SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2004

Commission file number  0-18868



Premier Community Bankshares, Inc.

(Exact name of registrant as specified in its charter)



|Virginia
(State or other jurisdiction
of incorporation or organization)        | 54-1560968
(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------ | -----------------------------------------------
|4095 Valley Pike
Winchester, Virginia
(Address of principal executive offices) | 22602
(Zip Code)                               



Registrants telephone number, including area code(540) 869-6600





Securities registered pursuant to Section 12(b) of the Act:

|Title of each class | Name of each exchange
on which registered
|------------------- | -----------------------------------------
|None                | n/a                                      



Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $1.00 per share

(Title of Class)



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]



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



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter.  $76,583,574



Indicate the number of shares outstanding of each of the registrants classes of common stock, as of March 2, 2005.  4,927,148



DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2005 Annual Meeting of Shareholders  Part III

---



PART I



Item 1. Business



General



Premier Community Bankshares, Inc. is a bank holding company that was incorporated in June 1989.  We own all of the outstanding stock of The Marathon Bank, which was incorporated in August 1987, and Rockingham Heritage Bank, which was incorporated in June 1989.  We acquired Rockingham Heritage Bank in November 2000.  Our headquarters are in Frederick County, Virginia.



Premier is a holding company for Marathon and Rockingham Heritage and is not directly engaged in the operation of any other business.  All of our business is conducted through Marathon and Rockingham Heritage.  Our subsidiary banks operate autonomously, with separate local identities, management teams and decision-making processes, and without strict operating control from the holding company.  Each bank has full responsibility for day-to-day operations, with minimal support from the holding company level.  As a result, each bank can tailor its services and products to the needs of its community.  The board of directors of the holding company does monitor the financial and operational performance of both banks.



Marathon and Rockingham Heritage, which are chartered under Virginia law, conduct a general banking business.  Both banks deposits are insured by the Federal Deposit Insurance Corporation and both are members of the Federal Reserve System.



We offer checking accounts, savings and time deposits, and commercial, real estate, personal, home improvement, automobile and other installment and term loans.  We also offer travelers checks, safe deposit, collection, notary public, discount brokerage service, and other customary bank services (other than trust services).  The three principal types of loans that we make are commercial and industrial loans, real estate loans and loans to individuals for household, family, and other consumer costs.  Our banking offices include drive-up facilities.  There are automated teller machines located at each of Marathons offices and an additional nine off-premise ATMs operated by Marathon.  Rockingham Heritage has 23 ATMs throughout its market area.



Principal Market Areas



Our business in the area served by Marathon (the counties of Frederick, Clarke, Shenandoah, Warren and the city of Winchester, Virginia) and Rockingham Heritage (Rockingham and Augusta counties, and the cities of Harrisonburg, Waynesboro, and Staunton, Virginia) is highly competitive with respect to both loans and deposits.  In addition, the loan production office in Martinsburg, West Virginia serves the counties of Morgan, Jefferson, and Berkeley, West Virginia.  In our primary service area, there are numerous commercial banks (including large, multi-state banks with multiple offices) offering services ranging from deposits and real estate loans to full service banking.  Certain of the commercial banks in this service area have higher lending limits than us and may provide various services for their customers that we do not offer.



According to a market share report prepared by the FDIC, Marathons deposits as a percentage of total deposits in financial institutions in its market areas was 10.9% as of June 30, 2004, the most recent date for which market share information is available.  Rockingham Heritages deposits as a percentage of total deposits in financial institutions in its market areas was 6.6% as of June 30, 2004.  Total deposits in the market areas of Marathon and Rockingham as of June 30, 2004, were $2.7 billion and $2.5 billion, respectively.



Expansion into West Virginia



The Corporation intends to organize a third bank in West Virginia, which will be named Premier Bank.  The Corporation plans to locate Premier Bank's headquarters in Martinsburg and its initial branch office in Shepherdstown, West Virginia.  It is expected that Premier Bank will open in the second quarter of 2005. The banking charter has been received from the state of West Virginia, as well as approval for deposit insurance from the FDIC.  Premier Bank was originally expected to open during the third quarter of 2004, but was unable to do so due to unexpected delays in the local government planning process.  Premier Bank will offer a wide variety of deposits and loans, including residential loans, commercial loans and commercial construction and development loans. The Corporation currently operates a loan production office in the Martinsburg area, which was approved by West Virginias Division of Banking on October 6, 2003.



2

---



Martinsburg and Shepherdstown are located in Berkeley County and Jefferson County, respectively, in West Virginias eastern panhandle.  Martinsburg and Shepherdstown are approximately 80 and 60 miles, respectively, from both Washington, D.C. and Baltimore, Maryland.  Many commuters to Washington and Baltimore and their populous suburbs in northern Virginia and Maryland live in Berkeley County and Jefferson County.  There is commuter train service from Martinsburg to Washington and Baltimore.



Since 1990, the projected market area for our new bank has experienced rapid growth.  Berkeley Countys population grew from 59,300 to 75,900 between 1990 and 2000.  In 2000, its average unemployment rate was 3.0% and its per capita income was $23,000.  Major employers in Berkeley County include Berkeley County Schools, General Motors and Quad Graphics, and a number of other companies maintain distribution centers there.  The federal government also has a strong presence in the county, including an Internal Revenue Service center, the VA Medical Center and the West Virginia Air National Guard.  As of June 30, 2004, the most recent date for which market share information is available, Berkeley County had $802 million of total bank deposits.



From 1990 to 2000, Jefferson Countys population grew from 36,000 to 42,000.  In 2002, its per capita income was $26,900 and its unemployment rate was 3.1%.  Major employers in Jefferson County include Penn National Gaming in Charles Town, Jefferson Memorial Hospital and the Jefferson County Board of Education.  As of June 30, 2004, Jefferson County had $577 million of total bank deposits.



Credit Policies



The principal risk associated with each of the categories of loans in our portfolio is the creditworthiness of our borrowers.  Within each category, such risk is increased or decreased, depending on prevailing economic conditions.  In an effort to manage the risk, our policy gives loan amount approval limits to individual loan officers based on their position and experience.  The risk associated with real estate mortgage loans and consumer loans varies, based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness.  The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction.



We have written policies and procedures to help manage credit risk.   Our loan review process includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with our policies.



Marathon uses an in-house management loan committee and a directors loan committee to approve loans.

The in-house loan committee, which consists of the president or senior vice president and two vice presidents, meets weekly to review loans which exceed individual loan authorities for loans that are intended to be held in the portfolio.  This committee approves unsecured loans up to $400,000, secured loans with non-negotiable collateral up to $500,000 and secured loans with negotiable collateral up to $1,000,000.  The directors loan committee, which is made up of six directors, approves loans up to the legal lending limit.   The directors loan committee also reviews lending policies proposed by management.



Rockinghams loan approval structure is similar to Marathons.  Rockinghams officer loan committee, which consists of the president or chief lending officer and two additional senior lending officers, approves loans in excess of individual loan officers lending authorities.  These individual authorities vary up to $500,000.  Loans in excess of $1,000,000 and up to the banks legal lending limit are approved by a directors loan committee, which consists of the president and three outside directors.  The directors loan committee also reviews loan policies and procedures, delinquent loans and other potential problem loans.



In the experience of both
subsidiary banks, residential loan originations come primarily from walk-in customers, real estate brokers and builders.  Commercial real estate
 loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers.  All completed
 loan applications are reviewed by our salaried loan officers.  As part of the application process, information is obtained concerning the income,
 financial condition, employment and credit history of the applicant.  If commercial real estate is involved, information is also obtained concerning
 cash flow after debt service.  Loan quality is analyzed based on each subsidiary banks experience and guidelines with respect to credit
 underwriting, as well as the guidelines issued by the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and other
 purchasers of loans, depending on the type of loan involved.  The non-conforming one-to-four-family adjustable-rate mortgage



3

---

loans that we originate, however, are not readily salable in the secondary market because they do not meet all of the secondary marketing guidelines. Real estate is appraised by independent fee appraisers who have been pre-approved by the bank and/or board of directors.



In the normal course of business, we make various commitments and incur certain contingent liabilities that are disclosed but not reflected in our annual financial statements, including commitments to extend credit.  At December 31, 2004, commitments to extend credit totaled $76.4 million.



Commercial Real Estate Lending



Commercial real estate loans are secured by various types of commercial real estate in our market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches.  At December 31, 2004, commercial real estate loans aggregated $142.9 million or 29.1% of our gross loans.



In our underwriting of commercial real estate, we may lend up to 100% of the secured propertys appraised value, although our loan to original appraised value ratio on such properties is 80% or less in most cases.  Commercial real estate lending entails significant additional risk, compared with residential mortgage lending.  Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.  Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy generally.  Our commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrowers creditworthiness and prior credit history and reputati







on, and we generally require personal guarantees or endorsements of borrowers.  We also carefully consider the location of the security property.



One-to-Four-Family Residential Real Estate Lending



We make loans secured by one-to-four-family residences, all of which are located in our market area.  We evaluate both the borrowers ability to make principal and interest payments and the value of the property that will secure the loan. We make loans in amounts of up to 100% of the appraised value of the underlying real estate.  Loans are made with a loan to value up to 95% for conventional mortgage loans and up to 100% for loans guaranteed by either the Federal Housing Authority or the Veterans Administration.  For conventional loans in excess of 80% loan to value, private mortgage insurance is secured insuring the mortgage loans to 75% loan to value.  Generally if the loans are not made to credit standards of FHLMC, additional fees and rate are charged.



Although, due to competitive market pressures, we do originate long-term, fixed-rate mortgage loans, we currently underwrite and document all such loans to permit their sale in the secondary mortgage market. Certain loans that may not qualify for sale into the secondary market are structured as balloon notes payable in full within a five-year period and are held in our portfolio.  At December 31, 2004, loans secured by one-to-four family residences aggregated $131.2 million or 26.7% of our gross loans.



All one-to-four-family real estate mortgage loans being originated by us contain a due-on-sale clause providing that we may declare the unpaid principal balance due and payable upon the sale of the mortgage property.  It is our policy to enforce these due-on-sale clauses concerning fixed-rate loans.



We require, in connection with the origination of residential real estate loans, title opinions or title insurance and fire and casualty insurance coverage, as well as flood insurance where appropriate, to protect our interest.  The cost of this insurance coverage is paid by the borrower.



We expect that Premier Bank, once it is organized, will make adjustable rate mortgages,
 in addition to fixed rate mortgage loans.  One-to-four-family residential adjustable-rate mortgage loans will have interest rates that
adjust every one or three years, generally in accordance with the rates on one-year  and three-year U.S. Treasury bills.  We expect
 that these loans will generally limit interest rate increases for each rate adjustment period and have an established ceiling rate at the time
 the loans are made.  To compete with other lenders in our market area, we may make one-year loans at interest rates that, for the first year,
are below the index rate that would otherwise apply to these loans.  There are unquantifiable risks resulting from potential increased costs to
the borrower as a result of
repricing.  It is possible, therefore, that during periods of rising interest rates, the risk of defaults on these loans may increase due
to the upward adjustment of interest costs to borrowers.



4

---



Construction Lending



We make local construction loans, both residential and
commercial, and land development loans.  At December 31, 2004, construction and land development loans
outstanding were $101.4 million, or 20.6%, of gross loans.  All of these loans are concentrated in our local market area.  The average life of a construction loan is approximately nine months. While some loan rates are fixed, many reprice monthly to meet the market, based on the prime rate.  Because the interest charged on these loans floats with the market, they help us in managing our interest rate risk.  Construction lending entails significant additional risks, compared with residential mortgage lending.  Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers.  Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of the home or land under
construction, which is of uncertain value prior to the completion of construction.  Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios.  To minimize the risks associated with construction lending, we limit most of our loan amounts to 80.0% of appraised value, in addition to our usual credit analysis of our borrowers.  We also obtain a first lien on the property as security for our construction loans and personal guarantees from the borrowers principal owners.



Consumer Lending



We offer various secured and unsecured consumer loans, including unsecured personal loans and lines of credit, automobile loans, deposit account loans, installment and demand loans, letters of credit, and home equity loans.  At December 31, 2004, we had consumer loans of $25.5 million or 5.2% of gross loans.  Such loans are generally made to customers with whom we had a pre-existing relationship.  We originate all of our consumer loans in our market area and intend to continue our consumer lending in this geographic area.



Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as lines of credit, or secured by rapidly
depreciable assets such as automobiles.  In such cases, any repossessed collateral for a defaulted consumer loan may
 not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation.  The remaining deficiency often does not warrant further substantial collection efforts against the
borrower.  In addition, consumer loan collections are dependent on the borrowers continuing financial stability, and
 thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the
application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.  Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of
such loan such as us, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral.  We add general provisions to our loan loss allowance at the time that the loans are originated.  Consumer loan delinquencies often increase over time as the loans age.  We have very few unsecured consumer loans.



The underwriting standards that we employ for consumer loans include a determination of the applicants payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  The stability of the applicants monthly income may be determined by verification of gross monthly income for primary employment, and additionally from any verifiable secondary income.  Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.



Commercial Loans



Commercial business loans generally have a higher
degree of risk than residential mortgage loans, but have commensurately higher yields.  To manage
these risks, we generally secure appropriate collateral and monitor the financial condition of our
business borrowers.  Residential mortgage loans generally are made on the basis of the
borrowers ability to make repayment from his employment and other income and are secured
by real estate whose value tends to be easily ascertainable.  In contrast, commercial
business loans typically are made on the basis of the borrowers ability to make repayment
from cash flow from its business and are secured by business assets, such as commercial real
estate, accounts receivable, equipment and inventory.  As a result, the availability of
funds for the repayment of commercial business loans may be substantially dependent on the
success of the business itself.  Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with
as much precision as residential real estate.  Our standard operating procedure includes a credit review and monitoring



5

---



process to review the cash flow of commercial borrowers.  At December 31, 2004, commercial loans totaled $63.1 million, or 12.8% of gross loans.



Employees



As of December 31, 2004, we had 243 total employees, 204 of which were full-time employees. None of our employees is covered by any collective bargaining agreement, and relations with employees are considered excellent.



Supervision and Regulation



General.  As a bank holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended (the BHCA), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the Federal Reserve Board).  Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board.  The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity that is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities.



As state-chartered banks, Marathon and Rockingham Heritage are subject to regulation, supervision and examination by the Virginia State Corporation Commissions Bureau of Financial Institutions.  They also are subject to regulation, supervision and examination by the Federal Reserve Board.  State and federal law also governs the activities in which Marathon and Rockingham Heritage engage, the investments that they make and the aggregate amount of loans that may be granted to one borrower.  Various consumer and compliance laws and regulations also affect the operations of each of Marathon and Rockingham Heritage.



Premier Bank, which we are currently organizing in West Virginia, will also be a state-chartered bank, but it will not be a member of the Federal Reserve.  As a result, Premier Bank will be subject to regulation, supervision and examination by West Virginias Division of Banking and the Federal Deposit Insurance Corporation.



The earnings of the Corporations subsidiaries, and therefore the earnings of the Corporation, are affected by general economic conditions, management policies, changes in state and federal legislation and actions of various regulatory authorities, including those referred to above.  The following description summarizes the significant federal and state laws to which the Corporation and Marathon and Rockingham Heritage are subject.  To the extent that statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.



Payment of Dividends.

The Corporation is a legal
 entity separate and distinct from its banking and other subsidiaries.  Virtually all of the
Corporations revenues will result from dividends paid to the Corporation by Marathon and
 Rockingham Heritage.  Marathon and Rockingham Heritage are subject to laws and regulations
that limit the amount of dividends that they can pay.  In addition, the Corporation and
Marathon and Rockingham Heritage are subject to various regulatory restrictions relating to
the payment of dividends, including requirements to maintain capital at or above regulatory
minimums.  Banking regulators have indicated that banking organizations should generally
pay dividends only if the organizations net income available to common shareholders over
the past three years has been sufficient to fully fund the dividends, and the prospective rate
of earnings retention appears consistent with the organizations capital
 needs, asset quality and overall financial condition.  The Corporation does not
 expect that any of these laws, regulations or policies will materially affect the ability
 of Marathon and Rockingham Heritage to pay dividends.



Insurance of Accounts, Assessments and Regulation by the FDIC.The deposits of Marathon and Rockingham Heritage are insured by the Federal Deposit Insurance Corporation (the FDIC) up to the limits set forth under applicable law.  The deposits of Marathon and Rockingham Heritage are subject to the deposit insurance assessments of the Bank Insurance Fund (BIF) of the FDIC.



The FDIC has implemented a risk-based deposit insurance assessment system under which the assessment rate for an insured institution may vary according to regulatory capital levels of the institution and other factors (including



6

---





supervisory evaluations).  Depository institutions insured by the BIF that are well capitalized are required to pay only the statutory minimum assessment of $2,000 annually for deposit insurance, while all other banks are required to pay premiums ranging from .03% to .27% of domestic deposits.  These rate schedules are subject to future adjustments by the FDIC.  In addition, the FDIC has authority to impose special assessments from time to time.  However, because the legislation enacted in 1996 requires that both Savings Association Insurance Fund insured and BIF-insured deposits pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation, the FDIC is assessing BIF-insured deposits an additional 1.30 basis points per $100 of deposits to cover those obligations.



The FDIC is authorized to
 prohibit any BIF-insured institution from engaging in any activity that the FDIC determines by
 regulation or order to pose a serious threat to the respective insurance fund.  Also, the
 FDIC may initiate enforcement actions against banks, after first giving the institutions
 primary regulatory authority an opportunity to take such action.  The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a hearing, that the
 institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law, regulation, order or
any condition imposed in writing by the FDIC.  It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance, if the institution has no tangible
capital.  If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals,
 shall continue to be insured for a period from six months to two years, as determined by the FDIC.  Management is not aware of any existing circumstances that could result in termination of any deposit insurance of TMB or RHB.



Capital.  The Federal Reserve Board has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises.  Under the risk-based capital requirements, the Corporation and Marathon and Rockingham Heritage are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%.  At least half of the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles (Tier 1 capital).  The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance (Tier 2 capital, which, together with Tier 1 capital, composes total capital).



In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations.  Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to federal bank regulatory evaluation of an organizations overall safety and soundness.



The risk-based capital standards of the Federal Reserve Board explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institutions ability to manage these risks, as important factors to be taken into account by the agency in assessing an institutions overall capital adequacy.  The capital guidelines also provide that an institutions exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organizations capital adequacy.



Premier Bank will be subject to similar guidelines that the FDIC has issued.



