##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

(Mark One)



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

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2003



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

SECURITIES EXCHANGE ACT OF 1934



For the transition period from              to



Commission file number 0-18868



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PREMIER COMMUNITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)



|Virginia                                                       |  | 54-1560968                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction Of Incorporation 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)



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 past 90 days.



YES  x                NO ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b2 of the Exchange Act.)



YES ̈NO  x



Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest practicable date: 4,576,584, $1.00 par value, as of August 8, 2003.



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



The following financial
statements are provided at the page numbers indicated.



|                           |  |                                                                                                           
|-------------------------- |  | ----------------------------------------------------------------------------------------------------------
|                           |  | Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                                     
|                           |  |                                                                                                           
|                           |  | Consolidated Statements of Income for the Three Months Ended and Six Months Ended June 30, 2003 and 2002  
|                           |  |                                                                                                           
|                           |  | Consolidated Statements of Changes in Shareholders Equity for the Six Months Ended June 30, 2003 and 2002
|                           |  |                                                                                                           
|                           |  | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002                     
|                           |  |                                                                                                           
|                           |  | Notes to Consolidated Financial Statements                                                                
|                           |  |                                                                                                           
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     
|                           |  |                                                                                                           
|Item 3.                    |  | Quantitative and Qualitative Disclosures about Market Risk                                                
|                           |  |                                                                                                           
|Item 4.                    |  | Controls and Procedures                                                                                   
|                           | 
|Part II. OTHER INFORMATION |  | 18-19                                                                                                     
|                           | 
|Signatures                 |  | 20                                                                                                        



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)



|Assets:                                                                                                                                                                     |  | (Unaudited) June 30, 2003 |         | December 31, 2002
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | -----------------
|Cash and due from banks                                                                                                                                                     |  | $                         | 30,783  |                  
|Interest-bearing deposits in other banks                                                                                                                                    |  |                           | 364     |                  
|Federal funds sold                                                                                                                                                          |  |                           | 12,043  |                  
|Securities available for sale, at fair value                                                                                                                                |  |                           | 15,223  |                  
|Securities held to maturity (fair value: June 30, 2003, $9,829 December 31, 2002 $10,033)                                                                                   |  |                           | 9,651   |                  
|Loans, net of allowance for loan losses of $3,764 June 30, 2003, $3,340 December 31, 2002                                                                                   |  |                           | 349,796 |                  
|Bank premises and equipment, net                                                                                                                                            |  |                           | 9,215   |                  
|Accrued interest receivable                                                                                                                                                 |  |                           | 1,662   |                  
|Other real estate                                                                                                                                                           |  |                           | 0       |                  
|Other assets                                                                                                                                                                |  |                           | 2,704   |                  
|                                                                                                                                                                            |  |                           |         |                  
|                                                                                                                                                                            |  | $                         | 431,441 |                  
|                                                                                                                                                                            |  |                           |         |                  
|Liabilities and Shareholders Equity:                                                                                                                                       |  |                           |         |                  
|Liabilities:                                                                                                                                                                |  |                           |         |                  
|Deposits:                                                                                                                                                                   |  |                           |         |                  
|Non-interest bearing demand deposits                                                                                                                                        |  | $                         | 52,038  |                  
|Savings and interest-bearing demand deposits                                                                                                                                |  |                           | 114,200 |                  
|Time deposits                                                                                                                                                               |  |                           | 211,934 |                  
|                                                                                                                                                                            |  |                           |         |                  
|Total deposits                                                                                                                                                              |  |                           | 378,172 |                  
|Federal Home Loan Bank advances                                                                                                                                             |  |                           | 11,000  |                  
|Short-term borrowings                                                                                                                                                       |  |                           | 531     |                  
|Accounts payable and accrued expenses                                                                                                                                       |  |                           | 1,953   |                  
|Capital lease payable                                                                                                                                                       |  |                           | 192     |                  
|Trust Preferred Capital Notes                                                                                                                                               |  |                           | 7,000   |                  
|                                                                                                                                                                            |  |                           |         |                  
|                                                                                                                                                                            |  | $                         | 398,848 |                  
|                                                                                                                                                                            |  |                           |         |                  
|Shareholders Equity:                                                                                                                                                       |  |                           |         |                  
|Preferred stock, Series A, 5% noncumulative, no par value; 1,000,000 shares authorized and unissued                                                                         |  | $                         | 0       |                  
|Common stock, $1 par value, 20,000,000 shares authorized June 30, 2003, 4,562,584 shares issued and outstanding; December 31,
2002, 4,555,484 shares issued and outstanding |  |                           | 4,562   |                  
|Capital surplus                                                                                                                                                             |  |                           | 15,020  |                  
|Retained earnings                                                                                                                                                           |  |                           | 12,573  |                  
|Accumulated other comprehensive income                                                                                                                                      |  |                           | 438     |                  
|                                                                                                                                                                            |  |                           |         |                  
|Total shareholders equity                                                                                                                                                  |  |                           | 32,593  |                  
|                                                                                                                                                                            |  |                          
|                                                                                                                                                                            |  | $                         | 431,441 |                  
|                                                                                                                                                                            |  |                           |         |                  



