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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 
 FORM 10-KSB 
 (Mark One)þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year
ended December 31, 2004
 OR
  ̈
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________ to __________ Commission File Number: 333-89972 Community Financial Holding Company, Inc.  Georgia(State or Other Jurisdiction of
Incorporation or Organization)
    
    04-3641019(I.R.S. Employer Identification No.)2775 Buford Highway
Duluth, Georgia
(Address of Principal Executive Offices)
    
    30096
(Zip Code)
 Issuers telephone number: (770) 476-2775 Securities registered pursuant to Section 12(b) of the Exchange Act: Title of Each Class
    
    Name of Exchange on Which RegisteredNone.
    
    None.
 Securities registered pursuant to Section 12(g) of the Exchange Act: None. Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that theregistrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No  ̈ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained herein, and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
þ State issuers revenues for its most recent fiscal year: $13.9 million. The aggregate market value of the voting common equity held by non-affiliates of the issuer,
computed by reference to the price at which the common equity was sold, was $18.8 million as of
March 15, 2005. As of March 15, 2005, there were 1,200,894 shares of the issuers common stock issued and
outstanding. Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders to be filed on or
about March 24, 2005 are incorporated by reference with respect to Part III. Transition
Small Business Disclosure Format. Yes
 ̈ No
þ




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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity SecuritiesItem 6. Managements Discussion and Analysis or Plan of OperationItem 7. Financial StatementsItem 8. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange ActItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESEX-21 SUBSIDIARIES OF THE REGISTRANTEX-31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICEREX-31.2 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICEREX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICEREX-32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICEREX-99.1 SAFE HARBOR COMPLIANCE STATEMENT    Table of Contents  Cautionary Notice Regarding Forward-Looking Statements Community Financial Holding Company, Inc. (Community Financial, Company, we or us) may
from time to time make written or oral forward-looking statements, including statements contained
in our filings with the Securities and Exchange Commission (including this annual report on Form
10-KSB and the exhibits thereto), in our reports to shareholders and in other communications by us,
which are made in good faith by us pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of our
plans, objectives, expectations, estimates and intentions that are subject to change based on
various important factors, some of which are beyond our control. Those factors could cause our
financial performance to differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements: the strength of the United States economy
in general and the strength of the local economies in which we conduct operations; the effects of,
and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of
the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the effects of any actual or potential military action or terrorist event; the timely
development of and acceptance of new products and services and the perceived overall value of these
products and services by users, including the features, pricing and quality compared to
competitors products and services; the willingness of users to substitute competitors products
and services for our products and services; our success in gaining regulatory approval of our
products and services, when required; the impact of changes in financial services laws and
regulations, including laws concerning taxes, banking, securities and insurance; technological
changes and acquisitions; managing credit risk; changes in consumer spending and saving habits; and
our success at managing the risks involved in the foregoing. We do not undertake to update any forward-looking statement, whether written or oral, that may
be made from time to time by us or on our behalf. 2




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PART I 
 Item 1. Description of Business. General Community Financial Holding Company, Inc. is a $242 million asset bank holding company
headquartered in Duluth, Georgia. We were organized as a business corporation under the laws of
the State of Georgia in 2002 and are a registered bank holding company under the Federal Bank
Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of
Georgia. We conduct operations in Gwinnett County, Georgia through our wholly-owned subsidiary,
Gwinnett Community Bank, which was organized in 1999 as a state banking corporation under the
banking laws of the State of Georgia. On March 29, 2002, we completed the acquisition of Gwinnett Community Bank as part of a
corporate reorganization of Gwinnett Community Bank into a one-bank holding company structure. We
had no material operations prior to our acquisition of Gwinnett Community Bank. Our executive offices and the full-service bank are located at 2775 Buford Highway, Duluth,
Georgia 30096. We also have a branch office located in Suwanee Georgia and are currently pursuing
a new branch opportunity in Snellville, Georgia Gwinnett Community Bank Through Gwinnett Community Bank, we offer a broad line of banking and financial products and
services using a strategy of combining community bank service and responsiveness with innovative
products and services. Gwinnett Community Bank is a full-service commercial bank offering a
variety of services customary for community banks of similar size, which are designed to meet the
banking needs of individuals and small- to medium-sized businesses. Gwinnett Community Bank
attracts most of its deposits and conducts most of its lending transactions from and within its
primary service area encompassing Gwinnett County, Georgia. As a convenience to our customers, we offer drive-thru teller windows, 24-hour automated
teller machines, and Saturday banking hours. Gwinnett Community Bank is a member of the STAR ATM
network of automated teller machines, which permits our customers to perform monetary transactions
in most cities throughout the southeast and other regions. We also offer commercial Internet
banking services through our Website at www.gwinnettcommunitybank.com. Deposit Services Deposits are a key component of our banking business, serving as a source of funding for
lending as well as for increasing customer account relationships. We offer a full range of
competitively priced deposit services including checking accounts, NOW accounts, savings accounts
and other time deposits of various types, ranging from money market accounts to longer-term
certificates of deposit. As of December 31, 2004, we had deposits of approximately $217 million and approximately 7,008
deposit accounts. No material portion of our deposits has been obtained from one or a few persons
or entities (including federal, state and local governments and agencies), the loss of any one or
more of which would have a materially adverse effect on us. The following table sets forth our mix of depository accounts as a percentage of total
deposits at December 31, 2004. Deposit Mix At December 31, 2004Non-interesting bearing demand
    
    
    11.69
    %NOW accounts and money market
    
    
    14.87
    %Savings
    
    
    4.80
    %Time Deposits Under $100,000
    
    
    37.05
    %Time Deposits $100,000 and over
    
    
    31.59
    %Total Deposits
    
    
    100.00
    %
 3




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Lending Services Our lending business consists principally of making consumer loans to individuals and
commercial loans to small and medium-sized businesses and professional concerns. In addition, we
make secured real estate loans, including residential and commercial construction loans, and first
and second mortgage loans for the acquisition or improvement of personal residences. As of
December 31, 2004, we had approximately $192 million in total loans outstanding, representing 79%
of our total assets of approximately $242 million. The loan portfolio is made up of both fixed and
adjustable rate loans. Approximately 39% of our total loan portfolio is fixed rate and 61% is
adjustable rate as of December 31, 2004. The following table summarizes the historical mix of
loans in our portfolio: December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,Loan Type
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Commercial
    
    
    28.5
    %
    
    
    21.5
    %
    
    
    25.4
    %
    
    
    24.3
    %
    
    
    22.5
    %Real estate
    
    
    59.1
    %
    
    
    70.4
    %
    
    
    65.4
    %
    
    
    68.6
    %
    
    
    70.5
    %Consumer
    
    
    12.4
    %
    
    
    8.1
    %
    
    
    9.2
    %
    
    
    7.1
    %
    
    
    7.0
    %
 No material portion of our loans is concentrated within a single industry or group of related
industries. We are not dependent to any material degree upon any single borrower or a few
principal borrowers. The loss of any individual borrower or a few principal borrowers would not
likely have a material adverse effect on our operations or earnings. Management is satisfied with
the mix of loans within our loan portfolio. Procedures for Establishment of the Allowance for Loan Losses. Gwinnett Community Bank has
contracted with a company which specializes in loan review. Reviews are performed quarterly.
Approximately 81% of the Banks total loan commitments by dollar were reviewed in 2004 by either
regulatory authorities or the outsourced loan review team. All loans of $100,000 or more and a
sample of other loans are reviewed. Additionally, past due, watch list, and regulatory criticized
loans are reviewed. Loans are reviewed annually and placed in various loan-grading categories
which assist in developing lists of potential problem loans. These loans are monitored to ensure
early identification of repayment problems so that adequate allowances can be made through the
provision for loan losses. The formal allowance for loss adequacy test is performed at month end.
Specific amounts of loss are estimated on problem loans and historical loss percentages (using peer
group loss ratios) are applied to the balance of the portfolio using certain portfolio
stratifications. Additionally, the evaluation takes into consideration such factors as changes in
the nature and volume of the loan portfolio, current economic conditions, regulatory examination
results, and the existence of loan concentrations. The results of the evaluation are compared to
the recorded allowance for loan losses and material differences are adjusted by increasing or
decreasing the provision for loan losses. While components of the allowance for loan losses will
include specific allocations to individual non-performing loans, the allowance for loan losses is
not allocated by type of loan. The entire allowance is available to absorb losses from any and all
loans. Management uses available information to recognize losses on loans; however, future additions
to the allowance may be necessary based on changes in economic conditions. In addition,
regulators, as an integral part of their examination process, periodically review the allowance for
loan losses. Such regulators may require additions to the allowance based on their judgments of
information available to them at the time of their examination. Real Estate Loans.Loans secured by real estate make up the primary component of our loan
portfolio, constituting approximately $135 million, or 70%, of total loans as of December 31, 2004.
Approximately 28% of the real estate loans are fixed rate and 72% are adjustable rate. These
loans consist of commercial real estate loans, construction and development loans, residential real
estate loans and home equity loans. Real estate loans are collateralized by commercial and
residential real estate in our primary and secondary market areas. The types of real estate that
typically constitute collateral include primary and secondary residences for individuals, including
multi-family projects, places of business, real estate for agricultural uses and undeveloped land. Commercial Loans. We make loans for commercial purposes to various industries located in our
market area. As of December 31, 2004, commercial loans constituted approximately $43 million, or
23% of total loans. Approximately 64% of commercial loans are fixed rate, while 36% are
adjustable. The typical commercial loan has a maturity of three years or less. Loans in this
category exclude commercial loans secured by real estate. Commercial loans secured by real estate
are included in the real estate category described above. The typical commercial loan has
collateral such as equipment for business use and inventory and may include unsecured working
capital lines. 4




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Consumer Loans. We make a variety of loans to individuals for personal and household
purposes, including secured and unsecured installment and term loans and lines of credit. As of
December 31, 2004, we held approximately $13 million of consumer loans, representing 7% of total
loans. Consumer loans are primarily fixed rate in nature with 71% of this loan category carrying
fixed rates. These loans are typically collateralized by personal automobiles, recreational
vehicles or household items and may include unsecured loans to individuals. Other Lending Activities.We also engage in mortgage activities through our partnership with
Guaranty Mortgage Corporation. The Company shares expenses and fees received in the originating
and packaging of these loans. Periodically we receive discount points depending on the pricing of
the loan. No mortgage loans are held by us for resale, nor do we service third-party loans. Risks Associated with Lending Activities The principal economic risk associated with each category of loans that we make is the
creditworthiness of the borrower. Borrower creditworthiness is affected by general economic
conditions and the strength of the relevant business market segment. General economic factors
affecting a borrowers ability to repay include interest, inflation and employment rates, as well
as other factors affecting a borrowers customers, suppliers and employees. Because consumer loans are often secured by rapidly depreciating assets such as automobiles or
other personal property, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent
on the borrowers continuing financial stability, and thus are more likely to be adversely affected
by job loss, divorce, illness or personal bankruptcy. Repayment of commercial loans and loans secured by commercial and multi-family real estate
properties are often dependent on the successful operation of the business or management of the
property. As a result, the quality of the commercial borrowers management and its ability both to
properly evaluate changes in the supply and demand characteristics affecting its markets for
products and services and to respond effectively to these changes are significant factors in a
commercial borrowers creditworthiness. Risks associated with commercial real estate loans also
include fluctuations in the value of real estate, new job creation trends and tenant vacancy rates.
Our practice is to underwrite these loans based on our analysis of the amount of cash flow
generated by the business and the resulting ability of the borrower to meet its payment
obligations. In addition, we generally seek to obtain a personal guarantee of the loan by the
owner(s) of the business and, under certain circumstances, seek additional collateral. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial
estimate of the security propertys value upon completion of construction as compared to the
estimated costs of construction, including interest and fees. In addition, we assume certain risks
associated with the borrowers ability to complete construction in a timely and workmanlike manner.
If the estimate of value proves to be inaccurate, or if construction is not performed timely or in
a quality manner, we may be confronted with a project which, when completed, has a value
insufficient to assure full repayment or to advance funds beyond the amount originally committed to
permit completion of the project. Legal Lending Limit We are subject to Georgia banking laws which limit the amount we lend to a single borrower and
its related interests. See Supervision and Regulation. In general, the legal lending limit for
a single borrower is 15% of Gwinnett Community Banks statutory capital base, or 25% of its
statutory capital base if the entire amount of the loan is fully secured. Gwinnett Community
Banks statutory capital base is the sum of its capital stock, additional paid-in capital and any
retained earnings it has designated as being unavailable for distribution to shareholders. 5




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Loan Underwriting Standards Management recognizes the importance of character and past performance as consideration in the
lending decision process. In analyzing a credit relationship, primary emphasis is placed on
adequacy of cash flow and the ability of the obligor to service the debt. Secondary emphasis is
placed on the past performance of the borrower, the type or value of the collateral, the amount of
net worth present or any performance of endorsers or guarantor that has not been proven. Collateral is not considered a substitute for the borrowers ability to repay. Collateral
serves as a way to control the borrower and provide additional sources of repayment in the event of
default. The quality and liquidity of the collateral are of paramount importance and must be
confirmed before the loan is made. We have established loan-to-value and margin guidelines that
are varied depending on the type of collateral offered. Loans secured by liquid assets and
securities carry margins of 50% to 100% depending on the liquidity and price volatility of the
asset. In general, loans to value on various types of real estate range from a high of 90% to a
low of 65%. Installment loans, in general, require a loan to collateral value of at least 80%. In
addition, we impose limits on terms of repayment of loans for automobiles and other depreciable
collateral that are dependent on the age of the asset. We may make some exceptions to the
loan-to-value guidelines that are dependent on the overall creditworthiness of the borrower. Market Area Our primary market area includes all of Duluth, Gwinnett County, Georgia. Approximately 95%
of our customers reside in Gwinnett County, although we attract some loan business from neighboring
Forsyth, Fulton, Jackson, Barrow and Hall Counties. Our secondary market area adds an additional
ten-mile radius and incorporates portions of DeKalb, Forsyth, Fulton, Jackson, Barrow and Hall
Counties. Gwinnett County is located approximately 20 miles northeast of Atlanta. Gwinnett
Countys major industries include manufacturing, wholesale trade, food processing, paper and lumber
products, construction, retail sales, and health services. Gwinnett County continues to be the largest deposit base in our primary and secondary
market area, with Barrow, Hall, Rockdale, and Walton Counties to its east and DeKalb, Forsyth, and
Fulton Counties to its west emerging as deposit growth areas for us. The amount of total deposits
in Gwinnett County was approximately $8.2 billion at June 30, 2004, compared to total deposits of
approximately $2.9 billion in 1993. We held a market share of 2.50% of total deposits in Gwinnett
County at June 30, 2004. Significant development has taken place in the Georgia area along the Interstate 85 corridor.
Due to its close proximity to downtown Atlanta and easy access to I-85, Gwinnett County is
receiving a significant boost from the continued expansion of the northeastern portion of metro
Atlanta. The development of communities northeast of metro Atlanta such as Norcross and Duluth
will have an impact on our primary and secondary market areas. Retail developments such as the
Mall of Georgia and the Discover Mills complex, along with a number of large residential
developments, are anticipated to have a positive economic impact on the County. Competition We operate in a highly competitive environment. We compete for deposits and loans with
commercial banks, savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies and other financial entities operating locally and elsewhere. In addition,
because the Gramm-Leach-Bliley Act now permits banks, securities firms and insurance companies to
affiliate, a number of larger financial institutions and other corporations offering wider variety
of financial services than we currently offer may now enter and aggressively compete in the market
we currently serve. Many of these competitors have substantially greater resources and lending
limits than us and may offer certain services that we do not or cannot provide. According to the FDIC Market Share Report, as of June 30, 2004, Gwinnett County was served by
a total of 37 financial institutions, with a total of 186 offices in Gwinnett County. The primary
factors in competing for deposits are interest rates, personalized services, the quality and range
of financial services, convenience of office locations and office hours. The primary factors in
competing for loans are interest rates, loan origination fees, the quality and range of lending
services and personalized services. To compete with other financial services providers, we
principally rely upon local promotional activities, personal relationships established by officers,
directors and employees with our customers, and specialized services tailored to meet our
customers needs. We offer many personalized services and attract customers by being responsive
and sensitive to the needs of the community. We rely not only on the goodwill and referrals of
satisfied 6




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customers, as well as traditional media advertising to attract new customers, but also on
individuals who develop new relationships to build our customer base. As a community banking operation, we offer convenient service, local decision-making and
competitive financial products and services. Additionally, by focusing our operations on the
community we serve, we believe that we are able to respond to changes in our market more quickly
than large, centralized institutions. Employees As of December 31, 2004, Gwinnett Community Bank had 48 full-time equivalent employees,
including eight part-time employees, none of whom is a party to a collective bargaining agreement.
Certain executive officers of Gwinnett Community Bank also serve as our officers (we do not have
compensated employees). We believe that we enjoy satisfactory relations with our employees. Supervision and Regulation We
and our bank subsidiary, Gwinnett Community Bank, are extensively regulated under federal and state laws and
regulations. These laws and regulations generally are intended to protect depositors, not
shareholders. The following is a summary description of certain provisions of selected laws and
regulations which affect bank holding companies and banks. To the extent that the following
summary describes statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable laws or
regulations may have a material effect on our business operations and prospects and those of our
bank subsidiary. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) and following with the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA), numerous additional regulatory requirements have been placed on the banking
industry in the past thirteen years, and additional changes have been proposed. The banking
industry has also changed significantly as a result of the passage of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the Interstate Banking Act) and the
Gramm-Leach-Bliley Act of 1999 (the Gramm-Leach-Bliley Act). Our operations may be affected by
legislative changes and new policies of various regulatory authorities. We cannot predict the
nature or the extent of the effect on our business and earnings that fiscal or monetary policies,
economic conditions, or new federal or state legislation may have in the future. Community Financial The Company is a bank holding company registered with the Board of Governors of the Federal
Reserve System (the Federal Reserve) under the Bank Holding Company Act of 1956, as amended (the
BHCA), and with the Georgia Department of Banking and Finance (the GDBF) under the Georgia Bank
Holding Company Act (the Georgia BHCA). As such, the Company is subject to the supervision,
examination, and reporting requirements of the BHCA and the Georgia BHCA, in addition to the
regulations of the Federal Reserve and the GDBF. Investments, Control and Activities.With certain limited exceptions, the BHCA requires every
bank holding company to obtain prior approval of the Federal Reserve:  
    to acquire the ownership or control of more than 5% of any class of voting stock
of any bank not already controlled by it;
    for it or any subsidiary (other than a bank) to acquire all or substantially all
of the assets of a bank; and
    to merge or consolidate with any other bank holding company. The BHCA further provides that the Federal Reserve may not approve any transaction that would
result in a monopoly, or the effect of which may be substantially to lessen competition in any
section of the country, or that in any other manner would be in restraint of trade, unless the
transactions anticompetitive effects are clearly outweighed by the public interest. The Federal
Reserve is also required to consider the financial and managerial resources and future prospects of
the bank holding companies and banks concerned and the convenience and needs of the community to be
served. In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act,
together with regulations thereunder, require Federal Reserve approval (or, depending on the
circumstances, no notice of disapproval) prior to any person or company acquiring control of a
bank holding company. Control is conclusively presumed to exist 7




