##### Table of Contents

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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 June 30, 2004



OR



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



For the transition period from  to



Commission File Number 000-22283



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Virginia Financial Group, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 54-1829288                          
|(State or other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|102 South Main Street, Culpeper, Virginia                      |  | 22701                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(Registrants
telephone number, including area code) 540-829-1633



---



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



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



As of July 31, 2004, there
were 7,160,417 shares of common stock, $5.00 par value, issued and outstanding.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.



INDEX



|       |  |                                                                                       |  |         
|------ |  | ------------------------------------------------------------------------------------- |  | --------
|       |  |                                                                                       |  | Page No.
|       |  | PART I - FINANCIAL INFORMATION                                                        |  |         
|       |  |                                                                                      
|ITEM 1 |  | Consolidated Financial Statements:                                                    |  |         
|       |  |                                                                                      
|       |  | Consolidated Balance Sheets                                                           |  | 3       
|       |  |                                                                                      
|       |  | Consolidated Statements of Income                                                     |  | 4-5     
|       |  |                                                                                      
|       |  | Consolidated Statements of Changes in Stockholders Equity                            |  | 6       
|       |  |                                                                                      
|       |  | Consolidated Statements of Cash Flows                                                 |  | 7-8     
|       |  |                                                                                      
|       |  | Notes to Consolidated Financial Statements                                            |  | 9-15    
|       |  |                                                                                      
|ITEM 2 |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16-23   
|       |  |                                                                                      
|ITEM 3 |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 24      
|       |  |                                                                                      
|ITEM 4 |  | Controls and Procedures                                                               |  | 24      
|       |  |                                                                                      
|       |  | PART II - OTHER INFORMATION                                                           |  |         
|       |  |                                                                                      
|ITEM 1 |  | Legal Proceedings                                                                     |  | 24      
|       |  |                                                                                      
|ITEM 2 |  | Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities       |  | 24      
|       |  |                                                                                      
|ITEM 3 |  | Defaults Upon Senior Securities                                                       |  | 24      
|       |  |                                                                                      
|ITEM 4 |  | Submission of Matters to a Vote of Security Holders                                   |  | 24      
|       |  |                                                                                      
|ITEM 5 |  | Other Information                                                                     |  | 25      
|       |  |                                                                                      
|ITEM 6 |  | Exhibits and Reports on Form 8-K                                                      |  | 26      



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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)



|                                                                                                                                     |  |               |           |                   |   |          
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | ----------------- | - | ---------
|                                                                                                                                     |  | JUNE 30, 2004 |           | DECEMBER 31, 2003
|                                                                                                                                     |  | (unaudited)   |           |                  
|ASSETS                                                                                                                               |  |               |           |                   |   |          
|Cash and due from depository institutions                                                                                            |  | $             | 51,593    |                   | $ | 43,719   
|Federal funds sold                                                                                                                   |  |               | 413       |                   |   | 1,222    
|Interest-bearing deposits in banks                                                                                                   |  |               | 336       |                   |   | 237      
|Securities (market value: 2004, $300,307; 2003, $364,926)                                                                            |  |               | 299,846   |                   |   | 364,298  
|Loans held for sale                                                                                                                  |  |               | 8,249     |                   |   | 5,174    
|Loans receivable, net                                                                                                                |  |               | 984,636   |                   |   | 912,946  
|Bank premises and equipment, net                                                                                                     |  |               | 26,881    |                   |   | 27,311   
|Interest receivable                                                                                                                  |  |               | 5,782     |                   |   | 5,914    
|Other real estate owned                                                                                                              |  |               | 5         |                   |   | 454      
|Core deposit intangibles, net                                                                                                        |  |               | 5,900     |                   |   | 6,247    
|Goodwill                                                                                                                             |  |               | 14,033    |                   |   | 14,033   
|Other assets                                                                                                                         |  |               | 8,748     |                   |   | 5,656    
|                                                                                                                                     |  |               |           |                   |   |          
|Total Assets                                                                                                                         |  | $             | 1,406,422 |                   | $ | 1,387,211
|                                                                                                                                     |  |               |           |                   |   |          
|LIABILITIES                                                                                                                          |  |               |           |                   |   |          
|Deposits:                                                                                                                            |  |               |           |                   |   |          
|Noninterest-bearing demand deposits                                                                                                  |  | $             | 225,416   |                   | $ | 216,560  
|Interest-bearing deposits                                                                                                            |  |               | 993,499   |                   |   | 994,214  
|                                                                                                                                     |  |               |           |                   |   |          
|Total deposits                                                                                                                       |  |               | 1,218,915 |                   |   | 1,210,774
|                                                                                                                                     |  |              
|Federal funds purchased and securities sold under agreements to repurchase                                                           |  |               | 20,600    |                   |   | 33,155   
|Short-term borrowings                                                                                                                |  |               | 4,898     |                   |   | 6,526    
|Federal Home Loan Bank advances                                                                                                      |  |               | 14,100    |                   |   | 9,140    
|Trust preferred capital notes                                                                                                        |  |               | 20,000    |                   |   |         
|Interest payable                                                                                                                     |  |               | 2,114     |                   |   | 2,223    
|Other liabilities                                                                                                                    |  |               | 5,021     |                   |   | 5,563    
|Commitments and contingencies                                                                                                        |  |               |          |                   |   |         
|                                                                                                                                     |  |               |           |                   |   |          
|Total Liabilities                                                                                                                    |  |               | 1,285,648 |                   |   | 1,267,381
|                                                                                                                                     |  |               |           |                   |   |          
|STOCKHOLDERS EQUITY                                                                                                                 |  |               |           |                   |   |          
|Preferred stock, no par value; (Authorized 5,000,000 shares, no shares outstanding)                                                  |  |               |          |                   |   |         
|Common stock, par value $5.00 per share; (Authorized 25,000,000 shares; issued and outstanding 7,160,417 and 7,152,885
respectively) |  |               | 35,802    |                   |   | 35,764   
|Capital surplus                                                                                                                      |  |               | 7,742     |                   |   | 7,578    
|Retained earnings                                                                                                                    |  |               | 76,671    |                   |   | 72,255   
|Accumulated other comprehensive income, net                                                                                          |  |               | 559       |                   |   | 4,233    
|                                                                                                                                     |  |               |           |                   |   |          
|Total Stockholders Equity                                                                                                           |  |               | 120,774   |                   |   | 119,830  
|                                                                                                                                     |  |               |           |                   |   |          
|Total Liabilities and Stockholders Equity                                                                                           |  | $             | 1,406,422 |                   | $ | 1,387,211
|                                                                                                                                     |  |               |           |                   |   |          



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)



