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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
    FORM 10-KSB    FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition
period from ______ to ______
 Commission File Number: 333-89972 Community Financial Holding Company, Inc.  Georgia
    
    04-3641019(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)2775 Buford Highway
    
    30096Duluth, Georgia
    
    (Zip Code)(Address of Principal Executive Offices)
 Registrants telephone number, including area code: (770) 476-2775 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Exchange on Which RegisteredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not 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. x State issuers revenues for its most recent fiscal year: $11.5 million. As of March 24, 2004, there were issued and outstanding 1,200,894 shares
of the registrants common stock. The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the price at which the common equity was sold, was $13.7 million. Portions of the Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed on or about April 1, 2004 are incorporated by
reference with respect to Part III. Transition Small Business Disclosure Format. Yes o No x




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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 and Related Stockholder MattersItem 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 ProceduresPART 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. Exhibits and Reports on Form 8-KItem 14. Principal Accountant Fees and ServicesSIGNATURESEX-10.3 EXECUTIVE EMPLOYMENT AGMT THOMAS J. MARTINEX-10.4 EXECUTIVE EMPLOYMENT AGMT ANN K. MARSHALLEX-10.5 EXECUTIVE EMPLOYMENT AGMT DONALD W. TEWEX-10.6 DESCRIPTION OF MANAGEMENT BONUS PLANEX-10.7 EXECUTIVE LONG-TERM CARE POLICYEX-14 CODE OF ETHICSEX-31.1 SECTION 302 CERTIFICATION OF PEOEX-31.2 SECTION 302 CERTIFICATION OF PFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFOEX-99.1 SAFE HARBOR COMPLIANCE STATEMENT    Table of Contents  Cautionary Notice
Regarding Forward-Looking Statements Community Financial Holding Company, Inc. (Community Financial, 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 stockholders 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 $197 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. 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, 2003, we had deposits of approximately $180 million and
approximately 6,075 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, 2003. Deposit Mix At December 31, 2003Non-interesting bearing demand
    
    
    10.05
    %NOW accounts and money market
    
    
    18.34
    %Savings
    
    
    3.96
    %Time Deposits Under $100,000
    
    
    37.20
    %Time Deposits $100,000 and over
    
    
    30.45
    %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, 2003, we had approximately $154 million in total loans
outstanding, representing 78% of our total assets of approximately $197
million. The loan portfolio is made up of both fixed and adjustable rate
loans. Approximately 59% of our total loan portfolio is fixed rate and 41% is
adjustable rate as of December 31, 2003. The following table summarizes the
historical mix of loans in our portfolio: December 31,
    
    December 31,
    
    December 31,
    
    December 31,Loan Type
    
    2000
    
    2001
    
    2002
    
    2003Commercial
    
    
    28.5
    %
    
    
    21.5
    %
    
    
    25.4
    %
    
    
    24.3
    %Real estate
    
    
    59.1
    %
    
    
    70.4
    %
    
    
    65.4
    %
    
    
    68.6
    %Consumer
    
    
    12.4
    %
    
    
    8.1
    %
    
    
    9.2
    %
    
    
    7.1
    %
 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 73% of the total outstanding
loans by dollar have been reviewed in 2003 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 $106 million, or
68%, of total loans as of December 31, 2003. Approximately 55% of the real
estate loans are fixed rate and 45% 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, 2003, commercial
loans constituted approximately $37 million, or 24% of total loans.
Approximately 69% of commercial loans are fixed rate, while 31% 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, 2003, we held approximately $11
million of consumer loans, representing 7% of total loans. Consumer loans are primarily fixed rate in nature with 70% 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 secondary-market mortgage
activities whereby we originate mortgage loans on behalf of investor
correspondent lenders who fund the loans. The investor correspondent lenders
underwrite and price the loans and we receive a fee for originating and
packaging the 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. 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. 5




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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 97% 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. Duluth, 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 $7.1 billion at June 30, 2003, compared to
total deposits of approximately $2.9 billion in 1993. We held a market share
of 2.38% of total deposits in Gwinnett County at June 30, 2003. 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, 2003, Gwinnett
County was served by a total of 34 financial institutions, with a total of 167
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 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. 6




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Employees As of December 31, 2003, Gwinnett Community Bank had 41 full-time
equivalent employees, including 5 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 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 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 7




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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 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. 8




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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. 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; 9




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
    
    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. In addition, the Georgia Fair Lending Act (GAFLA) imposes certain
restrictions and procedural requirements on most mortgage loans made in the
state of Georgia, including home equity loans and lines of credit. However, on
August 5, 2003, the Office of the Comptroller of the Currency (the OCC), the
primary federal regulator for national banks, determined that federal law
preempts the entirety of GAFLA as to national banks and their operating
subsidiaries. GAFLA contains a provision that preempts GAFLA as to state banks
in the event that the OCC determines that federal law preempts GAFLA as to
national banks. Therefore, the Bank is exempt from the requirements of GAFLA. 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 2003,nor
was it required to pay a deposit insurance assessment in 2004. Gwinnett
Community Bank was required to pay the Bank Insurance Fund Financial
Corporation (FICO) assessment in 2003, and will also pay this assessment in
2004. The FICO assessment rate is set quarterly, and is $1.54 per $100 of Bank
deposits for the first quarter of 2004. 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 fifteen-cent per share dividend to the shareholders of record on
April 1, 2004 that will be paid on May 1, 2004. 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: 10




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##### Table of Contents




    
    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. Furthermore, among the conditions to the DBFs approval of Gwinnett
Community Banks Articles of Incorporation, the DBF required Gwinnett Community
Banks Board of Directors to adopt resolutions committing: (i) that Gwinnett
Community Bank will not pay dividends until Gwinnett Community Bank has
recovered Bank start-up losses and Gwinnett Community Bank is making a
cumulative profit, and (ii) that Gwinnett Community Bank will maintain a Tier 1
Leverage Ratio of not less than 8% during Gwinnett Community Banks first three
years of operation, i.e., through October 2002. Gwinnett Community Bank recovered its start-up losses and achieved a
cumulative profit at the end of April 2002. As of December 31, 2003, Gwinnett
Community Banks Tier 1 Leverage Ratio was 8.23%. To date, Gwinnett Community
Bank has paid no dividends. At December 31, 2003, the Bank could pay a cash dividend to the Company
without obtaining prior regulatory approval. It is anticipated that the Bank
will pay dividends to the Company in the approximate amount of $180,000 for the
purpose of paying a dividend to its shareholders. 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 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 11




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##### Table of Contents



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. 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. 12




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##### Table of Contents



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, 2003: To Be Adequately
    
    To Be WellCapitalized
    
    Capitalized
    
    ActualAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs 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
    %As of December 31, 2002:Total Capital to Risk Weighted AssetsCommunity Financial
    
    $
    11,463
    
    
    
    38.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    15,949
    
    
    
    11.11
    %Gwinnett Community Bank
    
    
    11,463
    
    
    
    38.0
    %
    
    
    14,329
    
    
    
    310.0
    %
    
    
    14,750
    
    
    
    10.29
    %Tier I Capital to Risk Weighted
AssetsCommunity Financial
    
    $
    5,732
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    14,350
    
    
    
    10.00
    %Gwinnett Community Bank
    
    
    5,732
    
    
    
    34.0
    %
    
    
    8,597
    
    
    
    36.0
    %
    
    
    13,151
    
    
    
    9.18
    %Tier I Capital to Average AssetsCommunity Financial
    
    $
    6,538
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/A
    
    
    $
    14,350
    
    
    
    8.78
    %Gwinnett Community Bank
    
    
    6,538
    
    
    
    34.0
    %
    
    
    8,173
    
    
    
    35.0
    %
    
    
    13,151
    
    
    
    8.05
    %
 In addition to the federal regulatory capital requirements applicable to
Gwinnett Community Bank, and another condition to its approval of Gwinnett
Community Banks Articles of Incorporation, the DBF required Gwinnett Community
Banks Board of Directors to commit to maintain Gwinnett Community Banks Tier
1 Leverage Ratio at not less than 8% during Gwinnett Community Banks first
three years of operation commencing upon the effective date of the Permit to
begin Business (the Permit) issued by the DBF. The DBF issued Gwinnett
Community Banks Permit effective October 18, 1999. Gwinnett Community Bank
maintained its Tier 1 Leverage Ratio at or above 8% until September 30, 2001;
however, at December 31, 2001, its Tier 1 Leverage Ratio was 6.9% and at March
31, 2002, its Tier 1 Leverage Ratio was 6.53%. On June 28, 2002, we borrowed $2.5 million in order to return the Tier 1
Leverage Ratio of Gwinnett Community Bank to the 8% level required by the DBF
until October 18, 2002. We contributed $2.2 million of the loan proceeds to
Gwinnett Community Bank to bring Gwinnett Community Banks Tier 1 Leverage
Ratio up to the 8% required by the DBF. We retained $300,000 of the loan
proceeds for general corporate purposes, which may include additional
contributions to Gwinnett Community Banks capital, as needed, to maintain
compliance with the DBFs Tier 1 Leverage Ratio requirement. As of June 30,
2002, Gwinnett Community Banks Tier 1 Leverage Ratio was 8.09%, and therefore
complied with the DBFs 8% requirement. United Community Bank, Blairsville, Georgia, a third party not affiliated
with us or Gwinnett Community Bank, granted us the $2.5 million loan. The loan
was a revolving line of credit for which we pledged 100% of the outstanding
shares of Gwinnett Community Bank as collateral. The rate of interest for the
loan was prime minus 50 basis points, which was 4.25% as of May 20, 2002.
Repayment terms included interest-only payments for the first two years of the
loan, and level annual principal payments of $250,000 plus accrued interest for
10 years thereafter. The loan had no prepayment penalty. 13




