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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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ANNUAL REPORT UNDER SECTION 13 OF

THE SECURITIES EXCHANGE ACT OF 1934



FOR FISCAL YEAR ENDED DECEMBER 31, 2004



Commission File Number: 000-30517



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AMERICAN COMMUNITY BANCSHARES, INC.

(Exact Name of Registrant as specified in
its charter)



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NORTH CAROLINA

(State of
Incorporation)



56-2179531

(I.R.S. Employer Identification No.)



4500 Cameron Valley Parkway, Suite 150

Charlotte, North Carolina 28211

(Address of Principal Office)



(704) 225-8444

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(g) of the
Act:



COMMON STOCK, $1.00 PAR VALUE



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Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that 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 there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the
best of the 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



The Registrants revenues for
the year ended December 31, 2004 were $21,554,050.



The aggregate market value
of the voting stock held by non-affiliates of the Registrant at December 31, 2004 was approximately $54,543,591.



The number of shares of the Registrants Common Stock outstanding on December 31, 2004 was 3,489,249.



Documents Incorporated by Reference:



1. Portions of Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders (Part III).



Transitional Small Business Disclosure
Format    Yes ̈No  x



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FORM 10-KSB CROSS-REFERENCE INDEX



|                                                                                                                         |  |             |  |               
|------------------------------------------------------------------------------------------------------------------------ |  | ----------- |  | --------------
|                                                                                                                         |  | FORM 10-KSB |  | PROXYSTATEMENT
|PART I                                                                                                                   |  |             |  |               
|                                                                                                                         |  |            
|Item 1 
Description of Business                                                                                         |  | X           |  |               
|Item 2 
Description of Property                                                                                         |  | X           |  |               
|Item 3 
Legal Proceedings                                                                                               |  | X           |  |               
|Item 4 
Submission of Matters to a Vote of Security Holders                                                             |  | N/A         |  |               
|                                                                                                                         |  |            
|PART II                                                                                                                  |  |             |  |               
|                                                                                                                         |  |            
|Item 5 
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    |  | X           |  |               
|Item 6 
Managements Discussion & Analysis or Plan of Operation                                                         |  | X           |  |               
|Item 7 
Financial Statements                                                                                            |  | X           |  |               
|Item 8 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | N/A         |  |               
|Item 8a 
Controls and Procedures                                                                                        |  | X           |  |               
|Item 8b 
Other Information                                                                                              |  | N/A         |  |               
|                                                                                                                         |  |            
|PART III                                                                                                                 |  |             |  |               
|                                                                                                                         |  |            
|Item 9 
Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | X           |  | X             
|Item 10 
Executive Compensation                                                                                         |  |             |  | X             
|Item 11 
Security Ownership of Certain Beneficial Owners and Management                                                 |  |             |  | X             
|Item 12 
Certain Relationships and Related Transactions                                                                 |  |             |  | X             
|Item 13 
Exhibits                                                                                                       |  | X           |  |               
|Item 14 
Principal Accountant Fees and Services                                                                         |  |             |  | X             



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PART 1



ITEM 1  DESCRIPTION OF BUSINESS



Who We
Are



American Community Bancshares, Inc. (Bancshares) is a
bank holding company that owns all of the common stock of American Community Bank (American Community) a North Carolina-chartered bank and First National Bank of the Carolinas (First National) a South Carolina-chartered bank
(collectively known as Banks) both of which deposit accounts are insured by the Bank Insurance Fund of the FDIC. Bancshares was incorporated on February 16, 2000 as a North Carolina-chartered corporation and became the holding company
for American Community on April 28, 2000. To become American Communitys holding company, Bancshares received approval of the Federal Reserve Board as well as American Communitys shareholders. Upon receiving such approvals, each share of
the common stock of American Community was exchanged on a one-for-one basis for shares of the common stock of Bancshares. Bancshares acquired First National on April 15, 2004. First National shareholders could elect to receive $22.64 in cash for
each share of First National stock they owned, exchange each share of First National stock for 1.6347 shares of American Community Bancshares, Inc. stock, or a combination of stock and cash. As a result of the combination, the Company paid $7.1
million for shares exchanged for cash and has issued 617,343 additional shares of stock.



Since opening in November of 1998, we have accomplished the following:



| |  |  | Assembled a management team consisting of bankers from our local markets who each have over 20 years of banking experience;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Assembled an experienced and diverse board of directors that provides strategic expertise unique to a community bank of our size;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Opened eight full service banking offices throughout Union County and Mecklenburg County, home of Charlotte, one of North Carolinas largest and fastest growing metropolitan
areas;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Developed separate divisions within the Banks to provide mortgage banking, account receivable financing and leasing products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Implemented investment brokerage services through an agreement with Smith Barney at American Community and Raymond James Financial at First National;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Augmented our capital base through a local, best-efforts common stock offering of $1.3 million in early 2001, the private placement of $3.5 million of trust preferred securities in
late 2001 and early 2002, an additional public offering of units (which consisted of one share of stock and one warrant to buy stock) of $8.1 million in April 2002, and an additional $10.0 million in trust preferred securities in December 2003;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Listed our common stock on the Nasdaq SmallCap Market on July 17, 2001 under the symbol ACBA;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Developed a local identity in the communities we serve by sponsoring a wide variety of civic and charitable events;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Completed the acquisition of FNB Bancshares, Inc. and its subsidiary, First National Bank of the Carolinas, Gaffney, SC, thus giving us entry into South Carolina which borders our
market area to the south and providing three branches in Cherokee County, SC;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Announced the opening of two new branches in the South End area of Charlotte and Tega Cay, SC providing the organization a total of thirteen branches throughout North and South
Carolina.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Banks operate for the primary purpose of serving
the banking needs of individuals, and small to medium-sized businesses in our market areas. While numerous banks in our market have chosen to focus on the affluent and high net worth individuals, we have chosen to focus on middle income households
and the entrepreneurial segment of our market. We offer a wide range of banking services including checking, certificates of deposit and savings accounts, commercial, consumer and personal loans, mortgage, account receivable financing and leasing
services and other associated financial services.



Our Market Area



We consider our primary market area to be the Southern Piedmont area of
North Carolina, including Union, Mecklenburg and adjoining counties, and Cherokee and York Counties of South Carolina. The Banks will serve our



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market area through thirteen full service branch locations including a Wal-Mart Superstore branch in Monroe, which is
open seven days a week to offer even more convenience to our customers. The Banks customers may access various banking services through ATMs owned by the Bank and ATMs owned by others, through debit cards, and through the Banks automated
telephone and online banking products.



Union County had an estimated 2004
population of 148,000 and Mecklenburg County was estimated at 773,000. Both counties have a balanced and diversified economy. Monroe, with a population of approximately 27,000, is the largest city in Union County. Charlotte, with a population of
approximately 594,000, is Mecklenburg Countys and North Carolinas largest city. Union County is currently the fastest growing county in North Carolina. Charlotte has consistently been one of the fastest growing areas of the Southeast and
is ranked 21stin US population. In 2003, the unemployment rate was 4.9% for Union County and 5.2% for Mecklenburg
County; both lower than the North Carolina state rate of 5.8%. In 2003, Union County had an estimated labor force of 72,037 and Mecklenburg County had 413,442. Cherokee County has an estimated population of 54,000 and an estimated growth rate of 4%.
York County has an estimated population of 170,000, is the 2ndfastest growing county in South Carolina, and ranked
4thin per capita income in South Carolina.



Strategy



American Community has expanded aggressively since its opening for business in November 1998. Because of its strong capital position created during its incorporation
stage, American Community had the requisite capital needed to permit it to immediately establish branch offices. American Communitys branching strategy is opportunistic: it has established branch offices in growing areas within Union and
Mecklenburg Counties where there are opportunities to hire successful local bankers who have a loyal following of deposit and loan customers. To date we have centered each of our branch offices around such a local and experienced banker. Management
also believes it is important in the early formation years to build branches that will provide convenience and efficiencies in its operational infrastructure. Charlotte is a highly competitive banking market with many competitors including money
center, super-regional and community banks. American Communitys strategy is to develop a branch network surrounding Charlotte and to take advantage of opportunities that present themselves in both new geographic and new product markets.
American Community reorganized itself into the holding company form of organization to give it the greatest legal flexibility to take advantage of any opportunities that might arise. We will continue to search for opportunities, either for de
novo branching, branch purchase or whole bank acquisitions, to complete our encirclement of the growing Charlotte market by progressing in either a south and west or north and west direction. The acquisition of First National Bank of the
Carolinas provides us the opportunity to expand across the South Carolina state line into York County, the second fastest growing county in South Carolina. In addition, we will remain open to opportunistic expansion through acquisition of additional
whole banks in other growing metropolitan areas of North Carolina and South Carolina if the acquisition enhances shareholder value and there exists synergies of operations and compatible corporate culture (i.e. a community bank serving a
communitys needs).



Lending Activities



General. The Banks provide to its customers a full range of short- to medium-term
commercial, agricultural, Small Business Administration guaranteed, mortgage, construction and personal loans, both secured and unsecured. The Banks also make real estate mortgage and construction loans. The Banks have maintained a good balance
between variable and fixed rate loans within its portfolio. Variable rate loans accounted for 64% of the loan balances outstanding at December 31, 2004 while fixed rate loans accounted for 36% of the balances. The Banks emphasized variable rate
loans in 2004 due to the interest rate environment that prevailed during the year.



The Banks loan policies and procedures establish the basic guidelines governing its lending operations. Generally, the guidelines address the types of loans that the Banks seek, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrowers total
outstanding indebtedness to the Banks, including the indebtedness of any guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Banks. The Banks supplement their own supervision of the loan underwriting
and approval process with periodic loan audits by external loan examiners experienced in loan review work. The Banks have focused their portfolio lending activities on typically higher yielding commercial, construction and consumer loans.



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Loan Composition. The following table sets forth at the dates indicated the Banks loan portfolio composition
by type of loan:



|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|--------------------------------------------- |  | ---------------------- | ------- | - | ------- | ------ | - | ------ | - | ------- | ------- |  | ------ | ------ |  | - | ------- | - |  | ------ | - |  | ------- | ------- | - | ------ | ------ | - | ------- | - | ------- | - |  | ------ | -
|                                              |  | 2004                   |         |   | 2003    |        |   | 2002   |   |         | 2001    |  |        | 2000   | 
|                                              |  | Amount                 |         |   | Percent |        |   | Amount |   |         | Percent |  |        | Amount |  |   | Percent |   |  | Amount |   |  | Percent |         |   | Amount |        |   | Percent |  
|                                              |  | (Dollars in Thousands) |        
|Real estate - mortgage loans:                 |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|1-4 family                                    |  | $                      | 27,161  |   |         | 8.82   | % |        | $ | 15,894  |         |  | 7.77   | %      |  | $ | 12,426  |   |  | 7.52   | % |  | $       | 10,329  |   |        | 7.32   | % |         | $ | 9,106   |   |  | 8.32   | %
|Commercial mortgage                           |  |                        | 84,621  |   |         | 27.46  | % |        |   | 80,395  |         |  | 39.32  | %      |  |   | 58,237  |   |  | 35.24  | % |  |         | 54,305  |   |        | 38.47  | % |         |   | 29,538  |   |  | 26.99  | %
|Construction/development                      |  |                        | 39,844  |   |         | 12.93  | % |        |   | 28,469  |         |  | 13.92  | %      |  |   | 25,079  |   |  | 15.18  | % |  |         | 13,692  |   |        | 9.70   | % |         |   | 17,085  |   |  | 15.61  | %
|Home equity lines of credit                   |  |                        | 24,575  |   |         | 7.98   | % |        |   | 16,526  |         |  | 8.08   | %      |  |   | 14,643  |   |  | 8.86   | % |  |         | 12,996  |   |        | 9.20   | % |         |   | 9,694   |   |  | 8.86   | %
|Commercial and industrial loans               |  |                        | 85,911  |   |         | 27.88  | % |        |   | 41,121  |         |  | 20.11  | %      |  |   | 33,313  |   |  | 20.16  | % |  |         | 39,249  |   |        | 27.80  | % |         |   | 35,673  |   |  | 32.59  | %
|Loans to individuals                          |  |                        | 30,813  |   |         | 10.00  | % |        |   | 8,672   |         |  | 4.25   | %      |  |   | 9,990   |   |  | 6.05   | % |  |         | 9,809   |   |        | 6.95   | % |         |   | 8,348   |   |  | 7.63   | %
|Lease financing, net                          |  |                        | 15,177  |   |         | 4.93   | % |        |   | 13,397  |         |  | 6.55   | %      |  |   | 11,548  |   |  | 6.99   | % |  |         | 795     |   |        | 0.56   | % |         |   |        |   |  |       |  
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Subtotal                                      |  |                        | 308,102 |   |         | 100.00 | % |        |   | 204,474 |         |  | 100.00 | %      |  |   | 165,236 |   |  | 100.00 | % |  |         | 141,175 |   |        | 100.00 | % |         |   | 109,444 |   |  | 100.00 | %
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Less: allowance for loan losses               |  |                        | (3,488  | ) |         |        |   |        |   | (2,529  | )       |  |        |        |  |   | (2,375  | ) |  |        |   |  |         | (1,736  | ) |        |        |   |         |   | (1,385  | ) |  |        |  
|Plus: net unamortized deferred fees and costs |  |                        | (114    | ) |         |        |   |        |   | 59      |         |  |        |        |  |   | 130     |   |  |        |   |  |         | 92      |   |        |        |   |         |   |        |   |  |        |  
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Total                                         |  | $                      | 304,500 |   |         |        |   |        | $ | 202,004 |         |  |        |        |  | $ | 162,991 |   |  |        |   |  | $       | 139,531 |   |        |        |   |         | $ | 108,059 |   |  |        |  
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  