|                                                                                       |  |                             |        |             |   |       
|-------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ----------- | - | ------
|                                                                                       |  | THREE MONTHS ENDED JUNE 30,
|                                                                                       |  | 2004                        |        | 2003       
|                                                                                       |  | (unaudited)                 |        | (unaudited)
|Interest Income                                                                        |  |                             |        |             |   |       
|Interest and fees on loans                                                             |  | $                           | 14,239 |             | $ | 12,006
|Interest on deposits in other banks                                                    |  |                             | 1      |             |   |      
|Interest on investment securities:                                                     |  |                             |        |             |   |       
|Taxable                                                                                |  |                             | 92     |             |   | 114   
|Interest and dividends on securities available for sale:                               |  |                             |        |             |   |       
|Taxable                                                                                |  |                             | 2,125  |             |   | 1,970 
|Nontaxable                                                                             |  |                             | 714    |             |   | 940   
|Dividends                                                                              |  |                             | 77     |             |   | 108   
|Interest income on federal funds sold                                                  |  |                             | 7      |             |   | 65    
|                                                                                       |  |                             |        |             |   |       
|Total Interest Income                                                                  |  |                             | 17,255 |             |   | 15,203
|                                                                                       |  |                             |        |             |   |       
|Interest Expense                                                                       |  |                             |        |             |   |       
|Interest on deposits                                                                   |  |                             | 4,237  |             |   | 4,535 
|Interest on Federal Home Loan Bank advances                                            |  |                             | 183    |             |   | 178   
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                             | 35     |             |   | 49    
|Interest on other short-term borrowings                                                |  |                             | 44     |             |   | 2     
|Interest on trust preferred capital notes                                              |  |                             | 194    |             |   |      
|                                                                                       |  |                             |        |             |   |       
|Total Interest Expense                                                                 |  |                             | 4,693  |             |   | 4,764 
|                                                                                       |  |                             |        |             |   |       
|Net Interest Income                                                                    |  |                             | 12,562 |             |   | 10,439
|Less: Provision for loan losses                                                        |  |                             | 636    |             |   | 322   
|                                                                                       |  |                             |        |             |   |       
|Net Interest Income after Provision for Loan Losses                                    |  |                             | 11,926 |             |   | 10,117
|Noninterest Income                                                                     |  |                             |        |             |   |       
|Retail banking fees                                                                    |  |                             | 2,050  |             |   | 1,440 
|Fees from fiduciary activities                                                         |  |                             | 684    |             |   | 710   
|Mortgage banking fees                                                                  |  |                             | 836    |             |   | 1,259 
|Brokerage services                                                                     |  |                             | 147    |             |   | 115   
|Other operating income                                                                 |  |                             | 232    |             |   | 300   
|Gains on securities available for sale                                                 |  |                             |       |             |   | 46    
|                                                                                       |  |                             |        |             |   |       
|Total Noninterest Income                                                               |  |                             | 3,949  |             |   | 3,870 
|                                                                                       |  |                             |        |             |   |       
|Noninterest Expense                                                                    |  |                             |        |             |   |       
|Compensation and employee benefits                                                     |  |                             | 5,948  |             |   | 5,326 
|Net occupancy expense                                                                  |  |                             | 670    |             |   | 548   
|Supplies and equipment                                                                 |  |                             | 1,095  |             |   | 999   
|Amortization-intangible assets                                                         |  |                             | 174    |             |   | 40    
|Computer services                                                                      |  |                             | 442    |             |   | 291   
|Marketing                                                                              |  |                             | 149    |             |   | 209   
|Capital stock taxes                                                                    |  |                             | 141    |             |   | 195   
|Professional fees                                                                      |  |                             | 290    |             |   | 144   
|Other operating expenses                                                               |  |                             | 1,726  |             |   | 1,443 
|                                                                                       |  |                             |        |             |   |       
|Total Noninterest Expense                                                              |  |                             | 10,635 |             |   | 9,195 
|                                                                                       |  |                             |        |             |   |       
|Income Before Income Tax Expense                                                       |  |                             | 5,240  |             |   | 4,792 
|Income tax expense                                                                     |  |                             | 1,555  |             |   | 1,203 
|                                                                                       |  |                             |        |             |   |       
|Net Income                                                                             |  | $                           | 3,685  |             | $ | 3,589 
|                                                                                       |  |                             |        |             |   |       
|Earnings per Share, basic and diluted                                                  |  | $                           | .51    |             | $ | .50   
|                                                                                       |  |                             |        |             |   |       



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(000 OMITTED)



|                                                                                       |  |                           |        |             |   |       
|-------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ----------- | - | ------
|                                                                                       |  | SIX MONTHS ENDED JUNE 30,
|                                                                                       |  | 2004                      |        | 2003       
|                                                                                       |  | (unaudited)               |        | (unaudited)
|Interest Income                                                                        |  |                           |        |             |   |       
|Interest and fees on loans                                                             |  | $                         | 28,294 |             | $ | 24,214
|Interest on deposits in other banks                                                    |  |                           | 2      |             |   | 2     
|Interest on investment securities:                                                     |  |                           |        |             |   |       
|Taxable                                                                                |  |                           | 187    |             |   | 228   
|Interest and dividends on securities available for sale:                               |  |                           |        |             |   |       
|Taxable                                                                                |  |                           | 4,557  |             |   | 3,890 
|Nontaxable                                                                             |  |                           | 1,462  |             |   | 1,834 
|Dividends                                                                              |  |                           | 124    |             |   | 163   
|Interest income on federal funds sold                                                  |  |                           | 9      |             |   | 144   
|                                                                                       |  |                           |        |             |   |       
|Total Interest Income                                                                  |  |                           | 34,635 |             |   | 30,475
|                                                                                       |  |                           |        |             |   |       
|Interest Expense                                                                       |  |                           |        |             |   |       
|Interest on deposits                                                                   |  |                           | 8,771  |             |   | 9,285 
|Interest on Federal Home Loan Bank advances                                            |  |                           | 338    |             |   | 370   
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                           | 106    |             |   | 97    
|Interest on other short-term borrowings                                                |  |                           | 144    |             |   | 3     
|Interest on trust preferred capital notes                                              |  |                           | 222    |             |   |      
|                                                                                       |  |                           |        |             |   |       
|Total Interest Expense                                                                 |  |                           | 9,581  |             |   | 9,755 
|                                                                                       |  |                           |        |             |   |       
|Net Interest Income                                                                    |  |                           | 25,054 |             |   | 20,720
|Less: Provision for loan losses                                                        |  |                           | 1,317  |             |   | 645   
|                                                                                       |  |                           |        |             |   |       
|Net Interest Income after Provision for Loan Losses                                    |  |                           | 23,737 |             |   | 20,075
|Noninterest Income                                                                     |  |                           |        |             |   |       
|Retail banking fees                                                                    |  |                           | 3,599  |             |   | 2,688 
|Fees from fiduciary activities                                                         |  |                           | 1,460  |             |   | 1,489 
|Mortgage banking fees                                                                  |  |                           | 1,481  |             |   | 2,322 
|Brokerage services                                                                     |  |                           | 345    |             |   | 348   
|Other operating income                                                                 |  |                           | 521    |             |   | 612   
|Gains on securities available for sale                                                 |  |                           |       |             |   | 70    
|                                                                                       |  |                           |        |             |   |       
|Total Noninterest Income                                                               |  |                           | 7,406  |             |   | 7,529 
|                                                                                       |  |                           |        |             |   |       
|Noninterest Expense                                                                    |  |                           |        |             |   |       
|Compensation and employee benefits                                                     |  |                           | 11,808 |             |   | 10,584
|Net occupancy expense                                                                  |  |                           | 1,376  |             |   | 1,118 
|Supplies and equipment                                                                 |  |                           | 2,139  |             |   | 1,947 
|Amortization-intangible assets                                                         |  |                           | 347    |             |   | 79    
|Computer services                                                                      |  |                           | 741    |             |   | 632   
|Marketing                                                                              |  |                           | 302    |             |   | 310   
|Capital stock taxes                                                                    |  |                           | 310    |             |   | 385   
|Professional fees                                                                      |  |                           | 491    |             |   | 356   
|Other operating expenses                                                               |  |                           | 3,556  |             |   | 2,934 
|                                                                                       |  |                           |        |             |   |       
|Total Noninterest Expense                                                              |  |                           | 21,070 |             |   | 18,345
|                                                                                       |  |                           |        |             |   |       
|Income Before Income Tax Expense                                                       |  |                           | 10,073 |             |   | 9,259 
|Income tax expense                                                                     |  |                           | 2,933  |             |   | 2,376 
|                                                                                       |  |                           |        |             |   |       
|Net Income                                                                             |  | $                         | 7,140  |             | $ | 6,883 
|                                                                                       |  |                           |        |             |   |       
|Earnings per Share, basic                                                              |  | $                         | 1.00   |             | $ | .96   
|                                                                                       |  |                           |        |             |   |       
|Earnings per Share, diluted                                                            |  | $                         | .99    |             | $ | .96   
|                                                                                       |  |                           |        |             |   |       



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(000 OMITTED)

(unaudited)