Other Safety and Soundness Regulations.  There
 are a number of obligations and restrictions imposed on bank holding companies and their depository
institution subsidiaries by federal law and regulatory policy that are designed to reduce potential
loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the
 event that the depository institution is insolvent or is in danger of becoming insolvent.  For
example, under the requirements of the Federal Reserve Board with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise.  In addition, the cross-guarantee
provisions of federal law require insured depository institutions under common control to reimburse
 the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the insolvency of commonly
controlled insured depository institutions or for any assistance provided by the FDIC to
 commonly controlled insured depository institutions in danger of failure.  The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the deposit insurance funds.  The FDICs claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.





7

---





The federal banking agencies also have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions.  The extent of these powers depends upon whether the institution in question is well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized, as defined by the law.  As of December 31, 2004, the Corporation and Marathon and Rockingham Heritage were classified as well capitalized.



State banking regulators also have broad enforcement powers over Marathon and Rockingham Heritage, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator.



Community Reinvestment. The requirements of the Community Reinvestment Act are also applicable to each bank.  The act imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions.  A financial institutions efforts in meeting community needs currently are evaluated as part of the examination process pursuant to twelve assessment factors.  These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.  Marathon received an outstanding rating in its most recent CRA examination, and Rockingham Heritage received an outstanding rating in its most recent CRA examination.



Interstate Banking and Branching.  Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation.  Effective June 1, 1997, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date.  After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.



Gramm-Leach-Bliley Act of 1999.  The Gramm-Leach-Bliley Act of 1999 (the Act) was signed into law on November 12, 1999.  The Act covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies.  Most of the Acts provisions require the federal bank regulatory agencies and other regulatory bodies to adopt regulations to implement the Act, and for that reason an assessment of the full impact on the Corporation of the Act must await completion of that regulatory process.



The Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting unrestricted affiliations between banks and securities firms.  The Act also permits bank holding companies to elect to become financial holding companies.  A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, brokerage, investment and merchant banking and insurance underwriting, sales and brokerage activities.  In order to become a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating.



The Act provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage insurance sales, solicitations or cross-marketing activities.  Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain areas identified in the Act.  The Act directs the federal bank regulatory agencies to adopt insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures.



The Act adopts a system of functional
regulation under which the Federal Reserve Board is confirmed as the umbrella regulator
 for financial holding companies, but financial holding company affiliates are to be
 principally regulated by functional regulators such as the FDIC for state nonmember
bank affiliates, the Securities and Exchange Commission for securities affiliates and
 state insurance regulators for insurance affiliates.  The Act repeals the broad
 exemption of banks from the definitions of broker and dealer
 for purposes of the Securities Exchange Act of 1934, as amended, but identifies a
 set of specific activities, including traditional bank trust and fiduciary activities,
in which a bank may engage without being deemed a broker, and a set of activities
in which a bank may engage without being deemed a dealer.  The Act also makes
 conforming changes in the definitions of broker and dealer for purposes of the Investment Company Act of 1940, as
amended, and the Investment Advisers Act of 1940, as amended.







8

---

The Act contains
extensive customer privacy protection provisions.  Under these provisions, a
financial institution must provide to its customers, at the inception of the customer
 relationship and annually thereafter, the institutions policies and procedures
regarding the handling of customers nonpublic personal financial information.
 The Act provides that, except for certain limited exceptions, an institution
 may not provide such personal information to unaffiliated third parties unless the
 institution discloses to the customer that such information may be so provided and
 the customer is given the opportunity to opt out of such disclosure.  An
institution may not disclose to a non-affiliated third party, other than to a
consumer reporting agency, customer account numbers or other similar account identifiers
 for marketing purposes.  The Act also provides that the states may adopt customer
 privacy protections that are more strict than those contained in the Act.  The
 Act also makes a criminal offense, except in limited circumstances, obtaining or attempting to obtain customer information of a financial nature by fraudulent or deceptive means.



Filings with the SEC



The Corporation files annual, quarterly, and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission.  These reports are posted and are available at no cost on the Corporations website, www.premiercommunitybankshares.com, as soon as reasonably practible after the Corporation files such documents with the SEC.  Premiers filings are also available through the SECs website at www.sec.gov.



Item 2. Properties



The following table provides certain information with respect to our properties:





|Location                                                                      | Date Facility
Opened | Ownership and
Leasing Arrangements                                                                                                            
|----------------------------------------------------------------------------- | -------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Marathon:                                                                     |                      |                                                                                                                                               
|Main Office
4095 Valley Pike
Winchester, Virginia                             | 1988                 | Owned by Marathon.                                                                                                                            
|Front Royal Branch
300 Warren Avenue, Post Office Plaza
Front Royal, Virginia | 1993                 | Lease expires in 2016, subject to Marathons option to renew for two additional five-year terms.                                              
|Winchester Branch
1041 Berryville Avenue
Winchester, Virginia                 | 1995                 | Lease expires in 2009.                                                                                                                        
|Sunnyside Branch
1447 North Frederick Pike
Winchester, Virginia               | 1997                 | Lease expires in 2006, subject to Marathons option to renew for two additional five-year terms.                                              
|Woodstock Branch
1014 South Main Street
Woodstock, Virginia                   | 1997                 | Lease on real estate expires in 2007, subject to Marathons option to renew for three additional five-year terms.  Marathon owns the building.
|Old Town Branch
139 North Cameron Street
Winchester, Virginia                 | 2002                 | Owned by Marathon.                                                                                                                            
|522 South Branch
199 Front Royal Pike
Winchester, Virginia                    | 2003                 | Owned by Marathon.                                                                                                                            
|Front Royal Branch II
1729 Shenandoah Avenue
Front Royal, Virginia            | 2003                 | Owned by Marathon                                                                                                                             



9

---



|Operations Center
175 Front Royal Pike
Winchester, Virginia                        | 2003 | Lease expires in 2013, subject to Marathons option to renew for four additional five-year terms.                                  
|---------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------
|Loan Production Office
Suite 397-3
Mid-Atlantic Parkway
Martinsburg, West Virginia | 2003 | Lease expires in 2005. Current plan is to have the third bank established in a temporary facility at that time.                    
|Human Resources Offices
4046-2 Valley Pike
Winchester, Virginia                    | 2004 | Lease expires in 2005, subject to Marathons option to renew on a month to month basis.                                            
|Rockingham Heritage:                                                               |      |                                                                                                                                    
|Main Office
110 University Boulevard
Harrisonburg, Virginia                        | 1991 | Owned by Rockingham.                                                                                                               
|South Main Branch
1980 South Main Street
Harrisonburg, Virginia                    | 1996 | Owned by Rockingham.                                                                                                               
|Elkton Branch
410 West Spotswood Trail
Elkton, Virginia                            | 1998 | Owned by Rockingham.                                                                                                               
|Red Front Supermarket Branch
677 Chicago Avenue
Harrisonburg, Virginia             | 1993 | Lease expires in 2007, with automatic renewal for one additional five-year term.                                                   
|Weyers Cave Branch
54 Franklin Street
Weyers Cave, Virginia                        | 2000 | Lease expires in 2005, subject to Rockingham Heritages option to renew for four additional five-year terms.                       
|Waynesboro Branch
2556 Jefferson Highway
Waynesboro, Virginia                      | 2000 | Lease expires in 2009, subject to Rockingham Heritages option to renew for three additional five-year terms.                      
|Staunton Branch
49 Lee-Jackson Highway
Staunton, Virginia                          | 2001 | Lease expires in 2006, subject to Rockingham Heritages option to renew for four additional five-year terms.                       
|Operations Center
370 Neff Avenue
Harrisonburg, Virginia                           | 2002 | Lease is on a month to month basis, with no current plans to terminate.                                                            
|Bridgewater Branch
309 N. Main Street
Bridgewater, Virginia                        | 2004 | Owned by Rockingham.                                                                                                               
|Loan Operations Center
370 Neff Avenue
Harrisonburg, Virginia                      | 2004 | Lease expires in 2006, subject to month to month renewal by Rockingham.                                                            
|Loan Production Office
124 Main Street
Broadway, Virginia                          | 2004 | Lease is on a month to month basis.  Future plans are to build a branch office in the area and move production office to that site.





10

---

We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.



Item 3.  Legal Proceedings



In the course of normal operations, the Corporation, Marathon and Rockingham Heritage are parties to various legal proceedings.  Based upon information currently available, and after consultations with legal counsel, management believes that such legal proceedings will not have a material adverse effect on the Corporations business, financial position, or results of operations.



Item 4.  Submission of Matters to a Vote of Security Holders



No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Corporation through a solicitation of proxies or otherwise.



PART II



Item 5.  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Market Prices



The Corporations common stock is listed on the NASDAQ Small Cap Market under the symbol PREM.  Prior to the common stocks listing on NASDAQ on October 3, 1996, there were occasional transactions in the stock and management assisted in matching persons interested in buying or selling the stock.   The Corporation does not currently have a stock repurchase plan.



The following table represents the Corporations stock prices for 2003 and 2004.   This sales price information reflects inter-dealer prices, without retail mark-up, mark-down, or commission.



|     | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter
|---- | ----------- | ----------- | ----------- | -----------
|     | Low         | High        | Low         | High       
|2004 | 16.75       | 18.30       | 17.51       | 18.75      
|2003 | 10.10       | 12.98       | 12.00       | 14.20      





At December 31, 2004, the Corporation had approximately 2,315 stockholders of record.



The Corporation declared a $.21 per share cash dividend to stockholders of record as of December 31, 2004.  Cash dividends of $.18 per share cash declared in 2003 were paid in January, 2004 and cash dividends of $.15 per share, declared in 2002, were paid in January, 2003.



Dividend Policy



Our future dividend policy is subject to the discretion of the board of directors and will depend upon a number of factors, including future consolidated earnings, financial condition, liquidity and capital requirements of both us and Marathon and Rockingham Heritage, applicable governmental regulations and policies and other factors deemed relevant by our board of directors.



Our ability to distribute cash dividends will depend primarily on the abilities of our subsidiary banks to pay dividends to us.  As state member banks, both Marathon and Rockingham Heritage are subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations.  Furthermore, neither we nor the banks may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would render us insolvent or unable to pay our obligations as they become due in the ordinary course of business.  For additional information on these limitations, see Government Supervision and Regulation  Payment of Dividends in Item 1 above.



Stock Repurchases



The Corporation did not repurchase any shares of its common stock during the fourth quarter of 2004.

11

---



Item 6. Selected Financial Data



The following selected consolidated financial data is based upon the Corporations audited financial statements and related notes and should be read in conjunction with such financial statements and notes.



|                                                  |                                      | Year Ended December 31
|------------------------------------------------- | ------------------------------------ | ----------------------
|                                                  | 2004                                 | 2003                  
|                                                  | (In Thousands Except Per Share Data)
|Income Statement Data                             |                                      |                       
|Interest income                                   | $31,452                              | $26,512               
|Interest expense                                  | 8,971                                | 8,293                 
|Net interest income                               | 22,481                               | 18,219                
|Provision for loan losses                         | 1,020                                | 919                   
|                                                  |                                      |                       
|Net interest income after provision               | 21,461                               | 17,300                
|Non-interest income                               | 4,439                                | 3,654                 
|Non-interest expense                              | 16,573                               | 13,213                
|Income before income taxes                        | 9,327                                | 7,741                 
|Income taxes                                      | 2,984                                | 2,485                 
|Net income                                        | 6,343                                | 5,256                 
|                                                  |                                      |                       
|Per Share Data                                    |                                      |                       
|Net income-basic                                  | 1.30                                 | 1.14                  
|Net income-diluted                                | 1.26                                 | 1.11                  
|Cash dividends declared                           | 0.21                                 | 0.18                  
|Book value per share                              | 9.00                                 | 7.96                  
|                                                  |                                      |                       
|Balance Sheet Data                                |                                      |                       
|Assets                                            | $576,150                             | $463,302              
|Loans, net                                        | 486,865                              | 382,459               
|Securities                                        | 27,314                               | 24,051                
|Deposits                                          | 483,933                              | 397,345               
|Shareholders equity                              | 44,262                               | 38,877                
|Shares outstanding (actual)                       | 4,919,548                            | 4,881,084             
|                                                  |                                      |                       
|Performance Ratios                                |                                      |                       
|Return on average assets                          | 1.20%                                | 1.22%                 
|Return on average equity                          | 15.20%                               | 15.86%                
|Equity to assets                                  | 7.69%                                | 7.68%                 
|Net interest margin                               | 4.65%                                | 4.63%                 
|Efficiency ratio                                  | 61.04%                               | 59.90%                
|Allowance for loan losses to loans                | 1.02%                                | 1.06%                 
|                                                  |                                      |                       
|Asset Quality Ratios                              |                                      |                       
|Net charge-offs to average loans outstanding      | 0.08%                                | 0.04%                 
|Non-performing loans to period-end loans          | 0.23%                                | 0.13%                 
|Non-performing assets to total assets             | 0.22%                                | 0.12%                 
|Allowance for loan losses to non-performing loans | 447.05%                              | 825.75%               
|                                                  |                                      |                       
|Capital and Liquidity Ratios                      |                                      |                       
|Risk-based:                                       |                                      |                       
|Tier 1 capital                                    | 11.85%                               | 13.68%                

12

---



|Total capital                     | 12.89%    | 14.80%    | 12.56%    | 15.10%    | 13.16%   
|--------------------------------- | --------- | --------- | --------- | --------- | ---------
|Average loans to average deposits | 97.98%    | 93.29%    | 92.00%    | 89.30%    | 86.46%   
|Average shares outstanding:       |           |           |           |           |          
|Basic                             | 4,893,442 | 4,602,466 | 4,537,185 | 4,514,377 | 4,561,439
|Diluted                           | 5,048,797 | 4,745,089 | 4,621,088 | 4,591,734 | 4,615,023





Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operation



General



The following commentary discusses major components of our business and presents an overview of our consolidated financial position at December 31, 2004, and 2003, as well as results of operations for the periods ended December 31, 2004, 2003, and 2002. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this prospectus.



Our subsidiary banks operate autonomously, with separate local identities, management teams and decision-making processes, and without strict operating control from the holding company.  The following commentary is being presented on a consolidated basis.



We are not aware of any current recommendations by any regulatory authorities that, if they were implemented, would have a material effect on our liquidity, capital resources or results of operations.



Overview



Premier Community Bankshares, Incorporated (Premier or the Corporation) is a Virginia multi-bank holding company headquartered in Winchester, Virginia.  The Corporation owns The Marathon Bank and Rockingham Heritage Bank and its subsidiary, RHB Services, Inc.



The Corporation and its subsidiaries, The Marathon Bank and Rockingham Heritage Bank are engaged in the business of offering banking services to the general public. Premier offers checking accounts, savings and time deposits, and commercial, real estate, personal, home improvement, automobile and other installment and term loans.  The Corporation also offers financial services, travelers checks, safe deposit boxes, collection, notary public and other customary bank services (with the exception of trust services) to its customers.  The three principal types of loans made by Premier are: (1) commercial and industrial loans; (2) real estate loans; and (3) loans to individuals for household, family and other consumer expenditures.



The Corporation intends to organize a third bank in West Virginia, which will be named Premier Bank.  The Corporation plans to locate Premier Bank's headquarters in Martinsburg and its initial branch office in Shepherdstown, West Virginia.  It is expected that Premier Bank will open in the second quarter of 2005. The banking charter has been received from the state of West Virginia, as well as approval for deposit insurance from the FDIC.  Premier Bank was originally expected to open during the third quarter of 2004, but was unable to do so due to unexpected delays in the local government planning process.  Premier Bank will offer a wide variety of deposits and loans, including residential loans, commercial loans and commercial construction and development loans. The Corporation currently operates a loan production office in the Martinsburg area, which was approved by West Virginias Division of Banking on October 6, 2003.



Net interest income is our primary source of revenue.  We define revenue as net interest income plus non-interest income.  As discussed further in the interest rate sensitivity section, we manage our balance sheet and interest rate risk to both maximize and stabilize net interest income.  We do this by monitoring the spread between the interest rates we earn on interest earning assets such as loans, and the interest rates we pay on interest bearing liabilities such as deposit accounts.  We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it.  In addition to management of interest rate risk, we analyze our loan portfolio for credit risk.  Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by carefully underwriting and monitoring our extension of credit.  In addition to net interest income, non-interest income is an i







ncreasingly important source of income for our Corporation.  Non-interest income is derived chiefly from service charges on deposit accounts, (such as charges for non-sufficient funds and ATM fees,) as well as commissions and fees from bank services, such as mortgage originations and debit and credit card processing.







13

---















Caution About Forward Looking Statements



We make forward looking statements in this annual report that are subject to risks and uncertainties.  These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.  The words believes, expects, may, will, should, projects, contemplates, anticipates, forecasts, intends, or other similar words or terms are intended to identify forward looking statements.



These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including, but not limited to:



·

the ability to successfully manage our growth or implement our growth strategies if we are unable to identify attractive markets, locations or opportunities to expand in the future;

·

maintaining capital levels adequate to support our growth;

·

maintaining cost controls and asset qualities as we open or acquire new branches;

·

reliance on our management team, including our ability to attract and retain key personnel;

·

the successful management of interest rate risk;

·

changes in general economic and business conditions in our market area;

·

changes in interest rates and interest rate policies;

·

risks inherent in making loans such as repayment risks and fluctuating collateral values;

·

competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

·

demand, development and acceptance of new products and services;

·

problems with technology utilized by us;

·

changing trends in customer profiles and behavior; and

·

changes in banking and other laws and regulations applicable to us.



Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements.  In addition, our past results of operations do not necessarily indicate our future results.



Financial Overview



At December 31, 2004 we had total assets of  $576.2 million, net loans of $486.9 million, deposits of $483.9 million and shareholders equity of $44.3 million.  The increase in assets was 24.4% over the amount at December 31, 2003, while net loans and deposits increased 27.3% and 21.8%, respectively, for the same period.



Our earnings per share, on a fully diluted basis, for the year ended December 31, 2004 was $1.26, which represented an increase of $0.15, or 13.5%, over earnings per share, on a fully diluted basis, of $1.11 for the same period 2003.  The increase is partially attributable to a 23.4% increase in net interest income over the same periods, due to strong growth in our earning assets.  The increase is also attributable to a 21.5% increase in non-interest income, as service charge income and other fees provided recurring sources of income.



Our return on average equity was 15.20% for the period ended December 31, 2004.  We have been able to achieve this level without relying on a disproportionate share of income from mortgage banking operations.  Our improvement has occurred as we have continued to grow through the opening of new branches.  Our efficiency ratio has also increased during this growth in the past year, rising from 59.90% at December 31, 2003 to 61.04% for year-end 2004.