See Accompanying Notes
to Consolidated Financial Statements



3



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PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Income

(In Thousands, Except for Share Data)



|                                                         |  | (Unaudited)                        |           | (Unaudited)                     
|-------------------------------------------------------- |  | ---------------------------------- | --------- | --------------------------------
|                                                         |  | For the Three Months EndedJune 30, |           | For the Six Months EndedJune 30,
|                                                         |  | 2003                               |           | 2002                            
|Interest and dividend income:                            |  |                                    |           |                                 
|Interest and fees on loans                               |  | $                                  | 6,256     |                                 
|Interest on investment securities                        |  |                                    |           |                                 
|Nontaxable                                               |  |                                    | 110       |                                 
|Taxable                                                  |  |                                    | 24        |                                 
|Interest and dividends on securities available for sale: |  |                                    |           |                                 
|Nontaxable                                               |  |                                    | 124       |                                 
|Taxable                                                  |  |                                    | 13        |                                 
|Dividends                                                |  |                                    | 27        |                                 
|Interest on deposits in banks                            |  |                                    | 0         |                                 
|Interest on federal funds sold                           |  |                                    | 58        |                                 
|                                                         |  |                                    |           |                                 
|Total interest and dividend income                       |  | $                                  | 6,612     |                                 
|                                                         |  |                                    |           |                                 
|Interest expense:                                        |  |                                    |           |                                 
|Interest on deposits                                     |  | $                                  | 1,917     |                                 
|Interest on capital lease obligations                    |  |                                    | 4         |                                 
|Interest on borrowings                                   |  |                                    | 178       |                                 
|                                                         |  |                                    |           |                                 
|Total interest expense                                   |  | $                                  | 2,099     |                                 
|                                                         |  |                                    |           |                                 
|Net interest income                                      |  | $                                  | 4,513     |                                 
|Provision for loan losses                                |  |                                    | 250       |                                 
|                                                         |  |                                    |           |                                 
|Net interest income after prov. for loan losses          |  | $                                  | 4,263     |                                 
|                                                         |  |                                    |           |                                 
|Noninterest income                                       |  |                                    |           |                                 
|Service charges on deposit accounts                      |  | $                                  | 731       |                                 
|Commissions and fees                                     |  |                                    | 251       |                                 
|Other                                                    |  |                                    | 77        |                                 
|                                                         |  |                                    |           |                                 
|Total noninterest income                                 |  | $                                  | 1,059     |                                 
|                                                         |  |                                    |           |                                 
|Noninterest expense                                      |  |                                    |           |                                 
|Salaries and employee benefits                           |  | $                                  | 1,627     |                                 
|Net occupancy expense of premises                        |  |                                    | 146       |                                 
|Furniture and equipment                                  |  |                                    | 163       |                                 
|Other                                                    |  |                                    | 1,281     |                                 
|                                                         |  |                                    |           |                                 
|Total noninterest expenses                               |  | $                                  | 3,217     |                                 
|                                                         |  |                                    |           |                                 
|Income before income taxes                               |  | $                                  | 2,105     |                                 
|                                                         |  |                                    |           |                                 
|Provision for income taxes                               |  |                                    | 659       |                                 
|                                                         |  |                                    |           |                                 
|Net income                                               |  | $                                  | 1,446     |                                 
|                                                         |  |                                    |           |                                 
|Average shares:                                          |  |                                    |           |                                 
|Basic                                                    |  |                                    | 4,562,584 |                                 
|Assuming dilution                                        |  |                                    | 4,694,407 |                                 
|                                                         |  |                                    |           |                                 
|Earnings per common share:                               |  |                                    |           |                                 
|Basic                                                    |  | $                                  | 0.32      |                                 
|Assuming dilution                                        |  |                                    | 0.31      |                                 



