##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



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 September 30, 2004



| ̈ | 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



---



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 the past 90 days.    YES  x    NO ̈



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



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 4,904,548, $1.00 par
value, as of November 2, 2004.

---



---

##### 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 at September 30, 2004 and December 31, 2003                                          |  | 3    
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Income for the Three Months Ended and Nine Months Ended September 30, 2004 and 2003   |  | 4    
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Changes in Shareholders Equity for the Nine Months Ended September 30, 2004 and 2003 |  | 5    
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003                      |  | 6    
|           |  |                                                                                                                 
|           |  | Notes to Consolidated Financial Statements                                                                       |  | 7-12 
|           |  |                                                                                                                 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 1318
|           |  |                                                                                                                 
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 1819
|           |  |                                                                                                                 
|Item 4.    |  | Controls and Procedures                                                                                          |  | 20   
|           |  |                                                                                                                 
|Part II.   |  | OTHER INFORMATION                                                                                                |  | 21   
|           | 
|Signatures |  | 22                                                                                                              



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. FINANCIAL STATEMENTS

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Balance Sheets

(In Thousands, Except for Share Data)



|                                                                                                                                                                                 |  |                   |         |                  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                 |  | (Unaudited)       |         |                 
|                                                                                                                                                                                 |  | September 30,2004 |         | December 31,2003
|Assets:                                                                                                                                                                          |  |                   |         |                  |   |        
|Cash and due from banks                                                                                                                                                          |  | $                 | 24,461  |                  | $ | 22,394 
|Interest-bearing deposits in other banks                                                                                                                                         |  |                   | 126     |                  |   | 208    
|Federal funds sold                                                                                                                                                               |  |                   | 17,105  |                  |   | 16,901 
|Securities available for sale, at fair value                                                                                                                                     |  |                   | 17,902  |                  |   | 15,694 
|Securities held to maturity (fair value: September 30, 2004, $7,511; December 31, 2003, $8,207)                                                                                  |  |                   | 7,705   |                  |   | 8,357  
|Loans, net of allowance for loan losses of $4,957, September 30, 2004; $4,104, December 31, 2003                                                                                 |  |                   | 471,494 |                  |   | 382,459
|Bank premises and equipment, net                                                                                                                                                 |  |                   | 12,215  |                  |   | 10,962 
|Accrued interest receivable                                                                                                                                                      |  |                   | 1,799   |                  |   | 1,678  
|Other real estate                                                                                                                                                                |  |                   | 132     |                  |   | 67     
|Other assets                                                                                                                                                                     |  |                   | 6,369   |                  |   | 4,179  
|                                                                                                                                                                                 |  |                   |         |                  |   |        
|Total Assets                                                                                                                                                                     |  | $                 | 559,308 |                  | $ | 462,899
|                                                                                                                                                                                 |  |                   |         |                  |   |        
|Liabilities and Shareholders Equity:                                                                                                                                            |  |                   |         |                  |   |        
|Liabilities:                                                                                                                                                                     |  |                   |         |                  |   |        
|Deposits:                                                                                                                                                                        |  |                   |         |                  |   |        
|Non-interest bearing demand deposits                                                                                                                                             |  | $                 | 77,382  |                  | $ | 61,123 
|Savings and interest bearing demand deposits                                                                                                                                     |  |                   | 144,290 |                  |   | 130,312
|Time deposits                                                                                                                                                                    |  |                   | 248,096 |                  |   | 205,910
|                                                                                                                                                                                 |  |                   |         |                  |   |        
|Total deposits                                                                                                                                                                   |  |                   | 469,768 |                  |   | 397,345
|Federal Home Loan Bank advances                                                                                                                                                  |  |                   | 30,000  |                  |   | 10,000 
|Short-term borrowings                                                                                                                                                            |  |                   | 493     |                  |   | 541    
|Accounts payable and accrued expenses                                                                                                                                            |  |                   | 2,519   |                  |   | 2,948  
|Capital lease payable                                                                                                                                                            |  |                   | 181     |                  |   | 188    
|Trust Preferred Capital Notes                                                                                                                                                    |  |                   | 13,000  |                  |   | 13,000 
|                                                                                                                                                                                 |  |                   |         |                  |   |        
|Total Liabilities                                                                                                                                                                |  | $                 | 515,961 |                  | $ | 424,022
|                                                                                                                                                                                 |  |                   |         |                  |   |        
|Shareholders Equity:                                                                                                                                                            |  |                   |         |                  |   |        
|Preferred stock, Series A, 5% noncumulative, no par value; 1,000,000 shares authorized and unissued                                                                              |  | $                 | 0       |                  | $ | 0      
|Common stock, $1 par value, 20,000,000 shares authorized September 30, 2004, 4,902,423 shares issued and outstanding; December 31, 2003,
4,881,084 shares issued and outstanding |  |                   | 4,902   |                  |   | 4,881  
|Capital surplus                                                                                                                                                                  |  |                   | 19,391  |                  |   | 19,328 
|Retained earnings                                                                                                                                                                |  |                   | 18,928  |                  |   | 14,400 
|Accumulated other comprehensive income                                                                                                                                           |  |                   | 126     |                  |   | 268    
|                                                                                                                                                                                 |  |                   |         |                  |   |        
|Total shareholders equity                                                                                                                                                       |  |                   | 43,347  |                  |   | 38,877 
|                                                                                                                                                                                 |  |                  
|Total Liabilities and Shareholders Equity                                                                                                                                       |  | $                 | 559,308 |                  | $ | 462,899
|                                                                                                                                                                                 |  |                   |         |                  |   |        



