,000
|2011 |  |   | 10,000
|2016 |  |   | 20,000
|     |  |   |       
|     |  | $ | 60,000
|     |  |   |       



|7. | Trust Preferred Capital Notes:
|-- | ------------------------------

During the first quarter
of 2004, VFG Limited Liability Trust, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable Capital Securities (commonly referred to as Trust Preferred Capital Notes). On March 18, 2004, $20 million of Trust
Preferred Capital Notes were issued through a private transaction. The Trust issued $619 thousand in common equity to the Company. The securities have a LIBOR-indexed floating rate of interest which adjusts, and is payable, quarterly. The interest
rate at March 31, 2006 was 7.26%. The securities may be redeemed at par beginning in June, 2009 and each quarterly anniversary of such date until the securities mature on June 17, 2034. The principal asset of the Trust is $20.6 million of
the Companys junior subordinated debt securities with like maturities and like interest rates to the Capital Securities.

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

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

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



|8. | Other Borrowings:
|-- | -----------------

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

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



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

One of the Companys affiliates has an agreement with the Federal Reserve where it can borrow funds deposited by its customers. This agreement calls for variable interest and is payable on demand. U. S. Government securities and U. S.
Treasury notes are pledged as collateral. The targeted threshold maximum amount available under this agreement is $7.0 million.

In 2005 the
Company initiated a commercial paper program whereby customers of the affiliate banks can invest in unrated commercial paper of VFG. Terms include a daily maturity and floating rate of interest. The balance outstanding was $42.4 million and $24.5
million at March 31, 2006 and December 31, 2005, respectively.

The average balance of other borrowings did not exceed 30 percent
of stockholders equity for the three months ended March 31, 2006 or the year ended December 31, 2005.



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



|                               |  |           |  |                 |      |        |           |                 |   |     
|------------------------------ |  | --------- |  | --------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | 2006      |  | 2005           
|                               |  | Shares    |  | PerShare Amount |      | Shares |           | PerShare Amount
|Basic earnings per share       |  | 7,176,815 |  | $               | 0.62 |        | 7,163,198 |                 | $ | 0.56
|                               |  |           |  |                 |      |        |           |                 |   |     
|Effect of dilutive securities: |  |           |  |                 |      |        |           |                 |   |     
|Restricted shares              |  | 18,970    |  |                 |      |        | 18,655    |                 |   |     
|Stock options                  |  | 34,981    |  |                 |      |        | 28,995    |                 |   |     
|                               |  |           |  |                 |      |        |           |                 |   |     
|Diluted earnings per share     |  | 7,230,766 |  | $               | 0.62 |        | 7,210,848 |                 | $ | 0.56
|                               |  |           |  |                 |      |        |           |                 |   |     

In 2006 and 2005, stock options representing 39,434 and 8,260 shares, respectively, were not
included in the calculation of earnings per share as their effect would have been anti-dilutive.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. | Stock-Based Compensation:
|--- | -------------------------

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

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

Included within compensation and employee benefits expense for the three months ended March 31, 2006 is $48 thousand of stock-based
compensation. As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $30 thousand ($20 thousand after tax), which had no impact on basic and diluted earnings per share.

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



|                                                              |  |                                  |       |  
|------------------------------------------------------------- |  | -------------------------------- | ----- | -
|                                                              |  | Three Months EndedMarch 31, 2005 |      
|Net income, as reported                                       |  | $                                | 4,013 |  
|Less: pro forma stock option compensation expense, net of tax |  |                                  | (22   | )
|                                                              |  |                                  |       |  
|Pro forma net income                                          |  | $                                | 3,991 |  
|                                                              |  |                                  |       |  
|Earnings per share:                                           |  |                                  |       |  
|Basic  as reported                                           |  | $                                | 0.56  |  
|Basic  pro forma                                             |  |                                  | 0.56  |  
|Diluted  as reported                                         |  |                                  | 0.56  |  
|Diluted  pro forma                                           |  |                                  | 0.55  |  

Stock option compensation expense is the estimated fair value of options granted amortized on a
straight-line basis over the requisite service period for each separately vesting portion of the award. The weighted average estimated fair value of stock options granted in the three months ended March 31, 2006 and 2005 was $14.43 and none,
respectively. Fair value is estimated using the Black-Scholes option pricing model with the following assumptions: option term until exercise ranging from 4 to 5 years, volatility ranging from 22% to 27%, risk-free interest rate ranging from 4.7% to
5.1% and an expected dividend yield of 2.2%.

