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    June 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 the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 4,946,048 shares of common stock, $1.00 par value, as of July 29, 2005.



---



PART I.  FINANCIAL INFORMATION



Item 1.  Financial Statements



The following financial statements are provided at the page numbers

indicated.



|Consolidated Balance Sheets at
June 30, 2005 and December 31, 2004                                         | 3    
|---------------------------------------------------------------------------------------------------------- | -----
|                                                                                                           |      
|Consolidated Statements of Income for
the Three Months Ended and Six Months Ended
June 30, 2005 and 2004   | 4    
|                                                                                                           |      
|Consolidated Statements of Changes in
Shareholders Equity for the Six Months
Ended June 30, 2005 and 2004 | 5    
|                                                                                                           |      
|Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004                      | 6    
|                                                                                                           |      
|Notes to Consolidated Financial Statements                                                                 | 7-15 
|                                                                                                           |      
|Item 2.  Managements Discussion and Analysis of Financial
Condition and Results of Operations             | 1522
|                                                                                                           |      
|Item 3.  Quantitative and Qualitative
Disclosures About Market Risk                                        | 2223
|                                                                                                           |      
|Item 4.  Controls and Procedures                                                                           | 23-24
|                                                                                                           |      
|Part II.  OTHER INFORMATION                                                                                | 24-25
|                                                                                                           |      
|                                                                                                           |      
|Signatures                                                                                                 | 26   
|                                                                                                           |      





















2





---



|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: June 30, 2005,    
|$7,390; December 31, 2004,  $7,481)                        
|Loans, net of allowance for loan losses of $5,256 at       
|June 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   
|June 30, 2005, 4,937,798 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

---

|PREMIER COMMUNITY BANKSHARES, INC.                       |                            |                         
|-------------------------------------------------------- | -------------------------- | ------------------------
|Consolidated Statements of Income                        |                            |                         
|(In Thousands, Except for Share and Per Share Data)      |                            |                         
|                                                         |                            |                         
|                                                         | (Unaudited)                | (Unaudited)             
|                                                         | For the Three Months Ended | For the Six Months Ended
|                                                         | June 30,                   | June 30,                
|                                                         | 2005                       | 2004                    
|Interest and dividend income:                            |                            |                         
|Interest and fees on loans                               | $     9,236                | $     7,177             
|Interest on investment securities:                       |                            |                         
|Nontaxable                                               | 43                         | 47                      
|Taxable                                                  | 53                         | 71                      
|Interest and dividends on securities available for sale: |                            |                         
|Nontaxable                                               | 66                         | 68                      
|Taxable                                                  | 118                        | 79                      
|Dividends                                                | 45                         | 27                      
|Interest on deposits in banks                            | 2                          | 0                       
|Interest on federal funds sold                           | 151                        | 25                      
|Total interest and dividend income                       | $     9,714                | $     7,494             
|                                                         |                            |                         
|Interest expense:                                        |                            |                         
|Interest on deposits                                     | $     2,662                | $     1,839             
|Interest on capital lease obligations                    | 3                          | 3                       
|Interest on borrowings                                   | 511                        | 269                     
|Total interest expense                                   | $     3,176                | $     2,111             
|                                                         |                            |                         
|Net interest income                                      | $     6,538                | $     5,383             
|Provision for loan losses                                | 100                        | 316                     
|Net interest income after prov. for loan losses          | $     6,438                | $     5,067             
|                                                         |                            |                         
|Noninterest income:                                      |                            |                         
|Service charges on deposit accounts                      | $       793                | $       809             
|Commissions and fees                                     | 233                        | 228                     
|Other                                                    | 109                        | 135                     
|Total noninterest income                                 | $     1,135                | $     1,172             
|                                                         |                            |                         
|Noninterest expense:                                     |                            |                         
|Salaries and employee benefits                           | $     2,596                | $     2,166             
|Net occupancy expense of premises                        | 272                        | 228                     
|Furniture and equipment                                  | 295                        | 272                     
|Other                                                    | 1,766                      | 1,381                   
|Total noninterest expenses                               | $     4,929                | $     4,047             
|                                                         |                            |                         
|Income before income taxes                               | $     2,644                | $     2,192             
|                                                         |                            |                         
|Provision for income taxes                               | 871                        | 689                     
|                                                         |                            |                         
|Net income                                               | $     1,773                | $     1,503             
|                                                         |                            |                         
|Average shares:                                          |                            |                         
|Basic                                                    | 4,935,946                  | 4,887,088               
|Assuming dilution                                        | 5,073,432                  | 5,048,158               
|                                                         |                            |                         
|Earnings per common share:                               |                            |                         
|Basic                                                    | $      0.36                | $      0.31             
|Assuming dilution                                        | 0.35                       | 0.30                    
|                                                         |                            |                         

