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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    March 31, 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)

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: 4,934,548, $1.00 par value, as of May 4, 2005.

PART I.  FINANCIAL INFORMATION

Item 1.

Financial Statements

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

Consolidated Balance Sheets at March 31, 2005 and December 31, 2004

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Consolidated Statements of Income for the Three Months Ended

March 31, 2005 and 2004

4

Consolidated Statements of Changes in Shareholders’ Equity for the

Three Months Ended March 31, 2005 and 2004

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Consolidated Statements of Cash Flows for the Three Months Ended

March 31, 2005 and 2004

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Notes to Consolidated Financial Statements

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results

of Operations

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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Item 4.

Controls and Procedures

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Part II.

OTHER INFORMATION

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Signatures

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PREMIER COMMUNITY BANKSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

For the Three Months Ended March 31, 2005 and 2004

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 March 31, 2005 and December 31, 2004, and the results of operations and cash flows for the three months ended March 31, 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 provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (dollars in thousands except per share amounts):

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Deferred Compensation Plans

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

During the first quarter of 2005, a second deferred compensation plan and split dollar life insurance plan were adopted for additional selected Executive Officers of the Company. 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 March 31, 2005 and 2004, based on the present value of the retirement benefits, was $120,657 and $76,013, respectively. The plans are unfunded; however, life insurance has been acquired on the life company employees in amounts sufficient to offset the expense of the obligations.

Note 2. Results of Operations

The results of operations for the three-month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.

Note 3.  Securities

Securities held to maturity at March 31, 2005 are summarized as follows (in thousands):

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Securities available for sale at March 31, 2005 are summarized as follows (in thousands):

Securities in an unrealized loss position at March 31, 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 are approximately 24 securities in the consolidated portfolio of the Corporation that have losses, all of which are considered to be temporary.

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Note 4. Loans.

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

Impaired loans totaled $2.2 million at March 31, 2005 and $2.6 million at December 31, 2004. Non-accrual loans excluded from impaired loans disclosure under FASB 114 amounted to $243 thousand at March 31, 2005 and $268 thousand at December 31, 2004.

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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 several factors, including changes in the character and size of the loan portfolio and related loan loss experience, a review and examination of overall loan quality, which includes the assessment of problem loans, and an analysis of anticipated economic conditions in the market area.  An analysis of the allowance for loan losses, including charge-off activity, is presented below for the quarters ended March 31, 2005 and 2004.

The following is a summary of information pertaining to risk elements and impaired loans at March 31, 2005 and December 31, 2004.

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.

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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.  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 three months ended:   

Note 7.  Other Expenses

The Corporation and its subsidiaries had the following other expenses for the three months ended March 31, 2005 and 2004.

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Note 8. Subsequent Event

On April 25, 2005, the Corporation entered into an agreement with First Tennessee Bank to issue an additional $8 million in Trust Preferred Capital Notes.  The Corporation expects to receive the proceeds from this issue of subordinated debt no later than May 16, 2005.  The issue will have a floating interest rate of 1.74% plus the prevailing 3-month LIBOR rate. The issue will have a maturity date of May 16, 2035.  The Corporation is in the process of creating Premier Statutory Trust III to administer this new Trust Preferred obligation.  The proceeds will be used to capitalize the new bank in Martinsburg, West Virginia, and to fund anticipated loan growth.

Note 9. Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board 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 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.

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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 ended March 31, 2005 should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this quarterly report.

Financial Summary

General

Premier Community Bankshares, Inc. (“Premier” or the “Corporation”) is a Virginia multi-bank holding company headquartered in Winchester, Virginia.  The Corporation owns The Marathon Bank and Rockingham Heritage Bank and its subsidiary, RHB Services, Inc.  

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

The Corporation is organizing a third bank in West Virginia, named Premier Bank.  The Corporation will locate Premier Bank's headquarters in Martinsburg and its initial branch office in Shepherdstown, West Virginia.  It is expected that Premier Bank will open on June 20, 2005.  The banking charter has been received from the state of West Virginia, as well as approval deposit insurance from the FDIC.  Premier Bank was originally expected to open during the third quarter of 2004, but was unable to do so due to unexpected delays in the local government planning process.  Premier Bank will offer a wide variety of deposits and loans, including residential loans, commercial loans and commercial construction and development loans.  The Corporation currently operates a loan production office in the Martinsburg area, which was approved by West Virginia’s Division of Banking on October 6, 2003.  The Corporation has entered into a contractual agreement for the construction of the branch office in Shepherdstown.  The obligation totals $604,000, and construction must be completed on or before September 1, 2005.  In addition, the Corporation purchased property for the future construction of the Martinsburg location on March 22, 2005.  The cost of the property was $530,000.

