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, 2005



_____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                         | (I.R.S. Employer Identification No.)
|of incorporation or organization)                    |                                     
|                                                     |                                     
|4095 Valley Pike                                     |                                     
|Winchester, Virginia                                 | 22602                               
|(Address of principal executive offices)             | (Zip Code)                          
|                                                    
|(540) 869-6600                                      
|(Registrants telephone number, including area code)
|                                                    

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X   NO______







Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

YES X   NO______



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

YES______  NO X



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 4,948,048, $1.00 par value, as of October 31, 2005.

---









|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, 2005 and December 31, 2004                                          | 3    
|                                                                                                                 |      
|                                                                                                                 |      
|Consolidated Statements of Income for
the Three Months Ended and Nine Months Ended September 30, 2005 and 2004   | 4    
|
|                                                                                                                 |      
|Consolidated Statements of Changes in
Shareholders Equity for the Nine Months
Ended September 30, 2005 and 2004 | 5    
|                                                                                                                 |      
|Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and 2004                      | 6    
|                                                                                                                 |      
|Notes to Consolidated Financial Statements                                                                       | 7-14 
|                                                                                                                 |      
|Item 2.  Managements Discussion and Analysis of Financial
Condition and Results of Operations                   | 1521
|                                                                                                                 |      
|Item 3.  Quantitative and Qualitative
Disclosures about Market Risk                                              | 2123
|                                                                                                                 |      
|Item 4.  Controls and Procedures                                                                                 | 23   
|                                                                                                                 |      
|Part II. OTHER INFORMATION                                                                                       | 24   
|                                                                                                                 |      
|Signatures                                                                                                       | 25   

2





2

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|PART I.  FINANCIAL INFORMATION                              
|------------------------------------------------------------
|                                                            
|Item 1. FINANCIAL STATEMENTS                                
|PREMIER COMMUNITY BANKSHARES, INC.                          
|Consolidated Balance Sheets                                 
|(In Thousands, Except for Share Data)                       
|                                                            
|                                                            
|                                                            
|Assets:                                                     
|Cash and due from banks                                     
|Interest-bearing deposits in other banks                    
|Federal funds sold                                          
|Securities available for sale, at fair value                
|Securities held to maturity (fair value: September 30, 2005,
|$7,128;  December 31, 2004,  $7,481)                        
|Loans, net of allowance for loan losses of $5,403 at        
|September 30, 2005 and $5,007 at December 31, 2004          
|Bank premises and equipment, net                            
|Accrued interest receivable                                 
|Other real estate                                           
|Other assets                                                
|                                                            
|Total Assets                                                
|                                                            
|Liabilities and Shareholders' Equity:                       
|Liabilities:                                                
|Deposits:                                                   
|Non-interest bearing demand deposits                        
|Savings and interest bearing demand deposits                
|Time deposits                                               
|Total deposits                                              
|Federal Home Loan Bank advances                             
|Short-term borrowings                                       
|Accounts payable and accrued expenses                       
|Capital lease payable                                       
|Trust Preferred Capital Notes                               
|Total Liabilities                                           
|                                                            
|Shareholders' Equity:                                       
|Preferred stock, Series A, 5% noncumulative, no par         
|value; 1,000,000 shares authorized and unissued             
|Common stock, $1 par value, 20,000,000 shares authorized    
|September 30, 2005, 4,948,048 shares issued and outstanding;
|December 31, 2004, 4,919,548 shares issued and outstanding  
|Capital surplus                                             
|Retained earnings                                           
|Accumulated other comprehensive income                      
|Total Shareholders' Equity                                  
|                                                            
|Total Liabilities and Shareholders' Equity                  
|                                                            
|See Accompanying Notes to Consolidated Financial Statements 