See Accompanying Notes to Consolidated Financial Statements

4

---



|PREMIER COMMUNITY BANKSHARES, INC.                         
|-----------------------------------------------------------
|Consolidated Statements of Changes in Shareholders' Equity 
|For the Six Months Ended June 30, 2005 and 2004            
|(In Thousands, Except for Share Data)                      
|(Unaudited)                                                
|                                                           
|                                                           
|Balance December 31, 2003                                  
|                                                           
|Comprehensive Income                                       
|Net income                                                 
|Other comprehensive income (loss), unrealized              
|loss on available for sale securities                      
|(net of tax $132)                                          
|Total comprehensive income                                 
|                                                           
|Issuance of common stock-                                  
|exercise of stock options                                  
|(12,650 shares)                                            
|exercise of cashless options                               
|(3,261 shares)                                             
|                                                           
|Balances - June 30, 2004                                   
|                                                           
|                                                           
|Balance December 31, 2004                                  
|                                                           
|Comprehensive Income                                       
|Net income                                                 
|Other comprehensive income (loss), unrealized              
|loss on available for sale securities                      
|(net of tax $39)                                           
|Total comprehensive income                                 
|                                                           
|Issuance of common stock-                                  
|exercise of stock options                                  
|(18,250 shares)                                            
|                                                           
|Balances - June 30, 2005                                   
|                                                           
|                                                           
|See Accompanying Notes to Consolidated Financial Statements

5

---



|PREMIER COMMUNITY BANKSHARES, INC.                           
|-------------------------------------------------------------
|Consolidated Statements of Cash Flows                        
|For the Six Months Ended June 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) in accrued interest receivable                    
|Increase (Decrease) 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                    
|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 deposits 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 (decrease) 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

---



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



Stock Compensation Plan



The Corporation accounts for its stock compensation 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 (dollars in thousands except per share amounts):



|                                         | Six Months Ended     
|---------------------------------------- | ---------------------
|                                         | June 30,             
|                                         | 2005                 
|                                         | In Thousands,        
|                                         | except per share data
|                                         |                      
|Net Income, as reported                  | $3,434               
|Total stock-based compensation expense   |                      
|determined under fair value based method |                      
|for all rewards                          | (33)                 
|Pro forma net income                     | $3,401               
|                                         |                      
|                                         |                      
|Basic earnings per share                 |                      
|As reported                              | $   0.70             
|Pro forma                                | $   0.69             
|                                         |                      
|                                         |                      
|Diluted earnings per share               |                      
|As reported                              | $   0.68             
|Pro forma                                | $   0.67             
|                                         |                      



7

---

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 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 as of June 30, 2005 and 2004, based on the present value of the retirement benefits under the plans described above, was $266,391 and $152,027, 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 six-month periods ended June 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 the securities held to maturity at June 30, 2005 were as follows:
|-------------------------------------------------------------------------------------------------------
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|U.S. Government and                                                                                    
|federal agencies                                                                                       
|Obligations of state and                                                                               
|political subdivisions                                                                                 
|Mortgage-backed securities                                                                             
|Other                                                                                                  
|                                                                                                       
|                                                                                                       



8

---



|The amortized cost and fair values of the securities available for sale at June 30, 2005 were as follows:
|---------------------------------------------------------------------------------------------------------
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|U.S. Government and                                                                                      
|federal agencies                                                                                         
|Obligations of state and                                                                                 
|political subdivisions                                                                                   
|Corporate bonds                                                                                          
|Mortgage-backed securities                                                                               
|Restricted securities                                                                                    
|                                                                                                         
|                                                                                                         







Securities in an unrealized loss position at June 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 24 securities in the consolidated portfolio of the Corporation that had losses as of June 30, 2005, all of which are considered to be temporary.