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##### Table of Contents



In connection with the Federal Reserve Bank of Atlantas approval of our
request to incur the $2.5 million debt, we committed that: (i) our Board of
Directors would purchase at least $1.0 million of our planned public offering
for sale, at $15 per share, of up to 666,667 shares of our $5 par value common
stock; (ii) if sufficient funds were raised in the offering, we would repay the
$2.5 million debt within 30 days of the expiration of the offering; (iii) if
sufficient funds were not raised in the offering to repay the debt in full, and
if Gwinnett Community Bank was unable to pay dividends sufficient to support
our service of the debt, our Board of Directors would personally service the
debt; and (iv) until Gwinnett Community Bank has operated for five years, i.e.,
until October 2004, we will not pay dividends to our shareholders without the
prior approval of the Federal Reserve Bank of Atlanta. On December 12, 2002, the stock offering was closed. We raised $5.0
million in our stock issue and repaid the debt totaling $2.5 million to United
Community Bank. We contributed an additional $1.0 million to the capital of
Gwinnett Community Bank to support additional future asset growth. The
remaining $1.5 million was retained by us for future needs, including future
additional contributions to the capital of Gwinnett Community Bank. We
notified the Federal Reserve Bank of Atlanta of the retirement of the debt and
were released from all conditions that were imposed in connection with the
approval to incur debt, with the exception of not incurring any additional debt
without prior regulatory approval. In order to maintain Gwinnett Community Banks status as a
well-capitalized institution under the capital requirements discussed above, we
are currently exploring the possibility of raising approximately $5.5 million
of additional capital through an offering of trust preferred securities. If
consummated, the offering would result in the issuance by a subsidiary business
trust formed by us of preferred stock redeemable 30 years from issuance and
paying a quarterly coupon which may be deferred for up to 20 quarters at our
election. The proceeds of the offering would be loaned by the trust subsidiary
to us pursuant to a subordinated debenture and then contributed by us to the
capital of Gwinnett Community Bank. There can be no assurance that we will
complete the offering or otherwise obtain additional capital. If we are unable
to maintain Gwinnett Community Banks status as a well-capitalized institution,
Gwinnett Community Bank may be required to pay higher deposit insurance
premiums and face additional regulatory scrutiny. 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. 14




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##### Table of Contents



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. 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. 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. 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: 15




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##### Table of Contents




    
    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. 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 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. The net book values of the building and equipment as of December 31, 2003,
were $3.7 million and $671,000, 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. (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 16




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##### Table of Contents



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 stockholders. Gwinnett
Community Banks investments are primarily acquired to provide income,
liquidity, investment diversity and, to a lesser extent, possible capital gain. (c) Description of Real Estate and Operating Data. Not Applicable. 
 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, 2003. 
 PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters. There is no public trading market for Community Financial stock. We had
approximately 607 shareholders of record as of December 31, 2003. At December
31, 2003, there were 1,200,894 shares outstanding. Our ability to pay
dividends to stockholders 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. The Board of Directors approved a
fifteen-cent per share dividend to the shareholders of record on April 1, 2004
that will be paid on May 1, 2004. 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. 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, 2003
    
    December 31, 2002
    
    December 31, 2001Asset
    
    $
    197,488,450
    
    
    $
    169,055,418
    
    
    $
    123,840,266Annual Growth Rate (prior 12 months)
    
    
    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 17




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$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 were 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 2003 as
compared to 2002 (and 2002 compared to 2001) and also analyzes our financial
condition as of December 31, 2003 as compared to December 31, 2002. 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 2003 and 2002 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. 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 financial statements
and the related notes and the other statistical information also included in
this report. Executive Summary In 2003 we began planning to open our first branch office. In 2004, the
Company opened this branch facility in Suwanee, Georgia. The costs associated
with the new location may have an adverse effect on earnings for the first 12
to 18 months of operations. In addition, the Company has entered a new line of
lending activity, SBA Lending (Small Business Administration). It is our
objective to obtain a certified lender status. The SBA must underwrite these
loans until we receive our certification. We anticipate this will take as much
as twelve months. The lack of certification will reduce the number of SBA
loans that could be processed, thereby limiting the revenue from the new
product line until certification is obtained. The area of greatest uncertainty for 2004 is the cost and impact of
compliance with the Sarbanes-Oxley Act of 2002. There are two areas of the Act
that will impact our business in the near future. Audit costs will increase as
the
Company will be required to engage different accounting firms to perform
our financial statement audit and our outsourced internal audit program in
compliance with the new requirements of the Sarbanes-Oxley Act. Prior to 2004,
using the same firm provided some cost savings. Additionally, in 2005 our
audit procedures will have to be expanded to include testing 18




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necessary for our
external accountant to report on our assessment of our internal controls.
Compliance with Section 404 of the Sarbanes-Oxley Act requires the review and
documentation of the controls within the organization, including: manual
controls, computer controls, security controls, fraud programs, the financial
reporting process and Audit Committee oversight. The project will require many
of the Companys resources including managements time. The cost for
compliance is not yet determinable but an estimate has been made in our 2004
operating budget of $150,000. In 2003 Gwinnett Community Bank became a member of the Federal Home Loan
Bank (FHLB). It is the Banks intention to gather deposits within our local
market as our primary source of funding. The association with the FHLB provides
an additional source of funds at a competitive rate. The Bank may draw
advances up to 75% of the outstanding balance of 1 to 4 family first mortgage
loans which would collateralize the line. In addition, the Bank may borrow up
to 10% of total assets and secure those borrowings with investments, cash
accounts and other types of loans. The Bank intends to use the line only as a
secondary source of funds due to the additional record keeping requirements. Recent Accounting Pronouncements Accounting standards that have been issued or proposed by the Financial
Accounting Standards Board (FASB) and other standard setting entities that do
not require adoption until a future date are either not directly applicable at
the present time or are not expected to have a material impact on the Companys
consolidated financial statements upon adoption. 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 LossesThe 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. 19




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Deferred
Income Tax Valuation Allowance



Accounting principles for income taxes require management to evaluate its
ability to realize the future benefits of deferred tax assets. When it is
more likely than not that some portion or all of the deferred tax asset
will not be realized, accounting principles require that a valuation
allowance be imposed against the deferred tax assets.Future income tax benefits associated with operating loss carryforward
amounts are required to be recognized under the accounting principles.
When management assesses the likelihood of its ability to realize deferred
tax assets, projected future taxable income can be considered under the
accounting principles. Additionally, deferred tax liability reversals and
tax planning strategies can be considered.Projecting future taxable income involves many assumptions about asset
growth, interest rate margins, and other expense and revenue estimations.
Correspondingly, utilization of projected future taxable income amounts in
determining the likelihood of managements ability to realize deferred tax
assets introduces significant subjectivity to the measurement of these
assets.Management maintained an allowance against all deferred tax assets
including those associated with operating loss carryforwards until
consistent and sustainable monthly taxable earnings were established over
a period of approximately a year. The valuation allowance for deferred
income tax assets was reversed in 2001 when it became more likely than not
that future taxable income would be sufficient to realize the deferred tax
benefits.Because the imposition or reversal of an allowance for deferred income
taxes directly impacts the recorded income tax expense for a given period,
operating results are subject to significant changes upon movement in the
allowance for deferred income tax assets. 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 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 $1,742,119 in 2003, compared to $1,222,724 in 2002.
Diluted net earnings per share were $1.36 for 2003, compared to $1.25 per share
reported in 2002. Return on average assets and return on average stockholders
equity for 2003 was .96% and 12.20%, respectively, compared with .84% and
12.17%, respectively, for 2002. Net interest income increased by $1.09 million or 19.72% in 2003 driven by
an increase in the volume of loans, an increase in earnings on tax-exempt
securities, and reduced interest rates on deposits. Net interest income at
December 31, 2003, was $6.66 million compared to $5.57 million in 2002. Net
yield (tax equivalent) on interest earning assets (3.93% in 2003 and 4.10% in
2002) decreased by 17 basis points in 2003 from 2002 due to a sluggish
beginning to the economy in 2003 and increased competition causing a reduction
in lending yields. 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 20




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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 3.53% in 2003 and 3.69%
in 2002, while the net interest margin was 3.93% in 2003 and 4.10% in 2002.
The net interest margin has continued to decline over the past two years as
market interest rates have fallen. As the competition matched market rates,
pressure was placed on the established floor rate and it was lowered for all
new credits in 2003. Although interest rates have stabilized, a slight further
decline is possible as loans which contain a re-pricing provision are
renegotiated. Management believes interest rates will remain stable or
slightly increase in the foreseeable future, and if this is the case, the net
interest margin will also stabilize. 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 two years, the relationship
between interest income and interest expense and the average balances of
interest earning assets and interest bearing liabilities. Table 1
Average Balance Sheets and Net Interest Analysis
(in thousands) For the Years Ended December 31,2003
    