|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ----------- | ------ | - | -------------- | - | ----- | ----------------------------------- |  | - | ---------------- | - |  | ------------------- | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|                                                                                           |  | CommonStock |        |   | CapitalSurplus |   |       | AccumulatedOtherComprehensiveIncome |  |   | RetainedEarnings |   |  | ComprehensiveIncome |        |   | Total |  
|Balance, January 1, 2003                                                                   |  | $           | 35,884 |   |                | $ | 8,143 |                                     |  | $ | 6,210            |   |  | $                   | 64,134 |   |       |   |        |   |  | $ | 114,371 |  
|Net income                                                                                 |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     | 6,883  |   |       |   | 6,883  |   |  |   | 6,883   |  
|Other Comprehensive Income, net of tax:                                                    |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Unrealized gain on securities available for sale during the period, net of tax of $964     |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       |   | 1,792  |   |  |   |        |  
|Add: reclassification adjustment, net of tax of $25                                        |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       |   | (45    | ) |  |   |        |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Other comprehensive income                                                                 |  |             |       |   |                |   |      |                                     |  |   | 1,747            |   |  |                     |       |   |       |   | 1,747  |   |  |   | 1,747   |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Comprehensive income                                                                       |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       | $ | 8,630  |   |  |   |        |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Cash dividends ($.37 per share)                                                            |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     | (2,652 | ) |       |   |        |   |  |   | (2,652  | )
|Stock options exercised                                                                    |  |             | 7      |   |                |   | 14    |                                     |  |   |                 |   |  |                     |       |   |       |   |        |   |  |   | 21      |  
|Repurchase of common stock                                                                 |  |             | (143   | ) |                |   | (675  | )                                   |  |   |                 |   |  |                     |       |   |       |   |        |   |  |   | (818    | )
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Balance, June 30, 2003                                                                     |  | $           | 35,748 |   |                | $ | 7,482 |                                     |  | $ | 7,957            |   |  | $                   | 68,365 |   |       |   |        |   |  | $ | 119,552 |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Balance, January 1, 2004                                                                   |  | $           | 35,764 |   |                | $ | 7,578 |                                     |  | $ | 4,233            |   |  | $                   | 72,255 |   |       |   |        |   |  | $ | 119,830 |  
|Net income                                                                                 |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     | 7,140  |   |       |   | 7,140  |   |  |   | 7,140   |  
|Other Comprehensive Income, net of tax:                                                    |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Unrealized losses on securities available for sale during the period, net of tax of $1,978 |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       |   | (3,674 | ) |  |   |         |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Other comprehensive income (loss)                                                          |  |             |       |   |                |   |      |                                     |  |   | (3,674           | ) |  |                     |       |   |       |   | (3,674 | ) |  |   | (3,674  | )
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Comprehensive income                                                                       |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     |       |   |       | $ | 3,466  |   |  |   |        |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Cash dividends ($.38 per share)                                                            |  |             |       |   |                |   |      |                                     |  |   |                 |   |  |                     | (2,724 | ) |       |   |        |   |  |   | (2,724  | )
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Restricted stock awards                                                                    |  |             | 24     |   |                |   | 139   |                                     |  |   |                 |   |  |                     |       |   |       |   |        |   |  |   | 163     |  
|Stock option exercise                                                                      |  |             | 14     |   |                |   | 25    |                                     |  |   |                 |   |  |                     |       |   |       |   |        |   |  |   | 39      |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  
|Balance, June 30, 2004                                                                     |  | $           | 35,802 |   |                | $ | 7,742 |                                     |  | $ | 559              |   |  | $                   | 76,671 |   |       |   |        |   |  | $ | 120,774 |  
|                                                                                           |  |             |        |   |                |   |       |                                     |  |   |                  |   |  |                     |        |   |       |   |        |   |  |   |         |  



See accompanying notes to consolidated
financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)



|                                                                                  |  |                           |         |   |             |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ----------- | - | -------- | -
|                                                                                  |  | SIX MONTHS ENDED JUNE 30, |        
|                                                                                  |  | 2004                      |         |   | 2003        |  
|                                                                                  |  | (unaudited)               |         |   | (unaudited) |  
|OPERATING ACTIVITIES                                                              |  |                           |         |   |             |   |          |  
|Net income                                                                        |  | $                         | 7,140   |   |             | $ | 6,883    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |             |   |          |  
|Provision for loan losses                                                         |  |                           | 1,317   |   |             |   | 645      |  
|Deferred tax benefit                                                              |  |                           | (386    | ) |             |   | (253     | )
|Depreciation and amortization                                                     |  |                           | 1,871   |   |             |   | 1,499    |  
|Pension expense                                                                   |  |                           | (110    | ) |             |   | 174      |  
|(Gain) on sale of securities available for sale                                   |  |                           |        |   |             |   | (70      | )
|(Gain) on sale of fixed assets                                                    |  |                           | (4      | ) |             |   | (3       | )
|Amortization of premiums and discounts on securities                              |  |                           | 419     |   |             |   | 299      |  
|Fees on mortgage loans sold                                                       |  |                           | (1,481  | ) |             |   | (2,322   | )
|Proceeds from sale of mortgage loans                                              |  |                           | 89,536  |   |             |   | 132,496  |  
|Origination of loans for sale                                                     |  |                           | (91,130 | ) |             |   | (122,653 | )
|Changes in assets and liabilities:                                                |  |                           |         |   |             |   |          |  
|Decrease in interest receivable                                                   |  |                           | 132     |   |             |   | 208      |  
|(Increase) in other assets                                                        |  |                           | (141    | ) |             |   | (101     | )
|(Decrease) in interest payable                                                    |  |                           | (108    | ) |             |   | (145     | )
|(Decrease) in other liabilities                                                   |  |                           | (701    | ) |             |   | (675     | )
|                                                                                  |  |                           |         |   |             |   |          |  
|Net cash provided by operating activities                                         |  |                           | 6,354   |   |             |   | 15,982   |  
|                                                                                  |  |                           |         |   |             |   |          |  
|INVESTING ACTIVITIES                                                              |  |                           |         |   |             |   |          |  
|Proceeds from sale of securities available for sale                               |  |                           | 23      |   |             |   | 34,749   |  
|Proceeds from maturities and principal payments of securities available for sale  |  |                           | 72,995  |   |             |   | 120,465  |  
|Purchase of securities available for sale                                         |  |                           | (14,637 | ) |             |   | (179,961 | )
|Purchase of premises and equipment                                                |  |                           | (1,132  | ) |             |   | (1,859   | )
|Proceeds from sale of premises and equipment                                      |  |                           | 41      |   |             |   | 33       |  
|Additions to other real estate                                                    |  |                           |        |   |             |   | (157     | )
|Proceeds from sale of other real estate                                           |  |                           | 131     |   |             |   |         |  
|Increase in cash surrender value of life insurance                                |  |                           |        |   |             |   | (103     | )
|Net increase in loans                                                             |  |                           | (73,006 | ) |             |   | (33,465  | )
|                                                                                  |  |                           |         |   |             |   |          |  
|Net cash used in investing activities                                             |  |                           | (15,585 | ) |             |   | (60,298  | )
|                                                                                  |  |                           |         |   |             |   |          |  



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED)



|                                                          |  |                           |         |   |             |   |         |  
|--------------------------------------------------------- |  | ------------------------- | ------- | - | ----------- | - | ------- | -
|                                                          |  | SIX MONTHS ENDED JUNE 30, |        
|                                                          |  | 2004                      |         |   | 2003        |  
|                                                          |  | (unaudited)               |         |   | (unaudited) |  
|FINANCING ACTIVITIES                                      |  |                           |         |   |             |   |         |  
|Net increase in demand, money market and savings deposits |  |                           | 3,975   |   |             |   | 26,618  |  
|Net increase in time deposits                             |  |                           | 4,165   |   |             |   | 1,993   |  
|Proceeds (repayment) of Federal Home Loan Bank advances   |  |                           | 4,960   |   |             |   | (3,040  | )
|Net increase in repurchase agreements                     |  |                           | 2,445   |   |             |   | 1,365   |  
|Net (decrease) in federal funds purchased                 |  |                           | (15,000 | ) |             |   |        |  
|Net (decrease) in short-term borrowings                   |  |                           | (1,628  | ) |             |   | (957    | )
|Issuance of trust preferred capital notes                 |  |                           | 20,000  |   |             |   |        |  
|Repurchase of common stock                                |  |                           |        |   |             |   | (818    | )
|Proceeds from exercise of stock options                   |  |                           | 39      |   |             |   | 21      |  
|Common stock issued                                       |  |                           | 163     |   |             |   |        |  
|Cash dividends paid on common stock                       |  |                           | (2,724  | ) |             |   | (2,652  | )
|                                                          |  |                           |         |   |             |   |         |  
|Net cash provided by financing activities                 |  |                           | 16,395  |   |             |   | 22,530  |  
|                                                          |  |                           |         |   |             |   |         |  
|Increase (decrease) in cash and cash equivalents          |  |                           | 7,164   |   |             |   | (21,786 | )
|                                                          |  |                          
|CASH AND CASH EQUIVALENTS                                 |  |                           |         |   |             |   |         |  
|Beginning of the period                                   |  |                           | 45,178  |   |             |   | 71,547  |  
|                                                          |  |                           |         |   |             |   |         |  
|End of the period                                         |  | $                         | 52,342  |   |             | $ | 49,761  |  
|                                                          |  |                           |         |   |             |   |         |  
|Supplemental Schedule of Noncash Investing Activities     |  |                           |         |   |             |   |         |  
|Unrealized gain (losses) on securities available for sale |  | $                         | (5,652  | ) |             | $ | 2,688   |  
|                                                          |  |                           |         |   |             |   |         |  
|Other real estate acquired in settlement of loans         |  | $                         |        |   |             | $ | 157     |  
|                                                          |  |                           |         |   |             |   |         |  
|Restricted common stock issued                            |  | $                         | 163     |   |             | $ |        |  
|                                                          |  |                           |         |   |             |   |         |  