During 2006, the Company took into consideration guidance under SFAS 123R and SEC Staff
Accounting



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The weighted average expected option term for 2006 reflects the application of the simplified method set out in SAB 107, which defines the life as the average of the
contractual term of the options and the weighted average vesting period for all option tranches.

Restricted stock award activity for the
three months ended March 31, 2006 is summarized below:



|                                   |  |                       |   |  |                                               |      
|---------------------------------- |  | --------------------- | - |  | --------------------------------------------- | -----
|                                   |  | Shares (in thousands) |   |  | WeightedAverage GrantDate Fair ValuePer Award
|Restricted stock awards, January 1 |  | 17,760                |   |  | $                                             | 33.98
|Granted                            |  | 6,186                 |   |  |                                               | 37.92
|Vested                             |  | (4,030                | ) |  |                                               | 34.77
|Canceled or expired                |  | (946                  | ) |  |                                               | 29.27
|                                   |  |                       |   |  |                                               |      
|Restricted stock awards, March 31  |  | 18,970                |   |  |                                               |      
|                                   |  |                       |   |  |                                               |      

Stock option plan activity for the three months ended March 31, 2006 is summarized below:



|                               |  |         |   |  |                              |       |                                                    |     |                                                    |   |      
|------------------------------ |  | ------- | - |  | ---------------------------- | ----- | -------------------------------------------------- | --- | -------------------------------------------------- | - | -----
|                               |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (in years) |     | ValueUnexercisedIn-The-MoneyOptions (in thousands)
|Options outstanding, January 1 |  | 99,430  |   |  | $                            | 26.12 |                                                    |     |                                                    |   |      
|Granted                        |  | 43,259  |   |  |                              | 40.59 |                                                    |     |                                                    |   |      
|Exercised                      |  | (1,100  | ) |  |                              | 32.13 |                                                    |     |                                                    |   |      
|Canceled or expired            |  | (2,900  | ) |  |                              | 31.87 |                                                    |     |                                                    |   |      
|                               |  |         |   |  |                              |       |                                                    |     |                                                    |   |      
|Options outstanding, March 31  |  | 138,689 |   |  |                              | 30.49 |                                                    | 6.7 |                                                    | $ | 1,418
|                               |  |         |   |  |                              |       |                                                    |     |                                                    |   |      
|Options exercisable, March 31  |  | 72,826  |   |  |                              | 23.60 |                                                    | 5.2 |                                                    |   | 1,233
|                               |  |         |   |  |                              |       |                                                    |     |                                                    |   |      

The total value of in-the-money options exercised during the first three months ended
March 31, 2006 was $44 thousand.

As of March 31, 2006, there was $668 thousand and $885 thousand of total unrecognized
compensation expense related to nonvested restricted stock awards and options, respectively, which will be recognized over the remaining requisite service period.

Prior to the adoption of SFAS 123R, the Company presented the benefit of all tax deductions resulting from the exercise of stock options and restricted stock awards as operating cash flows in the Consolidated
Statements of Cash Flows. SFAS 123R requires the benefits of tax deductions in excess of grant-date fair value be reported as financing cash flow, rather than as an operating cash flow. Cash proceeds received from options exercised for the three
months ended March 31, 2006 and 2005 were $35 thousand and none, respectively.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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



|                                   |  |                              |     |   |      |   |     |  
|---------------------------------- |  | ---------------------------- | --- | - | ---- | - | --- | -
|                                   |  | Three Months Ended March 31, |    
|                                   |  | 2006                         |     |   | 2005 |  
|Service cost                       |  | $                            | 43  |   |      | $ | 50  |  
|Interest cost                      |  |                              | 61  |   |      |   | 64  |  
|Expected return on plan assets     |  |                              | (62 | ) |      |   | (65 | )
|Amortization of prior service cost |  |                              | 8   |   |      |   | 8   |  
|Amortization of net loss           |  |                              | 16  |   |      |   | 15  |  
|                                   |  |                              |     |   |      |   |     |  
|Net periodic benefit cost          |  | $                            | 66  |   |      | $ | 72  |  
|                                   |  |                              |     |   |      |   |     |  