    2002Average
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/Rate
    
    Balance
    
    Interest
    
    Yield/RateAssets:Interest earnings assets:Loans (including loan fees)
    
    $
    136,679
    
    
    
    9,675
    
    
    
    7.08
    %
    
    
    111,206
    
    
    
    8,682
    
    
    
    7.81
    %Investment securities:Taxable
    
    
    20,619
    
    
    
    906
    
    
    
    4.39
    %
    
    
    16,238
    
    
    
    975
    
    
    
    6.00
    %Tax-exempt
    
    
    5,133
    
    
    
    279
    
    
    
    5.43
    %
    
    
    1,021
    
    
    
    71
    
    
    
    6.95
    %Interest bearing deposits with other banks
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    3
    
    
    
    7.50
    %Federal funds sold
    
    
    9,610
    
    
    
    103
    
    
    
    1.07
    %
    
    
    7,697
    
    
    
    120
    
    
    
    1.56
    %Total interest earning assets
    
    
    172,045
    
    
    
    10,963
    
    
    
    6.37
    %
    
    
    136,202
    
    
    
    9,851
    
    
    
    7.23
    %Other non-interest earnings assets
    
    
    9,485
    
    
    
    
    
    
    
    
    
    
    
    8,589Total assets
    
    $
    181,530
    
    
    
    
    
    
    
    
    
    
    
    144,791Liabilities and stockholders equity:Interest-bearing liabilities:Deposits:Interest-bearing demand and savings
    
    $
    38,782
    
    
    
    441
    
    
    
    1.14
    %
    
    
    35,626
    
    
    
    715
    
    
    
    2.01
    %Time
    
    
    109,144
    
    
    
    3,757
    
    
    
    3.44
    %
    
    
    84,447
    
    
    
    3,544
    
    
    
    4.20
    %Federal funds purchased and securities
sold under repurchase agreements
    
    
    800
    
    
    
    6
    
    
    
    .75
    %
    
    
    227
    
    
    
    2
    
    
    
    .88
    %Total interest-bearing liabilities
    
    
    148,726
    
    
    
    4,204
    
    
    
    2.83
    %
    
    
    120,300
    
    
    
    4,261
    
    
    
    3.54
    %Non-interest bearing deposits
    
    
    18,058
    
    
    
    
    
    
    
    
    
    
    
    14,089Other liabilities
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    358Stockholders equity
    
    
    14,279
    
    
    
    
    
    
    
    
    
    
    
    10,044Total liabilities and
stockholders equity
    
    $
    181,530
    
    
    
    
    
    
    
    
    
    
    
    144,791Excess of interest-earning assets over
interest-bearing liabilities
    
    $
    23,319
    
    
    
    
    
    
    
    
    
    
    
    15,902Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    115.68
    %
    
    
    
    
    
    
    
    
    
    
    113.22
    %Net interest income
    
    
    
    
    
    
    6,759
    
    
    
    
    
    
    
    
    
    
    
    5,590Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.53
    %
    
    
    
    
    
    
    
    
    
    
    3.69
    %Net interest yield on interest earning
assets
    
    
    
    
    
    
    
    
    
    
    3.93
    %
    
    
    
    
    
    
    
    
    
    
    4.10
    %
 21




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##### Table of Contents



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, 2003 and 2002
includes loan fees in the amount of $732,661 and $677,659, 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. Table 2
Changes in Interest Income and Expense(in thousands) Increase (decrease) due to changes in:2003 over 2002
    
    2002 over 2001Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    TotalInterest income on:Loans (including loan fees)
    
    $
    1,676
    
    
    
    (683
    )
    
    
    993
    
    
    
    3,936
    
    
    
    (1,099
    )
    
    
    2,837Investment securities:Taxable
    
    
    228
    
    
    
    (297
    )
    
    
    (69
    )
    
    
    (465
    )
    
    
    52
    
    
    
    (413
    )Tax-exempt
    
    
    220
    
    
    
    (12
    )
    
    
    208
    
    
    
    71
    
    
    
    
    
    
    
    71Interest bearing deposits with other banks
    
    
    (1
    )
    
    
    (2
    )
    
    
    (3
    )
    
    
    (61
    )
    
    
    8
    
    
    
    (53
    )Federal funds sold
    
    
    66
    
    
    
    (83
    )
    
    
    (17
    )
    
    
    35
    
    
    
    (186
    )
    
    
    (151
    )Total interest earning assets
    
    
    2,189
    
    
    
    (1,077
    )
    
    
    1,112
    
    
    
    3,516
    
    
    
    (1,225
    )
    
    
    2,291Interest expense on:Deposits:Interest-bearing demand and savings
    
    
    70
    
    
    
    (344
    )
    
    
    (274
    )
    
    
    386
    
    
    
    (326
    )
    
    
    60Time
    
    
    553
    
    
    
    (340
    )
    
    
    213
    
    
    
    1,231
    
    
    
    (1,068
    )
    
    
    163Federal funds purchased repurchase
agreements
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    1
    
    
    
    (4
    )
    
    
    (3
    )Total interest-bearing liabilities
    
    
    627
    
    
    
    (684
    )
    
    
    (57
    )
    
    
    1,618
    
    
    
    (1,398
    )
    
    
    220Increase (decrease) in net interest income
    
    $
    1,562
    
    
    
    (393
    )
    
    
    1,169
    
    
    
    1,898
    
    
    
    173
    
    
    
    2,071
 Other operating income in 2003 of $709,000 increased $171,000 from the
2002 total of $537,000 or 31.8%. Service charges on deposit accounts increased
by $69,000 due to more than 700 new accounts and a increase of $32,000 in
non-sufficient fund charges. Mortgage origination income increased by $10,000
as the average loan amount increased and the volume decreased. Mortgage
origination income totaled $187,000 and $178,000 in 2003 and 2002,
respectively, on loan volumes of $18 million in each year. The bank poised
itself to take advantage of the refinance and low interest rate market over the
last two years. As interest rates climb, the demand for refinance will
diminish and new home buying may slow. This will have an impact on the
earnings in the mortgage origination area. Management is aware of the
potential for the loss of income in this area and is currently looking at
alternatives for replacing income. Gains on the sale of investment securities
increased by $67,000 as the company elected to sell some of the investments to
improve duration and the risk weighting of securities in the portfolio. The
increase in other income was primarily due to rental income from an arrangement
with a securities broker of $17,000 and $5,000 in rental income from available
office space in the main office building. Other expenses increased approximately $711,000 in 2003 or 19.87% over the
2002 balance of $3.6 million. Salaries increased by approximately $350,000 due
to merit increases and the increased number of personnel required. In
addition, other operating expenses increased $365,000. The following table
details changes in other operating expense from 2003 to 2002: 22




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Table 3
Changes in Other Expense Increase/2003
    
    2002
    
    DecreaseBusiness Development
    
    $
    164,464
    
    
    
    55,028
    
    
    
    109,436Legal and Professional Fees
    
    
    273,603
    
    
    
    171,580
    
    
    
    102,023Charitable Contributions
    
    
    45,033
    
    
    
    16,575
    
    
    
    28,458Advertising and Public Relations
    
    
    95,599
    
    
    
    106,796
    
    
    
    (11,197
    )Stationary and Supplies
    
    
    75,325
    
    
    
    61,755
    
    
    
    13,570Directors Fees
    
    
    46,600
    
    
    
    4,300
    
    
    
    42,300Various Operating Expenses
    
    
    380,059
    
    
    
    384,911
    
    
    
    (4,852
    )Data Processing
    
    
    255,661
    
    
    
    251,064
    
    
    
    4,597County and City Taxes
    
    
    169,173
    
    
    
    87,742
    
    
    
    81,431Total Other Expense
    
    $
    1,505,517
    
    
    
    1,139,751
    
    
    
    365,766
 Business development costs increased by $109,000 due to the implementation
of an aggressive customer development program. Legal and professional fees
increased by $102,000 which consists of: $50,000 increase in legal fees which
were attributable to the collection of a debt where the customer declared
bankruptcy and $34,000 in consultant fees paid to aid the Directors with
executive compensation issues. Charitable contributions increased $28,000 as
the Company made a donation to Habitat for Humanity of $10,000. Directors
fees increased $42,000 as director fees were implemented in December of 2002
and only one month of fees were paid in 2002 and twelve months were paid in
2003. City and County Occupational and Business License Taxes, which are based
on gross receipts, increased by $81,000 from 2002 to 2003. For the years ended December 31, 2002 and 2003, the effective tax rate was
36% and 35%, respectively, as state income tax more than offset the effects of
tax-exempt income. In 2001, Community Financial reversed the deferred tax
valuation allowance of $407,800 because it became more likely than not that
future taxable income will be sufficient to realize the tax benefits for
deductible temporary differences including loss carryforwards. For more
information on Community Financials income taxes, see note 7 to the
consolidated financial statements. Balance Sheet Review During 2003, average total assets increased $36.7 million (25.4%) over
2002. Average deposits increased $31.8 million (23.7%) in 2003 over 2002.
Average loans increased $25.5 million (22.9%) in 2003 over 2002. In 2002,
average total assets increased $49.1 million (51.3%) over 2001. Average
deposits increased $46.8 million (53.6%) in 2002 over 2001. Average loans
increased $48.7 million (77.9%) in 2002 over 2001. 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. 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, 2002, were $169 million, representing a $45.2
million (36.5%) increase from December 31, 2001. Total deposits increased
$39.3 million (34.4%) from 2001 to 2002 while total gross loans increased $31.5
million (32.5%) during 2002. Time deposits increased $23.2 million from 2001
to 2002 while all other deposit accounts increased $16.1 million in 2002. 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. 23