See Accompanying Notes
to Consolidated Financial Statements



3



---

##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Income

(In Thousands, Except for Share Data)

(Unaudited)



|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|-------------------------------------------------------- |  | --------------------------------------- | --------- | ---- | -------------------------------------- | --------- | ---- |  | ---- | --------- |  | - | ---------
|                                                         |  | For the Three Months EndedSeptember 30, |           |      | For the Nine Months EndedSeptember 30,
|                                                         |  | 2004                                    |           | 2003 |                                        |           | 2004 |  | 2003
|Interest and dividend income:                            |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Interest and fees on loans                               |  | $                                       | 7,872     |      | $                                      | 6,368     |      |  | $    | 21,871    |  | $ | 18,529   
|Interest on investment securities:                       |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Nontaxable                                               |  |                                         | 79        |      |                                        | (3        | )    |  |      | 173       |  |   | 163      
|Taxable                                                  |  |                                         | 24        |      |                                        | 139       |      |  |      | 165       |  |   | 250      
|Interest and dividends on securities available for sale: |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Nontaxable                                               |  |                                         | 69        |      |                                        | (2        | )    |  |      | 203       |  |   | 163      
|Taxable                                                  |  |                                         | 84        |      |                                        | 140       |      |  |      | 243       |  |   | 239      
|Dividends                                                |  |                                         | 16        |      |                                        | 13        |      |  |      | 57        |  |   | 50       
|Interest on deposits in banks                            |  |                                         | 1         |      |                                        | 0         |      |  |      | 2         |  |   | 3        
|Interest on federal funds sold                           |  |                                         | 81        |      |                                        | 61        |      |  |      | 156       |  |   | 181      
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Total interest and dividend income                       |  | $                                       | 8,226     |      | $                                      | 6,716     |      |  | $    | 22,870    |  | $ | 19,578   
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Interest expense:                                        |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Interest on deposits                                     |  | $                                       | 2,042     |      | $                                      | 1,857     |      |  | $    | 5,665     |  | $ | 5,759    
|Interest on capital lease obligations                    |  |                                         | 4         |      |                                        | 4         |      |  |      | 11        |  |   | 12       
|Interest on borrowings                                   |  |                                         | 315       |      |                                        | 179       |      |  |      | 832       |  |   | 518      
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Total interest expense                                   |  | $                                       | 2,361     |      | $                                      | 2,040     |      |  | $    | 6,508     |  | $ | 6,289    
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Net interest income                                      |  | $                                       | 5,865     |      | $                                      | 4,676     |      |  | $    | 16,362    |  | $ | 13,289   
|Provision for loan losses                                |  |                                         | 175       |      |                                        | 225       |      |  |      | 920       |  |   | 715      
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Net interest income after provision for loan losses      |  | $                                       | 5,690     |      | $                                      | 4,451     |      |  | $    | 15,442    |  | $ | 12,574   
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Noninterest income:                                      |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Service charges on deposit accounts                      |  | $                                       | 849       |      | $                                      | 739       |      |  | $    | 2,379     |  | $ | 1,832    
|Commissions and fees                                     |  |                                         | 224       |      |                                        | 188       |      |  |      | 599       |  |   | 633      
|Other                                                    |  |                                         | 102       |      |                                        | 65        |      |  |      | 404       |  |   | 188      
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Total noninterest income                                 |  | $                                       | 1,175     |      | $                                      | 992       |      |  | $    | 3,382     |  | $ | 2,653    
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Noninterest expense:                                     |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Salaries and employee benefits                           |  | $                                       | 2,219     |      | $                                      | 1,726     |      |  | $    | 6,389     |  | $ | 4,850    
|Net occupancy expense of premises                        |  |                                         | 233       |      |                                        | 180       |      |  |      | 670       |  |   | 484      
|Furniture and equipment                                  |  |                                         | 260       |      |                                        | 223       |      |  |      | 767       |  |   | 604      
|Other                                                    |  |                                         | 1,656     |      |                                        | 1,169     |      |  |      | 4,370     |  |   | 3,388    
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Total noninterest expense                                |  | $                                       | 4,368     |      | $                                      | 3,298     |      |  | $    | 12,196    |  | $ | 9,326    
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Income before income taxes                               |  | $                                       | 2,497     |      | $                                      | 2,145     |      |  | $    | 6,628     |  | $ | 5,901    
|                                                         |  |                                         |           |     
|Provision for income taxes                               |  |                                         | 793       |      |                                        | 689       |      |  |      | 2,100     |  |   | 1,895    
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Net income                                               |  | $                                       | 1,704     |      | $                                      | 1,456     |      |  | $    | 4,528     |  | $ | 4,006    
|                                                         |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Average shares:                                          |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Basic                                                    |  |                                         | 4,895,825 |      |                                        | 4,578,258 |      |  |      | 4,888,950 |  |   | 4,567,275
|Assuming dilution                                        |  |                                         | 5,010,259 |      |                                        | 4,731,853 |      |  |      | 5,046,746 |  |   | 4,701,303
|                                                         |  |                                         |           |     
|Earnings per common share:                               |  |                                         |           |      |                                        |           |      |  |      |           |  |   |          
|Basic                                                    |  |                                         | 0.35      |      |                                        | 0.32      |      |  |      | 0.93      |  |   | 0.88     
|Assuming dilution                                        |  |                                         | 0.34      |      |                                        | 0.31      |      |  |      | 0.90      |  |   | 0.85     



See Accompanying Notes
to Consolidated Financial Statements



4



---

##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Changes in Shareholders Equity

For the Nine Months Ended September 30, 2004 and 2003

(In Thousands, Except for Share Amounts)