|                                     |                     |                   |                     |            |            |  |            |           
|------------------------------------ | ------------------- | ----------------- | ------------------- | ---------- | ---------- |  | ---------- | ----------
|                                     |                     | June 30, 2005     |                     |            |            | 
|                                     | Less than 12 months |                   | More than 12 months |            | Total     
|(In Thousands)                       |                     | Unrealized        |                     |            | Unrealized |  |            | Unrealized
|                                     | Fair Value          | (Losses)          |                     | Fair Value | (Losses)   |  | Fair Value | (Losses)  
|U.S. Government and federal agencies | $ 5,903             | $     (52)        |                     | $   -      | $    -     |  | $ 5,903    | $     (52)
|Obligations of states and political  |                     |                   |                     |            |            |  |            |           
|subdivisions                         | 1,453               | (6)               |                     | 1,556      | (64)       |  | 3,009      | (70)      
|Mortgage-backed securities           | 37                  | -                 |                     | 20         | -          |  | 57         | -         
|Other securities                     | -                   | -                 |                     | 1,728      | (116)      |  | 1,728      | (116)     
|                                     | $ 7,393             | $     (58)        |                     | $ 3,304    | $   (180)  |  | $10,697    | $    (238)
|                                     |                     |                   |                     |            |            |  |            |           
|                                     |                     |                   |                     |            |            |  |            |           
|                                     |                     |                   |                     |            |            |  |            |           
|                                     |                     | December 31, 2004 |                     |            |            | 
|                                     | Less than 12 months |                   | More than 12 months |            | Total     
|(In Thousands)                       |                     | Unrealized        |                     |            | Unrealized |  |            | Unrealized
|                                     | Fair Value          | (Losses)          |                     | Fair Value | (Losses)   |  | Fair Value | (Losses)  
|U.S. Government and federal agencies | $ 5,408             | $     (45)        |                     | $   -      | $    -     |  | $ 5,408    | $     (45)
|Obligations of states and political  |                     |                   |                     |            |            |  |            |           
|subdivisions                         | 497                 | (8)               |                     | 1,308      | (97)       |  | 1,805      | (105)     
|Other securities                     | 93                  | (1)               |                     | 2,366      | (126)      |  | 2,459      | (127)     
|                                     | $ 5,998             | $     (54)        |                     | $ 3,674    | $   (223)  |  | $ 9,672    | $    (277)
|                                     |                     |                   |                     |            |            |  |            |           



9

---



Note 4. Loans



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



|                                                           | June 30,       | December 31,
|---------------------------------------------------------- | -------------- | ------------
|                                                           | 2005           | 2004        
|                                                           | (In Thousands)
|                                                           |                |             
|Loans secured by real estate:                              |                |             
|Construction and land development                          | 112,868        | 101,363     
|Secured by farmland                                        | 5,924          | 4,154       
|Secured by 1-4 family residential                          | 131,653        | 131,230     
|Multi-family residential                                   | 20,709         | 18,224      
|Nonfarm, nonresidential                                    | 161,698        | 142,897     
|Loans to farmers (except those secured by real estate)     | 1,135          | 999         
|Commercial loans (except those secured by real estate)     | 70,470         | 63,079      
|Loans to individuals (except those secured by real estate) | 26,248         | 25,491      
|All other loans                                            | 4,396          | 4,435       
|Total loans                                                | $   535,101    | $  491,872  
|                                                           |                |             
|Allowance for loan losses                                  | 5,256          | 5,007       
|Loans, net                                                 | $   529,845    | $  486,865  
|                                                           |                |             





Impaired loans totaled $2.4 million at June 30, 2005 and $2.6 million at December 31, 2004. Non-accrual loans excluded from impaired loans disclosure under FASB Statement No. 114 amounted to $71 thousand at June 30, 2005 and $268 thousand at December 31, 2004.



