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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-KSB



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(Mark One)



|x | Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003.



| ̈ | Transition report under section 13 or 15(d) of the Securities and Exchange Act of 1934
|- | --------------------------------------------------------------------------------------



For the transition period



Commission file number 000-49909



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Community First Financial Corporation

(Name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 81-0556879                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|1646 Graves Mill Road, Lynchburg, Virginia                     |  | 24502                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Issuers
telephone number (434) 386-6300



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Securities registered under Section 12(b) of the Act:



|                 |  |                                     
|---------------- |  | ------------------------------------
|(Title of class) |  | Name of exchange on which registered
|                 |  | None                                



Securities
registered under Section 12 (g) of the Act:



|                           |  |                                     
|-------------------------- |  | ------------------------------------
|Common Stock, No Par Value |  | None                                
|(Title of class)           |  | Name of exchange on which registered



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 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 ̈



Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x



State issuers revenues
for its most recent fiscal year $10,325,036



State the
aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within
the past 60 days. $11,623,356.00 based on $12.00 per share.



(Applicable only to corporate registrants) State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date 968,613 shares outstanding as of March 6, 2004.



Documents incorporated by reference. (1) Portions of the Annual Report
to Shareholders for the year ended December 31, 2003 are incorporated into Part II, Item 5 through 7. (2) Portions of the Corporations 2004 Definitive Proxy Statement have been incorporated by reference into Part III.



Transitional Small Business Disclosure
Format:Yes ̈No  x



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PART 1



Item 1. Description of Business



General



Community First Financial Corporation (CFFC, the Company or the Corporation) is a financial holding company organized under Virginia law during March 2002, commenced operations on
July 1, 2002 and was capitalized through the issuance of $9,686,130 in common stock. CFFC is the parent company of Community First Bank and its primary business activity is its investment in and managing the business of Community First Bank
(CFB or the Bank). CFB commenced operations on October 14, 1999 as a state charted, FDIC insured, commercial bank. The Bank is also a member of the Federal Reserve Bank System.



CFFC was organized by the directors of Community First Bank for the sole
purpose of becoming Community First Banks parent holding company. On July 1, 2002, CFFC and Community First bank completed a share exchange in which one share of Community First Banks common stock was exchanged for one share of
CFFCs common stock, Community First Banks shareholders became the shareholders of CFFC, and Community First Bank became CFFCs wholly-owned subsidiary. Community First Banks shareholders had approved the reorganization at the
annual shareholders meeting held on May 13, 2002.



On May
13, 2002 the shareholders approved a change in the articles of incorporation which authorized the issue of up to 1,000,000 shares of preferred stock and the issue of shares of new preferred stock from time to time in the future, in one or more
series, and to fix and determine the relative rights and preferences of these shares, or of each series of shares, at the time of issuance and without the further approval of shareholders.



During 2002 the Corporations Board of Directors created a series of
preferred stock consisting of 325,000 shares of non-cumulative, convertible preferred stock that provides for stated annual dividend of $.50 per share (Series A Preferred Stock). Through December 31, 2002, the Corporation had sold an
aggregate of 265,100 shares of these shares at a price of $10.00 per share in a private offering to a group of accredited investors, including certain of the Corporations directors and existing shareholders. An additional 34,900
was sold in 2003. The proceeds from the sale of those shares was used to enhance the capital position of the Bank, to purchase 62,700 shares of Highlands Community Bank common stock and for general corporate activities conducted by the Corporation.



Community First Bank, a Virginia banking corporation
headquartered in Lynchburg, Virginia, was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations on October 14, 1999. The bank is a community oriented financial institution that
provides varied banking services to



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small and medium-sized businesses, professionals and individuals located in its market area, which consists of the
Greater Lynchburg Area. The Banks initial focus is on the Bedford and Lynchburg County area, where it will be headquartered. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market
area, while maintaining the prompt response and level of service of a community bank. Management believes this operating strategy has particular appeal in the Banks market area.



The Bank currently conducts business from four full-service offices located at 1646 Graves Mill Road, 2301 Langhorne Road,
20479 Timberlake Road, Lynchburg, Virginia and 150 Front Street, Lovingston, Nelson County, Virginia. The Bank has no operating subsidiaries.



The Bank offers a full range of deposit services that are typically available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to the Banks market
area at rates competitive to those offered in the area. In addition, the Bank offers certain retirement account services, such as Individual Retirement Accounts (IRAs). All deposit accounts are insured by the Federal Deposit Insurance Corporation
(the FDIC) up to the maximum amount allowed by law (generally, $100,000 per depositor, subject to aggregation rules). The Bank solicits such accounts from individuals, businesses, associations and organizations, and governmental
authorities.



The Bank also offers a full range of
short-to-medium term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and
purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education and personal investments. Additionally, the Bank originates fixed and floating-rate mortgage loans and
real estate construction and acquisition loans.



Other services
offered by Community First Bank include safe deposit boxes, certain cash management services, travelers checks, direct deposit of payroll and social security checks and automatic drafts for various accounts. The Bank also has become associated
with a shared network of automated teller machines (ATMs) that may be used by Bank customers throughout Virginia and other states located in the Mid-Atlantic region and nationally.



Market Area



The Banks market area consists of Amherst, Bedford, Campbell and Nelson Counties and the City of Lynchburg. The Banks primary service area is
Bedford County and the city of Lynchburg. The market area had a population base of 216,163 people in 2002.



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Employees



As of December 31, 2003, the Bank had 39 full-time equivalent employees. None of its employees are represented by any collective bargaining agreements,
and relations with employees are considered excellent.



Governmental
Monetary Policies



The earnings and growth of the Bank are
affected not only by general economic conditions, but also by the monetary policies of various governmental regulatory authorities, particularly the Board of Governors of the Federal Reserve System (the Federal Reserve Board). The
Federal Reserve Board implements national monetary policy by its open market operations in United States Government securities, control of the discount rate and establishment of reserve requirements against both member and nonmember financial
institutions deposits. These actions have a significant effect on the overall growth and distribution of loans, investments and deposits, as well as the rates earned on loans, or paid on deposits.



Management of the Bank is unable to predict the effect of possible changes in
monetary policies upon the future operating results of the Bank.



Competition



The Bank competes as a financial
intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions
operating in the Metro Lynchburg market area and elsewhere. Many of the Banks non-bank competitors are not subject to the same extensive federal regulations that govern federally insured banks and state regulations governing state chartered
banks. As a result, such non-bank competitors may have certain advantages over the Bank in providing certain services.



The Banks market area is a highly competitive, highly branched banking market. Competition in the market area for loans to small businesses and
professionals, the Banks target market, is intense, and pricing is important. Most of the banks competitors have substantially greater resources and lending limits than the Bank and offer certain services, such as extensive and
established branch networks, that the Bank is not currently providing. Moreover, larger institutions operating in the market area have access to borrowed funds at lower cost than are presently available to the Bank. Deposit competition among
institutions in the market area also is strong. Competition for depositors funds comes from U.S. Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors, among other sources. As
a result, the Bank has paid and may in the future pay, above-market rates to attract deposits.



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Regulation



The Bank is subject to various state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general
regulatory oversight with respect to virtually all aspects of operations. The following is a brief summary of the material provisions of certain statutes, rules and regulations that will affect the Bank. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to below.



General.The Bank is under the supervision of, and subject to regulation and examination by, The Federal Reserve Bank (FRB), The Federal Deposit Insurance Corp. (FDIC) and the State Corporation Commission of
Virginia (the Commission). As such, the Bank is subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed
assets, interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and establishment of branch offices.