Rockingham Heritage Bank purchased land and a building for an additional branch in the Harrisonburg area on January 6, 2005.  The cost of the property was $215,000.  The branch application process is underway, with an anticipated opening date of July 1, 2005.  Rockingham Heritage Bank has also entered into a contractual obligation to purchase 1.00 acre of land for a future branch location in Broadway, Virginia.  The purchase contract is anticipated to close during late May 2005.  The opening of the new branch is anticipated in the first quarter of 2006.  Rockingham already operates a loan production office in the Broadway area.

Net interest income is our primary source of revenue.  We define revenue as interest income plus non-interest income.  As discussed further in the interest rate sensitivity section, 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).

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Financial Overview

At March 31, 2005, we had total assets of $609.8 million, net loans of $517.1 million, deposits of $514.9 million and shareholders’ equity of $45.9 million.  The increase in assets was 22.4% over the amount at March 31, 2004, while net loans and deposits increased 22.3% and 21.3%, respectively, for the same period.

Our earnings per share, on a fully diluted basis, for the quarter ended March 31, 2005 was $0.33, which represented an increase of $0.07, or 26.9%, over earnings per share, on a fully diluted basis, of $0.26 for the same period in 2004.  The increase was partially attributable to a 22.2% increase in net interest income over the same period, due to strong growth in our earning assets.  The increase was also attributable to a 1.7% increase in non-interest income, as service charge income and other fees provided recurring sources of income.

Our return on average equity was 14.93% for the period ended March 31, 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 60.92% at March 31, 2004 to 62.44% for the quarter ended March 31, 2005.

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:

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

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SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

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

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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 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 are making the assumption that the Corporation will continue to have taxable income, as opposed to losses.  We are also assuming that the Corporation will continue to be assessed at the current rate of 34%.

Net Income

Net income for the quarter ended March 31, 2005 was $1.7 million compared to $1.3 million for the same period in 2004. This is an increase of $340 thousand or 25.7% over the same period in 2004. The provision for income tax expense increased $200 thousand or 32.4% from $618 thousand for the first quarter of 2004 to $818 thousand for the same period in 2005. The return on assets increased to 1.15% at March 31, 2005, compared to 1.12% for the first quarter of 2004.  Return on equity was 14.93% and 13.39% for the first quarter of 2005 and 2004, respectively.

Total Assets

Total assets of Premier increased to $609.8 million at March 31, 2005 compared to $576.2 million at December 31, 2004, representing an increase of $33.7 million or 5.8%.  Total loans at March 31, 2005, were $522.3 million, of which $419.7 million were loans secured by real estate.  The remaining loans consisted of $67.4 million in commercial loans, $29.3 million in consumer installment loans and $5.9 million in all other loans.  Net loans at March 31, 2005 increased $30.2 million or 6.2% from the December 31, 2004 balance of $486.9 million.  The loan to deposit ratio was 101.4% at March 31, 2005 and 100.5% at March 31, 2004.  The loan growth has been generated by a strong local market that is diverse in several areas of the economy and the new loan production office in Martinsburg, West Virginia.  

The investment portfolio increased 2.2% to $27.9 million at March 31, 2005 compared to $27.3 million at December 31, 2004.  Federal funds sold increased from $19.1 million at December 31, 2004, to $22.4 million at March 31, 2005. Total interest-earning assets increased by $34.2 million or 6.4% to $572.8 million at March 31, 2005 compared to December 31, 2004.

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 inherent risk.  Additionally, specific reserves for individual loans are established depending on the severity of the potential loss.  Loans are individually reserved once classified as a “watch item” by management.  A higher percentage of the loan is reserved for individual loans with a more severe classification.  The adequacy of the provision for loan losses is reviewed regularly by management through consideration of several factors including changes in character and 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 March 31, 2005, was $5.2 million. This is an increase of $231 thousand or 4.6% from December 31, 2004.  This gives the Corporation a 1.00% allowance for loan losses to total loans.  Management has completed an analysis on the reserve and feels the reserve is adequate.

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Liabilities

Total deposits increased to $514.9 million at March 31, 2005, from $483.9 million at December 31, 2004, which is an increase of $31.0 million or 6.4%.  Non-interest bearing deposits decreased slightly from $88.2 million at December 31, 2004, to $84.8 million at March 31, 2005.  This is a decrease of $3.4 million or 3.9% from December 31, 2004.  During this period, interest bearing checking and savings accounts decreased $981 thousand or 0.7% to $147.7 million.  Management feels that the decrease in balances in these deposit categories is due to customers converting their funds to certificates of deposit, as these rates have begun to increase significantly.  The balance in time deposits was $282.3 million at the end of the first quarter, reflecting an increase of $35.4 million or 14.3% over the end of the year.  At March 31, 2005, non-interest bearing deposits represented 16.5% of total deposits as compared to 18.2% at year-end 2004.  Low cost interest bearing deposits, including savings and interest bearing checking, were 28.7% of total deposits, down slightly from 30.7% at December 31, 2004.  Time deposits represented 54.8% of total deposits at March 31, 2005, an increase from 51.0% at year-end.  Short-term borrowings decreased $3 thousand from the year-end 2004 balance, while Federal Home Loan Bank advances have increased by $1 million to $31.0 million.