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if an individual or company
acquires 25% or more of any class of voting securities of the bank holding company. Control is
presumed to exist, subject to rebuttal, if a person acquires 10% or more but less than 25% of any
class of voting securities and either the bank holding company has registered securities under
Section 12 of the Exchange Act or no other person will own a greater percentage of that class of
voting securities immediately after the transaction. Our common stock is registered under Section
12 of the Exchange Act. Applicable regulations provide a procedure for challenge of the rebuttable
control presumption. Permitted Activities.Until passage of the Gramm-Leach-Bliley Act of 1999, a bank holding
companys activities generally were limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other activity that the
Federal Reserve determines to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is permissible, the
Federal Reserve considered whether the performance of such an activity reasonably could be expected
to produce benefits to the public that outweigh possible adverse effects. The Federal Reserve has
determined that the following are among the activities permissible for bank holding companies:  
    factoring accounts receivable;
    acquiring or servicing loans;
    leasing personal property;
    conducting discount securities brokerage activities;
    performing certain data processing services;
    acting as agent or broker in selling credit life insurance and certain other
types of insurance in connection with credit transactions; and
    performing certain insurance underwriting activities. New Legislation.Changes to federal law that took effect in March 2000, and new regulations
to implement these changes, allow qualifying bank holding companies to become financial holding
companies that may affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature. Activities that are financial in nature include:  
    securities underwriting;
    dealing and market making;
    sponsoring mutual funds and investment companies;
    insurance underwriting and agency;
    merchant banking activities; and
    activities that the Federal Reserve determines to be closely related to banking. For the Company to qualify to become a financial holding company, its depository institution
subsidiaries must be well capitalized and well managed and must have a Community Reinvestment Act
rating of at least satisfactory. In addition, the Company must file an election with the Federal
Reserve to become a financial holding company and give the Federal Reserve 30 days written notice
prior to engaging in a permitted financial activity. Although the Company does not have any
immediate plans to file such an election, our holding company structure gives us the flexibility to
make such an election if deemed appropriate in the future. The federal law that took effect in March 2000 also contains provisions that directly impact
the following activities and operations of Gwinnett Community Bank:  
    Any insurance activities;
    The activities of and qualifications for any Bank financial subsidiaries; and
    Its privacy policies and practices concerning disclosure of consumer information. Source of Strength; Cross-Guarantee.Under Federal Reserve policy, a bank holding company is
expected to act as a source of financial strength to its bank subsidiaries and to commit resources
to support these subsidiaries. This support may be required at times when, absent such policy, the
bank holding company might not otherwise provide such support. Under this policy, a bank holding
company may be required to loan money to its subsidiary banks in the form of
capital notes or other instruments that qualify for capital under regulatory rules. In the
event of the Companys bankruptcy, any commitment by the Company to a federal bank regulatory
agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled
to a priority of payment. Under the BHCA, the Federal Reserve also 8




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may require a bank holding
company to terminate any activity or relinquish control of a non-bank subsidiary (other than a
non-bank subsidiary of a bank) upon the Federal Reserves determination that such activity or
control constitutes a serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Federal bank regulatory agencies have additional discretion to require a bank holding company
to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may
aid the depository institutions financial condition. Gwinnett Community Bank may be required to
indemnify, or cross-guarantee, the FDIC against losses it incurs with respect to any other bank we
control, which in effect makes our equity investments in healthy bank subsidiaries available to the
FDIC to assist any failing or failed bank subsidiary we may have. At present, we have no
subsidiary other than Gwinnett Community Bank. State Regulation.Our activities are subject to certain provisions of the Financial
Institutions Code of Georgia and regulations issued pursuant to such code. These provisions are
administered by the Georgia Department of Banking and Finance (DBF), which has concurrent
jurisdiction with the Federal Reserve over our activities. The laws and regulations administered
by the DBF are generally consistent with, or supplemental to, the federal laws and regulations
discussed herein. Gwinnett Community Bank As a banking corporation organized under the laws of the State of Georgia, Gwinnett Community
Bank is subject to supervision and examination by the DBF and the FDIC. Deposits in Gwinnett
Community Bank are insured by the FDIC up to a maximum amount (generally $100,000 per depositor,
subject to aggregation rules). The DBF and the FDIC regulate or monitor all areas of Gwinnett
Community Banks banking operations, including security devices and procedures, adequacy of
capitalization and loan loss reserves, loans, investments, borrowings, deposits, mergers,
consolidations, reorganizations, issuance of securities, payment of dividends, interest rates,
establishment of branches, and other aspects of its operations. These agencies require Gwinnett
Community Bank to maintain certain capital ratios and impose limitations on Gwinnett Community
Banks aggregate investment in real estate, bank premises and furniture and fixtures. Gwinnett
Community Bank is currently required by the FDIC to prepare quarterly reports on Gwinnett Community
Banks financial condition and to conduct an annual audit of its financial affairs in compliance
with minimum standards and procedures prescribed by the FDIC. Under FDICIA, all insured depository institutions must undergo periodic on-site examination by
the appropriate federal banking agency. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate agency against each institution
or affiliate as it deems necessary or appropriate. All insured institutions are required to submit
annual reports to the FDIC and the appropriate federal agency (or state supervisor when
applicable). FDICIA also directs the FDIC to develop with other appropriate agencies a method for
insured depository institutions to provide supplemental disclosure of the estimated fair market
value of assets and liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to prescribe, by regulation,
standards for all insured depository institutions and depository institution holding companies
relating, among other things, to: (i) internal controls, information systems and audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset
quality. Community Reinvestment Act.The Community Reinvestment Act (the CRA) requires that, in
connection with examinations of financial institutions within their respective jurisdictions, the
Federal Reserve, the FDIC, and any other federal banking agency, shall evaluate the record of the
financial institution in meeting the credit needs of its local community, including low and
moderate income neighborhoods. A financial institutions CRA record is considered in evaluating
applications to the agencies for mergers, acquisitions, and new branch facilities. Failure to
comply with the CRA could submit a financial institution to additional requirements and
limitations. Gwinnett Community Bank was last examined for CRA compliance as of October 30, 2001,
and received a CRA rating of Satisfactory. Other Rules and Regulations.Interest and other charges collected or contracted for by the
Bank are subject to state usury laws and federal laws concerning interest rates. For example,
under the Soldiers and Sailors Civil Relief Act
of 1940, a lender is generally prohibited from charging an annual interest rate in excess of
6% on any obligation for which the borrower is a person on active duty with the United States
military. 9




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##### Table of Contents



Gwinnett Community Banks loan operations are also subject to certain federal laws, and their
implementing regulations, such as the:  
    Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers;
    Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its CRA obligation to help meet the housing
needs of the community it serves;
    Equal Credit Opportunity Act prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit;
    Fair Credit Reporting Act of 1978 governing the use and provision of information
to credit reporting agencies;
    Fair Debt Collection Act governing the manner in which consumer debts may be
collected by collection agencies, and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal laws;
    Soldiers and Sailors Civil Relief Act, which governs the repayment terms of,
and property rights underlying, secured obligations of persons in military service;
and
    The rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws. The overdraft protection programs offered by the Bank are further subject to the Joint
Guidance on Overdraft Protection Program (Joint Guidance) issued by federal banking regulatory
agencies in February 2005. The Joint Guidance contains three primary sections: Safety and
Soundness Considerations; Legal Risks; and Best Practices. The safety and soundness discussion
seeks to ensure that financial institutions offering overdraft protection programs adopt adequate
policies and procedures to address credit, operational, and other associated risks. The legal
risks discussion advises institutions to have their overdraft protection programs reviewed by legal
counsel to ensure overall compliance prior to implementation. The best practices section addresses
the marketing and communications in connection with overdraft protection programs as well as the
disclosure and operation of these programs. The Bank will implement policies and procedures to
comply with the applicable requirements of the Joint Guidance. The deposit operations of Gwinnett Community Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records, and the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act,
which governs automatic deposits to and withdrawals from deposit accounts and customers rights and
liabilities arising from the use of automated teller machines and other electronic banking
services. Gwinnett Community Banks commercial transactions are also subject to the provisions of
Georgia law governing such transactions. These laws include the Uniform Commercial Code and other
provisions of the Georgia Code Annotated. Deposit Insurance The deposits of Gwinnett Community Bank are currently insured to a maximum of $100,000 per
depositor, subject to aggregation rules. The FDIC establishes rates for the payment of premiums by
federally insured banks and thrifts for deposit insurance. Since 1993, insured depository
institutions like Gwinnett Community Bank have paid for deposit insurance under a risk-based
premium system. Insurance of deposits may be terminated by the FDIC upon a finding that the
financial institution has engaged in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC. Based on Gwinnett Community Banks risk classification, Gwinnett Community Bank was not
required to pay an assessment for deposit insurance in 2004,nor was it required to pay a deposit
insurance assessment in 2005. Gwinnett Community Bank was required to pay the Bank Insurance Fund
Financial Corporation (FICO) assessment in 2004, and will also pay this assessment in 2005. The
FICO assessment rate is set quarterly, and is $1.44 per $100 of Bank deposits for the first quarter
of 2005. 10




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##### Table of Contents



Dividends Community Financial.We are a legal entity separate and distinct from Gwinnett Community
Bank. The principal source of our cash flow is dividends from Gwinnett Community Bank. The amount
of dividends that may be paid by Gwinnett Community Bank to us depends on Gwinnett Community Banks
earnings and capital position and is limited by various federal and state statutory and regulatory
limitations. In addition to the availability of funds from Gwinnett Community Bank, our future dividend
policy is subject to the discretion of our Board of Directors and will depend upon a number of
factors, including future earnings, financial condition, cash needs and general business
conditions. The Board of Directors approved a seventeen-cent per share dividend to the
shareholders of record on April 1, 2005 that will be paid on May 1, 2005. If we should declare
further dividends in the future, the amount of such dividends cannot be estimated at this time and
we cannot know whether such dividends would continue for future periods. Gwinnett Community Bank.As a Georgia banking corporation, Gwinnett Community Bank may pay
cash dividends on its outstanding capital stock out of its earnings without any requirement to
notify the DBF or request the approval of the DBF under the following conditions:  
    Total classified assets at the most recent examination of Gwinnett Community
Bank, the conclusions of which may have been presented to the Board, do not exceed
80% of Tier 1 Capital plus the Allowance for Loan Losses as reflected at such
examination;
    The aggregate amount of dividends declared or anticipated to be declared in the
calendar year does not exceed 50% of the net profits, after taxes but before
dividends, for the previous calendar year;
    The ratio of Tier 1 Capital to Adjusted Total Assets (the Tier 1 Leverage
Ratio) shall not be less than 6%. Any dividend to be declared by Gwinnett Community Bank at a time when each of the foregoing
conditions does not exist must be approved, in writing, by the DBF prior to the payment thereof.
Under FDICIA, Gwinnett Community Bank may not pay a dividend if, after paying the dividend,
Gwinnett Community Bank would be undercapitalized. See Capital Adequacy below. As
of December 31, 2004 and 2003, Gwinnett Community Banks Tier 1 Leverage Ratio was 9.70%
and 8.23%, respectively. Gwinnett Community Bank declared a fifteen-cent per share dividend to the shareholders of
record on April 1, 2004, which was paid on May 1, 2004. It is anticipated that the Bank will pay dividends to the Company in the amount of
approximately $200,000 for the purpose of paying a dividend on May 1, 2005 to its shareholders of
record on April 1, 2005. Capital Adequacy Federal bank regulatory authorities have adopted risk-based capital guidelines for banks and
bank holding companies that are designed to:  
    make regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies;
    account for off-balance sheet exposure; and
    minimize disincentives for holding liquid assets. The resulting capital ratios represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should maintain ratios
well in excess of the minimums. The current guidelines require all bank holding companies and federally regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1
capital. The degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease as it moves downward through the capital
categories. Bank holding companies controlling financial institutions can be called upon to boost
the 11




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institutions capital and to partially guarantee the institutions performance under their
capital restoration plans. Tier 1 capital includes shareholders equity, qualifying perpetual
preferred stock and minority interests in equity accounts of consolidated subsidiaries, but
excludes goodwill and most other intangible assets and excludes the allowance for loan and lease
losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated debt and
intermediate-term preferred stock and general reserves for loan and lease losses up to 1.25% of
risk-weighted assets. Under the guidelines, banks and bank holding companies assets are given risk-weights of 0%,
20%, 50% and 100%. In addition, certain off-balance sheet items are given credit conversion
factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply.
These computations result in the total risk-weighted assets. Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans, both of which carry a 50% rating. Most
investment securities are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies,
including issuance of a capital directive, the termination of deposit insurance by the FDIC, a
prohibition on the taking of brokered deposits, and other restrictions on its business. The Federal Reserve also has implemented a leverage ratio, which is Tier 1 capital as a
percentage of average total assets less intangible assets, to be used as a supplement to the
risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on
the maximum degree to which a bank holding company may leverage its equity capital base. The
Federal Reserve has established a minimum 3% leverage ratio of Tier 1 capital to total assets for
the most highly rated bank holding companies and insured banks. All other bank holding companies
and insured banks will be required to maintain a leverage ratio of 3% plus an additional cushion of
at least 100 to 200 basis points. The tangible Tier 1 Leverage Ratio is the ratio of a banking
organizations Tier 1 capital, less all intangibles, to total assets, less all intangibles. FDICIA established a capital-based regulatory plan designed to promote early intervention for
troubled banks and requires the FDIC to choose the least expensive resolution of bank failures.
The capital-based regulatory framework contains five categories of compliance with regulatory
capital requirements, including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. To qualify as a well capitalized
institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no
less than 6%, and a total risk-based capital ratio of no less than 10%. The bank must also not be
under any order or directive from the appropriate regulatory agency to meet and maintain a specific
capital level. Under FDICIA, regulators must take prompt corrective action against depository institutions
that do not meet minimum capital requirements. FDICIA and the related regulations establish five
capital categories as shown in the following table: Total Risk-
    
    
    Tier 1 Risk-
    
    
    Tier 1Classification
    
    Based Capital
    
    
    Based Capital
    
    
    Leverage RatioWell Capitalized (1)
    
    
    10
    %
    
    
    6
    %
    
    
    5
    %Adequately Capitalized (1)
    
    
    8
    %
    
    
    4
    %
    
    
    4
    %(2)Undercapitalized (3)
    
    
    <8
    %
    
    
    <4
    %
    
    
    4
    %(2)Significantly Undercapitalized (3)
    
    
    <6
    %
    
    
    <3
    %
    
    
    <3
    %Critically Undercapitalized (3)
    
    
    
    
    
    
    
    
    
    
    <2
    %
   (1)
    An institution must meet all three minimums.(2)
    3% for composite 1-rated institutions, subject to appropriate federal banking agency
guidelines.(3)
    An institution is classified as undercapitalized if it is below the specified capital
level for any of the three capital measures. 12




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##### Table of Contents



A depository institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives a less than satisfactory examination
rating in any one of four categories. As a depository institution moves downward through the
capitalization categories, the degree of regulatory scrutiny will increase and the permitted
activities of the institution will decrease. Action may be taken by a depository institutions
primary federal regulator against an institution that falls into one of the three undercapitalized
categories, including the requirement of filing a capital plan with the institutions primary
federal regulator, prohibition on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring. Other restrictions may be imposed on
the institution either by its primary federal regulator or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the institution. The following table presents the FDICIA capital requirements for adequately capitalized and
well capitalized institutions, and our capital ratios and those of Gwinnett Community Bank as of
December 31, 2004: To Be Adequately
    
    
    To Be WellCapitalized
    
    
    Capitalized
    
    
    ActualAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2004:Total Capital to Risk Weighted AssetsCommunity Financial
    
    $
    16,920
    
    
    
    38.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    25,734
    
    
    
    12.17
    %Gwinnett Community Bank
    
    
    16,911
    
    
    
    38.0
    %
    
    
    21,139
    
    
    
    310.0
    %
    
    
    25,556
    
    
    
    12.09
    %Tier I
Capital to Risk Weighted AssetsCommunity Financial
    
    $
    8,460
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    23,536
    
    
    
    11.13
    %Gwinnett Community Bank
    
    
    8,455
    
    
    
    34.0
    %
    
    
    12,683
    
    
    
    36.0
    %
    
    
    23,358
    
    
    
    11.05
    %Tier I Capital to Average AssetsCommunity Financial
    
    $
    9,646
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    23,536
    
    
    
    9.76
    %Gwinnett Community Bank
    
    
    9,635
    
    
    
    34.0
    %
    
    
    12,044
    
    
    
    35.0
    %
    
    
    23,358
    
    
    
    9.70
    %As of December 31, 2003:Total Capital to Risk Weighted AssetsCommunity Financial
    
    $
    13,589
    
    
    
    38.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    17,755
    
    
    
    10.46
    %Gwinnett Community Bank
    
    
    13,589
    
    
    
    38.0
    %
    
    
    16,987
    
    
    
    310.0
    %
    
    
    17,621
    
    
    
    10.37
    %Tier I
Capital to Risk Weighted AssetsCommunity Financial
    
    $
    6,795
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    16,091
    
    
    
    9.48
    %Gwinnett Community Bank
    
    
    6,795
    
    
    
    34.0
    %
    
    
    10,192
    
    
    
    36.0
    %
    
    
    15,957
    
    
    
    9.39
    %Tier I Capital to Average AssetsCommunity Financial
    
    $
    7,751
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    16,091
    
    
    
    8.31
    %Gwinnett Community Bank
    
    
    7,751
    
    
    
    34.0
    %
    
    
    9,689
    
    
    
    35.0
    %
    
    
    15,957
    
    
    
    8.23
    %
 On March 26, 2004, the Company issued, through a wholly owned Delaware statutory trust, CFHC
Capital Trust I (the Trust), $5,500,000 of preferred beneficial interests in the Companys
unsecured junior subordinated debentures (trust preferred securities) that qualify as Tier I
capital under Federal Reserve Board guidelines within certain limitations. The Company owns all of
the common securities of the Trust. The proceeds from the issuance of the common securities and the
trust preferred securities were used by the Trust to purchase $5,671,000 of junior subordinated
debentures of the Company, which carry a floating rate of interest equal to the prime rate of
interest published in the Money Rates table in the Eastern Edition of The Wall Street Journal
plus 12.5 basis points. At December 31, 2004, this rate was 5.375%. Of the proceeds received by the
Company from the sale of the junior subordinated debentures, $5,000,000 was used to strengthen the
capital position of the Bank and the remainder will be used to accommodate current and future
growth. The debentures and related accrued interest represent the sole assets of the Trust. The trust preferred securities accrue and pay distributions quarterly, at an interest rate
equal to the prime rate published in the Money Rates table in the Eastern Edition of The Wall
Street Journal plus 12.5 basis points on the stated 13