(Unaudited)



|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ----------- | ----- | - | -------------- | - | ------ | ---------------- |  | ------------------------------------ | ------ |  | ------------------- | ---- | - | ------------------------ | - | ----- | - |  | - | ------ | -
|                                                                                               |  | CommonStock |       |   | CapitalSurplus |   |        | RetainedEarnings |  | Accumulated OtherComprehensiveIncome |        |  | ComprehensiveIncome |      |   | TotalShareholdersEquity |  
|Balance December 31, 2002                                                                      |  | $           | 4,555 |   |                | $ | 14,977 |                  |  | $                                    | 10,023 |  | $                   | 269  |   |                          |   |       |   |  | $ | 29,824 |  
|                                                                                               |  |             |       |   |                |  
|Comprehensive Income                                                                           |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Net income                                                                                     |  |             |       |   |                |   |        |                  |  |                                      | 4,006  |  |                     |      |   |                          |   | 4,006 |   |  |   | 4,006  |  
|Other comprehensive income, unrealized loss on available for sale securities (net of tax -$32) |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     | (61  | ) |                          |   | (61   | ) |  |   | (61    | )
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Total comprehensive income                                                                     |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          | $ | 3,945 |   |  |   |        |  
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Issuance of common stock-exercise of stock options (35,000 shares)                             |  |             | 35    |   |                |   | 173    |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   | 208    |  
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Balances - September 30, 2003                                                                  |  | $           | 4,590 |   |                | $ | 15,150 |                  |  | $                                    | 14,029 |  | $                   | 208  |   |                          |   |       |   |  | $ | 33,977 |  
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|                                                                                               |  |             |       |   |                |  
|                                                                                               |  | CommonStock |       |   | CapitalSurplus |   |        | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome  |        |  | ComprehensiveIncome |      |   | TotalShareholdersEquity |  
|Balance December 31, 2003                                                                      |  | $           | 4,881 |   |                | $ | 19,328 |                  |  | $                                    | 14,400 |  | $                   | 268  |   |                          |   |       |   |  | $ | 38,877 |  
|                                                                                               |  |             |       |   |                |  
|Comprehensive Income                                                                           |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Net income                                                                                     |  |             |       |   |                |   |        |                  |  |                                      | 4,528  |  |                     |      |   |                          | $ | 4,528 |   |  |   | 4,528  |  
|Other comprehensive income, unrealized loss on available for sale securities (net of tax -$48) |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     | (142 | ) |                          |   | (142  | ) |  |   | (142   | )
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Total comprehensive income                                                                     |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          | $ | 4,386 |   |  |   |        |  
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Issuance of common stock -                                                                     |  |             | 24    |   |                |   | 118    |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   | 142    |  
|exercise of stock options (24,650 shares)                                                      |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|exercise of cashless options (3,261 shares)                                                    |  |             | (3    | ) |                |   | (55    | )                |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   | (58    | )
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  
|Balances - September 30, 2004                                                                  |  | $           | 4,902 |   |                | $ | 19,391 |                  |  | $                                    | 18,928 |  | $                   | 126  |   |                          |   |       |   |  | $ | 43,347 |  
|                                                                                               |  |             |       |   |                |   |        |                  |  |                                      |        |  |                     |      |   |                          |   |       |   |  |   |        |  



See Accompanying Notes
to Consolidated Financial Statements



5



---

##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2004 and 2003

(In Thousands)

(Unaudited)



|                                                                                        |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                        |  | 2004 |         |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                    |  |      |         |   |      |   |         |  
|Net income                                                                              |  | $    | 4,528   |   |      | $ | 4,006   |  
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |      |         |   |      |   |         |  
|Amortization                                                                            |  |      |        |   |      |   |        |  
|Depreciation                                                                            |  |      | 714     |   |      |   | 430     |  
|Net amortization and (accretion) on securities                                          |  |      | 37      |   |      |   | 12      |  
|Provision for loan loss                                                                 |  |      | 920     |   |      |   | 715     |  
|Change in loans held for sale                                                           |  |      |        |   |      |   |        |  
|Changes in assets and liabilities:                                                      |  |      |         |   |      |   |         |  
|(Increase) in other assets                                                              |  |      | (2,186  | ) |      |   | (139    | )
|Decrease in accrued interest receivable                                                 |  |      | 23      |   |      |   | 17      |  
|Increase in accounts payable and accrued expenses                                       |  |      | 290     |   |      |   | 79      |  
|Increase in interest expense payable                                                    |  |      | 21      |   |      |   | 99      |  
|                                                                                        |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                               |  | $    | 4,347   |   |      |   | 5,219   |  
|                                                                                        |  |     
|CASH FLOWS FROM INVESTING ACTIVITIES                                                    |  |      |         |   |      |   |         |  
|Proceeds from maturities, calls and principal payments on securities held to maturity   |  | $    | 50      |   |      | $ | 4,485   |  
|Proceeds from maturities, calls and principal payments on securities available for sale |  |      | 2,077   |   |      |   | 1,186   |  
|Purchase of securities available for sale                                               |  |      | (2,050  | ) |      |   | (1,836  | )
|Purchase of securities held to maturity                                                 |  |      | (1,886  | ) |      |   | (3,040  | )
|Net (increase) in loans                                                                 |  |      | (89,955 | ) |      |   | (47,451 | )
|Purchase of bank premises and equipment                                                 |  |      | (1,967  | ) |      |   | (2,699  | )
|                                                                                        |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                                   |  | $    | (93,731 | ) |      | $ | (49,355 | )
|                                                                                        |  |      |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                    |  |      |         |   |      |   |         |  
|Net increase in demand and interest bearing deposits                                    |  | $    | 30,237  |   |      | $ | 31,940  |  
|Net increase in certificates of deposits                                                |  |      | 42,186  |   |      |   | 14,343  |  
|Net increase in borrowings                                                              |  |      | 19,952  |   |      |   | 7,780   |  
|Principal payments on capital lease obligation                                          |  |      | (7      | ) |      |   | (6      | )
|Cash dividends paid                                                                     |  |      | (879    | ) |      |   | (683    | )
|Proceeds from issuance of common stock                                                  |  |      | 84      |   |      |   | 208     |  
|                                                                                        |  |      |         |   |      |   |         |  
|Net cash provided by financing activities                                               |  | $    | 91,573  |   |      | $ | 53,582  |  
|                                                                                        |  |      |         |   |      |   |         |  
|Increase in cash and cash equivalents                                                   |  | $    | 2,189   |   |      | $ | 9,446   |  
|Beginning                                                                               |  |      | 39,503  |   |      |   | 43,784  |  
|                                                                                        |  |      |         |   |      |   |         |  
|Ending                                                                                  |  | $    | 41,692  |   |      | $ | 53,230  |  
|                                                                                        |  |      |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                       |  |      |         |   |      |   |         |  
|Cash payments for:                                                                      |  |      |         |   |      |   |         |  
|Interest                                                                                |  | $    | 6,533   |   |      | $ | 6,280   |  
|                                                                                        |  |      |         |   |      |   |         |  
|Income taxes                                                                            |  | $    | 2,091   |   |      | $ | 1,650   |  
|                                                                                        |  |      |         |   |      |   |         |  
|Unrealized (loss) on securities available for sale                                      |  | $    | (190    | ) |      | $ | (93     | )
|                                                                                        |  |      |         |   |      |   |         |  