Critical Accounting Policies





14

---

General



The financial condition and results
of operations presented in the consolidated financial statements, the accompanying notes
 to the consolidated financial statements and this section are, to a large degree,
dependent upon our accounting policies.  The selection and application of these
accounting policies involve judgments, estimates, and uncertainties that are susceptible
 to change.  We discuss below those accounting policies that we believe are the most
important to the portrayal and understanding of our financial condition and results of
 operations.  These critical accounting policies require our most difficult, subjective
 and complex judgments about matters that are inherently uncertain.  In the event that
 different assumptions or conditions were to prevail, and depending upon the severity of such
changes, the possibility of materially different financial condition or results of operations
is a reasonable likelihood.



Allowance for Loan Losses



The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio.  The allowance is based on two basic principles of accounting:



·

SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and

·

SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.



Our allowance for loan losses is determined
 by evaluating our loan portfolio on at least a quarterly basis.   Particular attention
 is paid to individual loan performance, collateral values, borrower financial condition and overall
economic conditions.  The evaluation includes a close review of the internal watch list and other
 non-performing loans.  Management uses three steps in calculating the balance of the allowance.
 The first step is the specific classification which examines problem loans and applies a weight
 factor to each category.  The weight factor is based upon historical data and the loans within
each category are reviewed on a monthly basis to determine changes in their status.  The second
step applies a predetermined rate against total loans with unspecified reserves.  Again, this
 rate is based upon experience and can change over time.  The third step is an unallocated
allowance which is determined by economic events and conditions that may have a real, but as yet undetermined,
impact upon the portfolio.  Each of these steps is based on data that can be subjective and the actual losses may be greater or less than the amount of the allowance.  However, management feels that the allowance represents a reasonable assessment of the risk imbedded in the portfolio.



Other Real Estate Owned



Foreclosed properties are recorded at the lower of the outstanding loan balance at the time of foreclosure or the estimated fair value less estimated costs to sell.  At foreclosure any excess of the loan balance over the fair value of the property is charged to the allowance for loan losses. Such carrying value is periodically reevaluated and written down if there is an indicated decline in fair value, such as an independent appraisal. Historically, foreclosed properties are not carried on the books for more than two or three fiscal quarters, so the incidence of this happening is generally rare. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.



Income Taxes



Deferred income tax assets and liabilities are determined using the balance sheet method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. When calculating deferred tax assets, we are making the assumption that the Corporation will continue to have taxable income, as opposed to losses.  We are also assuming that the Corporation will continue to be assessed at the current rate of 34%.



Financial Condition



Total Assets



The Corporations assets grew at a 24.4% pace, ending the year at $576.2 million.  Total loans at year-end 2004, were $491.9 million of which $397.9 million were loans secured by real estate.  The remaining loans consisted of $63.1 million in commercial loans, $25.5 million in consumer installment loans and $5.4 million in all other loans.  Net loans for 2004, were $486.9 million, an increase of $104.4 million or 27.3% from the December 31, 2003



15

---

balance of $382.5 million.  The loan to deposit ratio was 100.6% for 2004 and 96.3% as of December 31, 2003.  Steady loan demand in an expanding market, combined with continued low interest rates for the first three quarters of the year, generated the loan growth experienced for 2004.  These conditions, along with the strong Valley economy, combined with the growth realized from the new loan production office in Martinsburg, West Virginia, gives management the belief that the Corporation will continue to see strong and increased loan demand for the immediate future.



The investment portfolio increased 13.6% to $27.3 million at year-end 2004 compared to $24.1 million at December 31, 2003.  Federal funds sold increased $2.2 million to $19.1 million at December 31, 2004 compared to $16.9 million at December 31, 2003.  Total interest earning assets increased $110.7 million or 25.9% from December 31, 2003 to December 31, 2004.  This increase was primarily the result of the increase in outstanding loan balances.



Liabilities



Total deposits increased to
 $483.9 million at December 31, 2004, from a balance of $397.3 million at December 31, 2003,
which is an increase of $86.6 million or 21.8%.  Non-interest bearing deposits have
 increased to $88.2 million as of December 31, 2004, an increase of $27.1 million or 44.3%
 from year-end 2003.  During this period interest bearing checking and savings accounts
increased $18.4 million or 14.1% to $148.7 million.  The balance in time deposits was $247.0
million at the end of 2004 reflecting an increase of $41.1 million or 19.9% over 2003.  As of
 December 31, 2004 non-interest bearing deposits represented 18.2% of total deposits as compared to
 15.4% at year-end 2003.  Low cost interest bearing deposits including savings and interest
bearing checking were 30.8% of total deposits, a slight decrease from 32.8% at December 31, 2003.
Time deposits represented 51.0% of total deposits at December 31, 2004, nearly unchanged from 51.8% at year-end 2003.



Advances from the Federal Home Loan Bank were $30.0 million at December 31, 2004, an increase from $10.0 million at December 31, 2003.  In addition, we had $13.4 million in outstanding trust preferred capital notes at December 31, 2004, unchanged from year-end 2003.



Shareholders' Equity



Total equity increased $5.4 million or 13.9% during 2004.  This increase was due to net income of $6.3 million for the year plus exercised stock options of $271 thousand, offset by an unrealized loss on available for sale securities of $138 thousand and further offset by dividends declared of $1.0 million.  The primary capital to assets ratio is 7.7%.



Net Income



Net income for the year ended 2004 was $6.3 million compared to $5.3 million for the same period in 2003. This is an increase of $1.1 million or 20.7% over the same period 2003. The provision for income tax expense increased $499 thousand from $2.5 million in 2003 to $3.0 million in 2004. The return on assets was 1.20% for 2004 as compared to 1.22% for the same period 2003.  For 2004, the return on equity was 15.20% down from 15.86% for 2003.



Net income for the year ended 2003 was $5.3 million compared to $4.4 million for the same period in 2002. This is an increase of $892 thousand or 20.4% over the same period 2002. The return on assets was 1.22% for 2003 as compared to 1.27% for the same period 2002. For 2003, the return on equity was 15.86% up from 15.63% for 2002.



Net Interest Income



Net interest income is the difference between interest income and interest expense and represents our gross profit margin. The net interest margin represents net interest income divided by average earning assets. It reflects the average effective rate that we earned on our earning assets.  Net interest margin is affected by changes in both average interest rates and average volumes of interest earning assets and interest bearing liabilities.



Net interest income for the year ending December 31, 2004 was $22.5 million, $4.3 million or 23.4% higher than the year ending 2003. This increase is the result of the growth in average earning assets of $90.5 million in 2004.  The combination of growth and rate changes had the effect of increasing the net interest margin from 4.63% at year-end 2003 to 4.65% for the same period of 2004.  As is the case with most financial institutions, Premier is liability sensitive for interest bearing balances re-pricing or maturing within one year.



Net interest income for the year ended December 31, 2003 was $18.2 million, $3.6 million or 24.4% higher than the year ended December 31, 2002. This increase is the result of the growth in average earning assets of $82.1 million in



16

---

2003. The combination of growth and rate changes had the effect of decreasing the net interest margin from 4.67% at year-end 2002 to 4.63% for the same period of 2003.



Interest income totaled $31.5 million for the year ended December 31, 2004, $4.9 million or 18.6% higher than the year ending December 31, 2003.  Interest and fees on loans of $30.0 million, which was an increase of 19.5% over the $25.1 million in interest and fees on loans recognized in 2003, comprised the vast majority of interest income. Interest income from investment securities was $1.2 million for 2004, virtually unchanged from the 2003 year-end amount of $1.2 million.  Interest income on federal funds, the third major component of the banks investments, increased $18 thousand or 7.6%.



Interest income totaled $26.5 million for the year ended December 31, 2003, $3.4 million or 14.7% higher than the year ended December 31, 2002. Interest and fees on loans of $25.1 million comprised the vast majority of interest income. Interest income from investment securities was $1.2 million for 2003, down slightly from the 2002 year-end amount of $1.3 million. This slight decrease was due to the decreased balance in the investment portfolio at December 31, 2003.  Interest income on federal funds sold decreased $46 thousand or 16.0%. The decline in interest earned on federal funds balances was the result of a decrease in the interest rate paid on fed funds during 2003.



Total interest expense for the year ended December 31, 2004 was $9.0 million, $678 thousand or 8.2% higher than the year ending 2003.  Interest paid on deposits for 2004 increased by $265 thousand or 3.5% over the same period 2003.  Although interest rates remained at or near record lows during the first three quarters of 2004, the additional expense was generated by an increase of $86.6 million in total deposits during the year.  Interest on borrowings increased by $414 thousand or 54.5% over the same period last year. This increase was primarily the result of interest expense related to the additional borrowings from the Federal Home Loan Bank.



Total interest expense for the year ended December 31, 2003 was $8.3 million, $175 thousand or 2.1% lower than for the same period 2002. Interest paid on deposits for 2003 decreased by $270 thousand or 3.5% over the same period 2002. The impact of declining interest rates from December 2002 through December 2003 more than offset the additional expense generated by an increase of $52.3 million in total deposits during the same period. Interest on borrowings increased by $95 thousand or 14.0% over the same period 2002. This increase was primarily the result of additional interest expense related to the issuance of a Trust Preferred Issue of $6.0 million during 2003. Borrowings were also obtained from the Federal Home Loan Bank.

































































17

---





The following table illustrates average balances of total earning assets and total interest-bearing liabilities for the periods indicated and shows the average distribution of assets, liabilities, shareholders equity, and the related income, expense, and corresponding weighted average yields and costs.  The average balances used for the purpose of this table and other statistical disclosures were calculated by using the daily average balances.



|Average Yields and Costs                                                   
|---------------------------------------------------------------------------
|                                                                           
|                                                                           
|(In thousands)                                                             
|                                                                           
|Assets:                                                                    
|                                                                           
|Interest Earning Assets                                                    
|Loans, net (1)                                                             
|Interest-bearing deposits                                                  
|Securities (2)                                                             
|Federal funds sold                                                         
|Total interest earning assets                                              
|                                                                           
|Non-Interest Earning Assets                                                
|Cash and due from banks                                                    
|Bank premises and equipment                                                
|Other assets                                                               
|Allowance for loan losses                                                  
|                                                                           
|Total assets                                                               
|                                                                           
|Liabilities and Shareholders Equity                                       
|                                                                           
|Liabilities                                                                
|Interest-bearing deposits                                                  
|Borrowed funds                                                             
|                                                                           
|Total interest-bearing liabilities                                         
|Non-Interest Bearing Liabilities:                                          
|Liabilities:                                                               
|Demand deposits                                                            
|Other liabilities                                                          
|Total liabilities                                                          
|Shareholders equity                                                       
|                                                                           
|Total liabilities and shareholders equity                                 
|                                                                           
|                                                                           
|Net Interest Earnings                                                      
|Net Interest Yield on Earnings Assets                                      
|                                                                           
|                                                                           
|(1) Non-accrual loans are included in the average balance of this category.
|(2) Amounts are shown on a tax equivalent basis.                           



18

---



The following table represents the variances of earning assets and interest-bearing liabilities for the periods indicated.  The total variance for each category is broken down between volume variance and rate variance which
provides an analysis of the impact that growth and changes in interest rates have upon the balance sheet structure.



|(In thousands)                    | December 31, 2004 vs. 2003 | December 31, 2003 vs. 2002
|--------------------------------- | -------------------------- | --------------------------
|                                  |                            |                           
|                                  | Due to                     | Change in                 
|Interest Earned On:               | Volume                     | Rate                      
|Loans                             | $6,515                     | ($1,585)                  
|Interest  bearing deposits       | (1)                        | 0                         
|Securities                        | 53                         | (57)                      
|Federal Funds Sold                | (79)                       | 98                        
|                                  |                            |                           
|Total interest earned on interest |                            |                           
|bearing assets                    | $6,488                     | ($1,544)                  
|                                  |                            |                           
|Interest Paid On:                 |                            |                           
|Interest-bearing deposits         | $1,125                     | ($860)                    
|Borrowed funds                    | 570                        | (157)                     
|                                  |                            |                           
|Total interest paid on interest   |                            |                           
|bearing Liabilities               | $1,695                     | ($1,017)                  
|                                  |                            |                           
|Net interest income               | $4,793                     | ($527)                    





For discussion on our interest sensitivity, see Item 7A below.



The following table presents the amounts of our interest sensitive assets and liabilities that mature or reprice at December 31, 2004.



|(In thousands)                                              |           | 90 Days   |           | Over    |         
|----------------------------------------------------------- | --------- | --------- | --------- | ------- | --------
|                                                            | 1-90 Days | to 1 Year | 1-5 Years | 5 Years | Total   
|Earning assets                                              |           |           |           |        
|Fed funds sold and interest bearing deposits in other banks | $19,142   | $0        | $0        | $48     | $19,190 
|Securities                                                  | 250       | 1,290     | 5,617     | 20,157  | 27,314  
|Loans                                                       | 147,161   | 64,468    | 252,865   | 27,378  | 491,872 
|                                                            |           |           |           |         |         
|Total earning assets                                        | $166,553  | $65,758   | $258,482  | $47,583 | $538,376
|                                                            |           |           |           |         |         
|Interest  bearing liabilities                              |           |           |           |         |         
|Interest  bearing demand                                   | $63,220   | $0        | $0        | $0      | $63,220 
|Savings                                                     | 14,692    | 0         | 20,439    | 0       | 35,131  
|Money market savings                                        | 50,378    | 0         | 0         | 0       | 50,378  
|Certificates of deposit                                     | 35,732    | 85,752    | 125,491   | 0       | 246,975 
|Borrowed funds                                              | 28,737    | 11,000    | 2,000     | 2,179   | 43,916  
|                                                            |           |           |           |         |         
|Total interest - bearing liabilities                        | $192,759  | $96,752   | $147,930  | $2,179  | $439,620
|                                                            |           |           |           |         |         
|Period GAP                                                  | ($26,206) | ($30,994) | $110,552  | $45,404 |         
|                                                            |           |           |           |         |         
|Cumulative GAP                                              | ($26,206) | ($57,200) | $53,352   | $98,756 |         
|                                                            |           |           |           |         |         
|Cumulative GAP/Earning assets                               | -4.87%    | -10.62%   | 9.91%     | 18.34%  |         



19

---



Contractual principal repayments of loans do not necessarily reflect the actual term of our loan portfolio.  The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and enforcement of due-on-sale clauses, which gives us the right to declare a loan immediately due and payable in the event, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid.  In addition, certain borrowers increase their equity in the security property by making payments in excess of those required under the terms of the mortgage.



Non-Interest Income



Our non-interest income is derived chiefly from service charges on deposit accounts, including charges for non-sufficient funds and ATM fees, and commissions and fees from bank services, such as mortgage originations and debit and credit card processing.



Total other income for 2004 was $4.4 million, an increase of $785 thousand or 21.5% over the 2003 balance of $3.7 million. This was the result of service charges and overdraft fees generated by an increasingly active deposit base and an increasing number of customer accounts, as more customers utilized the bounce protection program introduced in 2003.



Total other income for 2003 was $3.7 million, an increase of $1.2 million or 49.8% over the 2002 balance of $2.4 million. This was the result of service charges and overdraft fees generated by an increasingly active deposit base and an increasing number of customer accounts and the addition of an overdraft protection program.



Non-Interest Expenses



Non-interest expense consists of salaries and employee benefits, occupancy expenses, furniture and equipment and other operating expenses.  Total non-interest expenses for 2004 were $16.6 million, $3.4 million or 25.4% higher than the 2003 balance.  Salary expenses increased $2.0 million or 29.6%, as the Corporation opened one new branch, expanded its operations, and increased personnel to more efficiently handle the growth of the banks.  Expenses related to a bank-owned life insurance policy, which was newly purchased in 2004, totaled $304 thousand for the year ended 2004.  Expenses related to the bounce protection program, which was instituted in mid 2003, accounted for $266 thousand of non-interest expense for 2004.  The Corporation's efficiency ratio was 61.04% for 2004 compared to 59.9% for the same period in 2003.



Total non-interest expenses for 2003 were $13.2 million, $3.7 million or 38.7% higher than the 2002 balance.  Salary expenses increased $1.6 million or 31.3% during the year.  Advertising and marketing expenses increased $178 thousand or 47.5% during the same period.  The increased salary expenses were attributable to the additional staff needed for the two new branches opened during 2003, and the additional staffing required to more efficiently handle the growth of the banks.  The marketing expenses are related to the branch openings and to the banks campaigns to increase market share.  The Corporations efficiency ratio was 59.9% for 2003 compared to 55.3% for the same period in 2002.



Income Taxes



The provision for income tax expense increased $499 thousand or 20.1% for the year ended December 31, 2004 to $3.0 million versus $2.5 million at December 31, 2003.  The provision for income tax expense increased $390 thousand or 18.6% for the year ended December 31, 2003 to $2.5 million versus $2.1 million at December 31, 2002.







20

---







Investments



The following tables reflect the value of the securities portfolio of the Corporation at the dates indicated.



Carrying Value of Securities Available for Sale

|                                              | December 31,  
|--------------------------------------------- | --------------
|                                              | 2004          
|                                              | (In Thousands)
|U.S. Government and federal agencies          | $8,661        
|Obligations of state & political subdivisions | 7,233         
|Mortgage-backed securities                    | 373           
|Other securities                              | 3,478         
|                                              | $19,745       





Carrying Value of Securities Held to Maturity



|                                              | December 31,  
|--------------------------------------------- | --------------
|                                              | 2004          
|                                              | (In Thousands)
|U.S. Government and federal agencies          | $497          
|Obligations of state & political subdivisions | 4,334         
|Mortgage-backed securities                    | 0             
|Other securities                              | 2,738         
|                                              | $7,569        







At December 31, 2004, the approximate fair value of the securities portfolio was $27.2 million, compared to December 31, 2003 value of $23.9.  As of December 31, 2004, there were no obligations by any one issuer in the investment portfolio, exclusive of obligations of the U.S. Government or U.S. Agencies and Corporations, which in the aggregate exceeded 10% of stockholders equity.