10

---



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 six months ended June 30, 2005 and 2004.



|                                       | June 30,
|-------------------------------------- | --------
|(In thousands)                         | 2005    
|                                       |         
|Balance, beginning of period           | $5,007  
|Less Charge-offs:                      |         
|Commercial                             | 35      
|Real estate-mortgage                   | 0       
|Real estate-construction               | 0       
|Credit cards                           | 5       
|Consumer installment loans             | 117     
|Total                                  | $157    
|                                       |         
|Plus Recoveries:                       |         
|Commercial                             | 4       
|Real estate-mortgage                   | 0       
|Real estate-construction               | 15      
|Credit cards                           | 1       
|Consumer installment loans             | 59      
|Total                                  | $79     
|                                       |         
|Additions charged to operating expense | $327    
|                                       |         
|Balance, end of period                 | $5,256  
|                                       |         



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



|                                                           | June 30,       | December 31,
|---------------------------------------------------------- | -------------- | ------------
|                                                           | 2005           | 2004        
|                                                           | (In Thousands)
|Non-accrual loans                                          | $1,068         | $1,120      
|Loans past due 90 days or more and still accruing interest | 112            | 668         
|Restructured loans                                         | 0              | 0           
|                                                           | $1,180         | $1,788      
|                                                           |                |             



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

11

---

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 six months ended:



|                               | For the Six Months Ended:
|------------------------------ | -------------------------
|                               | June 30,                 
|                               | 2005                     
|                               | Shares                   
|                               |                          
|Basic earnings per share       | 4,931,201                
|                               |                          
|Effect of dilutive securities: |                          
|Stock options                  | 141,085                  
|                               |                          
|Diluted earnings per share     | 5,072,286                
|                               |                          





Note 7.  Other Expenses



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



|                               | 2005           | 2004
|------------------------------ | -------------- | ----
|                               | (In Thousands)
|                               |                |     
|Advertising                    | $     378      |     
|ATM Expense                    | 199            |     
|Directors' Fees                | 247            |     
|Postage Expense                | 139            |     
|Stationery and Supplies        | 229            |     
|Telephone Expense              | 200            |     
|Deferred Life Insurance        | 266            |     
|Other (no item >1% of revenue) | 1,731          |     
|                               | $   3,389      |     
|                               |                |     



12

---





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 1.74% plus the prevailing 3-month LIBOR rate. 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. Subsequent Event



On July 18, 2005, the Corporation opened its third subsidiary bankPremier Bank, Inc.  Premier Bank is located in Martinsburg, West Virginia, and has an initial branch office in Shepherdstown, West Virginia.  Premier Bank has opened in temporary quarters, and construction of the branch facility in Shepherdstown is expected to be complete in September 2005.  The construction of the main office in Martinsburg is expected to be complete during the fourth quarter of 2006.



Premier Bank was given final approval from the Federal Reserve to open for business as a banking facility on May 9, 2005.  This approval allowed the Corporation to purchase $6.0 million of Premier Banks capital stock.  That purchase was completed on May 24, 2005.



The Corporation has been operating a loan production office through its Marathon Bank subsidiary at the Martinsburg site since October 2003.  The loans generated by that office have been recorded on The Marathon Banks books.  Within regulatory constraints, those loans will be purchased by and recorded on the books of Premier Bank.  The current plan is for Premier Bank to begin the repurchase process on July 26, 2005.  It is expected that Premier Bank will repurchase all of the loans during the third quarter of 2005.  Funding for this repurchase will be provided by the $6.0 million received from the initial stock purchase, the deposits that Premier Bank expects to receive from its customers, and lines of credit from various sources,
which will be guaranteed by The Marathon Bank and Rockingham Heritage Bank.
 These guarantees will have no impact on the performance or financial statements of the Corporation, Marathon or Rockingham Heritage.



On July 29, 2005, The Marathon Bank opened a $10 million certificate of deposit at Premier Bank.  This deposit has the same interest rate as the rate currently being paid by Marathon on its $10 million FHLB advance.  This advance was originally obtained by Marathon to fund the loans being produced by the Martinsburg loan production office.  The deposit will help Premier Bank fund the repurchase of loans from The Marathon Bank. Federal regulatory approval of this deposit has been received.



Note 10. 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

13

---



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, 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 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 Bulleting 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
(EITF) 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 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 Board ratified the consensus on that one issue at its November 25,
 2004 meeting. In September 2004, the Financial Accounting Standards Board (FASB) directed the FASB 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 reach a decision whereby they declined to provide additional guidance on the meaning of other-than-temporary impairment. The Board directed the FASB staff to issue EITF 03-1a as final and
to draft a new FSP that will replace EITF 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

14

---



Corporation does not anticipate this revision will have a material effect on its financial statements.