See Accompanying Notes
to Consolidated Financial Statements



6



---

##### Table of Contents

PREMIER COMMUNITY BANKSHARES, INC.



Notes to Consolidated Financial Statements

(Unaudited)



Note 1. Accounting Policies



General



In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position of Premier Community Bankshares, Inc. (Premier or the Corporation) at September 30, 2004 and December 31, 2003, and the results of operations and cash flows for the nine
months ended September 30, 2004 and 2003. The statements should be read in conjunction with the Notes to Financial Statements included in Premiers Annual Report on Form 10-K for the year ended December 31, 2003.



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):



|                                                                                                |  |                                 |       |   |      |   |       |  
|----------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                |  | Nine Months Ended September 30, |      
|                                                                                                |  | 2004                            |       |   | 2003 |  
|                                                                                                |  | (In Thousands)                  |      
|Net income, as reported                                                                         |  | $                               | 4,528 |   |      | $ | 4,006 |  
|Total stock-based compensation expense determined under fair value based method for all rewards |  |                                 | (93   | ) |      |   | (93   | )
|                                                                                                |  |                                 |       |   |      |   |       |  
|Pro forma net income                                                                            |  | $                               | 4,435 |   |      | $ | 3,913 |  
|                                                                                                |  |                                 |       |   |      |   |       |  
|Basic earnings per share                                                                        |  |                                 |       |   |      |   |       |  
|As reported                                                                                     |  | $                               | 0.93  |   |      | $ | 0.88  |  
|                                                                                                |  |                                 |       |   |      |   |       |  
|Pro forma                                                                                       |  | $                               | 0.91  |   |      | $ | 0.86  |  
|                                                                                                |  |                                 |       |   |      |   |       |  
|Diluted earnings per share                                                                      |  |                                 |       |   |      |   |       |  
|As reported                                                                                     |  | $                               | 0.90  |   |      | $ | 0.85  |  
|                                                                                                |  |                                 |       |   |      |   |       |  
|Pro forma                                                                                       |  | $                               | 0.88  |   |      | $ | 0.83  |  
|                                                                                                |  |                                 |       |   |      |   |       |  



7



---

##### Table of Contents

Note 2. Results of Operations



The results of operations for the three-month and nine-month periods ended September 30,
2004 and 2003 are not necessarily indicative of the results to be expected for the full year.



Note 3. Securities



Securities held to
maturity as of September 30, 2004 are summarized as follows:



|                                                |  |                               |       |                      |   |                         |  |   |           |   |  |   |      
|----------------------------------------------- |  | ----------------------------- | ----- | -------------------- | - | ----------------------- |  | - | --------- | - |  | - | -----
|                                                |  | AmortizedCost                 |       | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | FairValue
|                                                |  | Sept. 30, 2004 (In Thousands)
|U.S. Government and federal agencies            |  | $                             | 497   |                      | $ | 0                       |  | $ | (2        | ) |  | $ | 495  
|Obligations of state and political subdivisions |  |                               | 4,469 |                      |   | 137                     |  |   | (216      | ) |  |   | 4,390
|Mortgage-backed securities                      |  |                               | 0     |                      |   | 0                       |  |   | 0         |   |  |   | 0    
|Other                                           |  |                               | 2,739 |                      |   | 0                       |  |   | (113      | ) |  |   | 2,626
|                                                |  |                               |       |                      |   |                         |  |   |           |   |  |   |      
|                                                |  | $                             | 7,705 |                      | $ | 137                     |  | $ | (331      | ) |  | $ | 7,511
|                                                |  |                               |       |                      |   |                         |  |   |           |   |  |   |      



