##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended September 30, 2006



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

For the transition period from  to

Commission File Number 0-18868



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PREMIER COMMUNITY BANKSHARES,
INC.

(Exact name of registrant as specified in its charter)



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

(540) 869-6600

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such 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: 5,680,842, $1.00 par value, as of November 6, 2006.



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##### Table of Contents

|           |  |                                                                                                                  |  |      
|---------- |  | ---------------------------------------------------------------------------------------------------------------- |  | -----
|PART I.    |  | FINANCIAL INFORMATION                                                                                            |  |      
|           |  |                                                                                                                 
|Item 1.    |  | Financial Statements                                                                                             |  |      
|           |  |                                                                                                                 
|           |  | Consolidated Balance Sheets at September 30, 2006 and December 31, 2005                                          |  | 3    
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Income for the Three Months Ended and Nine Months Ended September 30, 2006 and 2005   |  | 4    
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Changes in Shareholders Equity for the Nine Months Ended September 30, 2006 and 2005 |  | 5    
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005                      |  | 6    
|           |  |                                                                                                                 
|           |  | Notes to Consolidated Financial Statements                                                                       |  | 7-16 
|           |  |                                                                                                                 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 1724
|           |  |                                                                                                                 
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 25   
|           |  |                                                                                                                 
|Item 4.    |  | Controls and Procedures                                                                                          |  | 26   
|           |  |                                                                                                                 
|Part II.   |  | OTHER INFORMATION                                                                                                |  | 27   
|           |  |                                                                                                                 
|Item 1.    |  | Legal Proceedings                                                                                                |  | 27   
|           |  |                                                                                                                 
|Item 1A.   |  | Risk Factors                                                                                                     |  | 27   
|           |  |                                                                                                                 
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 27   
|           |  |                                                                                                                 
|Item 3.    |  | Defaults Upon Senior Securities                                                                                  |  | 27   
|           |  |                                                                                                                 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                              |  | 27   
|           |  |                                                                                                                 
|Item 5.    |  | Other Information                                                                                                |  | 27   
|           |  |                                                                                                                 
|Item 6.    |  | Exhibits                                                                                                         |  | 27   
|           | 
|Signatures |  | 28                                                                                                              



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Balance Sheets

(In Thousands,
Except for Share Data)



|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ------------------------- | - | ------- | -
|                                                                                                                                                                                 |  | September 30,2006(Unaudited) |         |   | December 31,2005(Audited) |  
|Assets:                                                                                                                                                                          |  |                              |         |   |                           |   |         |  
|Cash and due from banks                                                                                                                                                          |  | $                            | 24,543  |   |                           | $ | 20,459  |  
|Interest-bearing deposits in other banks                                                                                                                                         |  |                              | 6,074   |   |                           |   | 633     |  
|Federal funds sold                                                                                                                                                               |  |                              | 12,573  |   |                           |   | 19,270  |  
|Securities available for sale, at fair value                                                                                                                                     |  |                              | 34,324  |   |                           |   | 23,142  |  
|Securities held to maturity (fair value: September 30, 2006, $ 6,929; December 31, 2005, $6,983)                                                                                 |  |                              | 7,042   |   |                           |   | 7,237   |  
|Loans, net of allowance for loan losses of $6,822 at September 30, 2006 and $5,591 at December 31, 2005                                                                          |  |                              | 733,979 |   |                           |   | 573,405 |  
|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  
|Bank premises and equipment, net                                                                                                                                                 |  |                              | 25,114  |   |                           |   | 16,802  |  
|Accrued interest receivable                                                                                                                                                      |  |                              | 3,667   |   |                           |   | 2,467   |  
|Other real estate                                                                                                                                                                |  |                              |        |   |                           |   | 124     |  
|Other assets                                                                                                                                                                     |  |                              | 31,504  |   |                           |   | 10,857  |  
|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  
|Total assets                                                                                                                                                                     |  | $                            | 878,820 |   |                           | $ | 674,396 |  
|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  
|Liabilities and Shareholders Equity:                                                                                                                                            |  |                              |         |   |                           |   |         |  
|Liabilities:                                                                                                                                                                     |  |                              |         |   |                           |   |         |  
|Deposits:                                                                                                                                                                        |  |                              |         |   |                           |   |         |  
|Noninterest-bearing demand deposits                                                                                                                                              |  | $                            | 98,325  |   |                           | $ | 89,405  |  
|Savings and interest-bearing demand deposits                                                                                                                                     |  |                              | 200,413 |   |                           |   | 149,080 |  
|Time deposits                                                                                                                                                                    |  |                              | 412,777 |   |                           |   | 324,395 |  
|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  
|Total deposits                                                                                                                                                                   |  |                              | 711,515 |   |                           |   | 562,880 |  
|Short-term borrowings                                                                                                                                                            |  |                              | 541     |   |                           |   | 4,393   |  
|Accounts payable and accrued expenses                                                                                                                                            |  |                              | 5,234   |   |                           |   | 5,183   |  
|Federal Home Loan Bank advances                                                                                                                                                  |  |                              | 55,000  |   |                           |   | 30,000  |  
|Trust Preferred Capital Notes                                                                                                                                                    |  |                              | 36,084  |   |                           |   | 21,651  |  
|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  
|Total liabilities                                                                                                                                                                |  | $                            | 808,374 |   |                           | $ | 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 September 30, 2006, 5,679,842 shares issued and outstanding; December 31,
2005, 4,955,648 shares issued and outstanding |  |                              | 5,680   |   |                           |   | 4,956   |  
|Additional paid-in-capital                                                                                                                                                       |  |                              | 33,778  |   |                           |   | 19,805  |  
|Retained earnings                                                                                                                                                                |  |                              | 31,106  |   |                           |   | 25,612  |  
|Accumulated other comprehensive (loss)                                                                                                                                           |  |                              | (118    | ) |                           |   | (84     | )
|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  
|Total shareholders equity                                                                                                                                                       |  |                              | 70,446  |   |                           |   | 50,289  |  
|                                                                                                                                                                                 |  |                             
|Total liabilities and shareholders equity                                                                                                                                       |  | $                            | 878,820 |   |                           | $ | 674,396 |  
|                                                                                                                                                                                 |  |                              |         |   |                           |   |         |  

See Accompanying Notes to Consolidated Financial Statements



3



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##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Income

(In Thousands, Except for Share and Per Share Data)