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##### Table of Contents



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, 2003 and 2002: 2003
    
    2002United States treasuries and agencies
    
    $
    14,550
    
    
    
    9,319Mortgage-backed securities
    
    
    4,065
    
    
    
    6,603Municipal securities
    
    
    5,241
    
    
    
    3,036Corporate securities
    
    
    2,391
    
    
    
    1,543Trust Preferred securities
    
    
    1,763
    
    
    
    500$
    28,010
    
    
    
    21,001Other investments:The Bankers Bank stock
    
    $
    100
    
    
    
    100Federal Home Loan Bank stock
    
    
    170
    
    
    
    $
    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,
2003. 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, 2003, 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. Table 5
Expected Maturity of Securities
(in thousands) United States
    
    Mortgage-
    
    
    
    
    
    Trust
    
    
    
    
    
    WeightedMaturities at
    
    Treasuries and
    
    Backed
    
    Corporate
    
    Preferred
    
    
    
    
    
    AverageDecember 31, 2003
    
    Agencies
    
    Securities
    
    Securities
    
    Securities
    
    Municipals
    
    YieldsWithin 1 year
    
    $
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.72
    %After 1 through 5 years
    
    
    1,999
    
    
    
    1,153
    
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    3.07
    %After 5 through 10 years
    
    
    8,598
    
    
    
    463
    
    
    
    1,504
    
    
    
    
    
    
    
    953
    
    
    
    4.44
    %After 10 years
    
    
    3,990
    
    
    
    2,384
    
    
    
    300
    
    
    
    1,759
    
    
    
    4,316
    
    
    
    4.59
    %$
    14,587
    
    
    
    4,022
    
    
    
    2,310
    
    
    
    1,759
    
    
    
    5,269
 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. 24




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##### Table of Contents



Table 6
Loan Portfolio
(in thousands) The following table presents loans by type at the end of each of the last
two years. December 31,2003
    
    2002Commercial
    
    $
    37,479
    
    
    
    32,656Real estate
    
    
    105,708
    
    
    
    84,001Consumer
    
    
    10,906
    
    
    
    11,796154,093
    
    
    
    128,453Less: Unearned loan fees
    
    
    304
    
    
    
    251Allowance for loan losses
    
    
    1,664
    
    
    
    1,599Loans, net
    
    $
    152,125
    
    
    
    126,603
 The following tables set forth the maturity distribution of all loans,
including the interest rate sensitivity as of December 31, 2003. Table 7
Loan Portfolio Maturity
(in thousands) Maturity
    
    Commercial
    
    Real Estate
    
    Consumer
    
    TotalWithin 1 year
    
    $
    14,418
    
    
    
    46,055
    
    
    
    4,127
    
    
    
    64,6001 to 5 years
    
    
    15,642
    
    
    
    18,590
    
    
    
    3,754
    
    
    
    37,986After 5 years
    
    
    7,419
    
    
    
    41,062
    
    
    
    3,025
    
    
    
    51,506Totals
    
    $
    37,479
    
    
    
    105,707
    
    
    
    10,906
    
    
    
    154,092
 Fixed Interest
    
    Variable InterestRates
    
    Rates
    
    TotalCommercial:Within 1 year
    
    $
    7,093
    
    
    
    7,325
    
    
    
    14,4181 to 5 years
    
    
    14,544
    
    
    
    1,098
    
    
    
    15,642After 5 years
    
    
    4,163
    
    
    
    3,256
    
    
    
    7,41925,800
    
    
    
    11,679
    
    
    
    37,479Real Estate:Within 1 year
    
    
    11,257
    
    
    
    34,798
    
    
    
    46,0551 to 5 years
    
    
    17,435
    
    
    
    1,155
    
    
    
    18,590After 5 years
    
    
    29,298
    
    
    
    11,764
    
    
    
    41,06257,990
    
    
    
    47,717
    
    
    
    105,707Consumer:Within 1 year
    
    
    3,637
    
    
    
    490
    
    
    
    4,1271 to 5 years
    
    
    3,750
    
    
    
    3
    
    
    
    3,753After 5 years
    
    
    66
    
    
    
    2,960
    
    
    
    3,0267,453
    
    
    
    3,453
    
    
    
    10,906$
    91,243
    
    
    
    62,849
    
    
    
    154,092
 The provision for loan losses in 2003 was $400,292 compared to $613,000 in
2002. The provision for loan losses continues to reflect managements estimate
of potential 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 1.08% and 1.24% of total loans
outstanding at December 31, 2003 and 2002, respectively. Net charge-offs were
$335,000 and $146,000 and $149,000 in 2003, 2002 and 2001, respectively.
Management believes that these levels of allowance are appropriate based on
Gwinnett Community Banks loan portfolio and the current economic conditions. The increase in net charge-offs for 2003 was due to poor economic
conditions in 2002 and a sluggish economic recovery, which resulted in the
failure of two businesses. The first, an auto-repair shop, resulted in a net
loss of $160,000 25




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##### Table of Contents



after the collateral was liquidated. The second was an equipment company
loan, in which $115,000 was charged-off as the customer filed for bankruptcy
protection. Prior to year-end 2003, $33,000 was recovered on this debt.
Management expects to collect the remainder of the balance due on this account
in 2004 once the final accounting has been completed by the bankruptcy
trustees. The other significant charge-off was on a property loan where
$42,000 was charged-off and $35,000 was booked to ORE (Other Real Estate). The
Bank sold the property in 2004 and is holding the funds in escrow until a
zoning contingency is cleared. Once this occurs, the Bank will recover the
$35,000 booked in ORE and post a gain on the sale of ORE in the amount of
$35,000. The remaining $54,000, which was charged-off, consists of eight other
commercial and consumer accounts. 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 2003, 2002 and
2001. Additionally, the charge-off of loans also caused the provision for loan
losses to increase in 2003, 2002 and 2001. 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 at December 31, 2003 and
2002 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. Gwinnett Community Bank outsources the loan review function. In 2002 and
prior years the outsourced independent loan review was performed annually.
Beginning in the fall of 2003, Gwinnett Community Bank began an arrangement
with an outsourced independent loan company that performs quarterly loan
reviews and reports thereon. Loans are placed in various loan-grading
categories, which assist in developing a list 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. 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. A breakdown of the allowance for loan losses at December 31, 2003, is as
follows: Amount of
    
    % of LoansAllowance
    
    to Total loansCommercial loans
    
    $
    425,773
    
    
    
    24.3
    %Real estate loans
    
    
    1,127,980
    
    
    
    68.6
    %Consumer loans
    
    
    110,076
    
    
    
    7.1
    %$
    1,663,829
    
    
    
    100
    %
 At December 31, 2003 and 2002, Community Financial did not allocate the
allowance for loan losses to various loan categories. Management anticipated
$150,000 in net charge-offs for the year ended December 31, 2003; actual net
charge-offs for 2003 were $335,000. The anticipated amount of charge-offs
represented managements best estimate at the 26




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##### Table of Contents



time and was based on the limited historical experience of Gwinnett
Community Bank. Please refer to the explanation of increased charge-offs
previously discussed after Table 7. The following table presents a summary of changes in the allowance for
loan losses for each of the past three years. Table 8
Allowance for Loan Losses(in thousands) December 31,2003
    
    2002
    
    2001Balance at beginning of year
    
    $
    1,599
    
    
    
    1,132
    
    
    
    489Charge-offs:Commercial
    
    
    (293
    )
    
    
    (130
    )
    
    
    (143
    )Real estate
    
    
    (42
    )
    
    
    
    
    
    
    Installment loans to individuals
    
    
    (34
    )
    
    
    (19
    )
    
    
    (8
    )(369
    )
    
    
    (149
    )
    
    
    (151
    )Recoveries:Commercial
    
    
    33
    
    
    
    
    
    
    
    Real estate
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    1
    
    
    
    3
    
    
    
    234
    
    
    
    3
    
    
    
    2Net charge-offs
    
    
    (335
    )
    
    
    (146
    )
    
    
    (149
    )Additions charged to operations
    
    
    400
    
    
    
    613
    
    
    
    792Balance at end of year
    
    $
    1,664
    
    
    
    1,599
    
    
    
    1,132Ratio of net charge-offs during the period
to average loans outstanding during the
period
    
    
    .25
    %
    
    
    .13
    %
    
    
    .24
    %
 The following summarizes past due and non-accrual loans for the periods
presented: 2003
    
    2002
    
    2001Other real estate
    
    $
    34,600
    
    
    
    
    
    
    
    Accruing loans 90 days or more past due
    
    $
    
    
    
    
    
    
    
    
    Non-accrual loans
    
    $
    560,000
    
    
    
    102,000
    
    
    
    Interest on non-accrual loans which would
have been reported
    
    $
    55,100
    
    
    
    5,500
    
    
    