3

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|                                                              |                            |                          
|------------------------------------------------------------- | -------------------------- | -------------------------
|PREMIER COMMUNITY BANKSHARES, INC.                            |                            |                          
|Consolidated Statements of Income                             |                            |                          
|(In Thousands, Except for Share and Per Share Data)           |                            |                          
|(Unaudited)                                                   |                            |                          
|                                                              |                            |                          
|                                                              | For the Three Months Ended | For the Nine Months Ended
|                                                              | September 30,              | September 30,            
|                                                              | 2005                       | 2004                     
|Interest and dividend income:                                 |                            |                          
|Interest and fees on loans                                    | $      9,935               | $      7,872             
|Interest on investment securities:                            |                            |                          
|Nontaxable                                                    | 42                         | 79                       
|Taxable                                                       | 62                         | 24                       
|Interest and dividends on securities      available for sale: |                            |                          
|Nontaxable                                                    | 69                         | 69                       
|Taxable                                                       | 123                        | 84                       
|Dividends                                                     | 28                         | 16                       
|Interest on deposits in banks                                 | 27                         | 1                        
|Interest on federal funds sold                                | 190                        | 81                       
|Total interest and dividend income                            | $     10,476               | $      8,226             
|                                                              |                            |                          
|Interest expense:                                             |                            |                          
|Interest on deposits                                          | $      2,963               | $      2,042             
|Interest on capital lease obligations                         | 4                          | 4                        
|Interest on borrowings                                        | 535                        | 315                      
|Total interest expense                                        | $      3,502               | $      2,361             
|                                                              |                            |                          
|Net interest income                                           | $      6,974               | $      5,865             
|Provision for loan losses                                     | 245                        | 175                      
|Net interest income after provision for loan losses           | $      6,729               | $      5,690             
|                                                              |                            |                          
|Noninterest income:                                           |                            |                          
|Service charges on deposit accounts                           | $        813               | $        849             
|Commissions and fees                                          | 242                        | 224                      
|Other                                                         | 130                        | 102                      
|Total noninterest income                                      | $      1,185               | $      1,175             
|                                                              |                            |                          
|Noninterest expense:                                          |                            |                          
|Salaries and employee benefits                                | $      3,050               | $      2,295             
|Net occupancy expense of premises                             | 337                        | 233                      
|Furniture and equipment                                       | 358                        | 260                      
|Other                                                         | 1,610                      | 1,580                    
|Total noninterest expense                                     | $      5,355               | $      4,368             
|                                                              |                            |                          
|Income before income taxes                                    | $      2,559               | $      2,497             
|                                                              |                            |                          
|Provision for income taxes                                    | 831                        | 793                      
|                                                              |                            |                          
|Net income                                                    | $      1,728               | $      1,704             
|                                                              |                            |                          
|Average shares:                                               |                            |                          
|Basic                                                         | 4,945,540                  | 4,895,825                
|Assuming dilution                                             | 5,077,035                  | 5,010,259                
|                                                              |                            |                          
|Earnings per common share:                                    |                            |                          
|Basic                                                         | 0.35                       | 0.35                     
|Assuming dilution                                             | 0.34                       | 0.34                     
|                                                              |                            |                          
|See Accompanying Notes to Consolidated Financial Statements   |                            |                          



4

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|PREMIER COMMUNITY BANKSHARES, INC.                        
|----------------------------------------------------------
|Consolidated Statements of Changes in Shareholders' Equity
|For the Nine Months Ended September 30, 2005 and 2004     
|(In Thousands, Except for Share Data)                     
|(Unaudited)                                               
|                                                          

|                                                   |          |           |           | Accumulated   |               |              
|-------------------------------------------------- | -------- | --------- | --------- | ------------- | ------------- | -------------
|                                                   |          |           |           | Other         |               | Total        
|                                                   | Common   | Capital   | Retained  | Comprehensive | Comprehensive | Shareholders'
|                                                   | Stock    | Surplus   | Earnings  | Income        | Income        | 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      (loss), unrealized |          |           |           |               |              
|loss on available for     sale securities          |          |           |           |               |               |              
|(net of tax $-73)                                  |          |           |           | (142)         | (142)         | (142)        
|Total comprehensive income                         |          |           |           |               | $  4,386      |              
|                                                   |          |           |           |               |               |              
|Issuance of common stock-                          |          |           |           |               |               |              
|exercise of stock options                          |          |           |           |               |               |              
|(24,650 shares)                                    | 24       | 118       |           |               |               | 142          
|exercise of cashless                               |          |           |           |               |               |              
|options (3,261 shares)                             | (3)      | (55)      |           |               |               | (58)         
|                                                   |          |           |           |               |               |              
|Balances - September 30, 2004                      | $ 4,902  | $  19,391 | $ 18,928  | $ 126         |               | $ 43,347     
|                                                   |          |           |           |               |               |              
|                                                   |          |           |           |               |               |              
|                                                   |          |           |           |               |               |              
|                                                   |          |           |           | Accumulated   |               |              
|                                                   |          |           |           | Other         |               | Total        
|                                                   | Common   | Capital   | Retained  | Comprehensive | Comprehensive | Shareholders'
|                                                   | Stock    | Surplus   | Earnings  | Income        | Income        | Equity       
|                                                   |          |           |           |               |               |              
|Balance December 31, 2004                          | $ 4,920  | $  19,502 | $ 19,710  | $ 130         |               | $  44,262    
|                                                   |          |           |           |               |               |              
|Comprehensive Income                               |          |           |           |               |               |              
|Net income                                         |          |           | 5,162     |               | $  5,162      | 5,162        
|Other comprehensive income     (loss), unrealized  |          |           |           |               |              
|loss on available for     sale securities          |          |           |           |               |               |              
|(net of tax -$65)                                  |          |           |           | (125)         | (125)         | (125)        
|Total comprehensive income                         |          |           |           |               | $  5,037      |              
|                                                   |          |           |           |               |               |              
|Issuance of common stock-                          |          |           |           |               |               |              
|exercise of stock                                  |          |           |           |               |               |              
|options (28,500 shares)                            | 28       | 168       |           |               |               | 196          
|                                                   |          |           |           |               |               |              
|Balances - September 30, 2005                      | $  4,948 | $  19,670 | $  24,872 | $    5        |               | $  49,495    
|                                                   |          |           |           |               |               |              
|                                                   |          |           |           |               |               |              