The Company made a quarterly cash contribution of $32 thousand to the plan during the first
quarter of 2006, and estimates $225 thousand in total contributions to the plan for 2006.



|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   
|                                            |  |   |       



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

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

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

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

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



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



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



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



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



| |  |  | Changes may occur in banking legislation and regulation,
| | - |  | --------------------------------------------------------



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



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

OVERVIEW

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

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



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Critical Accounting Policies

General

The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United
States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of
factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be
present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses

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

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

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

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



18



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

Goodwill

The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS 142), effective January 1, 2002. Accordingly, goodwill is no longer
subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit
intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and,
accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their
estimated lives not to exceed fifteen years. Amortization expense charged to operations was $100 thousand and $168 thousand for the three months ended March 31, 2006 and 2005, respectively.

Non-GAAP Financial Measures

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

Results of Operations

VFGs consolidated net income for the quarter ended March 31, 2006 amounted to $4.5 million or $.62 per diluted share, compared to earnings of $4.0 million or
$.56 per diluted share for the quarter ended March 31, 2005. Net income increased 11.2% and diluted earnings per share increased 10.7% compared to first quarter 2005 results. The Companys earnings for the first quarter produced an
annualized return on average assets (ROA) of 1.19% and return on average equity (ROE) of 13.08%, compared to prior year ratios of 1.13% and 12.74%, respectively.

Net Interest Income

Total revenue, comprised of net interest income and noninterest income, was $18.1 million for the first quarter of
2006, an increase of $1.2 million or 7.4% over $16.9 million in 2005. The largest component, net interest income, amounted to $14.9 million for the first quarter, up $1.7 million or 12.7% compared with $13.2 million for the same quarter in 2005.
Improvements in the growth and mix of average earning assets, coupled with net interest margin expansion, were the primary contributors to this growth. The net interest margin for the first quarter of 2006 was 4.35%, down five basis points
sequentially compared to 4.40% for the fourth quarter of 2005, and up twenty basis points when compared to 4.15% for the first quarter of 2005. As interest rates have continued to increase over the past year, interest costs associated with interest
bearing liabilities have accelerated. The average rate paid on interest bearing liabilities for the first quarter was 2.60%, up 21 basis points sequentially compared to 2.39% for the fourth quarter of 2005, and up 56 basis points when compared to
the first quarter of 2005. Management anticipates the net interest margin to decline modestly for the foreseeable future as continuing pressures on deposit pricing in VFGs markets are anticipated.



19



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The following tables provide information on average earning assets and interest-bearing liabilities for the three months
ended March 31, 2006 and 2005 as well as amounts and rates of tax equivalent interest earned and interest paid. The tax equivalent adjustment, utilizing a federal statutory rate of 35%, amounted to $458 thousand and $407 thousand for the three
months ended March 31, 2006 and 2005, respectively.