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The following table sets forth the contractual maturity of loans at December 31, 2004:



|                                |  |                        |         |                                     |   |                  |  |       |        |  |   |        
|------------------------------- |  | ---------------------- | ------- | ----------------------------------- | - | ---------------- |  | ----- | ------ |  | - | -------
|                                |  | One YearOr Less        |         | Greater thanOne YearThrough 5 Years |   | More Than5 Years |  | Total
|                                |  | (Dollars in thousands)
|Real estate  mortgage loans:   |  |                        |         |                                     |   |                  |  |       |        |  |   |        
|1-4 family                      |  | $                      | 8,891   |                                     | $ | 15,154           |  | $     | 3,116  |  | $ | 27,161 
|Commercial mortgage             |  |                        | 16,104  |                                     |   | 59,041           |  |       | 9,476  |  |   | 84,621 
|Construction/development        |  |                        | 30,172  |                                     |   | 8,500            |  |       | 1,172  |  |   | 39,844 
|Home equity lines of credit     |  |                        |        |                                     |   | 1,190            |  |       | 23,385 |  |   | 24,575 
|Commercial and industrial loans |  |                        | 39,747  |                                     |   | 43,318           |  |       | 2,846  |  |   | 85,911 
|Loans to individuals            |  |                        | 13,438  |                                     |   | 15,034           |  |       | 2,341  |  |   | 30,813 
|Lease financing, net            |  |                        | 5,822   |                                     |   | 9,355            |  |       |       |  |   | 15,177 
|                                |  |                        |         |                                     |   |                  |  |       |        |  |   |        
|Total                           |  | $                      | 114,174 |                                     | $ | 151,592          |  | $     | 42,336 |  | $ | 308,102
|                                |  |                        |         |                                     |   |                  |  |       |        |  |   |        



The following table sets forth loans
with fixed and variable rates having contractual maturities greater than one year at December 31, 2004:



|                                |  |                        |        |               |   |         |  |   |        
|------------------------------- |  | ---------------------- | ------ | ------------- | - | ------- |  | - | -------
|                                |  | FixedRate              |        | Variable Rate |   | Total  
|                                |  | (Dollars in thousands)
|Real estate  mortgage loans    |  | $                      | 53,307 |               | $ | 43,152  |  | $ | 96,459 
|Home equity lines of credit     |  |                        |       |               |   | 24,575  |  |   | 24,575 
|Commercial and industrial loans |  |                        | 16,351 |               |   | 29,813  |  |   | 46,164 
|Loans to individuals            |  |                        | 13,743 |               |   | 3,632   |  |   | 17,375 
|Lease financing, net            |  |                        | 9,355  |               |   |        |  |   | 9,355  
|                                |  |                        |        |               |   |         |  |   |        
|                                |  | $                      | 92,756 |               | $ | 101,172 |  | $ | 193,928
|                                |  |                        |        |               |   |         |  |   |        



Real Estate Loans. Real estate
loans are made for purchasing, constructing and refinancing one-to-four family, five or more family and commercial properties. The Banks offer fixed and adjustable rate options, but typically limits the maximum fixed rate term to five years. The
Banks provide customers access to long-term conventional real estate loans through its mortgage loan department, which makes loans for the account of third parties.



Residential one-to-four family loans amounted to $27.2 million at December 31, 2004. The Banks residential mortgages loans are
typically construction loans that convert into permanent financing and are secured by properties located within the Banks market areas. Most of the permanent one-to-four family residential mortgage loans that the Banks originate are for the
account of third parties. Such loans are closed by the third party and therefore are not shown in the Banks financial statements. The Banks receive a fee for each such loan originated, with such fees aggregating $365,000 for the year ended
December 31, 2004. The Banks anticipate that they will continue to be an active originator of residential loans for the account of third parties.



The Banks have made, and anticipate continuing to make, commercial real estate loans. Commercial real estate loans equaled $84.6 million at December 31, 2004. This
lending has involved loans secured principally by owner occupied commercial buildings for office, storage and warehouse space. The Banks require the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the
debt. Loans secured by commercial real estate may be larger in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the
properties.



Another of the Banks primary lending focus is
construction/development lending with balances outstanding as of December 31, 2004 of $39.8 million. The Banks originate one to four family residential construction loans for the construction of custom homes (where the home buyer is the borrower)
and provides financing to builders and



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consumers for the construction of pre-sold homes. The Banks generally receive a pre-arranged permanent financing
commitment from an outside banking entity prior to financing the construction of pre-sold homes. The Banks are active in the construction market and on occasion make construction loans to builders of homes that are not presold, but limits the number
of speculative loans to any one builder. This type of lending is only done with local, well-established builders and not to large or national tract builders. The Banks lend to builders who have demonstrated a favorable record of performance and
profitable operations and who are building in markets that management believes it understands and in which it is comfortable with the economic conditions. The Banks also make commercial real estate construction loans, primarily for owner-occupied
properties. The Banks further endeavor to limit their construction lending risk through adherence to established underwriting procedures. The Banks generally require documentation of all draw requests and utilize third party appraisers to inspect
the project prior to paying any draw requests from the builder. With few exceptions, the Banks require personal guarantees and secondary sources of repayment on construction loans.



Commercial Loans. Commercial business lending is also a focus of the Banks lending activities. At December 31, 2004, the
Banks commercial loan portfolio equaled $85.9 million. Commercial loans include both secured and unsecured loans for working capital, expansion, and other business purposes. Short-term working capital loans generally are secured by accounts
receivable, inventory and/or equipment. The Banks also make term commercial loans secured by equipment and real estate. Lending decisions are based on an evaluation of the financial strength, cash flow, management and credit history of the borrower,
and the quality of the collateral securing the loan. With few exceptions, the Banks require personal guarantees and secondary sources of repayment. Commercial loans generally provide greater yields and reprice more frequently than other types of
loans, such as real estate loans. More frequent repricing means that yields on our commercial loans adjust with changes in interest rates.



Loans to Individuals and Home Equity Lines of Credit. Loans to individuals (consumer loans) include automobile loans, boat and recreational vehicle financing, home
equity and home improvement loans and miscellaneous secured and unsecured personal loans. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets
such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. The
Banks attempt to manage the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss.



Leasing. The Banks offer lease financing primarily to small business in our local market. The type of lease financing is generally
limited to heavy machinery, manufacturing equipment, and specific vehicles. The leases are structured as to provide no residual risk to the Banks. The leasing division also requires personal guarantees on the majority of our leases. In December
2002, the American Community purchased a leasing portfolio of approximately $6.5 million from a company whose management team then joined the American Community. Approximately $1.5 million of the purchased portfolio is still outstanding at December
31, 2004. The divisions professional staff with over 30 years of combined leasing experience in our market enhances the ability of the Banks to offer our customers a complete line of financial products.



Loan Approvals.The Banks loan policies and procedures establish the basic
guidelines governing its lending operations. Generally, the guidelines address the type of loans that the Banks seek, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws
and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrowers total outstanding indebtedness to the Banks, including the indebtedness of any guarantor. The
policies are reviewed and approved at least annually by the Board of Directors of the Banks. The Banks supplement their own supervision of the loan underwriting and approval process with periodic loan audits by independent, outside professionals
experienced in loan review work.



Responsibility for loan review and loan
underwriting resides with the Chief Lending Officer. He is responsible for loan processing, loan underwriting and approval. On an annual basis, the Board of Directors of the Banks determine the Presidents lending authority, who then delegates
lending authorities to the Chief Lending Officer and other lending officers of the Banks. Delegated authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors or
the President within his delegated authority.



The President of American
Community, the President of First National and the Chief Lending Officer each have the authority to approve loans up to the lending limit set by the Board of Directors, which was $1,000,000, $400,000



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and $500,000, respectively at December 31, 2004. All loans above the lending limit of the Presidents and the Chief
Lending Officer are reviewed and approved by the Loan Committee, which consists of the Presidents and seven outside directors. In addition, the Chief Lending Officer serves as a non-voting member. At December 31, 2004 the Loan Committee had the
authority to approve loans up to $1,500,000. All loans above the lending limit of the Loan Committee are reviewed and approved by the full Board of Directors. The Banks combined legal lending limit was $4.7 million at December 31, 2004. The
Banks seldom makes loans approaching their legal lending limit.



The Banks are
an active home mortgage originator and several of our offices have trained lending personnel to originate home mortgage loans for the account of third parties. We currently have four lending relationships to which we sell all home mortgages to
enable us to satisfy special lending requests of its borrowing customers.



The
Banks offer a credit card on an agency basis as an accommodation to its customers. The Banks assume none of the underwriting risk.



Nonperforming Assets



The table sets forth, for the period indicated, information about our nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), and total nonperforming assets.



|                                                    |  |                        |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                    |  | At December 31,        |      
|                                                    |  | 2004                   |       |   | 2003 |   |       | 2002 | 
|                                                    |  | (Dollars in thousands) |      
|Nonaccrual loans                                    |  | $                      | 881   |   |      | $ | 330   |      |  | $ | 580   |  
|Restructured loans                                  |  |                        |      |   |      |   |      |      |  |   |      |  
|                                                    |  |                        |       |   |      |   |       |      |  |   |       |  
|Total nonperforming loans                           |  |                        | 881   |   |      |   | 330   |      |  |   | 580   |  
|                                                    |  |                        |      
|Foreclosed real estate and other repossessed assets |  |                        | 311   |   |      |   | 157   |      |  |   | 463   |  
|                                                    |  |                        |       |   |      |   |       |      |  |   |       |  
|Total nonperforming assets                          |  | $                      | 1,192 |   |      | $ | 487   |      |  | $ | 1,043 |  
|                                                    |  |                        |       |   |      |   |       |      |  |   |       |  
|Accruing loans past due 90 days or more             |  | $                      | 1,117 |   |      | $ | 597   |      |  | $ | 684   |  
|Allowance for loan losses                           |  |                        | 3,488 |   |      |   | 2,529 |      |  |   | 2,375 |  
|Nonperforming loans to period end loans             |  |                        | .29   | % |      |   | .16   | %    |  |   | 0.35  | %
|Allowance for loan losses to period end loans       |  |                        | 1.13  | % |      |   | 1.24  | %    |  |   | 1.44  | %
|Allowance for loan losses to nonperforming loans    |  |                        | 396   | % |      |   | 766   | %    |  |   | 409   | %
|Nonperforming assets to total assets                |  |                        | .30   | % |      |   | .17   | %    |  |   | 0.48  | %



The financial statements are prepared
on the accrual basis of accounting, including the recognition of interest income on loans, unless a loan is placed on nonaccrual basis. Loans are accounted for on a nonaccrual basis when there are serious doubts about the collectibility of principal
or interest. Loans are placed on nonaccrual status in cases where there is uncertainty as to whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received on nonaccrual loans generally are applied first to principal
and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or
principal have been granted due to the borrowers weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. Potential problem loans
are loans which are currently performing and are not included in nonaccrual or restructured loans above, but about which we have serious doubts as to the borrowers ability to comply with present repayment terms. These loans are likely to be
included later in nonaccrual, past due or restructured loans, so they are considered by management in assessing the adequacy of the allowance for loan losses. At December 31, 2004, no major loans had been identified as potential problem loans.