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liquidation value of $50,000 per capital
security. The Company has entered into contractual arrangements which, taken collectively, fully
and unconditionally guarantee payment of accrued and unpaid distributions required to be paid on
the trust preferred securities, the redemption price with respect to any trust preferred securities
called for redemption by the Trust, and payments due upon a voluntary or involuntary dissolution,
winding up, or liquidation of the Trust. The trust preferred securities are mandatorily redeemable upon maturity of the debentures on
December 31, 2034, or upon earlier redemption as provided in the indenture. The Company has the
right to redeem the debentures purchased by the Trust in whole or in part, on or after December 31,
2009. As specified in the indenture, if the debentures are redeemed prior to maturity, the
redemption price will be the unpaid principal amount, plus any accrued unpaid interest. Interstate Banking and Branching Restrictions Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Riegle-Neal Act), effective September 29, 1995, an adequately capitalized and adequately managed
bank holding company may acquire a bank across state lines, without regard to whether such
acquisition is permissible under state law. A bank holding company is considered to be adequately
capitalized if it meets all applicable federal regulatory capital standards. While the Riegle-Neal Act precludes a state from entirely insulating its banks from
acquisition by an out-of-state holding company, a state may still provide that a bank may not be
acquired by an out-of-state company unless the bank has been in existence for a specified number of
years, not to exceed five years. Additionally, the Federal Reserve may not approve an interstate
acquisition which would result in the acquirers controlling more than 10% of the total amount of
deposits of insured depository institutions in the United States with 30% or more of the deposits
in the home state of the target bank. A state may waive the 30% limit based on criteria that does
not discriminate against out-of-state institutions. The limitations do not apply to the initial
entry into a state by a bank holding company unless the state has a deposit concentration cap that
applies on a nondiscriminatory basis to in-state or out-of-state bank holding companies making an
initial acquisition. The Riegle-Neal Act also provides that, beginning on June 1, 1997, banks with different home
states may merge, unless a particular state opts out of the statute. Consistent with the
Riegle-Neal Act, Georgia adopted legislation in 1996 which has permitted interstate bank mergers
since June 1, 1997. In addition, beginning June 1, 1997, the Riegle-Neal Act has permitted national and state
banks to establish de novo branches in another state if there is a law in that state which applies
equally to all banks and expressly permits all out-of-state banks to establish de novo branches.
However, in 1996, Georgia adopted legislation which opts out of this provision. The Georgia
legislation provides that, with the prior approval of the DBF, after July 1, 1996, a bank may
establish three new or additional de novo branch banks anywhere in Georgia and, beginning July 1,
1998, a bank may establish new or additional branch banks anywhere in the state with prior
regulatory approval. Restrictions on Transactions with Affiliates We are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A
places limits on the amount of:  
    loans or extensions of credit to affiliates;
    investment in affiliates;
    the purchase of assets from affiliates, except for real and personal property
exempted by the Federal Reserve;
    loans or extensions of credit to third parties collateralized by the securities
or obligations of affiliates; and
    any guarantee, acceptance or letter of credit issued on behalf of an affiliate. The total amount of the above transactions is limited in amount, as to any one affiliate, to
10% of a banks capital and surplus and, as to all affiliates combined, to 20% of a banks capital
and surplus. In addition to the limitation on the amount of these transactions, each of the above
transactions must also meet specified collateral requirements. We must also comply with other
provisions designed to avoid the taking of low-quality assets. 14




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##### Table of Contents



We are also subject to the provisions of Section 23B of the Federal Reserve Act which, among
other things, prohibit an institution from engaging in the above transactions with affiliates
unless the transactions are on terms substantially the same, or at least as favorable to the
institution or its subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies. On October 21, 2002, the Federal Reserve Board approved final Regulation W that implements
Sections 23A and 23B and that became effective on April 1, 2003. The Section 23A and Section 23B restrictions may limit our ability to obtain funds from
Gwinnett Community Bank for our cash needs, including funds for the payment of dividends, interest
and operating expenses. Further, federal law prohibits a bank holding company and its subsidiaries
from engaging in certain tie-in arrangements in connection with any extension of credit, lease or
sale of property, or the furnishing of services. Gwinnett Community Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, principal shareholders and their related interests. These
extensions of credit (1) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with third parties, and (2)
must not involve more than the normal risk of repayment or present other unfavorable features. Privacy Financial institutions are required by federal law to disclose their policies for collecting
and protecting certain customer information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with nonaffiliated third parties
except under narrow circumstances, such as the processing of transactions requested by the
consumer. Additionally, financial institutions generally may not disclose consumer account numbers
to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing
to consumers. California Privacy Legislation In response to heightened public concern for online security and identity theft, the State of
California passed 15 privacy and security laws covering many different issues and industries,
imposing more stringent privacy compliance than federal law. Legislation that might impact
financial institutions beyond the California border includes, among others, Notice of Security
Breach Chapter (Bill A.B.700) and California Financial Information Privacy Act (Bill S.B.1).
Bill A.B.700 requires a business that maintains computerized data of specified personal information
to disclose security breaches to any California resident whose unencrypted personal information
was, or is reasonably believed to have been, acquired by an unauthorized person, while Bill S.B.1
prohibits financial institutions from sharing or selling personally identifiable nonpublic
information without obtaining a consumers consent. The Company and the Bank will enhance and
improve their security and privacy practices in compliance with all of the applicable privacy
legislation. Anti-Terrorism Legislation In the wake of the tragic events of September 11th, on October 26, 2001, the President signed
the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions
are subject to prohibitions against specified financial transactions and account relationships as
well as enhanced due diligence and know your customer standards in their dealings with foreign
financial institutions and foreign customers. Section 326 of the Act, and regulations implementing this Section, required the Bank to
establish by October 1, 2003, and maintain thereafter, a written Customer Identification Program
(CIP) as a part of the Banks Bank Secrecy Act program. The Bank adopted and implemented a CIP
to comply with the Act and its implementing regulations prior to the effective date of the CIP
regulations. 15




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##### Table of Contents



Consumer Credit Reporting Legislation On December 4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the
FACT Act). The FACT Act amends the Fair Credit Reporting Act (the FCRA) to require, among other
things, that:  
    financial institutions develop policies and procedures to identify potential
identity theft and, upon the request of a consumer, place a fraud alert in the
consumers credit file stating that the consumer may be the victim of identity
theft or other fraud;
    lenders using consumer reports provide a new notice to consumers if the lenders
use risk-based credit pricing programs;
    entities that furnish information to consumer reporting agencies implement
procedures and policies regarding the accuracy and integrity of the furnished
information and regarding the correction of previously furnished information that
is later determined to be inaccurate; and
    mortgage lenders disclose credit scores to mortgage loan applicants. The FACT Act also generally prohibits a business that receives consumer information from an
affiliate from using that information for solicitations for marketing purposes, unless the consumer
is first provided a notice and an opportunity to direct the business not to use the information for
such purposes. Certain FACT Act requirements are effective in February 2004, while others are not effective
until the fourth quarter of 2004, or even later. The Company and the Bank will implement policies
and procedures to comply with the applicable requirements of the FCRA, as amended by the FACT Act,
prior to the effective dates of each of the requirements. Check 21 The Check Clearing for the 21st Century Act, or Check 21 as it is
commonly known, became effective October 28, 2004. Check 21 facilitates check collection by
creating a new negotiable instrument called a substitute check, which permits, but does not
require, financial institutions to replace original checks with substitute checks or information
from the original check and process check information electronically. Financial institutions that
do use substitute checks must comply with certain notice and credit rights. Check 21 is expected
to cut the time and cost involved in physically transporting paper items and reduce the time
between the deposit of a check in a bank and payment, especially in cases in which items were not
already being delivered same-day or overnight. Proposed Legislation and Regulatory Action New regulations and statutes are regularly proposed that contain wide-ranging proposals for
altering the structures, regulations and competitive relationships of the nations financial
institutions operating in the United States. We cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which our business may be affected
by any new regulation or statute. Effect of Governmental Monetary Polices Our earnings are affected by domestic economic conditions and the monetary and fiscal policies
of the United States government and its agencies. The Federal Reserve Banks monetary policies
have had, and are likely to continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve
affect the levels of bank loans, investments and deposits through its control over the issuance of
United States government securities, its regulation of the discount rate applicable to member banks
and its influence over reserve requirements to which member banks are subject. We cannot predict
the nature or impact of future changes in monetary and fiscal policies. 
 Item 2. Description of Property. (a) Properties. Our executive offices and our principal banking office are located in approximately 25,957
square feet of office space owned by Gwinnett Community Bank and located at 2775 Buford Highway in
Duluth, Georgia. Management believes the current facility is adequate for our present
requirements. 16




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##### Table of Contents



The net book values of the building and equipment as of December 31, 2004, were $3.6 million
and $720,500, respectively. We have entered into a lease agreement for our banking office located at 3463
Lawrenceville-Suwanee Road, Suwanee, Georgia. The office is approximately 1,050 square feet and is
lease for 24 months. Management believes the facility is adequate to meet our current needs.

The annual lease payment including common area maintenance and applicable taxes totals $22,300
annually. We are in the process of obtaining a leased space at 2135 East Main Street, Snellville,
Georgia in anticipation of opening a branch facility. The office is approximately 1,400 square
feet and the lease term is 12 months. Management believes it would be prudent to build a permanent
location in Snellville as soon a practical. The annual lease payment including common area
maintenance and applicable taxes totals $24,546 annually. (b) Investment Policies. See Item 1. Description of Business above for a general description of our and Gwinnett
Community Banks investment policies and any percentage of assets limitations regarding certain
investments established by regulation or our or Gwinnett Community Banks Board of Directors,
including policies relating to investments in real estate, real estate mortgages and securities.
All of Gwinnett Community Banks investment policies are reviewed and approved by its Board of
Directors, and such policies, subject to regulatory restrictions (if any), can be changed without a
vote of shareholders. Gwinnett Community Banks investments are primarily acquired to provide
income, liquidity, investment diversity and, to a lesser extent, possible capital gain. 
 Item 3. Legal Proceedings. While we are from time to time party to various legal proceedings arising from the ordinary
course of business, management believes that there are no proceedings pending, or to our knowledge
threatened, in which an adverse decision would have a material adverse effect on our financial
condition or results of operation. 
 Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of the
fiscal year ended December 31, 2004. 
 PART II 
 Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities. There is no public trading market for Community Financial stock. There is no established
public trading market for our common stock. We are aware that our common stock traded at the
following prices during our last two full fiscal years and subsequent
period: $20.00 and $22.00 in
the first quarter of 2005; $18.00 in fourth quarter of 2004; and $15.00 in the second quarter of
2003. We had approximately 589 shareholders of record and 1,200,894 shares of common stock
outstanding as of December 31, 2004. Our ability to pay dividends to shareholders is primarily dependent upon the dividends we
receive from Gwinnett Community Bank and to a lesser extent the amount of cash on hand. Gwinnett
Community Bank may not declare or pay a cash dividend on any of its stock if the effect thereof
would cause its regulatory capital to be reduced below the regulatory capital requirements. A
fifteen-cent per share dividend to the shareholders of record on April 1, 2004 was paid on May 1,
2004. Further, the Board of Directors has approved a seventeen-cent per share dividend to the
shareholders of record on April 1, 2005 that will be paid on May 1, 2005. If we should declare
further dividends in the future, the amount of such dividends cannot be estimated at this time and
we cannot know whether such dividends would continue for future periods. 
 Item 6. Managements Discussion and Analysis or Plan of Operation. An Overview of Our Business and this Discussion and Analysis Gwinnett Community Bank was organized in January of 1999 and opened for business on October
18, 1999. 17




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##### Table of Contents



Gwinnett Community Bank is located in Duluth, Gwinnett County, Georgia, which is a fast
growing suburb of metropolitan Atlanta. Seasoned management with long-standing relationships in
the area, coupled with a strong constant economic growth pattern, has allowed Gwinnett Community
Bank rapid growth opportunities. These growth opportunities have resulted in rapid historical asset growth as depicted in the
table below: December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001Assets
    
    $
    242,453,759
    
    
    $
    197,488,450
    
    
    $
    169,055,418
    
    
    $
    123,840,266Annual Growth Rate
(prior 12 months)
    
    
    22.8
    %
    
    
    16.8
    %
    
    
    36.6
    %
    
    
    95.2
    %
 Prompted by the rapid growth and the prospects for continued growth, as well as flexibilities
afforded a bank holding company that are not available to a bank, shareholders of Gwinnett
Community Bank approved the formation of a one-bank holding company (Community Financial) and a
plan to exchange all Gwinnett Community Bank stock shares for shares of the holding company in
March 2002. Subsequent to the transaction all of the shares of Gwinnett Community Bank were owned
by the holding company, Community Financial. Beginning August 12, 2002, Community Financial offered for sale at $15 per share up to 666,667
shares of its $5 par value common stock. The offering expired on December 31, 2002, resulting in
the sale of 333,334 shares and $4,877,458 in proceeds, net of certain issuance costs of $122,552.
The proceeds of the offering were first used to repay
borrowings under a line of credit facility and $1,400,000 of the remaining proceeds was
contributed to Gwinnett Community Bank to provide necessary capital for future growth. Community Financials most recent safety and soundness examination was performed by the
Georgia State Department of Banking and Finance as of September 2003. All recommendations by the
regulatory authority that, in managements opinion, had material effects on Community Financials
liquidity, capital resources or operations were immediately implemented. The following discussion describes our results of operations for 2004 as compared to 2003 (and
2003 compared to 2002) and also analyzes our financial condition as of December 31, 2004 as
compared to December 31, 2003. Like most community banks, we derive most of our income from
interest we receive on our loans and investments. Our primary source of funds for making these
loans and investments is our deposits, on which we pay interest. Consequently, one of the key
measures of our success is our amount of net interest income, or the difference between the income
on our interest-earning assets, such as loans and investments, and the expense on our
interest-bearing liabilities, such as deposits. Another key measure is the spread between the
yield we earn on these interest-earning assets and the rate we pay on our interest-bearing
liabilities. We have included a number of tables to assist in our description of these measures. For
example, the Average Balance Sheet and Net Interest Analysis table shows the average balance
during 2004 and 2003 of each category of our assets and liabilities, as well as the yield we earned
or the rate we paid with respect to each category. A review of this table shows that our loans
typically provide higher interest yields than do other types of interest earning assets, which is
why we intend to channel a substantial percentage of our earning assets into our loan portfolio.
Similarly, the Changes in Interest Income and Expense table helps demonstrate the impact of
changing interest rates and changing volume of assets and liabilities during the years shown. We
also track the sensitivity of our various categories of assets and liabilities to changes in
interest rates, and we have included a Interest Rate Gap Sensitivity table to help explain this.
Finally, we have included a number of tables that provide detail about our investment securities,
our loans, and our deposits and other borrowings. Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses
to absorb probable losses on existing loans that may become uncollectible. We establish and
maintain this allowance by charging a provision for loan losses against our operating earnings. In
the following section we have included a detailed discussion of this process, as well as several
tables describing our allowance for loan losses and the allocation of this allowance among our
various categories of loans. 18




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##### Table of Contents



In addition to earning interest on our loans and investments, we earn income through fees and
other expenses we charge to our customers. We describe the various components of this noninterest
income, as well as our noninterest expense, in the following discussion. The following discussion and analysis also identifies significant factors that have affected
our financial position and operating results during the periods included in the accompanying
financial statements. We encourage you to read this discussion and analysis in conjunction with
the consolidated financial statements and the related notes and the other statistical information
also included in this report. Executive Summary In 2004, the Company focused on expansion and growth. Our new branch located in Suwanee,
Georgia opened in March 2004. At year-end, with nearly one year of operations completed the branch
contributed nearly $10 million in deposits and services $16 million in loans. The branch office was
opened in a temporary storefront facility. This contributed to the relatively low operating costs
and reduced the drag on earnings typically expected with expansion. The Suwanee branch has grown to the extent that a larger permanent facility is necessary and
the Company is in the planning stages of this project. It is our intention the facility is
completed by the branchs second anniversary. We are also pursuing opportunities in other market
areas and have filed an application with the Georgia State Department of Banking and with the FDIC
for planned expansion into the Snellville market. We expect to open a temporary facility early in
the second quarter 2005. Our recently formed SBA (Small Business Administration) lending department is moving closer to
achieving certified lender status. The SBA must underwrite these loans until we receive our
certification. We anticipate we will
obtain this status in the second quarter 2005. The lack of certification reduces the number
of SBA loans that could be processed, thereby limiting the revenue from the new product line until
certification is obtained. We also began a partnership with Guaranty Mortgage Corporation in October 2004 due to the
retirement of our in-house mortgage loan originator in July 2004. This cost/profit sharing
arrangement contributed $18,000 of the $59,000 in mortgage origination income in 2004. The
retirement of our in-house lender coupled with the start up of the new venture and rising home
mortgage rates hampered the earnings in 2004. Mortgage origination revenue decreased $128,000 or
68% in 2004 as compared to 2003. We expect revenue to increase in 2005, but not to the same level
we enjoyed in the midst of the recent refinance boom. Recent increases in the prime lending rate
impact mortgage interest rates and could cause a reduction in mortgage origination income. The area of greatest uncertainty in 2005 is the economy. A sharp decline in the economy could
affect the housing market and therefore have a large impact on the earnings of the Company, as much
of our loan portfolio is concentrated in loans associated with the housing industry. An additional area of uncertainty continues to be the cost and impact of the Sarbanes-Oxley
Act of 2002. Audit costs will increase as our audit procedures will have to be expanded to include
testing necessary for our external accountants to report on our assessment of our internal
controls. In addition, we have engaged our internal audit firm to provide the company with
assistance in the documentation of the controls within the organization, including: manual
controls, computer controls, security controls, fraud programs, the financial reporting process and
Audit Committee oversight. Compliance with Section 404 of the Sarbanes-Oxley Act requires many of
the Companys resources including managements time. Recent Accounting Pronouncements Meaning of Other-Than-Temporary-Impairment In March 2004, The Emerging Issues Task Force (EITF) issued EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1). EITF
03-1 provides guidance for evaluating whether an investment is other-than-temporarily impaired.
The disclosure guidance was fully effective for other-than-temporary impairment evaluations made in
reporting periods ending after June 15, 2004, whereas the recognition and measurement guidance has
been deferred. The disclosures required by EITF 03-1 are included in Note 2 to the consolidated
financial statements. The Bank did not recognize an impairment loss on any investment in 2004 or
2003. 19