(Unaudited)



|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|-------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------ | - | --------- |  | ---- | --------- |  | - | ---------
|                                                         |  | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|                                                         |  | 2006                            |           | 2005                           |   | 2006      |  | 2005
|Interest and dividend income:                            |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Interest and fees on loans                               |  | $                               | 14,676    |                                | $ | 9,935     |  | $    | 37,531    |  | $ | 27,720   
|Interest on securities held to maturity:                 |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Nontaxable                                               |  |                                 | 39        |                                |   | 42        |  |      | 120       |  |   | 129      
|Taxable                                                  |  |                                 | 62        |                                |   | 62        |  |      | 190       |  |   | 182      
|Interest and dividends on securities available for sale: |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Nontaxable                                               |  |                                 | 48        |                                |   | 69        |  |      | 183       |  |   | 201      
|Taxable                                                  |  |                                 | 333       |                                |   | 123       |  |      | 629       |  |   | 339      
|Dividends                                                |  |                                 | 56        |                                |   | 28        |  |      | 133       |  |   | 98       
|Interest on deposits in banks                            |  |                                 | 73        |                                |   | 27        |  |      | 137       |  |   | 30       
|Interest on federal funds sold                           |  |                                 | 265       |                                |   | 190       |  |      | 571       |  |   | 422      
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Total interest and dividend income                       |  | $                               | 15,552    |                                | $ | 10,476    |  | $    | 39,494    |  | $ | 29,121   
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Interest expense:                                        |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Interest on deposits                                     |  | $                               | 5,473     |                                | $ | 2,963     |  | $    | 13,173    |  | $ | 7,913    
|Interest on borrowings and other                         |  |                                 | 1,411     |                                |   | 539       |  |      | 3,136     |  |   | 1,448    
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Total interest expense                                   |  | $                               | 6,884     |                                | $ | 3,502     |  | $    | 16,309    |  | $ | 9,361    
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Net interest income                                      |  | $                               | 8,668     |                                | $ | 6,974     |  | $    | 23,185    |  | $ | 19,760   
|Provision for loan losses                                |  |                                 | 71        |                                |   | 245       |  |      | 373       |  |   | 572      
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Net interest income after provision for loan losses      |  | $                               | 8,597     |                                | $ | 6,729     |  | $    | 22,812    |  | $ | 19,188   
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Noninterest income:                                      |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Service charges on deposit accounts                      |  | $                               | 825       |                                | $ | 813       |  | $    | 2,385     |  | $ | 2,322    
|Commissions and fees                                     |  |                                 | 293       |                                |   | 242       |  |      | 820       |  |   | 705      
|Other                                                    |  |                                 | 297       |                                |   | 130       |  |      | 622       |  |   | 345      
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Total noninterest income                                 |  | $                               | 1,415     |                                | $ | 1,185     |  | $    | 3,827     |  | $ | 3,372    
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Noninterest expenses:                                    |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Salaries and employee benefits                           |  | $                               | 3,850     |                                | $ | 3,050     |  | $    | 10,166    |  | $ | 8,354    
|Net occupancy expense of premises                        |  |                                 | 464       |                                |   | 337       |  |      | 1,191     |  |   | 868      
|Furniture and equipment                                  |  |                                 | 419       |                                |   | 358       |  |      | 1,208     |  |   | 923      
|Other                                                    |  |                                 | 2,179     |                                |   | 1,610     |  |      | 5,744     |  |   | 4,733    
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Total noninterest expenses                               |  | $                               | 6,912     |                                | $ | 5,355     |  | $    | 18,309    |  | $ | 14,878   
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Income before income taxes                               |  | $                               | 3,100     |                                | $ | 2,559     |  | $    | 8,330     |  | $ | 7,682    
|Income tax expense                                       |  |                                 | 1,084     |                                |   | 831       |  |      | 2,836     |  |   | 2,520    
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Net income                                               |  | $                               | 2,016     |                                | $ | 1,728     |  | $    | 5,494     |  | $ | 5,162    
|                                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Average shares:                                          |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Basic                                                    |  |                                 | 5,664,214 |                                |   | 4,945,540 |  |      | 5,200,964 |  |   | 4,936,033
|Diluted                                                  |  |                                 | 5,798,208 |                                |   | 5,077,035 |  |      | 5,331,456 |  |   | 5,073,921
|Earnings per common share:                               |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Basic                                                    |  | $                               | 0.36      |                                | $ | 0.35      |  | $    | 1.06      |  | $ | 1.05     
|Diluted                                                  |  |                                 | 0.35      |                                |   | 0.34      |  |      | 1.03      |  |   | 1.02     

See Accompanying Notes to Consolidated Financial Statements



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##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Changes in Shareholders Equity

Nine Months Ended September 30, 2006 and 2005

(In Thousands, Except for Share Data)

(Unaudited)



|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ----------- | ----- | - | ------------------------- | - | ------ | ---------------- |  | ------------------------------------------- | ------ |  | ------------------- | ---- | - | ------------------------ | - | ----- | - |  | - | ------ | -
|                                                                                              |  | CommonStock |       |   | AdditionalPaid-in-Capital |   |        | RetainedEarnings |  | Accumulated OtherComprehensiveIncome (loss) |        |  | ComprehensiveIncome |      |   | TotalShareholdersEquity |  
|Balance December 31, 2004                                                                     |  | $           | 4,920 |   |                           | $ | 19,502 |                  |  | $                                           | 19,710 |  | $                   | 130  |   |                          |   |       |   |  | $ | 44,262 |  
|Comprehensive Income                                                                          |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Net income                                                                                    |  |             |       |   |                           |   |        |                  |  |                                             | 5,162  |  |                     |      |   |                          | $ | 5,162 |   |  |   | 5,162  |  
|Other comprehensive loss, unrealized loss on available for sale securities (net of tax -$ 65) |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     | (125 | ) |                          |   | (125  | ) |  |   | (125   | )
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Total comprehensive income                                                                    |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          | $ | 5,037 |   |  |   |        |  
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Issuance of common stock-under incentive stock option plan (28,500 shares)                    |  |             | 28    |   |                           |   | 168    |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   | 196    |  
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Balance - September 30, 2005                                                                  |  | $           | 4,948 |   |                           | $ | 19,670 |                  |  | $                                           | 24,872 |  | $                   | 5    |   |                          |   |       |   |  | $ | 49,495 |  
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|                                                                                              |  |             |       |   |                           |  
|                                                                                              |  | CommonStock |       |   | AdditionalPaid-in-Capital |   |        | RetainedEarnings |  | AccumulatedOtherComprehensive(Loss)         |        |  | ComprehensiveIncome |      |   | TotalShareholdersEquity |  
|Balance December 31, 2005                                                                     |  | $           | 4,956 |   |                           | $ | 19,805 |                  |  | $                                           | 25,612 |  | $                   | (84  | ) |                          |   |       |   |  | $ | 50,289 |  
|Comprehensive Income                                                                          |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Net income                                                                                    |  |             |       |   |                           |   |        |                  |  |                                             | 5,494  |  |                     |      |   |                          | $ | 5,494 |   |  |   | 5,494  |  
|Other comprehensive loss, unrealized loss on available for sale securities (net of tax -$ 16) |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     | (34  | ) |                          |   | (34   | ) |  |   | (34    | )
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Total comprehensive income                                                                    |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          | $ | 5,460 |   |  |   |        |  
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Issuance of common stock-                                                                     |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|under incentive stock option plan (47,150 shares)                                             |  |             | 47    |   |                           |   | 384    |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   | 431    |  
|acquisition of bank (688,788 shares)                                                          |  |             | 689   |   |                           |   | 13,805 |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   | 14,494 |  
|Repurchase of common stock-exercise of cashless options (11,744 shares)                       |  |             | (12   | ) |                           |   | (242   | )                |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   | (254   | )
|Share-based compensation expense                                                              |  |             |       |   |                           |   | 26     |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   | 26     |  
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Balance - September 30, 2006                                                                  |  | $           | 5,680 |   |                           | $ | 33,778 |                  |  | $                                           | 31,106 |  | $                   | (118 | ) |                          |   |       |   |  | $ | 70,446 |  
|                                                                                              |  |             |       |   |                           |   |        |                  |  |                                             |        |  |                     |      |   |                          |   |       |   |  |   |        |  