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At December 31, 2004, the Banks had $881,000 in nonaccrual loans. Interest foregone on nonaccrual loans was approximately
$42,000 for the year ended December 31, 2004 and $6,000 for the year ended December 31, 2003.



Other real estate owned consists of foreclosed properties. At December 31, 2004, foreclosed real estate and other repossessed assets totaled $311,000 or .08% of total assets, and consisted of six single-family
residences. At December 31, 2003, foreclosed real estate and other repossessed assets totaled $487,000 or .17% of total assets, and consisted of two single-family residences and six vehicles.



Analysis of Allowance for Loan Losses



The allowance for loan losses is established through charges to earnings in the form of a
provision for loan losses. The allowance for loan losses is increased by provisions charged to operations and by recoveries of amounts previously charged off, and reduced by loans charged off. The adequacy of the allowance is evaluated at least
quarterly. In evaluating the adequacy of the allowance, the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrowers ability
to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors are all considered. In addition, regulatory agencies, as an integral part of their examination process, periodically review the
allowance for loan losses and may require adjustments to the allowance for loan losses based upon judgments different from those of management.



The Banks use a risk grading program, to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program,
risk grades are initially assigned by loan officers, reviewed by Credit Administration, and reviewed by a third party. The Banks strive to maintain the loan portfolio in accordance with conservative loan underwriting policies that result in loans
specifically tailored to the needs of the Banks market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Banks have no foreign loans and do not engage in highly leveraged
transactions.



The Banks follow a loan review program designed to evaluate the
credit risk in the loan portfolio. Through this loan review process, an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses is maintained. In
establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrowers ability to repay, the borrowers payment history and the current
delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on managements judgment and historical experience.



Loans classified as substandard are those loans with clear and defined weaknesses
such as unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Banks will sustain some losses if the
deficiencies are not corrected. Loans classified as doubtful are those loans that have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
Loans classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it
is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future. As a practical matter, when loans are identified as loss they are charged off against the allowance for loan losses. In
addition to the above classification categories, loans are also categorized based upon risk grade and loan type, assigning an allowance allocation based upon each category.



Growth in loans outstanding has, throughout Bancshares history, been the primary reason for increases in the allowance for loan losses
and the resultant provisions for loan losses necessary to provide for those increases. This growth has been spread among the major loan categories, with the concentrations of major loan categories being relatively consistent in recent years. Between
December 31, 2000 and December 31, 2004, the range of each major category of loans as a percentage of total loans outstanding is as follows: 1-4 family mortgage loans  7% to 9%, commercial mortgage loans  27% to 39%,
construction/development real estate loans  10 to 16%; home equity loans - 8% to 9%; commercial and industrial loans - 20% to 33%; loans to individuals - 4% to 10%; and lease financing - 5% to 7%. For all full fiscal years through 2004,
Bancshares loan loss experience was similar to that of other new banks, with net loan charge-offs in each year no greater than .35% of average loans outstanding. The



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allowance for loan losses at December 31, 2004 of $3.5 million represents 1.13% of total loans and 396% of nonperforming
loans. The acquisition of First National added allowance for loan losses of $685,000 which represented 1.20% of total loans and 336% of nonperforming loans. Due to the composition of First Nationals loan portfolio, the majority of their loan
loss provision acquired was allocated to the real estate loan portfolio.



The
allowance for loan losses represents managements estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Specific allowances are made that are allocated to certain
individual loans and pools of loans based on risk characteristics, as discussed below. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be
necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while Bancshares believes it has established the allowance for loan losses in
conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the portfolio, will not require adjustments to the allowance for loan losses. In addition, because future events affecting borrowers
and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors
discussed herein. Any material increase in the allowance for loan losses may adversely affect the financial condition and results of operations of Bancshares.



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The following table describes the allocation of the allowance for loan losses among various categories of loans and
certain other information for the dates indicated. The allocation is made for analytical purposes only and is not necessarily indicative of the categories in which future losses may occur.



|                                |  |                        |       |                     |        |   |        |      |                     |  |        |        |  |                     |       |  |        |   |                     |   |       |        |        |                     |  |   |       |  |        |  
|------------------------------- |  | ---------------------- | ----- | ------------------- | ------ | - | ------ | ---- | ------------------- |  | ------ | ------ |  | ------------------- | ----- |  | ------ | - | ------------------- | - | ----- | ------ | ------ | ------------------- |  | - | ----- |  | ------ | -
|                                |  | At December 31,        |      
|                                |  | 2004                   |       |                     | 2003   |   |        | 2002 |                     |  | 2001   |        |  | 2000                |      
|                                |  | Amount                 |       | % of TotalLoans (1) |        |   | Amount |      | % of TotalLoans (1) |  |        | Amount |  | % of TotalLoans (1) |       |  | Amount |   | % of TotalLoans (1) |   |       | Amount |        | % of TotalLoans (1) | 
|                                |  | (Dollars in thousands) |      
|Real estate loans               |  | $                      | 2,149 |                     | 49.21  | % |        | $    | 1,283               |  | 61.01  | %      |  | $                   | 994   |  | 57.94  | % |                     | $ | 796   |        | 55.49  | %                   |  | $ | 575   |  | 50.92  | %
|Home equity lines of credit     |  |                        | 72    |                     | 7.98   | % |        |      | 50                  |  | 8.08   | %      |  |                     | 42    |  | 8.86   | % |                     |   | 79    |        | 9.20   | %                   |  |   | 104   |  | 8.86   | %
|Commercial and industrial loans |  |                        | 731   |                     | 27.88  | % |        |      | 676                 |  | 20.11  | %      |  |                     | 970   |  | 20.16  | % |                     |   | 679   |        | 27.80  | %                   |  |   | 574   |  | 32.59  | %
|Loans to individuals            |  |                        | 232   |                     | 10.00  | % |        |      | 162                 |  | 4.25   | %      |  |                     | 219   |  | 6.05   | % |                     |   | 182   |        | 6.95   | %                   |  |   | 132   |  | 7.63   | %
|Lease financing, net            |  |                        | 304   |                     | 4.93   | % |        |      | 358                 |  | 6.55   | %      |  |                     | 150   |  | 6.99   | % |                     |   |      |        | 0.56   | %                   |  |   |      |  |       |  
|                                |  |                        |       |                     |        |   |        |      |                     |  |        |        |  |                     |       |  |        |   |                     |   |       |        |        |                     |  |   |       |  |        |  
|Total                           |  | $                      | 3,488 |                     | 100.00 | % |        | $    | 2,529               |  | 100.00 | %      |  | $                   | 2,375 |  | 100.00 | % |                     | $ | 1,736 |        | 100.00 | %                   |  | $ | 1,385 |  | 100.00 | %
|                                |  |                        |       |                     |        |   |        |      |                     |  |        |        |  |                     |       |  |        |   |                     |   |       |        |        |                     |  |   |       |  |        |  

---

|(1) | Represents total of all outstanding loans in each category as a percent of total loans
outstanding.
|--- | ---------------------------------------------------------------------------------------------------



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The following table presents for the periods indicated information regarding changes in the allowance for loan losses:



|                                                           |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                           |  | At or for the Years Ended December 31, |        
|                                                           |  | 2004                                   |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                           |  | (Dollars in thousands)                 |        
|Balance at beginning of period                             |  | $                                      | 2,529   |   |      | $ | 2,375   |      |  | $ | 1,736   |   |  | $    | 1,385   |   |  | $ | 813     |  
|Charge-offs:                                               |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate loans                                          |  |                                        | 51      |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Home equity lines of credit                                |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial loans                            |  |                                        | 209     |   |      |   | 598     |      |  |   | 298     |   |  |      | 156     |   |  |   | 19      |  
|Lease financing, net                                       |  |                                        | 24      |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans to individuals                                       |  |                                        | 54      |   |      |   | 67      |      |  |   | 16      |   |  |      | 40      |   |  |   | 45      |  
|                                                           |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                          |  |                                        | 338     |   |      |   | 665     |      |  |   | 314     |   |  |      | 196     |   |  |   | 64      |  
|                                                           |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries:                                                |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate loans                                          |  |                                        | 1       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Home equity lines of credit                                |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial loans                            |  |                                        | 10      |   |      |   | 35      |      |  |   | 34      |   |  |      |        |   |  |   |        |  
|Lease financing, net                                       |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans to individuals                                       |  |                                        | 27      |   |      |   |        |      |  |   | 4       |   |  |      | 4       |   |  |   |        |  
|                                                           |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                           |  |                                        | 38      |   |      |   | 35      |      |  |   | 38      |   |  |      | 4       |   |  |   |        |  
|                                                           |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs                                            |  |                                        | 300     |   |      |   | 630     |      |  |   | 276     |   |  |      | 192     |   |  |   | 64      |  
|                                                           |  |                                        |         |   |     
|Allowance acquired from First National merger              |  |                                        | 685     |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                           |  |                                        |         |   |     
|Provision for loan losses                                  |  |                                        | 574     |   |      |   | 784     |      |  |   | 915     |   |  |      | 543     |   |  |   | 636     |  
|                                                           |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance at end of period                                   |  | $                                      | 3,488   |   |      | $ | 2,529   |      |  | $ | 2,375   |   |  | $    | 1,736   |   |  | $ | 1,385   |  
|                                                           |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total loans outstanding                                    |  | $                                      | 307,988 |   |      | $ | 204,533 |      |  | $ | 165,366 |   |  | $    | 141,267 |   |  | $ | 109,444 |  
|                                                           |  |                                        |         |   |     
|Average loans outstanding                                  |  | $                                      | 275,011 |   |      | $ | 182,108 |      |  | $ | 146,530 |   |  | $    | 127,486 |   |  | $ | 83,730  |  
|Allowance for loan losses to total loans outstanding       |  |                                        | 1.13    | % |      |   | 1.24    | %    |  |   | 1.44    | % |  |      | 1.23    | % |  |   | 1.27    | %
|Ratio of net loan charge-offs to average loans outstanding |  |                                        | 0.11    | % |      |   | 0.35    | %    |  |   | 0.19    | % |  |      | 0.15    | % |  |   | 0.08    | %



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Investment Activities



Bancshares portfolio of investment securities, most of which are available for sale, consists of U.S. Government agency, mortgage-backed securities, municipal bonds
and other marketable equity securities.



Securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with any unrealized gains or losses reflected as an adjustment to stockholders equity. Securities held for indefinite
periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks.