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##### Table of Contents



Share-Based Payment In December 2004, the FASB revised SFAS No. 123 (SFAS No. 123 ®). SFAS No. 123 ®,
Share-Based Payment, requires all share-based payments to employees and directors, including grants
of employee stock options, to be recognized in the financial statements based on their fair values.
Pro forma disclosure is no longer an alternative to financial statement recognition. For the
Company, SFAS No. 123 ® is effective beginning January 1, 2006. Since the Company currently has
no unvested share-based plans, the adoption of these requirements will have no impact on the
Companys financial statements. Critical Accounting Policies The accounting and financial reporting policies of Community Financial conform to accounting
principles generally accepted in the United States of America and to general practices within the
banking industry. Following is a description of the accounting policies applied by Community
Financial, which are deemed critical. In determining which accounting policies are critical in
nature, Community Financial has identified the policies that require significant judgment or
involve complex estimates. The application of these policies has a significant impact on Community
Financials financial statements. Financial results could differ significantly if different
judgments or estimates are applied. 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: (1) Statement of
Financial Accounting Standards (SFAS) No. 5 Accounting for Contingencies, which requires
that losses be accrued when they are probable of occurring and estimable, and (2) SFAS No.
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. The
use of these values is inherently subjective and our actual losses could be greater or less
than the estimates. Our allowance for loan losses has two basic components: (1) specific loss estimates for
individually classified and impaired loans, and (2) general loss estimates on loans for
which no impairment has been identified and large groups of smaller balance homogeneous
loans. Specific loss estimates on individual loans include subjective evaluations related
to secondary sources of repayment for the loan which are principally collateral liquidation.
The general loss allocations use historical loss ratio experience, which may not be
indicative of the actual losses present in the loan portfolio at a given point in time. While the basic methodology of our loan loss allowance estimation process has not changed,
we continuously re-evaluate the use of historical loss factors, national and local economic
trends, credit concentrations and other relevant factors in determining the adequacy of the
allowance for loan loss. This estimation process associated with the allowance for loan losses can have significant
effects in the estimated loan loss expense of a given period. Generally, the allowance for
loan losses increases as the outstanding balance of loans increase or the level of
classified or impaired loans increases. Loans or portions of loans that are deemed
uncollectible are charged against and reduce the allowance. Because Community Financial has a relatively short operating history, historical trends
specific to Community Financial do not provide sufficient information to judge the adequacy
of the allowance for loan losses. Therefore, management considers industry trends, peer
comparisons and regulatory positions in addition to historical experience in its evaluation.
See note 1 to the consolidated financial statements for further discussion of managements
processes for estimating and recording an adequate allowance for loan losses. Forward-Looking Statements This discussion contains forward-looking statements that involve risks and uncertainties.
Although Community Financial believes that the assumptions underlying the forward-looking
statements contained in the discussion are reasonable, any of the assumptions could be inaccurate,
and therefore, no assurance can be made that any of the forward-looking statements included in this
discussion will be accurate. Factors that could cause actual results to differ from results
discussed in forward-looking statements include, but are not limited to: economic conditions (both
generally and in the markets where Community Financial operates); competition from other providers
of financial services offered by Community Financial; government regulation and legislation;
changes in interest rates; material unforeseen changes in the financial stability and liquidity of
Community Financials credit customers; all of which are difficult to predict and which 20




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##### Table of Contents



may be
beyond the control of Community Financial. Community Financial undertakes no obligation to revise
forward-looking statements to reflect events or changes after the date of this discussion or to
reflect the occurrence of unanticipated events. Statements of Earnings Review Net earnings were $2,125,154 in 2004, compared to $1,742,119 in 2003. Diluted net earnings per
share were $1.64 for 2004, compared to $1.36per share reported in 2003. Return on average assets
and return on average stockholders equity for 2004 was .94% and 12.70%, respectively, compared
with .96% and 12.20%, respectively, for 2003. Net interest income increased by $1.66 million or 24.98% in 2004 driven by an increase in the
volume of loans, an increase in interest rates, and a lag in the increase of interest rates on
deposits. Net interest income at December 31, 2004, was $8.33 million compared to $6.66 million in
2003. Net yield (tax equivalent) on interest earning assets (3.99% in 2004 and 3.93% in 2003)
increased by .06 basis points in 2004 from 2003 due to the increases in the interest rates of 100
basis points in 2004 and an increased focus on avoiding thinly priced loan transactions. Community Financials earnings depend to a large degree on net interest income, which is the
difference between the interest income received from its investments (such as loans, investment
securities, federal funds sold, etc.) and the interest expense, which is paid on deposits and other
liabilities. The banking industry uses two key ratios to measure relative profitability of net interest
income. The net interest rate spread measures the difference between the average yield on interest
earning assets and the average rate paid on interest bearing liabilities. The interest rate spread
eliminates the impact of non-interest bearing deposits and gives a direct perspective on the effect
of market interest rate movements. The net interest margin is defined as net interest income as a
percent of average total interest earning assets and takes into account the positive impact of
investing noninterest-bearing deposits. The fully tax equivalent net interest spread was 3.55% in 2004 and 3.53% in 2003, while the
net interest margin was 3.99% in 2004 and 3.93% in 2003. The net interest margin has begun to
improve in the past year as interest rates have increased. Management believes interest rates will
continue to rise moderately in the foreseeable
future. The given make up of our balance sheet indicates the Company is slightly asset
sensitive and slow increases in the interest rate will result in increased revenue. If interest
rates continue to rise, maturing liabilities will re-price causing net interest margins to tighten.
The Bank has continued to see an increase in net interest income, which was driven by volume
increases in loans. The following table shows, for the past three years, the relationship between interest income
and interest expense and the average balances of interest earning assets and interest bearing
liabilities. Tax exempt investment securities are shown on a tax-equivalent basis. 21




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##### Table of Contents



Table 1
Average Balance Sheets and Net Interest Analysis(dollars in thousands) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssets:Interest earnings assets:Loans (including loan fees)
    
    $
    172,613
    
    
    
    11,687
    
    
    
    6.77
    %
    
    
    136,679
    
    
    
    9,675
    
    
    
    7.08
    %
    
    
    111,206
    
    
    
    8,682
    
    
    
    7.81
    %Investment securities:Taxable
    
    
    28,433
    
    
    
    1,230
    
    
    
    4.33
    %
    
    
    20,619
    
    
    
    906
    
    
    
    4.39
    %
    
    
    16,238
    
    
    
    975
    
    
    
    6.00
    %Tax-exempt
    
    
    6,933
    
    
    
    389
    
    
    
    5.61
    %
    
    
    5,133
    
    
    
    279
    
    
    
    5.43
    %
    
    
    1,021
    
    
    
    71
    
    
    
    6.95
    %Interest bearing deposits with
other banks
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    3
    
    
    
    7.50
    %Federal funds sold
    
    
    9,025
    
    
    
    106
    
    
    
    1.17
    %
    
    
    9,610
    
    
    
    103
    
    
    
    1.07
    %
    
    
    7,697
    
    
    
    120
    
    
    
    1.56
    %Total interest earning assets
    
    
    217,017
    
    
    
    13,412
    
    
    
    6.18
    %
    
    
    172,045
    
    
    
    10,963
    
    
    
    6.37
    %
    
    
    136,202
    
    
    
    9,851
    
    
    
    7.23
    %Other non-interest earnings assets
    
    
    9,,343
    
    
    
    
    
    
    
    
    
    
    
    9,485
    
    
    
    
    
    
    
    
    
    
    
    8,589Total assets
    
    $
    226,360
    
    
    
    
    
    
    
    
    
    
    
    181,530
    
    
    
    
    
    
    
    
    
    
    
    144,791Liabilities and stockholders equity:Interest-bearing liabilities:Deposits:Interest-bearing demand and
savings
    
    $
    41,033
    
    
    
    425
    
    
    
    1.04
    %
    
    
    38,782
    
    
    
    441
    
    
    
    1.14
    %
    
    
    35,626
    
    
    
    715
    
    
    
    2.01
    %Time
    
    
    139,101
    
    
    
    4,327
    
    
    
    3.11
    %
    
    
    109,144
    
    
    
    3,757
    
    
    
    3.44
    %
    
    
    84,447
    
    
    
    3,544
    
    
    
    4.20
    %Federal funds purchased and
securities sold under repurchase
agreements
    
    
    987
    
    
    
    11
    
    
    
    1.11
    %
    
    
    800
    
    
    
    6
    
    
    
    .75
    %
    
    
    227
    
    
    
    2
    
    
    
    .88
    %Total interest-bearing
liabilities
    
    
    181,121
    
    
    
    4,763
    
    
    
    2.63
    %
    
    
    148,726
    
    
    
    4,204
    
    
    
    2.83
    %
    
    
    120,300
    
    
    
    4,261
    
    
    
    3.54
    %Non-interest bearing deposits
    
    
    23,643
    
    
    
    
    
    
    
    
    
    
    
    18,058
    
    
    
    
    
    
    
    
    
    
    
    14,089Other liabilities
    
    
    4,860
    
    
    
    
    
    
    
    
    
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    358Stockholders equity
    
    
    16,736
    
    
    
    
    
    
    
    
    
    
    
    14,279
    
    
    
    
    
    
    
    
    
    
    
    10,044Total liabilities and
stockholders equity
    
    $
    226,360
    
    
    
    
    
    
    
    
    
    
    
    181,530
    
    
    
    
    
    
    
    
    
    
    
    144,791Excess of interest-earning assets
over
interest-bearing liabilities
    
    $
    35,.896
    
    
    
    
    
    
    
    
    
    
    
    23,319
    
    
    
    
    
    
    
    
    
    
    
    15,902Ratio of interest-earning assets
to interest-bearing liabilities
    
    
    119.82
    %
    
    
    
    
    
    
    
    
    
    
    115.68
    %
    
    
    
    
    
    
    
    
    
    
    113.22
    %Net interest income
    
    
    
    
    
    
    8,649
    
    
    
    
    
    
    
    
    
    
    
    6,759
    
    
    
    
    
    
    
    
    
    
    
    5,590Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.55
    %
    
    
    
    
    
    
    
    
    
    
    3.53
    %
    
    
    
    
    
    
    
    
    
    
    3.69
    %Net interest yield on interest
earning assets
    
    
    
    
    
    
    
    
    
    
    3.99
    %
    
    
    
    
    
    
    
    
    
    
    3.93
    %
    
    
    
    
    
    
    
    
    
    
    4.10
    %
 Non-accrual loans and the interest income that was recorded on these loans, if any, are
included in the yield calculation for loans in all periods reported. Interest income on loans for the years end December 31, 2004 and 2003 includes loan fees in
the amount of $1,004,973 and $732,661, respectively. The following table shows the relative impact on net interest income of changes in the average
outstanding balances (volume) of interest earning assets and interest bearing liabilities and the
rates earned and paid by Community Financial on such assets and liabilities on a tax equivalent
basis. Variances resulting from a combination of changes in rate and volume are allocated in
proportion to the absolute dollar amounts of the change in each category. 22




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##### Table of Contents



Table 2 Changes in Interest Income and Expense  (in thousands)
 Increase (decrease) due to changes in:2004 over 2003
    
    
    2003 over 2002Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest income on:Loans (including loan fees)
    
    $
    2,411
    
    
    
    (399
    )
    
    
    2,012
    
    
    
    1,676
    
    
    
    (683
    )
    
    
    993Investment securities:Taxable
    
    
    338
    
    
    
    (14
    )
    
    
    324
    
    
    
    228
    
    
    
    (297
    )
    
    
    (69
    )Tax-exempt
    
    
    100
    
    
    
    10
    
    
    
    110
    
    
    
    220
    
    
    
    (12
    )
    
    
    208Interest bearing deposits with other banks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    (3
    )Federal funds sold
    
    
    (5
    )
    
    
    8
    
    
    
    3
    
    
    
    66
    
    
    
    (83
    )
    
    
    (17
    )Total interest earning assets
    
    
    2,844
    
    
    
    (395
    )
    
    
    2,449
    
    
    
    2,189
    
    
    
    (1,077
    )
    
    
    1,112Interest expense on:Deposits:Interest-bearing demand and savings
    
    
    30
    
    
    
    (46
    )
    
    
    (16
    )
    
    
    70
    
    
    
    (344
    )
    
    
    (274
    )Time
    
    
    878
    
    
    
    (308
    )
    
    
    570
    
    
    
    553
    
    
    
    (340
    )
    
    
    213Federal funds purchased repurchase
agreements
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    4
    
    
    
    
    
    
    
    4Total interest-bearing liabilities
    
    
    910
    
    
    
    (351
    )
    
    
    559
    
    
    
    627
    
    
    
    (684
    )
    
    
    (57
    )Increase (decrease) in net interest income
    
    $
    1,934
    
    
    
    (44
    )
    
    
    1,890
    
    
    
    1,562
    
    
    
    (393
    )
    
    
    1,169
 Other operating income in 2004 of $630,000 decreased $79,000 from the 2003 total of $709,000
or 11.03%. The decrease in earnings was primarily caused by the decrease in mortgage origination
income. In July 2004 the Companys mortgage originator retired. A new partnership was forged with
Guaranty Mortgage Corporation in October 2004. An increase in mortgage interest rates coupled with
the transition resulted in reduced earnings of approximately $128,000. This was partially offset
by increased revenue resulting from our partnership with Investment Professionals, Inc. for
investment services which provided earnings totaling $23,000, coupled with increased revenue from
rental of available office space in our main office building totaling $26,000. Other expenses increased approximately $912,000 in 2004 or 21.25% over the 2003 balance of
$4.3 million. Salaries increased by approximately $680,000 due to merit increases and the
increased number of personnel required. In addition, other operating expenses increased $98,000.
The following table details changes in other operating expense from 2004 to 2003: Table 3
Changes in Other Expense Increase/2004
    
    
    2003
    
    
    (Decrease)Business Development
    
    $
    167,383
    
    
    
    164,464
    
    
    
    2,919Legal and Professional Fees
    
    
    299,215
    
    
    
    273,603
    
    
    
    25,612Charitable Contributions
    
    
    29,659
    
    
    
    45,033
    
    
    
    (15,374
    )Advertising and Public Relations
    
    
    109,014
    
    
    
    95,599
    
    
    
    13,415Stationary and Supplies
    
    
    85,952
    
    
    
    75,325
    
    
    
    10,627Directors Fees
    
    
    48,600
    
    
    
    46,600
    
    
    
    2,000Various Operating Expenses
    
    
    437,656
    
    
    
    380,059
    
    
    
    57,597Data Processing
    
    
    281,838
    
    
    
    255,661
    
    
    
    26,177County and City Taxes
    
    
    144,030
    
    
    
    169,173
    
    
    
    (25,143
    )Total Other Expense
    
    $
    1,603,347
    
    
    
    1,505,517
    
    
    
    97,830
 Legal and professional fees increased by $25,612 due to increased expenses primarily
attributable to compliance with Sarbanes-Oxley Act Section 404 preparation work. Advertising as
well as the various operating expenses increased primarily due to the opening of our new branch
office in Suwanee, Georgia. Also included in the various operating expense was an increase in
security costs of approximately $12,000 due to the increase in bank robberies in our vicinity. The
increase in data processing costs were associated with increased volume and the addition of our new
branch office. 23




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##### Table of Contents



For the years ended December 31, 2004, 2003 and 2002 the effective income tax rate was 34%,
35% and 36% respectively, as state income tax more than offset the effects of tax-exempt income.
For more information on Community Financials income taxes, see note 8 to the consolidated
financial statements. Balance Sheet Review During 2004, average total assets increased $44.8 million (24.7%) over 2003. Average deposits
increased $37.8 million (22.8%) in 2004 over 2003. Average loans increased $36.0 million (26.3%) in
2004 over 2003. In 2003, average total assets increased $36.7 million (25.4%) over 2002. Average
deposits increased $31.8 million (23.7%) in 2003 over 2002. Total assets at December 31, 2004, were $242.5 million, representing a $45.0 million (22.8%)
increase from December 31, 2003. Total deposits increased $36.7 million (20.4%) from 2003 to 2004
while total gross loans increased $37.7 million (24.4%) during 2004. Time deposits increased $26.9
million from 2003 to 2004 while all other deposit accounts increased $9.7 million in 2004. As
Community Financial continues to grow, loan demand has remained strong. Loan increases were funded
principally with increases in deposit accounts. Total assets at December 31, 2003, were $197.5 million, representing a $28.4 million (16.82%)
increase from December 31, 2002. Total deposits increased $26.7 million (17.4%) from 2002 to 2003
while total gross loans increased $25.6 million (19.9%) during 2003. Time deposits increased $22.9
million from 2002 to 2003 while all other deposit accounts increased $3.7 million in 2003. Investments The investment portfolio consists of debt securities and to a lesser extent equity securities,
which provide Community Financial with a source of liquidity and a long-term, relatively stable
source of income. Additionally, the investment portfolio provides a balance to interest rate and
credit risk in other categories of the balance sheet while providing a vehicle for the investment
of available funds, furnishing liquidity, and supplying securities to pledge as required collateral
for certain deposits. Table 4
Investment Portfolio
(in thousands) The following table shows the carrying value of Community Financials securities, by security
type, as of December 31, 2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002United States treasuries and agencies
    
    $
    22,625
    
    
    
    14,550
    
    
    
    9,319Mortgage-backed securities
    
    
    4,021
    
    
    
    4,065
    
    
    
    6,603Municipal securities
    
    
    7,955
    
    
    
    5,241
    
    
    
    3,036Corporate securities
    
    
    1,841
    
    
    
    2,391
    
    
    
    1,543Trust Preferred securities
    
    
    1,777
    
    
    
    1,763
    
    
    
    500$
    38,219
    
    
    
    28,010
    
    
    
    21,001Other investments:The Bankers Bank stock
    
    $
    100
    
    
    
    100
    
    
    
    100Federal Home Loan Bank stock
    
    
    395
    
    
    
    170
    
    
    
    Equity in CFHC Capital Trust I
    
    
    171
    
    
    
    
    
    
    
    $
    666
    
    
    
    270
    
    
    
    100
 The following table presents the expected maturity of the total securities by maturity date
and average yields based on amortized cost at December 31, 2004. The composition and
maturity/repricing distribution of the securities portfolio is subject to change depending on rate
sensitivity, capital and liquidity needs. At December 31, 2004, there were no investment securities of any issuer other than the U.S.
government or its agencies or corporations that were in excess of 10% of stockholders equity. 24




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##### Table of Contents



Table 5
Expected Maturities of Securities
(in thousands) United StatesTreasuries
    
    
    Mortgage-
    
    
    
    
    
    
    Trust
    
    
    
    
    
    
    WeightedMaturities at
    
    and
    
    
    Backed
    
    
    Corporate
    
    
    Preferred
    
    
    
    
    
    
    AverageDecember 31, 2004
    
    Agencies
    
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    Municipals
    
    
    YieldsAfter 1 through 5 years
    
    $
    8,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.51
    %After 5 through 10 years
    
    
    12,179
    
    
    
    
    
    
    
    1,504
    
    
    