See accompanying notes to consolidated
financial statements.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND DECEMBER 31, 2003



|1. | Virginia Financial Group, Inc. (the Company) is a Virginia multi-bank holding company headquartered in Culpeper, Virginia. The Company owns Second Bank & Trust and
its subsidiary, Second Service Company; Virginia Heartland Bank and its subsidiary, Virginia Heartland Service Corporation; Planters Bank & Trust Company of Virginia and its subsidiary, Planters Insurance Agency, Inc.; Virginia Commonwealth
Trust Company, and VFG Limited Liability Trust. The consolidated statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated. In the opinion of management, the
accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2004 and December 31, 2003, the results of operations for the
three months and six months ended June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and 2003. The statements should be read in conjunction with the Notes to Financial Statements included in the Companys Annual
Report for the year ended December 31, 2003.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | The results of operations for the three month and six month periods ended June 30, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to prior period balances to conform to the current presentation.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                                 |  |                   |         |            |   |        
|------------------------------------------------ |  | ----------------- | ------- | ---------- | - | -------
|Securities Held to Maturity:                     |  |                   |         |            |   |        
|                                                 |  |                  
|                                                 |  | Amortized Cost    |         | Fair Value
|                                                 |  | June 30, 2004    
|                                                 |  | (unaudited)      
|Obligations of States and Political Subdivisions |  | $                 | 5,843   |            | $ | 6,304  
|                                                 |  |                   |         |            |   |        
|                                                 | 
|                                                 |  | December 31, 2003
|Obligations of States and Political Subdivisions |  | $                 | 5,837   |            | $ | 6,465  
|                                                 |  |                   |         |            |   |        
|                                                 |  |                  
|Securities Available for Sale:                   |  |                   |         |            |   |        
|                                                 |  | June 30, 2004    
|                                                 |  | (unaudited)      
|U.S. Treasury securities                         |  | $                 | 7,031   |            | $ | 7,336  
|U.S. Government securities                       |  |                   | 110,910 |            |   | 110,312
|State and municipals                             |  |                   | 71,899  |            |   | 73,743 
|Corporate bonds                                  |  |                   | 9,484   |            |   | 9,838  
|Collateralized mortgage obligations              |  |                   | 4,973   |            |   | 5,046  
|Mortgage-backed securities                       |  |                   | 77,924  |            |   | 76,642 
|Equity securities                                |  |                   | 1,575   |            |   | 1,738  
|Restricted stock                                 |  |                   | 6,500   |            |   | 6,500  
|Other securities                                 |  |                   | 2,848   |            |   | 2,848  
|                                                 |  |                   |         |            |   |        
|                                                 |  | $                 | 293,144 |            | $ | 294,003
|                                                 |  |                   |         |            |   |        



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND DECEMBER 31, 2003



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



The following table is a presentation
of the aggregate amount of unrealized loss in investment securities at June 30, 2004. The aggregate is determined by summation of all the related securities that have a continuous loss at June 30, and the length of time that the loss has been
unrealized is shown by terms of less than 12 months and 12 months or more. The fair value shown is the estimated market value at June 30, 2004 (000 omitted):



|                                                        |  |                     |         |                   |   |           |  |                 |     |            |   |                |  |   |         |  |   |      
|------------------------------------------------------- |  | ------------------- | ------- | ----------------- | - | --------- |  | --------------- | --- | ---------- | - | -------------- |  | - | ------- |  | - | -----
|                                                        |  | Less than 12 months |         | 12 months or more |   | Total    
|Description of Securities                               |  | Fair Value          |         | UnrealizedLoss    |   | FairValue |  | Unrealized Loss |     | Fair Value |   | UnrealizedLoss
|U.S. Treasury securities and U.S. Government securities |  | $                   | 54,250  |                   | $ | 1,376     |  | $               |    |            | $ |               |  | $ | 54,250  |  | $ | 1,376
|Mortgage backed securities                              |  |                     | 67,087  |                   |   | 1,559     |  |                 |    |            |   |               |  |   | 67,087  |  |   | 1,559
|State and municipals                                    |  |                     | 12,304  |                   |   | 300       |  |                 |    |            |   |               |  |   | 12,304  |  |   | 300  
|Collateralized mortgage obligations                     |  |                     | 1,873   |                   |   | 16        |  |                 |    |            |   |               |  |   | 1,873   |  |   | 16   
|                                                        |  |                     |         |                   |   |           |  |                 |     |            |   |                |  |   |         |  |   |      
|Subtotal debt securities                                |  |                     | 135,514 |                   |   | 3,251     |  |                 |    |            |   |               |  |   | 135,514 |  |   | 3,251
|                                                        |  |                     |         |                   |   |           |  |                 |     |            |   |                |  |   |         |  |   |      
|Common stock                                            |  |                     |        |                   |   |          |  |                 | 77  |            |   | 227            |  |   | 77      |  |   | 227  
|Preferred stock                                         |  |                     |        |                   |   |          |  |                 | 515 |            |   | 76             |  |   | 515     |  |   | 76   
|                                                        |  |                     |         |                   |   |           |  |                 |     |            |   |                |  |   |         |  |   |      
|Total temporarily impaired securities                   |  | $                   | 135,514 |                   | $ | 3,251     |  | $               | 592 |            | $ | 303            |  | $ | 136,106 |  | $ | 3,554
|                                                        |  |                     |         |                   |   |           |  |                 |     |            |   |                |  |   |         |  |   |      



There are a total of eighty-nine
securities that have unrealized losses as of June 30, 2004, twenty-two U.S. Treasuries or agency securities, thirty U.S. Agency MBS securities, one CMO security, thirty-one municipal securities, four common stock securities, and one preferred stock
security.



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND DECEMBER 31, 2003



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



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



The preferred stock category has one issue that is
showing a loss of more than 12 months. The issuer is the Federal Home Loan Mortgage Corporation (Freddie Mac). The impairment is the result of interest rate market conditions. The fixed income nature of this investment causes significant movement in
value in relation to the fixed income market. However, there is no change in the dividend stream as a result.



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



|                                             |  |              |         |   |                  |   |         |  
|-------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                             |  | June 30,2004 |         |   | December 31,2003 |  
|                                             |  | (unaudited)  |         |   |                  |  
|Real estate loans:                           |  |              |         |   |                  |   |         |  
|Construction                                 |  | $            | 102,907 |   |                  | $ | 94,372  |  
|Secured by 1  4 family residential          |  |              | 311,626 |   |                  |   | 283,631 |  
|Commercial and multifamily                   |  |              | 451,480 |   |                  |   | 414,476 |  
|Commercial, financial and agricultural loans |  |              | 78,278  |   |                  |   | 73,852  |  
|Consumer loans                               |  |              | 46,459  |   |                  |   | 48,154  |  
|All other loans                              |  |              | 4,500   |   |                  |   | 8,585   |  
|                                             |  |              |         |   |                  |   |         |  
|                                             |  |              | 995,250 |   |                  |   | 923,070 |  
|                                             |  |             
|Deferred loan costs (fees)                   |  |              | 185     |   |                  |   | (381    | )
|Allowance for loan losses                    |  |              | (10,799 | ) |                  |   | (9,743  | )
|                                             |  |              |         |   |                  |   |         |  
|                                             |  | $            | 984,636 |   |                  | $ | 912,946 |  
|                                             |  |              |         |   |                  |   |         |  



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



|                                     |  |               |        |   |                   |   |       |               |  |   |       |  
|------------------------------------ |  | ------------- | ------ | - | ----------------- | - | ----- | ------------- |  | - | ----- | -
|                                     |  | June 30, 2004 |        |   | December 31, 2003 |   |       | June 30, 2003 | 
|                                     |  | (unaudited)   |        |   |                   |   |       | (unaudited)   | 
|Balance at January 1                 |  | $             | 9,743  |   |                   | $ | 9,180 |               |  | $ | 9,180 |  
|                                     |  |               |       
|Recoveries added to the allowance    |  |               | 93     |   |                   |   | 229   |               |  |   | 110   |  
|Loan losses charged to the allowance |  |               | (354   | ) |                   |   | (956  | )             |  |   | (591  | )
|Provision recorded to expense        |  |               | 1,317  |   |                   |   | 1,290 |               |  |   | 645   |  
|                                     |  |               |        |   |                   |   |       |               |  |   |       |  
|Balance at end of period             |  | $             | 10,799 |   |                   | $ | 9,743 |               |  | $ | 9,344 |  
|                                     |  |               |        |   |                   |   |       |               |  |   |       |  