Mergers and Acquisitions.Under federal law enacted in 1995, previously existing restrictions on interstate bank
acquisitions were abolished effective September 29, 1995, and, since such date, bank holding companies from any state have been able to acquire banks and bank holding companies located in any other state. Effective June 1, 1997, the law allows banks
to merge across state lines, subject to earlier opt-in or opt-out action by individual states. The law also allows interstate branch acquisitions and de novo branching if permitted by the host state. Effective
July 1, 1995, Virginia adopted early opt-in legislation which permits interstate bank mergers. Virginia law also permits interstate branch acquisitions and de novo branching if reciprocal treatment is accorded Virginia banks in the state
of the acquirer.



Although the above laws may have a
significant impact on the banking industry, it is not possible for the management of the Bank to determine, with any degree of certainty, the impact of such laws on Community First Bank.



Dividends.The amount of dividends payable by the bank depends upon its earnings and capital position, and is limited
by federal and state law, regulations and policy. In addition, Virginia law imposes restrictions on the ability of all banks chartered under Virginia law to pay dividends. Under such law, no dividend may be declared or paid that would impair a
banks paid-in capital. Each of the Commission, the FRB and the FDIC have the general authority to limit dividends paid by the Bank if such payments are deemed to constitute an unsafe and unsound practice. In particular, Section 38 of the
Federal Deposit Insurance Act (FDIA) would prohibit the Bank from making a dividend if it were undercapitalized or if such dividend would result in the institution becoming undercapitalized.



Capital Requirements.The various federal bank regulatory agencies,
including the FRB, have adopted risk-based capital requirements for assessing bank capital adequacy. In addition, Virginia chartered banks must also satisfy the capital requirements adopted by the Commission. The federal capital standards define
capital and establish



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minimum capital requirements in relation to assets and off-balance sheet exposure, as adjusted for credit risk. The
risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.



The minimum requirement for the ratio
of total capital risk-weighted assets (including certain off-balance sheet obligations, such as stand-by letters of credit) is 8.0%. At least half of the risk-based capital must consist of common equity, retained earnings and qualifying perpetual
preferred stock, less deductions for goodwill and various other tangibles (Tier 1 capital). The remainder (Tier 2 capital) generally consists of a limited amount of subordinated debt, certain hybrid capital instruments and
other debt securities, preferred stock and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 and total capital to risk-weighted asset ratio of the Bank as of December 31, 2003 were 9.77% and 11.03%, respectively,
exceeding the minimums required.



The FRB also has adopted
regulations, which supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to quarterly average assets (Leverage ratio) of 3%. The FRB has emphasized that the foregoing standards are supervisory
minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating
significant growth. All other banking organizations are required to maintain a Leverage ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The tangible Tier 1 Leverage ratio is the ratio of a banking
organizations Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total tangible assets. The Leverage ratio of the Bank as of December 31, 2003 was 8.03%, well above the minimum requirement.



In August 1995, the FRB and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide for consideration of interest rate risk when assessing capital adequacy of a bank. Under the final rule, the FRB must explicitly include a banks exposure to declines
in the economic value of its capital due to changes in interest rates as a factor in evaluating a banks capital adequacy. In addition, in August 1995, the FRB and the other federal banking agencies published a joint policy statement for public
comment that describes the process the banking agencies will use to measure and assess the exposure of a banks net economic value to changes in interest rates. Under the policy statement, the FRB will consider results of supervisory and
internal interest rate risk models as one factor in evaluating capital adequacy.



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Deposit Insurance.Section 38 of the FDIA, as amended by the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), requires that the federal banking agencies establish five capital levels for insured depository institutions - well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized - and requires or permits such agencies to take certain supervisory actions as an insured institutions capital level falls. In
certain circumstances, a financial institutions low capital position can lead to enhanced restrictions by the FDIC. An adequately capitalized institution is restricted from accepting brokered deposits, and a significantly
undercapitalized institution must develop a capital restoration plan and is subject to a number of mandatory and discretionary supervisory actions. These powers and authorities are in addition to the traditional powers of the federal banking
agencies to deal with undercapitalized institutions.



As an
institution with deposits insured by the Bank Insurance Fund (BIF), the Bank also is subject to insurance assessments imposed by the FDIC. In September 1995, the BIF met its target reserve level and consequently, effective January 1996,
the FDIC revised its risk-based assessment schedule, imposing assessments ranging from 0.0% (subject to an annual minimum of $2,000) to 0.27% of an institutions average assessment base. The actual assessment to be paid by each BIF member is
based on whether the institution is considered well capitalized, adequately capitalized or undercapitalized, as such terms have been defined in applicable federal regulations, and whether such institution is
considered by its supervisory agency to be financially sound or to have supervisory concerns. The Bank was subject to a deposit insurance assessment, or $37,687 in fiscal 2003.



The Deposit Insurance Funds Act of 1996 (the Funds Act) was enacted on September 30, 1996. Among other
provisions, the Funds Act (i) requires that certain depository institutions pay a one-time special assessment (65.7 cents per $100 of SAIF-assessable deposits) to the FDIC to capitalize the Savings Association Insurance Fund (SAIF) at
its statutory required reserve ratio of 1.25% of insurable deposits, (ii) exempts certain depository institutions with SAIF-assessable deposits that meet any of several specified criteria from paying the special assessment and (iii) authorizes the
Financing Corporation (FICO) to impose periodic assessments on depository institutions that are members of the BIF, in addition to institutions that are members of the SAIF, in order to spread the cost of the interest payments on the
outstanding FICO bonds over a larger number of institutions. Until this change in the law, only SAIF-member institutions bore the cost of funding these interest payments. FICO assessment rates for the second quarter of 2003 were set at 1.62% (per
$100) annually for BIF-Assessable deposits and 1.62% (per $100) annually for SAIF-assessable deposits. These rates may be adjusted quarterly to reflect changes in assessment bases for BIF and the SAIF. By federal law, the FICO rate on BIF-assessable
deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged. As the Banks deposits are insured by the BIF, the Funds Act in not expected to significantly impact the Banks financial condition and
results of operation in the foreseeable future.



Safety and
soundness.The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions



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in capitalized question are well capitalized, adequately, undercapitalized,
significantly undercapitalized, or critically undercapitalized, all such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies.



On December 19, 1991, the FDICIA was enacted into law. FDICIA requires each
federal banking regulatory agency to prescribe, by regulation or guideline, standards for all insured depository institution holding companies relating to (i) internal controls, information systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) compensation, fees and benefits; and (vii) such other operational and managerial standards as the agency determines to be appropriate. The compensation standards would prohibit
employment contracts or other compensatory arrangements that provide excess compensation, fees or benefits or could lead to material financial loss. In addition, each federal banking regulatory agency must prescribe, by regulation or guideline,
standards relating to asset quality, earnings and stock valuation as the agency determines to be appropriate. On July 10, 1995 the federal banking agencies including the FRB adopted final rules and proposed guidelines concerning standards for safety
and soundness required to be prescribed by regulation pursuant to Section 39 of the FDIA. In general, the standards relate to (1) operational and managerial matters; (2) asset quality and earnings; and (3) compensation. The operational and
managerial standards cover (a) internal controls and informational systems, (b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e) interest rate exposure, (f) asset growth, and (g) compensation, fees and benefits.



Activities and Investments of Insured State-Chartered
Banks. The activities and equity investments of FDIC-insured, state chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority
interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such
limited partnership investments may not exceed 2% of the banks total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors, trustees and officers liability insurance
coverage or bankers blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institutions if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary, engage as principal in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the
insurance fund of which it is a member and the bank is in compliance with applicable regulatory requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the
impermissible activity.



Regulatory Enforcement
Authority.Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist



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or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as
defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe practices.



Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.



Gramm-Leach-Bliley Act



The Company is a financial holding company within the meaning of the Federal Gramm-Leach-Bliley Act (the GLB
Act). The GLB Act was adopted by Congress during 1999 and has dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act has expanded opportunities for banks and bank holding companies to
provide services and engage in other revenue-generating activities that previously were prohibited to them.