21

---





The following tables set forth the maturity of distribution and weighted average yields of the securities portfolio at December 31, 2004.  The weighted average yields are calculated on the book value of the portfolio and on securities interest income adjusted for amortization of premium and accretion of discount.



|                                              |                  | Available for Sale (1) |                  
|--------------------------------------------- | ---------------- | ---------------------- | -----------------
|                                              |                  | December 31, 2004      |                  
|(In Thousands)                                |                  |                        |                  
|                                              | Within One Year  |                        | Within Five Years
|                                              | Amount (000s)   | Yield (%)              |                  
|U.S. Government and federal agencies          | 2,025            | 4.00%                  |                  
|Obligations of state & political subdivisions | 250              | 5.96%                  |                  
|Mortgage-backed securities                    | 0                | 0.00%                  |                  
|Other securities                              | 0                | 0.00%                  |                  
|Total                                         | 2,275            | 4.22%                  |                  
|                                              |                  |                        |                  
|                                              | After Five But   |                        |                  
|                                              | Within Ten Years |                        | After Ten Years  
|                                              | Amount (000s)   | Yield (%)              |                  
|U.S. Government and federal agencies          | 3,175            | 4.83%                  |                  
|Obligations of state & political subdivisions | 4,573            | 5.68%                  |                  
|Mortgage-backed securities                    | 2                | 8.48%                  |                  
|Other securities                              | 0                | 0.00%                  |                  
|Total                                         | 7,750            | 5.33%                  |                  







|                                              |                  | Held to Maturity  |                  
|--------------------------------------------- | ---------------- | ----------------- | -----------------
|                                              |                  | December 31, 2004 |                  
|                                              |                  |                   |                  
|                                              | Within One Year  |                   | Within Five Years
|                                              | Amount (000s)   | Yield (%)         |                  
|U.S. Government and federal agencies          | 0                | 0.00%             |                  
|Obligations of state & political subdivisions | 271              | 6.31%             |                  
|Other securities                              | 0                | 0.00%             |                  
|Total                                         | 271              | 6.31%             |                  
|                                              |                  |                   |                  
|                                              | After Five But   |                   |                  
|                                              | Within Ten Years |                   | After Ten Years  
|                                              | Amount (000s)   | Yield (%)         |                  
|U.S. Government and federal agencies          | 497              | 4.59%             |                  
|Obligations of state & political subdivisions | 2,793            | 5.97%             |                  
|Other securities                              | 0                | 0.00%             |                  
|Total                                         | 3,290            | 5.76%             |                  



(1) Excludes Restricted Securities of $3,198

22

---



Loans



Net loans consist of total loans, unearned income, deferred loan fees and the allowance for loan losses and excludes loans held for sale.  Net loans were $486.9 million at December 31, 2004, an increase of 27.3% over December 31, 2003.



We have significant concentrations of credit in the land acquisition and land development and construction due to the current growth and other economic development that we have been experiencing in our market area for the last several years.  At December 31, 2004, we had $142.9 million of commercial loans secured by real estate, which represented 29.1% of gross loans at that date.  In addition, at December 31, 2004, we had $101.4 million of construction and land development loans secured by real estate, which represented 20.6% of gross loans at that date.  We believe that these loans are all well-secured and are performing as required.



The following table summarizes the composition of the loan portfolio at the dates indicated:





|(In thousands)                                                        | December 31, |              |              |         
|--------------------------------------------------------------------- | ------------ | ------------ | ------------ | --------
|                                                                      | 2004         | 2003         | 2002         | 2001    
|Loans secured by real estate:                                         |              |              | (In 000s)   |         
|Construction and land development                                     | $   101,363  | $     66,501 | $     38,063 | $21,926 
|Secured by farmland                                                   | 4,154        | 4,890        | 2,774        | 1677    
|Secured by 1-4 family residential                                     | 131,230      | 101,548      | 70,773       | 53,419  
|Multi-family residential                                              | 18,224       | 15,432       | 6,258        | 3,982   
|Non-farm, non-residential loans                                       | 142,897      | 120,675      | 123,477      | 83,612  
|Loans to farmers (except those secured by real estate)                | 999          | 197          | 42           | 12      
|Commercial and industrial loans (except those secured by real estate) | 63,079       | 49,735       | 52,970       | 49,445  
|Loans to individuals (except those secured by real estate)            | 25,491       | 23,296       | 19,699       | 17,261  
|All other loans                                                       | 4,435        | 4,289        | 1,838        | 425     
|                                                                      | $491,872     | $386,563     | $315,894     | $231,759
|Less:                                                                 |              |              |              |         
|Allowance for loan losses                                             | 5,007        | 4,104        | 3,340        | 2,459   
|                                                                      | $486,865     | $382,459     | $312,554     | $229,300





The Corporation had no loans outstanding to foreign countries or for highly leveraged transactions as of December 31, 2004, or any of the previous years disclosed above. In addition, there were no categories of loans that exceeded 10% of outstanding loans as of December 31, 2004, which were not disclosed.



23

---





|The table below presents the maturities of selected loans outstanding at December 31, 2004.
|-------------------------------------------------------------------------------------------
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Commercial                                                                                 
|Real estate-construction                                                                   
|                                                                                           



|Interest sensitivity on such loans maturing after one year:
|-----------------------------------------------------------
|(In Thousands)                                             
|                                                           
|Fixed                                                      
|Variable                                                   
|Total                                                      





Asset Quality



Asset quality is an important factor in the successful operation of a financial institution.  Banking regulations require institutions to classify their own assets and to establish prudent general allowances for losses for assets classified as substandard or doubtful.  For the portion of assets classified as loss, an institution is required to either establish specific allowances of 100% of the amount classified or charge such amounts off its books.



The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is wellsecured and in process of collection.  We place loans on non-accrual status at an earlier date, or we charge them off, if collection of principal or interest is considered doubtful.



All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until they qualify for a return to accrual status.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.



Allowance for Loan Losses



We maintain the allowance for loan losses at a sufficient level to provide for potential losses in the loan portfolio.  Loan losses are charged directly to the allowance when they occur, while recoveries are credited to the allowance.  Specific reserves by loan type are established based on overall historical losses, anticipated losses, and inherit risk.  Additionally, specific reserves for individual loans are established depending on the severity of the potential loss.  Loans are individually reserved once classified as a watch item by management.  A higher percentage of the loan is reserved for individual loans with a more severe classification.  The adequacy of the provision for loan losses is reviewed regularly by management through consideration of several factors including changes in character and size of the loan portfolio and related loan loss experience, a review and examination of overall loan quality whic







h includes the identification and assessment of problem loans and an analysis of anticipated economic conditions in the market area.





24

---

The allowance for loan losses, at December 31, 2004, was $5.0 million. This is an increase of $903 thousand or 22.0% from December 31, 2003. The increases in our allowance for loan losses are the result of adjustments that management has made in response to the growth of our loan portfolio.



An analysis of the allowance for loan losses, including charge-off activity, is presented in the following table for the periods indicated.

|                                       | Year Ended December 31,
|-------------------------------------- | -----------------------
|(In thousands)                         | 2004                   
|                                       |                        
|Balance, beginning of period           | $       4,104          
|Less Charge-offs:                     |                        
|Commercial                             | 39                     
|Real estate-mortgage                   | 10                     
|Real estate-construction               | 14                     
|Consumer installment loans             | 175                    
|Total                                  | $238                   
|                                       |                        
|Plus Recoveries:                       |                        
|Commercial                             | 13                     
|Real estate-mortgage                   | 1                      
|Real estate-construction               | 0                      
|Consumer installment loans             | 107                    
|Total                                  | $121                   
|                                       |                        
|Additions charged to operating expense | $1,020                 
|                                       |                        
|Balance, end of period                 | $5,007                 
|                                       |                        
|Ratio of net charge-offs to            |                        
|average loans outstanding              | 0.03%                  



25

---



Allocation of the Allowance for Loan Losses



The following table reflects managements allocation of the allowance for loan losses at December 31 for each of the years indicated:

|                                      | 2004                | 2003    | 2002                
|------------------------------------- | ------------------- | ------- | --------------------
|(In Thousands)                        | Allowance           | Percent | Allowance           
|                                      |                     |         |                     
|Real estate construction              | $               559 | 20.6%   | $               455 
|Real estate mortgage                  | 1,879               | 60.3%   | 2,397               
|Commercial, financial and agriculture | 1,964               | 13.0%   | 945                 
|Consumer & Other                      | 605                 | 6.1%    | 307                 
|                                      | $            5,007  | 100.0%  | $            4,104  
|                                      |                     |         |                     
|                                      |                     |         |                     
|                                      | 2001                | 2000    |                     
|                                      | Allowance           | Percent | Allowance           
|                                      |                     |         |                     
|Real estate construction              | $               137 | 9.5%    | $                 84
|Real estate mortgage                  | 1,287               | 61.6%   | 804                 
|Commercial, financial and agriculture | 855                 | 21.3%   | 912                 
|Consumer & Other                      | 180                 | 7.6%    | 200                 
|                                      | $            2,459  | 100.0%  | $            2,000  





Non-Performing Assets



Non-accrual loans at December 31, 2004 were $1.1 million compared to $497 thousand for 2003.  Approximately $22 thousand of interest income would have been recorded if interest had been accrued in 2004.  As of December 31, 2004, the Corporation had a total of $1.8 million in non-accrual, and 90 days past due and still accruing interest, compared to $1.4 million in 2003.  This was an increase of $345 thousand or 23.9%.  The Corporation had no restructured loans during 2004 and 2003.



As of December 31, 2004 the Corporation had $2.6 million in impaired loans, which included the $1.1 million balance in non-accrual loans disclosed above.  The Corporations management and Board of Directors have reviewed the asset quality of Marathons and Rockingham Heritages loan portfolios and both loan loss allowances and have found them to be adequate.



The following table details information concerning non-accrual loans, foreclosed properties and past due loans at December 31 for each of the years indicated:



| | December 31,
| | ------------

|                                                           | 2004           | 2003           | 2002          | 2001          | 2000         
|---------------------------------------------------------- | -------------- | -------------- | ------------- | ------------- | -------------
|                                                           | (in 000s)    
|                                                           |                |                |               |               |              
|Non-accrual loans                                          | $1,120         | $497           | $631          | $211          | $371         
|Foreclosed Properties                                      | 151            | 67             | 67            | 67            | 0            
|                                                           | $       1,271  | $          564 | $         698 | $         278 | $         371
|                                                           |                |                |               |               |              
|Loans past due 90 days or more and still accruing interest | $          668 | $          946 | $         223 | $      1,079  | $         154

26

---



Sources of Funds

Deposits



We primarily use deposits to fund our loans and investment securities.  We offer individuals and small-to-medium-size businesses a variety of deposit accounts.  Deposit accounts, including checking, savings, money markets and certificates of deposit, are obtained primarily from the communities we serve.  We attract both short-term and long-term deposits from the general public by offering a wide assortment of accounts and rates.  We offer statement savings accounts, various checking accounts, various money market accounts, fixed-rate certificates with varying maturities and individual retirement accounts.



At December 31, 2004, deposits were $483.9 million, an increase of 21.8% from $397.3 million at December 31, 2003. The deposit growth is a reflection of branch office growth, aggressive pricing, increased marketing and bank consolidation in our principal market.  In order to reduce the overall cost of funds and reduce our reliance on high cost time deposits and short- term borrowings as a funding source, we continue to direct marketing efforts towards attracting lower cost transaction accounts.  However, there is no assurance that these efforts will be successful, or if successful, will reduce our reliance on time deposits and short-term borrowings.



The following table details the average amount of, and the average rate paid on the following primary deposit categories for the years ended December 31, 2004, 2003 and 2002.

|                                  | Year ended        |         | Year ended        |         | Year ended        | 
|--------------------------------- | ----------------- | ------- | ----------------- | ------- | ----------------- | 
|(In thousands)                    | December 31, 2004 |         | December 31, 2003 |         | December 31, 2002 | 
|                                  |                   |         |                   |         |                   | 
|                                  | Average           | Average |                   | Average | Average           | 
|                                  | Balance           | Rate    |                   | Balance | Rate              | 
|Demand deposits                   | $71,362           |         |                   | $53,258 |                   | 
|                                  |                   |         |                   |         |                   | 
|Interest - bearing demand         | 59,003            | 0.39%   |                   | 49,062  | 0.54%             | 
|Savings                           | 82,161            | 1.10%   |                   | 67,341  | 1.20%             | 
|Certificates of deposit           | 233,127           | 2.81%   |                   | 206,813 | 3.06%             | 
|Total interest - bearing deposits | 374,291           | 2.06%   |                   | 323,216 | 2.33%             | 
|                                  |                   |         |                   |         |                   | 





The following is a summary of the maturity distribution of certificates of deposit and other time deposits in amounts of $100,000 or more at December 31, 2004.



|                       | Amount        | Percent
|---------------------- | ------------- | -------
|                       | (in 000's)   
|Three months or less   | $       9,685 | 13.90% 
|Over three-six months  | 9,265         | 13.30% 
|Over six-twelve months | 12,022        | 17.25% 
|Over twelve months     | 38,704        | 55.55% 
|                       | $     69,676  | 100.00%



27

---





Certificates of deposit in the amounts of $100,000 or more were $69.7 million at December 31, 2004.  This represents 28.2% of the total certificates of deposit balance of $247.0 million at December 31, 2004.  The Corporation does not solicit such deposits.  Further, the Corporation does bid for selected public funds deposits in large denominations, and such deposits may require a pledging of investment securities.



The Corporation competes with the major regional financial institutions for money market accounts and certificates of deposits less than $100,000.  While the Corporation is competitive with its interest rates, using a tiered rate system to increase individual account balances, the Corporation has found that it can continue to maintain a higher interest margin than its peers by matching loan maturities with certificate maturities and setting loan rates based on the Corporations cost of funds.





Liquidity and Capital Reserves



Liquidity is a measure of our ability to generate sufficient cash to meet present and future obligations in a timely manner.  Our liquidity requirements are measured by the need to meet deposit withdrawals, fund loans, meet reserve requirements and maintain cash levels necessary for daily operations. To meet liquidity requirements, we maintain cash reserves and have an adequate flow of funds from maturing loans, securities, and short-term investments. In addition, our banks have the ability to borrow additional funds from various sources.  Short-term borrowings are available from federal funds facilities at correspondent banks and from the discount window of the Federal Reserve Bank.  Borrowings are available from the Federal Home Loan Bank.  We consider our sources of liquidity to be ample to meet our estimated needs.



Our ability to fund these daily commitments at December 31, 2004, 2003 and 2002 is illustrated in the table below:



|                                     | December 31,      
|------------------------------------ | ------------------
|                                     | 2004              
|                                     | (amounts in 000s)
|Liquid Assets:                       |                   
|Cash and due from banks              | $21,574           
|Federal funds sold                   | 19,075            
|Liquid securities                    | 250               
|Loans maturing in one year or less   | 211,629           
|Total liquid assets                  | $252,528          
|                                     |                   
|Total deposits and other liabilities | $531,888          
|                                     |                   
|Ratio of liquid assets to deposits   |                   
|and other liabilities                | 47.48%            





The net loan to deposit ratio (100.61%) as of December 31, 2004 has provided the opportunity for the Corporation to achieve a high return on its deposits.  For the year ended December 31, 2004, the Corporation experienced a return on assets of 1.20% and a net interest margin of 4.65%.



Typically, management prefers to maintain a loan to deposit ratio of less than 100%.  The high rate of growth in new loans being produced by the loan production office in Martinsburg, West Virginia, (an office that cannot offer deposit products until it is established as a separate bank) is the primary reason for the Corporations higher than usual loan to deposit ratio.  Due to the anticipated deposit growth once Premier Bank has been established, and in light of the short-term borrowings available to the Corporation, management does not feel that this represents a liquidity problem, and we anticipate that the loan to deposit ratio will be back within normal ranges during 2005.



The source of new funds is strong for both long-term and short-term duration.  The growth in deposits was $86.6 million or 21.8% during 2004.  The Corporation also has access to overnight federal funds from correspondent banks totaling up to $22.1 million.  In addition, The Corporation has established borrowing limits through the Federal Reserve Banks discount window for $2.0 million. Also, the Corporation has $105.3 million of funds



28

---

available through the Federal Home Loan Bank of Atlanta of which $30.0 million has been utilized.  Management believes that the opportunity for the sale of loans on the market is good.





|The following table summarizes historical trends in our significant cash flow items for the periods indicated:
|--------------------------------------------------------------------------------------------------------------
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|CASH FLOWS PROVIDED:                                                                                          
|Operations                                                                                                    
|Investing                                                                                                     
|Maturity, call and purchase of securities                                                                     
|                                                                                                              
|Financing                                                                                                     
|Growth in deposits                                                                                            
|                                                                                                              
|CASH FLOWS USED:                                                                                              
|Investing                                                                                                     
|Growth in loans                                                                                               
|Purchase of property, plant and equipment                                                                     
|Purchase of securities                                                                                        





The following table summarizes ratios considered to be significant indicators of our profitability and financial condition for the periods indicated.

|                                      | For the Years Ended December 31,
|------------------------------------- | --------------------------------
|                                      | 2004                            
|                                      |                                 
|Return on average assets              |                                 
|(Net income/average total assets)     | 1.20%                           
|                                      |                                 
|Return on average equity              |                                 
|(Net income/average equity)           | 15.20%                          
|                                      |                                 
|Dividends payment ratio               |                                 
|(Dividends declared/                  |                                 
|Net income)                           | 16.29%                          
|                                      |                                 
|Average equity to average asset ratio | 7.91%                           







29

---

The following tables present the net income of the Corporation, broken down by quarter for the years ended December 31, 2004 and 2003.



|                                                    | 2004                                
|--------------------------------------------------- | ------------------------------------
|                                                    | In thousands (except per share data)
|                                                    | March 31                            
|Total interest income                               | $7,150                              
|Net interest income after provision for loan losses | 4,685                               
|Non interest income                                 | 1,035                               
|Non interest expense                                | 3,781                               
|Income before income taxes                          | 1,939                               
|Net income                                          | 1,321                               
|Earnings per common share  assuming dilution       | $0.26                               
|Dividends per common share                          | 0.00                                

|                                                    | 2003                                
|--------------------------------------------------- | ------------------------------------
|                                                    | In thousands (except per share data)
|                                                    | March 31                            
|Total interest income                               | $6,250                              
|Net interest income after provision for loan losses | 3,860                               
|Non interest income                                 | 602                                 
|Non interest expense                                | 2,811                               
|Income before income taxes                          | 1,651                               
|Net income                                          | 1,104                               
|Earnings per common share  assuming dilution       | $0.24                               
|Dividends per common share                          | 0.00                                





Capital Resources



The Corporations risk-based capital position at December 31, 2004 was $57.1 million, or 11.9% of risk-weighted assets, for Tier I capital, and $62.1 million, or 12.9% for total risk based capital. Tier I capital consists primarily of common shareholders' equity and Trust Preferred Capital Notes. Total risk-based capital includes the allowance for loan losses in addition to Tier 1 Capital. Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet items. Under current risk-based capital standards,
all banks are required to have Tier I capital of at least 4% and a total capital ratio of 8%.  The Corporations issuance of $7.2 million in Trust Preferred Capital Notes in the fourth quarter of 2001 and the additional issue of $6.2 million in 2003 are included in the Tier 1 capital base, and will serve as a long-term source of funding.



