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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

For the transition period from              to             

Commission file number 0-18868

PREMIER COMMUNITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code) (540) 869-6600

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,886,734, $1.00 par value, as of May 11, 2004.

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Balance Sheets

(In Thousands, Except for Share Data)

See Accompanying Notes to Consolidated Financial Statements

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PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Income

(In Thousands, Except for Share Data)

See Accompanying Notes to Consolidated Financial Statements

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PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statement of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2004 and 2003

(In Thousands)

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements

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PREMIER COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2004 and 2003

(In Thousands)

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements

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PREMIER COMMUNITY BANKSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

For the Three Months Ended March 31, 2004 and 2003

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, 2004 and December 31, 2003, and the result of operations and cash flows for the three months ended March 31, 2004 and 2003. 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, 2003.

Stock Compensation Plan

The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued 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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Note 2. Results of Operations

The results of operations for the three-month periods ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year.

Note 3. Securities

Securities held to maturity as of March 31, 2004 are summarized as follows (in thousands):

Securities available for sale as of March 31, 2004 are summarized as follows (in thousands):

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Note 4. Loans.

Impaired loans totaled $1.8 million at March 31, 2004 and $2.4 million at December 31, 2003. Non-accrual loans excluded from impaired loans disclosure under FASB 114 amounted to $315 thousand at March 31, 2004. There were no non-accrual loans excluded from impaired loans disclosure under FASB 114 at December 31, 2003.

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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, 2004 and 2003.

The following is a summary of information pertaining to risk elements and impaired loans for the periods ended March 31, 2004 and December 31, 2003.

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

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

Note 6. Earnings Per Share

Note 7. Other Expenses

The Corporation and its subsidiaries had the following other expenses for the three months ended March 31, 2004 and 2003.

Note 8. Recent Accounting Pronouncements

There were no new accounting pronouncements in the first quarter of 2004.

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

Financial Summary

General

Premier Community Bankshares, Inc. (“Premier” or the “Corporation”) is a Virginia multi-bank holding company headquartered in Winchester, Virginia. The Corporation owns The Marathon Bank and Rockingham Heritage Bank and its subsidiary, RHB Services, Inc. The consolidated financial statements include the accounts of Premier and its wholly-owned subsidiaries. All significant inter-company accounts have been eliminated.

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

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

Critical Accounting Policies

General

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

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Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingences, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

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

Net Income

Net income for the quarter ended March 31, 2004 was $1.3 million compared to $1.1 million for the same period in 2003. This is an increase of $217 thousand or 19.7% over the same period in 2003. The provision for income tax expense increased $71 thousand or 13.0% from $547 thousand for the first quarter of 2003 to $618 thousand for the same period in 2004. The return on assets was unchanged from the first quarter 2003 at 1.12%. Return on equity was 13.39% and 14.71% for the first quarter of 2004 and 2003, respectively.

Total Assets

Total assets of Premier increased to $498.2 million at March 31, 2004 compared to $462.9 million at December 31, 2003, representing an increase of $35.3 million or 7.6%. Total loans at March 31, 2004, were $427.2 million, of which $337.9 million were loans secured by real estate. The remaining loans consisted of $59.4 million in commercial loans, $25.0 million in consumer installment loans and $5.0 million in all other loans. Net loans at March 31, 2004 increased $40.2 million or 10.5% from the December 31, 2003 balance of $382.5 million. The loan to deposit ratio was 99.5% as of March 31, 2004 and 90.6% as of March 31, 2003. 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. Premier has also been able to increase its customer base due to the fact that recent mergers and consolidations of competitor offices in its market area have led customers to its community banks.

The investment portfolio increased 1.2% to $24.3 million at March 31, 2004 compared to $24.1 million at December 31, 2003. Federal funds sold decreased from $16.9 million at December 31, 2003, to $6.7 million at March 31, 2004, as these funds were converted to meet loan demand. Total average earning assets increased by $38.4 million or 9.6% to $437.3 million at March 31, 2004 compared to December 31, 2003.

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Allowance for Loan Losses

We maintain the allowance for loan losses at a sufficient level to provide for potential losses in the loan portfolio. Loan losses are charged directly to the allowance when they occur, while recoveries are credited to the allowance. Specific reserves by loan type are established based on overall historical losses, anticipated losses, and inherit risk. Additionally, specific reserves for individual loans are established depending on the severity of the potential loss. Loans are individually reserved once classified as a “watch item” by management. A higher percentage of the 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, as of March 31, 2004, was $4.5 million. This is an increase of $421 thousand or 10.3% from December 31, 2003. This gives the Corporation a 1.06% allowance for loan losses to total loans. Management has completed an analysis on the reserve and feels the reserve is adequate.