With respect to bank holding companies, the GLB Act in general (i) expands opportunities to affiliate with securities firms and insurance companies; (ii)
overrides certain state laws that would prohibit certain banking and insurance affiliations; (iii) expands the activities in which banks and bank holding companies may participate; (iv) requires that banks and bank holding companies engage in some
activities only through affiliates owned or managed in accordance with certain requirements; (v) reorganizes responsibility among various federal regulators for oversight of certain securities activities conducted by banks and bank holding
companies; and (vi) requires banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed
to certain persons.



The GLB Act has expanded opportunities for
us and Community First to provide other services and obtain other revenues in the future but, at present, it has not had a significant effect on our operations as they are presently conducted. However, this expanded authority also may present us
with new challenges as our larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions. The economic effects of the GLB Act on the banking industry, and on
competitive conditions in the financial services industry generally, may be profound.



Item 2. Description of Properties



As
of July 2000, Community First Bank conducted business from its main banking office located at 1646 Graves Mill Road, Lynchburg, Virginia. The Bank owns the two-story building, which contains approximately 7,500 square feet.



The Bank, in March 2001, established an office at 2301 Langhorne Road,
Lynchburg, Virginia, which it leases. In April 2002 the Bank leased additional space on the second floor of this office. Also, see Item 7, Certain Relationships and Related Transactions in this Form 10-KSB.



The Bank established a permanent office at 150 Front Street, Lovingston,
Virginia in the April of 2003, which is leased. In September of 2003, the bank established an office at 20479 Timberlake Road, Lynchburg, Virginia. The two-story building owned by the Bank contains approximately 4000 square feet. The Bank has
purchased lots in Amherst and Bedford for possible future offices.



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Item 3. Legal Proceedings



The Bank is not involved in any pending legal proceedings other than non-material legal proceedings occurring in the
ordinary course of business.



Item 4. Submission of Matters to a Vote of
Security Holders



There were no matters submitted to a
vote of security holders during the quarter ended December 31, 2003.



PART II



ITEM 5. Market for the
Common Equity and Related Shareholder Matters



CFFC first issued
shares of its common stock during July 2002 in exchange for the outstanding shares of Community First Banks common stock in connection with CFFCs initial incorporation as Community First Banks parent holding company. CFFCs
common stock is not listed on any exchange and there is not an active public market for CFFCs common stock. Prior to the organization of CFFC, Community First Banks common stock was not listed on any exchange, neither was there an active
public trading market for the stock.



Between the date of issuance and December
31, 2003, to the knowledge of management, the common stock traded at a low of $10.00, and a high of $12.00. Trades to date in 2004 have been at a low of $11.00 and a high of $12.00.



CFFC has not yet paid any cash dividend on its common stock. CFFC is a holding company, and its main source of revenue is dividends it
receives from Community First Bank. Therefore, CFFCs ability to pay dividends to its shareholders is subject to Community First Banks ability to pay dividends to it. Community First Banks ability to pay dividends to CFFC will
continue to depend on its earnings and financial condition, capital requirements, general economic conditions, compliance with regulatory requirements that apply to Virginia banks, and other factors. Also, dividends by Community First Bank are
subject to various laws and regulatory restrictions, including the requirement that its capital be maintained at certain levels and that it only pay dividends from its retained earnings. CFFC expects that, for the foreseeable future profits
resulting from Community First Bank will be retained by it as additional capital to support its operations and growth and that any dividends paid by Community First Bank to CFFC will be limited to amounts needed by CFFC to pay stated dividends on
CFFCs outstanding Series A Preferred Stock, to pay any separate expenses of CFFC, and that CFFC will not pay cash dividends on its common stock.



In the future, CFFCs ability to pay dividends also will be subject to its Board of Directors, evaluation of its own separate business factors, including CFFCs
earnings and financial condition, capital requirements, debt service requirements, and regulatory restrictions applicable to bank holding companies. In the future, CFFC may borrow additional funds,



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issue debt instruments, issue and sell additional shares of preferred stock or engage in other types of financing
activities, in order to increase its capital and/or to provide funds that it can use to increase Community First Banks capital. The terms of CFFCs outstanding Series A Preferred Stock provides that no dividends may be declared and paid
during any calendar year on CFFCs common stock unless and until there shall have been paid in full to the shareholders of the Series A Preferred Stock not less than a pro rata portion of the stated annual dividend on the series A Preferred
Stock for the year, at the rate provided for those dividends, through the date on which CFFCs proposes to pay dividends on the common stock. Covenants contained in any loan or financing agreement entered into by CFFC in the future, or other
debt or capital instruments issued by CFFC in the future, also could restrict or condition CFFCs payment of cash dividends based on various financial considerations or factors. Additionally, if CFFC creates and issues shares of any other
series of preferred stock, the terms of that stock require that stated periodic dividends be paid on the preferred stock before any cash dividends could be paid on CFFCs common stock. Therefore, there is no assurance that, for the foreseeable
future, CFFC will have funds available to pay cash dividends, or, even if funds are available, that it will pay dividends in any particular amount or at any particular time, or that it will pay dividends at all.



On August 15, 2002, CFFC issued 325,000 shares of its Series A preferred Stock for cash in a
limited offering. Through December 31,2002, the company had sold an aggregate of 265,100 shares of these shares at a price of $10.00 per share. In 2003 an additional 34,900 shares were sold. CFFC paid no underwriting discounts or commissions in
connection with the sale. The shares were sold only to persons who were accredited investors as defined in the Securities and Exchange Commissions Rule 501 (a). Each share is convertible into one share of CFFCs stock at
any time following two years after it is issued at the option of the holder of that share and, under certain circumstances, each share is convertible at the same rate at the option of CFFC. The full terms and conditions of such conversion are set
forth in CFFCs Private Placement Memorandum. The shares of Series A Preferred Stock were offered and sold without registration under the 1933 Act pursuant to the exemption from registration provided by Rule 506 of the 1933 Act.



ITEM 6. Managements Discussion and Analysis or Plan of Operations



This information is incorporated herein by reference from
pages 25 through 28 of the 2003 Annual Report.



Statistical Information



The following statistical information is furnished
pursuant to the requirements of Guide 3 promulgated under the Securities Act of 1933.



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INDEX



|          |  |                                                             |  |     
|--------- |  | ----------------------------------------------------------- |  | ----
|          |  |                                                             |  | Page
|TABLE 1.  |  | Average Balance Sheets, Net Interest Income, and Rates      |  | 14  
|          |  |                                                            
|TABLE 2.  |  | Analysis of Change in Net Interest Income                   |  | 16  
|          |  |                                                            
|TABLE 3.  |  | Types of Investment Securities                              |  | 17  
|          |  |                                                            
|TABLE 4.  |  | Maturity Schedule of Selected Loans as of December 31, 2003 |  | 18  
|          |  |                                                            
|TABLE 5.  |  | Summary of Allowance for Loan Losses                        |  | 19  
|          |  |                                                            
|TABLE 6.  |  | Allocation of the Allowance for Loan Losses                 |  | 20  
|          |  |                                                            
|TABLE 7.  |  | Deposits                                                    |  | 21  
|          |  |                                                            
|TABLE 8.  |  | Return on Equity and Assets                                 |  | 22  
|          |  |                                                            
|TABLE 9.  |  | Interest Sensitivity Analysis                               |  | 23  
|          |  |                                                            
|TABLE 10. |  | Selected Historical Financial Information                   |  | 24  



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TABLE 1



AVERAGE BALANCES, INCOME
AND EXPENSES, YIELDS AND RATES



The following table depicts
bank interest income on earnings assets and related average yields as well as interest expenses on interest-bearing liabilities and related average rates paid for the periods indicated.