See Accompanying Notes to Consolidated Financial Statements

5

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|PREMIER COMMUNITY BANKSHARES, INC.                         
|-----------------------------------------------------------
|Consolidated Statements of Cash Flows                      
|For the Nine Months Ended September 30, 2005 and 2004      
|(In Thousands)                                             
|(Unaudited)                                                
|                                                           
|CASH FLOWS FROM OPERATING ACTIVITIES                       
|Net income                                                 
|Adjustments to reconcile net income                        
|to net cash provided by operating activities:              
|Depreciation and amortization                              
|Net amortization and (accretion) on securities             
|Provision for loan loss                                    
|Gain on sale of other real estate                          
|Changes in assets and liabilities:                         
|(Increase) in other assets                                 
|(Increase) decrease in accrued interest receivable         
|Increase in accounts payable and accrued expenses          
|Increase in interest expense payable                       
|Net cash provided by operating activities                  
|                                                           
|CASH FLOWS FROM INVESTING ACTIVITIES                       
|Proceeds from maturities, calls and principal payments     
|on securities held to maturity                             
|Proceeds from maturities, calls and principal payments     
|on securities available for sale                           
|Purchase of securities available for sale                  
|Purchase of securities held to maturity                    
|Net (increase) in loans                                    
|Proceeds from sale of other real estate                    
|Purchase of bank premises and equipment                    
|Net cash used in investing activities                      
|                                                           
|CASH FLOWS FROM FINANCING ACTIVITIES                       
|Net increase in demand and interest bearing deposits       
|Net increase in certificates of deposit                    
|Net increase (decrease) in borrowings                      
|Proceeds from trust preferred capital notes                
|Principal payments on capital lease obligation             
|Cash dividends paid                                        
|Net proceeds from issuance of common stock                 
|Net cash provided by financing activities                  
|                                                           
|Increase in cash and cash equivalents                      
|Beginning                                                  
|Ending                                                     
|                                                           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
|                                                           
|Cash payments for:                                         
|Interest                                                   
|                                                           
|Income taxes                                               
|                                                           
|Change in unrealized gain on securities available for sale 
|                                                           
|See Accompanying Notes to Consolidated Financial Statements









6

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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, 2005 and December 31, 2004, and the results of operations and cash flows for the nine month periods ended September 30, 2005 and 2004, and the results of operations for the quarters ended September 30, 2005 and 2004. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in Premiers Annual Report on Form 10-K for the year ended December 31, 2004.



Stock Compensation Plan



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



|                                         | Nine Months Ended    
|---------------------------------------- | ---------------------
|                                         | September 30,        
|                                         | 2005                 
|                                         | In Thousands,        
|                                         | except per share data
|                                         |                      
|Net income, as reported                  | $ 5,162              
|Total stock-based compensation expense   |                      
|determined under fair value based method |                      
|for all rewards                          | (50)                 
|Pro forma net income                     | $ 5,112              
|                                         |                      
|                                         |                      
|Basic earnings per share                 |                      
|As reported                              | $  1.05              
|Pro forma                                | $  1.04              
|                                         |                      
|                                         |                      
|Diluted earnings per share               |                      
|As reported                              | $  1.02              
|Pro forma                                | $  1.01              
|                                         |                      



7

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Deferred Compensation Plans



During 2004, a deferred compensation plan and split dollar life insurance plan were adopted for selected officers of the Corporation.  Under these plans, the benefit to each officer is equal to 25% of the individual employees final base compensation at time of retirement.  Benefits are to be paid in monthly installments commencing at retirement for a period of 180 months.  The agreement provides that, if employment is terminated for reasons other than retirement or disability, the benefit is reduced based upon a vesting schedule.  If death occurs prior to termination of service, no retirement benefits are paid, but a life insurance benefit of up to three times compensation is paid to the employees beneficiary.



During the first quarter of 2005, a second deferred compensation plan and split dollar life insurance plan were adopted for additional selected officers of the Corporation. Under these new plans, the benefit is equal to 25% of the sum of the individual employee's final base compensation at time of retirement plus the average of bonuses paid during the final five years of service. Benefits are to be paid in annual installments commencing at retirement for a period of 15 years. The agreement provides that, if employment is terminated for reasons other than retirement or disability, the benefit is reduced based upon a vesting schedule. If death occurs prior to termination of service, only the accrued benefit and a life insurance benefit of $50,000 is paid to the employees' beneficiary.



The deferred compensation charged to expense for the nine months ended September 30, 2005 and 2004, based on the present value of the retirement benefits under the plans described above, was $412,459 and $228,040, respectively. The plans are unfunded; however, life insurance has been acquired on the life of the employees in amounts sufficient to offset the expense of the obligations.



Note 2. Results of Operations



The results of operations for the three-month and nine-month periods ended September 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.



Note 3.  Securities



The amortized cost and fair values of securities held to maturity at September 30, 2005 were as follows:



|                         |                | Gross      | Gross      |       
|------------------------ | -------------- | ---------- | ---------- | ------
|                         | Amortized      | Unrealized | Unrealized | Fair  
|                         | Cost           | Gains      | (Losses)   | Value 
|                         | Sept. 30, 2005
|                         | (In Thousands)
|U.S. Government and      |                |            |            |       
|federal agencies         | $497           | $0         | ($14)      | $483  
|Obligations of state and |                |            |            |       
|political subdivisions   | 4,128          | 80         | (40)       | 4,168 
|Other                    | 2,717          | 36         | (276)      | 2,477 
|                         | $7,342         | $116       | ($330)     | $7,128
|                         |                |            |            |       