The following table summarizes the amortized costs, gross unrealized gains and losses and the
resulting market value of investment securities:



|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|----------------------------------- |  | ---------------------- | ---------- | -------------------- | - | --------------------- |  | ---------- | ------- |  | - | ----------
|                                    |  | 2004                  
|                                    |  | AmortizedCost          |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Securities available for sale:      |  |                        |            |                      |   |                       |  |            |         |  |   |           
|U. S. Government agencies           |  | $                      | 5,802,765  |                      | $ | 1,501                 |  | $          | 26,181  |  | $ | 5,778,085 
|Mortgage-backed securities          |  |                        | 44,690,312 |                      |   | 85,199                |  |            | 262,564 |  |   | 44,512,947
|State and municipal bonds           |  |                        | 1,102,262  |                      |   | 30,242                |  |            |        |  |   | 1,132,504 
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|                                    |  |                        | 51,595,339 |                      |   | 116,942               |  |            | 288,745 |  |   | 51,423,536
|                                    |  |                        |            |                     
|Marketable equity securities        |  |                        | 406,808    |                      |   | 2,515                 |  |            |        |  |   | 409,323   
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|Total securities available for sale |  | $                      | 52,002,147 |                      | $ | 119,457               |  | $          | 288,745 |  | $ | 51,832,859
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|                                    |  |                        |            |                     
|                                    |  | AmortizedCost          |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Securities held to maturity:        |  |                        |            |                      |   |                       |  |            |         |  |   |           
|State and municipal bonds           |  | $                      | 2,185,951  |                      | $ | 12,132                |  | $          | 4,815   |  | $ | 2,193,268 
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|Total securities held to maturity   |  | $                      | 2,185,951  |                      | $ | 12,132                |  | $          | 4,815   |  | $ | 2,193,268 
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|                                    | 
|                                    |  | 2003                  
|                                    |  | AmortizedCost          |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|                                    |  | (Dollars in thousands)
|Securities available for sale:      |  |                        |            |                      |   |                       |  |            |         |  |   |           
|U. S. Government agencies           |  | $                      | 11,308     |                      | $ | 71                    |  | $          | 9       |  | $ | 11,369    
|Mortgage-backed securities          |  |                        | 38,722     |                      |   | 176                   |  |            | 90      |  |   | 38,809    
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|Total securities available for sale |  | $                      | 50,030     |                      | $ | 247                   |  | $          | 99      |  | $ | 50,178    
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|                                    |  |                        |            |                     
|                                    |  | AmortizedCost          |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|                                    |  | (Dollars in thousands)
|Securities held to maturity:        |  |                        |            |                      |   |                       |  |            |         |  |   |           
|State and municipals                |  | $                      | 1,891      |                      | $ | 8                     |  | $          | 4       |  | $ | 1,896     
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           
|Total securities held to maturity   |  | $                      | 1,891      |                      | $ | 8                     |  | $          | 4       |  | $ | 1,896     
|                                    |  |                        |            |                      |   |                       |  |            |         |  |   |           



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|                                    |  |                        |        |                      |   |                       |  |           |   |  |   |       
|----------------------------------- |  | ---------------------- | ------ | -------------------- | - | --------------------- |  | --------- | - |  | - | ------
|                                    |  | 2002                  
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities available for sale:      |  |                        |        |                      |   |                       |  |           |   |  |   |       
|U. S. Government agencies           |  | $                      | 12,724 |                      | $ | 77                    |  | $         |  |  | $ | 12,801
|Mortgage-backed securities          |  |                        | 14,511 |                      |   | 153                   |  |           |  |  |   | 14,664
|                                    |  |                        |        |                      |   |                       |  |           |   |  |   |       
|Total securities available for sale |  | $                      | 27,235 |                      | $ | 230                   |  | $         |  |  | $ | 27,465
|                                    |  |                        |        |                      |   |                       |  |           |   |  |   |       



The following table summarizes the
amortized cost and recorded market values of investment securities (excluding marketable equity securities) at December 31, 2004, by contractual maturity groups:



|                                                 |  |                        |        |           |   |           |  |      |  
|------------------------------------------------ |  | ---------------------- | ------ | --------- | - | --------- |  | ---- | -
|                                                 |  | AmortizedCost          |        | FairValue |   | BookYield | 
|                                                 |  | (Dollars in thousands) |       
|Securities available for sale & held to maturity |  |                        |        |           |   |           |  |      |  
|U S Government agencies                          |  |                        |        |           |   |           |  |      |  
|Due within one year                              |  | $                      | 305    |           | $ | 304       |  | 2.05 | %
|Due after one but within five years              |  |                        | 5,498  |           |   | 5,474     |  | 3.17 | %
|                                                 |  |                        |        |           |   |           |  |      |  
|                                                 |  |                        | 5,803  |           |   | 5,778     |  | 3.11 | %
|                                                 |  |                        |        |           |   |           |  |      |  
|Mortgage-backed securities                       |  |                        |        |           |   |           |  |      |  
|Due after one but within five years              |  |                        | 616    |           |   | 615       |  | 3.21 | %
|Due after five but within ten years              |  |                        | 13,451 |           |   | 13,396    |  | 3.99 | %
|Due after ten years                              |  |                        | 30,623 |           |   | 30,502    |  | 3.96 | %
|                                                 |  |                        |        |           |   |           |  |      |  
|                                                 |  |                        | 44,690 |           |   | 44,513    |  | 3.96 | %
|                                                 |  |                        |        |           |   |           |  |      |  
|Municipal bonds                                  |  |                        |        |           |   |           |  |      |  
|Due after five but within ten years              |  |                        | 1,102  |           |   | 1,133     |  | 4.93 | %
|Due after ten years                              |  |                        | 2,186  |           |   | 2,193     |  | 3.99 | %
|                                                 |  |                        |        |           |   |           |  |      |  
|                                                 |  |                        | 3,288  |           |   | 3,326     |  | 4.30 | %
|                                                 |  |                        |        |           |   |           |  |      |  
|Total investment securities                      |  |                        |        |           |   |           |  |      |  
|Due within one year                              |  |                        | 305    |           |   | 304       |  | 2.05 | %
|Due after one but within five years              |  |                        | 6,114  |           |   | 6,089     |  | 3.17 | %
|Due after five but within ten years              |  |                        | 14,553 |           |   | 14,529    |  | 4.06 | %
|Due after ten years                              |  |                        | 32,809 |           |   | 32,695    |  | 3.96 | %
|                                                 |  |                        |        |           |   |           |  |      |  
|                                                 |  | $                      | 53,781 |           | $ | 53,617    |  | 3.89 | %
|                                                 |  |                        |        |           |   |           |  |      |  



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##### Table of Contents

Deposit Activities



The Bank provides a range of deposit services, including non-interest bearing checking accounts, interest bearing checking and savings accounts, money market accounts and
certificates of deposit. These accounts generally earn interest at rates established by management based on competitive market factors and the desire to increase or decrease certain types or maturities of deposits.



The Banks periodically uses brokered deposits as consistent with asset and liability
management policies. At December 31, 2004 the Company had $20,867,000 in brokered deposits. We rarely bid on political funds for municipalities as such deposits are extremely rate sensitive and due to fiduciary pressures on government officials, not
as stable as regular corporate and individual customers.



The Banks offer a
variety of deposit programs to individual and to small-to-medium size businesses and other organizations at interest rates generally competitive with local market conditions. For some of our corporate customers who require such a service, we provide
a courier service for non-cash deposit pickup. The following table sets forth the average balances and rates for each of the deposit categories for the periods indicated:



|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|-------------------------------------------------------- |  | ----------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                                         |  | Year Ended December 31, |        
|                                                         |  | 2004                    |         |             | 2003 |   |                | 2002 |            
|                                                         |  | AverageBalance          |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                                                         |  | (Dollars in thousands)  |        
|Interest bearing NOW, savings, and money market accounts |  | $                       | 77,548  |             | 0.52 | % |                | $    | 42,555      |  | 0.74 | %              |  | $           | 34,227  |  | 0.98 | %
|Other time deposits                                      |  |                         | 69,551  |             | 2.59 | % |                |      | 73,813      |  | 2.87 | %              |  |             | 59,448  |  | 3.55 | %
|Time deposits greater than $100,000                      |  |                         | 92,195  |             | 2.82 | % |                |      | 51,493      |  | 3.75 | %              |  |             | 51,115  |  | 3.83 | %
|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total interest bearing deposits                          |  |                         | 239,294 |             | 2.01 | % |                |      | 167,861     |  | 2.60 | %              |  |             | 144,790 |  | 3.04 | %
|Demand and other non-interest bearing deposits           |  |                         | 39,861  |             |      |   |                |      | 25,015      |  |      |                |  |             | 20,863  |  |      |  
|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total average deposits                                   |  | $                       | 279,155 |             | 1.86 | % |                | $    | 192,876     |  | 2.26 | %              |  | $           | 165,653 |  | 2.66 | %
|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  



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##### Table of Contents

The following table indicates the amount of the Banks certificates of deposit by interest rate and by time
remaining until maturity as of December 31, 2004.



|                                   |  |                        |        |  |                                     |   |  |                                 |        |  |                    |   |  |       |        |  |      |   |  |   |        |  |      |   |  |   |         |  |      |  
|---------------------------------- |  | ---------------------- | ------ |  | ----------------------------------- | - |  | ------------------------------- | ------ |  | ------------------ | - |  | ----- | ------ |  | ---- | - |  | - | ------ |  | ---- | - |  | - | ------- |  | ---- | -
|                                   |  | (Dollars in thousands) |       
|                                   |  | Three months or less   |        |  | More than three monthsto six months |   |  | More than six monthsto one year |        |  | More than one year |   |  | Total |       
|Certificates of $100,000 or more   |  | $                      | 11,617 |  | 1.65                                | % |  | $                               | 13,107 |  | 2.11               | % |  | $     | 19,559 |  | 2.80 | % |  | $ | 52,620 |  | 3.26 | % |  | $ | 96,903  |  | 2.82 | %
|                                   |  |                        |        |  |                                     |   |  |                                 |        | 
|Certificates of less than $100,000 |  |                        | 14,584 |  | 1.61                                | % |  |                                 | 10,681 |  | 2.00               | % |  |       | 22,744 |  | 2.68 | % |  |   | 35,582 |  | 3.10 | % |  |   | 83,591  |  | 2.59 | %
|                                   |  |                        |        |  |                                     |   |  |                                 |        |  |                    |   |  |       |        |  |      |   |  |   |        |  |      |   |  |   |         |  |      |  
|Total                              |  | $                      | 26,201 |  | 1.63                                | % |  | $                               | 23,788 |  | 2.06               | % |  | $     | 42,303 |  | 2.74 | % |  | $ | 88,202 |  | 3.20 | % |  | $ | 180,494 |  | 2.71 | %
|                                   |  |                        |        |  |                                     |   |  |                                 |        |  |                    |   |  |       |        |  |      |   |  |   |        |  |      |   |  |   |         |  |      |  



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##### Table of Contents

Borrowings



Borrowed funds consist of advances from the Federal Home Loan Bank of Atlanta (FHLB), securities sold under agreement to repurchase, federal funds purchased
and obligations under a capitalized lease for the Banks main office facility. The following table summarizes balance and rate information for borrowed funds as of the dates and for the periods indicated.



|                                              |  |                                      |        |   |      |   |        |  
|--------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------ | -
|                                              |  | At or for the YearEnded December 31, |       
|                                              |  | 2004                                 |        |   | 2003 |  
|                                              |  | (Dollars in thousands)               |       
|AMOUNTS OUTSTANDING AT END OF PERIOD:         |  |                                      |        |   |      |   |        |  
|                                              |  |                                     
|Advances from the FHLB                        |  |                                      |        |   |      |   |        |  
|Amount                                        |  | $                                    | 12,778 |   |      | $ | 13,444 |  
|Weighted average rate                         |  |                                      | 3.84   | % |      |   | 4.10   | %
|                                              |  |                                     
|Securities sold under agreement to repurchase |  |                                      |        |   |      |   |        |  
|Amount                                        |  | $                                    | 25,763 |   |      | $ | 19,667 |  
|Weighted average rate                         |  |                                      | 1.96   | % |      |   | 1.00   | %
|                                              |  |                                     
|Capitalized lease obligation                  |  |                                      |        |   |      |   |        |  
|Amount                                        |  | $                                    | 1,710  |   |      | $ | 1,708  |  
|Weighted average rate                         |  |                                      | 8.24   | % |      |   | 8.24   | %
|                                              |  |                                     
|MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END:  |  |                                      |        |   |      |   |        |  
|                                              |  |                                     
|Advances from the FHLB                        |  | $                                    | 15,388 |   |      | $ | 14,000 |  
|Securities sold under agreement to repurchase |  |                                      | 27,497 |   |      |   | 20,362 |  
|Federal funds purchased                       |  |                                      | 3,000  |   |      |   |       |  
|Capitalized lease obligation                  |  |                                      | 1,710  |   |      |   | 1,708  |  
|                                              |  |                                     
|AVERAGES DURING THE PERIOD:                   |  |                                      |        |   |      |   |        |  
|                                              |  |                                     
|Advances from the FHLB                        |  |                                      |        |   |      |   |        |  
|Average balance                               |  | $                                    | 14,101 |   |      | $ | 12,744 |  
|Weighted average rate                         |  |                                      | 3.84   | % |      |   | 4.10   | %
|                                              |  |                                     
|Securities sold under agreement to repurchase |  |                                      |        |   |      |   |        |  
|Average balance                               |  | $                                    | 23,406 |   |      | $ | 8,760  |  
|Weighted average rate                         |  |                                      | 1.25   | % |      |   | .96    | %
|                                              |  |                                     
|Federal funds purchased                       |  |                                      |        |   |      |   |        |  
|Average balance                               |  | $                                    | 342    |   |      | $ | 54     |  
|Weighted average rate                         |  |                                      | 1.62   | % |      |   | 1.20   | %
|                                              |  |                                     
|Capitalized lease obligation                  |  |                                      |        |   |      |   |        |  
|Average balance                               |  | $                                    | 1,709  |   |      | $ | 1,707  |  
|Weighted average rate                         |  |                                      | 8.24   | % |      |   | 8.24   | %



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##### Table of Contents

Pursuant to collateral agreements with the FHLB, advances are secured by all of the Companys FHLB stock, investment
securities with a carrying value of $5.0 million at December 31, 2004, and a blanket lien on qualifying first mortgage loans.