|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|-------------------------------------------------------------------------- |  | ---------------------------- | --------- | --------------- | ---- | ------------ |  | ---- | -------------- |  | --------------- | --------- | ------------ | - | ------ |  | ---- | -
|                                                                           |  | Three months ended March 31, |          
|                                                                           |  | 2006                         |           |                 | 2005 |             
|Dollars in thousands                                                       |  | AverageBalance               |           | InterestInc/Exp |      | AverageRates |  |      | AverageBalance |  | InterestInc/Exp |           | AverageRates |  
|Assets                                                                     |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Loans receivable, net (1) (2)                                              |  | $                            | 1,157,736 |                 | $    | 19,453       |  | 6.81 | %              |  | $               | 1,071,992 |              | $ | 16,096 |  | 6.09 | %
|Investment securities                                                      |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Taxable                                                                    |  |                              | 152,945   |                 |      | 1,614        |  | 4.28 | %              |  |                 | 191,766   |              |   | 1,873  |  | 3.96 | %
|Tax exempt (2)                                                             |  |                              | 80,623    |                 |      | 1,253        |  | 6.30 | %              |  |                 | 62,326    |              |   | 1,010  |  | 6.57 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total investments                                                          |  |                              | 233,568   |                 |      | 2,867        |  | 4.98 | %              |  |                 | 254,092   |              |   | 2,883  |  | 4.60 | %
|Interest bearing deposits                                                  |  |                              | 5,961     |                 |      | 35           |  | 2.38 | %              |  |                 | 521       |              |   | 4      |  | 3.11 | %
|Federal funds sold                                                         |  |                              | 30,691    |                 |      | 276          |  | 3.65 | %              |  |                 | 1,122     |              |   | 8      |  | 2.89 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|                                                                           |  |                              | 270,220   |                 |      | 3,178        |  | 4.77 | %              |  |                 | 255,735   |              |   | 2,895  |  | 4.59 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total earning assets                                                       |  |                              | 1,427,956 |                 |      | 22,631       |  | 6.43 | %              |  |                 | 1,327,727 |              |   | 18,991 |  | 5.80 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total nonearning assets                                                    |  |                              | 96,907    |                 |      |              |  |      |                |  |                 | 118,536   |              |   |        |  |      |  
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total assets                                                               |  | $                            | 1,524,863 |                 |      |              |  |      |                |  | $               | 1,446,263 |              |   |        |  |      |  
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Liabilities and Stockholders Equity                                       |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Interest-bearing deposits                                                  |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Interest checking                                                          |  | $                            | 180,122   |                 | $    | 198          |  | 0.45 | %              |  | $               | 198,834   |              | $ | 195    |  | 0.40 | %
|Money market                                                               |  |                              | 166,666   |                 |      | 701          |  | 1.71 | %              |  |                 | 174,238   |              |   | 481    |  | 1.12 | %
|Savings                                                                    |  |                              | 120,090   |                 |      | 195          |  | 0.66 | %              |  |                 | 135,578   |              |   | 223    |  | 0.67 | %
|Time deposits:                                                             |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Less than $100,000                                                         |  |                              | 372,152   |                 |      | 3,185        |  | 3.47 | %              |  |                 | 369,507   |              |   | 2,761  |  | 3.03 | %
|$100,000 and more                                                          |  |                              | 175,314   |                 |      | 1,681        |  | 3.89 | %              |  |                 | 128,145   |              |   | 1,092  |  | 3.46 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total interest-bearing deposits                                            |  |                              | 1,014,344 |                 |      | 5,960        |  | 2.38 | %              |  |                 | 1,006,302 |              |   | 4,752  |  | 1.92 | %
|Federal funds purchased and securities sold under agreements to repurchase |  |                              | 14,801    |                 |      | 86           |  | 2.36 | %              |  |                 | 23,018    |              |   | 144    |  | 2.54 | %
|Federal Home Loan Bank advances                                            |  |                              | 56,427    |                 |      | 582          |  | 4.18 | %              |  |                 | 14,058    |              |   | 180    |  | 5.19 | %
|Trust preferred capital notes                                              |  |                              | 20,619    |                 |      | 374          |  | 7.36 | %              |  |                 | 20,619    |              |   | 265    |  | 5.21 | %
|Other borrowings                                                           |  |                              | 30,856    |                 |      | 306          |  | 4.02 | %              |  |                 | 9,618     |              |   | 57     |  | 2.40 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|                                                                           |  |                              | 122,703   |                 |      | 1,348        |  | 4.46 | %              |  |                 | 67,313    |              |   | 646    |  | 3.89 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total interest-bearing liabilities                                         |  |                              | 1,137,047 |                 |      | 7,308        |  | 2.60 | %              |  |                 | 1,073,615 |              |   | 5,398  |  | 2.04 | %
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total noninterest-bearing liabilities                                      |  |                              | 249,452   |                 |      |              |  |      |                |  |                 | 244,897   |              |   |        |  |      |  
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total liabilities                                                          |  |                              | 1,386,499 |                 |      |              |  |      |                |  |                 | 1,318,512 |              |   |        |  |      |  
|Stockholders equity                                                       |  |                              | 138,364   |                 |      |              |  |      |                |  |                 | 127,751   |              |   |        |  |      |  
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Total liabilities and stockholders equity                                 |  | $                            | 1,524,863 |                 |      |              |  |      |                |  | $               | 1,446,263 |              |   |        |  |      |  
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Net interest income (tax equivalent)                                       |  |                              |           |                 | $    | 15,323       |  |      |                |  |                 |           |              | $ | 13,593 |  |      |  
|                                                                           |  |                              |           |                 |      |              |  |      |                |  |                 |           |              |   |        |  |      |  
|Average interest rate spread                                               |  |                              |           |                 |      |              |  | 3.83 | %              |  |                 |           |              |   |        |  | 3.76 | %
|Interest expense as percentage of average earning assets                   |  |                              |           |                 |      |              |  | 2.08 | %              |  |                 |           |              |   |        |  | 1.65 | %
|Net interest margin                                                        |  |                              |           |                 |      |              |  | 4.35 | %              |  |                 |           |              |   |        |  | 4.15 | %