See Accompanying Notes to Consolidated Financial Statements



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##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2006 and 2005

(In Thousands)

(Unaudited)



|                                                                                                       |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                       |  | 2006 |         |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                   |  |      |         |   |      |   |         |  
|Net income                                                                                             |  | $    | 5,494   |   |      | $ | 5,162   |  
|Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                                          |  |      | 1,338   |   |      |   | 902     |  
|Net amortization (accretion) on securities                                                             |  |      | (47     | ) |      |   | 19      |  
|Provision for loan losses                                                                              |  |      | 373     |   |      |   | 572     |  
|Loss on sale of other real estate                                                                      |  |      | (12     | ) |      |   |        |  
|Share based compensation expense                                                                       |  |      | 26      |   |      |   |        |  
|Changes in assets and liabilities:                                                                     |  |      |         |   |      |   |         |  
|Increase in other assets                                                                               |  |      | (639    | ) |      |   | (3,152  | )
|Increase in accrued interest receivable                                                                |  |      | (689    | ) |      |   | (421    | )
|Increase (decrease) in accounts payable and accrued expenses                                           |  |      | (84     | ) |      |   | 576     |  
|Increase in interest expense payable                                                                   |  |      | 182     |   |      |   | 100     |  
|                                                                                                       |  |      |         |   |      |   |         |  
|Net cash and cash equivalents provided by operating activities                                         |  | $    | 5,942   |   |      | $ | 3,758   |  
|                                                                                                       |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                   |  |      |         |   |      |   |         |  
|Proceeds from maturities, calls and paydowns on securities held to maturity                            |  | $    | 184     |   |      | $ | 217     |  
|Proceeds from maturities, calls and paydowns on securities available for sale                          |  |      | 5,908   |   |      |   | 2,554   |  
|Purchase of securities available for sale                                                              |  |      | (5,551  | ) |      |   | (3,553  | )
|Net increase in loans                                                                                  |  |      | (65,575 | ) |      |   | (72,889 | )
|Proceeds from sale of other real estate                                                                |  |      | 112     |   |      |   | 151     |  
|Purchase of bank premises and equipment                                                                |  |      | (4,329  | ) |      |   | (4,448  | )
|Cash paid in bank acquisition                                                                          |  |      | (14,494 | ) |      |   |        |  
|Cash acquired in bank acquisition                                                                      |  |      | 5,414   |   |      |   |        |  
|                                                                                                       |  |      |         |   |      |   |         |  
|Net cash and cash equivalents (used in) investing activities                                           |  | $    | (78,331 | ) |      | $ | (77,968 | )
|                                                                                                       |  |      |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                   |  |      |         |   |      |   |         |  
|Net increase in demand and interest bearing deposits                                                   |  | $    | 8,831   |   |      | $ | 14,957  |  
|Net increase in time deposits                                                                          |  |      | 38,305  |   |      |   | 66,179  |  
|Net increase (decrease) in borrowings                                                                  |  |      | 14,603  |   |      |   | (5,024  | )
|Proceeds from trust preferred capital notes                                                            |  |      | 14,433  |   |      |   | 8,248   |  
|Cash dividends paid                                                                                    |  |      | (1,239  | ) |      |   | (1,033  | )
|Issuance of common stock                                                                               |  |      | 203     |   |      |   | 196     |  
|                                                                                                       |  |      |         |   |      |   |         |  
|Net cash and cash equivalents provided by financing activities                                         |  | $    | 75,136  |   |      | $ | 83,523  |  
|                                                                                                       |  |      |         |   |      |   |         |  
|Increase in cash and cash equivalents                                                                  |  | $    | 2,747   |   |      | $ | 9,313   |  
|Beginning                                                                                              |  |      | 40,362  |   |      |   | 40,649  |  
|                                                                                                       |  |      |         |   |      |   |         |  
|Ending                                                                                                 |  | $    | 43,109  |   |      | $ | 49,962  |  
|                                                                                                       |  |      |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                       |  |      |         |   |      |   |         |  
|Cash payments for:                                                                                     |  |      |         |   |      |   |         |  
|Interest                                                                                               |  | $    | 16,014  |   |      | $ | 9,261   |  
|Income taxes                                                                                           |  |      | 2,907   |   |      |   | 2,523   |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES                                  |  |      |         |   |      |   |         |  
|Change in unrealized gain on securities available for sale                                             |  | $    | (50     | ) |      | $ | (190    | )
|Issuance of common stock for bank acquisition                                                          |  |      | 14,494  |   |      |   |        |  
|TRANSACTIONS RELATED TO THE ACQUISITION OF ALBEMARLE                                                   |  |      |         |   |      |   |         |  
|Increase in assets and liabilities:                                                                    |  |      |         |   |      |   |         |  
|Loans                                                                                                  |  | $    | 95,165  |   |      | $ |        |  
|Securities                                                                                             |  |      | 14,396  |   |      |   |        |  
|Other Assets                                                                                           |  |      | 25,936  |   |      |   |        |  
|Noninterest bearing deposits                                                                           |  |      | 14,069  |   |      |   |        |  
|Interest bearing deposits                                                                              |  |      | 88,173  |   |      |   |        |  
|Borrowings                                                                                             |  |      | 6,537   |   |      |   |        |  
|Other Liabilities                                                                                      |  |      | 1,224   |   |      |   |        |  

See Accompanying Notes to Consolidated Financial Statements



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PREMIER COMMUNITY BANKSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

For the Nine Months Ended
September 30, 2006 and 2005

Note 1. Basis of Presentation

The consolidated financial statements, which include the accounts of Premier Community Bankshares, Inc. (the Corporation) and all of its subsidiaries, are prepared in
conformity with accounting principles generally accepted in the United States of America and follow general practice within the banking industry. In the opinion of management, the consolidated financial statements include all adjustments
necessary for a fair presentation of the interim period. These adjustments are of a normal nature and include adjustments to eliminate all significant intercompany transactions. In view of the changing conditions in the national economy,
the effect of actions taken by regulatory authorities and normal seasonal factors, the results for the interim period are not necessarily indicative of annual performance. For purposes of comparability, certain prior period amounts have been
reclassified to conform to current period presentation.

The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities in the financial statements, and the disclosure of
revenue and expenses during the reporting period. These assumptions are based on information available as of the date of the financial statements and could differ from actual results. See Premiers Annual Report on Form 10-K for the
year ended December 31, 2005.

Note 2. Business Combination

On January 12, 2006, the Corporation signed a definitive merger agreement with Albemarle First Bank (Albemarle). Effective July 1, 2006, Albemarle was merged
into Rockingham Heritage Bank, which is a subsidiary bank of the Corporation. The transaction was valued at $29.0 million. Total consideration paid to Albemarle shareholders consisted of $14.5 million in cash and 688,788 shares of the
Corporations common stock. The transaction resulted in total assets acquired as of July 1, 2006 of $122.1 million, including $95.2 million of loans; liabilities assumed were $110.0 million, including $102.2 million of deposits.
Additionally, the Corporation recorded $15.8 million of goodwill and $3.0 million of core deposit intangibles. The Corporation expensed $115 thousand in merger related costs since the consummation of the merger.