Shareholders' Equity

Total shareholders’ equity increased by $1.7 million or 3.8% from December 31, 2004 to March 31, 2005. The increase was due to a net profit of $1.7 million for the first three months of 2004. Stock options totaling $75 thousand were exercised.  Accumulated other comprehensive income decreased $60 thousand, net of tax. The primary capital to assets ratio is 7.5%.

Interest Income

Interest income totaled $8.9 million for the three months ended March 31, 2005, $1.8 million or 24.9% higher than the three months ended March 31, 2004.  Interest and fees on loans comprise the vast majority of interest income with $8.5 million for the first three months of 2005.  Interest income from securities increased by $23 thousand from the first quarter of 2004. Interest income on federal funds, the third major component of the bank’s investments, increased $31 thousand or 62.0%.  This is a direct result of the increased balances in federal funds sold, as our total deposit balances have increased.

Interest Expense

Total interest expense for the three months ended March 31, 2005 was $2.7 million, $647 thousand or 31.8% higher than the three months ended March 31, 2004.  Interest on deposits for the three-month period in 2005 increased by $504 thousand or 28.3% over the same period in 2004.  This increase was also attributable to the increased interest rates being paid on deposits, combined with the migration to higher-earning certificates of deposit.  Interest on borrowings increased by $143 thousand or 57.7% over the same period last year.  This increase in interest expense is a result of an increase in short-term borrowings to fund loan demand and the increase in outstanding Federal Home Loan Bank advances, which occurred in the second quarter of 2004.

Net Interest Income

Net interest income for the three months ended March 31, 2005 was $6.2 million, $1.1 million or 22.2% higher than the three months ended March 31, 2004. This increase was the result of the combination of the growth in interest earning assets of $34.2 million and the increase in loan interest income.  The net interest margin decreased by 5 basis points to 4.68% for the three months ended March 31, 2005 from 4.73% for the same period of 2004.  

Non-Interest Income

Total non-interest income for the three months ended March 31, 2005 was $1.1 million, a slight increase of $17 thousand or 1.6% over the 2004 amount of $1.0 million. Commissions and fees income increased $83 thousand or 56.5% as a result of increased secondary market mortgage commissions.  Other non-interest income decreased $61 thousand, partially as the result of the discontinued operation of Shenandoah Valley Title Company, an LLC in which the Corporation was invested.

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Non-Interest Expense

Total non-interest expense for the three months ended March 31, 2005 was $4.6 million, $813 thousand or 21.5% higher than the three months ended March 31, 2004.  Salary expense increased $438 thousand or 21.9%, and occupancy expenses increased by $50 thousand, over 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 62.4% for the three months ended March 31, 2005 compared to 60.9% 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 non-interest expenses compared to the growth in income.  

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

The following table reflects the calculation for the efficiency ratio for the quarter ended March 31, 2005 and 2004:

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.  Long-term borrowings are available from the Federal Home Loan Bank. The Corporation considers its sources of liquidity to be ample to meet its estimated needs.

Capital Resources

The Corporation’s risk-based capital position at March 31, 2005 was $58.9 million, or 11.4% of risk-weighted assets, for Tier I capital, and $64.1 million, or 12.4% for total risk based capital. Tier I capital consists primarily of common shareholders' equity and qualifying Trust Preferred Capital Notes. Total risk-based capital includes the allowance for loan losses in addition to total shareholders’ equity. 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%.

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On April 25, 2005, the Corporation entered into an agreement with First Tennessee Bank to issue an additional $8 million in Trust Preferred Capital Notes.  The Corporation expects to receive the proceeds from this issue of subordinated debt no later than May 16, 2005.  The issue will have a floating interest rate of 1.74% plus the prevailing 3-month LIBOR rate. The issue will have a maturity date of May 16, 2035.  The Corporation is in the process of creating Premier Statutory Trust III to administer this new Trust Preferred obligation.  The proceeds will be used to capitalize the new bank in Martinsburg, West Virginia, and 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:

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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;

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maintaining capital levels adequate to support our growth;

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

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

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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;

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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

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

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Earnings Simulation Analysis

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

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

The following table represents the interest rate sensitivity on net income for the Corporation using different rate scenarios as of March 31, 2005.  

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 March 31, 2005 data, over different rate environments with a one-year horizon.

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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 March 31, 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.

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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  

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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: 5/5/05

/s/ John K. Stephens

JOHN K. STEPHENS

CHAIRMAN

DATE: 5/5/05

/s/ Donald L. Unger

DONALD L. UNGER

PRESIDENT & CEO

DATE: 5/5/05

/s/ Frederick A. Board

FREDERICK A. BOARD

CHIEF FINANCIAL OFFICER

23

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.

24