**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**WASHINGTON,
D. C. 20549**


**FORM
10-Q**





/X/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
quarter period ended March 31, 2005





/  /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
transition period from  _ to





Commission
File Number: 33-81890




**Community
Bankshares, Inc.**


(Exact
name of registrant as specified in its charter)




**Georgia**
    
    **58-1415887***(State
      or other jurisdiction of*
    
    *(IRS
      Employer**incorporation
      or organization)*
    
    *Identification
      No.)*
 
 
 **448
      North Main Street,****Cornelia,
      Georgia**
    **30531***(Address
      of principal executive offices)*
    *(Zip
      Code)*





**(706)
778-2265**


*(Registrant’s
telephone number, including area code)*





**N/A**


*(Former
name, former address and former fiscal*


*year,
if changed since last report)*





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





AP PLICABLE
ONLY TO CORPORATE ISSUERS





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of May 1, 2005; 2,141,275








1
 Table of Contents








**COMMUNITY
BANKSHARES, INC.**


**AND
SUBSIDIARIES**


**INDEX**





**PART
I. FINANCIAL INFORMATION**






**Item
      1.**
    **Financial Statements**
    3Consolidated Balance Sheets -
      March 31, 2005 and December 31,
      2004
    3Consolidated Statements of Income
      and Comprehensive Income for Three
      Months Ended March 31, 2005 and
      2004
    4Consolidated Statements of Cash Flows -
      Three Months Ended March 31, 2005 and
      2004
    5Notes to Consolidated Financial
    Statements
    6**Item
      2.**
    **Management's Discussion and Analysis
      of**
      **Financial Condition and Results of
      Operations**
    10**Item
      3.**
    **Quantitative and Qualitative Disclosures
      about Market Risk**
    14**Item
      4.**
    **Controls and
    Procedures**15**PART
      II.  OTHER INFORMATION****Item
      1.**
    **Legal Proceedings**
    16**Item
      2.**
    **Unregistered Sale of Equity Securities and Use of
      Proceeds**
    16**Item
      3.**
    **Defaults Upon Senior
    Securities**
    16**Item 4.**
    **Submission of Matters to a Vote of Security
      Holders**
    16**Item
      6.**
    **Exhibits**
    16**Signatures**
    
    17







2
 Table of Contents





**PART
I - FINANCIALINFORMATION**


ITEM
1.FINANCIALSTATEMENTS


COMMUNITY
BANKSHARES, INC.


AND
SUBSIDIARIES


CONSOLIDATED
BALANCESHEETS


MARCH 31,
2005 AND DECEMBER 31, 2004


(Dollars
in thousands)


(Unaudited)


**Assets**
    
    
    **2005**
    ****
    ****
    **2004**Cash
      and due from banks
    
    $
    38,628
    
    $
    30,507Interest-bearing
      deposits in banks
    
    
    718
    
    
    487Federal
      funds sold
    
    
    23,050
    
    
    0Securities
      available-for-sale
    
    
    112,336
    
    
    114,883Securities
      held-to-maturity (fair value
      $19,874
      and $21,330)
    
    
    18,999
    
    
    20,217Restricted
      equity securities, at cost
    
    
    2,810
    
    
    2,469Loans,
      net of unearned income
    
    
    659,582
    
    
    645,500Less
      allowance for loan losses
    
    
    9,621
    
    
    9,170Loans,
      net
    
    
    649,961
    
    
    636,330Premises
      and equipment, net
    
    
    18,483
    
    
    18,330Intangible
      assets, net
    
    
    742
    
    
    812Goodwill
    
    
    968
    
    
    968Other
      real estate
    
    
    4,042
    
    
    3,901Other
      assets
    
    
    14,652
    
    
    14,474**Total
      assets**
    
    $
    885,389
    
    $
    843,378****
      **Liabilities,
      Redeemable Common Stock and Shareholders’
    Equity**Liabilities:
      Deposits:
      Noninterest-bearing
    
    $
    129,009
    
    $
    119,097Interest-bearing
      demand
    
    
    206,927
    
    
    197,927Savings
    
    
    41,787
    
    
    39,043Time,
      $100,000 and over
    
    
    143,568
    
    
    135,940Other
      time
    
    
    242,461
    
    
    234,968**Total
      deposits**
    
    
    763,752
    
    
    726,975Other
      borrowings
    
    
    30,703
    
    
    25,794Other
      liabilities
    
    
    10,831
    
    
    11,569**Total
      liabilities**
    
    
    805,286
    
    
    764,338Redeemable
      common stock held by ESOP, net of unearned ESOP shares related
      to
      ESOP
      debt guarantee of $487,971 and $585,218, at March 31, 2005
      and
      December 31, 2004 respectively
    
    
    19,023
    
    
    18,925Shareholders'
      equity
      Common
      stock, par value $1; 5,000,000 shares authorized;
      2,211,330
      and 2,211,330 shares issued at March 31, 2005 and
      December
      31, 2004, respectively
    
    
    2,211
    
    
    2,211Capital
      surplus
    
    
    6,477
    
    
    6,477Retained
      earnings
    
    
    55,364
    
    
    53,536Accumulated
      other comprehensive income
    
    
    39
    
    
    884Less
      cost of 70,055 and 69,745 shares of treasurystock
      at March 31, 2005 and
      December
      31, 2004, respectively
    
    
    (3,011
    )
    
    (2,993
    )**Total
      shareholders' equity**
    
    
    61,080
    
    
    60,115**Total
      liabilities, redeemable common stock and shareholders'
      equity**
    
    $
    885,389
    
    $
    843,378





See Notes
to Consolidated Financial Statements





3
 Table of Contents


COMMUNITY
BANKSHARES, INC.


