UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



FORM 10-Q

(Mark One)



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

SECURITIES EXCHANGE ACT OF 1934





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

SECURITIES EXCHANGE ACT OF 1934







PREMIER COMMUNITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)



|                                                     |                                      | 
|---------------------------------------------------- | ------------------------------------ | 
|Virginia                                             | 54-1560968                          
|_______________________________                      | ___________________________________ 
|(State or other jurisdiction                         | (I.R.S. Employer Identification No.)
|of incorporation or organization)                    |                                     
|
|4095 Valley Pike                                     |                                     
|Winchester, Virginia                                 | 22602                               
|________________________________                     | __________                          
|(Address of principal executive offices)             | (Zip Code)                          
|                                                    
|(540) 869-6600                                      
|(Registrants telephone number, including area code)
|                                                    
|                                                    
|                                                     |                                     

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

Large accelerated filer_____       Accelerated filer__X____     Non-accelerated filer_______



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES______  NO___X___



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 4,968,651, $1.00 par value, as of May 1, 2006.





---



PART I.  FINANCIAL INFORMATION



|                                                                                                              |      
|------------------------------------------------------------------------------------------------------------- | -----
|Item 1. Financial Statements                                                                                  | 3    
|                                                                                                              |      
|The following financial statements are provided at the page numbers indicated.                                |      
|                                                                                                              |      
|Consolidated Balance Sheets at March 31, 2006 and December 31, 2005                                           | 3    
|                                                                                                              |      
|Consolidated Statements of Income for
the Three Months Ended
March 31, 2006 and 2005                          | 4    
|                                                                                                              |      
|Consolidated Statements of Changes in Shareholders Equity for the Three Months Ended March 31, 2006 and 2005 | 5    
|                                                                                                              |      
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005                      | 6    
|                                                                                                              |      
|Notes to Consolidated Financial Statements                                                                    | 7-14 
|                                                                                                              |      
|Item 2.  Managements Discussion and Analysis
of Financial Condition and Results of Operations                | 1521
|                                                                                                              |      
|Item 3.  Quantitative and Qualitative
Disclosures about Market Risk                                           | 21-22
|                                                                                                              |      
|Item 4.  Controls and Procedures                                                                              | 23   
|                                                                                                              |      
|Part II. OTHER INFORMATION                                                                                    | 23-24
|                                                                                                              |      
|Signatures                                                                                                    | 25   





2

---



|                                                            |               |                
|----------------------------------------------------------- | ------------- | ---------------
|PART I.  FINANCIAL INFORMATION                             
|                                                           
|Item 1. FINANCIAL STATEMENTS                               
|PREMIER COMMUNITY BANKSHARES, INC.                         
|Consolidated Balance Sheets                                
|(In Thousands, Except for Share Data)                      
|                                                            |               |                
|                                                            | March 31,     | December 31,   
|                                                            | 2006          | 2005           
|Assets:                                                     | (Unaudited)   |                
|Cash and due from banks                                     | $      16,935 | $     20,459   
|Interest-bearing deposits in other banks                    | 3,617         | 633            
|Federal funds sold                                          | 15,331        | 19,270         
|Securities available for sale, at fair value                | 24,095        | 23,142         
|Securities held to maturity (fair value: March 31, 2006,    |               |                
|$7,182;  December 31, 2005,  $6,983)                        | 7,234         | 7,237          
|Loans, net of allowance for loan losses  (allowance: $5,654 |               |                
|March 31, 2006, $5,591 December 31, 2005)                   | 598,967       | 573,405        
|Bank premises and equipment, net                            | 18,616        | 16,802         
|Accrued interest receivable                                 | 2,575         | 2,467          
|Other real estate                                           | -             | 124            
|Other assets                                                | 11,159        | 10,857         
|                                                            |               |                
|Total Assets                                                | $     698,529 | $    674,396   
|                                                            |               |                
|Liabilities and Shareholders' Equity:                       |               |                
|Liabilities:                                                |               |                
|Deposits:                                                   |               |                
|Non-interest bearing demand deposits                        | $      93,075 | $     89,405   
|Savings and interest-bearing demand deposits                | 157,412       | 149,080        
|Time deposits                                               | 337,517       | 324,395        
|Total deposits                                              | 588,004       | 562,880        
|Federal Home Loan Bank advances                             | 32,000        | 30,000         
|Short-term borrowings                                       | 234           | 4,393          
|Accounts payable and accrued expenses                       | 4,419         | 5,014          
|Capital lease payable                                       | 166           | 169            
|Trust preferred capital notes                               | 21,651        | 21,651         
|Total Liabilities                                           | $     646,474 | $       624,107
|                                                            |               |                
|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    |               |                
|March 31, 2006, 4,966,648 shares issued and outstanding;    |               |                
|December 31, 2005, 4,955,648 shares issued and outstanding  | 4,967         | 4,956          
|Capital surplus                                             | 19,886        | 19,805         
|Retained earnings                                           | 27,317        | 25,612         
|Accumulated other comprehensive income (loss)               | (115)         | (84)           
|Total Shareholders' Equity                                  | 52,055        | 50,289         
|                                                            |               |                
|Total Liabilities and Shareholders' Equity                  | $     698,529 | $    674,396   
|                                                            |               |                
|See Accompanying Notes to Consolidated Financial Statements