|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|------------------------------------------------------- |  | --------------- | ------- | ------------------------- | ---- | -------------------- |  | ---- | --------------- |  | ------------------------- | ------- | -------------------- | - | ----- |  | ---- | -
|                                                        |  | 2003            |         |                           | 2002 |                     
|                                                        |  | Average Balance |         | Interest Income / Expense |      | Average Yield / Rate |  |      | Average Balance |  | Interest Income / Expense |         | Average Yield / Rate |  
|Assets:                                                 |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Investment securities                                   |  | $               | 4,291   |                           | $    | 139                  |  | 3.24 | %               |  | $                         | 3,013   |                      | $ | 105   |  | 3.48 | %
|Total Loans (1)                                         |  |                 | 141,932 |                           |      | 9,129                |  | 6.43 |                 |  |                           | 99,301  |                      |   | 7,209 |  | 7.26 |  
|Federal funds sold                                      |  |                 | 3,786   |                           |      | 38                   |  | 1.00 |                 |  |                           | 1,997   |                      |   | 34    |  | 1.70 |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Total earning assets                                    |  |                 | 150,009 |                           |      | 9,306                |  | 6.20 |                 |  |                           | 104,311 |                      |   | 7,348 |  | 7.04 |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|less: allowance for loan losses                         |  |                 | 1,599   |                           |      |                      |  |      |                 |  |                           | 1,059   |                      |   |       |  |      |  
|Total non-earning assets                                |  |                 | 9,964   |                           |      |                      |  |      |                 |  |                           | 6,342   |                      |   |       |  |      |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Total Assets                                            |  |                 | 158,374 |                           |      |                      |  |      |                 |  |                           | 109,594 |                      |   |       |  |      |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Liabilities & Equity                                    |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Interest-bearing deposits:                              |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|NOW                                                     |  | $               | 29,536  |                           | $    | 598                  |  | 2.02 | %               |  | $                         | 8,729   |                      | $ | 182   |  | 2.09 | %
|Savings                                                 |  |                 | 1,152   |                           |      | 8                    |  | .69  |                 |  |                           | 824     |                      |   | 8     |  | .97  |  
|Money market                                            |  |                 | 10,038  |                           |      | 163                  |  | 1.62 |                 |  |                           | 9,036   |                      |   | 171   |  | 1.89 |  
|Time deposits >$100,000                                 |  |                 | 21,864  |                           |      | 701                  |  | 3.21 |                 |  |                           | 19,728  |                      |   | 808   |  | 4.10 |  
|Other time                                              |  |                 | 68,863  |                           |      | 2,373                |  | 3.45 |                 |  |                           | 51,537  |                      |   | 2,342 |  | 4.54 |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Total interest-bearing deposits                         |  |                 | 131,453 |                           |      | 3,843                |  | 2.92 |                 |  |                           | 89,854  |                      |   | 3,511 |  | 3.91 |  
|                                                        |  |                 |         |                           |      |                     
|Short-term borrowings                                   |  |                 | 1,270   |                           |      | 37                   |  | 2.91 |                 |  |                           | 1,273   |                      |   | 23    |  | 1.81 |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Total interest bearing liabilities                      |  |                 | 132,723 |                           |      | 3,880                |  | 2.92 |                 |  |                           | 91,127  |                      |   | 3,534 |  | 3.88 |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Noninterest-bearing liabilities:                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Demand deposits                                         |  |                 | 13,039  |                           |      |                      |  |      |                 |  |                           | 8,973   |                      |   |       |  |      |  
|Other liabilities                                       |  |                 | 600     |                           |      |                      |  |      |                 |  |                           | 483     |                      |   |       |  |      |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Total Liabilities                                       |  |                 | 146,362 |                           |      |                      |  |      |                 |  |                           | 100,583 |                      |   |       |  |      |  
|                                                        |  |                 |         |                           |      |                     
|Shareholders equity                                    |  |                 | 12,012  |                           |      |                      |  |      |                 |  |                           | 9,011   |                      |   |       |  |      |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Total Liabilities & Equity                              |  |                 | 158,374 |                           |      |                      |  |      |                 |  |                           | 109,594 |                      |   |       |  |      |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Net interest Income                                     |  |                 |         |                           |      | 5,426                |  |      |                 |  |                           |         |                      |   | 3,814 |  |      |  
|                                                        |  |                 |         |                           |      |                      |  |      |                 |  |                           |         |                      |   |       |  |      |  
|Interest rate spread (2)                                |  |                 |         |                           |      |                      |  | 3.28 | %               |  |                           |         |                      |   |       |  | 3.16 | %
|Interest expense as a percent of average earning assets |  |                 |         |                           |      |                      |  | 2.59 | %               |  |                           |         |                      |   |       |  | 3.39 | %
|Net Interest margin (3)                                 |  |                 |         |                           |      |                      |  | 3.62 | %               |  |                           |         |                      |   |       |  | 3.66 | %

---

|(1) | Non-accruing loans are included in average loans outstanding
|--- | ------------------------------------------------------------

|(2) | Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities
|--- | ------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin is net interest income expressed as a percentage of average earning assets
|--- | ----------------------------------------------------------------------------------------------



13



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##### Table of Contents

TABLE 1CONTINUED



AVERAGE BALANCE, INCOME AND EXPENSE, YIELD RATES



|                                                        |  |                 |        |                           |   |                      |  |      |  
|------------------------------------------------------- |  | --------------- | ------ | ------------------------- | - | -------------------- |  | ---- | -
|                                                        |  | 2001            |       
|                                                        |  | Average Balance |        | Interest Income / Expense |   | Average Yield / Rate | 
|Assets:                                                 |  |                 |        |                           |   |                      |  |      |  
|Investment securities                                   |  | $               | 1,641  |                           | $ | 102                  |  | 6.22 | %
|Total Loans (1)                                         |  |                 | 64,444 |                           |   | 5,433                |  | 8.43 |  
|                                                        |  |                 |       
|Federal funds sold                                      |  |                 | 1,120  |                           |   | 43                   |  | 3.84 |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Total earning assets                                    |  |                 | 67,205 |                           |   | 5,578                |  | 8.30 |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|less: allowance for loan losses                         |  |                 | 737    |                           |   |                      |  |      |  
|Total non-earning assets                                |  |                 | 4,517  |                           |   |                      |  |      |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Total Assets                                            |  |                 | 70,985 |                           |   |                      |  |      |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Liabilities & Equity                                    |  |                 |        |                           |   |                      |  |      |  
|Interest-bearing deposits:                              |  |                 |        |                           |   |                      |  |      |  
|NOW                                                     |  | $               | 2,114  |                           | $ | 28                   |  | 1.32 | %
|Savings                                                 |  |                 | 301    |                           |   | 5                    |  | 1.66 |  
|Money market                                            |  |                 | 5,975  |                           |   | 213                  |  | 3.56 |  
|Time deposits >$100,000                                 |  |                 | 13,421 |                           |   | 772                  |  | 5.75 |  
|Other time                                              |  |                 | 32,968 |                           |   | 2,020                |  | 6.13 |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Total interest-bearing deposits                         |  |                 | 54,779 |                           |   | 3,038                |  | 5.55 |  
|                                                        |  |                 |       
|Short-term borrowings                                   |  |                 | 651    |                           |   | 31                   |  | 4.76 |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Total interest bearing liabilities                      |  |                 | 55,430 |                           |   | 3,069                |  | 5.54 |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Noninterest-bearing liabilities:                        |  |                 |        |                           |   |                      |  |      |  
|Demand deposits                                         |  |                 | 6,146  |                           |   |                      |  |      |  
|Other liabilities                                       |  |                 | 629    |                           |   |                      |  |      |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Total Liabilities                                       |  |                 | 62,205 |                           |   |                      |  |      |  
|                                                        |  |                 |       
|Shareholders equity                                    |  |                 | 8,780  |                           |   |                      |  |      |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Total Liabilities & Equity                              |  |                 | 70,985 |                           |   |                      |  |      |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Net interest Income                                     |  |                 |        |                           |   | 2,509                |  |      |  
|                                                        |  |                 |        |                           |   |                      |  |      |  
|Interest rate spread (2)                                |  |                 |        |                           |   |                      |  | 2.76 | %
|Interest expense as a percent of average earning assets |  |                 |        |                           |   |                      |  | 4.57 | %
|Net Interest margin (3)                                 |  |                 |        |                           |   |                      |  | 3.73 | %