8

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The amortized cost and fair values of securities available for sale at September 30, 2005 were as follows:



|                           |                | Gross      | Gross      |        
|-------------------------- | -------------- | ---------- | ---------- | -------
|                           | Amortized      | Unrealized | Unrealized | Fair   
|                           | Cost           | Gains      | (Losses)   | Value  
|                           | Sept. 30, 2005
|                           | (In Thousands)
|U.S. Government and        |                |            |            |        
|federal agencies           | $10,038        | $5         | ($83)      | $9,960 
|Obligations of state and   |                |            |            |        
|political subdivisions     | 7,019          | 89         | (7)        | 7,101  
|Mortgage-backed securities | 278            | 3          | 0          | 281    
|Restricted securities      | 3,202          | 0          | 0          | 3,202  
|                           | $20,537        | $97        | ($90)      | $20,544
|                           |                |            |            |        





Securities in an unrealized loss position at September 30, 2005, and December 31, 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 were approximately 28 securities in the consolidated portfolio of the Corporation that had losses as of September 30, 2005, all of which are considered to be temporary.



|                                     |                     | September 30, 2005 |                     |            |            | 
|------------------------------------ | ------------------- | ------------------ | ------------------- | ---------- | ---------- | 
|                                     | Less than 12 months |                    | More than 12 months |            | Total     
|(In Thousands)                       |                     | Unrealized         |                     |            | Unrealized | 
|                                     | Fair Value          | (Losses)           |                     | Fair Value | (Losses)   | 
|U.S. Government and federal agencies | $ 7,310             | $     (91)         |                     | $   493    | $     (6)  | 
|Obligations of states and political  |                     |                    |                     |            |            | 
|subdivisions                         | 1,607               | (44)               |                     | 717        | (3)        | 
|Other securities                     | 72                  | (177)              |                     | 1,728      | (99)       | 
|                                     | $ 8,989             | $    (312)         |                     | $ 2,938    | $   (108)  | 
|                                     |                     |                    |                     |            |            | 





|                                     |                     | December 31, 2004 |                     |            |            | 
|------------------------------------ | ------------------- | ----------------- | ------------------- | ---------- | ---------- | 
|                                     | Less than 12 months |                   | More than 12 months |            | Total     
|(In Thousands)                       |                     | Unrealized        |                     |            | Unrealized | 
|                                     | Fair Value          | (Losses)          |                     | Fair Value | (Losses)   | 
|U.S. Government and federal agencies | $ 5,408             | $     (45)        |                     | $   -      | $    -     | 
|Obligations of states and political  |                     |                   |                     |            |            | 
|subdivisions                         | 497                 | (8)               |                     | 1,308      | (97)       | 
|Other securities                     | 93                  | (1)               |                     | 2,366      | (126)      | 
|                                     | $ 5,998             | $     (54)        |                     | $ 3,674    | $   (223)  | 
|                                     |                     |                   |                     |            |            | 



9

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Note 4. Loans



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



|                                                           | September 30,  | December 31,
|---------------------------------------------------------- | -------------- | ------------
|                                                           | 2005           | 2004        
|                                                           | (In Thousands)
|                                                           |                |             
|Loans secured by real estate:                              |                |             
|Construction and land development                          | $    131,059   | $   101,363 
|Secured by farmland                                        | 5,334          | 4,154       
|Secured by 1-4 family residential                          | 136,896        | 131,230     
|Multi-family residential                                   | 25,417         | 18,224      
|Nonfarm, nonresidential                                    | 161,056        | 142,897     
|Loans to farmers (except those secured by real estate)     | 1,506          | 999         
|Commercial loans (except those secured by real estate)     | 70,979         | 63,079      
|Loans to individuals (except those secured by real estate) | 26,244         | 25,491      
|All other loans                                            | 6,094          | 4,435       
|Total loans                                                | $    564,585   | $   491,872 
|                                                           |                |             
|Allowance for loan losses                                  | 5,403          | 5,007       
|Loans, net                                                 | $    559,182   | $   486,865 
|                                                           |                |             





Impaired loans totaled $2.2 million and $2.6 million at September 30, 2005 and December 31, 2004, respectively. Non-accrual loans excluded from impaired loans disclosure under FASB Statement No. 114 amounted to $254 thousand at September 30, 2005 and $268 thousand at December 31, 2004.





10

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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 factors including changes in the character and size of the loan portfolio and related loan experience, a review and examination of overall loan quality, which includes the assessment of problem loans and an analysis of anticipated economic condition in the market area.  An analysis of the allowance for loan losses, including charge-off activity, is presented below for the nine months ended September 30, 2005 and 2004.



|                                       | September 30,
|-------------------------------------- | -------------
|(In Thousands)                         | 2005         
|                                       |              
|Balance, beginning of period           | $5,007       
|Less Charge-offs:                     | $0           
|Commercial                             | $45          
|Real estate-mortgage                   | $0           
|Real estate-construction               | $0           
|Credit cards                           | $6           
|Consumer installment loans             | $237         
|Total                                  | $288         
|                                       |              
|Plus Recoveries:                       |              
|Commercial                             | $8           
|Real estate-mortgage                   | $0           
|Real estate-construction               | $15          
|Credit cards                           | $2           
|Consumer installment loans             | $87          
|Total                                  | $112         
|                                       |              
|Additions charged to operating expense | $572         
|                                       |              
|Balance, end of period                 | $5,403       
|                                       |              