3

---



|                                                            |                            |                
|----------------------------------------------------------- | -------------------------- | ---------------
|PREMIER COMMUNITY BANKSHARES, INC.                         
|Consolidated Statements of Income                          
|(In Thousands, Except for Share and Per Share Data)        
|                                                            | (Unaudited)               
|                                                            | For the Three Months Ended
|                                                            | March 31,                 
|                                                            | 2006                       | 2005           
|Interest and dividend income:                               |                            |                
|Interest and fees on loans                                  | $      10,884              | $        8,549 
|Interest on investment securities:                          |                            |                
|Nontaxable                                                  | 40                         | 44             
|Taxable                                                     | 66                         | 67             
|Interest and dividends on securities available for sale:    |                            |                
|Nontaxable                                                  | 69                         | 66             
|Taxable                                                     | 144                        | 98             
|Dividends                                                   | 41                         | 25             
|Interest on deposits in banks                               | 12                         | 1              
|Interest on federal funds sold                              | 161                        | 81             
|Total interest and dividend income                          | $      11,417              | $         8,931
|                                                            |                            |                
|Interest expense:                                           |                            |                
|Interest on deposits                                        | $       3,584              | $         2,288
|Interest on capital lease obligations                       | 3                          | 4              
|Interest on borrowings                                      | 769                        | 391            
|Total interest expense                                      | $       4,356              | $        2,683 
|                                                            |                            |                
|Net interest income                                         | $       7,061              | $        6,248 
|Provision for loan losses                                   | 103                        | 227            
|Net interest income after provision for loan losses         | $       6,958              | $        6,021 
|                                                            |                            |                
|Noninterest income:                                         |                            |                
|Service charges on deposit accounts                         | $         761              | $          716 
|Commissions and fees                                        | 250                        | 230            
|Other                                                       | 116                        | 106            
|Total noninterest income                                    | $       1,127              | $        1,052 
|                                                            |                            |                
|Noninterest expense:                                        |                            |                
|Salaries and employees                                      | $       3,150              | $        2,442 
|Net occupancy expense of premises                           | 338                        | 259            
|Furniture and equipment                                     | 386                        | 270            
|Other                                                       | 1,652                      | 1,623          
|Total noninterest expenses                                  | $       5,526              | $        4,594 
|                                                            |                            |                
|Income before income taxes                                  | $       2,559              | $        2,479 
|                                                            |                            |                
|Provision for income taxes                                  | 854                        | 818            
|                                                            |                            |                
|                                                            |                            |                
|Net income                                                  | $       1,705              | $        1,661 
|                                                            |                            |                
|Average shares:                                             |                            |                
|Basic                                                       | 4,961,231                  | 4,926,403      
|Assuming dilution                                           | 5,093,976                  | 5,071,086      
|                                                            |                            |                
|Earnings per common per share:                              |                            |                
|Basic                                                       | $        0.34              | $         0.34 
|Assuming dilution                                           | $        0.33              | $         0.33 
|                                                            |                            |                
|See Accompanying Notes to Consolidated Financial Statements



4

---



|                                                            |        |         |          |               |               |              
|----------------------------------------------------------- | ------ | ------- | -------- | ------------- | ------------- | -------------
|PREMIER COMMUNITY BANKSHARES, INC.                         
|Consolidated Statement of Changes in Shareholders' Equity  
|For the Three Months Ended March 31, 2006 and 2005         
|(In Thousands, Except Shares Issued)                       
|(Unaudited)                                                
|                                                            |        |         |          |               |               |              
|                                                            |        |         |          | Accumulated   |               |              
|                                                            |        |         |          | Other         |               | Total        
|                                                            | Common | Capital | Retained | Comprehensive | Comprehensive | Shareholders'
|                                                            | Stock  | Surplus | Earnings | Income (Loss) | Income (Loss) | Equity       
|                                                            |        |         |          |               |               |              
|Balance December 31, 2004                                   | $4,920 | $19,502 | $19,710  | $   130       |               | $    44,262  
|                                                            |        |         |          |               |               |              
|Comprehensive Income                                        |        |         |          |               |               |              
|Net income                                                  |        |         | 1,661    |               | $    1,661    | 1,661        
|Other comprehensive loss,                                   |        |         |          |               |               |              
|unrealized loss on available for                            |        |         |          |               |               |              
|sale securities (net of tax $32)                            |        |         |          | (60)          | (60)          | (60)         
|Total comprehensive income                                  |        |         |          |               | $    1,601    |              
|                                                            |        |         |          |               |               |              
|Issuance of common stock-                                   |        |         |          |               |               |              
|exercise of stock options                                   |        |         |          |               |               |              
|(12,250 shares)                                             | 12     | 63      |          |               |               | 75           
|                                                            |        |         |          |               |               |              
|Balances - March 31, 2005                                   | $4,932 | $19,565 | $21,371  | $    70       |               | $    45,938  
|                                                            |        |         |          |               |               |              
|                                                            |        |         |          |               |               |              
|                                                            |        |         |          |               |               |              
|                                                            |        |         |          |               |               |              
|                                                            |        |         |          | Accumulated   |               |              
|                                                            |        |         |          | Other         |               | Total        
|                                                            | Common | Capital | Retained | Comprehensive | Comprehensive | Shareholders'
|                                                            | Stock  | Surplus | Earnings | Income (Loss) | Income (Loss) | Equity       
|                                                            |        |         |          |               |               |              
|Balance December 31, 2005                                   | $4,956 | $19,805 | $25,612  | $    (84)     |               | $    50,289  
|                                                            |        |         |          |               |               |              
|Comprehensive Income                                        |        |         |          |               |               |              
|                                                            |        |         |          |               |               |              
|Net income                                                  |        |         | 1,705    |               | $     1,705   | 1,705        
|Other comprehensive loss,                                   |        |         |          |               |               |              
|unrealized loss on available for                            |        |         |          |               |               |              
|sale securities (net of tax $15)                            |        |         |          | (31)          | (31)          | (31)         
|Total comprehensive income                                  |        |         |          |               | $     1,674   |              
|                                                            |        |         |          |               |               |              
|Issuance of common stock-                                   |        |         |          |               |               |              
|exercise of stock options                                   |        |         |          |               |               |              
|(11,000 shares)                                             | 11     | 81      |          |               |               | 92           
|                                                            |        |         |          |               |               |              
|Balances - March 31, 2006                                   | $4,967 | $19,886 | $27,317  | $   (115)     |               | $    52,055  
|                                                            |        |         |          |               |               |              
|                                                            |        |         |          |               |               |              
|See Accompanying Notes to Consolidated Financial Statements