---

|(1) | Non-accruing loans are included in average loans outstanding
|--- | ------------------------------------------------------------

|(2) | Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities
|--- | ------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin is net interest income expressed as a percentage of average earning assets
|--- | ----------------------------------------------------------------------------------------------



14



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##### Table of Contents

TABLE 2



VOLUME AND RATE ANALYSIS



The following table describes the impact on the
companys interest income and interest expense resulting from changes in average balances and average rates over the period indicated. The changes in interest due to both volume and rate have been allocated to rate and volume equally.



|                                                                        |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|----------------------------------------------------------------------- |  | ---------------------------------- | - |  | ---------------------------------- | - |  | -------------------------------- | - |  | ------------------------------- |  | --------------------------------- | - |  | -------------------------------- | -
|                                                                        |  | Years Ended December 31, 2003/2002 |   |  | Years Ended December 31, 2002/2001 |  
|                                                                        |  | Increase due to Average Balance    |   |  | (Decrease) change in Average Rate  |   |  | Total or net Increase (decrease) |   |  | Increase due to Average Balance |  | (Decrease) change in Average Rate |   |  | Total or net increase (decrease) |  
|Interest-earning assets:                                                |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Interest-bearing deposits with banks                                    |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Taxable securities                                                      |  | 41                                 |   |  | (7                                 | ) |  | 34                               |   |  | 48                              |  | (45                               | ) |  | 3                                |  
|Non-taxable securities                                                  |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Federal funds sold and securities purchased under resale agreements     |  | 18                                 |   |  | (14                                | ) |  | 4                                |   |  | 15                              |  | (24                               | ) |  | (9                               | )
|Totals loans (net of unearned)                                          |  | 2,921                              |   |  | (1,001                             | ) |  | 1,920                            |   |  | 2,656                           |  | (880                              | ) |  | 1,776                            |  
|                                                                        |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Income on interest-earning assets                                       |  | 2,980                              |   |  | (1,022                             | ) |  | 1,958                            |   |  | 2,719                           |  | (949                              | ) |  | 1,770                            |  
|                                                                        |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Interest-bearing liabilities:                                           |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Interest-bearing demand deposits                                        |  | 421                                |   |  | (5                                 | ) |  | 416                              |   |  | 138                             |  | 16                                |   |  | 154                              |  
|Money market deposits                                                   |  | 16                                 |   |  | (24                                | ) |  | (8                               | ) |  | 58                              |  | (100                              | ) |  | (42                              | )
|Savings deposits                                                        |  | 2                                  |   |  | (2                                 | ) |  | (0                               | ) |  | 5                               |  | (2                                | ) |  | 3                                |  
|Certificates of deposit of $100,000 & over                              |  | 68                                 |   |  | (175                               | ) |  | (107                             | ) |  | 258                             |  | (222                              | ) |  | 36                               |  
|Other time deposits                                                     |  | 597                                |   |  | (566                               | ) |  | 31                               |   |  | 844                             |  | (522                              | ) |  | 322                              |  
|Federal funds purchased and securities sold under repurchase agreements |  | (18                                | ) |  | 32                                 |   |  | 14                               |   |  | 11                              |  | (19                               | ) |  | (8                               | )
|                                                                        |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Federal Home Loan Bank long-term debt                                   |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Expense of interest-bearing liabilities                                 |  | 1,086                              |   |  | (740                               | ) |  | 346                              |   |  | 1,314                           |  | (849                              | ) |  | 465                              |  
|                                                                        |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  
|Net change in net interest income                                       |  | 1,894                              |   |  | (282                               | ) |  | 1,612                            |   |  | 1,405                           |  | (100                              | ) |  | 1,305                            |  
|                                                                        |  |                                    |   |  |                                    |   |  |                                  |   |  |                                 |  |                                   |   |  |                                  |  



15



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##### Table of Contents

TABLE 3



SECURITIES HELD FOR
RESALE AND INVESTMENT

MATURITY DISTRIBUTION AND AVERAGE YIELD



Book Value of Investments



|                                          |  |              |       |      |   |      
|----------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                          |  | December 31,
|                                          |  | 2003         |       | 2002
|Securities Available for Sale:            |  |              |       |      |   |      
|                                          |  |             
|Fair Value:                               |  |              |       |      |   |      
|U.S. Government Agencies and Corporations |  | $            | 9,242 |      | $ | 3,191
|Equity Securities                         |  |              | 672   |      |   | 672  
|                                          |  |              |       |      |   |      
|                                          |  | $            | 9,914 |      | $ | 3,863
|                                          |  |              |       |      |   |      



Maturities of Investments at
December 31, 2003



|                                   |  |                |       |                   |   |                        |  |     |  
|---------------------------------- |  | -------------- | ----- | ----------------- | - | ---------------------- |  | --- | -
|                                   |  | Amortized Cost |       | Fair Market Value |   | Weighted Average Yield | 
|Within one year                    |  | $              | 9,246 |                   | $ | 9,242                  |  | .99 | %
|After one year to five years       |  |                | 0     |                   |   | 0                      |  | 0   |  
|After five years through ten years |  |                | 0     |                   |   | 0                      |  | 0   |  
|                                   |  |                |       |                   |   |                        |  |     |  
|                                   |  | $              | 9,246 |                   | $ | 9,242                  |  | .99 | %
|                                   |  |                |       |                   |   |                        |  |     |  



Other than U.S.
Government Agencies, the Bank held no issues that exceeded 10% of Shareholders Equity at December 31, 2003.



16



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##### Table of Contents

TABLE 4



LOAN PORTFOLIO AND
MATURITY SCHEDULE OF SELECTED LOANS



|                          |  |              |         |   |      |   |         |  
|------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                          |  | December 31, |        
|                          |  | 2003         |         |   | 2002 |  
|Commercial                |  | $            | 24,696  |   |      | $ | 21,508  |  
|Real Estate:              |  |              |         |   |      |   |         |  
|Mortgage                  |  |              | 81,606  |   |      |   | 80,629  |  
|Construction              |  |              | 14,875  |   |      |   | 8,675   |  
|Installment               |  |              | 14,704  |   |      |   | 11,243  |  
|                          |  |              |         |   |      |   |         |  
|                          |  |              | 135,881 |   |      |   | 122,055 |  
|Net deferred fees         |  |              | (147    | ) |      |   | (122    | )
|Allowance for loan losses |  |              | (2,129  | ) |      |   | (1,302  | )
|                          |  |              |         |   |      |   |         |  
|Loans, net                |  | $            | 133,605 |   |      | $ | 120,631 |  
|                          |  |              |         |   |      |   |         |  



The following table presents the
maturities of loans for the Bank. Maturities of loans are not readily available by loan category.



|                                                     |  |                   |        
|---------------------------------------------------- |  | ----------------- | -------
|                                                     |  | December 31, 2003
|Aggregate Maturities of Loan balances which are due: |  |                   |        
|                                                     | 
|Within one year                                      |  | $                 | 61,475 
|Over one year through five years                     |  |                   | 44,961 
|Over five years                                      |  |                   | 27,169 
|                                                     |  |                   |        
|Total Loans                                          |  | $                 | 133,605
|                                                     |  |                   |        



There were no
restructured loans at December 31, 2002 and at December 31, 2003. The Bank had $0 and $1,366,943 in non-performing loans, repossessed or foreclosed properties at December 31, 2002 and 2003, respectively.



The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. This information is incorporated by reference in this report from note 15 on pages 20 and 21 of the 2003 Annual Report to
Stockholders.