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


AND
COMPREHESIVE INCOME


THREE
MONTHS ENDED MARCH 31, 2005 AND 2004


(Dollars
in thousands, except per share amounts)


(Unaudited)


**Three
      Months Ended**
      **March
      31,**
    ********
    ****
    **2005**
    ****
    **2004**Interest
      income:
      Loans,
      including fees
    
    $
    11,225
    
    $
    9,904Taxable
      securities
    
    
    654
    
    
    616Nontaxable
      securities
    
    
    651
    
    
    691Interest-bearing
      deposits in other banks
    
    
    4
    
    
    2Federal
      funds sold
    
    
    94
    
    
    35Total
      interest income
    
    
    12,628
    
    
    11,248Interest
      expense:
      Deposits
    
    
    3,576
    
    
    2,743Other
      borrowings
    
    
    269
    
    
    209Total
      interest expense
    
    
    3,845
    
    
    2,952Net
      interest income
    
    
    8,783
    
    
    8,296Provision
      for loan losses
    
    
    713
    
    
    1,129Net
      interest income after
      Provision
      for loan losses
    
    
    8,070
    
    
    7,167Other
      income:
      Service
      charges on deposit accounts
    
    
    2,150
    
    
    2,270Other
      service charges, commissions and fees
    
    
    625
    
    
    530Trust
      department fees
    
    
    64
    
    
    51Gains
      on sale of loans
    
    
    106
    
    
    11Nonbank
      subsidiary income
    
    
    1,850
    
    
    1,494Security
      gains, net
    
    
    (1
    )
    
    36Other
      operating income
    
    
    97
    
    
    97Total
      other income
    
    
    4,891
    
    
    4,489Other
      expenses:
      Salaries
      and employee benefits
    
    
    5,585
    
    
    4,866Equipment
      expense
    
    
    936
    
    
    814Occupancy
      expense
    
    
    638
    
    
    524Other
      operating expenses
    
    
    2,955
    
    
    3,185Total
      other expenses
    
    
    10,114
    
    
    9,389Income
      before income taxes
    
    
    2,847
    
    
    2,267Income
      tax expense
    
    
    826
    
    
    544Net
      income
    
    $
    2,021
    
    $
    1,723Other
      comprehensive income (loss):
      Unrealized
      income (losses) on securities available for sale:
      Unrealized
      gains (losses) arising during
      the
      period, net of taxes
    
    
    (845
    )
    
    583Reclassification
      adjustment
      for
      gains realized in net
      income,
      net of taxes
    
    
    0
    
    
    (22
    )Total
      other comprehensive income (loss)
    
    
    (845
    )
    
    561Comprehensive
      income
    
    $
    1,176
    
    $
    2,284Basic
      earnings per common share
    
    $
    .94
    
    $
    .81Diluted
      earnings per common share
    
    $
    .94
    
    $
    .80Cash
      dividends per share of common stock
    
    $
    .09
    
    $
    .08See
      Notes to Consolidated Financial Statements.




4
 Table of Contents


COMMUNITY
BANKSHARES, INC.


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASHFLOWS


THREE
MONTHS ENDED MARCH 31, 2005 AND 2004


(Dollars
in thousands)


(unaudited)




**2005**
    ****
    **2004****OPERATING
      ACTIVITIES**Net
      income
    
    $
    2,021
    
    $
    1,723Adjustments
      to reconcile net income to
      net
      cash provided by operating
      activities:Depreciation
      and amortization
    
    
    768
    
    
    708Provision
      for loan losses
    
    
    713
    
    
    1,129Provision
      for losses on other real estate owned
    
    
    -
    
    
    10Deferred
      income taxes
    
    
    (760
    )
    
    (50
    )Net
      realized (gains) losses on securities
      available-for-sale
    
    
    1
    
    
    (36
    )Decrease
      in interest receivable
    
    
    169
    
    
    245Decrease
      in interest payable
    
    
    (51
    )
    
    (101
    )Increase
      in taxes payable
    
    
    777
    
    
    933Increase
      in accounts
      receivable
      of nonbank subsidiary
    
    
    (621
    )
    
    (324
    )Decrease
      in work in
      Process
      of nonbank subsidiary
    
    
    4
    
    
    96Increase
      (decrease) in accruals and
      payables
      of nonbank subsidiary
    
    
    (548
    )
    