Liabilities

Total deposits increased to $424.6 million at March 31, 2004, from a balance of $397.3 million at December 31, 2003, which is an increase of $27.2 million or 6.9%. Non-interest bearing deposits have increased to $67.5 million at March 31, 2004, an increase of $6.3 million or 10.4% from December 31, 2003. During this period, interest bearing checking and savings accounts increased $8.1 million or 6.2% to $138.4 million. The balance in time deposits was $218.7 million at the end of the first quarter reflecting an increase of $12.7 million or 6.2% over the end of the year. At March 31, 2004, non-interest bearing deposits represented 15.9% of total deposits as compared to 15.4% at year-end 2003. Low cost interest bearing deposits including savings and interest bearing checking were 32.6%, which was down slightly from 32.8% at December 31, 2003. Time deposits represented 51.5% of total deposits at March 31, 2004, a decrease from 51.8% at year-end. Short-term borrowings increased $6.9 million over the year-end 2003 balance, while Federal Home Loan Bank advances have remained unchanged at $10.0 million.

Shareholders’ Equity

Total equity has increased by $1.4 million or 3.5% since December 31, 2003. The increase was due to a net profit of $1.3 million for the first three months of 2004. Stock options totaling $27 thousand were exercised. Accumulated other comprehensive income increased $29 thousand, net of tax. The primary capital to assets ratio is 8.1%.

Interest Income

Interest income totaled $7.1 million for the three months ended March 31, 2004, $900 thousand or 14.4% higher than the three months ended March 31, 2003. Interest and fees on loans comprise the vast majority of interest income with $6.8 million for the first three months of 2004. Interest income from investment securities dropped by $8 thousand from the first quarter of 2003 due to maturing and called securities being replaced with lower yielding securities. Interest income on federal funds, the third major component of the bank’s

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investments, decreased $9 thousand or 15.3%. This decrease is a direct result of the decline in federal funds sold, as these balances were converted to fund loan demand.

Interest Expense

Total interest expense for the three months ended March 31, 2004 was $2.0 million, $114 thousand or 5.3% lower than the three months ended March 31, 2003. Interest on deposits for the three-month period in 2004 decreased by $201 thousand or 10.1% over the same period in 2003. This decline is attributable to the decline in interest rates being paid on deposits. Interest on borrowings increased by $87 thousand or 54.0% 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 Trust Preferred Capital Notes, which occurred in the third quarter of 2003.

Net Interest Income

Net interest income for the three months ended March 31, 2004 was $5.1 million, $1.0 million or 24.7% higher than the three months ended March 31, 2003. This increase is the result of the combination of the growth in average earning assets of $38.4 million and the decline in interest expense discussed above. The net interest margin increased by 22 basis points to 4.73% for the three months ended March 31, 2004 from 4.53% for the same period of 2003. The impact on the margin was mitigated to a certain extent because of Premier’s liability sensitive status for interest bearing balances maturing or repricing within one year.

Noninterest Income

Total noninterest income for the three months ended March 31, 2004 was $1.0 million, an increase of $433 thousand or 71.9% over the 2003 amount of $602 thousand. The majority of the increase resulted from additional fees charged for services such as overdraft charges, check fees and ATM fees due to an increasing number of customer accounts and the addition of an overdraft protection program. Commissions and fees income decreased $47 thousand or 24.2% as a result of decreased secondary market mortgage commissions. Other noninterest income increased $121 thousand as a result of income received on bank-owned life insurance.

Noninterest Expense

Total noninterest expense for the three months ended March 31, 2004 was $3.8 million, $970 thousand or 34.5% higher than the three months ended March 31, 2003. Salary expense increased $507 thousand or 33.9%, and occupancy expenses increased by $51 thousand over the same period in 2003. The net increase in these expenses is in part a result of additional staffing to handle the growth of the Corporation, the expenses associated with opening additional branches (including the loan production office in West Virginia), and the costs involved in processing an increasing number of accounts and transactions. The Corporation’s efficiency ratio was 60.9% for the three months ended March 31, 2004 compared to 59.2% for the same period in 2003.

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

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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, 2004 was $53.0 million, or 12.7% of risk-weighted assets, for Tier I capital, and $57.5 million, or 13.8% 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%.

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Corporation expects,” “the Corporation believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Corporation, changing trends in customer profiles and changes in laws and regulations applicable to the Corporation. Although the Corporation believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Corporation will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For additional information on known and unknown risks, see the “Caution About Forward Looking Statements” section in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate risk is monitored through the use of three complimentary modeling tools: static gap analysis, earnings simulation modeling and economic value simulation (net present value estimation). Each of these models measure changes in a variety of interest rate scenarios. While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Corporation, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.

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Static gap which measures aggregate repricing values is less utilized since it does not effectively measure the earnings impact on the Corporation and is not addressed here. Earnings simulation and economic value models, however, which more effectively reflect the earnings impact, are utilized by management on a regular basis and are explained below.

Earnings Simulation Analysis

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

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

The following table represents the interest rate sensitivity on net income for the Corporation using different rate scenarios as of December 31, 2003. There have been no material changes in quantitative and qualitative disclosures about market risk since this information was developed using December 31, 2003 data.

Economic Value Simulation

Economic Value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation.

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

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, 2004, an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures was carried out under the supervision and with the participation of management, including the Corporation’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Corporation’s disclosure controls and procedures were effective.

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

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 and Reports on Form 8-K.

    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

On January 16, 2004, the Corporation filed a Current Report on Form 8-K dated January 14, 2004, that furnished under Item 12 a press release reporting its financial results for the year ended December 31, 2003.

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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.

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EXHIBIT INDEX

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