See Accompanying Notes
to Consolidated Financial Statements



4



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PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Changes in Shareholders Equity

For the Six Months Ended June 30, 2003 and 2002

(In Thousands)

(Unaudited)



|                                                                                              |  | CommonStock |       | CapitalSurplus |   | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome |        | ComprehensiveIncome |   | TotalShareholdersEquity
|--------------------------------------------------------------------------------------------- |  | ----------- | ----- | -------------- | - | ---------------- |  | ----------------------------------- | ------ | ------------------- | - | ------------------------
|                                                                                              |  |             |       |                |   |                 
|Balance December 31, 2001                                                                     |  | $           | 4,527 |                | $ | 14,808           |  | $                                   | 6,342  |                     | $ | 68                      
|Comprehensive Income                                                                          |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|Net income                                                                                    |  |             |       |                |   |                  |  |                                     | 2,026  |                     |   |                         
|Other Comprehensive Income, unrealized gain on available for sale securities (net of tax $38) |  |             |       |                |   |                  |  |                                     |        |                     |   | 74                      
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|Total comprehensive income                                                                    |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                 
|Issuance of common stock- exercise of stock options (9,000 shares)                            |  |             | 9     |                |   | 36               |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                 
|BalancesJune 30, 2002                                                                        |  | $           | 4,536 |                | $ | 14,844           |  | $                                   | 8,368  |                     | $ | 142                     
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                 
|                                                                                              |  | CommonStock |       | CapitalSurplus |   | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome |        | ComprehensiveIncome |   | TotalShareholdersEquity
|                                                                                              |  |             |       |                |   |                 
|Balance December 31, 2002                                                                     |  | $           | 4,555 |                | $ | 14,977           |  | $                                   | 10,023 |                     | $ | 269                     
|Comprehensive Income                                                                          |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|Net income                                                                                    |  |             |       |                |   |                  |  |                                     | 2,550  |                     |   |                         
|Other Comprehensive Income, unrealized gain on available for sale securities (net of tax $86) |  |             |       |                |   |                  |  |                                     |        |                     |   | 169                     
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|Total comprehensive income                                                                    |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                 
|Issuance of common stock- exercise of stock options (7,100 shares)                            |  |             | 7     |                |   | 43               |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         
|                                                                                              |  |             |       |                |   |                 
|Balances  June 30, 2003                                                                      |  | $           | 4,562 |                | $ | 15,020           |  | $                                   | 12,573 |                     | $ | 438                     
|                                                                                              |  |             |       |                |   |                  |  |                                     |        |                     |   |                         



See Accompanying Notes
to Consolidated Financial Statements



5



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PREMIER COMMUNITY BANKSHARES

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2003 and 2002

(In Thousands)

(Unaudited)