    354Net
      other operating activities
    
    
    772
    
    
    1,674Net
      cash provided by
      operating
      activities
    
    
    3,245
    
    
    6,361**INVESTING
      ACTIVITIES**Purchases
      of securities available-for-sale
    
    
    (16,141
    )
    
    (409
    )Proceeds
      from sales of securities
      available-for-sale
    
    
    11,071
    
    
    4,314Proceeds
      from maturities of securities
      available-for-sale
    
    
    5,867
    
    
    1,502Proceeds
      from maturities of securities
      held-to-maturity
    
    
    1,218
    
    
    514Net
      increase in Federal funds sold
    
    
    (23,050
    )
    
    (5,400
    )Net
      decrease in interest-bearing
      deposits
      in banks
    
    
    (231
    )
    
    (230
    )Net
      increase in loans
    
    
    (14,841
    )
    
    (34,747
    )Purchase
      of premises and equipment
    
    
    (849
    )
    
    (1,121
    )Proceeds
      from sales of other real estate
    
    
    357
    
    
    520Net
      cash used in
      investing
      activities
    
    
    (36,599
    )
    
    (35,057
    )**FINANCING
      ACTIVITIES**Net
      increase in deposits
    
    
    36,777
    
    
    15,147Repayment
      of other borrowings
    
    
    (91
    )
    
    (147
    )Purchase
      of Treasury Stock
    
    
    (18
    )
    
    (339
    )Increase
      in FHLB Advances
    
    
    5,000
    
    
    10,075Dividends
      paid
    
    
    (193
    )
    
    (172
    )Net
      cash provided by Financing activities
    
    
    41,475
    
    
    24,564Net
      increase (decrease) in cash and
      due
      from banks
    
    $
    8,121
    
    $
    (4,128
    )Cash
      and due from banks at beginning of the period
    
    
    30,507
    
    
    44,729Cash
      and due from banks at end of the period
    
    $
    38,628
    
    $
    40,601




5
 Table of Contents




COMMUNITY
BANKSHARES, INC.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASHFLOWS
 THREE
MONTHS ENDED MARCH 31, 2005 AND 2004
 (Dollars
in thousands)
 (Unaudited)
 (CONTINUED)




**2005**
    ****
    ****
    **2004****SUPPLEMENTAL
      DISCLOSURES**Cash
      paid for:
      Interest
    
    $
    3,896
    
    $
    3,042Income
      taxes
    
    $
    246
    
    $
    53**NONCASH
      TRANSACTIONS**Principal
      balances on loans
      Transferred
      to other real estate
    
    $
    497
    
    $
    612





6
 Table of Contents





COMMUNITY
BANKSHARES, INC.


AND
SUBSIDIARIES





NOTESTO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1.  BASIS OF
PRESENTATION





The
consolidated financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in opinion of management, necessary for a fair statement
of results for the interim periods.





The
results of operations for the three month period ending March 31, 2005 are not
necessarily indicative of the results to be expected for the full
year.





NOTE
2.  STOCK
COMPENSATION PLAN





The
Company has a stock-based employee compensation plan. The Company accounts for
the plan under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under the plan had an exercise price equal to the market value
of the underlying stock on the date of grant.





There
were no options granted during the three months ended March 31, 2005 and 2004.
Therefore, there would be no proforma effect on net income or earnings per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.





NOTE
3.  EARNINGS
PER COMMON S HARE





The
following is a reconciliation of net income (the numerator) and weighted-average
shares outstanding (the denominator) used in determining basic and diluted
earnings per common share (EPS).





Three
      Months Ended March 31, 2005(Dollars
      and shares in Thousands
      except
      per share amounts)Net
      Income
      (Numerator)
    
    Weighted-Average
      Shares
      (Denominator)
    
    Per
      Share
      AmountBasic
      EPS
    
    $
    2,021
    
    
    2,141
    
    $
    0.94Effect
      of Dilutive Securities
      Stock
      options
    
    
    -0-
    
    
    8
    
    
    -Diluted
      EPS
    
    $
    2,021
    
    
    2,149
    
    $
    0.94











Three
      Months Ended March 31, 2004(Dollars
      and shares in Thousands,
      except
      per share amounts)Net
      Income
      (Numerator)
    
    Weighted-Average
      Shares
      (Denominator)
    
    Per
      Share
      AmountBasic
      EPS
    
    $
    1,723
    
    
    2,140
    
    $
    0.81Effect
      of Dilutive Securities
      Stock
      options
    
    
    -0-
    
    
    7
    
    
    (.01
    )Diluted
      EPS
    
    $
    1,723
    
    
    2,147
    
    $
    0.80








7
 Table of Contents











NOTE
4.  SEGMENT
INFORMATION





Selected
segment information by industry segment for the three month periods ended March 31,
2005 and 2004 is as follows:





Reportable
      Segments
      (Dollars
      in thousands)For
      the period ended March 31, 2005
    