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND DECEMBER 31, 2003



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



|                                                                                 |  |               |       |                   |   |      
|-------------------------------------------------------------------------------- |  | ------------- | ----- | ----------------- | - | -----
|                                                                                 |  | June 30, 2004 |       | December 31, 2003
|                                                                                 |  | (unaudited)   |       |                  
|Impaired loans for which an allowance has been provided                          |  | $             | 6,489 |                   | $ | 3,128
|Impaired loans for which an allowance has not been provided                      |  |               | 2,614 |                   |   | 3,474
|                                                                                 |  |               |       |                   |   |      
|Total impaired loans                                                             |  |               | 9,103 |                   |   | 6,602
|                                                                                 |  |               |       |                   |   |      
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $             | 1,572 |                   | $ | 1,281
|                                                                                 |  |               |       |                   |   |      



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



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



|                                    |  |               |       |                   |   |      
|----------------------------------- |  | ------------- | ----- | ----------------- | - | -----
|                                    |  | June 30, 2004 |       | December 31, 2003
|                                    |  | (unaudited)   |       |                  
|Federal Home Loan Bank Advances     |  | $             | 4,000 |                   | $ |     
|Line of credit  Correspondent bank |  |               |      |                   |   | 6,500
|Federal Reserve borrowings          |  |               | 898   |                   |   | 26   
|                                    |  |               |       |                   |   |      
|                                    |  | $             | 4,898 |                   | $ | 6,526
|                                    |  |               |       |                   |   |      



The Company utilizes
overnight advances from the Federal Home Loan Bank of Atlanta for short term funding needs. The banking subsidiaries have available a combined $187.9 million line of credit with the Federal Home Loan Bank of Atlanta. Advances on the line are secured
by a blanket lien on the 1 to 4 family dwelling loan portfolios of the affiliate banks, which totaled $311.6 million at June 30, 2004.



The Company has a line of credit agreement with a correspondent bank for general working capital needs. The $15 million line is unsecured, calls for
variable interest payments and is payable on demand.



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



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



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



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



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



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND DECEMBER 31, 2003



long-term
advances ranged from 1.96% to 7.07%. One advance totaling $100 thousand at June 30, 2004 requires quarterly principal payments totaling $20 thousand plus interest. The remainder of the advances requires quarterly interest payments with principal due
upon maturity. The average interest rate was 5.12% at June 30, 2004 with an average balance outstanding of $9.6 million.



The Company also has outstanding $20 million of floating rate trust preferred securities. Under the terms of the Trust Preferred transaction, the
securities will mature in 30 years and are redeemable, in whole or in part, without penalty, at the option of the Company after five years. The securities have a floating rate, which will be reset quarterly, with a current rate of 4.32%.



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



|     |  |   |       
|---- |  | - | ------
|2004 |  | $ | 40    
|2005 |  |   | 4,060 
|2006 |  |   | 5,000 
|2010 |  |   | 5,000 
|2034 |  |   | 20,000
|     |  |   |       
|     |  | $ | 34,100
|     |  |   |       



|8. | Earnings Per Share:
|-- | -------------------



The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of
diluted potential common stock for the three month periods ended June 30, 2004 and 2003.



|                               |  |           |  |                  |     |        |           |                  |   |    
|------------------------------ |  | --------- |  | ---------------- | --- | ------ | --------- | ---------------- | - | ---
|                               |  | 2004      |  | 2003            
|                               |  | Shares    |  | Per Share Amount |     | Shares |           | Per Share Amount
|Basic earnings per share       |  | 7,155,206 |  | $                | .51 |        | 7,154,237 |                  | $ | .50
|                               |  |           |  |                  |     |        |           |                  |   |    
|Effect of dilutive securities: |  |           |  |                  |     |        |           |                  |   |    
|Stock options                  |  | 41,143    |  |                  |     |        | 35,597    |                  |   |    
|                               |  |           |  |                  |     |        |           |                  |   |    
|Diluted earnings per share     |  | 7,196,349 |  | $                | .51 |        | 7,189,834 |                  | $ | .50
|                               |  |           |  |                  |     |        |           |                  |   |    



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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND DECEMBER 31, 2003



The
following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock for the six month periods ended June 30, 2004 and 2003.



|                               |  |           |  |                 |      |        |           |                  |   |    
|------------------------------ |  | --------- |  | --------------- | ---- | ------ | --------- | ---------------- | - | ---
|                               |  | 2004      |  | 2003           
|                               |  | Shares    |  | PerShare Amount |      | Shares |           | Per Share Amount
|Basic earnings per share       |  | 7,154,585 |  | $               | 1.00 |        | 7,161,280 |                  | $ | .96
|                               |  |           |  |                 |      |        |           |                  |   |    
|Effect of dilutive securities: |  |           |  |                 |      |        |           |                  |   |    
|Stock options                  |  | 45,061    |  |                 |      |        | 34,497    |                  |   |    
|                               |  |           |  |                 |      |        |           |                  |   |    
|Diluted earnings per share     |  | 7,199,646 |  | $               | .99  |        | 7,195,777 |                  | $ | .96
|                               |  |           |  |                 |      |        |           |                  |   |    



In 2004 and 2003,
stock options representing 17,383 and 9,600 shares, respectively, were not included in the calculation of earnings per share as their effect would have been anti-dilutive.



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



At June 30, 2004, the Company has a stock-based employee compensation plan which is accounted for under the recognition and measurement principles of APB
Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the
underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share for the six months ended June, 2004 and 2003 if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (000s omitted).



|                                                                                                             |  |      |       |   |      |   |       |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                                                             |  | 2004 |       |   | 2003 |  
|Net income, as reported                                                                                      |  | $    | 7,140 |   |      | $ | 6,883 |  
|Deduct: total stock-based employee compensation expense determined based on fair value method for all awards |  |      | (36   | ) |      |   | (21   | )
|                                                                                                             |  |      |       |   |      |   |       |  
|Pro forma net income                                                                                         |  | $    | 7,104 |   |      | $ | 6,862 |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Earnings per share:                                                                                          |  |      |       |   |      |   |       |  
|Basic  as reported                                                                                          |  | $    | 1.00  |   |      | $ | .96   |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Basic  pro forma                                                                                            |  | $    | .99   |   |      | $ | .96   |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Diluted  as reported                                                                                        |  | $    | .99   |   |      | $ | .96   |  
|                                                                                                             |  |      |       |   |      |   |       |  
|Diluted  pro forma                                                                                          |  | $    | .99   |   |      | $ | .95   |  
|                                                                                                             |  |      |       |   |      |   |       |  



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND DECEMBER 31, 2003



|10. | Employee Benefit Plan
|--- | ---------------------



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



The components of net periodic benefit cost are as
follows:



|                                   |  |                          |      |   |      |   |      |  
|---------------------------------- |  | ------------------------ | ---- | - | ---- | - | ---- | -
|                                   |  | Six Months EndedJune 30, |     
|                                   |  | 2004                     |      |   | 2003 |  
|Service cost                       |  | $                        | 98   |   |      | $ | 114  |  
|Interest cost                      |  |                          | 135  |   |      |   | 134  |  
|Expected return on plan assets     |  |                          | (152 | ) |      |   | (126 | )
|Amortization of prior service cost |  |                          | 16   |   |      |   | 16   |  
|Amortization of net (gain) loss    |  |                          | 9    |   |      |   | (2   | )
|                                   |  |                          |      |   |      |   |      |  
|Net periodic benefit cost          |  | $                        | 106  |   |      | $ | 136  |  
|                                   |  |                          |      |   |      |   |      |  



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



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##### Table of Contents

VIRGINIA FINANCIAL GROUP, INC.

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



The following discussion provides information
about the major components of the results of operations, financial condition, liquidity and capital resources of Virginia Financial Group, Inc. (the Company). This discussion and analysis should be read in conjunction with the Consolidated Financial
Statements and supplemental financial data.



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



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, then a specific reserve may be established based on the Banks calculation of the loss
embedded in the individual loan. In addition to impairment testing, the Banks have a seven point grading system for each non-homogeneous loan in the portfolio. Loans meeting the criteria for impairment are segregated from performing loans within the
portfolio. Loans are then grouped by loan type and, in the case of commercial loans, by risk rating. Each loan type is assigned an allowance factor based on historical loss experience, economic conditions, and overall portfolio quality including
delinquency rates. The total of specific reserves required for impaired classified loans



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VIRGINIA FINANCIAL GROUP, INC.