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 six months ended June 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, as of May 24, 2005, Premier Bank, Inc.  Premier Bank opened on July 18, 2005.  For more information on its opening, see Note 9 of the Notes to Consolidated Financial Statements on page 13 of this quarterly report.



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.



Rockingham Heritage Bank completed the opening of a drive-up facility on Chicago Avenue in Harrisonburg.  This facility, which opened on July 5, 2005, operates as an extension of the existing branch at that location.  Additionally, Rockingham submitted an application and received approval to open a new branch in the town of Broadway, Virginia.  The Bank plans to open the new facility during January 2006.



The Marathon Bank submitted a branch application 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 is anticipated during the third quarter of 2005.



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 22 and 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

15

---

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).

Financial Overview



At June 30, 2005, we had total assets of $624.5 million, net loans of $529.8 million, deposits of $530.7 million and shareholders equity of $47.7 million.  The increase in assets was 15.0% over the amount at June 30, 2004, while net loans and deposits increased 19.0% and 16.6%, respectively, for the same period.



Our earnings per share, on a fully diluted basis, for the quarter ended June 30, 2005 was $0.35, which represented an increase of $0.05, or 16.7%, over earnings per share, on a fully diluted basis, of $0.30 for the same period in 2004.  The increase was mostly attributable to a 21.5% increase in net interest income over the same period, due to strong growth in our earning assets.



Our return on average equity was 15.06% for the six months ended June 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 61.06% at June 30, 2004 to 63.12% for the period ended June 30, 2005.  This increase was due to the extra staffing and other non-interest expenses incurred to open the new subsidiary bank.  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

---

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.



Other Real Estate Owned



Foreclosed properties are recorded at the lower of the outstanding loan balance at the time of foreclosure or the estimated fair value less estimated costs to sell.  At foreclosure any excess of the loan balance over the fair value of the property is charged to the allowance for loan losses. Such carrying value is periodically reevaluated and written down if there is an indicated decline in fair value, such as an independent appraisal. Historically, foreclosed properties are not carried on the books for more than two or three fiscal quarters, so the incidence of this happening is generally rare. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.



Income Taxes



Deferred income tax assets and liabilities are determined using the balance sheet method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book values and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. When calculating deferred tax assets, we make the assumption that the Corporation will continue to have taxable income, as opposed to losses.  We also assume that the Corporation will continue to be assessed at the current rate of 34%.



Net Income



Net income for the quarter ended June 30, 2005 was $1.8 million compared to $1.5 million for the same period in 2004. This is an increase of $270 thousand or 18.0% over the same period in 2004. The provision for income tax expense increased $182 thousand from $689 thousand for the 2004 period to $871 thousand for the 2005 period. The annualized return on assets was 1.15% for the second quarter of 2005 as compared to 1.17% for the same period of 2004.  Annualized return on equity was 15.18% and 14.81% for the second quarters of 2005 and 2004, respectively.

Net income for the six months ended June 30, 2005 was $3.4 million compared to $2.8 million for the same period in 2004. This is an increase of $610 thousand or 21.6% over the same period in 2004. The provision for income tax expense increased $382 thousand from $1.3 million for the 2004 period to $1.7 million for the 2005 period. The annualized return on assets was 1.15% for the first six months of 2005, unchanged from the same period in 2004.

17

---

For the first half of 2005 the annualized return on equity was 15.06%, compared to 14.09% for the same period in 2004.



Total Assets



Total assets of Premier increased to $624.5 million at June 30, 2005 compared to $576.2 million at December 31, 2004, representing an increase of $48.4 million or 8.4%.  Total loans at June 30, 2005 were $535.1 million, of which $432.9 million were loans secured by real estate.  The remaining loans consisted of $70.5 million in commercial loans, $26.2 million in consumer installment loans and $5.5 million in all other loans.  Net loans at June 30, 2005 were $529.8 million, an increase of $43.0 million or 8.8% from the December 31, 2004 amount of $486.9 million.  The loan to deposit ratio was 100.8% at June 30, 2005 and 101.6% at December 31, 2004.  Steady loan demand in an expanding market generated the loan growth experienced for the first six months of 2005.