    Banking
    
    Financial
      Supermarkets
    
    All
      Other
    
    TotalRevenue
      from external customers
    
    $
    15,721
    
    $
    1,711
    
    $
    188
    
    $
    17,620Intersegment
      revenues (expenses)
    
    
    (52
    )
    
    108
    
    
    654
    
    
    710Segment
      profit (loss)
    
    
    2,159
    
    
    309
    
    
    (470
    )
    
    1,998Segment
      assets
    
    $
    884,811
    
    $
    17,350
    
    $
    5,114
    
    $
    907,275





Reportable
      Segments
      (Dollars
      in thousands)For
      the period ended March 31, 2004
    
    Banking
    
    Financial
      Supermarkets
    
    All
      Other
    
    TotalRevenue
      from external customers
    
    $
    14,246
    
    $
    1,3741,3741
    
    $
    166
    
    $
    15,786Intersegment
      revenues (expenses)
    
    
    (31
    )
    
    90
    
    
    493
    
    
    552Segment
      profit (loss)
    
    
    1,963
    
    
    132
    
    
    (396
    )
    
    1,699Segment
      assets
    
    $
    798,463
    
    $
    14,885
    
    $
    5,797
    
    $
    819,145





2005
    
    2004Net
      IncomeTotal
      profit for reportable segments
    
    $
    2,468
    
    $
    2,095Non-reportable
      segment loss
    
    
    (470
    )
    
    (396
    )Elimination
      of intersegment (gains) losses
    
    
    23
    
    
    24Total
      consolidated net income
    
    $
    2,021
    
    $
    1,723









2005**Total
      Assets**Total
      assets for reportable segments
    
    $
    902,161Non-reportable
      segment assets
    
    
    5,114Elimination
      of intersegment assets
    
    
    (21,886
    )Total
      consolidated assets
    
    $
    885,389





8
 Table of Contents








NOTE
5. REVERSE STOCK
SPLIT





On
January 13, 2005, the Board of Directors of the Company voted unanimously to
declare a one for five-hundred reverse stock split for the primary for the
purpose of “Going private” which will relieve the Company from the expense and
burden associated with compliance with both current and proposed federal
securities laws and regulations. Since the Board of Directors and executive
officers, as defined by securities law, do not collectively control more than
50% of the voting shares of the Company’s outstanding stock and since the
reverse stock split is subject to regulatory and shareholder approval to amend
the Company’s by-laws, we have not restated the equity section of the balance
sheet or per share amounts. The following table illustrates the effect on
earnings per share if the Company had reflected the one for five-hundred reverse
stock split.





**Three
      Months Ended March 31,****2005**
    
    
    **2004**Earnings
      per share:Basic
      - as reported
    
    $
    .94
    
    $
    .81Basic
      - pro forma
    
    $
    470.00
    
    $
    405.00Diluted
      - as reported
    
    $
    .94
    
    $
    .80Diluted
      - pro forma
    
    $
    470.00
    
    $
    400.00





NOTE
6. RECENT
ACCOUNTING STANDARDS





In
December 2004, the FASB published Statement No. 123 (revised 2004), “Share-Based
Payment” (“FAS 123(R)” or the “Statement”). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. FAS 123(R) covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. FAS 123(R) is a
replacement of FASB Statement No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
its related interpretive guidance (APB 25).





The
effect of the Statement will be to require entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over the period the employee
is required to provide services for the award. FAS 123(R) permits entities to
use any option-pricing model that meets the fair value objective in the
Statement.





The
Company will be required to apply FAS 123(R) as of the beginning of its first
interim period that begins after December 15, 2005.





FAS
123(R) allows two methods for determining the effects of the transition: the
modified prospective transition method and the modified retrospective method of
transition. Under the modified prospective transition method, an entity would
use the fair value based accounting method for all employee awards granted,
modified, or settled after the effective date. As of the effective date,
compensation cost related to the nonvested portion of awards outstanding as of
that date would be based on the grant-date fair value of those awards as
calculated under the original provisions of Statement No. 123; that is, an
entity would not remeasure the grant-date fair value estimate of the unvested
portion of awards granted prior to the effective date. An entity will have the
further option to either apply the Statement to only the quarters in the period
of adoption and subsequent periods, or apply the Statement to all quarters in
the fiscal year of adoption. Under the modified retrospective method of
transition, an entity would revise its previously issued financial statements to
recognize employee compensation cost for prior periods presented in accordance
with the original provisions of Statement No. 123.





The
Company has not yet completed its study of the transition methods or made any
decisions about how it will adopt FAS 123(R).





9
 Table of Contents











COMMUNITY
BANKSHARES, INC.


AND
SUBSIDIARIES





ITEM 2.
MANAGEMENTDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND


RESULTS
OF OPERATIONS





Our
discussion below in this Item 2 is based on the more detailed discussions about
our business, operations and financial condition included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2004, under Item 7. Our
discussions here focus on our results during or as of the quarter ended March
31, 2005, and the comparable period of 2004, and, to the extent applicable, any
material changes from the information discussed in that Form 10-K or other
important intervening developments or information since that time. These
discussions should be read in conjunction with that 10-K for more detailed and
background information.