5

---



|                                                                         |               |              
|------------------------------------------------------------------------ | ------------- | -------------
|PREMIER COMMUNITY BANKSHARES, INC.                                      
|Consolidated Statements of Cash Flows                                   
|For the Three Months Ended March 31, 2006 and 2005                      
|(In Thousands)                                                          
|(Unaudited)                                                             
|                                                                         | 2006          | 2005         
|CASH FLOWS FROM OPERATING ACTIVITIES                                     |               |              
|Net income                                                               | $      1,705  | $      1,661 
|Adjustments to reconcile net income                                      |               |              
|to net cash provided by operating activities:                            |               |              
|Depreciation and amortization                                            | 413           | 270          
|Net amortization on securities                                           | 6             | 10           
|Provision for loan losses                                                | 103           | 227          
|Loss on sale of other real estate                                        | (12)          | -            
|Changes in assets and liabilities:                                       |               |              
|(Increase) in other assets                                               | (286)         | (2,822)      
|(Increase) in accrued interest receivable                                | (108)         | (222)        
|Increase in accounts payable and accrued expenses                        | 655           | 969          
|Increase (decrease)in interest expense payable                           | (12)          | 90           
|Net cash provided by operating activities                                | $      2,464  | $        183 
|                                                                         |               |              
|CASH FLOWS FROM INVESTING ACTIVITIES                                     |               |              
|Proceeds from maturities, calls and principal payments                   |               |              
|on securities available for sale                                         | $        981  | $        313 
|Purchase of securities available for sale                                | (1,847)       | (1,003)      
|Net (increase) in loans                                                  | (25,665)      | (30,440)     
|Proceeds from sale of other real estate                                  | -             | 151          
|Purchase of bank premises and equipment                                  | (2,227)       | (1,565)      
|Net cash used in investing activities                                    | $    (28,758) | $    (32,544)
|                                                                         |               |              
|CASH FLOWS FROM FINANCING ACTIVITIES                                     |               |              
|Net increase (decrease) in demand deposits and interest bearing deposits | $     12,002  | $     (4,410)
|Net increase in certificates of deposit                                  | 13,122        | 35,371       
|Net increase (decrease) in borrowings                                    | (2,159)       | 997          
|Principal payments on capital lease obligation                           | (3)           | (3)          
|Cash dividends paid                                                      | (1,239)       | (1,033)      
|Proceeds from issuance of common stock                                   | 92            | 75           
|                                                                         |               |              
|Net cash provided by financing activities                                | $     21,815  | $     30,997 
|                                                                         |               |              
|(Decrease) in cash and cash equivalents                                  | $     (4,479) | $     (1,364)
|Beginning                                                                | 40,362        | 40,649       
|Ending                                                                   | $     35,883  | $     39,285 
|                                                                         |               |              
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                        |               |              
|                                                                         |               |              
|Cash payments for:                                                       |               |              
|Interest                                                                 | $      4,181  | $      2,593 
|                                                                         |               |              
|Income taxes                                                             | --            | --           
|                                                                         |               |              
|Change in unrealized gain on securities available for sale               | $        (46) | $        (92)
|                                                                         |               |              
|See Accompanying Notes to Consolidated Financial Statements             



6

---



PREMIER COMMUNITY BANKSHARES, INC.



Notes to Consolidated Financial Statements

(Unaudited)

For the Three Months Ended March 31, 2006 and 2005



Note 1.  Accounting Policies



General



In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of Premier Community Bankshares, Inc. (Premier or the Corporation) at March 31, 2006 and December 31, 2005, and the results of operations and cash flows for the three months ended March 31, 2006 and 2005.  The statements should be read in conjunction with the Notes to the Consolidated Financial Statements included in Premiers Annual Report on Form 10-K for the year ended December 31, 2005 (the 2005 Form 10-K).



Note 2. Results of Operations



The results of operations for the three-month periods ended March 31, 2006 and 2005 are not necessarily indicative of the results to be expected for the full year.