Securities available for sale as of
September 30, 2004 are summarized as follows:



|                                                |  |                               |        |                      |   |                         |  |    |           |   |  |   |       
|----------------------------------------------- |  | ----------------------------- | ------ | -------------------- | - | ----------------------- |  | -- | --------- | - |  | - | ------
|                                                |  | AmortizedCost                 |        | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |    | FairValue
|                                                |  | Sept. 30, 2004 (In Thousands)
|U.S. Government and federal agencies            |  | $                             | 7,727  |                      | $ | 60                      |  | $  | 0         |   |  | $ | 7,787 
|Obligations of state and political subdivisions |  |                               | 6,949  |                      |   | 132                     |  |    | (44       | ) |  |   | 7,037 
|Corporate bonds                                 |  |                               | 250    |                      |   | 31                      |  |    | 0         |   |  |   | 281   
|Mortgage-backed securities                      |  |                               | 411    |                      |   | 13                      |  |    | 0         |   |  |   | 424   
|Restricted securities                           |  |                               | 2,373  |                      |   | 0                       |  |    | 0         |   |  |   | 2,373 
|                                                |  |                               |        |                      |   |                         |  |    |           |   |  |   |       
|                                                |  | $                             | 17,710 |                      | $ | 236                     |  | ($ | 44        | ) |  | $ | 17,902
|                                                |  |                               |        |                      |   |                         |  |    |           |   |  |   |       



8



---

##### Table of Contents

Securities in an unrealized loss position at September 30, 2004, by duration of the unrealized loss, are shown below. No
impairment has been recognized on any of the securities in a loss position because of managements intent and demonstrated ability to hold securities to scheduled maturity or call dates. There are approximately nine securities in the
consolidated portfolio of the Corporation that have losses, which are considered to be temporary.



|                                                 |  |                     |       |                  |                     |      |           |       |                  |       |  |           |     |                  |  |   |       |  |   |      |  
|------------------------------------------------ |  | ------------------- | ----- | ---------------- | ------------------- | ---- | --------- | ----- | ---------------- | ----- |  | --------- | --- | ---------------- |  | - | ----- |  | - | ---- | -
|                                                 |  | Less than 12 months |       |                  | More than 12 months |      |           | Total |                 
|LOSSES                                           |  | FairValue           |       | UnrealizedLosses |                     |      | FairValue |       | UnrealizedLosses |       |  | FairValue |     | UnrealizedLosses | 
|U.S. Government and agency securities            |  | $                   | 997   |                  | $                   |     |           |       | $                | 495   |  | $         | (2  | )                |  | $ | 1,492 |  | $ | (2   | )
|Obligations of states and political subdivisions |  |                     | 1,595 |                  |                     | (260 | )         |       |                  |      |  |           |    |                  |  |   | 1,595 |  |   | (260 | )
|Other securities                                 |  |                     | 864   |                  |                     | (62  | )         |       |                  | 1,502 |  |           | (51 | )                |  |   | 2,366 |  |   | (113 | )
|                                                 |  |                     |       |                  |                     |      |           |       |                  |       |  |           |     |                  |  |   |       |  |   |      |  
|                                                 |  | $                   | 3,456 |                  | $                   | (322 | )         |       | $                | 1,997 |  | $         | (53 | )                |  | $ | 5,453 |  | $ | (375 | )
|                                                 |  |                     |       |                  |                     |      |           |       |                  |       |  |           |     |                  |  |   |       |  |   |      |  



Note
4. Loans



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



|                                                           |  |                    |         |                   |   |        
|---------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                                                           |  | September 30, 2004 |         | December 31, 2003
|                                                           |  | (In Thousands)    
|Loans secured by real estate:                              |  |                    |         |                   |   |        
|Construction and land development                          |  | $                  | 98,336  |                   | $ | 66,501 
|Secured by farmland                                        |  |                    | 3,759   |                   |   | 4,890  
|Secured by 1-4 family residential                          |  |                    | 126,457 |                   |   | 101,548
|Multi-family residential                                   |  |                    | 18,692  |                   |   | 15,432 
|Nonfarm, nonresidential                                    |  |                    | 135,780 |                   |   | 120,675
|Loans to farmers (except those secured by real estate)     |  |                    | 928     |                   |   | 197    
|Commercial loans (except those secured by real estate)     |  |                    | 61,452  |                   |   | 49,735 
|Loans to individuals (except those secured by real estate) |  |                    | 26,467  |                   |   | 23,296 
|All other loans                                            |  |                    | 4,580   |                   |   | 4,289  
|                                                           |  |                    |         |                   |   |        
|Total loans                                                |  | $                  | 476,451 |                   | $ | 386,563
|                                                           |  |                   
|Allowance for loan losses                                  |  |                    | 4,957   |                   |   | 4,104  
|                                                           |  |                    |         |                   |   |        
|Loans, net                                                 |  | $                  | 471,494 |                   | $ | 382,459
|                                                           |  |                    |         |                   |   |        



Impaired loans totaled $1.7 million
and $2.4 million at September 30, 2004 and December 31, 2003, respectively. Non-accrual loans excluded from impaired loans disclosure under FASB 114 amounted to $112 thousand at September 30, 2004. There were no non-accrual loans excluded from
impaired loans disclosure under FASB 114 at December 31, 2003.