Forward
Looking Statements





This
discussion contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although the
Company believes the assumptions underlying the forward-looking statements
contained in the discussion are reasonable, any of the assumptions could be
inaccurate, and therefore, no assurance can be made that any of the
forward-looking statements included in this discussion will be accurate. Factors
that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to: economic conditions
(both generally and in the markets where the Company operates); competition from
other providers of financial services; government regulation and legislation; changes
in interest rates; and material unforeseen changes in the financial stability and
liquidity of the Company’s credit customers; all of
which are difficult to predict and which may be beyond the control of the
Company. The Company undertakes no obligation to revise forward-looking
statements to reflect events or
changes after the date of this discussion or to
reflect the occurrence of unanticipated events.





Critical
Accounting Policies





The
accounting principles the Company follows and its methods of applying these
principles conform with accounting principles generally accepted in the United
States and with general practices within the banking industry. In connection
with the application of those principles, the Company has made judgments and
estimates that, in the case of the determination of the allowance for loan
losses have been critical to the determination of the Company’s financial
position, results of operations and cash flows.





Management’s
judgment in determining the adequacy of the allowance for loan losses is based
on evaluations of the collectibility of loans in the portfolio. The allowance is
an amount that management believes will be adequate to absorb estimated losses
in the loan portfolio. The allowance for loan losses is evaluated on a regular
basis by management and is based upon management’s periodic review of the
collectibility of the loans in light of historical experience, the nature and
volume of the loan portfolio, particular circumstances that may affect the
borrower’s ability to repay, estimated value of any underlying collateral and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses, and may require the
Banks to make additions to the allowance based on their judgment about
information available to them at the time of their examinations.





Financial
Condition





For the
quarter ended March 31, 2005, we experienced growth in total assets, total
loans and total deposits as compared to December 31, 2004. Total assets, loans,
and deposits increased by 4.98%, 2.18% and 5.06% respectively. The growth in
deposits is attributed to our expanding markets and increased efforts to grow
our deposit base to help fund our increased loan demand. The growth in loans was
funded by the maturity and sale of securities, advances from Federal Home Loan
Bank, the growth of deposits and retention of earnings.





Liquidity





As of
March 31, 2005, the liquidity ratio was 18.14% which is within our target range
of 15 - 20%. Liquidity is measured by the ratio of net cash, short term and
marketable securities to net deposits and short term liabilities.














10
 Table of Contents







Interest
Rate Risk





Our
guideline is to allow no more than an 8% change in net interest income when
interest rates rise or fall 200 basis points or more. Our overall interest rate
risk was less than 4% of net interest income; therefore, we are within policy
guidelines. We have attempted to position ourselves to minimize the impact of
further changes in rates in either direction.





Capital





Banking
regulation requires the Company and the banks to maintain capital levels in
relation to our assets. At March 31, 2005, the banks' capital
ratios were considered well capitalized based on
regulatory minimum capital requirements. The minimum capital requirements for
the Company and the actual consolidated capital ratios were as
follows:





Actual
    
    Regulatory
      MinimumLeverage
    
    
    9.08%
    
    
    4.00%Core
      Capital
    
    
    11.62%
    
    
    4.00%Total
      Capital
    
    
    12.87%
    
    
    8.00%








Off
Balance Sheet Arrangements





Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business. These off-balance sheet
financial instruments include commitments to extend credit and standby letters
of credit. Such financial instruments are included in the financial statements
when funds are distributed or the instruments become payable. Our exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. We use the same
credit policies in making commitments as we do for on- balance sheet
instruments. Although these amounts do not necessarily represent future cash
requirements, a summary of our commitments as of March 31, 2005 and December 31,
2004 are as follows:





March
      31, 2005
    
    December
      31, 2004(Dollars
      in Thousands)
    
    (Dollars
      in Thousands)Commitments
      to extend credit
    
    $
    67,559
    
    $
    72,568Financial
      standby letters of credit
    
    
    3,853
    
    
    4,104





**A.
Results of Operation**





*Net
Income*





Net
income for the three month period ended March 31, 2005, was $2,021,000 or an
increase of 17.30% over the same period for 2004.





*Net
Interest Income*





Net
interest income for the three month period ended March 31, 2005 was up 5.87%
over the same period for 2004, from $8,296,000 to $8,783,000. Interest
income was up by 12.27% for the three month period ending March 31, 2005 from
$11,248,000 to $12,628,000. The increase was primarily caused by the increase in
the volume of earning assets. Earning
assets increased by 12.37% or $89,984,000 at March
31, 2005 as compared to March 31, 2004. The largest increase in earning assets
since March 31, 2004 was the increase in loans of $80,107,000 or 13.82%.
Securities increased by $11,767,000 while federal funds sold decreased by
$1,950,000.





Interest
expense was up 30.25% or $893,000 for the three month period ended March 31,
2005, over the same period in 2004. This increase was related to the
increase in interest bearing deposits and the increase in Federal Home Loan Bank
advances.