    
    
    
    
    1,617
    
    
    
    4.84
    %After 10 years
    
    
    1,991
    
    
    
    3,981
    
    
    
    300
    
    
    
    1,757
    
    
    
    6,291
    
    
    
    4.77
    %$
    22,669
    
    
    
    3,981
    
    
    
    1,804
    
    
    
    1,757
    
    
    
    7,908
 Mortgage backed securities are included in the maturities categories in which they are
anticipated to be repaid based on scheduled maturities. Yields are calculated on a tax equivalent
yield basis. Table 6
Loan Portfolio
(in thousands) The following table presents loans by type at the end of each of the last five years. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial
    
    $
    43,172
    
    
    
    37,479
    
    
    
    32,656
    
    
    
    20,852
    
    
    
    9,307Real estate
    
    
    135,178
    
    
    
    105,708
    
    
    
    84,001
    
    
    
    68,244
    
    
    
    19,286Consumer
    
    
    13,408
    
    
    
    10,906
    
    
    
    11,796
    
    
    
    7,852
    
    
    
    4,036191,758
    
    
    
    154,093
    
    
    
    128,453
    
    
    
    96,948
    
    
    
    32,629Less: Unearned loan fees
    
    
    516
    
    
    
    304
    
    
    
    251
    
    
    
    185
    
    
    
    55Allowance for loan losses
    
    
    2,198
    
    
    
    1,664
    
    
    
    1,599
    
    
    
    1,132
    
    
    
    489Loans, net
    
    $
    189,044
    
    
    
    152,125
    
    
    
    126,603
    
    
    
    95,631
    
    
    
    32,085
 The following tables set forth the maturity distribution of all loans, including the interest
rate sensitivity as of December 31, 2004. Table 7
Loan Portfolio Maturity
(in thousands) Maturity
    
    Commercial
    
    
    Real Estate
    
    
    Consumer
    
    
    TotalWithin 1 year
    
    $
    21,428
    
    
    
    69,838
    
    
    
    5,318
    
    
    
    96,5841 to 5 years
    
    
    19,953
    
    
    
    55,609
    
    
    
    4,343
    
    
    
    79,905After 5 years
    
    
    1,791
    
    
    
    9,731
    
    
    
    3,747
    
    
    
    15,269Totals
    
    $
    43,172
    
    
    
    135,178
    
    
    
    13,408
    
    
    
    191,758
 Fixed
    
    
    VariableInterest
    
    
    InterestRates
    
    
    Rates
    
    
    TotalCommercial:Within 1 year
    
    $
    11,530
    
    
    
    9,898
    
    
    
    21,4281 to 5 years
    
    
    15,309
    
    
    
    4,644
    
    
    
    19,953After 5 years
    
    
    744
    
    
    
    1,047
    
    
    
    1,79127,583
    
    
    
    15,589
    
    
    
    43,172Real Estate:Within 1 year
    
    
    10,255
    
    
    
    59,583
    
    
    
    69,8381 to 5 years
    
    
    27,555
    
    
    
    28,054
    
    
    
    55,609After 5 years
    
    
    
    
    
    
    9,731
    
    
    
    9,73137,810
    
    
    
    97,368
    
    
    
    135,178
 25




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##### Table of Contents



Fixed
    
    
    VariableInterest
    
    
    InterestRates
    
    
    Rates
    
    
    TotalConsumer:Within 1 year
    
    
    5,123
    
    
    
    196
    
    
    
    5,3191 to 5 years
    
    
    4,099
    
    
    
    244
    
    
    
    4,343After 5 years
    
    
    291
    
    
    
    3,455
    
    
    
    3,7469,513
    
    
    
    3,895
    
    
    
    13,408$
    74,906
    
    
    
    116,852
    
    
    
    191,758
 The provision for loan losses in 2004 was $512,054 compared to $400,292 in 2003. The
provision for loan losses continues to reflect managements estimate of probable loan losses
inherent in the portfolio and the creation of an allowance for loan losses adequate to absorb such
losses. The allowance for loan losses represented approximately 1.15% and 1.08% of total loans
outstanding at December 31, 2004 and 2003, respectively. In 2004, we had net recoveries of
$22,000. We had net charge-offs $335,000 and $146,000 in 2003 and 2002, respectively. Management
believes that these levels of allowance are appropriate based on Gwinnett Community Banks loan
portfolio and the current economic conditions. Total charge-offs for 2004 totaled $74,000 while recoveries totaled $96,000. Most of the
recovered losses were due to the complete recovery of a loan charged off in 2003 on an equipment
rental company. In addition, recoveries on consumer loans remained strong. Because Community Financial does not have a long operating history, no historical loan loss
ratios have been established. In substitution for the lack of historical loan loss ratios,
Community Financial uses peer loss ratios and peer allowance for loan losses to total ratios as a
component in its loan loss allowance adequacy test which is done monthly. Using these peer
statistics, provision for loan losses increases as the loan balances increase, which is the primary
reason for the increase in the allowance in 2004, 2003 and 2002. Additionally, problem loans also
caused the provision for loan losses to increase in 2003 and 2002. Additional considerations in
the adequacy test for the allowance for loan losses include industry and other concentrations in
the loan portfolio, current period delinquencies and specific analysis for potential problem loans.
As concentrations in the loan portfolio and delinquencies rise, the provision for loan losses will
also increase to maintain a higher level of allowance for loan losses to reflect an increasing
inherent risk of loss in the loan portfolio. No future negative trends in non-performing loans are
anticipated to affect the level of the allowance. Management believes that the level of the
allowance is appropriate based upon the loan portfolio and current economic conditions. Since
beginning business in 1999, Community Financial has maintained a consistent methodology for
assessing the adequacy of the allowance for loan losses. Management is in the process of refining
and enhancing its methodology going forward to migrate to using more of the Banks historical loss
data. In determining the adequacy of the allowance for loan losses, management uses a loan grading
system that rates loans in nine different categories. Grades five through nine are assigned
allocations of loss based on managements estimate of potential loss, which is generally based on
discounted, collateral deficiencies or loss percentages by grade used by the federal bank
regulators. Loans graded one through four are stratified by type and allocated loss ranges based
on peer group loss experience, regulatory guidelines and the Banks loss history. The Bank
augments this internal loan grading system by external independent loan reviews. The combination
of these results are compared monthly to the recorded allowance for loan losses and material
differences are adjusted by increasing or decreasing the provision for loan losses. Loans are
monitored to ensure early identification of repayment problems so
that adequate allowances can be made through the provision for loan losses. The formal
allowance for loss adequacy test is performed at month end. Specific amounts of loss are estimated
on problem loans and historical loss percentages (using peer group loss ratios) are applied to the
balance of the portfolio using certain portfolio stratifications. Additionally, the evaluation
takes into consideration such factors as changes in the nature and volume of the loan portfolio,
current economic conditions, external loan review, regulatory examination results and the existence
of loan concentrations. Managements judgment in determining the adequacy of the allowance is based on evaluations of
the collectibility of loans. These evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, current economic conditions that may affect the
borrowers ability to pay, overall portfolio quality, and review of specific problem loans. The
results are compared to the recorded allowance for loan losses and material differences are
adjusted by increasing or decreasing the provision for loan losses. Management believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, regulators, as an integral part of
their examination process, periodically review Community Financials allowance for loan losses.
Such regulators may require Community Financial to recognize additions to the allowance based on
their judgments of information available to them at the time of their examination. 26




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##### Table of Contents



Community Financial does not allocate the allowance for loan losses to various loan
categories. The following table presents a summary of changes in the allowance for loan losses for each of
the past five years. Table 8
Allowance for Loan Losses(dollars in thousands) For the years ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance at beginning of year
    
    $
    1,664
    
    
    
    1,599
    
    
    
    1,132
    
    
    
    489
    
    
    
    57Charge-offs:Commercial
    
    
    (3
    )
    
    
    (293
    )
    
    
    (130
    )
    
    
    143
    
    
    
    Real estate
    
    
    (68
    )
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    (3
    )
    
    
    (34
    )
    
    
    (19
    )
    
    
    8
    
    
    
    (74
    )
    
    
    (369
    )
    
    
    (149
    )
    
    
    151
    
    
    
    Recoveries:Commercial
    
    
    85
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    Real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    11
    
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    96
    
    
    
    34
    
    
    
    3
    
    
    
    2
    
    
    
    Net charge-offs/Recoveries
    
    
    22
    
    
    
    (335
    )
    
    
    (146
    )
    
    
    (149
    )
    
    
    Additions charged to operations
    
    
    512
    
    
    
    400
    
    
    
    613
    
    
    
    792
    
    
    
    432Balance at end of year
    
    $
    2,198
    
    
    
    1,664
    
    
    
    1,599
    
    
    
    1,132
    
    
    
    489Ratio of net charge-offs during
the period to average loans
outstanding during the period
    
    
    (.01
    %)
    
    
    .25
    %
    
    
    .13
    %
    
    
    .24
    %
    
    
    
 The following summarizes past due and non-accrual loans for the periods presented: 2004
    
    
    2003
    
    
    2002Other real estate
    
    $
    286,496
    
    
    
    34,600
    
    
    
    Accruing loans 90 days or more past due
    
    $
    
    
    
    
    
    
    
    
    Non-accrual loans
    
    $
    110,487
    
    
    
    560,000
    
    
    
    102,000Interest on non-accrual loans which
would have been reported
    
    $
    16,078
    
    
    
    55,100
    
    
    
    5,500
 As of December 31, 2004, non-performing assets were $397,000 compared to $594,500 at December
31, 2003, a decrease of $197,500 or 33.2%. The decrease was due primarily to removing the
equipment company loan ($436,000) from non-accrual status as the collateral was liquidated; and
adding a borrower to other real estate through foreclosure proceedings. This borrower declared
bankruptcy in the fall of 2004. The total balance attributable to this borrower totals $248,000.
The collateral consists of vacant lots which the Company anticipates selling. A loan is placed on non-accrual status when, in managements judgment, the collection of
interest appears doubtful. As a result of managements ongoing review of the loan portfolio, loans
are classified as non-accrual generally when they are past due in principal or interest payments
for more than 90 days or it is otherwise not reasonable to expect collection of principal and
interest under the original terms. Exceptions are allowed for 90-day past due loans when such
loans are well secured and in process of collection. Generally, payments received on non-accrual
loans are applied directly to principal. 27




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##### Table of Contents



Deposits Time deposits of $100,000 and greater totaled $68.5 million at December 31, 2004, compared to
$54.8 at year-end 2003. The following table sets forth the scheduled maturities of time deposits
of $100,000 and greater at December 31, 2004. Table 9
Time Deposits $100,000 and Greater
(in thousands) Within 3 months
    
    $
    12,189After 3 through 6 months
    
    
    12,691After 6 through 12 months
    
    
    21,170After 12 months
    
    
    22,416Total
    
    $
    68,466
 Included in these time deposits of $100,000 and greater are brokered deposits of $10,305,000
of which $4,410,000 matures within one year, $1,895,000 matures in 2006 and the remaining
$4,000,000 matures in 2007. Liquidity Community Financial must maintain, on a daily basis, sufficient funds to cover the withdrawals
from depositors accounts and to supply new borrowers with funds. To meet these obligations,
Community Financial keeps cash on hand, maintains account balances with its correspondent banks,
and purchases and sells federal funds and other short-term investments. Asset and liability
maturities are monitored in an attempt to match these to meet liquidity needs. It is the policy of
Community Financial to monitor its liquidity to meet regulatory requirements and their local
funding requirements. Community Financial maintains relationships with correspondent banks that can provide funds on
short notice, if needed. Presently, Community Financial has arrangements with a commercial bank
for short term unsecured advances up to $9.3 million. Cash and cash equivalents decreased $3.1 million to a total of $6.6 million at December 31,
2004, as cash flows provided by financing and operating activities were out-paced by amounts used
in investing activities. Cash inflows from operations totaled $2.7 million in 2004, while inflows
from financing activities totaled $42.5 million, most of which were net deposit increases during
2004 of $36.7 million. Investing activities used $48.4 million of cash and cash equivalents, principally composed of
net advances of loans to customers of $37.4 million and purchases of investment securities of $27.3
million during 2004, offset by $17.1 million, net proceeds, from investment liquidations. See the consolidated statements of cash flows in the financial statements for a more complete
analysis of cash flows. Capital Resources The following tables present Community Financials and Gwinnett Community Banks regulatory
capital position at December 31, 2004: Table 10
Capital Ratios 2004
    
    
    2003Consol.
    
    
    Bank
    
    
    Consol.
    
    
    BankTotal Capital
    
    
    12.17
    %
    
    
    12.09
    %
    
    
    10.46
    %
    
    
    10.37
    %Total Capital minimum requirement
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %Excess
    
    
    4.17
    %
    
    
    4.09
    %
    
    
    2.46
    %
    
    
    2.37
    %Tier 1 Capital
    
    
    11.13
    %
    
    
    11.05
    %
    
    
    9.48
    %
    
    
    9.39
    %
 28




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##### Table of Contents



2004
    
    
    2003Consol.
    
    
    Bank
    
    
    Consol.
    
    
    BankTier 1 Capital minimum requirement
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Excess
    
    
    7.13
    %
    
    
    7.05
    %
    
    
    5.48
    %
    
    
    5.39
    %Tier 1 Capital to adjusted total assets
(Leverage Ratio)
    
    
    9.76
    %
    
    
    9.70
    %
    
    
    8.31
    %
    
    
    8.23
    %Minimum leverage requirement
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Excess
    
    
    5.76
    %
    
    
    5.70
    %
    
    
    4.31
    %
    
    
    4.23
    %
 For a more complete discussion of the actual and required ratios of Community Financial, see
note 12 of the financial statements. Average equity to average assets was 7.39% in 2004, 7.87% in 2003, and 6.94% in 2002. A
dividend was declared in the amount of seventeen cents per share for the shareholders of record
April 1, 2005 to be paid May 1, 2005. In 2004, a dividend was paid to shareholders of record April
1, 2004 in the amount of fifteen cents per share. On March 26, 2004, the Company issued, through a wholly owned Delaware statutory trust, CFHC
Capital Trust I (the Trust), $5,500,000 of preferred beneficial interests in the Companys
unsecured junior subordinated debentures (trust preferred securities) that qualify as Tier I
capital under Federal Reserve Board guidelines within certain limitations. The proceeds from the
trust preferred are sufficient to maintain our well capitalized standing for the foreseeable
future. Asset/Liability Management It is our objective to manage assets and liabilities to provide a satisfactory, consistent
level of profitability within the framework of established cash, loan, investment, borrowing and
capital policies. Certain officers are charged with the responsibility for monitoring policies and
procedures that are designed to ensure acceptable composition of the asset/liability mix. It is
the overall philosophy of management to support asset growth primarily through growth of core
deposits, which include deposits of all categories made by local individuals, partnerships and
corporations. The bank has a concentration of certificates of deposit that contain a stated
maturity date. It is our objective to manage liquidity within a range of 17% to 25%. In 2004 the
liquidity ratio fell within a range of 17% to 25%. Management utilizes information reports to
monitor the maturity, redemption and renewal of its deposit accounts. In the event the bank is
unable to raise new deposits or retain maturing deposits other sources of funding may be utilized.
The bank can purchase deposits; known as brokered deposits or may borrow funds to cover short-term
liquidity needs on established lines of credit. In addition, the bank became a member of the
Federal Home Loan Bank of Atlanta in 2003, which provides an alternative source of liquidity. The
objective of these policies is to control interest sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on earnings. The asset/liability mix is monitored on a regular basis. A report reflecting the interest
sensitive assets and interest sensitive liabilities is prepared and presented to the Board on a
monthly basis. One method to measure a banks interest rate exposure is through its repricing gap.
The gap is calculated by taking all assets that reprice or mature within a given timeframe and
subtracting all liabilities that reprice or mature within that timeframe. The difference between
these two amounts is called the gap, the amount of either liabilities or assets that will reprice
without a corresponding asset or liability repricing. A negative gap (more liabilities repricing than assets) generally indicates that the banks
net interest income will decrease if interest rates rise and will increase if interest rates fall.
A positive gap generally indicates that the banks net interest income will decrease if rates fall
and will increase if rates rise. The following table summarizes the amounts of interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2004, that are expected to mature, prepay or reprice in
each of the future time periods shown. Except as stated below, the amount of assets or liabilities
that mature or reprice during a particular period was determined in accordance with the contractual
terms of the asset or liability. Adjustable rate loans are included in the period in which
interest rates are next scheduled to adjust rather than in the period in which they are due. unless
they have reached the floor rate of the loan. In this event the loan is placed in the fixed rate
category and is shown in the period of its contractual maturity. Fixed rate loans and
mortgage-backed securities are included in the periods in which they are anticipated to be repaid
based on scheduled maturities. Community Financials savings accounts and interest-bearing demand
accounts (NOW and money market deposit accounts), which are generally subject to immediate
withdrawal, are included in the 29




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##### Table of Contents



Three Months or Less category, although historical experience has
proven these deposits to be more stable over the course of a year. Table 11
Interest Rate Gap Sensitivity
(dollars in thousands) At December 31, 2004Maturing or Repricing inThree
    
    
    FourMonths or
    
    
    Months to
    
    
    1 to 5
    
    
    Over 5Less
    
    
    12 Months
    
    
    Years
    
    
    Years
    
    
    TotalInterest-earning assets:Federal funds sold
    
    $
    3,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,619Investment securities
    
    
    6,666
    
    
    
    3,596
    
    
    
    10,674
    
    
    
    17,283
    
    
    
    38,219Loans
    
    
    89,025
    
    
    
    21,219
    
    
    
    77,426
    
    
    
    4,086
    
    
    
    191,756Other investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495
    
    
    
    495Total interest-bearing assets
    
    
    99,310
    
    
    
    24,815
    
    
    
    88,100
    
    
    
    21,864
    
    
    
    234,089Interest-bearing liabilities:Deposits:Demand and savings
    
    
    67,987
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,987Time deposits
    
    
    26,526
    
    
    
    66,420
    
    
    
    55,820
    
    
    
    
    
    
    
    148,766Retail repurchase agreements
    
    
    1,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,135Total interest-bearing liabilities
    
    $
    95,648
    
    
    
    66,420
    
    
    
    55,820
    
    
    
    
    
    
    
    217,888Interest sensitive difference
per period
    
    
    3,662
    
    
    
    (41,605
    )
    
    
    32,280
    
    
    
    21,864
    
    
    
    16,201Cumulative interest sensitivity
difference
    
    
    3,662
    
    
    
    (37,943
    )
    
    
    (5,663
    )
    
    
    16,201Cumulative difference to total
assets
    
    
    1.51
    %
    
    
    (15.65
    %)
    
    
    (2.34
    %)
    