Note 3.  Securities



Securities held to maturity at March 31, 2006 are summarized as follows (in thousands):

|                           |                |            |            |          
|-------------------------- | -------------- | ---------- | ---------- | ---------
|                           |                | Gross      | Gross      |          
|                           | Amortized      | Unrealized | Unrealized | Fair     
|                           | Cost           | Gains      | (Losses)   | Value    
|                           | March 31, 2006
|U.S. Government and        |                |            |            |          
|                           |                |            |            |          
|federal agencies           | $     497      | $       -  | $    (24)  | $     473
|Obligations of state and   |                |            |            |          
|political subdivisions     | 4,013          | 52         | (32)       | 4,033    
|Trust Preferred Securities | 2,724          | 57         | (105)      | 2,676    
|                           | $   7,234      | $     109  | $   (161)  | $   7,182
|                           |                |            |            |          



Securities available for sale at March 31, 2006 are summarized as follows (in thousands):

|                           |                |            |            |          
|-------------------------- | -------------- | ---------- | ---------- | ---------
|                           |                | Gross      | Gross      |          
|                           | Amortized      | Unrealized | Unrealized | Fair     
|                           | Cost           | Gains      | (Losses)   | Value    
|                           | March 31, 2006
|U.S. Government and        |                |            |            |          
|federal agencies           | $  13,438      | $       -  | $  (203)   | $  13,235
|Obligations of state and   |                |            |            |          
|political subdivisions     | 7,092          | 47         | (18)       | 7,121    
|Mortgage-backed securities | 53             | 1          | (2)        | 52       
|Other                      | 3,687          | -          | -          | 3,687    
|                           | $  24,270      | $      48  | $  (223)   | $  24,095
|                           |                |            |            |          



7

---



Securities in an unrealized loss position at March 31, 2006 and December 31, 2005, 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.  As of March 31, 2006, there were approximately 40 securities in the consolidated portfolio of the Corporation that have losses, all of which are considered to be temporary.



|                                    |                     |            |                     |            |            |  |            |           
|----------------------------------- | ------------------- | ---------- | ------------------- | ---------- | ---------- |  | ---------- | ----------
|                                    | March 31, 2006      |            |                    
|                                    | Less than 12 months |            | More than 12 months |            | Total     
|(In Thousands)                      |                     | Unrealized |                     |            | Unrealized |  |            | Unrealized
|                                    | Fair Value          | (Losses)   |                     | Fair Value | (Losses)   |  | Fair Value | (Losses)  
|US government and agency securities | $  8,376            | $    (87)  |                     | $  5,332   | $  (140)   |  | $ 13,708   | $   (227) 
|Obligations of states and political |                     |            |                     |            |            |  |            |           
|subdivisions                        | 2,003               | (40)       |                     | 860        | (10)       |  | 2,863      | (50)      
|Mortgage-backed securities          | -                   | -          |                     | 52         | (1)        |  | 52         | (1)       
|Other Securities                    | -                   | -          |                     | 1,728      | (106)      |  | 1,728      | (106)     
|                                    | $ 10,379            | $   (127)  |                     | $ 7,972    | $  (257)   |  | $ 18,351   | $  (384)  
|                                    |                     |            |                     |            |            |  |            |           



|                                    |                     |                   |                     |            |            |  |            |           
|----------------------------------- | ------------------- | ----------------- | ------------------- | ---------- | ---------- |  | ---------- | ----------
|                                    |                     | December 31, 2005 |                     |            |            | 
|                                    | Less than 12 months |                   | More than 12 months |            | Total     
|(In Thousands)                      |                     | Unrealized        |                     |            | Unrealized |  |            | Unrealized
|                                    | Fair Value          | (Losses)          |                     | Fair Value | (Losses)   |  | Fair Value | (Losses)  
|                                    |                     |                   |                     |            |            |  |            |           
|US government and agency securities | $   7,943           | $   (113)         |                     | $  3,420   | $     (65) |  | $ 11,363   | $   (178) 
|Obligations of states and political |                     |                   |                     |            |            |  |            |           
|subdivisions                        | 3,048               | (55)              |                     | 709        | (11)       |  | 3,757      | (66)      
|Mortgage-backed securities          | 76                  | (1)               |                     | 53         | (1)        |  | 1,797      | (2)       
|Other Securities                    | 69                  | (180)             |                     | 1,728      | (108)      |  | 129        | (288)     
|                                    | $ 11,136            | $   (349)         |                     | $  5,910   | $   (185)  |  | $ 17,046   | $   (534) 
|                                    |                     |                   |                     |            |            |  |            |           



8

---





Note 4. Loans



The consolidated loan portfolio was composed of the following at the dates indicated:



|                                                           |                |             
|---------------------------------------------------------- | -------------- | ------------
|                                                           | March 31,      | December 31,
|                                                           | 2006           | 2005        
|                                                           | (In Thousands)
|                                                           |                |             
|Loans secured by real estate:                              |                |             
|Construction and land development                          | $   156,438    | $  144,829  
|Secured by farmland                                        | 12,736         | 5,514       
|Secured by 1-4 family residential                          | 145,332        | 141,697     
|Multi-family residential                                   | 27,812         | 25,560      
|Nonfarm, nonresidential                                    | 155,524        | 157,587     
|Loans to farmers (except those secured by real estate)     | 1,081          | 1,576       
|Commercial loans (except those secured by real estate)     | 72,954         | 69,869      
|Loans to individuals (except those secured by real estate) | 26,810         | 26,235      
|All other loans                                            | 5,934          | 6,129       
|Total loans                                                | $   604,621    | $  578,996  
|                                                           |                |             
|                                                           |                |             
|Allowance for loan losses                                  | 5,654          | 5,591       
|Loans, net                                                 | $   598,967    | $  573,405  
|                                                           |                |             







Impaired loans totaled $1.6 million at March 31, 2006 and $2.0 million at December 31, 2005. Non-accrual loans excluded from impaired loans disclosure under FASB 114 amounted to $80 thousand at March 31, 2006 and $74 thousand at December 31, 2005.