Note 3. Share-based Payment 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
underlying 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 or, in the case of former employees, ninety days after termination of employment.



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In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on
the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The 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 a result of the Corporations application of the fair
value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based compensation for the nine months ended September 30, 2006, the Corporation recognized share-based compensation expense of $26,392.
This minimal impact is a result of the Corporation having vested all outstanding stock options as of December 31, 2005.

Share-based 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 nine months ended September 30, 2006:



|                               |  |                 |   |  |                              |       |                                                    |       |                                        |   |          
|------------------------------ |  | --------------- | - |  | ---------------------------- | ----- | -------------------------------------------------- | ----- | -------------------------------------- | - | ---------
|                               |  | Numberof Shares |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (in years) |       | Value ofUnexercisedIn-The-MoneyOptions
|Options outstanding, January 1 |  | 314,650         |   |  | $                            | 12.01 |                                                    |       |                                        |   |          
|Granted                        |  | 27,000          |   |  |                              | 20.55 |                                                    | 10.00 |                                        |   |          
|Acquisition of bank            |  | 64,185          |   |  |                              | 13.30 |                                                    | 3.00  |                                        |   |          
|Exercised                      |  | (47,150         | ) |  |                              | 9.05  |                                                    |       |                                        |   |          
|Forfeited                      |  | (2,000          | ) |  |                              | 20.25 |                                                    |       |                                        |   |          
|                               |  |                 |   |  |                              |       |                                                    |       |                                        |   |          
|Options outstanding, Sept 30   |  | 356,685         |   |  | $                            | 13.30 |                                                    | 7.64  |                                        | $ | 2,815,087
|                               |  |                 |   |  |                              |       |                                                    |       |                                        |   |          
|Options exercisable, Sept 30   |  | 335,285         |   |  | $                            | 12.84 |                                                    | 7.42  |                                        | $ | 2,801,291

The total value of in-the-money options exercised during the first nine months
ended September 30, 2006 was $572,511.



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Note 4. Earnings Per Share

Earnings per share were as follows for the periods indicated:



|                               |  |                           |  |                   |      |        |           |        |   |     
|------------------------------ |  | ------------------------- |  | ----------------- | ---- | ------ | --------- | ------ | - | ----
|                               |  | For the Nine Months Ended
|                               |  | September 30, 2006        |  | September 30 2005
|                               |  | Shares                    |  | Amount            |      | Shares |           | Amount
|Basic earnings per share       |  | 5,200,964                 |  | $                 | 1.06 |        | 4,936,033 |        | $ | 1.05
|Effect of dilutive securities: |  |                           |  |                   |      |        |           |        |   |     
|Stock options                  |  | 130,492                   |  |                   |      |        | 137,888   |        |   |     
|Diluted earnings per share     |  | 5,331,456                 |  | $                 | 1.03 |        | 5,073,921 |        | $ | 1.02



|                               |  |                            |  |                   |      |        |           |        |   |     
|------------------------------ |  | -------------------------- |  | ----------------- | ---- | ------ | --------- | ------ | - | ----
|                               |  | For the Three Months Ended
|                               |  | September 30, 2006         |  | September 30 2005
|                               |  | Shares                     |  | Amount            |      | Shares |           | Amount
|Basic earnings per share       |  | 5,664,214                  |  | $                 | 0.36 |        | 4,945,540 |        | $ | 0.35
|Effect of dilutive securities: |  |                            |  |                   |      |        |           |        |   |     
|Stock options                  |  | 133,994                    |  |                   |      |        | 131,495   |        |   |     
|Diluted earnings per share     |  | 5,798,208                  |  | $                 | 0.35 |        | 5,077,035 |        | $ | 0.34

Note 5. Securities

The amortized cost and fair values of securities held to maturity at September 30, 2006 were as follows:



|                                                |  |                    |       |                      |   |                         |  |   |           |   |  |   |      
|----------------------------------------------- |  | ------------------ | ----- | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | -----
|                                                |  | AmortizedCost      |       | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|                                                |  | September 30, 2006
|                                                |  | (In Thousands)    
|U.S. Government and federal agencies            |  | $                  | 497   |                      | $ |                        |  | $ | (22       | ) |  | $ | 475  
|Obligations of state and political subdivisions |  |                    | 3,833 |                      |   | 26                      |  |   | (48       | ) |  |   | 3,811
|Other debentures                                |  |                    | 2,712 |                      |   | 26                      |  |   | (95       | ) |  |   | 2,643
|                                                |  |                    |       |                      |   |                         |  |   |           |   |  |   |      
|                                                |  | $                  | 7,042 |                      | $ | 52                      |  | $ | (165      | ) |  | $ | 6,929
|                                                |  |                    |       |                      |   |                         |  |   |           |   |  |   |      



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The amortized cost and fair values of securities available for sale at
September 30, 2006 were as follows:



|                                                |  |                    |        |                      |   |                         |  |   |           |   |  |   |       
|----------------------------------------------- |  | ------------------ | ------ | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | ------
|                                                |  | AmortizedCost      |        | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|                                                |  | September 30, 2006
|                                                |  | (In Thousands)    
|U.S. Government and federal agencies            |  | $                  | 22,457 |                      | $ | 39                      |  | $ | (158      | ) |  | $ | 22,338
|Obligations of state and political subdivisions |  |                    | 5,063  |                      |   | 6                       |  |   | (63       | ) |  |   | 5,006 
|Mortgage-backed securities                      |  |                    | 1,971  |                      |   | 4                       |  |   | (7        | ) |  |   | 1,968 
|Restricted securities                           |  |                    | 5,012  |                      |   |                        |  |   |          |   |  |   | 5,012 
|                                                |  |                    |        |                      |   |                         |  |   |           |   |  |   |       
|                                                |  | $                  | 34,503 |                      | $ | 49                      |  | $ | (228      | ) |  | $ | 34,324
|                                                |  |                    |        |                      |   |                         |  |   |           |   |  |   |       

Securities in an unrealized loss position at September 30, 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. There were
approximately 51 securities in the consolidated portfolio of the Corporation that had losses as of September 30, 2006, all of which are considered to be temporary. Management has evaluated the investment portfolio by security and determined the
declines in fair value were primarily attributable to changes in market interest rates, not in estimated cash flows or credit quality, and therefore no other-than-temporary impairment was recorded at the end of the reporting period.