The Bank also has certain concentrations of
credit risk. This information is incorporated by reference in this report from note 15 on page 21 of the 2003 Annual Report to Stockholders.



17



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##### Table of Contents

TABLE 5



SUMMARY OF ALLOWANCE FOR
LOAN LOSSES



The following table shows the Banks loan
loss and recovery experience for the past three years.



The
Bank tries to maintain an allowance for loan losses that represents an estimate of all losses estimated in the Banks loan portfolio. To achieve this goal, the loan loss provision must be sufficient to cover charged off loans plus growth in the
loan portfolio. The loan loss provision is a charge against earnings necessary to maintain the allowance for loan losses at managements targeted level. In considering the provision for loan loss, an evaluation of the loan portfolio is
conducted. Loans in non-accrual status and loans past due over ninety days are considered in this evaluation as well as other loans the Bank feels may be a potential loss. The status of non-accrual and past due loans varies from quarter to quarter
based on seasonality and cash flow of customers.



|                                 |  |       |   |  |       |   |  |      |  
|-------------------------------- |  | ----- | - |  | ----- | - |  | ---- | -
|                                 |  | 2003  |   |  | 2002  |   |  | 2001 |  
|Balance beginning of period      |  | 1,302 |   |  | 957   |   |  | 615  |  
|Loans charged off:               |  | (83   | ) |  | (458  | ) |  | (18  | )
|Recoveries                       |  | 7     |   |  | 18    |   |  | 1    |  
|                                 |  |       |   |  |       |   |  |      |  
|Net loans charged off            |  | (76   | ) |  | (440  | ) |  | (17  | )
|Provision for loan losses        |  | 903   |   |  | 785   |   |  | 359  |  
|Balance end of period            |  | 2,129 |   |  | 1,302 |   |  | 957  |  
|                                 |  |       |   |  |       |   |  |      |  
|Net charge-offs to Average loans |  | 0.59  | % |  | 0.44  | % |  | 0.03 | %



18



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##### Table of Contents

TABLE 6



ALLOCATION OF THE
ALLOWANCE FOR LOAN LOSSES



A breakdown of the allowance for
loan losses along with the percent of loans in each major category is provided in the following table. Management of the Bank does not believe that the allowance for loan losses can be fragmented by category with any precision that would be useful
to investors. The breakdown of the allowance for loan losses is based primarily upon those factors discussed above in computing the allowance as a whole. Because all of these factors are subject to change, the breakdown is not necessarily indicative
of the category of future losses.



|                         |  |                   |  |                                                     |  |           |  |                                                    
|------------------------ |  | ----------------- |  | --------------------------------------------------- |  | --------- |  | ---------------------------------------------------
|                         |  | December 31, 2003 |  | December 31, 2002                                  
|                         |  | Allowance         |  | Percentage of loans in each category to total loans |  | Allowance |  | Percentage of loans in each category to total loans
|Commercial               |  | 363               |  | 17.04                                               |  | 229       |  | 17.62                                              
|Real Estate Mortgage     |  | 1,300             |  | 61.04                                               |  | 860       |  | 66.06                                              
|Real Estate Construction |  | 236               |  | 11.06                                               |  | 93        |  | 7.11                                               
|Consumer                 |  | 230               |  | 10.86                                               |  | 120       |  | 9.21                                               
|                         |  |                   |  |                                                     |  |           |  |                                                    
|Total                    |  | 2,129             |  | 100.00                                              |  | 1,302     |  | 100.00                                             
|                         |  |                   |  |                                                     |  |           |  |                                                    



19



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##### Table of Contents

TABLE 7



DEPOSITS



The average balance and rates for certain categories of deposits for the
last three years are shown in the following table.



|                                    |  |                 |         |              |      |   |                 |      |              |  |      |                 |  |              |        |  |      |  
|----------------------------------- |  | --------------- | ------- | ------------ | ---- | - | --------------- | ---- | ------------ |  | ---- | --------------- |  | ------------ | ------ |  | ---- | -
|                                    |  | 2003            |         |              | 2002 |   |                 | 2001 |             
|                                    |  | Average Balance |         | Average Rate |      |   | Average Balance |      | Average Rate |  |      | Average Balance |  | Average Rate |       
|Noninterest-bearing demand deposits |  | $               | 13,039  |              |      |   |                 | $    | 8,973        |  |      |                 |  | $            | 6,146  |  |      |  
|                                    |  |                 |         |              |      |  
|Interest-bearing deposits:          |  |                 |         |              |      |   |                 |      |              |  |      |                 |  |              |        |  |      |  
|Now                                 |  |                 | 29,536  |              | 2.02 | % |                 |      | 8,729        |  | 2.09 | %               |  |              | 2,114  |  | 1.32 | %
|Savings                             |  |                 | 1,152   |              | .69  | % |                 |      | 824          |  | .97  | %               |  |              | 301    |  | 1.66 | %
|Money market                        |  |                 | 10,038  |              | 1.62 | % |                 |      | 9,036        |  | 1.89 | %               |  |              | 5,975  |  | 3.56 | %
|Time deposits >$100,000             |  |                 | 21,864  |              | 3.21 | % |                 |      | 19,728       |  | 4.10 | %               |  |              | 13,421 |  | 5.75 | %
|Other time                          |  |                 | 68,863  |              | 3.45 | % |                 |      | 51,536       |  | 4.54 | %               |  |              | 32,968 |  | 6.13 | %
|                                    |  |                 |         |              |      |   |                 |      |              |  |      |                 |  |              |        |  |      |  
|Total interest-bearing deposits     |  |                 | 131,453 |              | 2.92 | % |                 |      | 89,853       |  | 3.91 | %               |  |              | 54,779 |  | 5.55 | %
|                                    |  |                 |         |              |      |   |                 |      |              |  |      |                 |  |              |        |  |      |  
|Total deposit                       |  | $               | 144,492 |              |      |   |                 | $    | 98,826       |  |      |                 |  | $            | 60,925 |  |      |  
|                                    |  |                 |         |              |      |   |                 |      |              |  |      |                 |  |              |        |  |      |  



Maturities of CDs
>$100,000 at

December 31, 2003



|                                   |  |        |        |         |        |  
|---------------------------------- |  | ------ | ------ | ------- | ------ | -
|                                   |  | Amount |        | Percent |       
|Three months or less               |  | $      | 1,684  |         | 9.37   | %
|Over three months to twelve months |  |        | 7,248  |         | 40.33  | %
|One year through five years        |  |        | 8,218  |         | 45.73  | %
|Over five years                    |  |        | 821    |         | 4.57   | %
|                                   |  |        |        |         |        |  
|Total                              |  | $      | 17,971 |         | 100.00 | %
|                                   |  |        |        |         |        |  



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TABLE 8



RETURN ON EQUITY AND
ASSETS



The ratio of net income to average total assets and
average shareholders equity and certain other ratios for the periods indicated are as follows:



|                                 |  |      |   |  |      |   |  |       |  
|-------------------------------- |  | ---- | - |  | ---- | - |  | ----- | -
|                                 |  | 2003 |   |  | 2002 |   |  | 2001  |  
|Return on average assets         |  | .64  | % |  | .32  | % |  | .16   | %
|Return on average equity         |  | 8.46 | % |  | 3.90 | % |  | 1.31  | %
|Average equity to average assets |  | 7.58 | % |  | 8.22 | % |  | 12.37 | %
|Dividend payout ratio            |  | 0.00 | % |  | 0.00 | % |  | 0.00  | %