The
Company’s net interest margin was 4.64% for the three month period ended March
31, 2005 compared to 4.80% for the same period in 2004. Management anticipates a
stable net interest margin over the next twelve months. Any increase in rates
would have a slight positive effect on our net interest margin.








11
 Table of Contents











*Other
Income*





Other
income increased by $402,000 or 8.96% during the three month period ended March
31, 2005 as compared to the same period for 2004. This increase is primarily due
to increased sales by Financial Supermarkets, Inc. (“FSI”), a nonbank
subsidiary, of $326,000 or 24.26% for the three month period ended March 31,
2005 as compared to the same period in 2004. In addition, gain on sale of loans
increase by $95,000 or 863.64% as compared to same period in 2004.





*Non
Interest Expenses*





Non
interest expenses increased by 7.72% or $725,000 for the three month period
ending March 31, 2005 compared to the same period in
2004. Full time equivalent employees increased from 397 at the end of March 2004
to 429 at the end of March 2005. The increase in full time equivalent employees
was due to the overall growth of the Company’s banking operations. In addition,
the incentive commissions related to sales activity at FSI have increased due to
increased sales over the previous year. These increases caused salaries and
benefits to increase by 14.77% or $719,000 for the three month period ended
March 31, 2005 as compared to the same period in 2004.





Also
attributable to the overall growth of the Company, equipment and occupancy
expenses were up by 17.64% or $236,000 for the three month period ending March
31, 2005 as compared to the same period in 2004.





Other
operating expenses decreased by 7.22% or $230,000 for the three month period
ending March 31, 2005 as compared to the same periods in 2004. The single
largest item included in this decrease is attributed to the $447,000 expenses
associated with the new carefree check program that was started in 2004. In
addition, legal fees increased by $6,000 or 4.05% as compared to the same period
in 2004 due to legal services related to past due loans and other real estate
owned and the class action lawsuit described in Part II, Item 1 of this
Quarterly Report. Advertising
and marketing increased by $62,000 or 27.93%, as compared to the same period in
2004. This increase is attributed to the increased marketing and sales activity
of FSI. Director and advisory director fees increased by 36,000 or 37.11% as of
March 31, 2005, as compared to the same period in 2004. The Board of Directors
added advisory directors for most of the counties that we have significant
banking activity.





*Income
Taxes*





We
incurred income tax expenses of $826,000 which represents an effective rate of
29.01% for the three month period ended March 31, 2005 as compared to $544,000
which represents an effective tax rate of 24.00% for the same period in 2004.
The effective rate increase is due to a larger percentage of our income being
fully taxable as a result of our increased taxable income.





*Liquidity*





We are
not aware of any other known trends, events or uncertainties, that will have or
that are reasonably likely to have a material effect on its
liquidity, capital resources or operations. We are also not aware of any current
recommendations by the
regulatory authorities which, if they were implemented, would have such an
effect.





**B.
Asset Quality** ****





*Provision
for Loan Losses*





The
provision for loan losses was $713,000 and $1,129,000 for the first three months
of 2005 and 2004 respectively. The reserve at March 31, 2005 represented 136% of
non-accrual loans while the reserve at March 31, 2004 represented 184% of
non-accrual loans. Non accrual loans have increased from $4,659,000 to
$7,062,000, past due loans greater than 90 days and accruing interest have
increased from
$2,741,000 to $2,956,000 and net charge-offs have
increased from $127,000 to $262,000 at March 31, 2004 and March 31, 2005,
respectively. The increase in non-accrual loans was made up of six new lines,
from which management expects no losses.





Repossessed
real estate owned by the bank decreased 24.46% from $5,351,000 in March 2004 to
$4,042,000 in March 2005. Other real estate is carried in the books at the
lesser of cost or fair market value, less estimated costs to sell, with no
significant losses anticipated.





Management
has reviewed the non-accrual loans individually and determined that the
likelihood of any significant loss of principal is
mitigated due to the value of the collateral securing these loans. As of March
31, 2005, non-accrual loans and other real estate owned totaled
approximately $11,104,000 as compared to
$10,010,000 as of March 31, 2004. The ratio of the loan loss reserve balance to
the total loan balance at March 31, 2005 was 1.46% as compared to 1.48% at March
31, 2004. As of March 31, 2005, management considered our allowance for loan
losses adequate to cover any anticipated losses.