The following is a summary of information pertaining to risk elements and impaired loans for the periods ended September 30, 2005 and December 31, 2004.



|                                                           | September 30,  | December 31,
|---------------------------------------------------------- | -------------- | ------------
|                                                           | 2005           | 2004        
|                                                           | (In Thousands)
|Non-accrual loans                                          | $1,250         | $1,120      
|Loans past due 90 days or more and still accruing interest | 1,371          | 668         
|Restructured loans                                         | 0              | 0           
|                                                           | $2,621         | $1,788      
|                                                           |                |             



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

11

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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



Earnings per share were as follows for the periods indicated:



|                               | For the Nine Months Ended
|------------------------------ | -------------------------
|                               | September 30,            
|                               | 2005                     
|                               | Shares                   
|                               |                          
|Basic earnings per share       | 4,936,033                
|                               |                          
|Effect of dilutive securities: |                          
|Stock options                  | 137,888                  
|                               |                          
|Diluted earnings per share     | 5,073,921                
|                               |                          









Note 7. Other Expenses



The Corporation and its subsidiaries had the following other expenses for the nine months ended September 30, 2005 and 2004.



|                               | 2005           | 2004
|------------------------------ | -------------- | ----
|                               | (In Thousands)
|                               |                |     
|Advertising                    | $     526      |     
|ATM Expense                    | 319            |     
|Directors' Fees                | 376            |     
|Postage Expense                | 206            |     
|Stationery and Supplies        | 340            |     
|Telephone Expense              | 274            |     
|Other (no item >1% of revenue) | 2,692          |     
|                               | $   4,733      |     
|                               |                |     

12

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Note 8. Trust Preferred Capital Notes



On April 25, 2005, the Corporation entered into an agreement with First Tennessee Bank to issue an additional $8.2 million in Trust Preferred Capital Notes.  The Corporation received the proceeds from this issue of subordinated debt on May 16, 2005.  The issue has a floating interest rate of the prevailing 3-month LIBOR rate plus 1.74%. The issue has a maturity date of May 16, 2035.  The Corporation has created Premier Statutory Trust III to administer this new Trust Preferred obligation.  Of the proceeds, $6.0 million has been used to capitalize the new bank in Martinsburg, West Virginia, and the balance will be used to fund anticipated loan growth.



Note 9. Recent Accounting Pronouncements



In May 2005, the Financial Accounting Standards
 Board (FASB) issued Statement No. 154 (SFAS No. 154),Accounting
Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement
No. 3.
  The new standard changes the requirements for the accounting for and
reporting of a change in accounting principle.  Among other changes, SFAS No. 154 requires
 that a voluntary change in accounting principle be applied retrospectively with all prior period financial
statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle,
and (2) correction of errors in previously issued financial statements should be termed a restatement.  The new standard is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Corporation does not anticipate
this revision will have a material effect on its financial statements.



On December 16, 2004, the FASB issued Statement No. 123R
(revised 2004), Share-Based Payment (FAS 123R), that addresses the accounting for share-based
payment transactions in which a company receives employee services in exchange for either equity
instruments of the company or liabilities that are based on the fair value of the companys
equity instruments or that may be settled by the issuance of such equity instruments.  FAS
 123R eliminates the ability to account for share-based compensation transactions using the
intrinsic method and requires that such transactions be accounted for using a fair-value-based
 method and recognized as expense in the consolidated statement of income.  The effective date
 of FAS 123R (as amended by the Securities and Exchange Commission, (the SEC)) is for annual periods beginning after June 15, 2005.  The
 provisions of FAS 123R do not have an impact on the Corporations results of operations at the
 present time.



In March 2005, the SEC issued Staff Accounting
 Bulletin No. 107 (SAB 107).  SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staffs view regarding the valuation of share-based payment arrangements for public companies.  SAB 107 does not impact the Corporations results of operations at the present time.



In November 2004, the Emerging Issues Task
Force (the EITF or Task Force) published Issue 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Task Force
 discussed the meaning of other-than-temporary impairment and its application to certain investments carried at cost. The Task Force requested that the FASB staff consider other impairment models within U.S.
Generally Accepted Accounting Principles
 (GAAP) when developing its views. The Task Force also requested that the scope of the
impairment issue be expanded to

13

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include equity investments and investments subject to FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and that
the issue be addressed by the Task Force as a separate EITF issue. At the EITF meeting, the Task Force
 reached a consensus on one issue that certain quantitative and qualitative disclosures should be required
for securities accounted for under Statement 115 that are impaired at the balance sheet date but for which
an other-than-temporary impairment has not been recognized.
 The FASB ratified the consensus on that one issue at its November 25, 2004 meeting. In
September 2004, the FASB directed its staff to issue two proposed FASB Staff Positions (FSP):
Proposed FSP EITF Issue 03-1-a, which provides guidance for the application of paragraph 16 of
EITF Issue 03-1 to debt securities that are impaired because of interest rate and/or sector spread
increases, and Proposed FSP EITF Issue 03-1-b, which delays the effective date of Issue 03-1 for debt
securities that are impaired because of interest rate and/or sector spread increases. In June 2005,
the FASB reached a decision whereby it declined to provide additional guidance on the meaning of
other-than-temporary impairment. The FASB directed its staff to issue EITF issue 03-1-a as final and
to draft a new FSP that will replace EITF issue 03-01. The final FSP (retitled FAS 115-1, The Meaning
of Other-Than-Temporary Impairment and it Application to Certain Investments) would be effective
for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005.
 The Corporation does not anticipate this revision will have a material effect on its financial statements.