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TABLE 9



INTERST SENSITIVITY
ANALYSIS



Static Gap Schedule

(in thousands)



|                           |  |          |  |            |  |             |   |  |           |   |  |           |   |  |            |  |            |  |        
|-------------------------- |  | -------- |  | ---------- |  | ----------- | - |  | --------- | - |  | --------- | - |  | ---------- |  | ---------- |  | -------
|                           |  | Floating |  | 0-3 Months |  | 3-12 Months |   |  | 1-3 Years |   |  | 3-5 Years |   |  | 5-15 Years |  | > 15 Years |  | TOTAL  
|Assets                     |  |          |  |            |  |             |   |  |           |   |  |           |   |  |            |  |            |  |        
|                           |  |          |  |            |  |             |   | 
|Loans                      |  | 51,611   |  | 14,249     |  | 20,614      |   |  | 21,752    |   |  | 9,394     |   |  | 13,296     |  | 4,818      |  | 135,734
|Int -bearing Bank Deposits |  | 0        |  | 0          |  | 23          |   |  | 0         |   |  | 0         |   |  | 0          |  | 0          |  | 23     
|Fed Funds                  |  | 2,146    |  | 0          |  | 0           |   |  | 0         |   |  | 0         |   |  | 0          |  | 0          |  | 2,146  
|Investments                |  | 0        |  | 9,246      |  | 0           |   |  | 0         |   |  | 0         |   |  | 0          |  | 0          |  | 9,246  
|Totals                     |  | 53,757   |  | 23,495     |  | 20,637      |   |  | 21,752    |   |  | 9,394     |   |  | 13,296     |  | 4,818      |  | 147,149
|                           |  |          |  |            |  |             |   | 
|Liabilities                |  |          |  |            |  |             |   |  |           |   |  |           |   |  |            |  |            |  |        
|                           |  |          |  |            |  |             |   | 
|Interest-bearing           |  |          |  |            |  |             |   |  |           |   |  |           |   |  |            |  |            |  |        
|Transaction accounts       |  | 13,897   |  | 0          |  | 0           |   |  | 21,736    |   |  | 0         |   |  | 0          |  | 0          |  | 35,633 
|Money market/Savings       |  | 6,943    |  | 0          |  | 0           |   |  | 6,158     |   |  | 0         |   |  | 0          |  | 0          |  | 13,101 
|Certificates<$100M         |  | 0        |  | 10,957     |  | 21,275      |   |  | 23,138    |   |  | 8,985     |   |  | 0          |  | 0          |  | 64,355 
|Certificates>$100M         |  | 0        |  | 2,017      |  | 7,519       |   |  | 5,693     |   |  | 2,741     |   |  | 0          |  | 0          |  | 17,970 
|Other Borrowings           |  | 0        |  | 0          |  | 0           |   |  | 13        |   |  | 0         |   |  | 0          |  | 0          |  | 13     
|Fed Funds                  |  | 0        |  | 0          |  | 0           |   |  | 0         |   |  | 0         |   |  | 0          |  | 0          |  | 0      
|Totals                     |  | 20,840   |  | 12,974     |  | 28,794      |   |  | 56,738    |   |  | 11,726    |   |  | 0          |  | 0          |  | 131,072
|                           |  |          |  |            |  |             |   | 
|Gap                        |  | 32,917   |  | 10,521     |  | (8,157      | ) |  | (34,985   | ) |  | (2,332    | ) |  | 13,296     |  | 4,818      |  | 16,077 
|                           |  |          |  |            |  |             |   | 
|Cumulative Gap             |  | 32,917   |  | 43,438     |  | 35,281      |   |  | 295       |   |  | (2,037    | ) |  | 11,259     |  | 16,077     |  | 16,077 
|                           |  |          |  |            |  |             |   | 
|Cumulative Gap/EA          |  | 0.61     |  | 0.56       |  | 0.36        |   |  | 0.00      |   |  | (0.02     | ) |  | .08        |  | .11        |  | .11    
|                           |  |          |  |            |  |             |   | 
|Cumulative RSA/RSL         |  | 2.58     |  | 2.28       |  | 1.56        |   |  | 1.00      |   |  | 0.98      |   |  | 1.09       |  | 1.09       |  | 1.09   



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TABLE 10



COMMUNITY FIRST BANK

Selected Historical Financial Information

(In Thousands, Except Shares and Per Share Data and Ratios)



|                                                           |  |                          |         |   |      |         |   |      |        |   |      |        |    |      |        |   
|---------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | ------- | - | ---- | ------ | - | ---- | ------ | -- | ---- | ------ | --
|                                                           |  | Years Ended December 31, |        
|                                                           |  | 2003                     |         |   | 2002 |         |   | 2001 |        |   | 2000 |        |    | 1999 |       
|STATEMENT OF INCOME DATA:                                  |  |                          |         |   |      |         |   |      |        |   |      |        |    |      |        |   
|Total interest income                                      |  | $                        | 9,306   |   |      | 7,347   |   |      | 5,578  |   |      | 2,389  |    |      | 198    |   
|Total interest expense                                     |  |                          | 3,881   |   |      | 3,534   |   |      | 3,069  |   |      | 1,072  |    |      | 9      |   
|Net interest income                                        |  |                          | 5,425   |   |      | 3,813   |   |      | 2,509  |   |      | 1,317  |    |      | 189    |   
|Provision for loan losses                                  |  |                          | 903     |   |      | 785     |   |      | 359    |   |      | 466    |    |      | 150    |   
|Total non-interest income                                  |  |                          | 1,018   |   |      | 626     |   |      | 263    |   |      | 65     |    |      | 3      |   
|Total non-interest expense                                 |  |                          | 4,230   |   |      | 3,303   |   |      | 2,298  |   |      | 1,382  |    |      | 457    |   
|Income tax expense                                         |  |                          | 294     |   |      |        |   |      |       |   |      |       |    |      |       |   
|Net income                                                 |  |                          | 1,016   |   |      | 351     |   |      | 115    |   |      | (466   | )  |      | (415   | ) 
|                                                           |  |                          |         |   |     
|PER SHARE DATA:                                            |  |                          |         |   |      |         |   |      |        |   |      |        |    |      |        |   
|Net income                                                 |  | $                        | 1.05    |   |      | .36     |   |      | .12    |   |      | (.48   | )  |      | (.43   | ) 
|Net income  assuming dilution                             |  | $                        | .79     |   |      | .34     |   |      | .12    |   |      | (.48   | )  |      | (.43   | ) 
|Cash dividend                                              |  | $                        | 0.00    |   |      | 0.00    |   |      | 0.00   |   |      | 0.00   |    |      | 0.00   |   
|Stock Dividend                                             |  |                          | 0       |   |      | 0       |   |      | 0      |   |      | 0      |    |      | 0      |   
|Book Value                                                 |  | $                        | 10.39   |   |      | 9.58    |   |      | 9.13   |   |      | 9.01   |    |      | 9.48   |   
|                                                           |  |                          |         |   |     
|BALANCE SHEET DATA:                                        |  |                          |         |   |      |         |   |      |        |   |      |        |    |      |        |   
|Federal funds sold under resale agreements                 |  | $                        | 0.00    |   |      | 0.00    |   |      | 0.00   |   |      | 1,889  |    |      | 1,765  |   
|Securities available-for-sale                              |  |                          | 9,914   |   |      | 3,863   |   |      | 3,993  |   |      | 1,008  |    |      | 3,428  |   
|Securities held-to-maturity                                |  |                          | 0.00    |   |      | 0.00    |   |      | 0.00   |   |      | 0.00   |    |      | 0.00   |   
|Loans, net                                                 |  |                          | 133,605 |   |      | 120,631 |   |      | 75,622 |   |      | 40,708 |    |      | 6,644  |   
|Total Assets                                               |  |                          | 159,899 |   |      | 139,752 |   |      | 86,615 |   |      | 47,738 |    |      | 13,163 |   
|Total deposits                                             |  |                          | 143,267 |   |      | 122,498 |   |      | 74,392 |   |      | 38,633 |    |      | 3,942  |   
|Total stockholders equity                                 |  |                          | 13,176  |   |      | 11,815  |   |      | 8,839  |   |      | 8,724  |    |      | 9,186  |   
|                                                           |  |                          |         |   |     
|SELECTED RATIOS:                                           |  |                          |         |   |      |         |   |      |        |   |      |        |    |      |        |   
|Return on average assets                                   |  |                          | .68     | % |      | .32     | % |      | .16    | % |      | (1.58  | )% |      | (15.88 | )%
|Return on average equity                                   |  |                          | 8.46    | % |      | 3.90    | % |      | 1.31   | % |      | (5.16  | )% |      | (17.03 | )%
|Dividend payout ratio                                      |  |                          | 0.00    | % |      | 0.00    | % |      | 0.00   | % |      | 0.00   | %  |      | 0.00   | % 
|Average equity to average assets                           |  |                          | 7.58    | % |      | 8.22    | % |      | 12.37  | % |      | 30.71  | %  |      | 78.76  | % 
|Allowance for loan losses to loans, net of unearned income |  |                          | 1.59    | % |      | 1.06    | % |      | 1.25   | % |      | 1.49   | %  |      | 2.21   | % 