Securities sold under agreement to repurchase are secured by investment securities. The carrying value of the investment securities at December 31, 2004 was $26.2
million.



Bancshares also has available lines of credit totaling $15.0 million
from correspondent banks at December 31, 2004.



Junior Subordinated
Deferrable Interest Debentures



On December 31, 2001 we privately placed
2,000 shares of American Community Capital Trust I 9% Trust Preferred Securities, having a value of $2,000,000. On March 1, 2002, we privately placed an additional 1,500 shares of American Community Capital Trust I 9% Trust Preferred Securities,
having a liquidation value of $1,500,000. The trust preferred securities have a dividend yield equal to 9% of their face value each year and distributions are paid on a quarterly basis. Bancshares source of funds for the required interest
payments on the trust preferred securities is dividends payable by the Bank to Bancshares plus proceeds received from additional stock sold by Bancshares. Under the terms of the trust preferred securities, Bancshares is permitted to defer the
payment of interest on the trust preferred securities for up to 20 consecutive calendar quarters. The amount of any interest deferred also bears interest and must be paid at such time as funds are available to Bancshares.



During 2003, we formed a special purpose entity organized as a business trust under the laws
of the State of Connecticut. This business trust, called American Community Capital Trust II, Ltd was formed in order to allow us to issue trust preferred securities.



On December 15, 2003, American Community Capital Trust II, Ltd. issued a floating rate trust preferred security in the amount of
$10,000,000. The Trust used the proceeds from the issuance of the trust preferred security to acquire a junior subordinated note of the Company. The trust preferred security essentially mirrors the debt security, carrying a floating interest rate
based on 3-month LIBOR. The initial interest rate in effect at the time of issuance was 3.97%, which is reset on a quarterly basis. The rate as of December 31, 2004 was 4.775%. The securities have a legal maturity of 30 years, and can be called at
the Companys option in whole or part after five years.



Banking
Technology



We provide our customers with truncation of their deposit
accounts (check imaging), on-line banking and 24 hour telephone banking that permits our depositors to check balances, last cleared checks and deposit confirmation. Due to our imaging of all documentation, our customer service representatives can
access past statements and paid checks in a matter of seconds, eliminating research fees for our customers and eliminating any waiting time for such research. We implemented Internet banking for our personal customers during the fourth quarter of
2002 and our business Internet banking was implemented in 2003. We are very excited about the capability these products bring to our customers.



The Banks have ten ATM facilities attached to ten of its existing banking offices. The Banks ATM cards are linked to the nationwide Cirrus®, Plus® and Star® systems, allowing the Banks customers to withdraw funds from any ATM honoring these systems.



Competition



Commercial banking in North Carolina is highly competitive in large part due to early adoption of statewide branching. We compete in our
market areas with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies,
mortgage companies and other lenders engaged in the business of extending credit or taking investment monies such as mutual funds and brokerage firms. Many of our competitors have broader geographic markets and higher lending limits than us and are
also able to provide more services and make greater use of media advertising. In Union County, for example, there are currently 27 offices of 8 different commercial banks (including the largest banks in North Carolina). In Mecklenburg County, there
are currently 222 offices of 17 different commercial banks (including the largest banks in North Carolina). As an example, immediately to the west of Union County is Mecklenburg County and Charlotte, home of Bank of America,



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##### Table of Contents

Wachovia and numerous other banks of varying sizes. While we typically do not compete directly for loans with these
larger banks, they do influence our deposit products. We do compete more directly with mid-size and small community banks that have offices in our market areas. There are also a number of new community banks in Mecklenburg and Union Counties that
have a direct competitive effect as borrowers tend to shop the terms of their loans and deposits.



The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of our competitors. In addition, as a result of interstate banking, out-of-state
commercial banks have acquired North Carolina banks and heightened the competition among banks in North Carolina. For example, Atlanta, Georgia based SunTrust, a large multi-state financial institution has branches throughout North Carolina,
including Mecklenburg County and Regions Bancshares, from Birmingham, Alabama, has acquired a community bank in Charlotte.



The banking business is highly competitive in South Carolina as well. First National competes as a financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in the Cherokee County area and elsewhere. In Cherokee County, there are currently 10 offices of 5 different commercial banks. A number of these competitors are well established in
the Cherokee County area. Most of them have substantially greater resources and lending limits than our bank and offer certain services, such as extensive and established branch networks and trust services, that we either do not expect to provide or
do not currently provide. As a result of these competitive factors, the bank may have to pay higher rates of interest to attract deposits.



Despite the competition in our market areas, we believe that we have certain competitive advantages that distinguish us from our competition. We believe that our primary
competitive advantages are our bankers, each of whom is well known in his or her community with strong personal and business ties to that community with a loyal customer following. Our bankers each have a strong local identity and affiliation with
their communities. We offer customers modern banking services without forsaking community values such as prompt, personal service and friendliness. We also have established local advisory boards in certain of our communities to help us better
understand their needs and to be ambassadors of the Bank in those communities. We offer many personalized services and attract customers by being responsive and sensitive to their individualized needs. We believe our approach to business
builds goodwill among our customers, shareholders, and the communities we serve which results in referrals from shareholders and satisfied customers. We also rely on traditional marketing to attract new customers. To enhance a positive image in the
community, we support and participate in local events and our officers and directors serve on boards of local civic and charitable organizations. As an example, American Community was recognized in 1999, 2000, 2001, 2002, 2003 and 2004 for
outstanding contributions to the United Way Campaign for Union County. American Community is very active in the Special Olympics for Union County and has been honored by Special Olympics as Business of the Year for our sponsorship and
volunteer efforts.



American Community has also entered into a revenue sharing
agreement with Smith Barney, in which the Bank receives revenue for business generated by a broker located in our offices. Currently, a Smith Barney representative is only located in our main office, but visits all our branch locations periodically
when the opportunity arises. In addition, First National offers certain retirement account services, such as Individual Retirement Accounts (IRAs) and brokerage services through Raymond James Financial.



As a community service providing a competitive edge, the Banks sponsor small business
seminars and features various speakers on topics of interest to growing small businesses. The Banks attempt to bring together in one place a variety of experts to discuss timely issues of importance to business owners regarding such matters as
e-commerce, investments, and estate and retirement planning. This social setting also provides small business owners with an opportunity to network with other small business owners in our communities. Further, through its Kidz Club, the Banks offer
savings accounts designed for young savers. The Banks have also developed a Senior Citizens account for customers 50 years and older. These products offer free travelers checks, free safe deposit box, interest on daily balances, free wallet-style
checks, free quarterly breakfasts with guest speakers and quarterly day trips. American Community also sponsors the quarterly day trips as a way to attract Senior Citizens accounts and to further enhance their loyalty to the Bank.



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##### Table of Contents

ITEM 2 - PROPERTIES



The following table sets
forth the location of American Community and First Nationals main offices and branch offices, as well as certain information relating to these offices to date.



|                                                                             |  |             |  |                            |  |                
|---------------------------------------------------------------------------- |  | ----------- |  | -------------------------- |  | ---------------
|Office Location                                                              |  | Year Opened |  | Approximate Square Footage |  | Owned or Leased
|American Community                                                           |  |             |  |                            |  |                
|                                                                             |  |             | 
|Main Office 2593 West Roosevelt Boulevard Monroe, NC 28110                   |  | 1999        |  | 14,774                     |  | Leased         
|                                                                             |  |             | 
|Indian Trail Branch 13860 East Independence
Boulevard Indian Trail, NC 28079 |  | 1999        |  | 3,850                      |  | Leased         
|                                                                             |  |             | 
|Sunset Branch 120 East Sunset Drive Monroe, NC 28110                         |  | 1999        |  | 450                        |  | Leased         
|                                                                             |  |             | 
|Wal-Mart Superstore Branch 2406 West Roosevelt
Boulevard Monroe, NC 28110    |  | 2000        |  | 600                        |  | Leased         
|                                                                             |  |             | 
|Marshville Branch 7001 East Marshville
Boulevard Marshville, NC 28103        |  | 2000        |  | 3,500                      |  | Leased         
|                                                                             |  |             | 
|Mint Hill 7200 Matthews-Mint Hill Road Mint Hill, NC 28227                   |  | 2000        |  | 2,500                      |  | Leased         
|                                                                             |  |             | 
|Mountain Island Branch 3500 Mt. Holly-Huntersville
Road Charlotte, NC 28216  |  | 2000        |  | 4,500                      |  | Owned          
|                                                                             |  |             | 
|SouthPark Branch 4500 Cameron Valley Parkway
Charlotte, NC 28211             |  | 2003        |  | 2,800                      |  | Leased         
|                                                                             |  |             | 
|First National                                                               |  |             |  |                            |  |                
|                                                                             |  |             | 
|Main Office 217 N. Granard Street Gaffney, SC 29341                          |  | 1999        |  | 11,000                     |  | Owned          
|                                                                             |  |             | 
|Blacksburg Branch 207 W. Cherokee Street Blacksburg, SC 29702                |  | 2000        |  | 2,550                      |  | Owned          
|                                                                             |  |             | 
|Chesnee Highway Branch 626 Chesnee Highway Gaffney, SC 29341                 |  | 2001        |  | 2,550                      |  | Owned          



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##### Table of Contents

In 1999 American Community entered into a Commercial Lease Agreement with TyPar Realty, Inc. for the lease of a portion
of a two-story building constructed by L. C. Tyson Construction, Inc. This building serves as the main office of American Community. TyPar Realty, Inc. and L. C. Tyson Construction, Inc. are related interests of Carlton Tyson, a director of
Bancshares. The lease was for thirty years commencing in 1999 with increases every five years plus our share of common area expenses. American Community has a right of first refusal to lease the remainder of the building as it becomes available and
to purchase the building should it be offered for sale. This lease was entered into at arms-length and at then current market rates. The lease has been reviewed by an independent third party real estate appraiser for assurance that the terms of the
lease are not more favorable than would be engaged with any other party. Additionally, after a sealed bid process, L. C. Tyson Construction, Inc. was awarded as low bidder, the construction contract for American Communitys permanent buildings
in Marshville and Mountain Island. American Community believes the terms of that contract are fair to the bank. American Community sold and leased back the Marshville branch in 2001 to Carroll Edwards in an arms  length transaction at then
current market rates. In 2002 Mr. Edwards was elected to the board of directors of American Community. In 2003, American Community entered into a Commercial lease agreement with Zebulon Morris, Jr, a director of American Community, for the lease of
a new building constructed by Mr. Morris. The lease is for 10 years commencing in 2003. This lease was entered into at arms-length and at then current market rates.