    
    6.68
    %
 At December 31, 2004, the difference between Community Financials liabilities and assets
repricing or maturing within one year was $41.6 million. Due to an excess of liabilities repricing
or maturing within one year, a rise in interest rates would cause Community Financials net
interest income to decline. Certain shortcomings are inherent in the method of analysis presented in the foregoing table.
For example, although certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees or at different points in time to changes in market
interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features that
restrict changes in interest rates, both on a short-term basis and over the life of the asset.
Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers
to service their debt, among other factors, may change significantly from the assumptions made in
the table. Management takes other factors into consideration in monitoring the interest rate gap, which
are not represented in this table. Loans are a mix of variable and fixed rate accounts. In the
table above the variable rate loans are slotted by the next rate adjustment date. Fixed rate loans
are slotted by the maturity date. The gap table is not cumulative, that is to say, the loans shown
in the three months or less section of the table continue to be outstanding and help fill the gap
in the one year range. The internal model used by Management to monitor Interest Rate Gap Sensitivity makes
assumptions based on managements experience about the composition of the banks deposit and loan
portfolios as well as historical trends. For example, $31.5 million of our CDs contain a feature
to increase the interest rate one time in the original maturity. It is our experience that only a
small proportion of those eligible will reset the interest rate. Additionally, a modest rise in
interest rates in one category of deposit accounts will not entice all account holders to move to a
different account type. Compared to Table 11, the internal model which is reviewed monthly by
Management, shows the bank more evenly 30




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##### Table of Contents



balanced in the 1 and 3 year time horizons and as asset
sensitive in all time frames. Under this scenario a rise in interest rates would cause Community
Financials net interest income to increase. Off-Balance-Sheet Arrangements In the normal course of our business, we enter into certain off-balance sheet transactions
that are connected with meeting the financing needs of our customers. These off-balance-sheet
arrangements consist of letters of credit and commitments to extend credit. In note 15 to our
consolidated financial statements, we discuss in detail these off-balance-sheet arrangements. Inflation Inflation impacts the growth in total assets in the banking industry and causes a need to
increase equity capital at higher than normal rates to meet capital adequacy requirements.
Community Financial copes with the effects of inflation through the management of its interest rate
sensitivity gap position, by periodically reviewing and adjusting its pricing of services to
consider current costs, and through managing its level of net income relative to its dividend
payout policy. 31




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##### Table of Contents



Item 7. Financial Statements. COMMUNITY FINANCIAL HOLDING COMPANY, INC.
AND SUBSIDIARY Consolidated Financial Statements Report of Independent Registered Public Accounting Firm
    
    
    33Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    34Consolidated Statements of Earnings for the years ended December 31, 2004, 2003 and 2002
    
    
    35Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 and 2002
    
    
    36Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2004,
2003 and 2002
    
    
    37Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    38Notes to the Consolidated Financial Statements
    
    
    39
 32




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Community Financial Holding Company, Inc. and subsidiary We have audited the accompanying consolidated balance sheets of Community Financial Holding
Company, Inc. and subsidiary as of December 31, 2004 and 2003, and the related consolidated
statements of earnings, comprehensive income, changes in stockholders equity and cash flows for
each of the three years in the period ended December 31, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Community Financial Holding Company, Inc. and
subsidiary as of December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. /s/ Porter Keadle Moore, LLP Atlanta, Georgia
February 18, 2005 33




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003AssetsCash and due from banks, including cash reserve
requirements of $838,000 and $784,000, respectively
    
    $
    3,026,774
    
    
    
    2,972,743Federal funds sold
    
    
    3,618,693
    
    
    
    6,800,546Cash and cash equivalents
    
    
    6,645,467
    
    
    
    9,773,289Investment securities available for sale
    
    
    38,219,015
    
    
    
    28,010,058Other investments
    
    
    666,034
    
    
    
    269,734Loans, net of allowances for loan losses of $2,197,697
and $1,663,829, respectively
    
    
    189,043,992
    
    
    
    152,125,069Premises and equipment, net
    
    
    5,678,475
    
    
    
    5,709,560Accrued interest receivable and other assets
    
    
    2,200,776
    
    
    
    1,600,740$
    242,453,759
    
    
    
    197,488,450Liabilities and Stockholders EquityDeposits:Demand
    
    $
    25,344,383
    
    
    
    18,091,055Interest-bearing demand and money market
    
    
    32,235,103
    
    
    
    33,019,278Savings
    
    
    10,407,568
    
    
    
    7,128,273Time
    
    
    148,766,407
    
    
    
    121,816,593Total deposits
    
    
    216,753,461
    
    
    
    180,055,199Retail repurchase agreements
    
    
    1,134,690
    
    
    
    720,012Accrued interest payable and other liabilities
    
    
    796,498
    
    
    
    580,563Junior subordinated debenture
    
    
    5,671,000
    
    
    
    Total liabilities
    
    
    224,355,649
    
    
    
    181,355,774CommitmentsStockholders equity:Common stock, $5 par value; authorized 10,000,000
shares; 1,200,894 issued and outstanding
    
    
    6,004,470
    
    
    
    6,004,470Additional paid-in capital
    
    
    7,528,877
    
    
    
    7,528,877Retained earnings
    
    
    4,503,031
    
    
    
    2,558,011Accumulated other comprehensive income
    
    
    61,732
    
    
    
    41,318Total stockholders equity
    
    
    18,098,110
    
    
    
    16,132,676$
    242,453,759
    
    
    
    197,488,450
 See accompanying notes to consolidated financial statements. 34




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Statements of Earnings For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Interest and dividend income:Interest on loans, including fees of $1,004,973, $732,661,
and $677,659
    
    $
    11,687,076
    
    
    
    9,674,865
    
    
    
    8,682,127Interest on federal funds sold
    
    
    106,081
    
    
    
    103,291
    
    
    
    120,099Interest on government agencies securities
    
    
    1,018,897
    
    
    
    696,245
    
    
    
    912,413Interest on state, county and municipal securities
    
    
    257,058
    
    
    
    203,054
    
    
    
    46,937Interest on deposits with other banks
    
    
    
    
    
    
    
    
    
    
    3,099Interest and dividends on other investments
    
    
    211,297
    
    
    
    190,520
    
    
    
    62,672Total interest and dividend income
    
    
    13,280,409
    
    
    
    10,867,975
    
    
    
    9,827,347Interest expense:Interest-bearing demand and money market
    
    
    294,627
    
    
    
    356,991
    
    
    
    677,816Savings
    
    
    130,486
    
    
    
    84,124
    
    
    
    36,854Time
    
    
    4,326,598
    
    
    
    3,757,028
    
    
    
    3,544,560Other
    
    
    200,517
    
    
    
    6,319
    
    
    
    2,214Total interest expense
    
    
    4,952,228
    
    
    
    4,204,462
    
    
    
    4,261,444Net interest income
    
    
    8,328,181
    
    
    
    6,663,513
    
    
    
    5,565,903Provision for loan losses
    
    
    512,054
    
    
    
    400,292
    
    
    
    613,072Net interest income after provision for loan losses
    
    
    7,816,127
    
    
    
    6,263,221
    
    
    
    4,952,831Other income:Service charges on deposit accounts
    
    
    440,228
    
    
    
    407,392
    
    
    
    337,924Mortgage origination fees
    
    
    59,200
    
    
    
    187,183
    
    
    
    177,507Gains on sales of securities
    
    
    30,460
    
    
    
    70,064
    
    
    
    3,601Other
    
    
    100,514
    
    
    
    43,895
    
    
    
    18,403Total other income
    
    
    630,402
    
    
    
    708,534
    
    
    
    537,435Other expenses:Salaries and employee benefits
    
    
    3,067,362
    
    
    
    2,387,722
    
    
    
    2,039,086Occupancy and equipment
    
    
    532,371
    
    
    
    398,149
    
    
    
    401,341Other
    
    
    1,603,347
    
    
    
    1,505,517
    
    
    
    1,139,751Total other expenses
    
    
    5,203,080
    
    
    
    4,291,388
    
    
    
    3,580,178Net earnings before income taxes
    
    
    3,243,449
    
    
    
    2,680,367
    
    
    
    1,910,088Income tax expense
    
    
    1,118,295
    
    
    
    938,248
    
    
    
    687,364Net earnings
    
    $
    2,125,154
    
    
    
    1,742,119
    
    
    
    1,222,724Net earnings per common share:Basic earnings per common share
    
    $
    1.77
    
    
    
    1.45
    
    
    
    1.30Diluted earnings per common share
    
    $
    1.64
    
    
    
    1.36
    
    
    
    1.25
 See accompanying notes to consolidated financial statements. 35




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Net earnings
    
    $
    2,125,154
    
    
    
    1,742,119
    
    
    
    1,222,724Other comprehensive income:Unrealized holding gains on investment securities available
for sale arising during period
    
    
    67,424
    
    
    
    (152,639
    )
    
    
    138,012Reclassification adjustment for (gains) losses on investment
securities available for sale
    
    
    (30,460
    )
    
    
    (70,064
    )
    
    
    (3,601
    )Total other comprehensive income (loss) before tax
    
    
    36,964
    
    
    
    (222,703
    )
    
    
    134,411Income taxes related to other comprehensive income:Unrealized holding gains (losses) on investment securities
available for sale arising during period
    
    
    (28,125
    )
    
    
    51,897
    
    
    
    (46,924
    )Reclassification adjustment for gains on investment
securities available for sale
    
    
    11,575
    
    
    
    23,822
    
    
    
    1,224Total income taxes related to other comprehensive
income (loss)
    
    
    (16,550
    )
    
    
    75,719
    
    
    
    (45,700
    )Total other comprehensive (loss) income, net of tax
    
    
    20,414
    
    
    
    (146,984
    )
    
    
    88,711Total comprehensive income
    
    $
    2,145,568
    
    
    
    1,595,135
    
    
    
    1,311,435
 See accompanying notes to consolidated financial statements. 36




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders Equity For the Years Ended December 31, 2004, 2003 and 2002 Retained
    
    
    AccumulatedAdditional
    
    
    Earnings
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    (Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    Income
    
    
    TotalBalance, December 31, 2001
    
    
    867,560
    
    
    $
    4,337,800
    
    
    
    4,318,089
    
    
    
    (406,832
    )
    
    
    99,591
    
    
    
    8,348,648Proceeds from the sales of
common stock, net of
issuance costs of
$122,552
    
    
    333,334
    
    
    
    1,666,670
    
    
    
    3,210,788
    
    
    
    
    
    
    
    
    
    
    
    4,877,458Unrealized gains on
securities available for
sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,711
    
    
    
    88,711Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,222,724
    
    
    
    
    
    
    
    1,222,724Balance, December 31, 2002
    
    
    1,200,894
    
    
    
    6,004,470
    
    
    
    7,528,877
    
    
    
    815,892
    
    
    
    188,302
    
    
    
    14,537,541Unrealized gains on
securities available for
sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146,984
    )
    
    
    (146,984
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,742,119
    
    
    
    
    
    
    
    1,742,119Balance, December 31, 2003
    
    
    1,200,894
    
    
    
    6,004,470
    
    
    
    7,528,877
    
    
    
    2,558,011
    
    
    
    41,318
    
    
    
    16,132,676Unrealized gains on
securities available for
sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,414
    
    
    
    20,414Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180,134
    )
    
    
    
    
    
    
    (180,134
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,125,154
    
    
    
    
    
    
    
    2,125,154Balance, December 31, 2004
    
    
    1,200,894
    
    
    $
    6,004,470
    
    
    
    7,528,877
    
    
    
    4,503,031
    
    
    
    61,732
    
    
    
    18,098,110
 See accompanying notes to consolidated financial statements. 37




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net earnings
    
    $
    2,125,154
    
    
    
    1,742,119
    
    
    
    1,222,724Adjustments to reconcile net earnings to net cash used by operating
activities:Depreciation, amortization and accretion
    
    
    423,440
    
    
    
    417,412
    
    
    
    192,251Deferred income tax expense (benefit)
    
    
    50,952
    
    
    
    18,600
    
    
    
    (119,600
    )Provision for loan losses
    
    
    512,054
    
    
    
    400,292
    
    
    
    613,072Gain on sales of securities
    
    
    (30,460
    )
    
    
    (70,064
    )
    
    
    (3,601
    )Change in:Net unearned loan fees
    
    
    211,974
    
    
    
    52,313
    
    
    
    66,808Accrued interest receivable and other assets
    
    
    (208,444
    )
    
    
    75,800
    
    
    
    (226,057
    )Accrued interest payable and other liabilities
    
    
    215,935
    
    
    
    52,833
    
    
    
    199,278Net cash provided by operating activities
    
    
    3,300,605
    
    
    
    2,689,305
    
    
    
    1,944,875Cash flows from investing activities:Net change in deposits with other banks
    
    
    
    
    
    
    
    
    
    
    199,000Purchase of other investments
    
    
    (396,300
    )
    
    
    (169,700
    )
    
    
    Purchase of investment securities
    
    
    (27,319,418
    )
    
    
    (29,907,592
    )
    
    
    (15,221,829
    )Proceeds from sales, calls, paydowns and maturities of investment
securities
    
    
    17,096,438
    
    
    
    22,603,517
    
    
    
    11,888,776Net change in loans
    
    
    (37,981,638
    )
    
    
    (26,013,026
    )
    
    
    (31,651,757
    )Purchases of premises and equipment
    
    
    (303,295
    )
    
    
    (176,708
    )
    
    
    (218,315
    )Net cash used by investing activities
    
    
    (48,904,213
    )
    
    
    (33,663,509
    )
    
    
    (35,004,125
    )Cash flows from financing activities:Proceeds from issuance of junior subordinated debentures
    
    
    5,671,000
    
    
    
    
    
    
    
    Dividends paid to stockholders
    
    
    (180,134
    )
    
    
    
    
    
    
    Proceeds from note payable
    
    
    
    
    
    
    
    
    
    
    2,500,000Repayment of note payable
    
    
    
    
    
    
    
    
    
    
    (2,500,000
    )Net change in federal funds purchased
    
    
    
    
    
    
    
    
    
    
    (1,149,000
    )Net change in retail repurchase agreements
    
    
    414,678
    
    
    
    59,995
    
    
    
    660,017Debt issuance cost paid on junior subordinated debenture
    
    
    (128,020
    )
    
    
    
    
    
    
    Net change in deposits
    
    
    36,698,262
    
    
    
    26,706,465
    
    
    
    39,277,585Proceeds from issuance of common stock, net of offering costs
    
    
    
    
    
    
    
    
    
    
    4,877,458Net cash provided by financing activities
    
    
    42,475,786
    
    
    
    26,766,460
    
    
    
    43,666,060Net change in cash and cash equivalents
    
    
    (3,127,822
    )
    
    
    (4,207,744
    )
    
    
    10,606,810Cash and cash equivalents at beginning of period
    
    
    9,773,289
    
    
    
    13,981,033
    
    
    
    3,374,223Cash and cash equivalents at end of period
    
    $
    6,645,467
    
    
    
    9,773,289
    
    
    
    13,981,033Supplemental disclosures of cash flow information and noncash investing
activities:Cash paid for interest
    
    $
    4,936,154
    
    
    
    4,190,383
    
    
    
    4,146,284Cash paid for income taxes
    
    $
    1,269,500
    
    
    
    824,000
    
    
    
    743,000Transfer of loans to other real estate owned
    
    $
    338,687
    
    
    
    38,400
    
    
    
    Change in unrealized loss on securities available for sale, net of tax
    
    $
    20,414
    
    
    
    (146,984
    )
    
    
    88,711
 See accompanying notes to consolidated financial statements. 38




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements  (1)
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation and Nature of OperationsThe consolidated financial statements include the accounts of Community Financial Holding
Company (the Company) and its wholly owned subsidiary, Gwinnett Community Bank (the Bank).
All significant intercompany accounts and transactions have been eliminated in consolidation.On March 29, 2002, the Bank completed the formation of a one-bank holding company and a plan
to exchange all bank stock shares for shares of the holding company. Subsequent to the
reorganization, all of the shares of the Bank were owned by the Company.The Bank is a community oriented commercial bank with emphasis on retail banking and offers
such customary banking services as consumer and commercial checking accounts, savings
accounts, certificates of deposit, commercial and consumer loans, money transfers and a
variety of other banking services. The Bank has two banking offices. The main office is in
Duluth (Gwinnett County), Georgia, and conducts its banking activities primarily in Gwinnett
and surrounding counties. The branch is located in Suwanee (Gwinnett County), Georgia and
opened in the first quarter of 2004.The accounting principles followed by the Company and the methods of applying these principles
conform with generally accepted accounting principles (GAAP) and with general practices
within the banking industry. In preparing financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the reported amounts in
the financial statements. Actual results could differ significantly from those estimates.
Material estimates common to the banking industry that are particularly susceptible to
significant change in the near term include, but are not limited to, the determination of the
allowance for loan losses, the valuation of real estate acquired in connection with o
r in lieu
of foreclosure on loans, and valuation allowances associated with deferred tax assets, the
recognition of which are based on future taxable income.Investment SecuritiesThe Company classifies its securities in one of three categories: trading, available for sale,
or held to maturity. Trading securities are bought and held principally for the purpose of
selling them in the near term. Held to maturity securities are those securities for which the
Bank has the ability and intent to hold the security until maturity. All other securities not
included in trading or held to maturity are classified as available for sale. At December 31,
2004 and 2003, all securities were classified as available for sale.Available for sale securities are recorded at fair value. Held to maturity securities are
recorded at cost, adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses, net of the related tax effect, on securities available
for sale are excluded from earnings and are reported as a separate component of stockholders
equity until realized. Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized holding gains or losses associated with transfers of
securities from held to maturity to available for sale are recorded as a separate component of
stockholders equity. The unrealized holding gains or losses included in the separate
component of stockholders equity for securities transferred from available for sale to held
to maturity are maintained and amortized into earnings over the remaining life of the security
as an adjustment to yield in a manner consistent with the amortization or accretion of premium
or discount on the associated security.A decline in the market value of any available for sale or held to maturity investment below
cost that is deemed other than temporary is charged to earnings and establishes a new cost
basis for the security.Premiums and discounts are amortized or accreted over the life of the related security as an
adjustment to the yield. Realized gains and losses for securities classified as available for
sale and held to maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold. 39




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY
Consolidated Notes to Financial Statements, continued  (1)
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continuedOther Investments

Other investments include equity securities which have no readily determined fair value. These
investments are carried at cost.Loans, Loan Fees and Interest Income on Loans