    
 As of December 31, 2003, non-performing assets were $594,500 compared to
$102,000 at December 31, 2002, an increase of $458,000 or 449%. The majority
of the increase ($436,000) was due primarily to an equipment company, which
filed for bankruptcy protection. This action was settled in January 2004 and
100% of the principal was repaid. The remaining balance in non-accrual loans
consists of $124,000 attributable to three customers: one secured by paving
equipment totaling $85,000 and two other consumer accounts totaling $39,000. A
specific allowance allocation totaling $19,000 has been set aside to absorb
possible losses on these loans. The property in ORE totals $35,000. The
property was sold in 2004 and the funds are in escrow until a zoning
contingency is cleared. The Bank expects to recover the balance in ORE as well
as $35,000 of the $42,000, which was originally charged off in 2003. 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 $54.8 million at December
31, 2003, compared to $44.3 at year-end 2002. The following table sets forth
the scheduled maturities of time deposits of $100,000 and greater at December
31, 2003. Table 9
Time Deposits $100,000 and Greater
(in thousands) Within 3 months
    
    $
    11,981After 3 through 6 months
    
    
    7,519After 6 through 12 months
    
    
    13,816After 12 months
    
    
    21,517Total
    
    $
    54,833
 Included in these time deposits of $100,000 and greater are brokered
deposits of $9,798,000 of which $4,318,000 mature within one year, $3,000,000
mature in 2005 and the remainder $2,480,000 mature in 2006. 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 $4.2 million to a total of $9.7
million at December 31, 2003, as cash flows provided by financing and operating
activities were out-paced by amounts used in investing activities. Cash
inflows from operations totaled $2.6 million in 2003, while inflows from
financing activities totaled $26.8 million, most of which were net deposit
increases during 2003 of $26.7 million. Investing activities used $33.6 million of cash and cash equivalents,
principally composed of net advances of loans to customers of $25.9 million and
purchases of investment securities of $30.1 million during 2003, offset by
$22.6 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, 2003: 28




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##### Table of Contents



Table 10
Capital Ratios 2003
    
    2002Consol.
    
    Bank
    
    Consol.
    
    BankTotal Capital
    
    
    10.46
    %
    
    
    10.37
    %
    
    
    11.11
    %
    
    
    10.29
    %Total Capital minimum requirement
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %Excess
    
    
    2.46
    %
    
    
    2.37
    %
    
    
    3.11
    %
    
    
    2.29
    %Tier 1 Capital
    
    
    9.48
    %
    
    
    9.39
    %
    
    
    10.00
    %
    
    
    9.18
    %Tier 1 Capital minimum requirement
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Excess
    
    
    5.48
    %
    
    
    5.39
    %
    
    
    6.00
    %
    
    
    5.18
    %Tier 1 Capital to adjusted total assets
(Leverage Ratio)
    
    
    8.31
    %
    
    
    8.23
    %
    
    
    8.78
    %
    
    
    8.05
    %Minimum leverage requirement
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Excess
    
    
    4.31
    %
    
    
    8.23
    %
    
    
    4.78
    %
    
    
    4.05
    %
 In addition to the above ratios, as a condition of opening, Gwinnett
Community Bank agreed with the DBF that it would maintain a Tier 1 capital
leverage ratio of 8% or higher until its third anniversary, October 18, 2002.
At December 31, 2002, Gwinnett Community Banks Tier 1 capital leverage ratio
was 8.05%. For a more complete discussion of the actual and required ratios of
Community Financial, see note 11 of the financial statements. Average equity to average assets was 7.87% in 2003, 6.94% in 2002, and
8.30% in 2001. No dividends have been declared or paid since inception. In
2004 management will evaluate the appropriateness of the payment of dividends. Community Financial has grown rapidly and as a result has deployed its
current capital. In the near future, additional capital will be required to
sustain our growth and maintain our well-capitalized status. Management has
reviewed several options to address the capital issues. One consideration is
to return to the equity market with an additional offering of common stock.
Another consideration would be to allow the bank to migrate to an adequately
capitalized position. This would increase the annual cost of FDIC insurance by
$67,200. Additionally, we considered utilizing a Trust Preferred instrument,
which we ultimately decided to pursue. A trust preferred instrument is a
long-term debt of the Company, which can be counted as tier one capital for
regulatory capital adequacy purposes. The additional benefit of the trust
preferred capital instrument is that it does not dilute the current
shareholders interest in the Company. The Company is in the process of issuing
$5.5 million in Trust Preferred Securities, pending negotiation of terms. We
anticipate an issuance cost of approximately $171,000, which will be amortized
over the life of the instrument (30 years). There can be no assurance that we
will complete the offering or otherwise obtain additional capital. 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 2003 the liquidity ratio fell within a range of 18% 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 29




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##### Table of Contents



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, 2003, 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 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
(in thousands) At December 31, 2003Maturing or Repricing inThree
    
    FourMonths or
    
    Months to
    
    1 to 5
    
    Over 5Less
    
    12 Months
    
    Years
    
    Years
    
    TotalInterest-earning assets:Federal funds sold
    
    $
    6,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,800Investment securities
    
    
    
    
    
    
    22
    
    
    
    3,658
    
    
    
    24,330
    
    
    
    28,010Loans
    
    
    49,351
    
    
    
    19,947
    
    
    
    34,720
    
    
    
    50,074
    
    
    
    154,092Other investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    270Total interest-bearing assets
    
    
    56,151
    
    
    
    19,969
    
    
    
    38,400
    
    
    
    74,652
    
    
    
    189,172Interest-bearing liabilities:Deposits:Demand and savings
    
    
    58,239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,239Time deposits
    
    
    27,795
    
    
    
    47,009
    
    
    
    38,764
    
    
    
    8,249
    
    
    
    121,817Retail repurchase agreements
    
    
    720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    720Total interest-bearing liabilities
    
    $
    86,754
    
    
    
    47,009
    
    
    
    38,764
    
    
    
    8,249
    
    
    
    180,776Interest sensitive difference
per period
    
    
    (30,603
    )
    
    
    (27,040
    )
    
    
    (364
    )
    
    
    66,403
    
    
    
    8,396Cumulative interest sensitivity
difference
    
    
    (30,603
    )
    
    
    (57,643
    )
    
    
    (58,007
    )
    
    
    8,396Cumulative difference to total
assets
    
    
    (15.50
    %)
    
    
    (29.19
    %)
    
    
    (29.37
    %)
    
    
    4.25
    %
 At December 31, 2003, the difference between Community Financials
liabilities and assets repricing or maturing within one year was $57.6 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 30




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##### Table of Contents



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. Most of the fixed rate loans, which are slotted by maturity
date, have a re-pricing opportunity due to a rate call feature. The rate call
feature allows the bank to re-price the loans at a three- or five-year interval
(depending on the note agreement) after the loan is made. There is
approximately $50 million in loans in this category. Another factor that is
not represented in the table is loans which have variable interest rates, which
have reached a floor limit are automatically slotted by their maturity date and
no longer by their re-pricing date. This is a correct assumption in a
declining rate environment, as the loan rate cannot reduce below its floor;
however, in a rising rate environment, these loans will re-price upward and
reduce the pressure on the net interest margin. The bank had more than $12
million in loans that are sitting at established floor rates. 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, $12 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 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 14 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. 
 Item 7. Financial Statements. COMMUNITY FINANCIAL HOLDING COMPANY, INC.
AND SUBSIDIARY Consolidated Balance Sheets Report of Independent Certified Public Accountants
    
    
    32Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    33Consolidated Statements of Earnings for the years ended December 31, 2003, 2002 and 2001
    
    
    34Consolidated Statements of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001
    
    
    35Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2003, 2002 and 2001
    
    
    36Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    
    
    37Notes to the Consolidated Financial Statements
    
    
    38
 31




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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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, 2003 and
2002, 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, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. \s\ Porter Keadle Moore, LLP Atlanta, Georgia
February 20, 2004 32




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2003 and 2002 2003
    
    2002AssetsCash and due
from banks, including cash reserve requirements of $784,000 and $588,000, respectively
    
    $
    2,972,743
    
    
    
    3,233,411Federal funds sold
    
    
    6,800,546
    
    
    
    10,747,622Cash and cash equivalents
    
    
    9,773,289
    
    
    
    13,981,033Investment securities available for sale
    
    
    28,010,058
    
    
    
    21,001,052Other investments
    
    
    269,734
    
    
    
    100,034Loans, net of allowances for loan losses of $1,663,829
and $1,598,956, respectively
    
    
    152,125,069
    
    
    
    126,603,048Premises and equipment, net
    
    
    5,709,560
    
    
    
    5,808,134Accrued interest receivable and other assets
    
    
    1,600,740
    
    
    
    1,562,117$
    197,488,450
    
    
    
    169,055,418Liabilities and Stockholders EquityDeposits:Demand
    
    $
    18,091,055
    
    
    
    14,352,872Interest-bearing demand and money market
    
    
    33,019,278
    
    
    
    36,139,726Savings
    
    
    7,128,273
    
    
    
    4,027,314Time
    
    
    121,816,593
    
    
    
    98,828,822Total deposits
    
    
    180,055,199
    
    
    
    153,348,734Retail repurchase agreements
    
    
    720,012
    
    
    
    660,017Accrued interest payable and other liabilities
    
    
    580,563
    
    
    
    509,126Total liabilities
    
    
    181,355,774
    
    
    
    154,517,877CommitmentsStockholders 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
    
    
    2,558,011
    
    
    
    815,892Accumulated other comprehensive income
    
    
    41,318
    
    
    
    188,302Total stockholders equity
    
    
    16,132,676
    
    
    