Off-Balance Sheet Obligations



The Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit and commercial lines of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.



The Corporation's exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making commitments as it does for on-balance-sheet instruments.



At December 31, 2004, commitments for standby letters of credit totaled $6.2 million, unfunded commitments under lines of credit totaled $76.4 million, and commitments to extend credit totaled $58.4 million.  At December 31, 2003, commitments for standby letters of credit totaled $4.8 million, unfunded commitments under lines of credit totaled $90.3 million, and commitments to extend credit totaled $35.0 million.





30

---

Contractual Obligations



During the normal course of business, the Corporation obligates itself to certain contractual obligations.  These obligations include long-term debt, capital leases, and operating leases.  The following table summarizes those obligations as of December 31, 2004.



|( In thousands)           |                 | Less Than       |                 |                    | More than      
|------------------------- | --------------- | --------------- | --------------- | ------------------ | ---------------
|Contractual Obligations   | Total           | One Year        | >1-3 years      | >3-5 years         | Five Years     
|Long-Term Debt            | $        43,403 | $        16,000 | $        12,000 | $                - | $        15,403
|Capital Lease Obligations | 273             | 24              | 48              | 48                 | 153            
|Operating Leases          | 580             | 213             | 200             | 92                 | 75             
|Purchase Obligations      | -               | -               | -               | -                  | -              
|Other                     | -               | -               | -               | -                  | -              
|TOTAL                     | $        44,256 | $        16,237 | $        12,248 | $             140  | $        15,631







31

---

Recent Accounting Pronouncements



In January 2003, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
46, Consolidation of Variable Interest Entities (FIN 46).  This
Interpretation provides guidance with respect to the identification of variable interest entities
 when the assets, liabilities, non-controlling interests, and results of operations of a variable
interest entity need to be included in a Corporations consolidated financial statements.  An
entity is deemed a variable interest entity, subject to the interpretation, if the equity investment at
risk is not sufficient to permit the entity to finance its activities without additional subordinated
financial support from other parties, or in cases in which the equity investors lack one or more of the
essential characteristics of a controlling financial interest, which include the ability to make decisions
 about the entitys activities through voting rights, the obligations to absorb the expected losses of
the entity if they occur, or the right to receive the expected residual returns of the entity if they
 occur.  Due to significant implementation issues, the FASB modified the wording of FIN 46 and issued
FIN 46R in December of 2003.  FIN46R deferred the effective date for the provisions of FIN 46 to entities
other than Special Purpose Entities (SPEs) until financial statements issued for periods ending after
 March 15, 2004.  SPEs were subject to the provisions of either FIN 46 or FIN 46R as of December 15, 2003.
 Management has evaluated the Corporations investments in variable interest entities and potential
variable interest entities or transactions, particularly in limited liability partnerships involved in low-income
housing development and trust preferred securities structures because these entities or transactions constitute the
Corporations primary FIN 46 and FIN 46R exposure.  The adoption of FIN 46 and FIN 46R did not have a material effect on the Corporations
consolidated financial position or consolidated results of operations.

In December 2003, the Accounting Standards Executive Committee (AcSEC) of
the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities
 Acquired in a Transfer.  The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The scope of the SOP applies to
unhealthy problem  loans that have been acquired, either individually in a portfolio, or in a business  acquisition.  The SOP addresses
 accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.  The SOP does not apply to loans originated by the
Corporation.  The Corporation intends to adopt the provisions of SOP 03-3 effective January 1, 2005, and does not expect the initial implementation to have a
significant effect on the Corporations consolidated financial position or consolidated results of operations.

Emerging Issues Task Force Issue No. 03-1 The Meaning of Other-Than-Temporary
 Impairment and Its Application to Certain Investments (EITF 03-1) was issued and is effective March 31, 2004.  The EITF 03-1 provides guidance
for determining the meaning of other than-temporarily impaired and its application to certain debt and equity securities within the scope of Statement
of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115) and investments accounted
 for under the cost method.  The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must
be recorded as other-than-temporarily impaired unless the Corporation can assert and demonstrate its intention to hold the security for a period of time sufficient to allow
 for a recovery of fair value up to or beyond the cost of the investment which might mean maturity.  This issue also requires disclosures assessing the
 ability and intent to hold investments in instances in which an investor determines that an investment with a fair value less than cost is not other-than-temporarily
 impaired.  On September 30, 2004, the Financial Accounting Standards Board decided to delay the effective date for the measurement and recognition guidance contained
in Issue 03-1.  This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature.  The
 disclosure guidance in Issue 03-1 was not delayed.



32

---

EITF No. 03-16, Accounting for
Investments in Limited Liability Companies was ratified by the Board and is effective for reporting periods beginning after June 15, 2004.  APB
Opinion No. 18, The Equity Method of Accounting Investments in Common Stock, prescribes the accounting for investments in common stock of
corporations that are not consolidated.  AICPA Accounting Interpretation 2, Investments in Partnerships Ventures, of Opinion 18,
 indicates that many of the provisions of the Opinion would be appropriate in accounting for partnerships. In EITF Abstracts, Topic  No.
D-46, Accounting for Limited Partnership Investments, the SEC staff clarified its view that investments of more than 3 to 5 percent are
considered to be more than minor and, therefore, should be accounted for using the equity method.  Limited liability companies (LLCs) have characteristics of both characteristics of both corporations and partnerships, but are dissimilar from both in
certain respects.  Due to those similarities and differences, diversity in practice exists with respect to accounting for non-controlling investments in LLCs.  The consensus reached was that an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a non-controlling investment should be accounted for using the cost method or the equity method of accounting. We do not expect that implementation will have a significant impact on the financial statements.

In December 2004, the FASB issued Statement of Financial Accounting
 Standards No. 123 (revised 2004), Share-Based Payment.This Statement establishes standards for
the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair
value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. The Statement
focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.
 The Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity
 instruments based on the grant-date fair value of the award (with limited exceptions).  That cost will be recognized over
 the period during which an employee is required to provide service in exchange for the award  the requisite service period (usually the vesting period).
 The entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its
 current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement
 date.Changes in fair value during the requisite service period will be recognized as compensation
cost over that period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing
models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are
available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an
amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.   This Statement is effective for public entities that do
not file as small business issuersas of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Under the transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures. For periods before the required effective date, entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123.









33

---

Item 7A. Quantitative and Qualitative Disclosures About Market Risk



General



An important element of both earnings performance and liquidity is the management of our interest-sensitive assets and our interest-sensitive liabilities maturing or repricing within specific time intervals and the risks involved with them.  Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices.  Our market risk is composed primarily of interest rate risk.  The asset and liability management committee at each bank is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk.  Our board of directors reviews the guidelines established by each committee.



Interest rate risk is monitored through the use of three complimentary modeling tools: static gap analysis, earnings simulation modeling and economic value simulation (net present value estimation).  Each of these models measures changes in a variety of interest rate scenarios.  While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of our interest rate risk, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.  Static gap, which measures aggregate repricing values, is less utilized since it does not effectively measure the earnings impact on us.  Earnings simulation and economic value models, however, which more effectively reflect the earnings impact, are utilized by management on a regular basis.



Earnings Simulation Analysis



We use simulation analysis to measure the sensitivity of net income to changes in interest rates.  The model calculates an earnings estimate based on current and projected balances and rates.  This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis.



Assumptions used in the model, including loan and deposit growth rates, are derived from seasonal trends and managements outlook, as are the assumptions used to project the yields and rates for new loans and deposits.  All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments.  Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning.  Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates.  Interest rates on different asset and liability accounts move differently when the prime rate changes and are accounted for in the different rate scenarios.



The following table represents the interest rate sensitivity on our net income using different rate scenarios as of December 31, 2004.



|                     |  | % Change in
|-------------------- |  | -----------
|Change in Prime Rate |  | Net Income 
|+300 basis points    |  | +10.1%     
|+200 basis points    |  | +8.4%      
|+100 basis points    |  | +5.3%      
|Most Likely          |  | 0          
|-100 basis points    |  | -4.1%      
|-200 basis points    |  | -11.0%     
|-300 basis points    |  | -23.9%     









34

---



Economic Value Simulation



We use economic value simulation to calculate the estimated fair value of assets and liabilities over different interest rate environments.  Economic values are calculated based on discounted cash flow analysis.  The economic value of equity is the economic value of all assets minus the economic value of all liabilities.  The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet.  The same assumptions are used in the economic value simulation as in the earnings simulation.





The following chart reflects the change in net market value by using December 31, 2004 data, over different rate environments with a one-year horizon.

|                     |  | Change in Economic Value of Equity
|-------------------- |  | ----------------------------------
|Change in Prime Rate |  | (dollars in thousands)            
|+300 basis points    |  | 6,059                             
|+200 basis points    |  | 5,910                             
|+100 basis points    |  | 5,653                             
|Most Likely          |  | 5,424                             
|-100 basis points    |  | 4,657                             
|-200 basis points    |  | 1,652                             
|-300 basis points    |  | (4,243)                           







Management of the Interest Sensitivity Gap



The interest sensitivity gap is the difference between
interest-sensitive assets and interest-sensitive liabilities maturing or repricing within a specific time interval.  The gap can be managed by repricing assets or liabilities, by selling investments, by replacing an asset or liability prior to maturity, or by adjusting the interest rate during the life of an asset or liability.  Matching the amounts of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net income due to changes in market interest rates.  We evaluate interest rate risk and then formulate guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments in order to decrease sensitivity risk.  These guidelines are based upon managements outlook regarding future interest rate movements, the
state of the regional and national economy, and other financial and business risk factors.



Our asset and liability committees review deposit pricing, changes in borrowed money, investment and trading activity, loan sale activities, liquidity levels and the overall interest sensitivity.  The actions of the committees are reported to the boards of directors regularly (monthly by Marathon and quarterly by Rockingham Heritage).  The daily monitoring of interest rate risk, investment and trading activity, along with any other significant transactions are managed by the presidents of each bank with input from other committee members.















35

---





Item 8. Financial Statements and Supplementary Data



The following financial statements are included in this Item 8:





-- Report of Independent Registered Public Accounting Firm - Yount, Hyde & Barbour, P.C.

-- Consolidated Balance Sheets - December 31, 2004 and 2003.

-- Consolidated Statements of Income - Years ended December 31, 2004, 2003, and 2002.

-- Consolidated Statements of Changes in Shareholders Equity - Years Ended December 31, 2004, 2003 and 2002.

-- Consolidated Statements of Cash Flows - Years Ended December 31, 2004, 2003 and 2002.

-- Notes to Consolidated Financial Statements.





















































36

---

To the Board of Directors

Premier Community Bankshares, Inc.





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





We have audited the
accompanying consolidated balance sheets of Premier Community Bankshares, Inc. and Subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31, 2004.  We also
have audited management's assessment, included in the accompanying Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A, that Premier Community Bankshares, Inc. and
Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Premier Community Bankshares, Inc. and Subsidiaries
management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting.  Our responsibility is to express an opinion on these financial statements, an opinion
 on management's assessment, and an opinion on the effectiveness of the corporation's internal control over financial reporting based on our audits.



We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).  
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
 the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects.  Our audit of financial statements
 included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
 statements, assessing the accounting principles used and significant estimates made by management, and
 evaluating the overall financial statement presentation.  Our audit of internal control over financial
 reporting included obtaining an understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe
 that our audits provide a reasonable basis for our opinions.



A corporation's internal control over financial reporting is a process designed 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.  A corporations internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations
 of management and directors of the company; and (3) provide reasonable assurance regarding prevention
 or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Premier Community Bankshares, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, managements assessment that Premier Community Bankshares, Inc. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on Internal Control



37



---

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Furthermore, in our opinion, Premier Community Bankshares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



/s/ Yount, Hyde & Barbour, P.C.





Winchester, Virginia

February 17, 2005































38



---

|PREMIER COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES            
|---------------------------------------------------------------
|Consolidated Balance Sheets                                    
|December 31, 2004 and 2003                                     
|(In Thousands, Except for Share Data)                          
|Assets                                                         
|                                                               
|Cash and due from banks                                        
|Interest-bearing deposits in other banks                       
|Federal funds sold                                             
|Securities available for sale, at fair value                   
|Securities held to maturity (fair value approximates $7,481 and
|$8,207 at December 31, 2004 and 2003, respectively)            
|Loans, net of allowance for loan losses of $5,007 in 2004      
|and $4,104 in 2003                                             
|Bank premises and equipment, net                               
|Accrued interest receivable                                    
|Other real estate                                              
|Other assets                                                   
|                                                               
|Liabilities and Shareholders' Equity                           
|                                                               
|Liabilities                                                    
|Deposits:                                                      
|Noninterest-bearing demand deposits                            
|Savings and interest-bearing demand deposits                   
|Time deposits                                                  
|Total deposits                                                 
|Federal Home Loan Bank advances                                
|Short-term borrowings                                          
|Accounts payable and accrued expenses                          
|Capital lease payable                                          
|Trust Preferred Capital Notes                                  
|Commitments and contingent liabilities                         
|Total liabilities                                              
|                                                               
|Shareholders' Equity                                           
|Preferred stock, Series A, 5% noncumulative, no par            
|value; 1,000,000 shares authorized and unissued                
|Common stock, $1 par value; 20,000,000 shares authorized;      
|2004, 4,919,548 shares issued and outstanding;                 
|2003, 4,881,084 shares issued and outstanding;                 
|Capital surplus                                                
|Retained earnings                                              
|Accumulated other comprehensive income                         
|Total shareholders' equity                                     
|                                                               
|See Notes to Consolidated Financial Statements.                
|                                                               



39



---

|PREMIER COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES     
|--------------------------------------------------------
|Consolidated Statements of Income                       
|Years Ended December 31, 2004, 2003 and 2002            
|(In Thousands, Except for Per Share Data)               
|                                                        
|                                                        
|Interest and dividend income:                           
|Interest and fees on loans                              
|Interest on investment securities:                      
|Nontaxable                                              
|Taxable                                                 
|Interest and dividends on securities available for sale:
|Nontaxable                                              
|Taxable                                                 
|Dividends                                               
|Interest on deposits in banks                           
|Interest on federal funds sold                          
|Total interest and dividend income                      
|                                                        
|Interest expense:                                       
|Interest on deposits                                    
|Interest on capital lease obligations                   
|Interest on borrowings                                  
|Total interest expense                                  
|Net interest income                                     
|Provision for loan losses                               
|Net interest income after provision for loan losses     
|                                                        
|Noninterest income:                                     
|Service charges on deposit accounts                     
|Commissions and fees                                    
|Other                                                   
|Total noninterest income                                
|                                                        
|Noninterest expenses:                                   
|Salaries and employee benefits                          
|Net occupancy expense of premises                       
|Furniture and equipment                                 
|Other                                                   
|Total other expenses                                    
|Income before income taxes                              
|Provision for income tax                                
|                                                        
|Net income                                              
|                                                        
|Earnings per share, basic                               
|Earnings per share, assuming dilution                   
|                                                        
|See Notes to Consolidated Financial Statements.         





40



---





|PREMIER COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders Equity
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, except Share Data)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                |              |             |              | Accumulated       |              |              
|----------------------------------------------- | ------------ | ----------- | ------------ | ----------------- | ------------ | -------------
|                                                |              |             |              | Other             |              |              
|                                                |              |             |              | Compre-           | Compre-      | Total        
|                                                | Common       | Capital     | Retained     | Hensive           | hensive      | Shareholders'
|                                                | Stock        | Surplus     | Earnings     | Income (Loss)     | Income       | Equity       
|Balance, December 31, 2001                      | $      4,527 | $    14,808 | $      6,342 | $             68  |              | $      25,745
|Comprehensive income:                           |              |             |              |                   |              |              
|Net income                                      | - -          | - -         | 4,364        | - -               | $      4,364 | 4,364        
|Other comprehensive income, unrealized          |              |             |              |                   |              |              
|gain on securities available for sale           |              |             |              |                   |              |              
|(net of tax, $104)                              | - -          | - -         | - -          | 201               | 201          | 201          
|Total comprehensive income                      | - -          | - -         | - -          | - -               | $      4,565 | - -          
|Dividends declared ($0.15 per share)            | - -          | - -         | (683)        | - -               |              | (683)        
|Issuance of common stock - exercise of          |              |             |              |                   |              |              
|stock options (28,000 shares)                   | 28           | 169         | - -          | - -               |              | 197          
|Balance, December 31, 2002                      | $      4,555 | $    14,977 | $    10,023  | $             269 |              | $     29,824 
|Comprehensive income:                           |              |             |              |                   |              |              
|Net income                                      | - -          | - -         | 5,256        | - -               | $      5,256 | 5,256        
|Other comprehensive income, unrealized          |              |             |              |                   |              |              
|(loss) on securities available for sale         |              |             |              |                   |              |              
|(net of tax, $1)                                | - -          | - -         | - -          | (1)               | (1)          | (1)          
|Total comprehensive income                      | - -          | - -         | - -          | - -               | $      5,255 | - -          
|Dividends declared ($0.18 per share)            | - -          | - -         | (879)        | - -               |              | (879)        
|Issuance of common stock  exercise of          |              |             |              |                   |              |              
|stock options (38,100 shares)                   | 38           | 378         | - -          | - -               |              | 416          
|Issuance of comon stock,                        |              |             |              |                   |              |              
|stock offering (287,500 shares)                 | 288          | 3,973       | - -          | - -               |              | 4,261        
|Balance, December 31, 2003                      | $      4,881 | $    19,328 | $    14,400  | $             268 |              | $      38,877
|Comprehensive income:                           |              |             |              |                   |              |              
|Net income                                      | - -          | - -         | 6,343        | - -               | $      6,343 | 6,343        
|Other comprehensive income, unrealized          |              |             |              |                   |              |              
|(loss) on securities available for sale         |              |             |              |                   |              |              
|(net of tax, $ 71)                              | - -          | - -         | - -          | (138)             | (138)        | (138)        
|Total comprehensive income                      | - -          | - -         | - -          | - -               | $      6,205 | - -          
|Dividends declared ($0.21 per share)            | - -          | - -         | (1,033)      | - -               |              | (1,033)      
|Issuance of common stock - exercise of          |              |             |              |                   |              |              
|stock options ( 41,775 shares)                  | 42           | 229         |              |                   |              | 271          
|Repurchase of common stock - exercise of        |              |             |              |                   |              |              
|cashless stock options (3,311 shares)           | (3)          | (55)        |              |                   |              | (58)         
|Balance, December 31, 2004                      | $      4,920 | $    19,502 | $    19,710  | $         130     |              | $   44,262   
|                                                |              |             |              |                   |              |              
|See Notes to Consolidated Financial Statements. |              |             |              |                   |             