9



---

##### Table of Contents

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 conditions in the market area. An analysis of the allowance for loan losses, including charge-off activity, is presented below for the nine months ended September 30, 2004 and 2003.



|                                       |  |               |       |      |   |      
|-------------------------------------- |  | ------------- | ----- | ---- | - | -----
|                                       |  | September 30,
|(In Thousands)                         |  | 2004          |       | 2003
|Balance, beginning of period           |  | $             | 4,104 |      | $ | 3,340
|Less Charge-offs:                     |  |               |       |      |   |      
|Commercial                             |  |               | 0     |      |   | 27   
|Real estate-mortgage                   |  |               | 10    |      |   | 0    
|Real estate-construction               |  |               | 0     |      |   | 0    
|Consumer installment loans             |  |               | 154   |      |   | 120  
|                                       |  |               |       |      |   |      
|Total                                  |  | $             | 164   |      | $ | 147  
|                                       |  |              
|Plus Recoveries:                       |  |               |       |      |   |      
|Commercial                             |  | $             | 1     |      | $ | 8    
|Real estate-mortgage                   |  |               | 0     |      |   | 0    
|Real estate-construction               |  |               | 0     |      |   | 0    
|Consumer installment loans             |  |               | 96    |      |   | 49   
|                                       |  |               |       |      |   |      
|Total                                  |  | $             | 97    |      | $ | 57   
|                                       |  |              
|Additions charged to operating expense |  | $             | 920   |      | $ | 715  
|                                       |  |              
|Balance, end of period                 |  | $             | 4,957 |      | $ | 3,965
|                                       |  |               |       |      |   |      



The following is a summary of
information pertaining to risk elements and impaired loans at September 30, 2004 and December 31, 2003.



|                                                           |  |                   |       |                  |   |      
|---------------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                           |  | September 30,2004 |       | December 31,2003
|                                                           |  | (In Thousands)   
|Non-accrual loans                                          |  | $                 | 177   |                  | $ | 497  
|Loans past due 90 days or more and still accruing interest |  |                   | 833   |                  |   | 946  
|Restructured loans                                         |  |                   | 0     |                  |   | 0    
|                                                           |  |                   |       |                  |   |      
|                                                           |  | $                 | 1,010 |                  | $ | 1,443
|                                                           |  |                   |       |                  |   |      



10



---

##### Table of Contents

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.



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 status. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.



Note 6. Earnings Per Share



The Corporation and its subsidiaries had the following earnings per share for the nine months ended September 30, 2004 and 2003.



|                               |  |                            |  |                   |      |        |           |        |   |     
|------------------------------ |  | -------------------------- |  | ----------------- | ---- | ------ | --------- | ------ | - | ----
|                               |  | For the Nine Months Ended:
|                               |  | September 30, 2004         |  | September 30 2003
|                               |  | Shares                     |  | Amount            |      | Shares |           | Amount
|Basic earnings per share       |  | 4,888,950                  |  | $                 | 0.93 |        | 4,567,275 |        | $ | 0.88
|                               |  |                            |  |                  
|Effect of dilutive securities: |  |                            |  |                   |      |        |           |        |   |     
|Stock options                  |  | 157,796                    |  |                   |      |        | 134,028   |        |   |     
|                               |  |                            |  |                  
|Diluted earnings per share     |  | 5,046,746                  |  | $                 | 0.90 |        | 4,701,303 |        | $ | 0.85



Note
7. Other Expenses



The Corporation and its subsidiaries had the following
other expenses for the nine months ended September 30, 2004 and 2003.



|                               |  |                |       |      |   |      
|------------------------------ |  | -------------- | ----- | ---- | - | -----
|                               |  | 2004           |       | 2003
|                               |  | (In Thousands)
|Advertising                    |  | $              | 486   |      | $ | 392  
|ATM Expense                    |  |                | 280   |      |   | 232  
|Directors Fees                |  |                | 312   |      |   | 272  
|Postage Expense                |  |                | 213   |      |   | 202  
|Stationery and Supplies        |  |                | 311   |      |   | 393  
|Other (no item >1% of revenue) |  |                | 2,768 |      |   | 1,897
|                               |  |                |       |      |   |      
|                               |  | $              | 4,370 |      | $ | 3,388
|                               |  |                |       |      |   |      



11



---

##### Table of Contents

Note 8. Recent Accounting Pronouncements



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



On September 30, 2004, the Financial Accounting Standards Board decided to delay the effective date for the measurement and recognition
guidance contained in Issue 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure guidance in Issue 03-1 was not delayed.



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



We do not expect that implementation of the above will have a significant impact on the financial statements.



12



---

##### Table of Contents

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



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 and Rockingham Heritage Bank and its subsidiary, RHB Services, Inc. The consolidated financial 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.



The Corporation intends to organize a third bank in West Virginia, which will be named
Premier Bank. The Corporation plans to locate Premier Banks headquarters in Martinsburg and its initial branch office in Shepherdstown in West Virginia. State regulatory approvals to operate Premier Bank and FDIC approval have been received.
Because of the slower than anticipated approvals from the planning commissions in Jefferson and Berkeley counties, construction of the two banking offices has been delayed. Therefore, the opening date of Premier Bank is projected to be the second
quarter of 2005, rather than the originally anticipated fourth quarter of 2004. Premier Bank will offer a wide variety of deposits and loans, including residential loans, commercial loans and commercial construction and development loans. The
Corporation currently operates a loan production office in Martinsburg, until the new bank is fully operational.



Critical Accounting Policies



General



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



13



---

##### Table of Contents

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: (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.



Premiers allowance for loan losses is determined by evaluating its loan portfolio on a monthly 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 that is determined by economic events and conditions that may have a real, but as yet undetermined, impact upon the portfolio. Each of these steps is based on data that can be subjective, and the actual losses may be greater or
less than the amount of the allowance. However, management feels that the allowance represents a reasonable assessment of the risk imbedded in the portfolio.



Net Income



Net income for the quarter ended September 30, 2004 was $1.7 million compared to $1.5 million for the same period in 2003. This is an increase of $248 thousand or
17.0% over the same period in 2003. The provision for income tax expense increased $104 thousand from $689 thousand in 2003 to $793 thousand in 2004. The annualized return on assets was 1.22% for the third quarter of 2004 as compared to 1.31% for
the same period in 2003. Annualized return on equity was 15.98% and 17.37% for the third quarters of 2004 and 2003, respectively.