The investment portfolio increased 0.5% to $27.5 million at June 30, 2005 compared to $27.3 million at December 31, 2004.  Federal funds sold increased $786 thousand to $19.9 million at June 30, 2005 compared to $19.1 million at December 31, 2004.  Total interest earning assets increased $44.2 million or 8.22% from December 31, 2004 to June 30, 2005.  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 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 June 30, 2005, was $5.3 million. This is an increase of $249 thousand or 5.0% from December 31, 2004.  This gives the Corporation a 0.98% allowance for loan losses to total loans.  Management has completed an analysis on the reserve and believes the reserve is adequate.



Liabilities



Total deposits increased to $530.7 million at June 30, 2005 from $483.9
 million at December 31, 2004, which is an increase of $46.8 million or 9.7%.  Non-interest bearing deposits have
 increased to $90.4 million at June 30, 2005, an increase of $2.1 million or 2.4% from the amount at December 31, 2004.
 During this period interest bearing checking and savings accounts decreased $1.9 million or 1.3% to $146.8 million.
  The amount of time deposits was $293.6 million at the end of the second quarter, reflecting an increase of $46.6
million or 18.9% over the amount at the end of the year.  At June 30, 2005 non-interest bearing deposits represented 17.0% of total

18

---

deposits as compared to 18.2% at year-end 2004.  Low cost interest-bearing deposits
including savings and interest bearing checking were 27.7% of total deposits.   Time deposits represented 55.3% of total deposits at June 30, 2005, up slightly from
51.0% at year-end 2004.  The increase in time deposits is the result of Premiers ability to offer competitive rates in its market area.



Shareholders' Equity



Total equity increased by $3.5 million or 7.9% from December 31, 2004 to June 30, 2005.  The increase was due to a $3.4 million net profit for the first six months of 2005 plus exercised stock options of $124 thousand and a decrease of $76 thousand in accumulated other comprehensive income.  The primary capital to assets ratio was 7.6% at June 30, 2005.



Interest Income



Interest income totaled $18.6 million for the six months ended June 30, 2005, $4.0 million or 27.3% higher than the amount for the six months ended June 30, 2004.  Interest and fees on loans of $17.8 million comprise the majority of interest income. Interest income from investment securities was $625 thousand for the first six months of 2005, an increase of $56 thousand or 9.8% from the same period in 2004.  Interest income on federal funds, the third major component of the Corporations investments, increased $157 thousand or 209.3%.  The increase in interest income on federal funds balances was the result of increased fed funds balances earlier in the six-month period.



Interest Expense



Total interest expense for the six months ended June 30, 2005 was $5.9 million, $1.7 million or 41.3% higher than the amount for the six months ended June 30, 2004.  Interest on deposits for the six-month period increased by $1.3 million or 36.6% over the same period in 2004.  Interest on borrowings increased by $385 thousand or 74.5% over the same period last year.



Net Interest Income



Net interest income for the six months ended June 30, 2005 was $12.8
million, $2.3 million or 21.8% higher than the amount for the six months ended June 30, 2004. This increase is the
result of the growth in earning assets of $44.2 million from June 30, 2004 to June 30, 2005, combined with an increase in certificate of deposit rates.  Despite the increase in rates, the Corporation was able to maintain a high net interest margin.  The net interest margin for the six months ended June 30, 2005 was 4.63%, down slightly from 4.68% for the same period of 2004.  Premier is liability sensitive for interest bearing balances repricing or maturing within one year.



Noninterest Income



Total non-interest income for the six months ended June 30, 2005 was $2.2 million, a slight decrease of $20 thousand or 0.9% from the 2004 amount of $2.2 million. This leveling-off was largely the result of a migration from interest-bearing checking accounts to certificates of deposit, which earn less fee income.  Fee income is traditionally the major component of non-interest income.



19

---

Noninterest Expense



Total non-interest expense for the six months ended June 30, 2005 was $9.5 million, $1.7 million or 21.7% higher than the amount for the six months ended June 30, 2004.  Salary expense increased $868 thousand or 20.8%, and other expense increased by $674 thousand from the same period in 2004.  The net increase in these expenses was in part a result of additional staffing to handle the growth of the Corporation, the expenses associated with opening an additional branch, and the costs involved in processing an increasing number of accounts and transactions.