Employees



As of December 31, 2004, we had 93 full-time employees and 9 part-time employees. None of these employees are covered by a collective bargaining agreement. We consider
relations with our employees to be good.



ITEM 3  LEGAL PROCEEDINGS



During 2004, one
of the Companys wholly-owned subsidiaries, American Community Bank, was the defendant in an action brought before the Mecklenburg County Superior Court (Charlotte, North Carolina). The action was commenced on January 8, 2003 by MC Contractors,
Inc. (formerly known as Mann Contractors, Inc.), the sole plaintiff involved in the litigation.



The plaintiff alleged that in 2001 American Community was negligent in allowing an individual who was an owner, executive officer and director of Mann Contractors, Inc. to open a commercial checking account with the
American Community in the name of Mann Contractors, Inc. The plaintiff was seeking relief in the form of monetary damages.



On May 11, 2004, a Mecklenburg County, North Carolina jury returned a $631,600 verdict against American Community. Reflected in the 2004 financials is a $600,000 charge
to pre-tax earnings for a proposed settlement of the lawsuit. The lawsuit was subsequently settled in February of 2005 for $600,000 and the judgment was cancelled.



ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not Applicable



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##### Table of Contents

PART II



ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



American Community Bancshares stock is listed on the Nasdaq SmallCap market under the symbol ACBA. It began trading on this market on July 17, 2000. In
addition warrants to buy shares of American Community Bancshares included as a part of the units sold in April 2002 are also traded on the Nasdaq SmallCap market under the symbol ACBAW. There are approximately 3.5 million shares
outstanding at December 31, 2004 owned by approximately 2,500 shareholders. In addition, approximately 1.0 million warrants to buy stock at a price of $10.50 per share, which expire April 30, 2005, were outstanding at December 31, 2004. The table
below lists the high and low prices at which trades were completed during each quarter indicated for our stock and warrants to buy stock.



|               |  |              |       |          |   |       |  |     |      |  |   |     
|-------------- |  | ------------ | ----- | -------- | - | ----- |  | --- | ---- |  | - | ----
|               |  | Sale Price  
|               |  | Common Stock |       | Warrants
|               |  | High         |       | Low      |   | High  |  | Low
|2004           |  |              |       |          |   |       |  |     |      |  |   |     
|First Quarter  |  | $            | 14.20 |          | $ | 12.14 |  | $   | 4.85 |  | $ | 2.71
|Second Quarter |  |              | 14.15 |          |   | 11.77 |  |     | 4.39 |  |   | 2.80
|Third Quarter  |  |              | 13.21 |          |   | 11.37 |  |     | 3.14 |  |   | 1.80
|Fourth Quarter |  |              | 16.81 |          |   | 12.91 |  |     | 6.11 |  |   | 2.60
|               |  |              |       |         
|2003           |  |              |       |          |   |       |  |     |      |  |   |     
|First Quarter  |  | $            | 8.84  |          | $ | 8.13  |  | $   | 1.21 |  | $ | 0.90
|Second Quarter |  |              | 10.49 |          |   | 8.25  |  |     | 1.60 |  |   | 0.90
|Third Quarter  |  |              | 11.10 |          |   | 10.16 |  |     | 1.92 |  |   | 0.90
|Fourth Quarter |  |              | 13.10 |          |   | 11.09 |  |     | 4.00 |  |   | 1.87



See Item 11 of this report for
disclosure regarding securities authorized for issuance and equity compensation plans required by Item 201(d) of Regulation S-B.



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##### Table of Contents

ITEM 6 - MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



The following presents managements discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes. This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors. The following discussion is
intended to assist in understanding the financial condition and results of operations of Bancshares. Because American Community Bancshares, Inc. has no material operations and conducts no business on its own other than owning its subsidiaries,
American Community Bank (American Community) and First National Bank of the Carolinas (First National), the discussion contained in this Managements Discussion and Analysis concerns primarily the business of American
Community and First National. However, for ease of reading and because the financial statements are presented on a consolidated basis, American Community Bancshares, American Community Bank and First National Bank of the Carolinas are collectively
referred to herein as American Community Bancshares or Bancshares unless otherwise noted.



OVERVIEW



In April 2000, Bancshares was
formed as a holding company for American Community. Upon formation, one share of Bancshares $1 par value common stock was exchanged for each of the then outstanding 1,492,063 shares of American Communitys $5 par value common stock. On
April 15, 2004, Bancshares acquired First National Bank of the Carolinas. First National shareholders could elect to receive $22.64 in cash for each share of First National stock they owned, exchange each share of First National stock for 1.6347
shares of American Community Bancshares, Inc. stock, or a combination of stock and cash. As a result of the combination, the Company paid $7.1 million for shares exchanged for cash and has issued 617,343 additional shares of stock. Bancshares
currently has no operations and conducts no business on its own other than owning American Community and First National.



American Community was opened for business as a North Carolina-chartered commercial bank on November 16, 1998. It completed its first full fiscal year on December 31,
1999. American Community operates out of its main office at 2593 West Roosevelt Boulevard, Monroe, North Carolina. It also operates four other full service branches in Union County and three full service branches in Mecklenburg County for a total of
eight offices. American Community is a North Carolina-chartered banking corporation.



First National commenced operations as a national banking association on October 18, 1996. The Bank provides banking services to domestic markets principally in Cherokee County, South Carolina, and is operating under the rules and
regulations of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. First National operates out of its main office at 217 N. Granard Street, Gaffney, South Carolina. It also operates two other full service
branches in Cherokee County for a total of three offices.



Both Banks
lending activities are oriented to the consumer/retail customer as well as the small-to-medium sized business located in the Union and Mecklenburg County areas of North Carolina and the Cherokee County area of South Carolina. The Banks offer
commercial, consumer, and mortgage lending products, as well as the ability to structure credit arrangements to fit specialized needs through accounts receivable financing, leasing arrangements and other products. The deposit services offered by
both Banks include small business and personal checking and savings accounts and certificates of deposit. The Banks concentrate on customer relationships in building its customer deposit base and competes aggressively in the area of transaction
accounts. Additional funding includes borrowings from the FHLB and various other financial institutions. Both Banks also offer investment services through agreements with Smith Barney and Raymond James investment brokers.



Comparison of Financial Condition at December 31, 2004 and 2003



On April 15, 2004, the Company acquired First National Bank of the Carolinas (First
National). When appropriate, during discussions regarding increases in certain asset and liability categories, information will be included to allow the reader to determine the portion of overall increases attributable to the merger and that
attributable to core internal growth.



Total assets at December 31, 2004
increased by $118.2 million or 42.0% to $399.5 million compared to $281.3 million at December 31, 2003. The acquisition of First National added approximately $82.8 million in assets, of which $10.7 million were intangible. Bancshares had earning
assets of $370.6 million at year-end December 31,



23



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##### Table of Contents

2004 consisting of $308.0 million in gross loans, $56.1 million in investment securities and non-marketable equity
securities, and $6.5 million in interest-bearing deposits with banks. Total deposits as of December 31, 2004 increased by $98.5 million or 47.3% to $306.7 million compared to $208.2 million at December 31, 2003. Total borrowings as of December 31,
2004 increased by $5.9 million or 12.2% from $48.3 million to $54.2 million. Stockholders equity was $37.1 million at December 31, 2004 compared to $24.2 million at December 31, 2003 for an increase of $12.9 million or 53.3%.



Gross loans grew by $103.5 million or 50.6% from $204.5 million as of December
31, 2003 to $308.0 million at year-end 2004. The acquisition of First National added $56.8 million of the total $103.5 million increase. The composition of the loan portfolio, by category, as of December 31, 2004 is as follows: 9% 1-4 family
mortgage loans, 27% commercial mortgage real estate loans, 13% construction/development real estate loans, 8% home equity lines of credit, 28% commercial loans, 10% consumer and other loans to individuals and 5% leases. The real estate category grew
$26.8 million from $124.8 million to $151.6 million. Within the real estate category, 1-4 family loans grew $11.3 million from $15.9 million to $27.2 million, commercial mortgage real estate loans grew $4.2 million from $80.4 million to $84.6
million while construction/development loans increased $11.3 million from $28.5 million to $39.8 million. These construction/development loans are primarily single family residences and owner occupied commercial properties. Net increases in other
loan categories included $8.1 million in home equity lines of credit, $44.8 million in commercial and industrial loans, $22.1 million in consumer and other loans and $1.8 million in leases. The Banks take no residual risk in the leasing portfolio as
all lease residuals are personally guaranteed by the borrower. The composition of the loan portfolio at December 31, 2003, by category, was 8% 1-4 family mortgage loans, 39% commercial mortgage real estate loans, 14% construction/development real
estate loans, 8% home equity lines of credit, 20% commercial loans, 4% consumer and other loans to individuals and 7% leases.



Bancshares recorded a $574,000 provision for loan losses for the year ended December 31, 2004, representing a decrease of $210,000 from the $784,000 provision for the
year ended December 31, 2003. Bancshares also experienced a decrease in net loan charge-offs during 2004, to $282,000 from $630,000 in 2003. The percentage of net loan charge-offs to average loans outstanding was .10% for the year ended December 31,
2004 as compared with .35% for year ended December 31, 2003. Nonperforming loans totaled $881,000 or .29% of total loans at December 31, 2004, up from $330,000 or .16% of total loans at December 31, 2003. Of the $551,000 increase in non-performing
loans, $124,000 was related to the acquisition of First National. All non-performing loans have been reviewed for collectibility and any specific reserves necessary have been recorded. The allowance for loan losses at December 31, 2004 of $3.5
million represents 1.13% of total loans and 396% of nonperforming loans. The allowance for loan losses at December 31, 2003 of $2.5 million represented 1.24% of total loans and 766% of nonperforming loans. Under American Communitys loan
grading system, loans classified as especially mentioned, substandard, doubtful or loss (which includes non-performing loans) actually decreased from 3.83% of total loans at December 31, 2003 to 2.58% of total loans at December 31, 2004 resulting in
a decrease in current year provision and allowance for loan losses. Management believes that the allowance for loan losses as of December 31, 2004 is adequate to absorb losses inherent in the loan portfolio.



Bancshares had total investment securities of $54.0 million at December 31, 2004 of which
$51.8 million are accounted for as available for sale under Statement of Financial Accounting Standards (SFAS) No. 115 and are presented at fair value, and $2.2 million of the securities are intended to be held to maturity. The investment securities
portfolio increased by $1.9 million from the $52.1 million balance at December 31, 2003. Additions to the investment portfolio included $22.6 million in new securities purchases, funded from $27.4 million in proceeds from investment maturities,
calls, sales and principal re-payments. Bancshares acquired $7.4 million in investment securities and $197,000 of Federal Home Loan Bank stock through the acquisition of First National. In 2003, the Company borrowed $15.0 million in repurchase
agreements with six month maturities and invested the proceeds in 10 year mortgaged backed securities to take advantage of increased spreads between short-term and long-term rates and provide protection against falling short-term interest rates. The
$15.0 million in repurchase agreements are still outstanding at December 31, 2004.



Interest-earning deposits with banks decreased by $4.5 million primarily to fund strong loan demand.



Non interest-earning assets increased by $17.0 million from $15.4 million at December 31, 2003 to $32.4 million at December 31, 2004. Goodwill resulting from the FNB acquisition accounted for $9.8 million of the
increase. The remainder of the increase is primarily attributable to an increase of $2.2 million to $9.5 million in the cash and due from banks category. This includes cash on hand and customer deposits and other cash receipts that are in the
process of collection and not available for overnight investment. Accrued interest receivable also increased



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$566,000 to $1.7 million at December 31, 2004 as a result of the increase in earning assets. Bank premises and equipment
was $8.7 million at December 31, 2004 an increase of $3.4 million from December 31, 2003. This increase resulted primarily from the additional $3.1 million in premises and equipment obtained in the acquisition of First National, net of depreciation
expense of $770,000. Foreclosed real estate was $311,000 at December 31, 2004 an increase of $194,000 from December 31, 2003. This increase is primarily due to the addition of five 1-4 family properties foreclosed in 2004, offset by the sale of one
property in 2004. Other assets increased by $1.1 million at December 31, 2004 to $2.3 million primarily as a result of an increase in deferred taxes related to the acquisition of First National, as well as an increase in prepaid expenses.