9

---



Note 5. Reserve for Loan Losses



The Corporation maintains 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.  The adequacy of the provision for loan losses is reviewed periodically by management through consideration of several factors, including changes in the character and size of the loan portfolio and related loan loss experience, a review and examination of overall loan quality, which includes the assessment of problem loans, and an analysis of anticipated economic conditions in the market area.  An analysis of the allowance for loan losses, including charge-off activity, is presented below for the quarters ended March 31, 2006 and 2005.



|                                       |           |       
|-------------------------------------- | --------- | ------
|                                       | March 31,
|(In thousands)                         | 2006      | 2005  
|                                       |          
|Balance, beginning of period           | $5,591    | $5,007
|Less Charge-offs:                      |           |       
|Commercial                             | 2         | 16    
|Real estate-mortgage                   | -         | -     
|Real estate-construction               | -         | -     
|Consumer installment loans             | 66        | 36    
|                                       |           |       
|Total                                  | $68       | $52   
|                                       |           |       
|Plus Recoveries:                       |           |       
|Commercial                             | 2         | 3     
|Real estate-mortgage                   | -         | -     
|Real estate-construction               | -         | 15    
|Consumer installment loans             | 26        | 38    
|Total                                  | $28       | $56   
|                                       |           |       
|Additions charged to operating expense | $103      | $227  
|                                       |           |       
|Balance, end of period                 | $5,654    | $5,238





The following is a summary of information pertaining to risk elements and impaired loans at March 31, 2006 and December 31, 2005.



|                                                           |                |             
|---------------------------------------------------------- | -------------- | ------------
|                                                           | March 31,      | December 31,
|                                                           | 2006           | 2005        
|                                                           | (In Thousands)
|Non-accrual loans                                          | $       229    | $        614
|Loans past due 90 days or more and still accruing interest | 369            | 191         
|                                                           | $       598    | $        805





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 non-accrual 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 non-accrual or charged off is reversed against interest income.  The interest on these loans



10

---



is accounted for on the cash-basis or cost-recovery method, until qualifying for 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.





Note 6.  Earnings Per Share



Earnings per share were as follows for the three months ended:



|                               |           |           |           |       
|------------------------------ | --------- | --------- | --------- | ------
|                               | March 31, | March 31,
|                               | 2006      | 2005     
|                               | Shares    | Amount    | Shares    | Amount
|                               |           |           |           |       
|Basic earnings per share       | 4,961,231 | $0.34     | 4,926,403 | $0.34 
|                               |           |           |           |       
|Effect of dilutive securities: |           |           |           |       
|Stock options                  | 132,745   |           | 144,683   |       
|                               |           |           |           |       
|Diluted earnings per share     | 5,093,976 | $0.33     | 5,071,086 | $0.33 





Note 7.  Stock Compensation Plans



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. All options were 100% vested as of March 31, 2006.



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



As of March 31, 2006, all of Premiers stock options were fully vested.  Due to the fact that no additional options have been granted since that date, there is no effect on the Corporations income statement for the period ending March 31, 2006.



11

---



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 for the three months ended March 31, 2005. (dollars in thousands except per share amounts):



|                                         |        
|---------------------------------------- | -------
|Net income, as reported                  | $1,661 
|Total stock-based compensation expense   |        
|determined under fair value based method |        
|for all awards                           | (17)   
|Pro forma net income                     | $1,644 
|                                         |        
|Basic earnings per share                 |        
|As reported                              | $  0.34
|Pro forma                                | $  0.33
|                                         |        
|Diluted earnings per share               |        
|As reported                              | $  0.33
|                                         |        
|Pro forma                                | $  0.32





Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.



The following table summarizes stock option plan activity for the three months ended March 31, 2006:

|                               |          |  |            |  |                 |  |                  
|------------------------------ | -------- |  | ---------- |  | --------------- |  | -----------------
|                               |          |  | Weighted   |  | Weighted        |  | Value of         
|                               | Number   |  | Average    |  | Average         |  | Unexercised      
|                               | of       |  | Exercise   |  | Remaining       |  | In-The-          
|                               | Shares   |  | Price      |  | Contractual     |  | Money            
|                               |          |  |            |  | Life (in years) |  | Options          
|                               |          |  |            |  |                 |  |                  
|Options outstanding, January 1 | 310,650  |  | $    12.01 |  |                 |  |                  
|Granted                        | - -      |  | - -        |  |                 |  |                  
|Exercised                      | (11,000) |  | 8.35       |  |                 |  |                  
|Forfeited                      | - -      |  | - -        |  |                 |  |                  
|Options Outstanding, March 31  | 299,650  |  | $    12.14 |  | 6.67            |  | $       3,139,431
|                               |          |  |            |  |                 |  |                  
|Options exercisable, March 31  | 310,650  |  | $    12.14 |  | 6.67            |  | $       3,139,431





The total value of in-the-money options exercised during the first three months ended March 31, 2006 was $156,970.



12

---



Note 8.  Deferred Compensation Plans



During 2004, a deferred compensation plan and split dollar life insurance plan were adopted for selected officers of the Corporation.  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.