20



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Noninterest Income

Total noninterest income was $3.3 million for the first quarter of 2006, a decrease of $431 thousand or 11.7% compared to $3.7 million for the first quarter of 2005. The 2006 results include a loss of $181 thousand on sale of securities
available for sale associated with branch realignment within the Company. Approximately $20 million in securities sold were reinvested at a yield pickup of approximately 120 basis points. Included in the 2005 results is a net gain of $408 thousand
in connection with the sales of two branches located in Tazewell County. Trust and brokerage fee income rose to $1.04 million for the first quarter of 2006, an increase of $133 thousand or 14.7% over the same period in 2005. Gross mortgage banking
fees amounted to $633 thousand, an increase of $158 thousand or 33.3% when compared to $475 thousand for the first quarter of 2005, but down sequentially $277 thousand or 30.4% from the fourth quarter of 2005.

Noninterest Expense

Noninterest expense for the first quarter of
2006 totaled $11.2 million, up $649 thousand or 6.2% from $10.5 million for the same period in 2005. Compensation and employee benefits increased $554 thousand or 9.2% over the same quarter a year ago. This increase reflects new positions for the
openings of the Seminole Trail and Graves Mill branches during the fourth quarter 2005 and first quarter 2006, respectively. It also reflects approximately $160 thousand in non-recurring severance benefits associated with a reorganization of
management within our Virginia Commonwealth Trust Company affiliate during the first quarter of 2006. Management would anticipate some increase in operating expenses as two new branches open middle to late second quarter of 2006. VFGs
efficiency ratio was 59.5% for the quarter, compared to 60.8% for the same quarter in 2005.

Income Taxes

Income tax expense for the first quarter of 2006 was $2.0 million resulting in an effective tax rate of 30.6% compared to $1.8 million, or 30.8%, for the first quarter of
2005. The decrease in the effective tax rate for the quarter is a result of an increase in earnings from tax-exempt assets as a percentage of total income. The average balance of tax-exempt securities for the first quarter of 2006 increased by $18
million over the same period last year, resulting in an increase in related tax-exempt interest income.

Asset Quality

Asset quality remains strong, with VFGs ratio of non-performing assets as a percentage of total assets amounting to .13% at March 31, 2006, compared to .15% at
March 31, 2005 and .12% at December 31, 2005. Net charge-offs as a percentage of average loans receivable amounted to .01% for the first quarter and for the same quarter a year ago. At March 31, 2006, the allowance for loan losses was
approximately seven times the level of non-performing assets, while the allowance as a percentage of total loans amounted to 1.17%, down slightly from 1.19% at December 31, 2005. The Company decreased its provision for loan losses by $36
thousand or 6.6%, from $546 thousand for the three months ended March 31, 2005 compared to $510 thousand for the three months ended March 31, 2006.



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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



|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|-------------------------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | ------------- |  | - | ------ | -
|                                                                                 |  | March 31,2006 |        |   | December 31,2005 |   |        | March 31,2005 | 
|Non accrual loans                                                                |  | $             | 1,787  |   |                  | $ | 1,604  |               |  | $ | 1,917  |  
|Troubled debt restructurings                                                     |  |               | 134    |   |                  |   | 154    |               |  |   | 218    |  
|Other real estate owned                                                          |  |               | 79     |   |                  |   | 75     |               |  |   | 55     |  
|Loans past due as to principal or interest for 90 days or more accruing interest |  |               |       |   |                  |   |       |               |  |   |       |  
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Total nonperforming assets                                                       |  | $             | 2,000  |   |                  | $ | 1,833  |               |  | $ | 2,190  |  
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Nonperforming assets to total assets                                             |  |               | .13    | % |                  |   | .12    | %             |  |   | .15    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Nonperforming assets to loans and other property                                 |  |               | .17    | % |                  |   | .16    | %             |  |   | .20    | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Allowance for loan losses as a percentage of loans receivable                    |  |               | 1.17   | % |                  |   | 1.19   | %             |  |   | 1.12   | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Allowance for loan losses as a percentage of nonperforming assets                |  |               | 697.05 | % |                  |   | 740.92 | %             |  |   | 556.21 | %
|                                                                                 |  |               |        |   |                  |   |        |               |  |   |        |  
|Net charge-offs as a percentage of average loans receivable                      |  |               | .01    | % |                  |   | .01    | %             |  |   | .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 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 three months ended March 31, 2006, the Company retained $2.9 million, or 64.5% of its net income. Stockholders equity increased by $3.2 million, reflecting the earnings retention and an increase of $219 thousand in accumulated
comprehensive income net of tax, after sales and reinvestment of securities related to branch realignment within the Company.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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, 2006, that the Company and the subsidiary banks met all minimum capital adequacy requirements to which they are subject and are
categorized as well capitalized. There are no conditions or events that management believes have changed the subsidiary banks well capitalized position.