The Corporation's efficiency ratio was 63.1% for the six months ended June 30, 2005 compared to 61.1% for the same period in 2004.  The efficiency ratio is a non-GAAP financial measure, which we believe provides investors with important information, as it gives investors a better look at how well the Corporation is managing non-interest expenses compared to the growth in income.



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



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



|EFFICIENCY RATIO                    | PREMIER          
|----------------------------------- | -----------------
|                                    | June  30,        
|                                    | 2005             
|Total Noninterest Expense           | $           9,523
|                                    | $           9,523
|                                    |                  
|Net Interest Income                 | $         12,786 
|Fully Taxable Equivalent
adjustment | 113              
|Noninterest Income                  | 2,187            
|                                    | $        15,086  
|                                    |                  
|Efficiency Ratio                    | 63.1%            
|                                    |                  





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



20

---

·

Capital Resources



The Corporations risk-based capital
position at June 30, 2005 was $63.6 million, or 11.94% of risk-weighted assets for Tier 1
capital, and $73.9 million, or 13.88% for total risk based capital. Tier 1 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 1 capital of at least 4% and a total capital ratio of 8%.  The Corporations issuance of $7.2 million in Trust Preferred Capital Notes in the fourth quarter of 2001, $6.2 million in notes in the third quarter of 2003 and, as described below, $8.2 million in notes in the second quarter of 2005 are included in the Tier 1 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.



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;

21

---

·

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



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



Interest rate risk is monitored through the use of three complimentary modeling tools: static
 gap analysis, earnings simulation modeling and economic value simulation (net present value estimation).  Each of these models measures
changes in a variety of interest rate scenarios.  While each of the interest rate risk measures has limitations, taken together they represent
 a reasonably comprehensive view of the magnitude of interest rate risk in the Corporation, the distribution of risk along the yield curve, the level
 of risk through time, and the amount of exposure to changes in certain interest rate relationships.  Static gap, which measures aggregate repricing
values, is less utilized since it does not effectively measure the earnings impact on the Corporation and is not addressed here. The earnings simulation and
economic value models, however, which more effectively reflect the earnings impact, are utilized by management on a regular basis and are explained below.



Earnings Simulation Analysis



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



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

22

---

different asset and liability accounts move differently when the prime rate changes and are accounted for in the different rate scenarios.



The following table represents the interest rate sensitivity on net interest income for the Corporation using different rate scenarios at June 30, 2005.



|                     |  | % 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.



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.



|                     |  | 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)                          







The Corporation maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission.  As of June 30, 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.

23

---

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





PART II. OTHER INFORMATION



Item 1.  Legal Proceedings



None.



Item 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



(a)

Premier Community Bankshares, Inc. held its Annual Meeting of Shareholders on Tuesday, May 3, 2005 in Winchester, Virginia.

(b)

Not Applicable

(c)

At the Annual Meeting, the shareholders approved the election of three of the directors of the Company and the appointment of the firm Yount, Hyde & Barbour, P.C. as the independent auditors for the fiscal year ending December 31, 2005.



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



|NAME             | FOR       | WITHHELD
|---------------- | --------- | --------
|Clifton L. Good  | 4,084,790 | 10,942  
|Joseph W. Hollis | 4,072,570 | 23,162  
|Wayne B. Ruck    | 4,086,542 | 9,190   



The votes cast for, against or abstain to approve the ratification of Yount, Hyde & Barbour, P.C. as independent auditors for the fiscal year ending December 31, 2005 were as follows:



|NAME                                               | FOR       | AGAINST | ABSTAIN
|-------------------------------------------------- | --------- | ------- | -------
|Independent Auditors - Yount, Hyde & Barbour, P.C. | 4,080,629 | 4,116   | 10,987 



(d)  Not Applicable



24

---

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















25

---

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:    8/8/05





/s/ Donald L. Unger

DONALD L. UNGER

PRESIDENT AND CEO









DATE:    8/8/05

/s/ Frederick A. Board

FREDERICK A. BOARD



CHIEF FINANCIAL OFFICER





























26

---





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.