|                                     |  |                     |        |                    |                     |      |            |       |                    |        |  |            |      |                    |  |   |        |  |   |      |  
|------------------------------------ |  | ------------------- | ------ | ------------------ | ------------------- | ---- | ---------- | ----- | ------------------ | ------ |  | ---------- | ---- | ------------------ |  | - | ------ |  | - | ---- | -
|                                     |  | September 30, 2006  |        |                    |                     |     
|                                     |  | Less than 12 months |        |                    | More than 12 months |      |            | Total |                   
|(In Thousands)                       |  | Fair Value          |        | Unrealized(Losses) |                     |      | Fair Value |       | Unrealized(Losses) |        |  | Fair Value |      | Unrealized(Losses) | 
|U.S. Government and federal agencies |  | $                   | 4,755  |                    | $                   | (26  | )          |       | $                  | 8,414  |  | $          | (154 | )                  |  | $ | 13,169 |  | $ | (180 | )
|State and political subdivisions     |  |                     | 4,507  |                    |                     | (77  | )          |       |                    | 1,651  |  |            | (35  | )                  |  |   | 6,158  |  |   | (112 | )
|Mortgage-backed securities           |  |                     | 520    |                    |                     | (6   | )          |       |                    | 27     |  |            | (1   | )                  |  |   | 547    |  |   | (7   | )
|Other securities                     |  |                     | 248    |                    |                     | (2   | )          |       |                    | 1,728  |  |            | (92  | )                  |  |   | 1,976  |  |   | (94  | )
|                                     |  |                     |        |                    |                     |      |            |       |                    |        |  |            |      |                    |  |   |        |  |   |      |  
|                                     |  | $                   | 10,030 |                    | $                   | (111 | )          |       | $                  | 11,820 |  | $          | (282 | )                  |  | $ | 21,850 |  | $ | (393 | )
|                                     |  |                     |        |                    |                     |      |            |       |                    |        |  |            |      |                    |  |   |        |  |   |      |  



|                                     |  |                     |        |                    |                     |      |            |       |                    |       |  |            |      |                    |  |   |        |  |   |      |  
|------------------------------------ |  | ------------------- | ------ | ------------------ | ------------------- | ---- | ---------- | ----- | ------------------ | ----- |  | ---------- | ---- | ------------------ |  | - | ------ |  | - | ---- | -
|                                     |  | December 31, 2005   |        |                    |                     |     
|                                     |  | Less than 12 months |        |                    | More than 12 months |      |            | Total |                   
|(In Thousands)                       |  | Fair Value          |        | Unrealized(Losses) |                     |      | Fair Value |       | Unrealized(Losses) |       |  | Fair Value |      | Unrealized(Losses) | 
|U.S. Government and federal agencies |  | $                   | 7,943  |                    | $                   | (113 | )          |       | $                  | 3,420 |  | $          | (65  | )                  |  | $ | 11,363 |  | $ | (178 | )
|State 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 | )
|                                     |  |                     |        |                    |                     |      |            |       |                    |       |  |            |      |                    |  |   |        |  |   |      |  



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Note 6. Loans

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



|                                                           |  |                   |         |                  |   |        
|---------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                           |  | September 30,2006 |         | December 31,2005
|                                                           |  | (In Thousands)   
|Loans secured by real estate:                              |  |                   |         |                  |   |        
|Construction and land development                          |  | $                 | 202,813 |                  | $ | 144,829
|Secured by farmland                                        |  |                   | 14,679  |                  |   | 5,514  
|Secured by 1-4 family residential                          |  |                   | 175,494 |                  |   | 141,697
|Multi-family residential                                   |  |                   | 34,029  |                  |   | 25,560 
|Nonfarm, nonresidential                                    |  |                   | 178,826 |                  |   | 157,587
|Loans to farmers (except those secured by real estate)     |  |                   | 1,125   |                  |   | 1,576  
|Commercial loans (except those secured by real estate)     |  |                   | 99,027  |                  |   | 69,869 
|Loans to individuals (except those secured by real estate) |  |                   | 28,940  |                  |   | 26,235 
|All other loans                                            |  |                   | 5,868   |                  |   | 6,129  
|                                                           |  |                   |         |                  |   |        
|Total loans                                                |  | $                 | 740,801 |                  | $ | 578,996
|                                                           |  |                  
|Allowance for loan losses                                  |  |                   | 6,822   |                  |   | 5,591  
|                                                           |  |                   |         |                  |   |        
|Loans, net                                                 |  | $                 | 733,979 |                  | $ | 573,405
|                                                           |  |                   |         |                  |   |        

Impaired loans totaled $1.4 million at September 30, 2006 and $2.0 million at December 31, 2005.
Non-accrual loans excluded from impaired loans disclosure under the SFAS No. 114 amounted to $1.6 million at September 30, 2006 and $74 thousand at December 31, 2005. The increase in non-accrual loans is primarily attributable to the
acquisition of Albemarle.

Note 7. Allowance 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 factors including changes in the character and size of the loan portfolio and related loan experience, a
review and examination of overall loan quality, which includes the assessment of problem loans, and an analysis of anticipated economic condition in the market area.



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An analysis of the allowance for loan losses, including charge-off activity, is presented below for the nine months ended
September 30, 2006 and 2005.



|                                       |  |               |       |      |   |      
|-------------------------------------- |  | ------------- | ----- | ---- | - | -----
|                                       |  | September 30,
|(In thousands)                         |  | 2006          |       | 2005
|Balance, beginning of period           |  | $             | 5,591 |      | $ | 5,007
|Allowance of acquired bank             |  |               | 1,039 |      |   |     
|Less Charge-offs:                      |  |               |       |      |   |      
|Commercial                             |  |               | 3     |      |   | 45   
|Real estate-mortgage                   |  |               |      |      |   |     
|Real estate-construction               |  |               |      |      |   |     
|Credit cards                           |  |               | 15    |      |   | 6    
|Consumer installment loans             |  |               | 239   |      |   | 237  
|                                       |  |               |       |      |   |      
|Total                                  |  | $             | 257   |      | $ | 288  
|                                       |  |              
|Plus Recoveries:                       |  |               |       |      |   |      
|Commercial                             |  |               | 8     |      |   | 8    
|Real estate-mortgage                   |  |               | 7     |      |   |     
|Real estate-construction               |  |               |      |      |   | 15   
|Credit cards                           |  |               | 7     |      |   | 2    
|Consumer installment loans             |  |               | 54    |      |   | 87   
|                                       |  |               |       |      |   |      
|Total                                  |  | $             | 76    |      | $ | 112  
|Additions charged to operating expense |  | $             | 373   |      | $ | 572  
|                                       |  |               |       |      |   |      
|Balance, end of period                 |  | $             | 6,822 |      | $ | 5,403
|                                       |  |               |       |      |   |      

The following is a summary of information pertaining to risk elements and impaired loans for the periods ended
September 30, 2006 and December 31, 2005.



|                                                           |  |                   |       |                  |   |    
|---------------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | ---
|                                                           |  | September 30,2006 |       | December 31,2005
|                                                           |  | (In Thousands)   
|Non-accrual loans                                          |  | $                 | 1,864 |                  | $ | 614
|Loans past due 90 days or more and still accruing interest |  |                   | 1,726 |                  |   | 191
|                                                           |  |                   |       |                  |   |    
|                                                           |  | $                 | 3,590 |                  | $ | 805
|                                                           |  |                   |       |                  |   |    

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is past due 90 days
or more 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 by management.

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 by the 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.



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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 September 30, 2006 and 2005, based on the present value of the retirement benefits, was $314,553 and $412,459, respectively. The plans are unfunded; however,
life insurance has been acquired on the life of company employees in amounts sufficient to offset the expense of the obligations.