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



and the calculated reserves by loan category are then compared to the recorded allowance for loan losses. This is the methodology used to determine the sufficiency of the
allowance for loan losses and the amount of the provision for loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.



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



Goodwill



The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS 142), effective January 1, 2002. Accordingly, goodwill is no longer subject to
amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are
separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets
related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed
fifteen years. Amortization expense charged to operations was $174 thousand and $40 thousand for the three months ended June 30, 2004 and 2003, and $347 thousand and $79 thousand for the six months ended June 30, 2004 and 2003, respectively.



Results of Operations



Virginia Financial Group, Inc.s consolidated net income for the quarter ended June 30,
2004 amounted to $3.7 million or $.51 per diluted share, compared to earnings of $3.6 million or $.50 per diluted share for the quarter ended June 30, 2003. Net income increased 2.7% and diluted earnings per share increased 2.0% compared to second
quarter 2003 results. The Companys earnings for the second quarter produced an annualized return on average assets (ROA) of 1.05% and return on average equity (ROE) of 12.20%, compared to prior year ratios of 1.28% and 12.41%, respectively.



For the first six months of 2004, net income was $7.1 million, up 3.7% from
$6.9 million for the same period in 2003. Net income per diluted share was $.99, up 3.1% from $.96 for the first six months of 2003. ROA and ROE for the six month period were 1.02% and 11.86%, compared to 1.24% and 11.97% for the same period in
2003, respectively.



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VIRGINIA FINANCIAL GROUP, INC.

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



Net Interest Income



Net interest income increased $2.2 million or 20.3% to $12.6 million for the three months ended June 30, 2004. This improvement can be attributed to continuing growth in average earning assets from loan production
offices and contributions from eight new branches purchased in the third quarter of 2003. The net interest margin for the three months ended June 30, 2004 was 4.05%, compared to 4.09% for the quarter ended March 31, 2004 and 4.21% for the quarter
ended June 30, 2003. The decline is largely due to lower yields associated with significant loan growth and the lower interest rate environment over the past twelve month period. The net interest margin for the six month period ended June 30, 2004
was 4.07%, compared to 4.24% for the same period in 2003.



The following table
provides information on average earning assets and interest-bearing liabilities for the three months and six months ended June 30, 2004 and 2003 as well as amounts and rates of tax equivalent interest earned and interest paid. The tax equivalent
adjustment, utilizing a federal statutory rate of 35%, amounted to $448 thousand and $586 thousand for the three months ended June 30, and $910 thousand and $1.2 million for the six months ended June 30, 2004 and 2003, respectively.



|                                                        |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|------------------------------------------------------- |  | ---------------------- | --------- | -------------- | ---- | ---------------- | -------------- | ---- | -------------- |  | -------------- | --------- | ---------------- | - | ------ |  | ---- | -
|                                                        |  | Quarter Ended June 30, |          
|                                                        |  | 2004                   |           |                | 2003 |                 
|                                                        |  | AverageBalance         |           | Income/Expense |      | AnnualYield/Rate |                |      | AverageBalance |  | Income/Expense |           | AnnualYield/Rate |  
|                                                        |  | (in thousands)         |           |                |      |                  | (in thousands) |      |                | 
|Securities                                              |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Taxable                                                 |  | $                      | 244,109   |                | $    | 2,300            |                | 3.79 | %              |  | $              | 222,572   |                  | $ | 2,188  |  | 3.93 | %
|Tax-exempt                                              |  |                        | 66,608    |                |      | 1,097            |                | 6.62 | %              |  |                | 78,652    |                  |   | 1,458  |  | 7.42 | %
|                                                        |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total securities                                        |  |                        | 310,717   |                |      | 3,397            |                | 4.40 | %              |  |                | 301,224   |                  |   | 3,646  |  | 4.84 | %
|Loans, net                                              |  |                        | 976,563   |                |      | 14,297           |                | 5.89 | %              |  |                | 724,539   |                  |   | 12,078 |  | 6.69 | %
|Interest earning bank deposits                          |  |                        | 504       |                |      | 1                |                | 1.03 | %              |  |                | 511       |                  |   | 1      |  | 0.55 | %
|Federal funds sold                                      |  |                        | 3,221     |                |      | 8                |                | 0.92 | %              |  |                | 22,538    |                  |   | 64     |  | 1.14 | %
|                                                        |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total earning assets                                    |  | $                      | 1,291,005 |                | $    | 17,703           |                | 5.51 | %              |  | $              | 1,048,812 |                  | $ | 15,789 |  | 6.03 | %
|                                                        |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Interest-bearing deposits:                              |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Checking                                                |  | $                      | 189,402   |                | $    | 185              |                | 0.39 | %              |  | $              | 127,182   |                  | $ | 237    |  | 0.75 | %
|Money market                                            |  |                        | 170,698   |                |      | 375              |                | 0.88 | %              |  |                | 159,828   |                  |   | 465    |  | 1.17 | %
|Savings                                                 |  |                        | 141,020   |                |      | 235              |                | 0.67 | %              |  |                | 111,359   |                  |   | 275    |  | 0.99 | %
|Certificates of deposit:                                |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Less than $100,000                                      |  |                        | 370,677   |                |      | 2,449            |                | 2.66 | %              |  |                | 311,831   |                  |   | 2,683  |  | 3.45 | %
|$100,000 and more                                       |  |                        | 119,939   |                |      | 993              |                | 3.33 | %              |  |                | 90,714    |                  |   | 875    |  | 3.87 | %
|                                                        |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total interest-bearing deposits                         |  |                        | 991,736   |                |      | 4,237            |                | 1.72 | %              |  |                | 800,914   |                  |   | 4,535  |  | 2.27 | %
|                                                        |  |                        |           |                |      |                 
|Federal funds and repurchase agreements                 |  |                        | 21,633    |                |      | 34               |                | 0.64 | %              |  |                | 20,940    |                  |   | 49     |  | 0.93 | %
|Other short term borrowings                             |  |                        | 10,813    |                |      | 46               |                | 1.71 | %              |  |                | 600       |                  |   | 2      |  | 0.87 | %
|Trust preferred capital notes                           |  |                        | 20,000    |                |      | 194              |                | 3.90 | %              |  |                |          |                  |   |       |  |      |  
|FHLB of Atlanta borrowings                              |  |                        | 14,118    |                |      | 182              |                | 5.20 | %              |  |                | 10,912    |                  |   | 178    |  | 6.57 | %
|                                                        |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total interest-bearing liabilities                      |  | $                      | 1,058,300 |                | $    | 4,693            |                | 1.78 | %              |  | $              | 833,366   |                  | $ | 4,764  |  | 2.29 | %
|                                                        |  |                        |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Net interest income                                     |  |                        |           |                | $    | 13,010           |                |      |                |  |                |           |                  | $ | 11,025 |  |      |  
|Interest rate spread                                    |  |                        |           |                |      |                  |                | 3.73 | %              |  |                |           |                  |   |        |  | 3.74 | %
|Interest expense as a percent of average earning assets |  |                        |           |                |      |                  |                | 1.46 | %              |  |                |           |                  |   |        |  | 1.82 | %
|Net interest margin                                     |  |                        |           |                |      |                  |                | 4.05 | %              |  |                |           |                  |   |        |  | 4.21 | %



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VIRGINIA FINANCIAL GROUP, INC.