12
 Table of Contents





*Non-accrual,
Past Due and Restructured Debt*





The
following table, dollars in thousands, is a
summary of Non Accrual, Past due and Restructured Debt





**March
      31, 2005****Non-accrual**
      **Loans**
    
    **Past
      Due**
      **90
      days**
      **Still
      accruing**
    
    **Restructured**
      **Debt**Commercial
      Loans
    
    $
    732
    
    $
    440
    
    $
    248Real
      Estate Loans
    
    
    5,895
    
    
    2,270
    
    
    626Consumer
      Loans
    
    
    435
    
    
    246
    
    
    25Total
    
    
    7,062
    
    
    2,956
    
    
    899








**March 31,
      2004****Non-accrual**
      **Loans**
    
    **Past
      Due**
      **90
      days**
      **Still
      accruing**
    
    **Restructured**
      **Debt**Commercial
      Loans
    
    $
    544
    
    $
    157
    
    $
    14Real
      Estate Loans
    
    
    3,909
    
    
    2,076
    
    
    870Consumer
      Loans
    
    
    206
    
    
    508
    
    
    --Total
    
    $
    4,659
    
    $
    2,741
    
    $
    884








The
Bank’s policy is to discontinue the accrual of interest income when, in the
opinion of management, collection of such interest becomes doubtful. This status
is accorded such interest when (1) there is a significant deterioration in the
financial condition of the borrower and full repayment of principal and interest
is not expected and (2) the principal or interest is more than ninety days past
due, unless the loan is both well-secured and in the process of collection.
Accrual of interest on such loans is resumed, in management’s judgment, when the
collection of interest and principal become probable. Loans classified for
regulatory purposes as substandard, or special mention that have not been
included in the table above do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources. These
classified loans do not represent material credits
about which management is aware and which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.





13
 Table of Contents


*Allowance
for Loan Loss*
 
 The
following table, dollars in thousands, furnishes information on the loan loss
reserve for the current three month reporting period and the same period for
2004.
 
 2005
    
    
    2004(Dollars
      in Thousands)Beginning
      Balance
    
    $
    9,170
    
    $
    7,561Less
      Charge Offs:
      Commercial
      Loans
    
    
    (32
    )
    
    (89
    )Real
      Estate Loans
    
    
    (169
    )
    
    (4
    )Consumer
      Loans
    
    
    (155
    )
    
    (159
    )(356
    )
    
    (252
    )Plus
      Recoveries:
      Commercial
      Loans
    
    
    10
    
    
    45Real
      Estate Loans
    
    
    49
    
    
    48Consumer
      Loans
    
    
    35
    
    
    3294
    
    
    125Net
      Charge-offs
    
    
    (262
    )
    
    (127
    )Provision
      for loan loss
    
    
    713
    
    
    1,129Ending
      Balance
    
    $
    9,621
    
    $
    8,563
 
 Our
Company operates in three distinct markets, northeast
Georgia, midwest Georgia and mideast Alabama. Each of these markets has seen a
modest increase in unemployment and bankruptcy filings.
 
 
 ITEM 3.
QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 The
Company is exposed only to U.S. dollar interest rate changes and accordingly,
the Company manages exposure by considering the possible changes in the net
interest margin. The Company does not have any trading instruments nor does it
classify any portion of the investment portfolio as held for trading. The
Company does not engage in any hedging activities or enter into any derivative
instruments other than mortgage backed securities, which are commonly pass
through securities. Finally, the Company has no exposure to foreign currency
exchange rate risk, commodity price risk, and other market risks.
 
 Interest
rates play a major part in the net interest income of a financial institution.
The sensitivity to rate changes is known as “interest rate risk”. The repricing
of interest earning assets and interest-bearing liabilities can influence the
changes in net interest income. As part of the Company’s asset/liability
management program, the timing of repriced assets and liabilities is referred to
as Gap management.


14
 Table of Contents











The
Company’s objective in Gap management is to manage assets and liabilities to
maintain satisfactory and consistent profitability. Officers of each bank are
charged with monitoring policies and procedures designed to ensure an acceptable
asset/liability mix. Management’s philosophy is to support asset growth
primarily through growth of core deposits within the banks’ market
areas.





The
Company’s asset/liability mix is monitored regularly with a report reflecting
the interest rate sensitive assets and interest rate sensitive liabilities that
is prepared and presented to the Board of Directors of each bank on at least a
quarterly basis. Management’s objective is to monitor interest rate sensitive
assets and liabilities so as to minimize the impact on earnings of substantial
fluctuations in interest rates. An asset or liability is considered to be
interest rate-sensitive if it will reprice or mature within the time period
analyzed, usually one year
or less. The interest rate-sensitivity gap is
the difference between the interest-earning assets and interest-bearing
liabilities scheduled to mature or reprice within the relevant period. A gap is
considered positive when the amount of interest rate-sensitive assets exceeds
the amount of interest rate-sensitive liabilities. A gap is considered negative
when the amount of interest rate-sensitive liabilities exceeds the interest
rate-sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to adversely
affect net interest income. If the Company’s assets and liabilities were equally
flexible and moved concurrently, the impact of any increase or decrease in
interest rates on net interest income would be minimal.





A simple
interest rate “gap” analysis by itself may not be an accurate indicator of how
net interest income will be affected by changes in interest rates. For example,
while interest-bearing transaction accounts are by their terms immediately
repricable, competitive conditions and other circumstances usually preclude
repricing such deposits proportionately with changes in rates affecting
interest-earning assets.