    14,537,541$
    197,488,450
    
    
    
    169,055,418
 See accompanying notes to consolidated financial statements. 33




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Statements of Earnings For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Interest and dividend income:Interest on
loans, including fees of $732,661, $677,659 and $529,807
    
    $
    9,674,865
    
    
    
    8,682,127
    
    
    
    5,845,200Interest on federal funds sold
    
    
    103,291
    
    
    
    120,099
    
    
    
    270,855Interest on government agencies securities
    
    
    696,245
    
    
    
    912,413
    
    
    
    1,358,309Interest on state, county and municipal securities
    
    
    203,054
    
    
    
    46,937
    
    
    
    Interest on deposits with other banks
    
    
    
    
    
    
    3,099
    
    
    
    55,517Interest and dividends on other investments
    
    
    190,520
    
    
    
    62,672
    
    
    
    30,254Total interest and dividend income
    
    
    10,867,975
    
    
    
    9,827,347
    
    
    
    7,560,135Interest expense:Interest-bearing demand and money market
    
    
    356,991
    
    
    
    677,816
    
    
    
    642,071Savings
    
    
    84,124
    
    
    
    36,854
    
    
    
    13,214Time
    
    
    3,757,028
    
    
    
    3,544,560
    
    
    
    3,385,398Other
    
    
    6,319
    
    
    
    2,214
    
    
    
    403Total interest expense
    
    
    4,204,462
    
    
    
    4,261,444
    
    
    
    4,041,086Net interest income
    
    
    6,663,513
    
    
    
    5,565,903
    
    
    
    3,519,049Provision for loan losses
    
    
    400,292
    
    
    
    613,072
    
    
    
    791,862Net interest income after provision for loan losses
    
    
    6,263,221
    
    
    
    4,952,831
    
    
    
    2,727,187Other income:Service charges on deposit accounts
    
    
    407,392
    
    
    
    337,924
    
    
    
    251,322Mortgage origination fees
    
    
    187,183
    
    
    
    177,507
    
    
    
    150,522Gains on sales of securities
    
    
    70,064
    
    
    
    3,601
    
    
    
    Other
    
    
    43,895
    
    
    
    18,403
    
    
    
    33,024Total other income
    
    
    708,534
    
    
    
    537,435
    
    
    
    434,868Other expenses:Salaries and employee benefits
    
    
    2,387,722
    
    
    
    2,039,086
    
    
    
    1,737,747Occupancy and equipment
    
    
    398,149
    
    
    
    401,341
    
    
    
    275,154Other
    
    
    1,505,517
    
    
    
    1,139,751
    
    
    
    818,817Total other expenses
    
    
    4,291,388
    
    
    
    3,580,178
    
    
    
    2,831,718Net earnings before income taxes
    
    
    2,680,367
    
    
    
    1,910,088
    
    
    
    330,337Income tax (expense) benefit
    
    
    (938,248
    )
    
    
    (687,364
    )
    
    
    291,396Net earnings
    
    $
    1,742,119
    
    
    
    1,222,724
    
    
    
    621,733Net earnings per common share:Basic earnings per common share
    
    $
    1.45
    
    
    
    1.30
    
    
    
    0.72Diluted earnings per common share
    
    $
    1.36
    
    
    
    1.25
    
    
    
    0.72
 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 Comprehensive Income For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Net earnings
    
    $
    1,742,119
    
    
    
    1,222,724
    
    
    
    621,733Other comprehensive income:Unrealized holding gains on investment securities available
for sale arising during period
    
    
    (152,639
    )
    
    
    138,012
    
    
    
    14,103Reclassification adjustment for (gains) losses on investment
securities available for sale
    
    
    (70,064
    )
    
    
    (3,601
    )
    
    
    Total other comprehensive income (loss) before tax
    
    
    (222,703
    )
    
    
    134,411
    
    
    
    14,103Income taxes related to other comprehensive income:Unrealized holding gains (losses) on investment securities
available for sale arising during period
    
    
    51,897
    
    
    
    (46,924
    )
    
    
    (4,795
    )Reclassification adjustment for gains (losses) on investment
securities available for sale
    
    
    23,822
    
    
    
    1,224
    
    
    
    Total income taxes related to other comprehensive
income (loss)
    
    
    75,719
    
    
    
    (45,700
    )
    
    
    (4,795
    )Total other comprehensive (loss) income, net of tax
    
    
    (146,984
    )
    
    
    88,711
    
    
    
    9,308Total comprehensive income
    
    $
    1,595,135
    
    
    
    1,311,435
    
    
    
    631,041
 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 Changes in Stockholders Equity For the Years Ended December 31, 2003, 2002 and 2001 Retained
    
    AccumulatedAdditional
    
    Earnings
    
    OtherCommon
    
    Paid-in
    
    (Accumulated
    
    ComprehensiveStock
    
    Capital
    
    Deficit)
    
    Income
    
    TotalBalance, December 31, 2000
    
    $
    4,337,800
    
    
    
    4,318,089
    
    
    
    (1,028,565
    )
    
    
    90,283
    
    
    
    7,717,607Unrealized gains on
securities available for
sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,308
    
    
    
    9,308Net earnings
    
    
    
    
    
    
    
    
    
    
    621,733
    
    
    
    
    
    
    
    621,733Balance, December 31, 2001
    
    
    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
    
    
    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
    
    
    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
    
    $
    6,004,470
    
    
    
    7,528,877
    
    
    
    2,558,011
    
    
    
    41,318
    
    
    
    16,132,676
 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 Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings
    
    $
    1,742,119
    
    
    
    1,222,724
    
    
    
    621,733Adjustments to reconcile net earnings to net cash used by operating
activities:Depreciation, amortization and accretion
    
    
    417,412
    
    
    
    192,251
    
    
    
    138,649Deferred income tax expense (benefit)
    
    
    18,600
    
    
    
    (119,600
    )
    
    
    (433,200
    )Provision for loan losses
    
    
    400,292
    
    
    
    613,072
    
    
    
    791,862Gain on sales of securities
    
    
    (70,064
    )
    
    
    (3,601
    )
    
    
    Change in:Accrued interest receivable and other assets
    
    
    37,400
    
    
    
    (226,057
    )
    
    
    (165,070
    )Accrued interest payable and other liabilities
    
    
    52,833
    
    
    
    199,278
    
    
    
    16,674Net cash provided by operating activities
    
    
    2,598,592
    
    
    
    1,878,067
    
    
    
    970,648Cash flows from investing activities:Net change in deposits with other banks
    
    
    
    
    
    
    199,000
    
    
    
    1,900,000Purchase of other investments
    
    
    (169,700
    )
    
    
    
    
    
    
    Purchase of investment securities
    
    
    (29,907,592
    )
    
    
    (15,221,829
    )
    
    
    (18,459,565
    )Proceeds from sales, calls, paydowns and maturities of investment
securities
    
    
    22,603,517
    
    
    
    11,888,776
    
    
    
    19,590,614Net change in loans
    
    
    (25,922,313
    )
    
    
    (31,584,949
    )
    
    
    (64,338,395
    )Purchases of premises and equipment
    
    
    (176,708
    )
    
    
    (218,315
    )
    
    
    (3,875,046
    )Net cash used by investing activities
    
    
    (33,572,796
    )
    
    
    (34,937,317
    )
    
    
    (65,182,392
    )Cash flows from financing activities:Proceeds from note payable
    
    
    
    
    
    
    2,500,000
    
    
    
    Repayment of note payable
    
    
    
    
    
    
    (2,500,000
    )
    
    
    Net change in federal funds purchased
    
    
    
    
    
    
    (1,149,000
    )
    
    
    1,149,000Net change in retail repurchase agreements
    
    
    59,995
    
    
    
    660,017
    
    
    
    Net change in deposits
    
    
    26,706,465
    
    
    
    39,277,585
    
    
    
    58,550,748Proceeds from issuance of common stock, net of offering costs
    
    
    
    
    
    
    4,877,458
    
    
    
    Net cash provided by financing activities
    
    
    26,766,460
    
    
    
    43,666,060
    
    
    
    59,699,748Net change in cash and cash equivalents
    
    
    (4,207,744
    )
    
    
    10,606,810
    
    
    
    (4,511,996
    )Cash and cash equivalents at beginning of period
    
    
    13,981,033
    
    
    
    3,374,223
    
    
    
    7,886,219Cash and cash equivalents at end of period
    
    $
    9,773,289
    
    
    
    13,981,033
    
    
    
    3,374,223Supplemental disclosures of cash flow information and noncash investing
activities:Cash paid for interest
    
    $
    4,190,383
    
    
    
    4,146,284
    
    
    
    3,999,164Cash paid for income taxes
    
    $
    824,000
    
    
    
    743,000
    
    
    
    133,000Change in unrealized loss on securities available for sale, net of tax
    
    $
    (146,984
    )
    
    
    88,711
    
    
    
    9,308
 See accompanying notes to consolidated financial statements. 37




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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 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 one banking office in Duluth (Gwinnett
County), Georgia, and conducts its banking activities primarily in Gwinnett
and surrounding counties. The Bank will open its first branch in Suwanee
(Gwinnett County), Georgia in the first quarter or 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 or 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, 2003 and 2002, 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. 38