14

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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of

Operations



The following discussion and analysis of the financial condition and results of operations for the three months and nine months ended September 30, 2005 should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this quarterly report and in the Annual Report on Form 10-K for the year ended December 31, 2004.



General



Premier Community Bankshares, Inc. (Premier or the Corporation) is a Virginia multi-bank holding company headquartered in Winchester, Virginia.  The Corporation owns The Marathon Bank, Rockingham Heritage Bank and its subsidiary, RHB Services, Inc., and Premier Bank, Inc.  Premier Bank opened on July 18, 2005.



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



Net interest income is our primary
source of revenue.  We define revenue as interest income plus non-interest income.
 As discussed further in the quantitative and qualitative disclosures about market
risk section on pages 21 through 23, we manage our balance sheet and interest rate risk
to both maximize and stabilize net interest income.  We do this by monitoring the
spread between the interest rates we earn on interest earning assets such as loans and
 the interest rates we pay on interest bearing liabilities such as deposit accounts.  We
attempt to minimize our exposure to interest rate risk, but are unable to eliminate it.  In
addition to management of interest rate risk, we analyze our loan portfolio for credit risk.  Risk
of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our
 exposure to this risk by carefully underwriting and monitoring our extension of credit.  In
addition to net interest income, non-interest income is an increasingly important source of income for the
Corporation.  Non-interest income is derived chiefly from service charges on deposit accounts (such as charges for non-sufficient funds and ATM fees) as well as commissions and fees from bank services (such as mortgage originations and debit and credit card processing).



The Marathon Bank has received approval for a new branch in the City of Winchester.  The facility, located on Valley Avenue, will be leased and will serve as Marathons sixth branch location in Winchester.  Opening was originally anticipated for the third quarter, but construction delays regarding renovations have postponed the expected opening to early November of 2005.  In addition, Marathon has received approval from the Federal Reserve Bank of Richmond to open a branch office on Route 50 in Winchester.  Construction of the office is expected to begin during the fourth quarter of 2005, and opening is expected in the second quarter of 2006.  The branch will be the seventh location in the Winchester area.







15

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Financial Overview



At September 30, 2005, we had total assets of $665.4 million, net loans of $559.2 million, deposits of $565.1 million and shareholders equity of $49.5 million.  The increase in assets was 18.9% over the amount at September 30, 2004, while net loans and deposits increased 18.6% and 20.3%, respectively, for the same period.



Our earnings per share, on a fully diluted basis, for the nine months ended September 30, 2005 was $1.02, an increase of $0.12, or 13.3%, over earnings per share, on a fully diluted basis, of $0.90 for the same period in 2004.  The increase was mostly attributable to a 20.8% increase in net interest income over the same period.



Our return on average equity was 14.72% for the nine months ended September 30, 2005.  We have been able to achieve this level without relying on a disproportionate share of income from mortgage banking operations.  Our efficiency ratio also increased during this period, rising from 61.2% for the nine months ended September 30, 2004 to 63.9% for the nine months ended September 30, 2005.  This increase was due to the extra staffing and other non-interest expenses incurred to open the new subsidiary bank.  Our efficiency ratio is not a measurement under accounting principles generally accepted in the United States.  For more information on the efficiency ratio and its calculation, see the non interest expense section below.



Critical Accounting Policies



General



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

Allowance for Loan Losses



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



·

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

·

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.





16

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Our allowance for loan losses is determined by
evaluating our loan portfolio on at least a quarterly basis.   Particular attention is paid to
individual loan performance, collateral values, borrower financial condition and overall economic conditions.
  The evaluation includes a close review of the internal watch list and other non-performing loans.
 Management uses two steps in calculating the balance of the allowance.  The first step is the
specific classification, which examines problem loans and applies a weight factor to each category.  
The weight factor is based upon historical data, and the loans within each category are reviewed on a monthly
 basis to determine changes in their status.  The second step applies a predetermined rate against
 total loans with unspecified reserves.  Again, this rate is based upon experience and can change over
 time.  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, 2005 was $1.7 million, virtually unchanged from $1.7 million for the same period in 2004. This is an increase of $24 thousand or 1.4% over the same period in 2004. The provision for income tax expense increased $38 thousand from $793 thousand in 2004 to $831 thousand in 2005. The annualized return on assets was 1.06% for the third quarter of 2005 as compared to 1.22% for the same period in 2004.  Annualized return on equity was 14.09% and 15.98% for the third quarters of 2005 and 2004, respectively.



Net income for the nine months ended September 30, 2005 was $5.2 million compared to $4.5 million for the same period in 2004. This is an increase of $634 thousand or 14.0% over the same period 2004. The provision for income tax expense increased $420 thousand from $2.1 million in 2004 to $2.5 million in 2005. The annualized return on assets was 1.12% for the first nine months of 2005 as compared to 1.18% for the same period in 2004.  For the first nine months of 2005 the annualized return on equity was 14.72%, unchanged from the same period in 2004.