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



|                                                        |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|------------------------------------------------------- |  | ------------------------- | --------- | -------------- | ---- | ---------------- | -------------- | ---- | -------------- |  | -------------- | --------- | ---------------- | - | ------ |  | ---- | -
|                                                        |  | Six Months Ended June 30, |          
|                                                        |  | 2004                      |           |                | 2003 |                 
|                                                        |  | AverageBalance            |           | Income/Expense |      | AnnualYield/Rate |                |      | AverageBalance |  | Income/Expense |           | AnnualYield/Rate |  
|                                                        |  | (in thousands)            |           |                |      |                  | (in thousands) |      |                | 
|Securities                                              |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Taxable                                                 |  | $                         | 250,962   |                | $    | 4,874            |                | 3.91 | %              |  | $              | 213,254   |                  | $ | 4,282  |  | 4.02 | %
|Tax-exempt                                              |  |                           | 68,759    |                |      | 2,248            |                | 6.58 | %              |  |                | 79,119    |                  |   | 2,834  |  | 7.16 | %
|                                                        |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total securities                                        |  |                           | 319,721   |                |      | 7,122            |                | 4.48 | %              |  |                | 292,373   |                  |   | 7,116  |  | 4.87 | %
|Loans, net                                              |  |                           | 959,816   |                |      | 28,411           |                | 5.95 | %              |  |                | 720,645   |                  |   | 24,388 |  | 6.82 | %
|Interest earning bank deposits                          |  |                           | 526       |                |      | 2                |                | 0.78 | %              |  |                | 499       |                  |   | 2      |  | 0.92 | %
|Federal funds sold                                      |  |                           | 2,040     |                |      | 10               |                | 0.93 | %              |  |                | 24,981    |                  |   | 144    |  | 1.16 | %
|                                                        |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total earning assets                                    |  | $                         | 1,282,103 |                | $    | 35,545           |                | 5.57 | %              |  | $              | 1,038,498 |                  | $ | 31,650 |  | 6.13 | %
|                                                        |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Interest-bearing deposits:                              |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Checking                                                |  | $                         | 192,967   |                | $    | 570              |                | 0.59 | %              |  | $              | 125,540   |                  | $ | 473    |  | 0.76 | %
|Money market                                            |  |                           | 169,963   |                |      | 781              |                | 0.92 | %              |  |                | 158,157   |                  |   | 1,001  |  | 1.28 | %
|Savings                                                 |  |                           | 139,020   |                |      | 484              |                | 0.70 | %              |  |                | 109,153   |                  |   | 585    |  | 1.08 | %
|Certificates of deposit:                                |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Less than $100,000                                      |  |                           | 371,508   |                |      | 4,956            |                | 2.68 | %              |  |                | 312,213   |                  |   | 5,466  |  | 3.53 | %
|$100,000 and more                                       |  |                           | 117,896   |                |      | 1,980            |                | 3.38 | %              |  |                | 90,579    |                  |   | 1,760  |  | 3.92 | %
|                                                        |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total interest-bearing deposits                         |  |                           | 991,354   |                |      | 8,771            |                | 1.78 | %              |  |                | 795,642   |                  |   | 9,285  |  | 2.35 | %
|                                                        |  |                           |           |                |      |                 
|Federal funds and repurchase agreements                 |  |                           | 28,024    |                |      | 106              |                | 0.78 | %              |  |                | 20,238    |                  |   | 97     |  | 0.96 | %
|Other short term borrowings                             |  |                           | 18,614    |                |      | 144              |                | 1.53 | %              |  |                | 527       |                  |   | 3      |  | 1.06 | %
|Trust preferred capital notes                           |  |                           | 11,538    |                |      | 222              |                | 3.87 | %              |  |                |           |                  |   |        |  |      |  
|FHLB of Atlanta borrowings                              |  |                           | 11,820    |                |      | 338              |                | 5.74 | %              |  |                | 11,561    |                  |   | 370    |  | 6.46 | %
|                                                        |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Total interest-bearing liabilities                      |  | $                         | 1,061,350 |                | $    | 9,581            |                | 1.81 | %              |  | $              | 827,968   |                  | $ | 9,755  |  | 2.37 | %
|                                                        |  |                           |           |                |      |                  |                |      |                |  |                |           |                  |   |        |  |      |  
|Net interest income                                     |  |                           |           |                | $    | 25,964           |                |      |                |  |                |           |                  | $ | 21,895 |  |      |  
|Interest rate spread                                    |  |                           |           |                |      |                  |                | 3.76 | %              |  |                |           |                  |   |        |  | 3.76 | %
|Interest expense as a percent of average earning assets |  |                           |           |                |      |                  |                | 1.50 | %              |  |                |           |                  |   |        |  | 1.89 | %
|Net interest margin                                     |  |                           |           |                |      |                  |                | 4.07 | %              |  |                |           |                  |   |        |  | 4.24 | %



Noninterest Income



Total noninterest income was $3.95 million for the second quarter of 2004, an increase of
$79 thousand or 2.0% compared to $3.87 million for the second quarter of 2003. Growth in retail banking fees offset the decline in mortgage revenue for the quarter, with revenue of $2.1 million, up $610 thousand or 42.4% from the same period in
2003. Fees and net gains from mortgages sold were $836 thousand for the second quarter of 2004, a decrease of $423 thousand or 33.6% from the second quarter of 2003. Originations were $55.3 million for the second quarter of 2004, down 13.2% compared
to $63.7 million for the same period in 2003. Refinance loans represented $27.8 million or 55.2% of total originations for the second quarter of 2004.



Total noninterest income was $7.4 million for the six months ended June 30, 2004, down $123 thousand or 1.6% from the same period in 2003. The decline in revenue from
mortgage operations of $841 thousand or 36.2% was the primary factor for this decrease, while the increase in retail banking fees of $911 thousand or 33.9% for the six month period offset this decline.



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VIRGINIA FINANCIAL GROUP, INC.

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



Noninterest Expense



Noninterest expense for the second quarter of 2004 amounted to $10.6 million, up $1.4 million or 15.7% from the same period in 2003, and up 1.9% from the first quarter of 2004. For the six month period ended June 30,
2004, noninterest expense amounted to $21.1 million, an increase of $2.8 million or 14.9% over the same period in 2003. The increases are largely attributable to the Companys expansion efforts, and the incremental operating costs and
intangible amortization associated with the eight purchased branches, loan production offices in Charlottesville and Lynchburg and a de novo branch in Fishersville, Virginia. Also contributing to the quarterly increase was a 100% increase in
professional fees associated with governance initiatives, consulting for an operations review and Sarbanes Oxley compliance, and placement fees for executive recruitment.



Income Taxes



Income tax expense for the three months ended June 30, 2004 amounted to $1.6 million resulting in an effective tax rate of 29.7% compared to $1.2 million, or 25.1%, for
the three months ended June 30, 2003. For the six months ended June 30, 2004 income tax expense was $2.9 million resulting in an effective rate of 29.1%, compared to $2.4 million or 25.7% for the same period in 2003. The increase in the effective
tax rate for the quarter and six month period is a result of a decrease in earnings from tax-exempt assets as a percentage of total income. The rate of loan growth has resulted in a decrease in the securities component of the Companys balance
sheet, resulting in less municipal security holdings and related tax exempt interest.



Asset Quality



The Companys provision for loan losses
for the second quarter was $636 thousand, up $314 thousand or almost 100% from the same period in 2003. For the six month period, the provision for loan losses was $1.3 million, up $672 thousand or over 100% from the same period in 2003. The
increases are directly attributed to the aforementioned higher rates of loan growth for each period, and an increase in impaired loans from December 31, 2003. Nonperforming assets and net charge-offs were at improved levels, with non-performing
assets as a percentage of total assets of .31% at June 30, 2004, compared to .66% at June 30, 2003. Net charge-offs for the second quarter were $120 thousand, compared to net charge-offs of $346 thousand for the same period in 2003. Net charge-offs
as a percentage of average loans were .01% for the second quarter and .03% for the six month period, compared to .05% and .07% for the same periods in 2003. At June 30, 2004, the allowance for loan losses as a percentage of non-performing assets was
248.8%, while the allowance as a percentage of total loans amounted to 1.08%, up slightly from 1.06% at December 31, 2003.



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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):



|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  
|-------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | ------------ |  | - | ------ | -
|                                                                                 |  | June 30,2004 |        |   | December 31,2003 |   |        | June 30,2003 | 
|Non accrual loans                                                                |  | $            | 2,325  |   |                  | $ | 2,677  |              |  | $ | 1,257  |  
|Troubled debt restructurings                                                     |  |              | 1,998  |   |                  |   | 4,525  |              |  |   | 4,707  |  
|Other real estate owned                                                          |  |              | 5      |   |                  |   | 454    |              |  |   | 1,051  |  
|Loans past due as to principal or interest for 90 days or more accruing interest |  |              | 13     |   |                  |   | 25     |              |  | $ | 512    |  
|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  
|Total nonperforming assets                                                       |  | $            | 4,341  |   |                  | $ | 7,681  |              |  | $ | 7,527  |  
|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  
|Nonperforming assets to total assets                                             |  |              | .31    | % |                  |   | .55    | %            |  |   | .66    | %
|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  
|Nonperforming assets to loans and other property                                 |  |              | .44    | % |                  |   | .83    | %            |  |   | 1.04   | %
|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  
|Allowance for loan losses as a percentage of loans receivable                    |  |              | 1.08   | % |                  |   | 1.06   | %            |  |   | 1.27   | %
|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  
|Allowance for loan losses as a percentage of nonperforming assets                |  |              | 248.77 | % |                  |   | 126.85 | %            |  |   | 124.14 | %
|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  
|Net charge-offs as a percentage of average loans receivable                      |  |              | .03    | % |                  |   | .09    | %            |  |   | .07    | %
|                                                                                 |  |              |        |   |                  |   |        |              |  |   |        |  



Liquidity and Capital Resources



Capital Resources



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



The primary source of additional capital to the Company is
earnings retention, which represents net income less dividends declared. During the six months ended June 30, 2004, the Company retained $4.4 million, or 61.8% of its net income. Stockholders equity increased by $944 thousand, reflecting the
earnings retention and a decrease of $3.7 million in accumulated comprehensive income net of tax, which relates primarily to a universal decline in bond market valuations, resulting in a decrease in unrealized gains on securities available-for-sale
during the period.