|                                                                                        |  | 2003 |         |   | 2002 |  
|--------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|CASH FLOWS FROM OPERATING ACTIVITIES                                                    |  |      |         |   |      |  
|Net income                                                                              |  | $    | 2,550   |   |      | $
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |      |         |   |      |  
|Amortization                                                                            |  |      | 7       |   |      |  
|Depreciation                                                                            |  |      | 409     |   |      |  
|Net amortization and (accretion) on securities                                          |  |      | 7       |   |      |  
|Provision for loan losses                                                               |  |      | 490     |   |      |  
|Origination of loans available for sale                                                 |  |      |        |   |      |  
|Proceeds from sale of loans available for sale                                          |  |      |        |   |      |  
|Changes in assets and liabilities:                                                      |  |      |         |   |      |  
|(Increase) in other assets                                                              |  |      | (55     | ) |      |  
|(Increase) in accrued interest receivable                                               |  |      | (17     | ) |      |  
|Increase (Decrease) in accounts payable and accrued expenses                            |  |      | 585     |   |      |  
|Increase (Decrease) in interest expense payable                                         |  |      | (9      | ) |      |  
|                                                                                        |  |      |         |   |      |  
|Net cash provided by operating activities                                               |  | $    | 3,967   |   |      | $
|                                                                                        |  |     
|CASH FLOWS FROM INVESTING ACTIVITIES                                                    |  |      |         |   |      |  
|Proceeds from maturities, calls and principal payments on securities held to maturity   |  | $    | 1,069   |   |      | $
|Proceeds from maturities, calls and principal payments on securities available for sale |  |      | 3,732   |   |      |  
|Purchase of securities available for sale                                               |  |      | (2,341  | ) |      |  
|Purchase of securities held to maturity                                                 |  |      | (1,806  | ) |      |  
|Net (increase) in loans                                                                 |  |      | (37,732 | ) |      |  
|Purchase of bank premises and equipment                                                 |  |      | (1,953  | ) |      |  
|                                                                                        |  |      |         |   |      |  
|Net cash used in investing activities                                                   |  | $    | (39,031 | ) |      | $
|                                                                                        |  |      |         |   |      |  
|                                                                                        |  |     
|CASH FLOWS FROM FINANCING ACTIVITIES                                                    |  |      |         |   |      |  
|Net increase in interest bearing deposits                                               |  | $    | 29,608  |   |      | $
|Net increase (decrease) in non interest bearing deposits                                |  |      | 3,502   |   |      |  
|Net increase in borrowings                                                              |  |      | 1,996   |   |      |  
|Principal payments on capital lease obligation                                          |  |      | (4      | ) |      |  
|Cash dividends paid                                                                     |  |      | (683    | ) |      |  
|Proceeds from issuance of common stock                                                  |  |      | 50      |   |      |  
|                                                                                        |  |      |         |   |      |  
|Net cash provided by financing activities                                               |  | $    | 34,469  |   |      | $
|                                                                                        |  |      |         |   |      |  
|                                                                                        |  |     
|Decrease in cash and cash equivalents                                                   |  | $    | (595    | ) |      | $
|Beginning                                                                               |  |      | 43,785  |   |      |  
|                                                                                        |  |      |         |   |      |  
|Ending                                                                                  |  | $    | 43,190  |   |      | $
|                                                                                        |  |      |         |   |      |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                       |  |      |         |   |      |  
|                                                                                        |  |     
|Cash payments for:                                                                      |  |      |         |   |      |  
|Interest                                                                                |  | $    | 4,264   |   |      | $
|                                                                                        |  |      |         |   |      |  
|Income taxes                                                                            |  | $    | 1,206   |   |      | $
|                                                                                        |  |      |         |   |      |  
|Unrealized gain on securities available for sale                                        |  | $    | 255     |   |      | $
|                                                                                        |  |      |         |   |      |  



See Accompanying Notes
to Consolidated Financial Statements



6



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##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.



Notes to Consolidated Financial Statements

(Unaudited)



Note 1. General



In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Premier Community Bankshares, Inc. (Premier or the Corporation) for the periods ending June 30, 2003 and December 31, 2002, and the results of operations and
cash flows for the six months ended June 30, 2003 and 2002. The statements should be read in conjunction with the Notes to Financial Statements included in Premiers Annual Report on Form 10-KSB for the year ended December 31, 2002.



The results of operations for the three-month and six-month periods ended
June 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year.



Note 2. Stock Compensation Plan



The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued
toEmployees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provision of FASB Statement No. 123, Accounting for Stock-BasedCompensation, to
stock-based compensation (dollars in thousands except per share amounts):

|                                                                                                |  | Six Months EndedJune 30, |      
|----------------------------------------------------------------------------------------------- |  | ------------------------ | -----
|                                                                                                |  | 2003                     |      
|                                                                                                |  | In Thousands             |      
|                                                                                                |  |                         
|Net Income, as reported                                                                         |  | $                        | 2,550
|Total stock-based compensation expense determined under fair value based method for all rewards |  |                          | (58  
|                                                                                                |  |                          |      
|Pro forma net income                                                                            |  | $                        | 2,492
|                                                                                                |  |                          |      
|Basic earnings per share                                                                        |  |                          |      
|As reported                                                                                     |  | $                        | 0.56 
|                                                                                                |  |                          |      
|Pro forma                                                                                       |  | $                        | 0.55 
|                                                                                                |  |                          |      
|Diluted earnings per share                                                                      |  |                          |      
|As reported                                                                                     |  | $                        | 0.54 
|                                                                                                |  |                          |      
|Pro forma                                                                                       |  | $                        | 0.53 
|                                                                                                |  |                          |      