The following table includes information with respect to the Companys risk-based capital as of March 31, 2006 (000 omitted):



|                                                                 |  |   |           |  
|---------------------------------------------------------------- |  | - | --------- | -
|Tier 1 capital                                                   |  | $ | 142,684   |  
|Tier 2 capital                                                   |  |   | 13,941    |  
|Total risk-based capital                                         |  |   | 156,811   |  
|Total risk-weighted assets                                       |  |   | 1,266,245 |  
|Average adjusted total assets                                    |  |   | 1,507,097 |  
|Capital ratios:                                                  |  |   |           |  
|Tier 1 risk-based capital ratio                                  |  |   | 11.27     | %
|Total risk-based capital ratio                                   |  |   | 12.38     | %
|Leverage ratio (Tier 1 capital to average adjusted total assets) |  |   | 9.47      | %
|Equity to assets ratio                                           |  |   | 8.98      | %
|Tangible equity to assets ratio                                  |  |   | 7.90      | %

Liquidity

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

The liquidity of the Parent Company also represents an important aspect of liquidity management. The Parent
Companys cash outflows consist of overhead associated with corporate expenses, executive management,



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

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

Off Balance Sheet Items

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

Contractual Obligations

There have been no material changes outside
the ordinary course of business to the contractual obligations disclosed in VFGs annual report on Form 10-K for the fiscal year ended December 31, 2005.

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

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

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

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



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VIRGINIA FINANCIAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

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

Access to Filings

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

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to the
quantitative and qualitative market risk disclosures in the Companys Form 10-K for the year ended December 31, 2005.

ITEM 4  CONTROLS AND PROCEDURES

We are required to include in our periodic reports information regarding our
controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.



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VIRGINIA FINANCIAL GROUP, INC.

PART I  FINANCIAL INFORMATION

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

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

Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of our assets
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our internal
control over financial reporting or control of assets during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or control of assets.

PART II - OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

There are no material legal
proceedings to which the Company or any of its subsidiaries, directors, or officers is a party or by which they, or any of them, are threatened. Any legal proceeding presently pending or threatened against Virginia Financial Group, Inc. and its
subsidiaries are either not material in respect to the amount in controversy or fully covered by insurance.



|ITEM 1a. | RISK FACTORS.
|-------- | -------------

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



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

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



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

None.



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

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

Not applicable.



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

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



|                 |  |                                                                                                                                                                                                       
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. 2    |  | Agreement and Plan of Reorganization incorporated by reference to Agreement and Plan of Reorganization filed as Exhibit A to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No.
333-69216).
|                 | 
|Exhibit No. 3.1  |  | Articles of Incorporation, incorporated by reference to Exhibit 3.1 to Form 8-K filed on January 30, 2002.                                                                                            
|                 | 
|Exhibit No. 3.2  |  | Bylaws, incorporated by reference to Exhibit 3.2 to Form 8-K filed on January 30, 2002.                                                                                                               
|                 | 
|Exhibit No. 4    |  | Stock Option Agreement is incorporated by reference to Exhibit B to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216).                                                         
|                 | 
|Exhibit No. 4.1  |  | Stock Incentive Plan is incorporated by reference to Form S-8 filed on February 26, 2002 (File No. 333-83410).                                                                                        
|                 | 
|Exhibit No. 10   |  | Employment contracts of certain officers incorporated by reference to Form 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.                                

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 9, 2006/s/ Jeffrey W. FarrarJeffrey W. Farrar, CPAExecutive Vice President and Chief Financial OfficerMay 9, 2006




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