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Item 7. Financial Statements



This information is incorporated herein by reference from pages 2 through 25 of the 2003 Annual Report.



Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure



Larrowe & Company, P.L.C. served as
the Companys independent public accountants for the period from October 14, 1999 through December 31, 2003.



For the period from October 14, 1999 through December 31, 2003, the independent auditors report with respect to the Companys financial
statements neither contained an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements with Larrowe & Company on any matter of
accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Larrowe & Company, would have caused it to make a reference to the subject matter of the disagreement
in connection with its report.



There have been no
disagreements between the Company and its independent accountants for the Banks most recent three fiscal years.



Item 8A. Controls and Procedures



As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Companys management,
including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have not been any changes in the Companys internal control over financial reporting that
occurred during the Companys last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.



The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls and procedures is dependent upon the employees responsible for
executing it. While we have evaluated the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance to achieve their objective.



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##### Table of Contents

PART III



ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act



Certain information is incorporated herein by reference from pages 3 through
6 of the Companys 2004 definitive proxy statement for the annual meeting of shareholders (Definitive Proxy Statement), which was filed with the Securities and Exchange Commission on March 29, 2004.



The following is information on the executive officers of the Company who
are not directors of the Company:



|                 |  |      |  |                                                                                                                                                                                                                                                                                                                                            
|---------------- |  | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Francis F. Falls |  | (63) |  | Vice President and Operations Officer of Community First Bank; prior to joining the Bank Mr. Falls was Vice president of Metro-county Bank from March 1997 to June 1999. He was an Independent
Insurance Agent from January 1996 to March 1997. Mr. Falls was Vice President - Operations for Piedmont Trust Bank from 1981 to October 1994
|                 |  |     
|James M. Thomas  |  | (44) |  | Vice President  Business Banking of Community First Bank; prior to joining the Bank Mr. Thomas was Vice President  P&E Banking for MainStreet Bank-Central (formally First
Community Bank) from November 1994 to July 1999.                                                                                                              



The Company has adopted a Code of
Ethics that applies to the directors, executives and employees of the Company and the Bank, including the Companys Chief Executive Officer, Chief Financial Officer, Controller and other persons performing similar functions. A copy of this Code
of Conduct is attached hereto as Exhibit 14.



The Board of Directors has also
determined that Mr. Thomas S. Mignogna qualifies as an Audit Committee financial expert within the meaning of applicable regulations of the SEC, promulgated pursuant to the Sarbanes-Oxley Act of 2002.



Item 10. Executive Compensation



This information is incorporated herein by reference from page 3 of the
Companys Definitive Proxy Statement.



Item 11. Security Ownership
of Certain Beneficial Owners and Management



This
information is incorporated herein by reference from pages 5 and 6 of the Companys Definitive Proxy Statement.



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##### Table of Contents

Item 12. Certain Relationships and Related Transactions



This information is incorporated herein by reference from Note 12, page 18
of the Companys 2003 Annual Report.



Item 13. Exhibits and Reports
on Form 8-K



(a) Exhibits



|          |  |                                                                                                                                                                                                                                                                                               
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|3.1 & 3.2 |  | The Companys Articles of Incorporation and By Laws (Item (a) (2)), required to be filed under this section, have been previously filed with the Securities and Exchange Commission as an
exhibit to the Companys Form 8-K filed on July 11, 2002, and are incorporated herein by reference. 
|          | 
|10.2      |  | The Companys Stock Incentive Plan, required to be filed under this section, have been previously filed with the Board of Governors of the Federal Reserve System as an exhibit to the
Banks Form 10-QSB filed for the quarter ended June 30, 2001, and are incorporated herein by reference.
|          | 
|13.0      |  | 2003 Annual Report to Stockholders, Exhibit A.                                                                                                                                                                                                                                                
|          | 
|14.0      |  | Code of Ethics                                                                                                                                                                                                                                                                                
|          | 
|20        |  | Proxy Statement / Annual Meeting of Stockholders, Exhibit B.                                                                                                                                                                                                                                  



(b)
Reports on Form 8-K.



There were no reports filed on
Form 8-K during the fourth quarter 2003.



|     |  |                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------
|31.1 |  | Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



In accordance with
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 FIRST BANK
|               |  |                     
|March 29, 2004 |  | By:                  |  | /s/ F. F. Falls
|               |  |                      |  | F. F. Falls    
|               |  |                      |  | Vice President 



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CERTIFICATIONS



The undersigned hereby certifies that, (to his or her knowledge), (i) the Form 10-KSB filed by Community First Financial Corporation (the issuer) for
the year ended December 31, 2003, fully complies with the requirements of Section 13(a) or 15(b) 0f the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the
financial conditions and results of operations of the Issuer (on the dates and for the periods presented therein).



|                     |  |                                         
|-------------------- |  | ----------------------------------------
|Date: March 29, 2004 |  | /s/ John L. Wynne                       
|                     |  | John L. Wynne                           
|                     |  | President and Chief Executive Officer   
|                     | 
|Date: March 29, 2004 |  | /s/ F. F. Falls                         
|                     |  | F. F. Falls                             
|                     |  | Vice President Chief Financial Officer



In accordance with 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.



|                                                     |  |                             |  |               
|---------------------------------------------------- |  | --------------------------- |  | --------------
|Signatures                                           |  | Title                       |  | Date          
|/s/ John L. WynneJohn L. Wynne                       |  | President, CEO and Director |  | MARCH 29, 2004
|                                                     |  |                            
|/s/ R. Thomas BeachR. Thomas Beach                   |  | Director                    |  | MARCH 29, 2004
|                                                     |  |                            
|/s/ A. C. Coleman, Jr.A. C. (Buzzy) Coleman, Jr.     |  | Director                    |  | MARCH 29, 2004
|                                                     | 
|                                                     |  |                            
|/s/ Frank C. Crist, Jr., DDSFrank C. Crist, Jr., DDS |  | Director                    |  | MARCH 29, 2004
|                                                     | 
|                                                     |  |                            
|/s/ G. Scott GarrettG. Scott Garrett                 |  | Director                    |  | MARCH 29, 2004
|                                                     | 
|                                                     |  |                            
|/s/ Walter G. Mason, IIWalter G. Mason, II           |  | Vice President and Director |  | MARCH 29, 2004
|                                                     | 
|                                                     |  |                            
|/s/ Thomas M. MignognaThomas M. Mignogna             |  | Director                    |  | MARCH 29, 2004
|                                                     | 
|                                                     |  |                            
|/s/ Dr. Larry H. RedmondDr. Larry H. Redmond         |  | Director                    |  | MARCH 29, 2004
|                                                     | 
|                                                     |  |                            
|/s/ Daniel P. ThorntonDaniel P. Thornton             |  | Director                    |  | MARCH 29, 2004
|                                                     | 



27