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##### Table of Contents

Note 3. Securities



The amortized cost and fair values of the securities held to maturity as of June 30, 2003, are as follows:



|                                                |  | AmortizedCost  |        | GrossUnrealizedGains |    |     | GrossUnrealized(Losses) |  |    | FairValue
|----------------------------------------------- |  | -------------- | ------ | -------------------- | -- | --- | ----------------------- |  | -- | ---------
|                                                |  | June 30, 2003 
|                                                |  | (In Thousands)
|U.S. Government and federal agencies            |  | $              | 1,596  |                      | $  | 34  |                         |  | $  | 0        
|Obligations of state and political subdivisions |  | $              | 5,279  |                      | $  | 266 |                         |  | $  | 0        
|Mortgage-backed securities                      |  | $              | 929    |                      | ($ | 65  | )                       |  | $  | 0        
|Other                                           |  | $              | 2,748  |                      | $  | 17  |                         |  | ($ | 139      
|                                                |  |                |        |                      |    |     |                         |  |    |          
|                                                |  | $              | 10,552 |                      | $  | 252 |                         |  | ($ | 139      
|                                                |  |                |        |                      |    |     |                         |  |    |          



Securities available for sale as of
June 30, 2003 are summarized as follows:



|                                                |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  | FairValue
|----------------------------------------------- |  | -------------- | ------ | -------------------- | - | ----------------------- |  | ---------
|                                                |  | June 30, 2003 
|                                                |  | (In Thousands)
|U.S. Government and federal agencies            |  | $              | 5,548  |                      | $ | 200                     |  | $        
|Obligations of state and political subdivisions |  |                | 6,057  |                      | $ | 366                     |  |          
|Corporate Bonds                                 |  |                | 250    |                      | $ | 63                      |  |          
|Mortgage-backed securities                      |  |                | 1,001  |                      | $ | 35                      |  |          
|Restricted Securities                           |  |                | 1,703  |                      | $ | 0                       |  |          
|                                                |  |                |        |                      |   |                         |  |          
|                                                |  | $              | 14,559 |                      | $ | 664                     |  | $        
|                                                |  |                |        |                      |   |                         |  |          



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##### Table of Contents

Note 4. Loans.



The consolidated loan portfolio is composed of the following:



|                                                           |  | June 30,2003   |         | December 31,2002
|---------------------------------------------------------- |  | -------------- | ------- | ----------------
|                                                           |  | (In Thousands)
|Loans secured by real estate:                              |  |                |         |                 
|Construction and land development                          |  |                | 57,271  |                 
|Secured by farmland                                        |  |                | 5,106   |                 
|Secured by 1-4 family residential                          |  |                | 87,824  |                 
|Multi-family residential                                   |  |                | 15,558  |                 
|Nonfarm, nonresidential                                    |  |                | 117,176 |                 
|Loans to farmers (except those secured by real estate)     |  |                | 264     |                 
|Commercial loans (except those secured by real estate)     |  |                | 45,784  |                 
|Loans to individuals (except those secured by real estate) |  |                | 18,960  |                 
|All other loans                                            |  |                | 5,995   |                 
|                                                           |  |                |         |                 
|                                                           |  |               
|Total loans                                                |  | $              | 353,938 |                 
|                                                           |  |                |         |                 
|                                                           |  |               
|Less: Unearned income                                      |  |                | 378     |                 
|Allowance for loan losses                                  |  |                | 3,764   |                 
|Loans, net                                                 |  | $              | 349,796 |                 
|                                                           |  |                |         |                 



Impaired loans totaled $575 thousand
and $1.1 million at June 30, 2003 and December 31, 2002, respectively. Non-accrual loans excluded from impaired loans disclosure under FASB 114 amounted to $43 thousand and $114 thousand at June 30, 2003 and December 31, 2002, respectively.



Note 5. Reserve for Loan Losses.



The Corporation maintains the allowance for loan losses at a sufficient level to provide
for potential losses in the loan portfolio. Loan losses are charged directly to the allowance when they occur, while recoveries are credited to the allowance. The adequacy of the provision for loan losses is reviewed periodically by management
through consideration of several factors including changes in the character and size of the loan portfolio and related loan 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. An analysis of the allowance for loan loss, including charge-off activity, is presented below for the six months ended June 30, 2003 and 2002.