Net income for the nine months ended September 30, 2004 was $4.5 million compared to $4.0 million for the same period in 2003. This is an increase of $522 thousand or
13.0% over the same period 2003. The provision for income tax expense increased $205 thousand from $1.9 million in 2003 to $2.1 million in 2004. The annualized return on assets was 1.18% for the first nine months of 2004 as compared to 1.27% for the
same period in 2003. For the first nine months of 2004 the annualized return on equity was 14.72% compared to 16.83% for the same period in 2003.



Total Assets



Total assets of Premier increased to $559.3 million at September 30, 2004 compared to $462.9 million at December 31, 2003, representing an increase of $96.4 million or
20.8%. Total loans at September 30, 2004, were $476.5 million, of which $383.0 million were loans secured by real estate. (Of the loans secured by real estate, $98.3 million were construction and land development loans.) The remaining loans
consisted of $61.5 million in commercial loans, $26.5 million in consumer installment loans and $5.5 million in all other loans. Net loans at September 30, 2004, were $471.5 million, an increase of $89.0 million or 23.3% from the December



14



---

##### Table of Contents

31, 2003 amount of $382.5 million. The loan to deposit ratio was 101.4% at September 30, 2004 and 97.3% at December 31,
2003. Steady loan demand in an expanding market generated the loan growth experienced for the period.



The investment portfolio increased 6.5% to $25.6 million at September 30, 2004 compared to $24.1 million at December 31, 2003. Federal funds sold increased $204.0 thousand to $17.1 million at September 30, 2004
compared to $16.9 million at December 31, 2003. Total interest earning assets increased $91.6 million or 21.4% from December 31, 2003 to September 30, 2004. This increase was primarily the result of the increase in outstanding loan balances.



Allowance for Loan Losses



We maintain the allowance for loan losses at a sufficient level to provide for potential
losses in the loan portfolio. Loan losses are charged directly to the allowance when they occur, while recoveries are credited to the allowance. Specific reserves by loan type are established based on overall historical losses, anticipated losses,
and inherit risk. Additionally, specific reserves for individual loans are established depending on the severity of the potential loss. Loans are individually reserved once classified as a watch item by management. A higher percentage of
the loan is reserved for individual loans with a more severe classification. The adequacy of the provision for loan losses is reviewed regularly by management through consideration of several factors including changes in character and the size of
the loan portfolio and related loan loss experience, a review and examination of overall loan quality that 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, 2004, was $5.0 million. This is an
increase of $853 thousand or 20.8% from December 31, 2003. This gives the Corporation a 1.04% 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 $469.8 million at September 30, 2004, from $397.3 million at
December 31, 2003, which is an increase of $72.4 million or 18.2%. Non-interest bearing deposits have increased to $77.4 million at September 30, 2004, an increase of $16.3 million or 26.6% from December 31, 2003. During this period, interest
bearing checking and savings accounts increased $14.0 million or 10.7% to $144.3 million. The amount of time deposits was $248.1 million at the end of the third quarter, reflecting an increase of $42.2 million or 20.5% over the end of 2003. At
September 30, 2004, non-interest bearing deposits represented 16.5% of total deposits as compared to 15.4% at year-end 2003. Low cost interest bearing deposits, including savings and interest bearing checking, were 30.7% of total deposits, compared
to 32.8% at December 31, 2003. Time deposits represented 52.8% of total deposits at September 30, 2004, an increase from 51.8% at year-end 2003.



Shareholders Equity



Total equity has increased by $4.5 million or 11.5% since December 31, 2003. The increase was due to a $4.5 million net profit for the first nine months plus exercised
stock options of $84 thousand and a decrease of $142 thousand in accumulated other comprehensive income. The primary capital to assets ratio is 7.8%.



15



---

##### Table of Contents

Interest Income



Interest income totaled $22.9 million for the nine months ended September 30, 2004, $3.3 million or 16.8% higher than the nine months ended
September 30, 2003. Interest and fees of $21.9 million on loans comprise the vast majority of interest income. Interest income from investment securities was $841 thousand for the first nine months of 2004, down 2.8% from $865 thousand for the same
period in 2003. Interest income on federal funds, the third major component of Premiers interest income, decreased $25 thousand or 13.8%. The decline in interest earned on federal funds was the result of decreased average federal funds
balances held during the period.



Interest
Expense



Total interest expense for the nine months ended September 30,
2004 was $6.5 million, $219 thousand or 3.5% higher than the nine months ended September 31, 2003. Interest on deposits for the nine-month period decreased by $94 thousand or 1.6% over the same period in 2003. The impact of continued historically
low interest rates from September 2003 through September 2004 offset the additional expense generated by an increase of $56.2 million in total interest bearing deposits during the same period. Interest on borrowings increased by $314 thousand or
60.6% over the same period last year. Borrowings are obtained from the Federal Home Loan Bank.



Net Interest Income



Net interest income for the nine months ended September 30, 2004 was $16.4 million, $3.1 million or 23.1% higher than the nine months ended September 30, 2003. This
increase is the result of the growth in earning assets of $100.5 million from September 30, 2003. The combination of growth and rates had the effect of increasing the net interest margin from 4.57% on a tax-equivalent basis for the nine months ended
September 30, 2003 to 4.65% for the same period of 2004. Premier, like most financial institutions, is liability sensitive for interest bearing balances repricing or maturing within one year.