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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 InvestmentsOther investments include equity securities of Community Financial
Services, Inc. (The Bankers Bank) and FHLB stock, which have no readily
determined fair value. These investments are carried at cost.Loans, Loan Fees and Interest Income on LoansLoans 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 LossesThe 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. 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, continuedPremises and EquipmentPremises 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 AgreementsSecurities 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 TaxesThe 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 FlowsFor purposes of reporting cash flows, the Company includes cash and due
from banks and federal funds sold.Net Earnings Per ShareBasic 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, 2003, 2002 and 2001 as follows: 40




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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, continued Average
    
    PerNet
    
    Shares
    
    ShareEarnings
    
    Outstanding
    
    AmountFor 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
    
    
    $
    1.25For the year ended December 31, 2001:Net earnings  basic
    
    $
    621,733
    
    
    
    867,560
    
    
    $
    0.72Effect of dilutive stock warrants
    
    
    
    
    
    
    Net earnings  diluted
    
    $
    621,733
    
    
    
    867,560
    
    
    $
    0.72
  Recent Accounting PronouncementsAccounting standards that have been issued or proposed by the Financial
Accounting Standards Board (FASB) and other standard setting entities that
do not require adoption until a future date are either not directly
applicable at the present time or are not expected to have a material
impact on the Companys consolidated financial statements upon adoption.  (2)
    
    INVESTMENT SECURITIESInvestment securities available for sale at December 31, 2003 and 2002
are as follows: 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
 December 31, 2002Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueU.S. Government agencies
    
    $
    9,182,063
    
    
    
    141,147
    
    
    
    3,799
    
    
    
    9,319,411Mortgage backed securities
    
    
    6,495,138
    
    
    
    108,000
    
    
    
    331
    
    
    
    6,602,807Municipal securities
    
    
    3,030,742
    
    
    
    13,947
    
    
    
    8,641
    
    
    
    3,036,048Corporate securities
    
    
    1,507,500
    
    
    
    35,286
    
    
    
    
    
    
    
    1,542,786Trust preferred securities
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,000$
    20,715,443
    
    
    
    298,380
    
    
    
    12,771
    
    
    
    21,001,052
 41




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (2)
    
    INVESTMENT SECURITIES, continuedThe 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, 2003: Less than 12 months
    
    12 months or more
    
    TotalFair
    
    Unrealized
    
    
    
    
    
    Unrealized
    
    Fair
    
    UnrealizedDescription of securities
    
    Value
    
    Loss
    
    Fair 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
    
    
    
    61,522Temporarily impaired securities
    
    $
    12,056,192
    
    
    
    199,397
    
    
    
    76,993
    
    
    
    1,393
    
    
    
    12,133,185
    
    
    
    200,790
  The amortized cost and estimated fair value of securities available for
sale at December 31, 2003, 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. Amortized
    
    EstimatedCost
    
    Fair ValueWithin 1 year
    
    $
    
    
    
    
    1 to 5 years
    
    
    2,505,223
    
    
    
    2,531,8585 to 10 years
    
    
    11,055,547
    
    
    
    11,084,994More than 10 years
    
    
    10,364,511
    
    
    
    10,328,788Mortgage backed securities
    
    
    4,022,172
    
    
    
    4,064,418$
    27,947,453
    
    
    
    28,010,058
  Proceeds from sales of investment securities in 2003 and 2002 totaled
$3,790,000 and $995,000, respectively. There were no sales of securities
available for sale during 2001. Gross gains and losses are as follows: 2003
    
    2002Gross gains on sales
    
    $
    74,998
    
    
    
    2,593Gross losses on sales
    
    
    (5,674
    )
    
    
    Gross gains on calls
    
    
    740
    
    
    
    1,008Net gains
    
    $
    70,064
    
    
    
    3,601
  Securities with a carrying value of approximately $5,187,000 and $6,028,000
at December 31, 2003 and 2002, respectively were pledged to secure public
deposits and for other purposes.  At December 31, 2003 and 2002, the Bank had no outstanding derivative
financial instruments such as swaps, options, futures, or forward
contracts.  (3)
    
    LOANSMajor classifications of loans at December 31, 2003 and 2002, are
summarized as follows: 2003
    
    2002Commercial
    
    
    
    $
    37,478,750
    
    
    
    32,656,514Real estate
    
    
    
    
    105,707,711
    
    
    
    84,000,838Consumer
    
    
    
    
    10,906,135
    
    
    
    11,796,037154,092,596
    
    
    
    128,453,389Less:
    
    Allowance for loan losses
    
    
    1,663,829
    
    
    
    1,598,956Unearned loan fees
    
    
    303,698
    
    
    
    251,385Net loans
    
    $
    152,125,069
    
    
    
    126,603,048
 42




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (3)
    
    LOANS, continuedThe 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: 2003
    
    2002
    
    2001Balance at beginning of year
    
    $
    1,598,956
    
    
    
    1,132,130
    
    
    
    489,444Provision for loan losses
    
    
    400,292
    
    
    
    613,072
    
    
    
    791,862Loans charged off
    
    
    (369,412
    )
    
    
    (149,131
    )
    
    
    (150,686
    )Recoveries on loans charged off
    
    
    33,993
    
    
    
    2,885
    
    
    
    1,510$
    1,663,829
    
    
    
    1,598,956
    
    
    
    1,132,130
  (4)
    
    PREMISES AND EQUIPMENTPremises and equipment at December 31, 2003 and 2002, are summarized as
follows: 2003
    
    2002Land
    
    $
    1,369,959
    
    
    
    1,369,959Building
    
    
    3,883,111
    
    
    
    3,874,150Equipment, furniture and vehicles
    
    
    1,294,246
    
    
    
    1,126,4986,547,316
    
    
    
    6,370,607Less: Accumulated depreciation and amortization
    
    
    837,756
    
    
    
    562,473$
    5,709,560
    
    
    
    5,808,134
  Depreciation expense and leasehold amortization was approximately $275,000,
$278,500 and $141,600 for the years ended December 31, 2003, 2002 and 2001,
respectively.  (5)
    
    DEPOSITSThe aggregate amount of time deposits with a minimum denomination of
$100,000 was approximately $54,833,000 and $44,339,500 at December 31, 2003
and 2002, respectively.At December 31, 2003, the scheduled maturities of time deposits are as
follows: 2004
    
    $
    74,803,7512005
    
    
    29,553,4022006
    
    
    9,210,7472007
    
    
    6,851,4092008 and thereafter
    
    
    1,397,284$
    121,816,593
  The Bank had brokered time deposits at December 31, 2003, of approximately
$9,798,000. 43




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (6)
    
    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, 2003, the Bank had
lending guidelines that would allow for approximately $19.7 million of
borrowings from the FHLB.  (7)
    
    INCOME TAXESThe components of income tax expense (benefit) for the years ended December
31, 2003, 2002 and 2001 are as follows: 2003
    
    2002
    
    2001Current
    
    $
    919,648
    
    
    
    806,964
    
    
    
    270,004Deferred
    
    
    18,600
    
    
    
    (108,800
    )
    
    
    (25,400
    )Utilization of net operating loss
    
    
    
    
    
    
    (10,800
    )
    
    
    (128,200
    )Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (407,800
    )$
    938,248
    
    
    
    687,364
    
    
    
    (291,396
    )
  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, 2003, 2002 and 2001, are as follows: 2003
    
    2002
    
    2001Pretax income at statutory rate
    
    $
    911,300
    
    
    
    649,400
    
    
    
    112,300Add:Tax exempt income
    
    
    (62,700
    )
    
    
    (15,800
    )
    
    
    Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (407,800
    )Other, primarily state income taxes
    
    
    89,648
    
    
    
    53,764
    
    
    
    4,104$
    938,248
    
    
    
    687,364
    
    
    
    (291,396
    )
  The following summarizes the sources and expected tax consequences of
future taxable deductions (income), which comprise the net deferred taxes
at December 31, 2003 and 2002. 2003
    
    2002Deferred income tax assets:Allowance for loan losses
    
    $
    544,000
    
    
    
    546,700Organizational and preopening costs
    
    
    24,800
    
    
    
    46,800Other
    
    
    17,400
    
    
    
    2,100Total gross deferred income tax assets
    
    
    586,200
    
    
    
    595,600Deferred income tax liabilities:Net unrealized gain on investment securities
    
    
    (21,300
    )
    
    
    (97,100
    )Premises and equipment
    
    
    (52,000
    )
    
    
    (42,800
    )Total gross deferred income tax liabilities
    
    
    (73,300
    )
    
    
    (139,900
    )Net deferred income tax benefit
    
    $
    512,900
    
    
    
    455,700
 44




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (8)
    
    EMPLOYEE BENEFIT PLANBeginning in 2000, the Bank adopted 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 3% of the participants
eligible compensation, which amounted to $51,800, $45,900 and $37,500 in
2003, 2002 and 2001, respectively.(9)
    
    STOCKHOLDERS EQUITYBeginning August 12, 2002, the Company 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 were
contributed to the Bank to provide necessary capital for future growth.In 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 (1/3) of the warrant shares on
October 18, 2000, October 18, 2001 and October 18, 2002. All warrants were
fully vested at December 31, 2003. 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.(10)
    
    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 2004 without prior approval is approximately
$903,000.(11)
    
    REGULATORY MATTERSThe 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.Quantitative 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).As of December 31, 2003 and 2002, 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. 45




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (11)
    
    REGULATORY MATTERSActual capital amounts and ratios are also presented in the table (amounts
presented in thousands). To Be WellCapitalizedFor Capital
    