During 2005, a second deferred compensation plan and split dollar life insurance plan were adopted for additional selected officers of the Corporation. Under these new plans, the benefit is equal to 25% of the sum of the individual
employee's final base compensation at time of retirement plus the average of bonuses paid during the final five years of service. Benefits are to be paid in annual installments commencing at retirement for a period of 15 years. 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, only the accrued benefit and a life insurance benefit of $50,000 is paid to the employees' beneficiary.



The deferred compensation charged to expense as of March 31, 2006 and 2005, based on the present value of the retirement benefits, was $94,364 and $120,657, respectively. 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 9.  Other Expenses



The Corporation and its subsidiaries had the following other expenses for the three months ended March 31, 2006 and 2005.



|                               |                |      |          
|------------------------------ | -------------- | ---- | ---------
|                               | 2006           | 2005
|                               | (In Thousands)
|                               |                |      |          
|Advertising                    | $     219      |      | $     213
|ATM expense                    | 120            |      | 96       
|Directors' fees                | 147            |      | 118      
|Postage expense                | 78             |      | 71       
|Stationery and supplies        | 100            |      | 112      
|Telephone expense              | 112            |      | 104      
|Other (no item >1% of revenue) | 876            |      | 909      
|                               | $   1,652      |      | $   1,623



13

---



Note 10. Recent Accounting Pronouncements



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



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



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



14

---



Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of operations for the three months ended March 31, 2006 should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this quarterly report and in the Annual Report on Form 10-K for the year ended December 31, 2005.

General



Premier Community Bankshares, Inc. (Premier or 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., all of which are located in Virginia, and Premier Bank, Inc. which is headquartered in Martinsburg, West Virginia.



The Corporation and its subsidiaries 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.



Net interest income is our primary source of revenue.  We define revenue as interest income plus non-interest income.  As discussed further in the quantitative and qualitative disclosures about market risk 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 increasingly important source of income for the 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).



On January 12, 2006, the Corporation, Rockingham Heritage Bank and Albemarle First Bank entered into an agreement and plan of merger.  The merger agreement sets forth the terms and conditions of the Corporations acquisition of Albemarle First Bank through the merger of Albemarle First Bank with and into Rockingham Heritage Bank.  Consummation of the merger is subject to a number of customary conditions including the approval of the merger by Albemarle First Banks shareholders and the receipt of all required regulatory approvals.  The merger is expected to be completed at the beginning of the third quarter of 2006.



Under the terms of the merger agreement (which is further discussed in the 2005 10-K), the Corporation will issue to the shareholders of Albemarle First Bank, for each share of Albemarle First Bank common stock that they own, a number of shares of the Corporations common stock with an aggregate market value equal to



15

---

$15.80 per share or $15.80 in cash, subject to the limitation that no less than 35% and no more than 50%
of the total consideration will be in the form of cash.  Management is considering the possibility of issuing $14.0 million of new trust preferred capital notes to provide funds for the Albemarle First merger.



Financial Overview



At March 31, 2006, we had total assets of $698.5 million, net loans of $599.0 million, deposits of $588.0 million and shareholders equity of $52.1 million.  The increase in assets was 14.6% over the amount at March 31, 2005, while net loans and deposits increased 15.8% and 14.2%, respectively, for the same period.



Our earnings per share, on a fully diluted basis, for the quarter ended March 31, 2006 was $0.33, which was unchanged from the same period in 2005.
Management is encouraged by the fact that the Corporation was able to maintain the strong earnings of the previous year while investing significant assets in our de novo bank in West Virginia, and absorbing the net operating loss of that subsidiary.  While the new bank is not yet profitable, management believes that our presence in this dynamic market will produce a positive return for investors in the future.



Our return on average equity was 13.51% for the period ended March 31, 2006.  We have been able to achieve this level without relying on a disproportionate share of income from mortgage banking operations.  Our efficiency ratio also increased during this period, rising from 62.44% at March 31, 2005 to 67.03% for the quarter ended March 31, 2006.  This increase was due to the extra staffing and other non-interest expenses incurred to open additional branches and the new bank and service an expanding customer base.  Our efficiency ratio is not a measurement under accounting principles generally accepted in the United States.  For more information on the efficiency ratio and its calculation, see the non interest expense section below.



Critical Accounting Policies



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



16

---



·

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.



Net Income



Net income for the quarter ended March 31, 2006 was $1.7 million. This is an increase of $44 thousand or 2.6% over the same period in 2005. The provision for income tax expense increased $36 thousand or 4.4% from $818 thousand for the first quarter of 2005 to $854 thousand for the same period in 2006. The return on assets decreased to 0.98% at March 31, 2006, compared to 1.15% for the first quarter of 2005.  Return on equity was 13.51% and 14.93% for the first quarter of 2006 and 2005, respectively.



Total Assets



Total assets of Premier increased to $698.5 million at March 31, 2006 compared to $674.4 million at December 31, 2005, representing an increase of $24.1 million or 3.6%.  Total loans at March 31, 2006, were $604.6 million, of which $497.8 million were loans secured by real estate.  The remaining loans consisted of $73.0 million in commercial loans, $26.8 million in consumer installment loans and $7.0 million in all other loans.  Net loans at March 31, 2006 increased $25.6 million or 4.5% from the December 31, 2005 balance of $573.4 million.  The loan to deposit ratio was 102.8% at March 31, 2006 and 101.4% at March 31, 2005.  Steady loan demand in an expanding market generated the loan growth experienced for this period of 2006.