Accordingly,
the Company also evaluates how changes in interest rates impacts the repayment
of particular assets and liabilities. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities may not be
affected uniformly by changes in interest rates. In addition, the magnitude and
duration of changes in interest rates may significantly affect net interest
income. For example, although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain types of assets and
liabilities fluctuate in advance of changes in general market rates, while
interest rates on other types may lag behind changes in general market rates. In
addition, certain assets have features (generally referred to as “interest rate
caps and floors”) which limit changes in interest rates. Also, prepayments and
early withdrawal levels could deviate significantly from those reflected in the
interest rate gap. The Company prepares a report monthly that measures the
potential of the banks’ impact on net interest margin by rising or falling
rates. This report is reviewed monthly by the Asset/Liability Committee and
quarterly by each Board of Directors.





At March
31, 2005, the Company’s cumulative interest rate sensitivity gap ratio for the
next twelve months was 113% which was within its targeted range of 80% to
120%.





Gap
management alone is not enough to properly manage interest rate sensitivity
because interest rates do not respond at the same speed or at the same level to
market rate changes. For example, savings and money market rates are more stable
than loans tied to a “Prime” rate and thus respond with less volatility to a
market rate change. Thus, the Company uses a simulation model to monitor changes
in net interest income due to changes in market rates. The model of rising,
falling and stable interest rate scenarios allows management to monitor and
adjust interest rate sensitivity to minimize the impact of market rate swings.
The analysis of impact on net interest margins as well as market value of equity
over a twelve month period is subjected to a 200 basis point increase and
decrease in rate. The March 2005 model reflects an increase of 3.89% in net
interest income and a 5.25% decrease in market value equity for a 200 basis
point increase in rates. The same model shows a 3.85% decrease in net interest
income and a .72% decrease in market value equity for a 200 basis point decrease
in rates. The Company’s policy is to allow no more than +/-8% change in net
interest income and no more than +/-25% change in market value equity for these
scenarios. Therefore, the Company is within its policy guidelines.





ITEM
4.  CONTROLS& PROCEDURES





Our
management, including the chief executive and chief financial officers,
supervised and participated in an evaluation of our disclosure controls and
procedures (as defined in federal securities rules) as of the end of the period
covered by this report. Based on, and as of the date of, that evaluation, our
CEO and CFO have concluded that our disclosure controls and procedures are
effective in accumulating and communicating information to our management,
including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosures of that information under the Securities and Exchange
Commission rules and forms and that our disclosure controls and procedures are
designed to ensure that the information we are required to disclose in reports
that we file or submit under all applicable federal securities laws is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms.





There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.








15
 Table of Contents





**PART
II - OTHERINFORMATION**





**ITEM
1. LegalProceedings**





The
Company was named in a lawsuit in the Superior Court of Greene County, Georgia
on May 18, 2004. The case was removed to the Middle District of Georgia in June
2004. The plaintiff in the case is seeking class action certification for owners
of self-directed individual retirement accounts at the Company’s Georgia bank
subsidiaries that included investments in securities issued by Stewart Finance
Company, National Finance Company or D&E Acquisitions, Inc. These issuing
companies are bankrupt and have defaulted on the securities. The plaintiff
claims that the Company aided and abetted and conspired with the issuing
companies in issuing unregistered securities, committing acts in violation of
the Georgia racketeering statute and in committing common law fraud. Although
the plaintiff has not made a specific claim for damages, he is claiming that the
proposed class is entitled to the amount of the lost investment in the
securities and treble and punitive damages. The Company has denied liability in
this case and does not believe the case will have a material adverse effect on
the Company.





**ITEM
2. UnregisteredSales of Equity Securities and Use of
Proceeds**





Issuer
Purchases of Equity Securities in the quarter ended March 31, 2005:








**Period**
    ****
    **Total
      Number of**
      **Shares Purchased
      (1)**
    ****
    **Average
      Price**
      **Paid Per
      Share**
    ****
    **Total
      Number of**
      **Shares**
      **Purchased as**
      **Part of Publicly**
      **Announced**
      **Plans or
      Programs**
    ****
    **Maximum**
      **Number of**
      **Shares that May**
      **Yet Be**
      **Purchased**
      **Under the Plans**
      **or Programs**January
      1-31
    
    
    60
    
    $
    58.10February
      1-28
    
    
    -
    
    
    -March
      1-31
    
    
    250
    
    
    58.14Total
    
    
    310
    
    
    58.13








(1)  The
shares purchased during the first quarter of 2005 were purchased as treasury
stock**.**





**ITEM
3. Defaultsupon Senior Securities - None**





**ITEM
4.Submissionof Matters to a vote of Security Holders - None**





**ITEM
5. OtherInformation - None**





**ITEM
6. EXHIBITS**





31.1 and
31.2 - Rule 13a-15(e) and 15d-15(e) Certifications





32 -
Certification of Chief Executive Officer and Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 of the Sarbanes-
Oxley Act of 2002.





16
 Table of Contents








**SIGNATURES**





Pursuant
to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.








COMMUNITY BANKSHARES,
      INC.DATE:  May 13, 2005
    By:
    /s/  Harry L.
    StephensHarry
      L. Stephens,
      Executive
      Vice President and Chief Financial
Officer










17