Total deposits increased $98.5 million or 47.3% from $208.2 million on
December 31, 2003 to $306.7 million on December 31, 2004. The composition of the deposit base, by category, at December 31, 2004 is as follows: 15% non-interest bearing demand deposits, 4% savings deposits, 22% money market and interest bearing
demand deposits and 59% time deposits. All deposit categories experienced increases over the twelve-month period. Dollar and percentage increases by category were as follows: non-interest bearing demand deposits, $15.7 million or 53%; savings
deposits, $5.3 million or 86%, money market and interest bearing demand deposits, $28.3 million or 69%, and time deposits, $49.2 million or 37%. Time deposits of $100,000 or more totaled $96.9 million, or 54% of total deposits at December 31, 2004.
The acquisition of First National added $61.3 million in deposits, comprised of $11.3 million in non-interest bearing deposits, $3.8 million in savings deposits, $21.3 million in money market and interest bearing demand deposits and $24.9 million in
time deposits. The composition of deposits at December 31, 2003 was 14% non-interest bearing demand deposits, 3% savings deposits, 20% money market and interest bearing demand deposits and 63% time deposits. Time deposits of $100,000 or more at
December 31, 2003 were $67.0 million or 32% of total deposits.



At December 31,
2004, $12.8 million of advances were outstanding with maturity dates ranging from October 2005 through February 2013. The balance of FHLB advances at December 31, 2003 was $13.4 million. These advances are secured by a blanket lien on 1-4 family
mortgage loans and certain loans secured by commercial property, Federal Home Loan Bank stock, and $5.0 million in investment securities. Bancshares also maintained the capital lease for its main office. The recorded obligation under this capital
lease at December 31, 2004 was $1.7 million. Bancshares also issued junior subordinated debentures in the amount of $1.5 million during 2002 at a fixed rate of 9% which increased the outstanding balance to $3.5 million at December 31, 2002 from $2.0
million at December 31, 2001, or a 75% increase. The entire $3.5 million was eligible for inclusion as Tier I capital for American Community Bancshares, Inc in 2004. In 2003, Bancshares issued additional junior subordinated debentures in the amount
of $10.0 million. The debentures have a maturity of thirty years with a five-year continuous call provision and are re-priced monthly based on a spread over 90 day LIBOR. Approximately $5.4 million was eligible for inclusion as Tier I capital for
American Community Bancshares, Inc. The Bank also offers corporate customers the option to sweep excess checking account balances into one day maturity repurchase agreements which are collateralized by certain of the Banks investment
securities. The balance of these repurchase agreements at December 31, 2004 was $10.8 million. In 2003, the Company borrowed $15.0 million in repurchase agreements with six month maturities and invested the proceeds in 10 year mortgaged backed
securities to take advantage of increased spreads between short-term and long-term rates and provide protection against falling short-term interest rates. The $15.0 million in repurchase agreements are still outstanding at December 31, 2004.



Other liabilities increased by $581,000 to $1.2 million at December 31, 2004
from $581,000 at December 31, 2003. The increase was primarily due to the increase in accrued income taxes for the year.



Bancshares began 2004 with total stockholders equity of $24.2 million. Total equity increased to $37.0 million at December 31, 2004. This increase was due to the
acquisition of First National Bank, and comprehensive income for 2004 of $2.5 million, which was offset by the $283,000 payment of cash dividends of $.10 per share in the first quarter of 2004. In addition 34,997 options to buy stock and 11,200
warrants were exercised in 2004 resulting in $328,000 in net proceeds.



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Net Interest Income



Like most financial institutions, the primary component of earnings for Bancshares is net interest income. Net interest income is the difference between interest income,
principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the average dollar
level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities. During the fiscal years ended December 31,
2004, 2003 and 2002, average interest-earning assets were $337.3 million, $230.7 million, and $189.2 million, respectively. During these same periods, Bancshares net yields on average interest-earning assets (net interest margin) were 3.56%,
3.42%, and 3.26%, respectively.



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##### Table of Contents

Average Balances and Average Rates Earned and Paid. The following table sets forth, for the periods indicated,
information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest
income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Average loans include nonaccruing loans, the effect which is to lower the average rates shown.



|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ----------- | ---------------------------- | ---- | -------------- |  | - | -------- | - | ----------- | - | ------ | --------------- | ---- | - | -------- | - | ------------ | - |  | - | ------ |  | ---- | -
|                                                                                 |  | Year Ended December 31, 2004 |         |   | Year Ended December 31, 2003 |   |             | Year Ended December 31, 2002 |     
|                                                                                 |  | AverageBalance               |         |   | Interest                     |   | AverageRate |                              |      | AverageBalance |  |   | Interest |   | AverageRate |   |        | Average Balance |      |   | Interest |   | Average Rate |  
|                                                                                 |  | (Dollars in thousands)       |        
|Interest-earning assets:                                                         |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Loans                                                                            |  | $                            | 275,011 |   |                              | $ | 16,387      |                              | 5.96 | %              |  | $ | 182,108  |   |             | $ | 11,761 |                 | 6.46 | % |          | $ | 146,530      |   |  | $ | 10,381 |  | 7.08 | %
|Investments                                                                      |  |                              | 53,499  |   |                              |   | 1,740       |                              | 3.25 | %              |  |   | 40,875   |   |             |   | 1,219  |                 | 2.98 | % |          |   | 20,446       |   |  |   | 758    |  | 3.71 | %
|Interest-earning deposits                                                        |  |                              | 8,782   |   |                              |   | 89          |                              | 1.01 | %              |  |   | 7,764    |   |             |   | 75     |                 | .97  | % |          |   | 22,252       |   |  |   | 325    |  | 1.46 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Total interest-earning assets                                                    |  |                              | 337,292 |   |                              |   | 18,216      |                              | 5.40 | %              |  |   | 230,747  |   |             |   | 13,055 |                 | 5.66 | % |          |   | 189,228      |   |  |   | 11,464 |  | 6.06 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Other assets                                                                     |  |                              | 29,376  |   |                              |   |             |                              |      |                |  |   | 15,295   |   |             |   |        |                 |      |   |          |   | 11,229       |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Total assets                                                                     |  | $                            | 366,668 |   |                              |   |             |                              |      |                |  | $ | 246,042  |   |             |   |        |                 |      |   |          | $ | 200,457      |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Interest-bearing liabilities:                                                    |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Deposits:                                                                        |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Savings                                                                          |  | $                            | 11,071  |   |                              |   | 21          |                              | .19  | %              |  | $ | 5,415    |   |             |   | 13     |                 | .24  | % |          | $ | 3,585        |   |  |   | 32     |  | .89  | %
|Money Market and NOW                                                             |  |                              | 66,477  |   |                              |   | 383         |                              | .58  | %              |  |   | 37,140   |   |             |   | 301    |                 | .81  | % |          |   | 30,642       |   |  |   | 304    |  | .99  | %
|Time                                                                             |  |                              | 161,746 |   |                              |   | 4,058       |                              | 2.51 | %              |  |   | 125,752  |   |             |   | 3,707  |                 | 2.95 | % |          |   | 110,563      |   |  |   | 4,064  |  | 3.68 | %
|Borrowings(1)                                                                    |  |                              | 53,108  |   |                              |   | 1,758       |                              | 3.31 | %              |  |   | 28,162   |   |             |   | 1,148  |                 | 4.08 | % |          |   | 13,904       |   |  |   | 894    |  | 6.43 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Total interest-bearing liabilities                                               |  |                              | 292,402 |   |                              |   | 6,220       |                              | 2.13 | %              |  |   | 196,469  |   |             |   | 5,169  |                 | 2.63 | % |          |   | 158,694      |   |  |   | 5,294  |  | 3.34 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Non-interest-bearing deposits                                                    |  |                              | 39,861  |   |                              |   |             |                              |      |                |  |   | 25,230   |   |             |   |        |                 |      |   |          |   | 20,863       |   |  |   |        |  |      |  
|Other liabilities                                                                |  |                              | 1,955   |   |                              |   |             |                              |      |                |  |   | 842      |   |             |   |        |                 |      |   |          |   | 1,050        |   |  |   |        |  |      |  
|Stockholders equity                                                             |  |                              | 32,450  |   |                              |   |             |                              |      |                |  |   | 23,501   |   |             |   |        |                 |      |   |          |   | 19,850       |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Total liabilities and stockholders equity                                       |  | $                            | 366,668 |   |                              |   |             |                              |      |                |  | $ | 246,042  |   |             |   |        |                 |      |   |          | $ | 200,457      |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Net interest income and interest rate spread                                     |  |                              |         |   |                              | $ | 11,996      |                              | 3.27 | %              |  |   |          |   |             | $ | 7,886  |                 | 3.03 | % |          |   |              |   |  | $ | 6,170  |  | 2.72 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Net yield on average interest-earning assets                                     |  |                              |         |   |                              |   |             |                              | 3.56 | %              |  |   |          |   |             |   |        |                 | 3.42 | % |          |   |              |   |  |   |        |  | 3.26 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                              | 115.35  | % |                              |   |             |                              |      |                |  |   | 117.45   | % |             |   |        |                 |      |   |          |   | 119.24       | % |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                 |      |   |          |   |              |   |  |   |        |  |      |  

---

|(1) | Borrowings includes borrowings from the Federal Home Loan Bank, securities sold under agreement to repurchase, capital lease obligation and junior subordinated
deferrable interest debentures.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Rate/Volume Analysis



The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing
liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior periods rate), (ii) changes attributable to rate (changes in rate multiplied by the prior periods volume), and
(iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable
to rate.



|                                     |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  
|------------------------------------ |  | -------------------------- | ----- | -------------------------- | ----- | ------ | ------------------------- | ------ | - | ----- | ---- | - | ----- | - |  | - | ------ | - |  | - | ----- | -
|                                     |  | December 31, 2004 vs. 2003 |       | December 31, 2003 vs. 2002 |      
|                                     |  | Increase (Decrease)Due to  |       |                            | Total |        | Increase (Decrease)Due to |        |   | Total |     
|                                     |  | Volume                     |       | Rate                       |       |        |                           | Volume |   |       | Rate |   |      
|                                     |  | (Dollars in thousands)     |      
|Interest income:                     |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  
|Loans                                |  | $                          | 5,767 |                            | $     | (1,141 | )                         |        | $ | 4,626 |      | $ | 2,094 |   |  | $ | (1,209 | ) |  | $ | 1,380 |  
|Investment securities                |  |                            | 394   |                            |       | 127    |                           |        |   | 521   |      |   | 683   |   |  |   | (222   | ) |  |   | 461   |  
|Interest-earning deposits with banks |  |                            | 10    |                            |       | 4      |                           |        |   | 14    |      |   | (176  | ) |  |   | (74    | ) |  |   | (250  | )
|                                     |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  
|Total interest income                |  |                            | 6,171 |                            |       | (1,010 | )                         |        |   | 5,161 |      |   | 2,917 |   |  |   | (1,326 | ) |  |   | 1,591 |  
|                                     |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  
|Interest expense:                    |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  
|Deposits                             |  |                            | 1,202 |                            |       | (761   | )                         |        |   | 441   |      |   | 575   |   |  |   | (954   | ) |  |   | (379  | )
|Borrowings                           |  |                            | 921   |                            |       | (311   | )                         |        |   | 610   |      |   | 749   |   |  |   | (495   | ) |  |   | 254   |  
|                                     |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  
|Total interest expense               |  |                            | 2,123 |                            |       | (1,072 | )                         |        |   | 1,051 |      |   | 1,324 |   |  |   | (1,449 | ) |  |   | (125  | )
|                                     |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  
|Net interest income                  |  | $                          | 4,048 |                            | $     | 62     |                           |        | $ | 4,110 |      | $ | 1,593 |   |  | $ | 123    |   |  | $ | 1,716 |  
|                                     |  |                            |       |                            |       |        |                           |        |   |       |      |   |       |   |  |   |        |   |  |   |       |  



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Comparison of Results of Operations for the Years Ended December 31, 2004 and 2003



Net Income. Bancshares generated net income in 2004 of $2.7 million compared
to net income in 2003 of $1.4 million. On a per share basis, fully diluted earnings were $.75 for 2004 compared to $.48 for 2003. Return on average assets was .74% and .56% and return on average equity was 8.50% and 5.91% for the years ended
December 31, 2004 and 2003, respectively.