The investment portfolio increased 3.1% to $31.3 million at March 31, 2006 compared to $30.3 million at December 31, 2005.  Federal funds sold decreased from $19.3 million at December 31, 2005, to $15.3 million at March 31, 2006. Total interest-earning assets increased by $25.6 million or 4.1% to $654.9 million at March 31, 2006 compared to $629.2 million at December 31, 2005.



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 inherent risk.  Additionally, specific reserves for individual loans are established depending on the severity of the potential



17

---

loss.  Loans are individually reserved once classified as a watch item by management.  Higher
percentages of loans are 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, which includes the identification and assessment of problem loans, and an analysis of anticipated economic conditions in the market area.



The allowance for loan losses, at March 31, 2006, was $5.7 million. This is an increase of $63 thousand or 1.1% from December 31, 2005.  This gives the Corporation a 0.94% allowance for loan losses to total loans.  Management has completed an analysis on the reserve and feels the reserve is adequate.



Liabilities

Total deposits increased to $588.0 million at March 31, 2006, from $562.9 million at December 31, 2005, which is an increase of $25.1 million or 4.5%.  Non-interest bearing deposits increased from $89.4 million at December 31, 2005, to $93.1 million at March 31, 2006.  This is an increase of $3.7 million or 4.1% from December 31, 2005.  During this period, interest bearing checking and savings accounts increased $8.3 million or 5.6% to $157.4 million.  The balance in time deposits was $337.5 million at the end of the first quarter, reflecting an increase of $13.1 million or 4.0% over the end of the year.  At March 31, 2006, non-interest bearing deposits represented 15.8% of total deposits as compared to 15.9% at year-end 2005.  Low cost interest bearing deposits, including savings and interest
bearing checking, were 26.8% of total deposits, up slightly from 26.5% at December 31, 2005.  Time deposits represented 57.4% of total deposits at March 31, 2006, a slight decrease from 57.6% at year-end.  Short-term
borrowings decreased $4.2 million from the year-end 2005 balance, while Federal Home Loan Bank advances increased by $2 million to $32.0 million.



Shareholders' Equity



Total shareholders equity increased by $1.8 million or 3.5% from December 31, 2005 to March 31, 2006. The increase was mostly due to a net profit of $1.7 million for the first three months of 2006. Stock options totaling $92 thousand were exercised.  Accumulated other comprehensive income decreased $31 thousand, net of tax. The primary capital to assets ratio was 7.5%.



Interest Income



Interest income totaled $11.4 million for the three months ended March 31, 2006, $2.5 million or 27.8% higher than the three months ended March 31, 2005.  Interest and fees on loans comprise the vast majority of interest income with $10.9 million for the first three months of 2006.  Interest income from securities increased by $71 thousand or 23.6% from the first quarter of 2005. Interest income on federal funds, the third major component of the Corporations interest income, increased $80 thousand or 98.8%.  This is a direct result of the increased balances in federal funds sold, as our total deposit account balances have increased.



Interest Expense



Total interest expense for the three months ended March 31, 2006 was $4.4 million, $1.7 million or 62.4% higher than the three months ended March 31, 2005.  Interest on deposits for the three-month period in 2006 increased by $1.3 million or 56.6% over the same period in 2005.  This increase was attributable to the increased interest rates being paid on deposits, combined with the migration to higher-earning certificates of deposit.  Interest on borrowings



18

---

increased by $378 thousand or 96.7% over the same period last year.  This increase in interest expense is a result of an increase in outstanding Federal Home Loan Bank advances, which occurred in the first quarter of 2006, and the issuance of additional trust preferred capital notes during the second quarter of 2005.



Net Interest Income



Net interest income for the three months ended March 31, 2006 was $7.1 million, $813 thousand or 13.0% higher than the three months ended March 31, 2005. This increase was the result of the combination of the growth in interest earning assets of $25.6 million and the increase in loan interest income.  The net interest margin decreased 28 basis points to 4.40% for the three months ended March 31, 2006 from 4.68% for the same period of 2005.



Non-Interest Income



Total non-interest income for the three months ended March 31, 2006 was $1.1 million, an increase of $75 thousand or 7.1% over the 2005 amount of $1.1 million. Service charges on deposit accounts increased $45 thousand or 6.3% as a result of increased deposit account balances.  Commissions and fees and other non-interest income increased $30 thousand, mostly as a result of increased secondary market fee income and ATM fees.



Non-Interest Expense



Total non-interest expense for the three months ended March 31, 2006 was $5.5 million, $932 thousand or 20.3% higher than the three months ended March 31, 2005.  Salary expense increased $708 thousand or 29.0%, and occupancy expenses increased by $79 thousand, over the same period in 2005.  The net increase in these expenses was in part a result of additional staffing to handle the growth of the Corporation, the expenses associated with opening additional branches and the new bank, and the costs involved in processing an increasing number of accounts and transactions.



The Corporation's efficiency ratio was 67.0% for the three months ended March 31, 2006 compared to 62.4% for the same period in 2005.  The efficiency ratio is a non-GAAP financial measure, which we believe provides investors with important information regarding our operational efficiency.  This gives investors a better look at how well the Corporation is managing non-interest expenses compared to the growth in income.