Total Assets



Total assets of Premier increased to $665.4 million at September 30, 2005 compared to $576.2 million at December 31, 2004, representing an increase of $89.2 million or 15.5%.  Total loans at September 30, 2005, were $564.6 million, of which $459.8 million were loans secured by real estate.  Of the loans secured by real estate, $131.1 million were construction and land development loans.  The remaining loans consisted of $71.0 million in commercial loans, $26.2 million in consumer installment loans and $7.6 million in all other loans.  Net loans at September 30, 2005, were $559.2 million, an increase of $72.3 million or 14.9% from the December 31, 2004 amount of $486.9 million.  The loan to deposit ratio was 99.9% at September 30, 2005 and 101.6% at December 31, 2004.  Steady loan demand in an expanding market generated the loan growth experienced for the period.



The investment portfolio increased 2.1% to $27.9 million at September 30, 2005 compared to $27.3 million at December 31, 2004.  Federal funds sold increased $6.4 million to $25.4 million at September 30, 2005 compared to $19.1 million at December 31, 2004.  Total interest earning assets increased $80.0 million or 14.9% from December 31, 2004 to September 30, 2005.  This increase was primarily the result of the increase in outstanding loan balances.



17

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Allowance for Loan Losses



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



The allowance for loan losses at September 30, 2005 was $5.4 million. This is an increase of $396 thousand or 7.9% from December 31, 2004.  This gives the Corporation a 0.96% 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 $565.1 million at
 September 30, 2005, from $483.9 million at December 31, 2004, which is an increase of $81.1 million
or 16.8%.  Non-interest bearing deposits have increased to $97.1 million at September 30, 2005,
an increase of $8.8 million or 10.0% from December 31, 2004.  During this period, interest bearing
 checking and savings accounts increased $6.1 million or 4.1% to $154.8 million.  The amount of time
 deposits was $313.2 million at the end of the third quarter, reflecting an increase of $66.2 million or
 26.8% over the end of 2004.  At September 30, 2005, non-interest bearing deposits represented 17.2%
of total deposits as compared to 18.2% at year-end 2004.  Low cost interest bearing deposits,
including savings and interest bearing checking, were 27.4% of total deposits, compared to 30.8% at
 December 31, 2004. Time deposits represented 55.4% of total deposits at September 30, 2005, an increase
from 51.0% at year-end 2004.



Shareholders' Equity



Total equity increased by $5.2 million or 11.8% from December 31, 2004 to September 30, 2005.  The increase was due to a $5.2 million net profit for the first nine months of 2005 plus exercised stock options of $196 thousand and a decrease of $125 thousand in accumulated other comprehensive income.  The primary capital to assets ratio was 7.4% at September 30, 2005.



Interest Income



Interest income totaled $29.1 million for the nine months ended September 30, 2005, $6.3 million or 27.3% higher than the nine months ended September 30, 2004.  Interest and fees of $27.7 million on loans comprise the vast majority of interest income. Interest income from investment securities was $949 thousand for the first nine months of 2005, up 12.8% from $841 thousand for the same period in 2004.  Interest income on federal funds, the third major component of Premiers interest income, increased $266 thousand or 170.5%.  The increase in interest earned on
 federal funds was the result of increased average federal funds balances held during the period, as well as increases in interest rates.

18

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Interest Expense



Total interest expense for the nine months ended September 30, 2005 was $9.4 million, $2.9 million or 43.8% higher than the nine months ended September 30, 2004.  Interest on deposits for the nine-month period increased by $2.2 million or 39.7% over the same period in 2004.  This increase was the result of a 2.75% increase in the Fed Funds rate by the Federal Reserve Bank since the third quarter of 2004, combined with an increase of $75.6 million in total interest bearing deposits during the same period.  Interest on borrowings increased by $605 thousand or 72.7% 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, 2005 was $19.8 million, $3.4 million or 20.8% higher than the nine months ended September 30, 2004. This increase is the result of the growth in earning assets of $99.5 million from September 30, 2004.  The combination of growth and rates had the effect of increasing the net interest margin from 4.65% on a tax-equivalent basis for the nine months ended September 30, 2004 to 4.81% for the same period of 2005.



Noninterest Income



Total other income for the nine months ended September 30, 2005 was $3.4 million, a decrease of $10 thousand or 0.3% over $3.4 million for the same period in 2004. This was the result of a reduction in service charges and fees for overdraft charges, check fees and ATM fees.



Noninterest Expense



Total other expenses for the nine months ended September 30, 2005 were $14.9 million, $2.7 million or 22.0% higher than the nine months ended September 30, 2004.  Salary expense increased $1.7 million or 26.3%, and other expenses increased by $945 thousand over the same period in 2004.  The net increase in other expenses was in part a result of additional staffing to handle the growth of the banks and the costs involved in processing an increasing number of accounts and transactions.



The Corporation's efficiency ratio was 63.9% for the nine months ended September 30, 2005 compared to 61.2% for the same period in 2004.  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 noninterest expenses compared to the growth in income.



We compute our efficiency ratio by dividing noninterest expense by the sum of the net interest income on a tax-equivalent basis and noninterest income, net of securities gains or losses.