Loans are stated at the principal amount outstanding, net of the allowance for loan losses.
Interest on loans is calculated by using the simple interest method on daily balances of the
principal amount outstanding.Accrual of interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, the borrowers financial condition is
such that collection of interest is doubtful. When a loan is placed on nonaccrual status,
previously accrued and uncollected interest is charged to interest income on loans. Generally,
payments on nonaccrual loans are applied to principal.Impaired loans are measured based on the present value of expected future cash flows
discounted at the loans effective interest rate, or at the loans observable market price or
at the fair value of the collateral, if the loan is collateral dependent. A loan is impaired
when, based on current information and events, it is probable that all amounts that are due
according to the contract and terms of the loan agreement will not be collected.Loan fees, net of certain origination costs, are deferred and amortized over the lives of the
respective loans.Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes that
the collection of the principal is unlikely. The allowance represents an amount, which in
managements judgment, will be adequate to absorb probable losses on existing loans that may
become uncollectible.Managements judgment in determining the adequacy of the allowance is based on evaluations of
the collectibility of loans. These evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions that may affect
the borrowers ability to pay, overall portfolio quality, and review of specific problem
loans. In determining the adequacy of the allowance for loan losses, management uses a loan
grading system that rates loans in nine different categories. Grades five through nine are
assigned allocations of loss based on managements estimate of potential loss, which is
generally based on discounted, collateral deficiencies or loss percentages by grade used by
the federal bank regulators. Loans graded one through four are stratified by type and
allocated loss ranges based on peer group loss experience, regulatory guidelines and the
Banks loss history. The combination of these results are compared monthly to the recorded
allowance for loan losses and material differences are adjusted by increasing or decreasing
the provision for loan losses.Management uses an outsourced independent loan review specialist on a quarterly basis to
corroborate and challenge the internal loan grading system and methods used to determine the
adequacy of the allowance for loan losses.Management believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the allowance for loan losses.
Such regulators may require additions to the allowance based on their judgments of information
available to them at the time of their examination. 40




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COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY
Consolidated Notes to Financial Statements, continued  (1)
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continuedPremises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the related asset.
When assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is reflected in
income for the period. The cost of maintenance and repairs which do not improve or extend the
useful life of the respective asset is charged to income as incurred, whereas significant
renewals and improvements are capitalized. The range of estimated useful lives for premises
and equipment are: Buildings
    

40 yearsEquipment and furniture
    

3
- 10 years
  Securities Sold Under Retail Repurchase
Agreements

Securities sold under retail repurchase agreements are secured borrowings from customers and
are treated as financing activities and are carried at the amounts at which the securities
will be subsequently reacquired as specified in the respective agreements.Income Taxes

The Company uses the liability method of accounting for income taxes, which requires the
recognition of deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Additionally, this method requires the
recognition of future tax benefits, such as net operating loss carryforwards, to the extent
that realization of such benefits is more likely than not. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
the assets and liabilities are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income tax expense in the
period that includes the enactment date.In the event the future tax consequences of differences between the financial reporting bases
and the tax bases of the Companys assets and liabilities results in deferred tax assets, an
evaluation of the probability of being able to realize the future benefits indicated by such
asset is required. A valuation allowance is provided for the portion of the deferred tax asset
when it is more likely than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realization of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies.Statement of Cash Flows

For purposes of reporting cash flows, the Company includes cash and due from banks and federal
funds sold.Net Earnings Per Share

Basic net earnings per share is based on the weighted average number of common shares
outstanding during the period. Diluted net earnings per share includes the effects of
potential common shares outstanding during the period. The average market price during the
year is used to compute equivalent shares. The reconciliation of the amounts used in the
computation of both basic earnings per share and diluted earnings per share for the years
ended December 31, 2004, 2003 and 2002 as follows: 41




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COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (1)
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued AverageNet
    
    
    Shares
    
    
    Per ShareEarnings
    
    
    Outstanding
    
    
    AmountFor the year ended December 31, 2004:Net earnings  basic
    
    $
    2,125,154
    
    
    
    1,200,894
    
    
    $
    1.77Effect of dilutive stock warrants
    
    
    
    
    
    
    94,967Net earnings  diluted
    
    $
    2,125,154
    
    
    
    1,295,861
    
    
    $
    1.64For the year ended December 31, 2003:Net earnings  basic
    
    $
    1,742,119
    
    
    
    1,200,894
    
    
    $
    1.45Effect of dilutive stock warrants
    
    
    
    
    
    
    79,688Net earnings  diluted
    
    $
    1,742,119
    
    
    
    1,280,582
    
    
    $
    1.36For the year ended December 31, 2002:Net earnings  basic
    
    $
    1,222,724
    
    
    
    938,947
    
    
    $
    1.30Effect of dilutive stock warrants
    
    
    
    
    
    
    42,500Net earnings  diluted
    
    $
    1,222,724
    
    
    
    981,447
    
    
    $
    1.25
  Recent Accounting PronouncementsMeaning of Other-Than-Temporary-Impairment

In March 2004, The Emerging Issues Task Force (EITF) issued EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1).
EITF 03-1 provides guidance for evaluating whether an investment is other-than-temporarily
impaired. The disclosure guidance was fully effective for other-than-temporary impairment
evaluations made in reporting periods ending after June 15, 2004, whereas the recognition
and measurement guidance has been deferred. The disclosures required by EITF 03-1 are
included in note 2 to the consolidated financial statements. The Bank did not recognize an
impairment loss on any investment in 2004 or 2003.Share-Based Payment

In December 2004, the FASB revised SFAS No. 123 (SFAS No. 123 ®). SFAS No. 123 ®,
Share-Based Payment, requires all share-based payments to employees and directors, including
grants of employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure is no longer an alternative to financial statement
recognition. For the Company, SFAS No. 123 ® is effective beginning January 1, 2006.
Since the Company currently has no unvested share-based plans, the adoption of these
requirements will have no impact on the Companys financial statements.Reclassifications

Certain amounts in the 2003 and 2002 consolidated financial statements have been restated to
conform to the 2004 presentation.(2)
    INVESTMENT SECURITIESInvestment securities available for sale at December 31, 2004 and 2003 are as follows: December 31, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government agencies
    
    $
    22,669,198
    
    
    
    27,467
    
    
    
    71,624
    
    
    
    22,625,041Mortgage backed securities
    
    
    3,981,187
    
    
    
    40,163
    
    
    
    104
    
    
    
    4,021,246Municipal securities
    
    
    7,908,393
    
    
    
    95,242
    
    
    
    48,507
    
    
    
    7,955,128Corporate securities
    
    
    1,804,110
    
    
    
    37,740
    
    
    
    750
    
    
    
    1,841,100Trust preferred securities
    
    
    1,756,558
    
    
    
    19,942
    
    
    
    
    
    
    
    1,776,500$
    38,119,446
    
    
    
    220,554
    
    
    
    120,985
    
    
    
    38,219,015
 42




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COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (2)
    INVESTMENT SECURITIES, continued December 31, 2003Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government agencies
    
    $
    14,587,216
    
    
    
    76,918
    
    
    
    113,807
    
    
    
    14,550,327Mortgage backed securities
    
    
    4,022,172
    
    
    
    67,707
    
    
    
    25,461
    
    
    
    4,064,418Municipal securities
    
    
    5,268,674
    
    
    
    33,809
    
    
    
    61,522
    
    
    
    5,240,961Corporate securities
    
    
    2,310,698
    
    
    
    80,479
    
    
    
    
    
    
    
    2,391,177Trust preferred securities
    
    
    1,758,693
    
    
    
    4,482
    
    
    
    
    
    
    
    1,763,175$
    27,947,453
    
    
    
    263,395
    
    
    
    200,790
    
    
    
    28,010,058
  The following outlines the unrealized losses and fair value by investment category and length
of time that individual securities have been in a continuous unrealized loss position at
December 31, 2004 and 2003: December 31, 2004Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.S. Government agencies
    
    $
    8,031,250
    
    
    
    48,740
    
    
    
    1,977,116
    
    
    
    22,884
    
    
    
    10,008,366
    
    
    
    71,624Mortgage backed
securities
    
    
    1,015,778
    
    
    
    64
    
    
    
    198,265
    
    
    
    40
    
    
    
    1,214,043
    
    
    
    104Corporate securities
    
    
    299,250
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    299,250
    
    
    
    750Municipal securities
    
    
    2,428,416
    
    
    
    37,787
    
    
    
    775,636
    
    
    
    10,720
    
    
    
    3,204,052
    
    
    
    48,507$
    11,774,694
    
    
    
    87,341
    
    
    
    2,951,017
    
    
    
    33,644
    
    
    
    14,725,711
    
    
    
    120,985
 December 31, 2003Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.S. Government agencies
    
    $
    7,868,438
    
    
    
    113,807
    
    
    
    
    
    
    
    
    
    
    
    7,868,438
    
    
    
    113,807Mortgage backed
securities
    
    
    1,866,543
    
    
    
    24,068
    
    
    
    76,993
    
    
    
    1,393
    
    
    
    1,943,536
    
    
    
    25,461Municipal securities
    
    
    2,321,211
    
    
    
    61,522
    
    
    
    
    
    
    
    
    
    
    
    2,321,211
    
    
    
    61,522$
    12,056,192
    
    
    
    199,397
    
    
    
    76,993
    
    
    
    1,393
    
    
    
    12,133,185
    
    
    
    200,790
  At December 31, 2004, unrealized losses in the investment securities portfolio related to debt
securities totaled $120,985. The unrealized losses on these debt securities arose due to
changing interest rates and are considered to be temporary. From the December 31, 2004 table
above 8 out of 21 securities issued by U.S. government agencies, 9 out of 19 securities issued
by municipalities, 3 out of 7 mortgage backed securities and 1 out of 3 corporate securities
contained unrealized losses. These unrealized losses are considered temporary because of
acceptable investment grades on each security and the repayment sources of principal and
interest are government backed.The amortized cost and estimated fair value of securities available for sale at December 31,
2004, by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers have the right to call or prepay obligations with or
without call or prepayment penalties. 43




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COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (2)
    INVESTMENT SECURITIES, continued Amortized
    
    
    EstimatedCost
    
    
    Fair Value1 to 5 years
    
    $
    8,499,339
    
    
    
    8,465,9385 to 10 years
    
    
    15,300,711
    
    
    
    15,373,912More than 10 years
    
    
    10,338,209
    
    
    
    10,357,920Mortgage backed securities
    
    
    3,981,187
    
    
    
    4,021,245$
    38,119,446
    
    
    
    38,219,015
  Proceeds from sales of investment securities in 2004, 2003 and 2002 totaled $8,592,000,
$3,790,000 and $995,000, respectively. Gross gains and losses are as follows: 2004
    
    
    2003
    
    
    2002Gross gains on sales
    
    $
    78,295
    
    
    
    74,998
    
    
    
    2,593Gross losses on sales
    
    
    (47,835
    )
    
    
    (5,674
    )
    
    
    Gross gains on calls
    
    
    
    
    
    
    740
    
    
    
    1,008Net gains
    
    $
    30,460
    
    
    
    70,064
    
    
    
    3,601
  Securities with a carrying value of approximately $10,597,000 and $5,187,000 at December 31,
2004 and 2003, respectively were pledged to secure public deposits and for other purposes.At December 31, 2004 and 2003, the Bank had no outstanding derivative financial instruments
such as swaps, options, futures, or forward contracts.(3)
    LOANSMajor classifications of loans at December 31, 2004 and 2003, are summarized as follows: 2004
    
    
    2003Commercial
    
    $
    43,171,589
    
    
    
    37,478,750Real estate
    
    
    135,177,983
    
    
    
    105,707,711Consumer
    
    
    13,407,789
    
    
    
    10,906,135191,757,361
    
    
    
    154,092,596Less: Allowance for loan losses
    
    
    2,197,697
    
    
    
    1,663,829Net unearned loan fees
    
    
    515,672
    
    
    
    303,698Net loans
    
    $
    189,043,992
    
    
    
    152,125,069
  The Bank grants loans and extensions of credit to individuals and a variety of firms and
corporations located primarily in Gwinnett County and other surrounding Georgia counties. A
substantial portion of the loan portfolio is collateralized by improved and unimproved real
estate and is dependent upon the real estate market.An analysis of the activity in the allowance for loan losses is presented below: 2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    1,663,829
    
    
    
    1,598,956
    
    
    
    1,132,130Provision for loan losses
    
    
    512,054
    
    
    
    400,292
    
    
    
    613,072Loans charged off
    
    
    (74,388
    )
    
    
    (369,412
    )
    
    
    (149,131
    )Recoveries on loans charged off
    
    
    96,202
    
    
    
    33,993
    
    
    
    2,885$
    2,197,697
    
    
    
    1,663,829
    
    
    
    1,598,956
 44




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COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (4)
    PREMISES AND EQUIPMENTPremises and equipment at December 31, 2004 and 2003, are summarized as follows: 2004
    
    
    2003Land
    
    $
    1,369,959
    
    
    
    1,369,959Building
    
    
    3,918,481
    
    
    
    3,883,111Leasehold improvements
    
    
    154,740
    
    
    
    Equipment, furniture and vehicles
    
    
    1,404,376
    
    
    
    1,294,2466,847,556
    
    
    
    6,547,316Less accumulated depreciation and amortization
    
    
    1,169,081
    
    
    
    837,756$
    5,678,475
    
    
    
    5,709,560
  Depreciation expense and leasehold amortization was approximately $333,000, $275,000 and
$278,500 for the years ended December 31, 2004, 2003 and 2002, respectively.(5)
    DEPOSITSThe aggregate amount of time deposits with a minimum denomination of $100,000 was
approximately $68,466,000 and $54,833,000 at December 31, 2004 and 2003, respectively.At December 31, 2004, the scheduled maturities of time deposits are as follows: 2005
    
    $
    92,910,1162006
    
    
    18,852,7842007
    
    
    31,953,9092008
    
    
    1,430,8222009 and thereafter
    
    
    3,618,776$
    148,766,407
  The Bank had brokered time deposits at December 31, 2004 and 2003, of approximately
$10,305,000 and $9,798,000, respectively. Brokered time deposits at December 31, 2004 had a
weighted average interest rate of 3.75%.(6)
    JUNIOR SUBORDINATED DEBENTURESOn March 26, 2004, the Company issued, through a wholly owned Delaware statutory trust, CFHC
Capital Trust I (the Trust), $5,500,000 of preferred beneficial interests in the Companys
unsecured junior subordinated debentures (trust preferred securities) that qualify as Tier I
capital under Federal Reserve Board guidelines within certain limitations. The Company owns
all of the common securities of the Trust. The proceeds from the issuance of the common
securities and the trust preferred securities were used by the Trust to purchase $5,671,000 of
junior subordinated debentures of the Company, which carry a floating rate of interest equal
to the prime rate of interest published in the Money Rates table in the Eastern Edition of
The Wall Street Journal plus 12.5 basis points. Of the proceeds received by the Company from
the sale of the junior subordinated debentures, $5,000,000 was used to strengthen the capital
position of the Bank and the remainder will be used to accommodate current and future growth.
The debentures and related accrued interest represent the sole assets of the Trust.The trust preferred securities accrue and pay distributions quarterly, at an interest rate
equal to the prime rate published in the Money Rates table in the Eastern Edition of The
Wall Street Journal plus 12.5 basis points on the stated liquidation value of $50,000 per
capital security. The Company has entered into contractual arrangements which, taken
collectively, fully and unconditionally guarantee payment of accrued and unpaid distributions
required to be paid on the trust preferred securities, the redemption price with respect to
any trust preferred securities called for redemption by the Trust, and payments due upon a
voluntary or involuntary dissolution, winding up, or liquidation of the Trust. 45




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COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (6)
    JUNIOR SUBORDINATED DEBENTURES, continuedThe trust preferred securities are mandatorily redeemable upon maturity of the debentures on
December 31, 2034, or upon earlier redemption as provided in the indenture. The Company has
the right to redeem the debentures purchased by the Trust in whole or in part, on or after
December 31, 2009. As specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be the unpaid principal amount, plus any accrued unpaid
interest.(7)
    FHLB BORROWING AGREEMENTIn 2003, the Bank entered into an agreement with the Federal Home Loan Bank (FHLB) whereby
the FHLB agreed to provide the Bank credit facilities. Any amounts advanced by the FHLB would
be collateralized under a Blanket Floating Lien covering all of the Banks 1-4 family first
mortgage loans. The Bank may draw advances up to 75% of the outstanding balance of these loans
based on the agreement with the FHLB. Additionally, the FHLB allows for borrowing utilizing
other assets as collateral such as investments, cash balances and other types of loans. At
December 31, 2004, the Bank had lending guidelines that would allow for approximately
$36,368,000 million of borrowings from the FHLB .(8)
    INCOME TAXESThe components of income tax expense (benefit) for the years ended December 31, 2004, 2003 and
2002 are as follows: 2004
    
    
    2003
    
    
    2002Current
    
    $
    1,067,343
    
    
    
    919,648
    
    
    
    806,964Deferred
    
    
    50,952
    
    
    
    18,600
    
    
    
    (108,800
    )Utilization of net operating loss
    
    
    
    
    
    
    
    
    
    
    (10,800
    )$
    1,118,295
    
    
    
    938,248
    
    
    
    687,364
  The difference between income tax expense (benefit) and the amount computed by applying the
statutory federal income tax rate to income before taxes for the years ended December 31,
2004, 2003 and 2002, are as follows: 2004
    
    
    2003
    
    
    2002Pretax income at statutory rate
    
    $
    1,102,773
    
    
    
    911,300
    
    
    
    649,400Add:Tax exempt income
    
    
    (94,654
    )
    
    
    (62,700
    )
    
    
    (15,800
    )Other, primarily state income taxes
    
    
    110,176
    
    
    
    89,648
    
    
    
    53,764$
    1,118,295
    
    
    
    938,248
    
    
    
    687,364
  The following summarizes the sources and expected tax consequences of future taxable
deductions (income), which comprise the net deferred taxes at December 31, 2004 and 2003. 2004
    
    
    2003Deferred income tax assets:Allowance for loan losses
    
    $
    738,310
    
    
    
    544,000Organizational and preopening costs
    
    
    7,415
    
    
    
    24,800Other
    
    
    6,335
    
    
    
    17,400Total gross deferred income tax assets
    
    
    752,060
    
    
    
    586,200Deferred income tax liabilities:Net unrealized gain on investment securities
    
    
    (37,837
    )
    
    
    (21,300
    )Premises and equipment
    
    
    (268,812
    )
    
    
    (52,000
    )Total gross deferred income tax liabilities
    
    
    (306,649
    )
    
    
    (73,300
    )Net deferred income tax asset
    
    $
    445,411
    
    
    