We compute our efficiency ratio by dividing non-interest expense by the sum of the net interest income on a tax-equivalent basis and non-interest income, net of securities gains or losses.  The following table reflects the calculation for the efficiency ratio for the quarters ended March 31, 2006 and 2005:

|                                    |                 |                
|----------------------------------- | --------------- | ---------------
|                                    | March 31,      
|                                    | 2006            | 2005           
|Total Non-interest Expense          | $         5,526 | $         4,594
|                                    | $         5,526 | $         4,594
|                                    |                 |                
|Net interest Income                 | $         7,061 | $         6,248
|Fully Taxable Equivalent adjustment | 56              | 57             
|Non-interest Income                 | 1,127           | 1,052          
|                                    | $         8,244 | $         7,357
|                                    |                 |                
|Efficiency Ratio                    | 67.03%          | 62.44%         



19

---



Liquidity



Premiers 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, Premier maintains cash reserves and has an adequate flow of funds from maturing loans, securities, and short-term investments. In addition, Premiers subsidiary 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.  Long-term borrowings are available from the Federal Home Loan Bank. The Corporation considers its sources of liquidity to be sufficient to meet its estimated needs.



Capital Resources



The Corporations risk-based capital position at March 31, 2006 was
 $69.6 million, or 11.6% of risk-weighted assets, for Tier I capital, and $79.5 million, or 13.3% for total risk based capital. Tier I
capital consists primarily of common shareholders' equity and qualifying Trust Preferred Capital Notes. Total risk-based capital includes
 the allowance for loan losses in addition to total shareholders equity. 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, $6.2 million in notes in the third quarter of 2003 and $8.2 million in notes
 in the second quarter of 2005 are included in the total risk-weighted capital base, and will serve as a long-term source of funding.



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.  There have been no material changes in these instruments from the amounts disclosed in the 2005 Form 10-K.



Caution About Forward Looking Statements



We make forward-looking statements in this quarterly 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;



20



---

·

successful and timely closing of the merger with Albemarle First Bank and the risks associated with entering a new market area;

·

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.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



General



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.  The Corporations market risk is composed primarily of interest rate risk.  The Corporations Asset and Liability Management Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk.  The Board of Directors reviews the guidelines established by ALCO.



Interest rate risk is monitored through the use of three complementary 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 interest rate risk in the Corporation, 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 re-pricing values, is less utilized since it does not effectively measure the earnings impact on the Corporation and is not addressed here. Earnings simulation and economic value models, however, which more effectively reflect the earnings impact, are utilized by management on a regular basis and are
 explained below.



Earnings Simulation Analysis



Management uses 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.



21

---

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 net income for the Corporation using different rate scenarios as of December 31, 2005. There
have been no material changes in quantitative and qualitative disclosures about market risk since this information was developed using December 31, 2005 data, the latest date for which such data is available to the Corporation.





|                     |  |            
|-------------------- |  | -----------
|                     |  | % Change in
|Change in Prime Rate |  | Net Income 
|+300 basis points    |  | +18.0%     
|+200 basis points    |  | +15.4%     
|+100 basis points    |  | +11.5%     
|Most Likely          |  | 0          
|-100 basis points    |  | +1.2%      
|-200 basis points    |  | -4.5%      
|-300 basis points    |  | -13.2%     





Economic Value Simulation



Economic value simulation is used 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 re-pricing 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, 2005 data, over different rate environments with a one-year horizon.  There have been no material changes in quantitative and qualitative disclosures about market risk since this information was developed using December 31, 2005 data, the latest date for which such data is available to the Corporation.





|                     |  |                                   
|-------------------- |  | ----------------------------------
|                     |  | Change in Economic Value of Equity
|Change in Prime Rate |  | (dollars in thousands)            
|+300 basis points    |  | 334                               
|+200 basis points    |  | 161                               
|+100 basis points    |  | (105)                             
|Most Likely          |  | (638)                             
|-100 basis points    |  | (737)                             
|-200 basis points    |  | (2,498)                           
|-300 basis points    |  | (5,794)                           



22

---

Item 4. 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.  As of March 31, 2006, an evaluation of the effectiveness of the design and operation of the Corporations disclosure controls and procedures 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.



The Corporations management is also responsible for establishing and maintaining adequate internal control over financial reporting.  There were no changes in the Corporations internal control over financial reporting identified in connection with the evaluation of it that occurred during the Corporations last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.





PART II. OTHER INFORMATION



Item 1.  Legal Proceedings



None



Item 1A. Risk Factors



As of the date of this report, there are no material changes to the risk factors previously disclosed in Part I, Item 1A (Risk Factors) of the 2005 Form 10-K.  In evaluating the risks of the Corporations business, investors should carefully consider the risk factors discussed  in the 2005 Form 10-K, which could materially affect the Corporations business, financial condition or operating results, in addition to the other information set forth in this report and in other filings with the Securities and Exchange Commission.  The risks described in the 2005 Form 10-K are not the only risks facing the Corporation. Additional risks and uncertainties not currently known to the Corporation or that the Corporation currently deems to be immaterial also may materially adversely
 affect its business, financial condition and/or operating results.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds



None



Item 3.  Defaults upon Senior Securities



None



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



None



Item 5.  Other Information



None



23

---

Item 6.  Exhibits



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



24

---

SIGNATURES:



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





PREMIER COMMUNITY BANKSHARES, INC.









DATE:    5/5/06

/s/ Donald L. Unger

DONALD L. UNGER

PRESIDENT & CHIEF EXECUTIVE OFFICER









DATE:    5/5/06

/s/ Frederick A. Board

FREDERICK A. BOARD

CHIEF FINANCIAL OFFICER



























































25

---



EXHIBIT INDEX



Exhibit No.

Description



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.













27