9



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##### Table of Contents

|                                       |  | June 30,
|-------------------------------------- |  | --------
|(In thousands)                         |  | 2003    
|                                       |  |         
|Balance, beginning of period           |  | $       
|Less Charge-offs:                     |  |         
|Commercial                             |  |         
|Real estate-mortgage                   |  |         
|Real estate-construction               |  |         
|Credit Cards                           |  |         
|Consumer installment loans             |  |         
|                                       |  |         
|Total                                  |  | $       
|                                       |  |         
|Plus Recoveries:                       |  |         
|Commercial                             |  | $       
|Real estate-mortgage                   |  |         
|Real estate-construction               |  |         
|Credit Cards                           |  |         
|Consumer installment loans             |  |         
|                                       |  |         
|Total                                  |  | $       
|                                       |  |         
|Additions charged to operating expense |  | $       
|                                       |  |         
|Balance, end of period                 |  | $       
|                                       |  |         



The following is a summary of
information pertaining to risk elements and impaired loans for the periods ended June 30, 2003 and December 31, 2002.



|                                                           |  | June 30,       |     | December 31,
|---------------------------------------------------------- |  | -------------- | --- | ------------
|                                                           |  | 2003           |     | 2002        
|                                                           |  | (In Thousands)
|Non-accrual loans                                          |  | $              | 618 |             
|Loans past due 90 days or more and still accruing interest |  |                | 236 |             
|Restructured loans                                         |  |                | 0   |             
|                                                           |  |                |     |             
|                                                           |  | $              | 854 |             
|                                                           |  |                |     |             



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



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



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Note 6. Earnings Per Share



|                               |  | For the Six Months Ended:
|------------------------------ |  | -------------------------
|                               |  | June 30, 2003            
|                               |  | Shares                   
|Basic earnings per share       |  | 4,561,692                
|                               |  |                          
|                               |  |                          
|Effect of dilutive securities: |  |                          
|Stock options                  |  | 125,911                  
|                               |  |                          
|Diluted earnings per share     |  | 4,687,603                







|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



Financial Summary



General



Premier Community Bankshares, Inc. (Premier or
the Corporation) is a Virginia multi-bank holding company headquartered in Winchester, Virginia. The Corporation owns The Marathon Bank as well as Rockingham Heritage Bank and its subsidiary, RHB Services, Inc. Rockingham Heritage Bank
and its subsidiary were merged into Premier in a pooling of interests transaction consummated on November 20, 2000. Concurrent with the merger, Marathon Financial Corporation changed its name to Premier Community Bankshares, Inc. The consolidated
statements include the accounts of Premier and its wholly-owned subsidiaries. All significant inter-company accounts have been eliminated.



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



Critical Accounting Policies



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: (i) SFAS 5, Accounting for Contingences, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) 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.



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



Net Income



Net income for the quarter ending June 30, 2003 was $1.4 million compared to
$1.1 million for the same period in 2002. This is an increase of $349 thousand or 31.8% over the same period 2002. The provision for income tax expense increased $126 thousand from $533 thousand in 2002 to $659 thousand in 2003. The annualized
return on assets was 1.37% for the second quarter of 2003 as compared to 1.31% for the same period of 2002. Annualized return on equity was 18.25% and 16.02% for the second quarters of 2003 and 2002, respectively.



Net income for the six months ending June 30, 2003 was $2.6 million compared
to $2.0 million for the same period in 2002. This is an increase of $524 thousand or 25.9% over the same period 2002. The provision for income tax expense increased $217 thousand from $989 thousand in 2002 to $1.2 million in 2003. The annualized
return on assets was 1.25% for the first six months of 2003 as compared to 1.28% for the same period 2002. For the first half of 2003 the annualized return on equity was 16.52% up from 15.24% for 2002.



Total Assets



Total assets of Premier increased to $431.4 million at June 30, 2003
compared to $393.8 million at December 31, 2002 representing an increase of $37.7 million or 9.6%. Total loans at June 30, 2003, were $353.6 million of which $282.9 million were loans secured by real estate. The remaining loans consisted of $45.8
million in commercial loans, $19.0 million in consumer installment loans and $6.3 million in all other loans. Net loans at June 30, 2002, were $349.8 million, an increase of $37.2 million or 11.9% from the December 31, 2002 balance of $312.6
million. The loan to deposit ratio was 93.5% as of June 30, 2003 and 91.5% as of December 31, 2002. Steady loan demand in an expanding market generated the loan growth experienced for the first six months of 2003.



The investment portfolio decreased 1.7% to $24.9 million at June 30, 2003
compared to $25.3 million at December 31, 2002. Federal funds sold decreased $7.0 million to $12.0 million at June 30, 2003 compared to $19.0 million at December 31, 2002. The decline in federal funds sold was used to fund the net shortfall between
loans and deposits during the first six months of 2003. Total interest earning assets increased $28.6 million or



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7.89% from December 31, 2002 to June 30, 2003. This increase was primarily the result of the increase in outstanding loan
balances.