    512,900
 46




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COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY
Consolidated Notes to Financial Statements, continued  (9)
    EMPLOYEE BENEFIT PLANThe Bank sponsors a defined contribution plan, intended to comply with the requirements of
section 401(k) of the Internal Revenue Code, covering substantially all employees subject to
certain minimum age and service requirements. Contributions to the plan are made each payroll
period and are approved annually by the Board of Directors. The Bank matched each
participants contributions up to 4% of the participants eligible compensation, which
amounted to $89,320, $51,800 and $45,900 in 2004, 2003 and 2002, respectively.In 2003, the Board of Directors amended the defined contribution plan in order to incorporate
a profit sharing plan. The Bank contributed 2% of eligible compensation to all its officers
and employees in 2004, which totaled $35,084. Executive officers did not receive a profit
sharing contribution under this plan in 2004.(10)
    STOCKHOLDERS EQUITYIn consideration of their efforts in organizing the Bank and their commitment to serve as its
initial directors, the organizers received warrants entitling each of them, for each share
purchased by the organizer (or his/her affiliates or immediate family) in the offering, to
purchase at any time before October 18, 2009, an additional share of common stock at the
offering price of $10. Rights to purchase 212,500 shares were granted to the organizers.
Organizers may not sell or otherwise transfer the warrants without the prior written consent
of the Bank.The warrants were not immediately exercisable. The right to exercise the warrants vested with
respect to one-third of the warrant shares on October 18, 2000, October 18, 2001 and October
18, 2002. The Bank has the right, upon notice from its regulators that the Bank is capital
deficient, to require each organizer to exercise or forfeit all of his/her warrants within
twenty-one days of the Banks call for the exercise of the warrants.(11)
    DIVIDEND RESTRICTIONSDividends paid by the Bank are the primary source of funds available to the Company. Banking
regulations limit the amount of dividends that may be paid without prior approval of the
regulatory authorities. The amount of dividends the Bank may pay in 2005 without prior
approval is approximately $1,063,000.The Company and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory  and possibly additional discretionary  actions by regulators that, if
undertaken, could have a direct material effect on the Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.(12)
    REGULATORY MATTERSQuantitative measures established by regulations to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2004 and 2003, that the Company and the Bank met all capital adequacy
requirements to which they are subject.As of December 31, 2004, the most recent regulatory notification categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table.Actual capital amounts and ratios are also presented in the table (amounts presented in
thousands). 47




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY
Consolidated Notes to Financial Statements, continued  (12)
    REGULATORY MATTERS, continued For Capital
    
    
    To Be Well CapitalizedAdequacy
    
    
    Under Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2004:Total Capital (to Risk-Weighted Assets)Consolidated
    
    $
    25,734
    
    
    
    12.17
    %
    
    $
    16,920
    
    
    
    38.0
    %
    
    
    N/A
    
    
    
    N/ABank only
    
    $
    25,556
    
    
    
    12.09
    %
    
    $
    16,911
    
    
    
    38.0
    %
    
    $
    21,139
    
    
    
    310.0
    %Tier I Capital (to Risk-Weighted Assets)Consolidated
    
    $
    23,536
    
    
    
    11.13
    %
    
    $
    8,460
    
    
    
    34.0
    %
    
    
    N/A
    
    
    
    N/ABank only
    
    $
    23,358
    
    
    
    11.05
    %
    
    $
    8,455
    
    
    
    34.0
    %
    
    $
    12,683
    
    
    
    3  6.0
    %Tier I Capital (to Average Assets)Consolidated
    
    $
    23,536
    
    
    
    9.76
    %
    
    $
    9,646
    
    
    
    34.0
    %
    
    
    N/A
    
    
    
    N/ABank only
    
    $
    23,358
    
    
    
    9.70
    %
    
    $
    9,635
    
    
    
    34.0
    %
    
    $
    12,044
    
    
    
    3  5.0
    %As of December 31, 2003:Total Capital (to Risk-Weighted Assets)Consolidated
    
    $
    17,755
    
    
    
    10.46
    %
    
    $
    13,589
    
    
    
    38.0
    %
    
    
    N/A
    
    
    
    N/ABank only
    
    $
    17,621
    
    
    
    10.37
    %
    
    $
    13,589
    
    
    
    38.0
    %
    
    $
    16,987
    
    
    
    310.0
    %Tier I Capital (to Risk-Weighted Assets)Consolidated
    
    $
    16,091
    
    
    
    9.48
    %
    
    $
    6,795
    
    
    
    34.0
    %
    
    
    N/A
    
    
    
    N/ABank only
    
    $
    15,957
    
    
    
    9.39
    %
    
    $
    6,795
    
    
    
    34.0
    %
    
    $
    10,192
    
    
    
    3 6.0
    %Tier I Capital (to Average Assets)Consolidated
    
    $
    16,091
    
    
    
    8.31
    %
    
    $
    7,751
    
    
    
    34.0
    %
    
    
    N/A
    
    
    
    N/ABank only
    
    $
    15,957
    
    
    
    8.23
    %
    
    $
    7,751
    
    
    
    34.0
    %
    
    $
    9,689
    
    
    
    35.0
    %
  (13)
    MISCELLANEOUS OPERATING EXPENSESComponents of other operating expenses which are greater than 1% of interest income and other
operating income are as follows: 2004
    
    
    2003
    
    
    2002Legal and professional fees
    
    $
    299,215
    
    
    
    273,603
    
    
    
    171,580Data processing fees
    
    $
    281,837
    
    
    
    255,659
    
    
    
    251,065Advertising and public relations
    
    $
    109,013
    
    
    
    95,600
    
    
    
    106,796Business development
    
    $
    167,382
    
    
    
    164,464
    
    
    
    55,028
  (14)
    RELATED PARTY TRANSACTIONSThe Bank conducts transactions with directors and executive officers, including companies in
which they have beneficial interest, in the normal course of business. It is the policy of the
Bank that loan transactions with directors and executive officers be made on substantially the
same terms as those prevailing at the time for comparable loans to other persons. The
following is a summary of activity for related party loans for 2004: Beginning balance
    
    $
    2,948,813Loans advanced
    
    
    1,085,380Repayments
    
    
    (1,937,625
    )Ending balance
    
    $
    2,096,568
 48




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (14)
    RELATED PARTY TRANSACTIONS, continuedThe aggregate amount of deposits of directors and executive officers and their affiliates
amounted to approximately $1,791,000 and $3,497,000 at December 31, 2004 and 2003,
respectively.(15)
    COMMITMENTSThe Bank is a party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments could
include commitments to extend credit, standby letters of credit and financial guarantees.
Those instruments involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial instruments.The exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit and financial
guarantees written is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.In most cases, the Bank requires collateral or other security to support financial instruments
with credit risk. ApproximateContract Amount2004
    
    
    2003Financial instruments whose contract amounts represent credit risk:Commitments to extend credit
    
    $
    41,225,000
    
    
    
    29,281,000Standby letters of credit
    
    $
    1,217,000
    
    
    
    969,000
  Commitments to extend credit are agreements to lend to a customer, as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit is based on managements credit evaluation.
Collateral held varies but may include unimproved and improved real estate, certificates of
deposit, or personal property.Standby letters of credit and financial guarantees written are conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to local businesses. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.The Bank has obtained lines of credit available with correspondent banks to purchase federal
funds. At December 31, 2004, unused lines of credit totaled $9,300,000.(16)
    FAIR VALUE OF FINANCIAL INSTRUMENTSThe assumptions used in the estimation of the fair value of the Banks financial instruments
are detailed below. Where quoted prices are not available, fair values are based on estimates
using discounted cash flows and other valuation techniques. The use of discounted cash flows
can be significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. The following disclosures should not be considered a surrogate
of the liquidation value of the Bank, but rather a good-faith estimate of the increase or
decrease in value of financial instruments held by the Bank since purchase, origination or
issuance.  Cash and Cash EquivalentsFor cash, due from banks and federal funds sold, the carrying amount is a
reasonable estimate of fair value.Investment Securities Available for SaleFair values for investment securities are based on quoted market prices. 49




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (16)
    FAIR VALUE OF FINANCIAL INSTRUMENTS, continued  Other Investments

The carrying value of other investments approximates fair value.Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar
credit ratings. For variable rate loans, the carrying amount is a reasonable estimate
of fair value.Deposits

The fair value of demand deposits, savings accounts, NOW accounts and money market
deposits is the amount payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated by discounting the future cash flows
using current rates at which comparable certificates would be issued.Securities Sold Under Retail Repurchase
Agreements

The carrying value of securities sold under retail repurchase agreements approximates
fair value.Commitments to Extend Credit and Standby Letters of Credit

Because commitments to extend credit and standby letters of credit are made using
variable rates and have short maturities, the carrying value and the fair value are
immaterial.Limitations

Fair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one time
the Banks entire holdings of a particular financial instrument. Because no market
exists for a significant portion of the Banks financial instruments, fair value
estimates are based on many judgments. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future business and
the value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial instruments
include, deferred income taxes and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.The carrying amount and estimated fair values of the Banks financial instruments at December
31, 2004 and 2003 are as follows: 2004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    6,645,467
    
    
    
    6,645,467
    
    
    
    9,773,289
    
    
    
    9,773,289Investment securities
    
    $
    38,219,015
    
    
    
    38,219,015
    
    
    
    28,010,058
    
    
    
    28,010,058Other investments
    
    $
    666,034
    
    
    
    666,034
    
    
    
    269,734
    
    
    
    269,734Loans
    
    $
    189,043,992
    
    
    
    189,762,000
    
    
    
    152,125,069
    
    
    
    156,454,069Liabilities:Deposits
    
    $
    216,753,461
    
    
    
    218,118,387
    
    
    
    180,055,199
    
    
    
    181,696,970Retail repurchase agreements
    
    $
    1,134,690
    
    
    
    1,134,690
    
    
    
    720,012
    
    
    
    720,012
 50




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (17)
    CONDENSED FINANCIAL INFORMATION OF COMMUNITY FINANCIAL HOLDING COMPANY, INC. Balance Sheets
December 31, 2004 and 2003 2004
    
    
    2003AssetsCash
    
    $
    152,885
    
    
    
    119,554Investment in bank subsidiary
    
    
    23,420,132
    
    
    
    15,998,483Other investment
    
    
    171,000
    
    
    
    Income taxes receivable
    
    
    165,677
    
    
    
    31,139$
    23,909,694
    
    
    
    16,149,176Liabilities
and Stockholders EquityJunior subordinated debentures
    
    $
    5,671,000
    
    
    
    Accrued expenses and other liabilities
    
    
    140,584
    
    
    
    16,500Stockholders equity
    
    
    18,098,110
    
    
    
    16,132,676$
    23,909,694
    
    
    
    16,149,176
 Statements of Earnings
For the Year Ended December 31, 2004 and 2003 2004
    
    
    2003Equity in undistributed earnings of bank subsidiary
    
    $
    2,401,235
    
    
    
    1,806,894Other operating expenses
    
    
    (418,305
    )
    
    
    (102,817
    )Earnings before income taxes
    
    
    1,982,930
    
    
    
    1,704,077Income tax benefit
    
    
    142,224
    
    
    
    38,042Net earnings
    
    $
    2,125,154
    
    
    
    1,742,119
 Statements of Cash Flows
For the Year Ended December 31, 2004 and 2003 2004
    
    
    2003Cash flows from operating activities:Net earnings
    
    $
    2,125,154
    
    
    
    1,742,119Adjustments to reconcile net earnings to net cash used by
operating activities:Equity in undistributed earnings of bank subsidiary
    
    
    (2,401,235
    )
    
    
    (1,806,894
    )Change in other assets and liabilities, net
    
    
    117,566
    
    
    
    28,970Net cash used by operating activities
    
    
    (158,515
    )
    
    
    (35,805
    )Cash flows from investing activities:Contributions to bank subsidiary
    
    
    (5,000,000
    )
    
    
    (1,000,000
    )Purchase of other investments
    
    
    (171,000
    )
    
    
    Net cash used by investing activities
    
    
    (5,171,000
    )
    
    
    (1,000,000
    )Cash flows from financing activities:Proceeds from issuance of junior subordinated debentures
    
    
    5,671,000
    
    
    
    Debt issuance costs paid on junior subordinated debentures
    
    
    (128,020
    )
    
    
    Dividends paid to stockholders
    
    
    (180,134
    )
    
    
    Net cash provided by financing activities
    
    
    5,362,846
    
    
    
    Net change in cash
    
    
    33,331
    
    
    
    (1,035,805
    )Cash and cash equivalents at beginning of the period
    
    
    119,554
    
    
    
    1,155,359Cash and cash equivalents at end of the period
    
    $
    152,885
    
    
    
    119,554
 51




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##### Table of Contents



Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. 
 Item 8A. Controls and Procedures. As of December 31, 2004 (the Evaluation Date), we carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined by Rule 15d-14(c) of the
Securities Exchange Act of 1934) under the supervision and with the participation of our chief
executive officer and chief financial officer. Based on and as of the Evaluation Date, the
aforementioned officers have concluded that our disclosure controls and procedures were effective. We also maintain a system of internal accounting controls that is designed to provide
assurance that our assets are safeguarded and that transactions are executed in accordance with
managements authorization and properly recorded. This system is continually reviewed and is
augmented by written policies and procedures, the careful selection and training of qualified
personnel and an internal audit program to monitor its effectiveness. Since the Evaluation Date,
there have been no significant changes to this system of internal controls or in other factors that
could significantly affect those controls. 
 Item 8B. Other Information. None. 
 PART III 
 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. The information contained under the sections captioned Proposal I  Election of Directors
and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys definitive proxy
statement for the Companys 2005 Annual Meeting of Shareholders (the Proxy Statement) is
incorporated herein by reference. The Company adopted a Code of Ethics which is incorporated in the Employee Handbook. The
document is published on the Companys website at www.gwinnettcommunitybank.com. A copy of the
Code of Ethics may be obtained without charge upon written request to the Secretary of the Company. The Audit Committee has at least one financial expert, J. Terry Gordon, who is also an
independent director and the Chairman of the Audit Committee. 
 Item 10. Executive Compensation. The information contained under the section captioned Director and Executive Officer
Compensation in the Proxy Statement is incorporated herein by reference. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information contained under the sections captioned Voting Securities and Principal
Holders Thereof and Proposal I  Election of Directors in the Proxy Statement is incorporated
herein by reference. 
 Item 12. Certain Relationships and Related Transactions. The information contained under the section captioned Certain Relationships and Related
Transactions in the Proxy Statement is incorporated herein by reference. 52




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##### Table of Contents



Item 13. Exhibits. Exhibits.  3.1
    Articles of Incorporation of Community Financial (incorporated by reference to
Exhibit 3.1 of the Community Financials Registration Statement on Form S-1, filed June
6, 2002 (File No. 333-89972)).3.2
    Bylaws of Community Financial (incorporated by reference to Exhibit 3.2 of the
Community Financials Registration Statement on Form S-1, filed June 6, 2002 (File No.
333-89972)).4.1
    See exhibits 3.1 and 3.2 for provisions of Community Financials Articles of
Incorporation and Bylaws defining the rights of shareholders.4.2
    Specimen certificate representing shares of Community Financials common stock
(incorporated by reference to Exhibit 4.2 of the Community Financials Registration
Statement on Form S-1, filed June 6, 2002 (File No. 333-89972)).10.1
    Agreement between Fiserv Solutions, Inc. and Gwinnett Community Bank dated June
8, 1999 (incorporated by reference to Exhibit 10.1 of the Community Financials
Registration Statement on Form S-1, filed June 6, 2002 (File No. 333-89972)).10.2
    Form of Organizer Warrant (incorporated by reference to Exhibit 10.1 of the
Community Financials Registration Statement on Form S-1, filed June 6, 2002 (File No.
333-89972)).10.3
    Executive Employment Agreement for Thomas J. Martin effective January 1, 2004.
(incorporated by reference to Exhibit 10.3 to Community
Financials 10-KSB for the fiscal year ended December 31, 2003).10.4
    Executive Employment Agreement for Ann K. Marshall effective January 1, 2004.
(incorporated by reference to Exhibit 10.4 to Community
Financials 10-KSB for the fiscal year ended December 31, 2003).10.5
    Executive Employment Agreement for Donald W. Tew effective January 1, 2004.
(incorporated by reference to Exhibit 10.5 to Community
Financials 10-KSB for the fiscal year ended December 31, 2003).10.6
    Description of Management Bonus Plan.
(incorporated by reference to Exhibit 10.6 to Community
Financials 10-KSB for the fiscal year ended December 31, 2003).10.7
    Executive Long-Term Care Policy.
(incorporated by reference to Exhibit 10.7 to Community
Financials 10-KSB for the fiscal year ended December 31, 2003).10.8
    Amended and Restated Trust Agreement dated as of March 26, 2004, by and among
the Company, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee
(incorporated by reference to Exhibit 10.1 to Community Financials Quarterly Report on
Form 10-QSB for the period ended March 31, 2004)10.9
    Guarantee Agreement dated as of March 26, 2004, by and between the Company, as
Guarantor, and Wilmington Trust Company, as Guarantee Trustee (incorporated by
reference to Exhibit 10.2 to Community Financials Quarterly Report on Form 10-QSB for
the period ended March 31, 2004)10.10
    Junior Subordinated Indenture dated as of March 26, 2004, by and between the
Company and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit
10.3 to Community Financials Quarterly Report on Form 10-QSB for the period ended
March 31, 2004).14
    Code of Ethics (incorporated by reference to Exhibit 14.1 to Community
Financials Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003).21
    Subsidiaries of the Registrant24
    Power of Attorney (see signature page to this Report on Form 10-KSB).31.1
    Certification of Principal Executive Officer.31.2
    Certification of Principal Financial Officer.32.1
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.32.2
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.99.1
    Safe Harbor Compliance Statement for Forward-Looking Statements. 
 Item 14. Principal Accountant Fees and Services. The information contained under the section captioned Ratification of Appointment of
Auditors in the Companys Proxy Statement is incorporated herein by reference. 53




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SIGNATURES In accordance with the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. COMMUNITY FINANCIAL HOLDING COMPANY, INC.Dated: March 24, 2005
    
    
    
    By:
    
    /s/Thomas J. MartinThomas J. MartinPresident and Chief Executive Officer
 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the signature page
to this report constitutes and appoints Thomas J. Martin and Ann K. Marshall, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any and all amendments
to this report, and to file the same, with all exhibits hereto, and other documents in connection
herewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of the, or their or his substitutes, may lawfully do or cause to be done by
virtue hereof. In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated. /s/ Thomas J. Martin

     Thomas J. Martin
    
    Chairman of the
Board, President and
Chief Executive
Officer (Principal
Executive Officer)
    
    March 24, 2005/s/ Ann K. Marshall

     Ann K. Marshall
    
    Executive Vice
President and Chief
Financial Officer
(Principal
Accounting and
Financial Officer)
    
    March 24, 2005/s/ Frank W. Bell, Jr.

     Frank W. Bell, Jr.
    
    Director
    
    March 24, 2005/s/ James B Braden

     James B. Braden
    
    Director
    
    March 24, 2005/s/ J. Terry Gordon

     J. Terry Gordon
    
    Director
    
    March 24, 2005/s/ Miles H. Mason, III

     Miles H. Mason, III, M.D.
    
    Director
    
    March 24, 2005/s/ Don F. Phillips

     Don F. Phillips, Jr.
    
    Director
    
    March 24, 2005/s/ Daniel E. Reeves

     Daniel E. Reeves
    
    Director
    
    March 24, 2005/s/ Franklin M. Rinker

     Franklin M. Rinker
    
    Director
    
    March 24, 2005
 54