The Company and its banking subsidiaries are subject to
various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect



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VIRGINIA FINANCIAL GROUP, INC.

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



on the Company and the subsidiary banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts
and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios of
total and Tier 1 capital to average assets. Management believes, as of June 30, 2004 that the Company and the subsidiary banks met all minimum capital adequacy requirements to which they are subject and are categorized as well
capitalized. There are no conditions or events that management believes have changed the subsidiary banks well capitalized position.



The following table includes information with respect to the Companys risk-based capital as of June 30, 2004 (000 omitted):



|                                                                 |  |   |           |  
|---------------------------------------------------------------- |  | - | --------- | -
|Tier 1 capital                                                   |  | $ | 120,406   |  
|Tier 2 capital                                                   |  |   | 10,884    |  
|Total risk-based capital                                         |  |   | 131,290   |  
|Total risk-weighted assets                                       |  |   | 1,045,252 |  
|Average adjusted total assets                                    |  |   | 1,385,237 |  
|Capital ratios:                                                  |  |   |           |  
|Tier 1 risk-based capital ratio                                  |  |   | 11.52     | %
|Total risk-based capital ratio                                   |  |   | 12.56     | %
|Leverage ratio (Tier 1 capital to average adjusted total assets) |  |   | 8.69      | %
|Equity to assets ratio                                           |  |   | 8.59      | %
|Tangible equity to assets ratio                                  |  |   | 7.17      | %



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 market served, concentrations of business and industry,
competition, and the Companys overall financial condition. The Companys primary source of liquidity is cash, securities in our available for sale portfolio and a $15 million line of credit with a correspondent bank. In addition, the
Banks have substantial lines of credit from their correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank of Atlanta to support liquidity as conditions dictate.



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



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VIRGINIA FINANCIAL GROUP, INC.

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



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



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



Effects of Inflation



The effect of changing prices on financial institutions is typically different from other industries as the Companys assets and liabilities are monetary in nature. Interest rates and thus the Companys
asset liability management is impacted by changes in inflation, but there is not a direct correlation between the two measures. Management monitors the impact of inflation on the financial markets.



Recent Accounting Pronouncements



The Financial Accounting Standards Board has issued no accounting pronouncements during the
first half of 2004 that are pertinent to the Companys lines of business, and reference is made to discussion of previous pronouncements included in the Companys Form 10-K filing for December 31, 2003.



Access to Filings



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



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VIRGINIA FINANCIAL GROUP, INC.

PART I  FINANCIAL INFORMATION



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



ITEM 4  CONTROLS AND PROCEDURES



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



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



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



Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of our
assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our
internal control over financial reporting or control of assets during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or control of assets.



PART II - OTHER INFORMATION



|        |  |                                                                                                                                                                                                                                                                                                                                                                                             
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 1. |  | LEGAL PROCEEDINGS.                                                                                                                                                                                                                                                                                                                                                                          
|        | 
|        |  | There are no material legal proceedings to which the Company or any of its subsidiaries, directors, or officers is a party or by which they, or any of them, are threatened. Any legal
proceeding presently pending or threatened against Virginia Financial Group, Inc. and its subsidiaries are either not material in respect to the amount in controversy or fully covered by insurance.
|        | 
|ITEM 2. |  | CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES.                                                                                                                                                                                                                                                                                                          
|        | 
|        |  | 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.                                                                                                                                                                                                                                                                                                                                        
|        | 
|        |  | The annual meeting of stockholders of Virginia Financial Group, Inc. was held on April 20, 2004.                                                                                                                                                                                                                                                                                            



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PART II - OTHER INFORMATION



The following directors were elected for terms expiring in 2007:



|                        |  |           |  |        
|----------------------- |  | --------- |  | -------
|                        |  | FOR       |  | AGAINST
|Lee S. Baker            |  | 5,249,689 |  | 17,464 
|O. R. Barham, Jr.       |  | 4,966,933 |  | 300,220
|Benham M. Black         |  | 5,010,381 |  | 256,772
|P. William Moore, Jr.   |  | 5,249,689 |  | 17,464 
|Thomas F. Williams, Jr. |  | 5,013,820 |  | 253,333



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



|                  |  |                        
|----------------- |  | -----------------------
|Fred D. Bowers    |  | Christopher M. Hallberg
|Taylor E. Gore    |  | Martin F. Lightsey     
|Jan S. Hoover     |  | E. Page Butler         
|H. Wayne Parrish  |  |                        
|Gregory L. Fisher |  |                        



|                                                                                                                                     |  |                   
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------
|Votes were cast in ratification of the selection of Yount, Hyde & Barbour, P.C. as external auditors of the Company for fiscal 2004.
|                                                                                                                                     | 
|ITEM 5.                                                                                                                              |  | OTHER INFORMATION.
|                                                                                                                                     | 
|                                                                                                                                     |  | Not applicable.   



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VIRGINIA FINANCIAL GROUP, INC.

PART II - OTHER INFORMATION



|        |  |                                                                                                             |  |                                                                                                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.                                                                          
|        | 
|        |  | (a) The following exhibits either are filed as part of this Report or are incorporated herein by reference:
|        |  |                                                                                                            
|        |  | Exhibit No. 2                                                                                               |  | Agreement and Plan of Reorganization incorporated by reference to Agreement and Plan of Reorganization filed as Exhibit A to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No.
333-69216).
|        |  |                                                                                                            
|        |  | Exhibit No. 3.1                                                                                             |  | Articles of Incorporation incorporated by reference to Exhibit 3.1 to Form 8-K filed on January 30, 2002.                                                                                             
|        |  |                                                                                                            
|        |  | Exhibit No. 3.2                                                                                             |  | Bylaws incorporated by reference to Exhibit 3.2 to Form 8-K filed on January 30, 2002.                                                                                                                
|        |  |                                                                                                            
|        |  | Exhibit No. 4                                                                                               |  | Stock Option Agreement is incorporated by reference to Exhibit B to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216).                                                         
|        |  |                                                                                                            
|        |  | Exhibit No. 4.1                                                                                             |  | Stock Incentive Plan is incorporated by reference to Form S-8 filed on February 26, 2002 (File No. 333-83410).                                                                                        
|        |  |                                                                                                            
|        |  | Exhibit No. 10                                                                                              |  | Employment contracts of certain officers incorporated by reference to Form S-4 Amendment No. 3 filed on December 3, 2001 (File No. 333-69216).                                                        
|        |  |                                                                                                            
|        |  | Exhibit No. 31.1                                                                                            |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                                    
|        |  |                                                                                                            
|        |  | Exhibit No. 31.2                                                                                            |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                                    
|        |  |                                                                                                            
|        |  | Exhibit No. 32                                                                                              |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                
|        | 
|        |  | (b)    Reports on Form 8-K:                                                                                
|        |  |                                                                                                            
|        |  |                                                                                                             |  | On April 1, 2004, Virginia Financial Group, Inc. filed a Form 8-K announcing the closing of a $20 million trust preferred offering.                                                                   
|        |  |                                                                                                            
|        |  |                                                                                                             |  | On April 26, 2004, Virginia Financial Group, Inc. filed a Form 8-K announcing its results of operations for the quarter ended March 31, 2004.                                                         



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



VIRGINIA FINANCIAL GROUP, INC./s/ O.R. Barham, Jr.O.R. Barham, Jr.President and Chief Executive OfficerAugust 9, 2004/s/ Jeffrey W. FarrarJeffrey W. Farrar, CPAExecutive Vice President and Chief Financial OfficerAugust 9, 2004




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