Note 9. Other Expenses

The Corporation had the following other noninterest expenses for the nine months ended
September 30, 2006 and 2005.



|                               |  |                |       |      |   |      
|------------------------------ |  | -------------- | ----- | ---- | - | -----
|                               |  | 2006           |       | 2005
|                               |  | (In Thousands)
|Advertising                    |  | $              | 586   |      | $ | 526  
|ATM Expense                    |  |                | 374   |      |   | 319  
|Directors Fees                |  |                | 494   |      |   | 376  
|Other Outside Services         |  |                | 313   |      |   | 104  
|Postage Expense                |  |                | 242   |      |   | 206  
|Stationery and Supplies        |  |                | 299   |      |   | 340  
|Telephone Expense              |  |                | 350   |      |   | 274  
|Other (no item >1% of revenue) |  |                | 3,086 |      |   | 2,588
|                               |  |                |       |      |   |      
|                               |  | $              | 5,744 |      | $ | 4,733
|                               |  |                |       |      |   |      



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Note 10. Trust Preferred Capital Notes

On June 20, 2006, the Corporation formed Premier Statutory Trust IV, a wholly-owned subsidiary, for the purpose of issuing redeemable capital securities in
connection with the acquisition of Albemarle that was completed on July 1, 2006. A Trust Preferred Capital Note of $14.4 million was issued through a pooled underwriting. The securities have a 3-Month LIBOR-indexed floating rate plus 1.55%,
which adjusts and is payable quarterly. The redeemable securities may be called at par after five years on June 20, 2010 and each quarterly anniversary of such date until the securities mature in 2036. The proceeds of this issue were used to
pay the cash consideration related to the acquisition of Albemarle.

Note 11. Goodwill and Other Intangible Assets

In connection with the acquisition of Albemarle, the Corporation recorded $15.8 million in goodwill and $3.0 million in core deposit intangible assets. The
core deposit intangible assets are amortized over a weighted average remaining useful life of 7.37 years on a straight-line basis. The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which discontinues the
amortization of goodwill and intangible assets with indefinite lives but requires an annual or more frequent impairment review if certain impairment indicators are evidenced. There have been no events subsequent to the acquisition that would
indicate any evidence of impairment of goodwill.

Information concerning goodwill and intangible assets is presented in
the following table (in thousands):



|                                     |  |                     |        |                         |   |                   |  |   |       
|------------------------------------ |  | ------------------- | ------ | ----------------------- | - | ----------------- |  | - | ------
|September 30, 2006                   |  | Gross CarryingValue |        | AccumulatedAmortization |   | Net CarryingValue
|Amortizable core deposit intangibles |  | $                   | 3,030  |                         | $ | 103               |  | $ | 2,927 
|Goodwill                             |  |                     | 15,800 |                         |   |                  |  |   | 15,800



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Note 12. Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses the SEC staffs views
regarding the process of quantifying financial statement misstatements. These interpretations were issued to address diversity in practice and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108
expresses the SEC staffs view that a registrants materiality evaluation of an identified unadjusted error should quantify the effects of the error on each financial statement and related financial statement disclosures and that prior
year misstatements should be considered in quantifying misstatements in current year financial statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would not require previously filed reports to be
amended. Such correction may be made the next time the registrant files the prior year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual
financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year
and the offsetting adjustment should be made to the opening balance of retained earnings for that year. Registrants should disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure should
also include when and how each error arose and the fact that the errors had previously been considered immaterial. The SEC staff encourages early application of the guidance in SAB 108 for interim periods of the first fiscal year ending after
November 15, 2006. The Corporation does not expect the adoption of SAB 108 to have a material impact on its financial statements.

In February 2006,
the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 permits fair value measurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation. The Statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133. It establishes a requirement to
evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 also clarifies that
concentrations of credit risk in the form of subordination are not embedded derivatives. Finally, SFAS 155 amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006. The Company does not expect the implementation of SFAS 155 to have a material impact on its financial statements.

In March 2006,
the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into certain servicing contracts. The Statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if
practicable. SFAS 156 permits an entity to choose between the amortization and fair value methods for subsequent measurements. At initial adoption, the Statement permits a one-time reclassification of available for sale securities to trading
securities by entities with recognized servicing rights. SFAS 156 also requires



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separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This Statement is effective as of the beginning of an entitys first fiscal year that begins after September 15,
2006. The Corporation does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS
157 does not require any new fair value measurements but may change current practice for some entities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within
those years. The Company does not expect the implementation of SFAS 157 to have a material impact on its financial statements.

In September 2006, the FASB
issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive
income. The funded status of a benefit plan will be measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. For any other postretirement
plan, the benefit obligation is the accumulated postretirement benefit obligation. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The Statement also requires
additional disclosure in the notes to financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset
or obligation. The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to
measure plan assets and benefit obligations as of the date of the employers fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Corporation does not expect the adoption of SFAS
158 to have a material impact on the financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes: An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS 109. The Interpretation
prescribes a recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Corporation does not affect the adoption of FIN 48 to have a material impact



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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 and nine months ended September 30, 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.

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, the 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;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the risks associated with entering a new market area related to the merger with Albemarle First Bank;
| | - |  | -----------------------------------------------------------------------------------------------------



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



| |  |  | the successful management of interest rate risk;
| | - |  | ------------------------------------------------



| |  |  | the risks of a cool down or slow down in the real estate market that might affect the real estate portion of our loan portfolio;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



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EXECUTIVE OVERVIEW

Premier Community Bankshares, Inc. (the Corporation) is a Virginia multi-bank holding company headquartered in Winchester, Virginia. The Corporation is the parent company of the following banking subsidiaries: 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 located in West Virginia and began operating as a de novo bank on July 18, 2005. On
July 1, 2006, the Corporation acquired Albemarle First Bank (Albemarle) in Charlottesville, Virginia. Albemarle merged with and into Rockingham Heritage Bank and will operate as a division of it.

The Corporation and its subsidiaries are engaged in the business of offering financial 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.

Loan interest and fee income is our primary source of revenue. We define
revenue as interest and dividend income plus non-interest income. As discussed further in the quantitative and qualitative disclosures about market risk section on pages 25 through 26, 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; however, this risk cannot be completely eliminated. In addition to the management of interest rate risk, we analyze our loan portfolio for credit risk. Risk of loan defaults and foreclosures is
inherent in our loan portfolio and generally within the banking industry. We mitigate our exposure to this risk through the underwriting process and subsequent monitoring of our credits. In addition to interest, dividend and loan fee 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).

The Corporation acquired Albemarle to expand the footprint
of the Corporation into the growing Charlottesville market. The total consideration paid to Albemarle shareholders in connection with the acquisition was $29.0 million, which consisted of $14.5 million in cash and the issuance of 688,788 shares of
the Corporations common stock. The operations of Albemarle, as part of Rockingham, have been included in the Corporations financial statements beginning July 1, 2006. As of June 30, 2006, Albemarle had total assets of
$122.1 million. Refer to Note 2 and Note 11 for further information related to the accounting for the business combination.

Our earnings per share,
on a fully diluted basis, for the quarter ended September 30, 2006 were $0.35, a slight increase from $0.34 for the same quarter in 2005. Diluted earnings for the nine months ended September 30, 2006 totaled $1.03 compared to $1.02 for the
same period for September 30, 2005. Overall earnings growth compared to prior years has slowed, which is attributable to the factors explained below.



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First, as indicated above, the Corporations earnings are largely dependent on the growth of net interest income.
The Corporation is experiencing upward interest rate pressure on deposits in our local markets from funding competition, and the mix of deposits is trending toward a larger composition of certificates of deposit. This change makes our cost of funds
more expensive when compared to prior periods. The Corporation expects this trend to continue in the near term. Second, the Corporation has incurred additional interest expense from trust preferred capital security issuances and from an increase in
non-core funding from the Federal Home Loan Bank. As this mix has changed, our borrowing costs have increased at a faster pace than the growth of our interest and dividend income.