41



---

|PREMIER COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES                                    
|---------------------------------------------------------------------------------------
|                                                                                       
|Consolidated Statements of Cash Flows                                                  
|Years Ended December 31, 2004, 2003 and 2002                                           
|(Dollars in Thousands)                                                                 
|                                                                                       
|                                                                                       
|Cash Flows from Operating Activities                                                   
|Net income                                                                             
|Adjustments to reconcile net income to net cash provided by operating activities:      
|Depreciation and amortization                                                          
|Provision for loan losses                                                              
|Deferred tax (benefit)                                                                 
|Loss on sale of equipment                                                              
|Net amortization on securities                                                         
|Origination of loans held for sale                                                     
|Proceeds from sale of loans held for sale                                              
|Changes in asset and liabilities:                                                      
|Increase in other assets                                                               
|Increase in accrued interest receivable                                                
|Increase in accounts payable and accrued expenses                                      
|Net cash provided by operating activities                                              
|                                                                                       
|Cash Flows from Investing Activities                                                   
|Proceeds from maturities, calls and principal payments of investment securities        
|Proceeds from maturities, calls and principal payments of securities available for sale
|Purchase of investment securities                                                      
|Purchase of securities available for sale                                              
|Net increase in loans                                                                  
|Purchase of bank premises and equipment                                                
|Net cash (used in) investing activities                                                
|                                                                                       
|Cash Flows from Financing Activities                                                   
|Net increase in demand deposits, NOW accounts and savings accounts                     
|Net increase in certificates of deposit                                                
|Increase in Federal Home Loan Bank advances                                            
|Increase (decrease) in short-term borrowings                                           
|Proceeds from trust preferred capital notes                                            
|Net proceeds from issuance of common stock                                             
|Repurchase of common stock                                                             
|Principal payments on capital lease obligations                                        
|Payment of dividends                                                                   
|Net cash provided by financing activities                                              
|                                                                                       
|Increase (decrease) in cash and cash equivalents                                       
|                                                                                       
|Cash and Cash Equivalents                                                              
|Beginning                                                                              
|Ending                                                                                 
|                                                                                       
|Supplemental Disclosures of Cash Flow Information                                      
|Cash payments for:                                                                     
|Interest                                                                               
|Income taxes                                                                           
|                                                                                       
|Supplemental Schedule of Noncash Investing and Financing Activities                    
|Other real estate acquired in settlement of loans                                      
|Unrealized gain (loss) on securities available for sale                                
|                                                                                       
|See Notes to Consolidated Financial Statements.                                        





42



---

Notes to Consolidated Financial Statements







Note 1.

Nature of Banking Activities and Significant Accounting Policies



Premier Community Bankshares, Inc. (the Corporation) is a Virginia multi-bank holding company headquartered in Winchester, Virginia.  The Corporation owns The Marathon Bank, Rockingham Heritage Bank and its subsidiary, RHB Services, Inc., Premier Statutory Trust I, and Premier Statutory Trust II.



The accounting and reporting policies of the Corporation and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  The following is a summary of the more significant policies.



Principles of Consolidation



The consolidated financial statements of the Premier Community Bankshares, Inc. and its subsidiaries, include the accounts of all companies.  All material intercompany balances and transactions have been eliminated.  FASB Interpretation No. 46 (R) requires that the Corporation no longer consolidate Premier Statutory Trust I and Premier Statutory Trust II.  The subordinated debt of the Trusts are reflected as a liability on the Corporations balance sheet.



Securities



Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost.  Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.



Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.



Restricted securities include Federal Reserve stock and Federal Home Loan Bank stock.



Stock Offering



On November 19, 2003, the Corporation issued 287,500 shares of common stock through a stock offering.  The stock was offered to the public at $15.75 per share.  After expenses of $267,000 proceeds to the Corporation were $4,261,000.







43



---

Notes to Consolidated Financial Statements





Loans



The Corporations banking subsidiaries grant mortgage, commercial and consumer loans to customers.  These loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers.  A substantial portion of the loan portfolio is represented by mortgage loans throughout the Augusta, Frederick, Rockingham, Shenandoah and Warren County areas of Virginia.  Additionally, the new loan production office in Martinsburg, West Virginia, has produced a concentration of loans in the counties of Berkeley, Jefferson,
 and Morgan.  The ability of the debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.



Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for loan losses.  Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using a method that approximates the interest method.



The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection.  Loans are placed on nonaccrual at an earlier date or charged off if collection of principal or interest is considered doubtful.



All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.



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 allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  Management uses three steps in calculating the balance of the reserve. The first step is the specific classification which examines problem loans and applies a weight factor to each category.  The weight factor is based
 upon historical data and the loans within each category are reviewed on a monthly basis to determine changes in their status.  The second step
 applies a predetermined rate against total loans with unspecified reserves.  Again, this rate
is based upon experience and can change over time.  The third step is an unallocated allowance
 which is determined by economic events and conditions that may have a real, but as
 yet undetermined, impact upon the portfolio.  This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as more information becomes available.



44



---

Notes to Consolidated Financial Statements









The impairment of loans that have been separately identified for evaluation is measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral.  However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment of those loans is to be based on the fair value of the collateral.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Corporation does not separately identify individual consumer and residential loans
for impairment disclosures.



Classifications of Amortization on Assets Acquired Under Capital Leases



The amortization expense on assets acquired under capital leases is included with the depreciation expense.



Earnings Per Share



Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method.



Income Taxes



Deferred income tax assets and liabilities are determined using the balance sheet method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.



Cash and Cash Equivalents



For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold.  Generally, federal funds are purchased and sold for one-day periods.



45



---

Notes to Consolidated Financial Statements









Bank Premises and Equipment



Land is carried at cost.  Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets, ranging from 3 to 40 years.



Other Real Estate Owned



Foreclosed properties are recorded at the lower of the outstanding loan balance at the time of foreclosure or the estimated fair value less estimated costs to sell.  At foreclosure any excess of the loan balance over the fair value of the property is charged to the allowance for loan losses. Such carrying value is periodically reevaluated and written down if there is an indicated decline in fair value.  Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.



Advertising Costs



The Corporation and subsidiaries follow the policy of charging the production costs of advertising to expense as incurred.



Use of Estimates



In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets.



Stock Compensation Plan



The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion No. 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 have an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (dollars in thousands except per share amounts):



46



---

Notes to Consolidated Financial Statements











|                                         | 2004             |  | 2003             |  | 2002            
|---------------------------------------- | ---------------- |  | ---------------- |  | ----------------
|                                         |                  |  |                  |  |                 
|Net income, as reported                  | $         6,343  |  | $         5,256  |  | $         4,364 
|Total stock-based compensation expense   |                  |  |                  |  |                 
|determined under fair value based method |                  |  |                  |  |                 
|for all rewards                          | (127)            |  | (125)            |  | (177)           
|Pro forma net income                     | $         6,216  |  | $         5,131  |  | $         4,187 
|                                         |                  |  |                  |  |                 
|Basic earnings per share                 |                  |  |                  |  |                 
|As reported                              | $           1.30 |  | $           1.14 |  | $           0.96
|Pro forma                                | $           1.27 |  | $           1.11 |  | $           0.92
|                                         |                  |  |                  |  |                 
|Diluted earnings per share               |                  |  |                  |  |                 
|As reported                              | $           1.26 |  | $           1.11 |  | $           0.94
|Pro forma                                | $           1.23 |  | $           1.08 |  | $           0.91



The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model.  The estimates were calculated using the following weighted-average assumptions for grants in 2004 and 2003, respectively:  Dividend rate of 1.27% and 1.33%, price volatility of 24.53% and 22.92%, risk-free interest rate of 3.66% and 3.54%, and expected lives of 5 years.



See Note 15 for additional information relating to this plan.



Reclassifications



Certain reclassifications have been made to prior period balances to conform to the current year presentation.





Note 2.

Securities



The amortized cost and fair value of the securities available for sale as of December 31, 2004 and 2003 are as follows:



|                           |                 |  | Gross           |  | Gross           |  |                  
|-------------------------- | --------------- |  | --------------- |  | --------------- |  | -----------------
|                           | Amortized       |  | Unrealized      |  | Unrealized      |  | Fair             
|                           | Cost            |  | Gains           |  | (Losses)        |  | Value            
|                           | 2004           
|U.S. Government and        |                 |  | (In Thousands)  |  |                
|federal agencies           | $         8,646 |  | $            28 |  | (13)            |  | $           8,661
|Obligations of state and   |                 |  |                 |  |                 |  |                  
|political subdivisions     | 7,086           |  | 168             |  | (21)            |  | 7,233            
|Mortgage-backed securities | 368             |  | 6               |  | (1)             |  | 373              
|Equity securities          | 250             |  | 30              |  | - -             |  | 280              
|Restricted securities      | 3,198           |  | - -             |  | - -             |  | 3,198            
|                           | $       19,548  |  | $          232  |  | $          (35) |  | $         19,745 
|                           |                 |  |                 |  |                 |  |                  

47



---

Notes to Consolidated Financial Statements



|                           |                 |  | Gross            |  | Gross             |  |               
|-------------------------- | --------------- |  | ---------------- |  | ----------------- |  | --------------
|                           | Amortized       |  | Unrealized       |  | Unrealized        |  | Fair          
|                           | Cost            |  | Gains            |  | (Losses)          |  | Value         
|                           | 2003           
|                           | (In Thousands) 
|U.S. Government and        |                 |  |                  |  |                   |  |               
|federal agencies           | $         6,281 |  | $           121  |  | $             - - |  | $        6,402
|Obligations of state and   |                 |  |                  |  |                   |  |               
|political subdivisions     | 6,337           |  | 223              |  | (18)              |  | 6,542         
|Mortgage-backed securities | 588             |  | 20               |  | - -               |  | 608           
|Equity securities          | 250             |  | 60               |  | - -               |  | 310           
|Restricted securities      | 1,832           |  | - -              |  | - -               |  | 1,832         
|                           | $       15,288  |  | $            424 |  | $           (18)  |  | $      15,694 
|                           |                 |  |                  |  |                   |  |               

The amortized cost and fair value of the securities available for sale as of December 31, 2004, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because mortgages underlying the mortgage-backed securities may be called or prepaid without any penalties.  Therefore, these securities are not included in the maturity categories in the maturity summary.



|                                       | Amortized        |  | Fair            
|-------------------------------------- | ---------------- |  | ----------------
|                                       | Cost             |  | Value           
|                                       | (In Thousands)  
|                                       |                  |  |                 
|Due in one year or less                | $          2,256 |  | $          2,275
|Due after one year through five years  | 4,127            |  | 4,143           
|Due after five years through ten years | 7,616            |  | 7,748           
|Due over ten years                     | 1,733            |  | 1,728           
|Mortgage-backed securities             | 368              |  | 373             
|Equity securities                      | 250              |  | 280             
|Restricted securities                  | 3,198            |  | 3,198           
|                                       | $        19,548  |  | $        19,745 
|                                       |                  |  |                 



48



---

Notes to Consolidated Financial Statements





The amortized cost and fair value of securities being held to maturity as of December 31, 2004 and 2003, are as follows:



|                           |                     |  | Gross               |  | Gross                |  |                     
|-------------------------- | ------------------- |  | ------------------- |  | -------------------- |  | --------------------
|                           | Amortized           |  | Unrealized          |  | Unrealized           |  | Fair                
|                           | Cost                |  | Gains               |  | (Losses)             |  | Value               
|                           | 2004               
|                           | (In Thousands)     
|                           |                     |  |                     |  |                      |  |                     
|U.S. Government and        |                     |  |                     |  |                      |  |                     
|federal agencies           | $               497 |  | $                 - |  | $               (31) |  | $                466
|Obligations of state and   |                     |  |                     |  |                      |  |                     
|political subdivisions     | 4,334               |  | 139                 |  | (84)                 |  | $             4,389 
|Trust preferred securities | 2,738               |  | 15                  |  | (127)                |  | $             2,626 
|                           | $            7,569  |  | $               154 |  | $             (242)  |  | $             7,481 
|                           |                     |  |                     |  |                      |  |                     

|                           |                   |  | Gross               |  | Gross              |  |                  
|-------------------------- | ----------------- |  | ------------------- |  | ------------------ |  | -----------------
|                           | Amortized         |  | Unrealized          |  | Unrealized         |  | Fair             
|                           | Cost              |  | Gains               |  | (Losses)           |  | Value            
|                           | 2003             
|                           | (In Thousands)   
|                           |                   |  |                     |  |                    |  |                  
|U.S. Government and        |                   |  |                     |  |                    |  |                  
|federal agencies           | $             897 |  | $                 9 |  | $             (10) |  | $             896
|Obligations of state and   |                   |  |                     |  |                    |  |                  
|political subdivisions     | 4,716             |  | 194                 |  | (225)              |  | 4,685            
|Trust preferred securities | 2,744             |  | 17                  |  | (135)              |  | 2,626            
|                           | $          8,357  |  | $             220   |  | $           (370)  |  | $          8,207 





49



---

The amortized cost and fair value of the securities being held to maturity as of December 31, 2004, by contractual maturity, are shown below.



|                                       | Amortized        |  | Fair            
|-------------------------------------- | ---------------- |  | ----------------
|                                       | Cost             |  | Value           
|                                       | (In Thousands)  
|                                       |                  |  |                 
|Due in one year or less                | $            271 |  | $            273
|Due after one year through five years  | 370              |  | 384             
|Due after five years through ten years | 3,290            |  | 3,382           
|Due over ten years                     | 3,638            |  | 3,442           
|                                       | $         7,569  |  | $         7,481 



For the years ended December 31, 2004, 2003, and 2002, there were no sales of securities available for sale.



Securities having a carrying value of $ 7,932,000 and $5,379,000 at December 31, 2004 and 2003 were pledged to secure public deposits and for other purposes required by law.



Securities in an unrealized loss position at December 31, 2004, and 2003, by duration of the unrealized loss, are shown below.  No impairment has been recognized on any of the securities in a loss position because of managements intent and demonstrated ability to hold securities to
scheduled maturity or call dates.  There are approximately 20 securities in the consolidated portfolio of the two banks that have losses, which are considered to be temporary.



December 31, 2004

|                           | Less Than 12 Months |  | 12 Months or More |  | Total           
|-------------------------- | ------------------- |  | ----------------- |  | ----------------
|                           |                     |  | Unrealized        |  |                 
|                           | Fair Value          |  | (Losses)          |  | Fair Value      
|                           | (In Thousands)     
|                           |                     |  |                   |  |                 
|U.S. Government            |                     |  |                   |  |                 
|and agency securities      | $       5,408       |  | $         (45)    |  | $            - -
|Obligations of states      |                     |  |                   |  |                 
|and political subdivisions | 497                 |  | (8)               |  | 1,308           
|Other securities           | 93                  |  | (1)               |  | 2,366           
|                           | $       5,998       |  | $         (54)    |  | $       3,674   
|                           |                     |  |                   |  |                 

50



---

Notes to Consolidated Financial Statements





December 31, 2003

|                                                 | Less Than 12 Months |  | 12 Months or More |  | Total          
|------------------------------------------------ | ------------------- |  | ----------------- |  | ---------------
|                                                 |                     |  | Unrealized        |  |                
|                                                 | Fair Value          |  | (Losses)          |  | Fair Value     
|                                                 | (In Thousands)     
|                                                 |                     |  |                   |  |                
|                                                 |                     |  |                   |  |                
|U.S. Government and
agency securities            | $          487      |  | $          (10)   |  | $             -
|Obligations of states and political subdivisions | 1,637               |  | (243)             |  | - -            
|Other securities                                 | 1,728               |  | (128)             |  | 638            
|                                                 | $       3,852       |  | $        (381)    |  | $          638 
|                                                 |                     |  |                   |  |                

Note 3.

Loans and Related Party Transactions



The composition of the net loans is as follows:

|                                                                 | December 31,  
|---------------------------------------------------------------- | --------------
|                                                                 | 2004          
|                                                                 | (In Thousands)
|Mortgage loans on real estate:                                   |               
|Construction                                                     | $     101,363 
|Secured by farmland                                              | 4,154         
|Secured by 1-4 family residential                                | 131,230       
|Multi-family residential                                         | 18,224        
|Nonfarm, nonresidential loans                                    | 142,897       
|Loans to farmers (except those secured by real estate)           | 999           
|Commercial loans (except those secured by real estate)           | 63,079        
|Consumer installment loans (except those secured by real estate) | 25,491        
|Overdrafts reclassified from deposits                            | 246           
|All other loans                                                  | 4,189         
|                                                                 | $      491,872
|Less:                                                            |               
|Allowance for loan losses                                        | 5,007         
|                                                                 | $      486,865





The Corporation, through its banking subsidiaries, has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.  These persons and firms were indebted to the Banks for loans totaling $ 6,022,000 and $7,232,000 at December 31, 2004 and 2003, respectively. During 2004, total principal additions
 were $3,855,000 and total principal payments were $5,065,000.



51

---

Notes to Consolidated Financial Statements







Note 4.

Allowance for Loan Losses



Changes in the allowance for loan losses are as follows:

|                          | December 31,   
|------------------------- | ---------------
|                          | 2004           
|                          | (In Thousands) 
|                          |                
|Balance, beginning        | $         4,104
|Provision for loan losses | 1,020          
|Recoveries                | 121            
|Loan losses charged to    |                
|the allowance             | (238)          
|Balance, ending           | $         5,007
|                          |                

The following is a summary of information pertaining to impaired loans for the years ended December 31, 2004 and 2003:



|                                              |  |  | December 31,    
|--------------------------------------------- |  |  | ----------------
|                                              |  |  | 2004            
|                                              |  |  | (In Thousands)  
|                                              |  |  |                 
|Impaired loans with a valuation allowance     |  |  | $         2,550 
|Impaired loans without a valuation allowance  |  |  | 64              
|Total impaired loans                          |  |  | $         2,614 
|                                              |  |  |                 
|Valuation allowance related to impaired loans |  |  | $            255
|                                              |  |  |                 
|Average investment in impaired loans          |  |  | $         2,041 
|                                              |  |  |                 
|Interest income recognized on impaired loans  |  |  | $            101
|                                              |  |  |                 
|Interest income recognized on a cash basis    |  |  |                 
|on impaired loans                             |  |  | $             97





52



---

Notes to Consolidated Financial Statements









No additional funds are committed to be advanced in connection with impaired loans.



Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $268,225 and $136,851 at December 31, 2004 and 2003, respectively.  If interest on these loans had been accrued, such income would have approximated $5,800, $4,800 and $2,000 for 2004, 2003 and 2002, respectively.





Note 5.

Bank Premises and Equipment, Net



Bank premises and equipment as of December 31, 2004 and 2003 consists of the following:



|                                        | 2004           |  | 2003           
|--------------------------------------- | -------------- |  | ---------------
|                                        | (In Thousands)
|                                        |                |  |                
|Bank premises                           | $       10,328 |  | $         8,360
|Furniture and equipment                 | 6,276          |  | 5,435          
|Capital leases - property and equipment | 257            |  | 257            
|Bank premises and equipment in process  | 172            |  | 828            
|                                        | $       17,033 |  | $       14,880 
|Less accumulated depreciation           | 4,875          |  | 3,918          
|                                        | $      12,158  |  | $      10,962  



Depreciation and amortization, related to Bank premises and equipment, included in operating expense for 2004, 2003 and 2002 was $1,036,000, $886,000 and $498,000, respectively.





Note 6.

Deposits



The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2004 and 2003 was $69,676,000 and $55,808,000, respectively.



At December 31, 2004, the scheduled maturities of time deposits are as follows (dollars in thousands):



|Years Ending December 31: |                  
|------------------------- | -----------------
|                          |                  
|2005                      | $         121,335
|2006                      | 54,157           
|2007                      | 19,151           
|2008                      | 26,721           
|2009                      | 25,611           
|                          | $         246,975





53



---

Notes to Consolidated Financial Statements







Note 7.

Income Taxes



Net deferred tax assets consist of the following components as of December 31, 2004 and 2003:



|                                                 | 2004              |  | 2003             
|------------------------------------------------ | ----------------- |  | -----------------
|                                                 | (In Thousands)   
|Deferred tax assets:                             |                   |  |                  
|Allowance for loan losses                        | $           1,584 |  | $           1,301
|Deferred loan fees                               | 166               |  | 128              
|Deferred benefit plans                           | 327               |  | 172              
|Other                                            | 91                |  | 65               
|                                                 | $          2,168  |  | $          1,666 
|Deferred tax liabilities:                        |                   |  |                  
|Depreciation                                     | $             578 |  | $             460
|Securities available for sale                    | 67                |  | 138              
|                                                 | $             645 |  | $             598
|Net deferred tax assets                          |                   |  |                  
|Net deferred tax assets
included in other assets | $          1,523  |  | $          1,068 
|                                                 |                   |  |                  

The provision for income taxes charged to operations for the years ended December 31, 2004, 2003 and 2002, consists of the following:



|                       | 2004            |  | 2003            |  | 2002           
|---------------------- | --------------- |  | --------------- |  | ---------------
|                       | (In Thousands) 
|                       |                 |  |                 |  |                
|Current tax expense    | $         3,368 |  | $         2,672 |  | $         2,274
|Deferred tax (benefit) | (384)           |  | (187)           |  | (179)          
|                       | $         2,984 |  | $         2,485 |  | $         2,095
|                       |                 |  |                 |  |                

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 2004, 2003 and 2002, due to the following:



|                                    | 2004            |  | 2003            |  | 2002           
|----------------------------------- | --------------- |  | --------------- |  | ---------------
|                                    | (In Thousands) 
|                                    |                 |  |                 |  |                
|Computed "expected" tax expense     | $         3,171 |  | $         2,632 |  | $         2,196
|Increase (decrease) in income taxes |                 |  |                 |  |                
|resulting from:                     |                 |  |                 |  |                
|Tax-exempt interest income          | (199)           |  | (155)           |  | (102)          
|Other                               | 12              |  | 8               |  | 1              
|                                    | $         2,984 |  | $         2,485 |  | $         2,095



54



---

Notes to Consolidated Financial Statements











Note 8.

Leases



Capital Leases



The Marathon Bank has a lease agreement on a branch facility.  The liability is payable in monthly installments of $1,991 through May 31, 2016 at an interest rate of 8%. The capital lease payable at December 31, 2004 in the amount of $179,000 represents the present value of the balance due in future years for lease rentals discounted at the respective interest rates.Since the term of the lease is approximately the same as the estimated useful life of the assets, and the present value of the future minimum lease payments at the beginning of the lease
 approximated the fair value of the leased assets at that date, the lease is considered to be a capital lease and has been so recorded.



The following is a schedule by years of the future minimum lease payments under the capital lease together with the present value of the net minimum lease payments as of December 31, 2004:



Years ending December 31 (dollars in thousands):

|                                            |                     
|------------------------------------------- | --------------------
|2005                                        | $                 24
|2006                                        | 24                  
|2007                                        | 24                  
|2008                                        | 24                  
|2009                                        | 24                  
|Later years                                 | 153                 
|Total minimum lease payments                | $               273 
|Less the amount representing interest       | (94)                
|Present value of net minimum                |                     
|Present value of net minimum
lease payments | $               179 
|                                            |                     



Operating Leases



Rockingham Heritage Bank has entered into a five-year operating lease with an entity of which a director of the Corporation is a shareholder.  The lease expires on November 30, 2005 and has four five-year renewal options.  The total minimum lease commitment at December 31, 2004 under this lease is $26,565.



The Banks were obligated under a number of other noncancelable leases for various banking premises, which including renewal options, expire through 2012.  Total rental expense on premises and equipment for 2004, 2003 and 2002, was $325,000, $258,000 and $226,000, respectively.



55



---

Notes to Consolidated Financial Statements





Minimum rental commitments under noncancelable operating leases with terms in excess of one year as of December 31, 2004 were as follows (dollars in thousands):



|2005        | $        213
|----------- | ------------
|2006        | 131         
|2007        | 69          
|2008        | 57          
|2009        | 35          
|Later years | 75          
|            | $        580





Note 9.

Commitments and Contingent Liabilities



In the normal course of business, there are other outstanding commitments and contingent liabilities which are not reflected in the accompanying financial statements.  See Note 11 with respect to financial instruments with off-balance-sheet risk.



As members of the Federal Reserve System, the banking subsidiaries are required to maintain certain average reserve balances.  For the final weekly reporting period in the years ended December 31, 2004 and 2003, the aggregate amounts of daily average required balances were approximately $6,404,000 and $2,828,000, respectively.



The Banks are required to maintain certain required reserve balances with its correspondent bank.  Those required balances were $2,025,000 and $9,050,000 for 2004 and 2003, respectively.





Note 10.

Dividend Restrictions



Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Banks to the Corporation.  The total amount of dividends which may be paid at any date is generally limited to the current year earnings and earnings retained for the two preceding years.



As of December 31, 2004, the aggregate amount of unrestricted funds, which could be transferred from the Corporations subsidiaries to the Parent Company, without prior regulatory approval, totaled approximately $17,449,000 or 39.4% of the consolidated net assets.



In addition, dividends paid by the Banks to the Corporation would be prohibited if the effect thereof would cause the Banks capital to be reduced below applicable minimum capital requirements.



56



---

Notes to Consolidated Financial Statements







Note 11.

Financial Instruments With Off-Balance-Sheet Risk



The Banks are party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit and commercial lines of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.



The Banks' exposure to credit loss is represented by the contractual amount of these commitments. The Banks follow the same credit policies in making commitments as it does for on-balance-sheet instruments.



At December 31, 2004 and 2003, the following financial instruments were outstanding whose contract amounts represent credit risk:



|                           | Contract Amount
|-------------------------- | ---------------
|                           | 2004           
|                           | (In Thousands) 
|                           |                
|Commitments to grant loans | $       58,385 
|Standby letters of credit  | 6,161          
|Unfunded commitments under |                
|lines of credit            | 76,391         
|                           |                



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Banks evaluate each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if it is deemed necessary by the Banks, is based on management's credit evaluation of the counterparty.



Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers.  These lines of credit generally are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Banks are committed.



Commercial and standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party.  Those letters of credit are primarily issued to support public and private borrowing arrangements.  Essentially all letters of credit issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Banks generally hold collateral supporting those commitments for which collateral is deemed necessary.



57



---

Notes to Consolidated Financial Statements









The Banks have cash accounts in other commercial banks.  The amount on deposit at these banks at December 31, 2004 exceeded the insurance limits of the Federal Deposit Insurance Corporation by approximately $2,316,000.



Note 12.

Employee Benefit Plans



The Marathon Bank and Rockingham Heritage Bank each have a 401(k) Profit Sharing Plan covering employees who have completed 90 days of service and are at least 18 years of age.  Employees may contribute compensation subject to certain limits based on federal tax laws.  The Bank makes discretionary matching contributions equal to 100 percent of an employees compensation contributed to the Plan up to 5 percent of the employees compensation.  Additional amounts may be contributed, at the option of the Banks Board of Directors.  These additional contributions generally
 amount to 4.5 percent of eligible employees compensation.
 Employer contributions vest to the employee over a six-year period.



For the years ended December 31, 2004, 2003 and 2002, expense attributable to these retirement plans amounted to $330,000, $307,000 and $183,000, respectively.



Deferred Compensation Plans



During 2004, a deferred compensation plan and split dollar life insurance plan were adopted for selected Executive Officers of the Company.  Under these plans, the benefit is equal to 25% of the individual employees final compensation at
time of retirement.  Benefits are to be paid in monthly installments commencing at retirement
 for a period of 180 months.  The agreement provides that if employment is terminated for reasons other than retirement or disability, the benefit is reduced based upon a vesting schedule.  If death occurs prior to termination of service, no retirement benefits are paid but a life insurance benefit of up to three times compensation is paid to the employees beneficiary. The deferred compensation charged to expense for 2004, based on the present value of
the retirement benefits, was $304,054.  The plans are unfunded; however, life insurance has
 been acquired on the life company employees in amounts sufficient
to offset the expense of the obligations.



Note 13.

Fair Value of Financial Instruments and Interest Rate Risk



The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:



Cash and Short-Term Investments



For those short-term instruments, the carrying amount is a reasonable estimate of fair value.



Securities



For securities, fair values are based on quoted market prices or dealer quotes.



Loan Receivables



For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.  The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.





58



---

Notes to Consolidated Financial Statements







Deposits and Borrowings



The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.  The fair value of all other deposits and borrowings is determined using the discounted cash flow method.  The discount rate was equal to the rate currently offered on similar products.



Accrued Interest



The carrying amounts of accrued interest approximate fair value.



Off-Balance-Sheet Financial Instruments



The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.



At December 31, 2004 and 2003, the fair value of loan commitments and stand-by letters of credit were immaterial.

|                              | 2004          |  | 2003        
|----------------------------- | ------------- |  | ------------
|                              | Carrying      |  | Fair        
|                              | Amount        |  | Value       
|                              | (Thousands)   |  | (Thousands) 
|Financial assets:             |               |  |             
|Cash and short-term           |               |  |             
|investments                   | $      40,649 |  | $     40,649
|Securities                    | 27,314        |  | 27,226      
|Loans, net                    | 486,865       |  | 489,532     
|Accrued interest receivable   | 1,850         |  | 1,850       
|                              |               |  |             
|Financial liabilities:        |               |  |             
|Deposits                      | $    483,933  |  | $    482,666
|Federal Home Loan Bank        |               |  |             
|advances                      | 30,000        |  | 30,169      
|Short-term borrowings         | 513           |  | 513         
|Capital lease payable         | 179           |  | 179         
|Trust preferred capital notes | 13,403        |  | 13,403      
|Accrued interest payable      | 504           |  | 504         
|                              |               |  |             



The Corporation, through its banking subsidiaries, assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the fair values of their financial instruments will change when interest rate levels change and that change may be



59



---

Notes to Consolidated Financial Statements







either favorable or unfavorable.  Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk.  However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment.  Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.  Management monitors rates
 and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms
of new loans and deposits and by investing in securities with terms that mitigate the Corporation's overall interest rate risk.





Note 14.

Minimum Regulatory Capital Requirements



The Corporation (on a consolidated basis) and the Banks are subject to various regulatory
 capital requirements administered by the federal banking agencies.  Failure to meet minimum capital
 requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
 that, if undertaken, could have a direct material effect on the Corporations and Banks
 financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt
 corrective action, the Corporation and the Banks 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 classification are also subject
 to qualitative judgments by the regulators about components, risk weightings, and
 other factors.  Prompt correction action provisions are not applicable to bank holding companies.



Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2004 and 2003, that the Corporation and the Banks met all capital adequacy requirements to which they are subject.



As of December 31, 2004, the most recent notification from the Federal Reserve Bank categorized the Banks as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.



There are no conditions or events since the notification that management believes have changed the Banks category.  The Corporations and the Banks capital amounts and ratios as of December 31, 2004 and 2003 are also presented in the table.

60

---

Notes to Consolidated Financial Statements



|                         |                       |  |             |  |                   |  |                   |  | Minimum          
|------------------------ | --------------------- |  | ----------- |  | ----------------- |  | ----------------- |  | -----------------
|                         |                       |  |             |  |                   |  |                   |  | To Be Well       
|                         |                       |  |             |  |                   |  |                   |  | Capitalized Under
|                         |                       |  |             |  | Minimum Capital   |  | Prompt Corrective
|                         | Actual                |  | Requirement |  | Action Provisions
|                         | Amount                |  | Ratio       |  | Amount            |  | Ratio             |  | Amount           
|                         | (Amount in Thousands)
|As of December 31, 2004: |                       |  |             |  |                   |  |                   |  |                  
|Total Capital to Risk    |                       |  |             |  |                   |  |                   |  |                  
|Weighted Assets:         |                       |  |             |  |                   |  |                   |  |                  
|Consolidated             | $ 62,139              |  | 12.89%      |  | $ 38,560          |  | 8.00%             |  | N/A              
|The Marathon Bank        | $ 33,877              |  | 11.36%      |  | $ 23,853          |  | 8.00%             |  | $       29,816   
|Rockingham Heritage Bank | $ 21,855              |  | 12.00%      |  | $ 14,565          |  | 8.00%             |  | $       18,207   
|Tier 1 Capital to Risk   |                       |  |             |  |                   |  |                   |  |                  
|Weighted Assets:         |                       |  |             |  |                   |  |                   |  |                  
|Consolidated             | $ 57,132              |  | 11.85%      |  | $ 19,280          |  | 4.00%             |  | N/A              
|The Marathon Bank        | $ 30,673              |  | 10.29%      |  | $ 11,927          |  | 4.00%             |  | $      17,890    
|Rockingham Heritage Bank | $ 20,050              |  | 11.01%      |  | $   7,283         |  | 4.00%             |  | $      10,924    
|Tier 1 Capital to        |                       |  |             |  |                   |  |                   |  |                  
|Average Assets:          |                       |  |             |  |                   |  |                   |  |                  
|Consolidated             | $ 57,132              |  | 10.13%      |  | $ 22,559          |  | 4.00%             |  | N/A              
|The Marathon Bank        | $ 30,673              |  | 8.62%       |  | $ 14,226          |  | 4.00%             |  | $      17,782    
|Rockingham Heritage Bank | $ 20,050              |  | 9.62%       |  | $   8,333         |  | 4.00%             |  | $      10,416    
|                         |                       |  |             |  |                   |  |                   |  |                  
|As of December 31, 2003: |                       |  |             |  |                   |  |                   |  |                  
|Total Capital to Risk    |                       |  |             |  |                   |  |                   |  |                  
|Weighted Assets:         |                       |  |             |  |                   |  |                   |  |                  
|Consolidated             | $ 55,713              |  | 14.80%      |  | $ 30,112          |  | 8.00%             |  | N/A              
|The Marathon Bank        | $ 23,560              |  | 10.63%      |  | $ 17,729          |  | 8.00%             |  | $      22,161    
|Rockingham Heritage Bank | $ 19,227              |  | 12.51%      |  | $ 12,296          |  | 8.00%             |  | $      15,370    
|Tier 1 Capital to Risk   |                       |  |             |  |                   |  |                   |  |                  
|Weighted Assets:         |                       |  |             |  |                   |  |                   |  |                  
|Consolidated             | $ 51,478              |  | 13.68%      |  | $ 15,056          |  | 4.00%             |  | N/A              
|The Marathon Bank        | $ 21,160              |  | 9.55%       |  | $   8,864         |  | 4.00%             |  | $      13,297    
|Rockingham Heritage Bank | $ 17,523              |  | 11.40%      |  | $   6,148         |  | 4.00%             |  | $        9,222   
|Tier 1 Capital to        |                       |  |             |  |                   |  |                   |  |                  
|Average Assets:          |                       |  |             |  |                   |  |                   |  |                  
|Consolidated             | $ 51,478              |  | 11.46%      |  | $ 17,975          |  | 4.00%             |  | N/A              
|The Marathon Bank        | $ 21,160              |  | 7.98%       |  | $ 10,609          |  | 4.00%             |  | $      13,261    
|Rockingham Heritage Bank | $ 17,523              |  | 9.52%       |  | $   7,366         |  | 4.00%             |  | $        9,208   
|                         |                       |  |             |  |                   |  |                   |  |                  







61



---

Notes to Consolidated Financial Statements







Note 15.

Stock Compensation Plan



The Corporations Long-Term Incentive Plan allows for incentive stock options and nonqualified stock options to be granted to certain key employees and directors with an exercise price to be not less than 100% of the Fair Market Value of the Stock on the day the stock option is granted.  440,000 shares of the Corporations common stock plus sufficient shares to cover the options outstanding under the Corporations previous plan have been reserved for the
 issuance of stock options under the Plan.  All options expire ten years from the grant date and vest 25% at the date of grant and 25% each year for the three years following the grant year.