Allowance for Loan Losses



The allowance for loan losses, as of June 30, 2003, was $3.8
million. This is an increase of $424 thousand or 12.7% from December 31, 2002. This gives the Corporation a 1.06% 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 $378.2 million at June 30, 2003, from a balance
of $345.1 million at December 31, 2002, which is an increase of $33.1 million or 9.6%. Non-interest bearing deposits have increased to $52.0 million as of June 30, 2003, an increase of $3.5 million or 7.2% from December 31, 2002. During this period
interest bearing checking and savings accounts increased $13.2 million or 13.1% to $114.2 million. The balance in time deposits was $211.9 million at the end of the second quarter reflecting an increase of $16.4 million or 8.4% over the end of the
year. As of June 30, 2003 non-interest bearing deposits represented 13.8% of total deposits as compared to 14.1% at year-end 2002. Low cost interest bearing deposits including savings and interest bearing checking were 30.2% of total deposits. Time
deposits represented 56.0% of total deposits at June 30, 2003, down from 56.7% at year-end. The increase in time deposits is the result of Premiers ability to offer competitive rates in its market area.



Shareholders Equity



Total equity has increased by $2.8 million or 9.3% since December 31, 2002.
The increase was due to a $2.6 million net profit for the first six months plus exercised stock options of $50 thousand and an increase of $169 thousand in accumulated other comprehensive income. The primary capital to assets ratio is 7.6%.



Interest Income



Interest income totaled $12.9 million for the six months ending June 30,
2003, $2.0 million or 18.5% higher than the six months ending June 30, 2002. Interest and fees on loans of $12.2 million comprise the vast majority of interest income. Interest income from investment securities was $578 thousand for the first six
months of 2003, a decrease of $44 thousand or 7.1% from the same period 2002. Interest income on federal funds, the third major component of the banks investments, decreased $46 thousand or 27.7%. The decline in interest earned on federal
funds balance was the result of decreased fed funds balances, as those funds were converted to meet loan demand.



Interest Expense



Total interest expense for the six months ending June 30, 2003 was $4.2 million, $136 thousand or 3.3% higher than the six months ending June 30, 2002.
Interest on deposits for the six-month period increased by $124 thousand or 3.3% over the same period in 2002. Interest on borrowings increased by $12 thousand or 3.7% over the same period last year.



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Net Interest Income



Net interest income for the six months ending June 30, 2003 was $8.6
million, $1.9 million or 27.8% higher than the six months ending June 30, 2002. This increase is the result of the growth in earning assets of $73.9 million from June 2002. The combination of growth and rate changes had the effect of decreasing the
net interest margin from 4.66% for the six months ending June 30, 2002 to 4.59% for the same period of 2003. Premier is liability sensitive for interest bearing balances repricing or maturing within one year.



Other Income



Total other income for the six months ending June 30, 2003 was $1.7 million,
an increase of $585 thousand or 54.4% over the 2002 balance of $1.1 million. This was the result of service charges and fees for overdraft charges, check fees and ATM fees due to an increasing number of customer accounts and the addition of an
overdraft protection program.



Other
Expenses



Total other expenses for the six months ending
June 30, 2003 were $6.0 million, $1.7 million or 37.7% higher than the six months ending June 30, 2002. Salary expense increased $722 thousand or 30.1%, and other expense increased by $761 thousand over the same period in 2002. The net increase in
other expenses is in part a result of additional staffing to handle the growth of the bank and the costs involved in processing an increasing number of accounts and transactions. The Marathon Bank also incurred additional salary and occupancy
expenses related to the opening of a new branch in Winchester, Virginia in April 2003. The Corporations efficiency ratio was 58.26% through June 30, 2003 compared to 54.4% for the same period 2002.



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 affiliate 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 ample to meet its estimated needs.



Capital Resources



The Corporations risk-based capital position at June 30, 2002 was $39.2 million, or 11.29% of risk-weighted assets,
for Tier I capital and $42.9 million, or 12.38% for total risk based capital. Tier I capital consists primarily of common shareholders equity and Trust Preferred Capital Notes. Total risk-based capital includes the allowance for loan losses in
addition to Tier 1 Capital. Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet items. Under current risk-based capital standards, all banks are required to have Tier I
capital of at least 4% and a total capital ratio of 8%. The Corporations issuance of $7.0 million in Trust Preferred



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Capital Notes in the fourth quarter of 2001 is included in the Tier 1 capital base, and will serve as a long-term source
of funding.