Third, the Company over the last 18 months has made significant investments in expanding our market area through de novo expansion into the eastern panhandle of West Virginia, the acquisition of Albemarle and branch
expansion in local area markets. Specifically, the Corporation has experienced a net operating loss from the de novo bank in the amount of $733 thousand through the first nine months of 2006. An operating loss is customary and expected as a de novo
bank begins to ramp up its operations and expand its trade area. Management feels that these investments in expanded operations are necessary and will have a positive impact on earnings in the future. However, these results cannot be guaranteed and
are subject to the factors that are disclosed in Caution About Forward Looking Statements above, which may cause results that are materially different than our expectations.

CRITICAL ACCOUNTING POLICIES

General

The Companys financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already
occurred. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. A variety of factors could affect the ultimate value that is
obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. These actual results may differ from our estimates. The allowance for loan losses is considered our critical accounting estimate.

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



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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 amount, which is estimated based upon the potential impact of economic and other 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 embedded in the portfolio.

RESULTS OF OPERATIONS

Net Income

Net income for the
quarter ended September 30, 2006 was $2.0 million, an increase of $288 thousand or 16.7% over the same period in 2005. Earnings per share, on a diluted basis, increased $.01 per share or 2.9% to $.35 per share compared to $.34 for the same
quarter in 2005. The annualized return on average assets was 0.93% for the third quarter of 2006 as compared to 1.06% for the same period in 2005. Annualized return on average equity was 11.76% for the third quarter of 2006 compared to 14.09% for
the third quarter of 2005.

The acquisition of Albemarle has been reflected in the financial statements as of July 1, 2006 and represented net income
of approximately $455 thousand for the quarter ended September 30, 2006. Current period expenses related to Albemarle include interest costs in connection with the trust preferred capital notes issuance to fund the acquisition and merger
related costs. The interest expense from this issuance and merger related costs were $156 thousand and $76 thousand, respectively, net of tax. As a result, excluding the effects of the Albemarle acquisition, the Corporations net income would
have represented an increase of $65 thousand or 3.8%.

Net income for the nine months ended September 30, 2006 was $5.5 million compared to $5.2
million for the same period in 2005, an increase of $332 thousand or 6.4%. This represents an increase in diluted earnings per share of $.01 from $1.03 from $1.02 for the nine months ended September 30, 2005. As discussed above, the Corporation
issued shares in connection with the acquisition of Albemarle. These shares increased the average outstanding shares by 234 thousand when comparing the nine months ended September 30, 2006 to the same period in 2005. The annualized return
on assets was 0.95% for the first nine months of 2006 as compared to 1.12% for the same period in 2005. For the first nine months of 2006, the annualized return on equity was 12.81%, compared to 14.72% for the same period in 2005.

Interest and dividend income

Interest and dividend income totaled $39.5 million for the nine months ended September 30, 2006, an increase of $10.4 million or 35.6% compared to the nine months ended September 30, 2005. Albemarle contributed $2.1 million to
this growth for the nine months ended September 30, 2006. Loan interest and fees comprise 95% of total interest and dividend income and 87% of total operating revenue (interest and dividend income plus non-interest income). Interest income from
investment securities was $1.3 million for the first nine months of 2006, up 32.2% from $949 thousand for the same period in 2005. Interest income on federal funds, the third major component of Premiers interest income, increased $149 thousand
or 35.3%.



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The increase in interest earned on federal funds was the result of increased average federal funds balances held during
the period, as well as increases in interest rates. The increased average balances were a function of timing, and this growth in income is not expected to be as large in the future.

Interest and dividend income totaled $15.6 million for the three months ended September 30, 2006 compared to $10.5 million for the same period in 2005, an increase of $5.1 million and 48.5%, respectively. As
discussed above, Albemarle contributed $2.1 million to this growth. Overall growth is primarily attributable to organic loan growth and the acquisition of Albemarles loan and security portfolio as described above.

Interest Expense

Total interest
expense for the nine months ended September 30, 2006 was $16.3 million, $6.9 million or 74.2% higher than the nine months ended September 30, 2005. Interest on deposits for the nine-month period increased by $5.3 million or 66.5% over the
same period in 2005. This increase was attributable to an increase of $139.7 million in total interest bearing deposits year over year and the change in portfolio mix and rates paid as discussed above. Interest on borrowings increased by $1.7
million or 117.5% over the same period last year. These borrowings consist of Federal Home Loan Bank advances and pooled trust preferred issues. The Corporation issued $14.4 million in Trust Preferred Capital Notes, which facilitated the acquisition
of Albemarle.

Interest expense for the third quarter of 2006 was $6.9 million compared to $3.5 million for the same period of 2005, an increase of $3.4
million or 96.5%. This increase is attributable to the increase in deposits from both our organic growth and Albemarle, in addition to the increased borrowings as discussed above.

Net Interest Income

Net interest
income for the nine months ended September 30, 2006 was $23.2 million, $3.4 million or 17.3% higher than the nine months ended September 30, 2005. This increase is the result of the growth in earning assets of $182.4 million from
September 30, 2005. The combination of growth and rates had the effect of decreasing the net interest margin from 4.81% on a tax-equivalent basis for the nine months ended September 30, 2005 to 4.63% for the same period of 2006.

Net interest income for the quarter ended September 30, 2006 was $8.7 million compared to $7.0 million for the same period in 2005. The increase is
attributable to growth of earning assets offset by higher deposit and borrowing costs.

Noninterest Income

Total noninterest income for the nine months ended September 30, 2006 was $3.8 million, an increase of $455 thousand or 13.49% over $3.4 million
for the same period in 2005. Commissions and fees income increased $115 thousand or 16.3% as a result of increased secondary market mortgage commissions. The Corporation also had a one-time gain of $110 thousand as a result of the sale of Marathon
Banks credit card portfolio in June of 2006. The acquisition of Albemarle did not materially impact noninterest income.

Noninterest income for the
quarter ended September 30, 2006 was $1.4 million compared to $1.2 million for the same period in 2005, an increase of $200 thousand or 16%. Service charge income was flat during the quarter, which was attributable to slower growth in
noninterest-bearing deposits year over year, exclusive of deposits assumed from Albemarle.



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Noninterest Expense

Total noninterest expenses for the nine months ended September 30, 2006 were $18.3 million, $3.4 million or 23.06% higher than the nine months ended September 30, 2005. Salary expense increased $1.8 million
or 21.7%, and occupancy expense increased by $323 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 costs involved in processing an increasing number of accounts and transactions.

Total noninterest expenses for the three
months ended September 30, 2006 were $6.9 million compared to $5.4 million for the same period in 2005. This increase was primarily attributable to the additional staffing for the branch expansion, employees acquired from the Albemarle, and
additional holding company staff.