A summary of the activity in the stock option plan follows:



|                                 | 2004         |  | 2003         |  | 2002        
|-------------------------------- | ------------ |  | ------------ |  | ------------
|                                 |              |  | Weighted     |  |             
|                                 | Number       |  | Average      |  | Number      
|                                 | of           |  | Exercise     |  | of          
|                                 | Shares       |  | Price        |  | Shares      
|                                 |              |  |              |  |             
|Outstanding at beginning of year | 295,275      |  | $       7.77 |  | 331,375     
|Granted                          | 4,000        |  | 17.56        |  | 12,000      
|Exercised                        | (41,775)     |  | 5.91         |  | (38,100)    
|Forfeited                        | (2,000)      |  | 7.30         |  | (10,000)    
|Outstanding at end of year       | 255,500      |  | $       8.23 |  | 295,275     
|                                 |              |  |              |  |             
|Options exercisable at year-end  | 230,750      |  | $       7.79 |  | 213,025     
|Weighted-average fair value of   |              |  |              |  |             
|options granted during the year  | $       4.36 |  |              |  | $       3.31





Information pertaining to options outstanding at December 31, 2004 is as follows:



|                          |         | Options Outstanding |      | Options Exercisable
|------------------------- | ------- | ------------------- | ---- | -------------------
|                          |         |                     |      | Weighted           
|                          |         |                     |      | Average            
|                          |         |                     |      | Remaining          
|Exercise                  |         | Number              |      | Contractual        
|Price                     |         | Outstanding         |      | Life               
|                          |         |                     |      |                    
|$     5.00                |         | 37,875              |      | 1.75               
|7.25                      |         | 5,000               |      | 1.75               
|7.30                      |         | 135,000             |      | 6.75               
|10.53                     |         | 61,625              |      | 7.75               
|10.23                     |         | 1,000               |      | 8.00               
|11.67                     |         | 1,000               |      | 8.25               
|14.99                     |         | 10,000              |      | 8.75               
|17.56                     |         | 4,000               |      | 9.50               
|Oustanding at end of year | 255,500 |                     | 6.28 |                    



62



---

Notes to Consolidated Financial Statements









Note 16.

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. Potential dilutive common stock had no effect on income available to common shareholders.



|                   | 2004      |  | 2003         |  | 2002     
|------------------ | --------- |  | ------------ |  | ---------
|                   |           |  | Per          |  |          
|                   |           |  | Share        |  |          
|                   | Shares    |  | Amount       |  | Shares   
|Basic earnings     |           |  |              |  |          
|per share          | 4,893,442 |  | $       1.30 |  | 4,602,466
|Effect of dilutive |           |  |              |  |          
|securities:        |           |  |              |  |          
|Stock options      | 155,355   |  |              |  | 142,623  
|Diluted earnings   |           |  |              |  |          
|per share          | 5,048,797 |  | $       1.26 |  | 4,745,089
|                   |           |  |              |  |          

In 2004 there were no shares excluded from EPS or considered to be antidilutive.  In 2003 and in 2002, stock options representing 1,000 and 31,500 shares were not included in computing diluted EPS because their effects were antidilutive.





Note 17.

Borrowings



The Corporations banking subsidiaries has a line of credit with the Federal Home Loan Bank (FHLB) of Atlanta for $105,300,000 and $69,400,000 as of December 31, 2004 and 2003, respectively. Advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available.  These advances are secured by 1-4 family residential mortgages.  The unused line of credit totaled $75,300,000 and $59,400,000 at
December 31, 2004 and 2003, respectively.  On some fixed rate advances the
FHLB may convert the advance to an indexed floating interest rate at some set point
 in time for the remainder of the term.  If the advance converts to a floating interest
 rate, the Banks may pay back all or part of the advance without a prepayment penalty.  Floating
rate advances may be paid back at any time without penalty.



As of December 31, 2004, the fixed-rate long-term debt totaled $17,000,000 and matures through April 6, 2011.  The interest rates on the fixed-rate note payable ranges from 1.84% to 7.07%.  As of December 31, 2004, the adjustable-rate long-term debt totaled $13,000,000 and matures through June 18, 2007.  $10,000,000 of the adjustable-rate long-term debt is adjustable quarterly with a current rate of 2.01%; the remaining  $3,000,000 is adjustable daily, with a rate of 2.50% as of December 31, 2004.



As of December 31, 2003, the fixed-rate long-term debt totaled $10,000,000 and matured through April 6, 2011.  The interest rates on the fixed-rate notes payable range from 2.31% to 7.07%.



63



---

Notes to Consolidated Financial Statements









The contractual maturities of FHLB advances as of December 31, 2004 are as follows (dollars in thousands):



|Due in 2005 | $     16,000
|----------- | ------------
|Due in 2006 | 2,000       
|Due in 2007 | 10,000      
|Due in 2011 | 2,000       
|            | $     30,000



In 2001, Premier Statutory Trust I, a wholly-owned subsidiary of the Corporation, was formed for the purpose of issuing redeemable Capital Securities.  On December 18, 2001, $7.2 million of trust preferred securities were issued through a pooled underwriting totaling approximately $300 million.  The securities have a LIBOR-indexed floating rate of interest.  The interest rate as of December 31, 2004 was 6.10%.  Interest is payable monthly.  The securities
 have a mandatory redemption date of December 18, 2031, and are subject to varying call provisions
beginning December 18, 2006.  The principal asset of the Trust is $7.2 million of the
 Corporations junior subordinated debt securities with the like maturities and like interest
rates to the Capital Securities.



In 2003, Premier Statutory Trust II, a wholly-owned subsidiary of the Corporation, was formed for the purpose of issuing redeemable Capital Securities.  On September 25, 2003, an additional $6.2 million of trust preferred securities were issued through a pooled underwriting totaling approximately $228 million.  The securities have a LIBOR-indexed floating rate of interest.  The interest rate as of December 31, 2004 was 5.17%.  Interest is payable monthly.  The securities have an optional redemption date of October 8, 2008, and are subject to varying
call provisions beginning October 8, 2033.  The principal asset of the Trust is $6.2 million of the Corporations junior subordinated debt securities with the like maturities and like interest rates to the Capital Securities.



The Trust Preferred Securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier I capital after its inclusion.  The portion of the Trust Preferred not considered as Tier I capital may be included in Tier II capital.



The obligations of the Corporation with respect to the issuance of the Capital Securities constitute a full and unconditional guarantee by the Corporation of the Trusts obligations with respect to the Capital Securities.



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



64



---

Notes to Consolidated Financial Statements









Note 18.

Other Expenses



The Corporation and its subsidiaries had the following expenses as of December 2004, 2003 and 2002 as follows:



|                               | 2004           |  | 2003          |  | 2002         
|------------------------------ | -------------- |  | ------------- |  | -------------
|                               | (In Thousands)
|Advertising                    | $          621 |  | $         553 |  | $         375
|ATM expense                    | 374            |  | 315           |  | 257          
|Directors' fees                | 425            |  | 356           |  | 275          
|Postage expense                | 270            |  | 278           |  | 262          
|Stationary and supplies        | 431            |  | 545           |  | 328          
|Telephone expense              | 388            |  | 294           |  | 226          
|Other (no item >1% of revenue) | 3,114          |  | 2,419         |  | 1,508        
|                               | $       5,623  |  | $      4,760  |  | $      3,231 





Note 19.

Formation of New Bank Subsidiary



The Corporation intends to organize a third bank in West Virginia, which will be named Premier Bank.  The Corporation plans to locate Premier Bank's headquarters in Martinsburg and its initial branch office in Shepherdstown, West Virginia.  It is expected that Premier Bank will open in the second quarter of 2005. The banking charter has been received from the state of West Virginia, as well as approval for deposit insurance from the FDIC.  Premier Bank was originally expected to open during the third quarter of 2004, but was unable to do so due to
 unexpected delays in the local government planning process.  Premier Bank will offer a
 wide variety of deposits and loans, including residential loans, commercial loans and commercial
construction and development loans. The Corporation has entered into a contractual agreement for
the construction of the branch office in Shepherdstown.  The obligation totals $604,000.  The contract must commence
 on or before March 1, 2005, and must be completed on or before September 1, 2005.



65



---

Notes to Consolidated Financial Statements









Note 20.

Parent Corporation Only Financial Statements



|PREMIER COMMUNITY BANKSHARES, INC.             
|-----------------------------------------------
|(Parent Corporation Only)                      
|                                               
|Balance Sheets                                 
|December 31, 2004 and 2003                     
|                                               
|                                               
|                                               
|                                               
|Assets                                         
|Cash                                           
|Interest bearing deposits with subsidiary banks
|Federal funds sold                             
|Investment in subsidiaries                     
|Equipment, net                                 
|Other assets                                   
|                                               
|Total assets                                   
|                                               
|Liabilities                                    
|Accrued expenses                               
|Dividends payable                              
|Trust preferred capital notes                  
|                                               
|                                               
|Shareholders' Equity                           
|Preferred stock                                
|Common stock                                   
|Capital surplus                                
|Retained earnings                              
|Accumulated other comprehensive income         
|Total shareholders' equity                     
|                                               
|Total liabilities and shareholders' equity     







66



---

Notes to Consolidated Financial Statements









|PREMIER COMMUNITY BANKSHARES, INC.               
|-------------------------------------------------
|(Parent Corporation Only)                        
|                                                 
|Statements of Income                             
|Years Ended December 31, 2004, 2003 and 2002     
|                                                 
|                                                 
|                                                 
|                                                 
|Income                                           
|Interest on federal funds sold                   
|Interest on deposits in other banks              
|Management fee income                            
|Total income                                     
|                                                 
|Expenses                                         
|Interest expense on trust preferred capital notes
|Other expenses                                   
|Total expense                                    
|                                                 
|(Loss) before income tax (benefit) and           
|undistributed income of subsidiaries             
|                                                 
|Income tax (benefit)                             
|                                                 
|(Loss) before undistributed                      
|income of subsidiaries                           
|                                                 
|Undistributed income of subsidiaries             
|                                                 
|Net income                                       
|                                                 





67



---

Notes to Consolidated Financial Statements











|PREMIER COMMUNITY BANKSHARES, INC.                 
|---------------------------------------------------
|(Parent Corporation Only)                          
|                                                   
|Statements of Cash Flows                           
|Years Ended December 31, 2004, 2003 and 2002       
|                                                   
|                                                   
|                                                   
|                                                   
|Cash Flows from Operating Activities               
|Net income                                         
|Adjustments to reconcile net income to net cash    
|(used in) operating activities:                    
|Depreciation expense                               
|(Undistributed income) of subsidiary               
|(Increase) decrease in other assets                
|Increase (decrease) in accrued expenses            
|Net cash (used in) operating activities            
|                                                   
|Cash Flows from Investing Activities               
|Increase in investment in subsidiaries             
|Purchase of equipment                              
|(Increase) decrease in investment in certificates  
|of deposit with subsidiaries                       
|Net cash (used in) investing activities            
|                                                   
|Cash Flows from Financing Activities               
|Net proceeds from issuance of common stock         
|Repurchase of common stock                         
|Proceeds from trust preferred capital notes        
|Payment of dividends                               
|Net cash provided by (used in) financing activities
|                                                   
|Increase (decrease) in cash and cash equivalents   
|                                                   
|Cash and Cash Equivalents                          
|Beginning                                          
|                                                   
|Ending                                             





68



---





Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



Item 9A.  Controls and Procedures



Disclosure Controls and Procedures. The Corporation maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission.  An evaluation of the effectiveness of the design and operation of the Corporations disclosure controls and procedures as of December 31, 2004 was carried out under the supervision and with the participation of management, including the Corporations Chief Executive Officer and Chief Financial Officer.  Based on and as of the date of such evaluation, the aforementioned officers concluded that the Corporations disclosure controls and procedures were effective.



Managements Report on Internal Control over Financial Reporting.Management of the Corporation is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  The Corporations internal control over financial reporting is designed to provide reasonable assurance to the Corporations management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principals.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.



Management assessed the effectiveness of the Corporations internal control over financial reporting as of December 31, 2004.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.Based on this assessment, management believes that, as of December 31, 2004, the Companys internal control over financial reporting was effective based on those criteria.



Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, has been audited by Yount, Hyde & Barbour, P.C., the independent registered public accounting firm who also audited the Corporations consolidated financial statements included in this Annual Report on Form 10-K.  Yount, Hyde & Barbour, P.C.s attestation report on managements assessment of the Corporations internal control over financial reporting appears on pages 37 and 38 hereof.



Changes in Internal Control Over Financial Reporting. There were no changes in the Corporations internal control over financial reporting during the Corporations fourth quarter ended December 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Corporations internal control over financial reporting.



Item 9B.  Other Information



Not Applicable.





PART III



The information required by Items 10, 11, 12, 13 and 14 of Part III has been incorporated herein by reference to the Corporations Proxy Statement for the 2005 Annual Meeting of Shareholders (the 2005 Proxy Statement) as set forth below in accordance with General Instruction G.3 of Form 10-K.



Item 10.  Directors and Executive Officers of the Registrant



Information with respect to this Item 10 is set forth in the sections entitled Election of Directors, Corporate Governance and the Board of Directors  Committees of the Board  Audit Committee, Stock Ownership  Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance and the Board of Directors  Code of Ethics of the 2005 Proxy Statement and is incorporated herein by reference.





69

---





Item 11.  Executive Compensation



Information with respect to this Item 11 is set forth in the sections entitled Executive Compensation and Related Transactions  Executive Officer Compensation,  Deferred Compensation Plans,  Stock Options, and Compensation/Options Committee Interlocks and Insider Participation and  Employment Agreement and Corporate Governance and the Board of Directors  Director Compensation in the 2005 Proxy Statement and is incorporated herein by reference.



Item 12. Security Ownership of Certain Beneficial Owners and Management



Information with respect to this Item 12 is set forth in the sections entitled Stock Ownership and Executive Compensation and Related Transactions  Equity Compensation Plan Information in the 2005 Proxy Statement and is incorporated herein by reference.



Item 13.  Certain Relationships and Related Transactions



Information with respect to this Item 13 is set forth in the section entitled Executive Compensation and Related Transactions  Certain Relationships and Related Transactions in the 2005 Proxy Statement and is incorporated herein by reference.



Item 14.  Principal Accounting Fees and Services



Information with respect to this Item 14 is set forth in the section entitled Audit Information  Fees of Independent Public Accountants and  Pre-Approved Policies and Procedures in the 2005 Proxy Statement and is incorporated herein by reference.































70

---









PART IV



Item 15.  Exhibits, Financial Statement Schedules



(a)

(1) and (2)  The response to this portion of Item 15 is included in Item 8 above.



(3)  Exhibits:



3.1

Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.1 to the Corporation's Annual Report on Form 10-KSB for the year ended December 31, 2000 (File No. 0-18868).

3.2

Bylaws (as amended and restated in electronic format as of August 12, 2003), incorporated herein by reference to Exhibit 3.2 to the Corporation's Registration Statement on Form S-1, as amended, filed October 10, 2003 (File No. 333-109656).

10.1

401(k) Plan of Marathon Financial Corporation, incorporated herein by reference to Exhibit 10.1 to the Corporation's Registration Statement on Form S-1 filed August 26, 1992 (File No. 33-51366).

10.2

Lease between The Marathon Bank and Post Office Plaza, L.C. for the branch office at 300 Warren Avenue, Front Royal, Virginia, incorporated herein by reference to Exhibit 10.3 to the Corporation's Registration Statement on Form S-1 filed July 26, 1992 (File No. 333-08995).

10.3

Lease between The Marathon Bank and the Lessor, James Butcher, for the branch office at 1041 Berryville Avenue, Winchester, Virginia, incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-18868).

10.4

Lease between The Marathon Bank and the Lessors, Keith R. Lantz and Mary G. Lantz, for land at 1014 Main Street, Woodstock, Virginia, incorporated herein by reference to Exhibit 10.5 to the Corporation's Annual Report on Form 10-KSB for the year ended December 31, 1997 (File No. 0-18868).

10.5

1996 Long-Term Incentive Plan of Marathon Financial Corporation, incorporated herein by reference to Exhibit 99 to the Corporation's Registration Statement on Form S-8 filed November 26, 1997 (File No. 333-41163).*

10.6

2002 Long-Term Incentive Plan of the Corporation, incorporated herein by reference to Exhibit 99 to the Corporation's Registration Statement on Form S-8 filed December 3, 2002 (File No. 333-101619).*

10.7

Salary Reduction Deferred Compensation Agreement, dated as of September 22, 1998, between The Marathon Bank and Donald L. Unger, incorporated herein by reference to Exhibit 10.8 to the Corporation's Registration Statement on Form S-1, as amended, filed October 10, 2003 (File No. 333-109656).*

10.8

Employment Agreement, dated as of April 1, 1998, between Marathon Financial Corporation and Donald L. Unger, incorporated herein by reference to Exhibit 10.8 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 0-18868).*

21.1

Subsidiaries of Premier Community Bankshares, Inc., incorporated by reference herein by reference to Exhibit 21 to the Corporation's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-18868).

23.1

Consent of Yount, Hyde & Barbour, P.C.

31.1

Rule 13a-14(a) Certification of Chief Executive Officer.

31.2

Rule 13a-14(a) Certification of Chief Financial Officer.

32.1

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350.





*  Management contract or compensatory plan or arrangement.



(All exhibits not incorporated herein by reference are attached as exhibits to the Corporations Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.)





71

---







(b)

Exhibits



See Item 15(a)(3) above.



(c)

Financial Statement Schedules



See Item 15(a)(2) above.











(All signatures are included with the Corporations Annual Report on Form 10-K for the year ended

December 31, 2004, as filed with the Securities and Exchange Commission.)

















































72

---







SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



PREMIER COMMUNITY BANKSHARES, INC.



Date:  March 8, 2005

By:

/s/ Donald L. Unger

Donald L. Unger

President and Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|Signature                                  | Title                                                                                | Date         
|------------------------------------------ | ------------------------------------------------------------------------------------ | -------------
|/s/ Donald L. Unger

Donald L. Unger       | President and Chief
Executive Offi­c­er and Di­rec­tor (Principal Executive Officer) | March 8, 2005
|/s/ Frederick A. Board

Frederick A. Board | Chief Financial Officer
(Principal Financial and
Accounting Officer)                 | March 8, 2005
|/s/ John K. Stephens

John K. Stephens     | Chairman of the Board
and Director                                                   | March 8, 2005
|/s/ Walter H. Aikens

Walter H. Aikens     | Director                                                                             | March 8, 2005
|/s/ Clifton L. Good

Clifton L. Good       | Director                                                                             | March 8, 2005
|/s/ Stephen T. Heitz

Stephen T. Heitz     | Director                                                                             | March 8, 2005
|/s/ Joseph W. Hollis

Joseph W. Hollis     | Director                                                                             | March 8, 2005
|/s/ Meryl G. Kiser

Meryl G. Kiser         | Director                                                                             | March 8, 2005
|/s/ Wayne B. Ruck

Wayne B. Ruck           | Director                                                                             | March 8, 2005
|/s/ Psul R. Yoder, Jr.

Paul R. Yoder, Jr. | Director                                                                             | March 8, 2005



73

---













EXHIBIT INDEX





Exhibit No.

Description





23.1

Consent of Yount, Hyde & Barbour P.C.



31.1

Rule 13(a)-14(a) Certification of Chief Executive Officer.



31.2

Rule 13(a)-14(a) Certification of Chief Financial Officer.



32.1

Statement of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C.

Section 1350.













































74