Noninterest Income



Total other income for the nine months ended September 30, 2004 was $3.4 million, an
increase of $729 thousand or 27.5% over $2.7 million for the same period in 2003. 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.



Noninterest Expense



Total other expenses for the nine months ended September 30, 2004 were $12.2 million, $2.9
million or 30.8% higher than the nine months ended September 30, 2003. Salary expense increased $1.5 million or 31.7%, and other expenses increased by $1.3 million over the same period in 2003. 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 Corporations efficiency ratio was 61.2% for the nine months ended September 30, 2004 compared to 57.9% for the same period in 2003. The efficiency ratio is a
non-GAAP financial measure, which we believe provides investors with important information regarding our operational efficiency. This gives investors a better look at how well the Corporation is managing non-interest expenses compared to the growth
in income.



16



---

##### Table of Contents

We compute our Efficiency Ratio by dividing non-interest expense by the sum of the net interest income on a
tax-equivalent basis and non-interest income, net of securities gains or losses. The following table reflects the calculation for the efficiency ratio for the nine months ended September 30, 2004 and 2003:



|                                    |  |               |        |   |      |   |        |  
|----------------------------------- |  | ------------- | ------ | - | ---- | - | ------ | -
|                                    |  | September 30, |       
|                                    |  | 2004          |        |   | 2003 |  
|Total Other Expenses                |  | $             | 12,196 |   |      | $ | 9,326  |  
|(-) Foreclosed Property Expense     |  |               | 0      |   |      |   | 0      |  
|(-) Amortization of Intangibles     |  |               | 0      |   |      |   | 0      |  
|                                    |  |               |        |   |      |   |        |  
|                                    |  | $             | 12,196 |   |      | $ | 9,326  |  
|                                    |  |               |        |   |      |   |        |  
|Net Interest Income                 |  | $             | 16,362 |   |      | $ | 13,289 |  
|Fully Taxable Equivalent adjustment |  |               | 194    |   |      |   | 172    |  
|Non Interest Income                 |  |               | 3,382  |   |      |   | 2,653  |  
|                                    |  |               |        |   |      |   |        |  
|                                    |  | $             | 19,938 |   |      | $ | 16,114 |  
|                                    |  |               |        |   |      |   |        |  
|Efficiency Ratio                    |  |               | 61.17  | % |      |   | 57.88  | %



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 ample to meet its estimated needs.



Capital Resources



The Corporations risk-based capital position at September 30, 2004 was $56.2 million,
or 12.08% of risk-weighted assets, for Tier I capital and $61.2 million, or 13.15%, 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 Capital Notes in the fourth quarter of 2001 and an additional issuance of $6.0 million
in the third quarter of 2003 are included in the Tier 1 capital base, and will serve as a long-term source of funding.



There have been no material changes in off-balance sheet arrangements or contractual obligations that were disclosed in the Corporations Annual Report on Form 10-K
for the year ended December 31, 2003.



17



---

##### Table of Contents

Forward-Looking Statements



Certain information contained in this discussion may include forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as the
Corporation expects, the Corporation believes or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, interest rate fluctuations, competition within and from
outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Corporation, the ability to
successfully manage the Corporations growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future, the ability to continue to attract low cost core deposits to
fund asset growth, maintaining capital levels adequate to support the Corporations growth, maintaining cost controls and assets qualities as the Corporation opens or acquires new branches, reliance on the Corporations management team,
including its ability to attract and retain key personnel, the successful management of interest rate risk, changes in general economic and business conditions in the Corporations market area, changes in interest rates and interest rate
policies, demand, development and acceptance of new products and services, changing trends in customer profiles and changes in laws and regulations applicable to the Corporation. Although the Corporation believes that its expectations with respect
to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Corporation will not differ
materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For additional information on known and unknown risks, see the Caution About Forward Looking Statements section in
the Corporations Annual Report on Form 10-K for the year ended December 31, 2003.



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 to 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. 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.



18



---

##### Table of Contents

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 September 30, 2004.



|                     |  |                                |  
|-------------------- |  | ------------------------------ | -
|Change in Prime Rate |  | % Change inNet Interest Income |  
|+300 basis points    |  | +8.4                           | %
|+200 basis points    |  | +7.1                           | %
|+100 basis points    |  | +4.2                           | %
|Most Likely          |  | 0                              |  
|-100 basis points    |  | -4.6                           | %
|-200 basis points    |  | -11.4                          | %
|-300 basis points    |  | -24.1                          | %



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, 2004 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    |  | $                                                        | 7,330 |  
|+200 basis points    |  |                                                          | 7,426 |  
|+100 basis points    |  |                                                          | 7,438 |  
|Most Likely          |  |                                                          | 7,652 |  
|-100 basis points    |  |                                                          | 7,165 |  
|-200 basis points    |  |                                                          | 4,477 |  
|-300 basis points    |  |                                                          | (-948 | )



19



---

##### Table of Contents

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, 2004, 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.



20



---

##### Table of Contents

PART II. OTHER INFORMATION



Item 1. Legal Proceedings.



None.



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



21



---

##### Table of Contents

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: 11/10/04 |  | /s/ JOHN K. STEPHENS              
|               |  | JOHN K. STEPHENS                  
|               |  | CHAIRMAN                          
|               | 
|DATE: 11/10/04 |  | /s/ DONALD L. UNGER               
|               |  | DONALD L. UNGER                   
|               |  | PRESIDENT & CEO                   
|               | 
|DATE: 11/10/04 |  | /s/ FREDERICK A. BOARD            
|               |  | FREDERICK A. BOARD                
|               |  | CHIEF FINANCIAL OFFICER           



22



---

##### Table of Contents

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.



23