    Under PromptAdequacy
    
    CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs 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
    
    
    
    >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
    %As of December 31, 2002:Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    15,949
    
    
    
    11.11
    %
    
    $
    11,463
    
    
    
    38.0
    %
    
    $
    N/A
    
    
    
    N/ABank only
    
    $
    14,750
    
    
    
    10.29
    %
    
    $
    11,463
    
    
    
    38.0
    %
    
    $
    14,329
    
    
    
    310.0
    %Tier I Capital (to Risk Weighted Assets)Consolidated
    
    $
    14,350
    
    
    
    10.00
    %
    
    $
    5,732
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/ABank only
    
    $
    13,151
    
    
    
    9.18
    %
    
    $
    5,732
    
    
    
    34.0
    %
    
    $
    8,597
    
    
    
    >6.0
    %Tier I Capital (to Average Assets)Consolidated
    
    $
    14,350
    
    
    
    8.78
    %
    
    $
    6,538
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/ABank only
    
    $
    13,151
    
    
    
    8.05
    %
    
    $
    6,538
    
    
    
    34.0
    %
    
    $
    8,713
    
    
    
    35.0
    %
  (12)
    
    MISCELLANEOUS OPERATING EXPENSESComponents of other operating expenses which are greater than 1% of
interest income and other operating income are as follows: 2003
    
    2002
    
    2001Stationary and supplies
    
    $
    75,326
    
    
    
    61,755
    
    
    
    65,938Legal and professional fees
    
    $
    273,603
    
    
    
    171,580
    
    
    
    66,378Data processing fees
    
    $
    255,659
    
    
    
    251,065
    
    
    
    169,324Advertising and public relations
    
    $
    95,600
    
    
    
    106,796
    
    
    
    57,979Business development
    
    $
    164,464
    
    
    
    55,028
    
    
    
    74,571
  (13)
    
    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
2003: Beginning balance
    
    $
    3,077,815Loans advanced
    
    
    1,774,573Repayments
    
    
    (1,903,828
    )Ending balance
    
    $
    2,948,560
 46




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (13)
    
    RELATED PARTY TRANSACTIONS, continuedThe aggregate amount of deposits of directors and executive officers and
their affiliates amounted to approximately $3,497,000 and $3,245,000 at
December 31, 2003 and 2002, respectively.(14)
    
    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 Amount2003
    
    2002Financial instruments whose contract amounts represent credit risk:Commitments to extend credit
    
    $
    29,281,000
    
    
    
    24,023,000Standby letters of credit
    
    $
    969,000
    
    
    
    293,000
  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, 2003, unused lines of credit
totaled $9,300,000.(15)
    
    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. 47




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (15)
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS, continued  Investment Securities Available for SaleFair values for investment securities are based on quoted market
prices.Other InvestmentsThe carrying value of other investments approximates fair
value.LoansThe 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.DepositsThe 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 AgreementsThe carrying value securities sold under retail repurchase agreements
approximates fair value.Commitments to Extend Credit and Standby Letters of CreditBecause 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.LimitationsFair 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, 2003 and 2002 are as follows: 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    9,773,289
    
    
    
    9,773,289
    
    
    
    13,981,033
    
    
    
    13,981,033Investment securities
    
    $
    28,010,058
    
    
    
    28,010,058
    
    
    
    21,001,052
    
    
    
    21,001,052Other investments
    
    $
    269,734
    
    
    
    269,734
    
    
    
    100,034
    
    
    
    100,034Loans
    
    $
    152,125,069
    
    
    
    156,454,069
    
    
    
    126,603,048
    
    
    
    131,110,356Liabilities:Deposits
    
    $
    180,055,199
    
    
    
    181,696,970
    
    
    
    153,348,734
    
    
    
    155,486,034Retail repurchase agreements
    
    $
    720,012
    
    
    
    720,012
    
    
    
    660,017
    
    
    
    660,017
 48




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##### Table of Contents



COMMUNITY FINANCIAL HOLDING COMPANY, INC. AND SUBSIDIARY Consolidated Notes to Financial Statements, continued  (16)
    
    CONDENSED FINANCIAL INFORMATION OF COMMUNITY FINANCIAL HOLDING COMPANY,
INC. Balance Sheets
December 31, 2003 and 2002 2003
    
    2002AssetsCash
    
    $
    119,554
    
    
    
    1,155,359Investment in subsidiary
    
    
    15,998,483
    
    
    
    13,338,572Income taxes receivable
    
    
    31,139
    
    
    
    43,610$
    16,149,176
    
    
    
    14,537,541Liabilities and Stockholders EquityAccrued expenses and other liabilities
    
    $
    16,500
    
    
    
    Stockholders equity
    
    
    16,132,676
    
    
    
    14,537,541$
    16,149,176
    
    
    
    14,537,541
 Statements of Earnings
For the Year Ended December 31, 2003 and 2002 2003
    
    2002Equity in undistributed earnings of bank subsidiary
    
    $
    1,806,894
    
    
    
    1,301,213Other operating expenses
    
    
    (102,817
    )
    
    
    (124,586
    )Earnings before income taxes
    
    
    1,704,077
    
    
    
    1,176,627Income tax benefit
    
    
    38,042
    
    
    
    46,097Net earnings
    
    $
    1,742,119
    
    
    
    1,222,724
 Statements of Cash Flows
For the Year Ended December 31, 2003 and 2002 Cash flows from operating activities:Net earnings
    
    $
    1,742,119
    
    
    
    1,222,724Adjustments to reconcile net earnings to net cash used by
operating activities:Equity in undistributed earnings of bank subsidiary
    
    
    (1,806,894
    )
    
    
    (1,301,213
    )Change in other assets and liabilities, net
    
    
    28,970
    
    
    
    (43,610
    )Net cash used by operating activities
    
    
    (35,805
    )
    
    
    (122,099
    )Cash flows from investing activities consisting of contributions
to subsidiary
    
    
    (1,000,000
    )
    
    
    (3,600,000
    )Cash flows from financing activities:Proceeds from note payable
    
    
    
    
    
    
    2,500,000Repayment of note payable
    
    
    
    
    
    
    (2,500,000
    )Proceeds from issuance of common stock, net of offering costs
    
    
    
    
    
    
    4,877,458Net cash provided by financing activities
    
    
    
    
    
    
    4,877,458Net change in cash
    
    
    (1,035,805
    )
    
    
    1,155,359Cash and cash equivalents at beginning of the period
    
    
    1,155,359
    
    
    
    Cash and cash equivalents at end of the period
    
    $
    119,554
    
    
    
    1,155,359
 49




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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 a date (the Evaluation Date) within the 90-day period prior to the
filing of this report, 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 date of such evaluation, 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. 
 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 section captioned Proposal I -
Election of Directors and Section 16(a) Beneficial Ownership in the Companys
definitive proxy statement for the Companys 2004 Annual Meeting of
Stockholders (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 its website at
www.gwinnettcommunitybank.com and is also attached as Exhibit 14. 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 section captioned Voting Securities and
Principal Holders Thereof 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. 
 Item 13. Exhibits and Reports on Form 8-K.  (a)
    
    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)). 50




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##### Table of Contents



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. *10.4
    
    Executive Employment Agreement for Ann K. Marshall effective January 1, 2004. *10.5
    
    Executive Employment Agreement for Donald W. Tew effective January 1, 2004. *10.6
    
    Description of Management Bonus Plan*10.7
    
    Executive Long-Term Care Policy*14.1
    
    Code of Ethics21.1
    
    Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 of the Community Financials Registration Statement on
Form S-1, filed June 6, 2002 (File No. 333-89972)).24.1
    
    Power of Attorney (see signature page to this Report on Form 10-KSB)31.1
    
    Certification of Principal Executive Officer31.2
    
    Certification of Principal Financial Officer32.1
    
    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. *     The indicated exhibits are management contracts or compensatory plans or
arrangements required to be filed or incorporated by reference herein.  (b)
    
    Reports onForm 8-K. None. 
 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. 51




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized. COMMUNITY FINANCIAL HOLDING COMPANY, INC.By:
    
    /s/ Thomas J. MartinDated: March 25, 2004
    
    
    
    Thomas J. MartinPresident and Chief Executive Officer (Duly AuthorizedRepresentative)
 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. Pursuant to the requirement of the Securities Exchange Act of 1934, 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 25, 2004/s/ Ann K. Marshall
   Ann
K. Marshall
    
    Executive Vice
President and Chief
Financial Officer
(Principal
Accounting and
Financial Officer)
    
    March 25, 2004/s/ Frank W. Bell, Jr.
   Frank
W. Bell, Jr.
    
    Director
    
    March 25, 2004/s/ James B. Braden
   James
B. Braden
    
    Director
    
    March 25, 2004/s/ J. Terry Gordon
   J.
Terry Gordon
    
    Director
    
    March 25, 2004/s/ Miles H. Mason, III
   Miles
H. Mason, III, M.D.
    
    Director
    
    March 25, 2004/s/ Don F. Phillips
   Don
F. Phillips, Jr.
    
    Director
    
    March 25, 2004/s/ Daniel E. Reeves
   Daniel
E. Reeves
    
    Director
    
    March 25, 2004/s/ Franklin M. Rinker
   Franklin
M. Rinker
    
    Director
    
    March 25, 2004
 52