As discussed in the prior quarter, the Board of Directors approved a plan by management to begin assessing the
feasibility of streamlining and consolidating back-office operations of the Corporation. Currently, the subsidiary banks primarily operate these functions autonomously. In light of the continued compression on the net interest margin and
in an effort to restructure the overall operations of the Corporation to become more efficient and potentially lower the operating costs of the Corporation, management has begun a study of areas to consolidate at the holding company level. The
Corporation believes the consolidation of these operations will provide cost and operating efficiencies; however, these results cannot be guaranteed and are subject to the factors that are disclosed in Caution About Forward Looking
Statements above, which may cause results, which are materially different than our expectations. As such, the Corporation cannot accurately quantify or estimate the potential cost savings related to the consolidation until the completion
of the study.

FINANCIAL CONDITION

Total Assets

Total assets of Premier
increased to $878.8 million at September 30, 2006 compared to $674.4 million at December 31, 2005, representing an increase of $204.4 million or 30.3%. Total loans at September 30, 2006, were $740.8 million, of which $605.8 million
were loans secured by real estate. Of the loans secured by real estate, $202.8 million were construction and land development loans. The remaining loans consisted of $99.0 million in commercial loans, $28.9 million in consumer installment loans and
$7.1 million in all other loans. Net loans at September 30, 2006, were $734.0 million, an increase of $160.6 million or 28.0% from the December 31, 2005 amount of $573.4. The loan to deposit ratio was 103.2% at September 30, 2005 and
101.9% at December 31, 2005. As previously discussed, significant loans and other assets were acquired through the purchase of Albemarle.

The
investment portfolio increased 36.2% to $41.4 million at September 30, 2006 compared to $30.4 million at December 31, 2005. Federal funds sold decreased $6.7 million to $12.6 million at September 30, 2006 compared to $19.3 million at
December 31, 2005. Total interest earning assets increased $171.5 million or 27.26% from December 31, 2005 to September 30, 2006. This increase was primarily the result of the increase in outstanding loan balances.



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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 allowance 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 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 September 30, 2006 was $6.8 million. This is an increase of $1.2 million or 2.2% from December 31, 2005. This gives the Corporation a 0.92% 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 $711.5 million at September 30, 2006, from $562.9 million at December 31, 2005, which is an increase of $148.6
million or 26.4%. Noninterest-bearing deposits increased to $98.3 million at September 30, 2006, an increase of $8.9 million or 10.0% from December 31, 2005. During this period, interest-bearing checking and savings accounts increased
$51.3 million or 34.4% to $200.4 million. The amount of time deposits was $412.8 million at the end of the third quarter, an increase of $88.4 million or 27.2% over the end of 2005.

At September 30, 2006, noninterest-bearing deposits represented 13.8% of total deposits as compared to 15.9% at year-end 2005. Low cost interest-bearing deposits, including savings and interest-bearing checking,
were 28.2% of total deposits, compared to 26.5% at December 31, 2005. Time deposits represented 58.0% of total deposits at September 30, 2006, an increase from 57.6% at year-end 2005. The increase in time deposits is the result of
Premiers ability to offer competitive rates in its market area; however, if this trend continues, it may further compress the net interest margin. The Corporation has been experiencing a changing trend in its deposit mix from lower cost
savings and money market accounts to higher cost time deposits. This is consistent with national and local trends in our industry, and the Corporation continues to create new deposit products and explore other avenues of achieving higher profits.

Shareholders Equity

Total shareholders equity increased by $20.2 million or 40.1% from December 31, 2005 to September 30, 2006. The increase was due to a $5.5 million net profit for the first nine months of 2006 plus exercised stock options of
$203 thousand and a decrease of $34 thousand in accumulated other comprehensive income. The stock issued for the acquisition of Albemarle contributed an additional $14.5 million to total shareholders equity. The primary capital to assets ratio
was 8.0% at September 30, 2006.



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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. Borrowings are available from the Federal Home Loan Bank. The Corporation considers its
sources of liquidity to be sufficient to meet its estimated needs.

During October 2006, the Corporation entered into a Letter of Intent to refinance
Premier Statutory Trust I and obtain an additional $3.0 million. The terms of the transaction are consistent with the Corporations other trust preferred issuances. The Corporation will pay a rate of either 5-year SWAP rate plus 1.61% or
3-months LIBOR plus 1.61%. This rate will be locked in prior to or upon commencement of the refinancing, which is scheduled to close in the middle of December 2006.

CAPITAL RESOURCES

The
Corporations risk-based capital position at September 30, 2006 was $70.2 million, or 9.53% of risk-weighted assets, for Tier 1 capital and $95.2 million, or 12.92%, for total risk based capital. Tier 1 capital consists primarily of common
shareholders equity and qualifying Trust Preferred Capital Notes. Tier 2 capital includes the allowance for loan losses and the portion of Trust Preferred Capital Notes that does not qualify for inclusion in Tier 1 capital. Total risk-based
capital is the sum of Tier 1 and Tier 2 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 1 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, $8.2
million in notes in the second quarter of 2005 and, as described below, $14.4 million in notes during the second quarter of 2006 are included in risk-based capital, and will serve as a long-term source of funding.

On June 20, 2006, the Corporation entered into an agreement with Wilmington Trust Company to issue an additional $14.4 million in Trust Preferred Capital Notes. The
Corporation received the proceeds from this issue of subordinated debt on June 20, 2006. The issue has a floating interest rate of 1.55% plus the prevailing 3-month LIBOR rate. The issue has a maturity date of June 20, 2036. The
Corporation has created Premier Statutory Trust IV to administer this new Trust Preferred obligation. The proceeds have been used to fund the acquisition of Albemarle.

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.



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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 repricing values, is less utilized since it does not effectively measure the earnings impact on the Corporation and is
not addressed here. The 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.

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 interest income for the Corporation using different rate scenarios at September 30, 2006.



|                     |  |                        |  
|-------------------- |  | ---------------------- | -
|Change in Prime Rate |  | % Change in Net Income |  
|+300 basis points    |  | +3.6                   | %
|+200 basis points    |  | +4.1                   | %
|+100 basis points    |  | +2.5                   | %
|Most Likely          |  | 0                      |  
|-100 basis points    |  | -4.2                   | %
|-200 basis points    |  | -6.1                   | %
|-300 basis points    |  | -8.1                   | %



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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 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 September 30, 2006 data, over different rate environments with a one-year horizon.



|                     |  |                                                        |  
|-------------------- |  | ------------------------------------------------------ | -
|Change in Prime Rate |  | Change in EconomicValue of Equity(dollars inthousands) |  
|+300 basis points    |  | (4,115                                                 | )
|+200 basis points    |  | (3,919                                                 | )
|+100 basis points    |  | (4,179                                                 | )
|Most Likely          |  | (4,631                                                 | )
|-100 basis points    |  | (4,001                                                 | )
|-200 basis points    |  | (5,064                                                 | )
|-300 basis points    |  | (8,387                                                 | )

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 September 30, 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.



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##### Table of Contents

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.

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

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



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SIGNATURES

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



|              |  |                                    
|------------- |  | -----------------------------------
|              |  | PREMIER COMMUNITY BANKSHARES, INC. 
|              | 
|DATE: 11/6/06 |  | /s/ Donald L. Unger                
|              |  | DONALD L. UNGER                    
|              |  | PRESIDENT & CHIEF EXECUTIVE OFFICER
|              | 
|DATE: 11/6/06 |  | /s/ John A. Willingham             
|              |  | JOHN A. WILLINGHAM                 
|              |  | CHIEF FINANCIAL OFFICER            



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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.



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