19

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The following table reflects the calculation for the efficiency ratio for the nine months ended September 30, 2005 and 2004:



EFFICIENCY RATIO

|                                    | September 30,
|----------------------------------- | -------------
|                                    | 2005         
|Total Noninterest Expenses          | $  14,878    
|                                    | $  14,878    
|                                    |              
|Net Interest Income                 | $  19,760    
|Fully Taxable Equivalent adjustment | 170          
|Noninterest Income                  | 3,372        
|                                    | $  23,302    
|                                    |              
|Efficiency Ratio                    | 63.85%       



Liquidity



Premiers liquidity requirements are measured by the need to meet deposit withdrawals, fund loans, meet reserve requirements and maintain cash levels necessary for daily operations. To meet liquidity requirements, Premier maintains cash reserves and has an adequate flow of funds from maturing loans, securities, and short-term investments. In addition, Premiers subsidiary banks have the ability to borrow additional funds from various sources.  Short-term borrowings are available from federal funds facilities at correspondent banks and from the discount window of the Federal Reserve Bank.  Borrowings are available from the Federal Home Loan Bank. The Corporation considers its sources of liquidity to be sufficient to meet its estimated needs.



Capital Resources



The Corporations risk-based capital position at September 30, 2005 was $66.0
 million, or 11.78% of risk-weighted assets, for Tier I capital and $76.5 million, or 13.66%, 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 I Capital. Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet items. Under current risk-based capital standards, all banks are required to have Tier I capital of at least 4% and a total capital ratio of 8%.  The Corporations issuance of $7.2 million in Trust Preferred Capital Notes in the fourth quarter of 2001, $6.2 million in notes in the third quarter of 2003 and, as described below, $8.2 million in notes in the second quarter of 2005 are included in the total risk-weighted capital base, and will serve as a long-term source of funding.



On April 25, 2005, the Corporation entered into an agreement with First Tennessee Bank to issue an additional $8.2 million in Trust Preferred Capital Notes.  The Corporation received the proceeds from this issue of subordinated debt on May 16, 2005.  The issue has a floating interest rate of the prevailing 3-month LIBOR rate plus 1.74%. The issue has a maturity date of May 16, 2035.  The Corporation has created Premier Statutory Trust III to administer this new Trust Preferred obligation.  Of the proceeds, $6.0 million has been used to capitalize the new bank
in Martinsburg, West Virginia, and the balance will be used to fund anticipated loan growth.



20

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Caution About Forward Looking Statements



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



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



·

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

·

maintaining capital levels adequate to support our growth;

·

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

·

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

·

the successful management of interest rate risk;

·

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

·

changes in interest rates and interest rate policies;

·

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

·

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

·

demand, development and acceptance of new products and services;

·

problems with technology utilized by us;

·

changing trends in customer profiles and behavior; and

·

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



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



Item 3.  Quantitative and Qualitative Disclosures About Market Risk



General



Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices.  The Corporations market risk is composed primarily of interest rate risk.  The Corporations Asset and Liability Management Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk.  The Board of Directors reviews the guidelines established by ALCO.



Interest rate risk is monitored through the use of
three complementary modeling tools: static gap analysis, earnings simulation modeling and economic
 value simulation (net present value estimation).  Each of these models measures changes in a
 variety of interest rate scenarios.  While each of the interest rate risk



21

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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.

Earnings Simulation Analysis



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



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



The following table represents the interest rate sensitivity on net interest income for the Corporation using different rate scenarios as of June 30, 2005.  There have been no material changes in quantitative and qualitative disclosures about market risk since this information was developed using June 30, 2005 data,
 the latest date for which such data is available to the Corporation.



|                     |  | % Change in
|-------------------- |  | -----------
|Change in Prime Rate |  | Net Income 
|+300 basis points    |  | +9.8%      
|+200 basis points    |  | +9.0%      
|+100 basis points    |  | +6.4%      
|Most Likely          |  | 0          
|-100 basis points    |  | -2.3%      
|-200 basis points    |  | -6.4%      
|-300 basis points    |  | -15.4%     





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.

22

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The following chart reflects the change in net market value by using June 30, 2005 data, over different rate environments with a one-year horizon. There have been no material changes in quantitative and qualitative disclosures about market risk since this information was developed using June 30, 2005 data,
 the latest date for which such data is available to the Corporation.



|                     |  | Change in Economic Value of Equity
|-------------------- |  | ----------------------------------
|Change in Prime Rate |  | (dollars in thousands)            
|+300 basis points    |  | 1,261                             
|+200 basis points    |  | 1,431                             
|+100 basis points    |  | 1,464                             
|Most Likely          |  | 1,109                             
|-100 basis points    |  | 1,212                             
|-200 basis points    |  | (-807)                            
|-300 basis points    |  | (-5,509)                          







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, 2005, 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.









23

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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







24

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SIGNATURES



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





PREMIER COMMUNITY BANKSHARES, INC.











DATE:     10/31/05



/s/ Donald L. Unger

DONALD L. UNGER

PRESIDENT & CHIEF EXECUTIVE OFFICER









DATE:     10/31/05

/s/ Frederick A. Board

FREDERICK A. BOARD

CHIEF FINANCIAL OFFICER



























25

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EXHIBIT INDEX





Exhibit No.

Description



31.1

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



Officer.



31.2

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

Officer.



32.1

Statement of Chief Executive Officer and Chief



Financial Officer Pursuant to 18 U.S.C. Section

1350.