Recent Accounting
Pronouncements



In April 2003, the Financial Accounting Standard Board
issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement NO. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or
modified after June 30, 2003 and is not expected to have an impact on the Corporations consolidated financial statements.



In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities
and Equity. This Statement establishes standards for how an issuer classifies and measures certain equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Corporations consolidated financial statements.



|Item 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



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 complimentary
modeling tools: static gap analysis, earnings simulation modeling and economic value simulation (net present value estimation). Each of these models measure 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. But earnings
simulation and economic value models which more effectively the earnings impact are utilized by management on a regular basis and are explained below.



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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 income for the Corporation using different rate scenarios as of March 31, 2003, the most recent date for which an analysis is available. There
have been no material changes in qualitative and qualitative disclosures about market risk since this information was developed using March 31, 2003 data.



|Change in Prime Rate |  | % Change in Net Income
|-------------------- |  | ----------------------
|+300 basis points    |  | +8.5%                 
|+200 basis points    |  | +9.2%                 
|+100 basis points    |  | +7.5%                 
|Most Likely          |  | 0                     
|-100 basis points    |  | +0.5%                 
|-200 basis points    |  | -5.0%                 
|-300 basis points    |  | -18.5%                



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.



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##### Table of Contents

The following chart reflects the change in net market value by using March 31, 2003 data, over different rate
environments with a one-year horizon.



|Change in Prime Rate |  | Change in Economic Value of Equity (dollars in thousands)
|-------------------- |  | ---------------------------------------------------------
|+300 basis points    |  | 1,931                                                    
|+200 basis points    |  | 2,316                                                    
|+100 basis points    |  | 2,498                                                    
|Most Likely          |  | 2,535                                                    
|-100 basis points    |  | 3,018                                                    
|-200 basis points    |  | 1,751                                                    
|-300 basis points    |  | (-1,473)                                                 



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 June 30, 2003, 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. There have been no significant changes in the Corporations internal controls or in other factors that could significantly affect internal
controls subsequent to the date of this evaluation.



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##### Table of Contents

PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 2. Change in Securities.



None



Item 3. Defaults upon Senior Securities.



None



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



| | (a) |  | Premier Community Bankshares, Inc. held its Annual Meeting of Shareholders on Tuesday, May 6, 2003 in Front Royal, Virginia.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Not Applicable
| | --- |  | --------------

| | (c) |  | At the Annual Meeting, the shareholders were asked to vote on the election of three of the directors of the Company, and to ratify the appointment of the firm Yount, Hyde &
Barbour, PC as the independent auditors for the fiscal year ending December 31, 2003.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The votes cast for or withheld for the election of the directors were as follows:



|NAME             |  | FOR       |  | WITHHELD
|---------------- |  | --------- |  | --------
|Stephen T. Heitz |  | 3,620,513 |  | 80,775  
|John K. Stephens |  | 3,621,882 |  | 79,406  
|Donald L. Unger  |  | 3,622,648 |  | 78,640  



The votes cast for,
against or abstain to approve the ratification of Yount, Hyde & Barbour as independent auditors for the fiscal year ending December 31, 2003.



|NAME                                           |  | FOR       |  | AGAINST |  | ABSTAIN
|---------------------------------------------- |  | --------- |  | ------- |  | -------
|Independent AuditorsYount, Hyde & Barbour, PC |  | 3,666,026 |  | 23,027  |  | 12,235 



| | (d) |  | Not Applicable
| | --- |  | --------------



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##### Table of Contents

Item 5. Other Information.



None



Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits
| | --- |  | --------



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 



| | (b) |  | Reports on Form 8-KNone
| | --- |  | ------------------------



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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:        August 12, 2003 |  | /s/    JOHN K. STEPHENSJOHN K. STEPHENS CHAIRMAN                   
|                             | 
|DATE:        August 12, 2003 |  | /s/    DONALD L. UNGERDONALD L. UNGER PRESIDENT & CEO              
|                             | 
|DATE:        August 12, 2003 |  | /s/    FREDERICK A. BOARDFREDERICK A. BOARD CHIEF FINANCIAL OFFICER



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EXHIBIT INDEX



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 



21