Earnings for the year ended December
31, 2004 were positively impacted by strong growth in average earning assets and by increases in net interest income and non-interest income. The impact of the growth in average earning assets was further enhanced by the reduction in the cost of
interest-bearing liabilities, which decreased to 2.13% in 2004 from 2.63% in 2003.



Net Interest Income. Net interest income increased $4.1 million from $7.9 million in 2003 to $12.0 million in 2004. Total interest income benefited from strong growth in average earning assets combined with an increase in net
interest margin from 3.42% in 2003 to 3.56% in 2004.



Total average earning
assets increased $106.6 million or 46% from an average of $230.7 million in 2003 to an average of $337.3 million in 2004. The acquisition of First National added $65.5 million of the $106.6 million increase, consisting of $56.0 million in average
loans, $7.0 million in average investments and $2.5 million in average interest bearing deposits. Bancshares experienced strong loan growth during 2004 with average loan balances increasing by $92.9 million. The increase in the average balances for
investment securities and interest-earning deposits was $13.6 million. Total interest income increased $5.2 million due to an increase in average earning assets of $106.6 million, offset by a decrease in yield on earning assets from 5.66% in 2003 to
5.40% in 2004. Average total interest-bearing liabilities increased by $95.9 million during 2004, consisting of a $71.0 million increase in average interest-bearing deposits while average borrowings increased $24.9 million.



Net interest margin is interest income earned on loans, securities and other earning assets,
less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The net interest margin for the year ended 2004 was 3.56% compared to 3.42% for 2003. The increase in net interest margin resulted from
the differences between the terms and conditions of earning assets and interest-bearing liabilities. Interest rates on a significant portion of our earning assets, such as certain loans and short-term investments, are tied to index rates, including
the prime lending rate and the Federal Funds rate. Conversely, rates on a significant portion of interest-bearing liabilities such as certificates of deposits and borrowings remain fixed until maturity. During the second half of 2004, the Federal
Reserve Open Market Committee increased short-term interest rates five times for a total of 125 basis points. When an interest rate increase occurs, yields on certain assets are increased immediately while the impact on deposits and borrowings is
delayed until such time as these instruments mature and are replaced with instruments that reflect the interest rate increase. The average yield on earning assets for 2004 was 5.40% or 26 basis points lower than the 5.66% for 2003. The 2004 average
cost of interest-bearing liabilities was 2.13% or 50 basis points lower than the 2.63% for 2003. As a result, the interest rate spread, which is the difference between the average yield on earning assets and the cost of interest-bearing funds,
increased 24 basis points from 3.03% in 2003 to 3.27% in 2004.



Provision
for Loan Losses. Bancshares provision for loan losses for 2004 was $574,000, representing a $210,000 or 26.8% decrease from the $784,000 recorded for 2003. Provisions for loan losses are charged to income to bring the allowance for
loan losses to a level deemed appropriate by management based on factors discussed under Analysis of Loan Losses. Under American Communitys loan grading system, loans classified as especially mentioned, substandard, doubtful or
loss (which includes non-performing loans) actually decreased from 3.83% of total loans at December 31, 2003 to 2.58% of total loans at December 31, 2004 resulting in a decrease in current year provision and allowance for loan losses. The allowance
for loan losses was $3.5 million at December 31, 2004, representing 1.13% of total outstanding loans and 396% of non-performing loans. The allowance for loan losses at December 31, 2003 was $2.5 million, representing 1.24% of total outstanding loans
at that date and 766% of non-performing loans.



Non-interest Income.
Non-interest income increased by $693,000 or 26% to $3.3 million for the year ended December 31, 2004 compared with $2.6 million for the prior period. The largest components of non-interest income were service charges on deposit accounts of $2.3
million in 2004 as compared to $1.7 million in 2003, a 35% increase, fees from mortgage banking operations of $365,000 in 2004 as compared to $517,000 in 2003, a 29% decrease, and fees from accounts receivable financing of $85,000 in 2004 as
compared to $94,000 in 2003, a 10% decrease. Service charge income increased as a result of the $49.4 million or 64% increase in deposit transaction accounts from $76.8 million at December 31, 2003 to $126.2 million at December 31, 2004. The
acquisition of First National accounted for $363,000 of the $566,000 increase in service charge income. Fees from mortgage banking operations decreased due to the increasing interest rate environment in 2004. Fees from accounts receivable financing
decreased due to the decreased emphasis placed on this type of lending by management during the year.



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Non-interest Expenses. Total non-interest expense increased from $7.6 million in 2003 to $10.2 million in 2004.
This 34% increase was primarily due to the acquisition of FNB, increases in compensation associated with branch expansion and other growth and increases in occupancy and equipment expenses. Salaries and benefits expense was $4.9 million for the year
ended December 31, 2004, representing a $1.0 million or 26% increase over the $3.9 million recorded for the prior year. Occupancy and equipment costs were $1.8 million for the year ended December 31, 2003 representing a $393,000 or 29% increase over
the $1.4 million for the prior year. Data processing cost was $554,000 for the year ended December 31, 2004 representing a $19,000 or 4% increase over the $535,000 for the prior year.



Provision for Income Taxes. Bancshares had tax expense of $1.6 million, or 37.1% of income before income taxes, for the year ended
December 31, 2004 compared to an income tax expense of $807,000 in 2003 or 36.7% of income before income taxes.



Comparison of Results of Operations for the Years Ended December 31, 2003 and 2002



Net Income. Bancshares generated net income in 2003 of $1.4 million compared to net income in 2002 of $1.3 million. On a per
share basis, fully diluted earnings were $.48 for 2003 compared to $.51 for 2002. Return on average assets was .56% and .65% and return on average equity was 5.91% and 6.55% for the years ended December 31, 2003 and 2002, respectively.



Earnings for the year ended December 31, 2003 were positively impacted by strong growth in
average earning assets and by increases in net interest income and non-interest income. The impact of the growth in average earning assets was further enhanced by the reduction in the cost of interest-bearing liabilities, which decreased to 2.63% in
2003 from 3.34% in 2002.



Net Interest Income. Net interest
income increased $1.7 million from $6.2 million in 2002 to $7.9 million in 2003. Total interest income benefited from strong growth in average earning assets combined with an increase in net interest margin from 3.26% in 2002 to 3.42% in 2003.



Total average earning assets increased $41.5 million or 22% from an average of
$189.2 million in 2002 to an average of $230.7 million in 2003. Bancshares experienced good loan growth during 2003 with average loan balances increasing by $35.6 million. The increase in the average balances for investment securities and
interest-earning deposits was $5.9 million. Total interest income increased $1.6 due to an increase in average earning assets of $41.5 million, offset by a decrease in yield on earning assets from 6.06% in 2002 to 5.66% in 2003. Average total
interest-bearing liabilities increased by $37.8 million during 2003, consisting of a $23.5 million increase in average interest-bearing deposits while average borrowings increased $14.3 million.



Net interest margin is interest income earned on loans, securities and other earning assets,
less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The net interest margin for the year ended 2003 was 3.42% compared to 3.26% for 2002. The increase in net interest margin resulted from
the differences between the terms and conditions of earning assets and interest-bearing liabilities. Interest rates on a significant portion of our earning assets, such as certain loans and short-term investments, are tied to index rates, including
the prime lending rate and the Federal Funds rate. Conversely, rates on a significant portion of interest-bearing liabilities such as certificates of deposits and borrowings remain fixed until maturity. The average yield on earning assets for 2003
was 5.66% or 40 basis points lower than the 6.06% for 2002. The 2003 average cost of interest-bearing liabilities was 2.63% or 71 basis points lower than the 3.34% for 2002. As a result, the interest rate spread, which is the difference between the
average yield on earning assets and the cost of interest-bearing funds, increased 31 basis points from 2.72% in 2002 to 3.03% in 2003.



Provision for Loan Losses. Bancshares provision for loan losses for 2003 was $784,000, representing a $129,000 or 14% decrease from the $913,000
recorded for 2002. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on factors discussed under Analysis of Loan Losses. The decrease in the 2003
provision, as compared to the 2002 provision, is principally due to losses incurred in 2002 from a line of credit in the accounts receivable financing portfolio. This line of credit was charged off in 2003. The allowance for loan losses was $2.5
million at December 31, 2003, representing 1.24% of total outstanding loans and 766% of non-performing loans. The allowance for loan losses at December 31, 2002 was $2.4 million or 1.44% of total outstanding loans at that date.



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Non-interest Income. Non-interest income increased by $615,000 or 30% to $2.6 million for the year ended December
31, 2003 compared with $2.0 million for the prior year. Non-interest income as a percentage of total revenue increased from 24.8% in 2002 to 25.1% in 2003. The increase was primarily due to the increase of $500,000 in deposit service charges in
2003. The largest components of non-interest income were service charges on deposit accounts of $1.7 million in 2003 as compared to $1.2 million in 2002, a 42% increase, fees from mortgage banking operations of $517,000 in 2003 as compared to
$488,000 in 2002, a 6% increase, and fees from factoring operations of $94,000 in 2003 as compared to $96,000 in 2002, a 2% decrease. Service charge income increased as a result of the $23.8 million or 45% increase in deposit transaction accounts
from $53.0 million at December 31, 2002 to $76.8 million at December 31, 2003. In addition, the Bank offered an overdraft privilege program to certain of its customers, which generated additional fee income. Fees from mortgage banking operations
increased due to the continued favorable mortgage interest rate environment in 2003. Fees from factoring operations decreased due to the decreased emphasis placed on this type of lending by management during the year.



Non-interest Expenses. Total non-interest expense increased from $6.1 million in 2002
to $7.6 million in 2003. This 25% increase was primarily due to the expansion of the Banks branches from seven to eight during 2003, increases in compensation associated with branch expansion and other growth and increases in occupancy and
equipment expenses. These categories accounted for $1.1 million of the $1.5 million increase in non-interest expense. Salaries and benefits expense was $3.9 million for the year ended December 31, 2003, representing an $855,000 or 29% increase over
the $3.0 million recorded for the prior year. Occupancy and equipment costs were $1.4 million for the year ended December 31, 2003 representing a $269,000 or 24% increase over the $1.1 million for the prior year. Data processing cost was $535,000
for the year ended December 31, 2003 representing a $123,000 or 30% increase over the $412,000 for the prior year.



Provision for Income Taxes. Bancshares had tax expense of $807,000, or 36.8% of income before income taxes, for the year ended December 31, 2003 compared to an
income tax benefit in 2002 of $83,000, which was principally due to adjustments to the valuation allowance associated with deferred tax assets. This valuation allowance has been fully released due to managements determination that it is more
likely than not that the entire deferred tax asset will be realized.



Liquidity and Capital Resources



Maintaining adequate
liquidity while managing interest rate risk is the primary goal of Bancshares asset and liability management strategy. Liquidity is the ability to fund the needs of Bancshares borrowers and depositors, pay operating expenses, and meet
regulatory liquidity requirements. Maturing investments, loan and mortgage-backed security principal repayments, deposit growth and borrowings from the Federal Home Loan Bank are presently the main sources of Bancshares liquidity.
Bancshares primary uses of liquidity are to fund loans, operating expenses, deposit withdrawals, repay borrowings and to make investments.



As of December 31, 2004, liquid assets (cash and due from banks, interest-earning deposits with banks, and investment securities available for sale) were approximately
$67.9 million, which represents 17.0% of total assets and 18.7% of total deposits and borrowings. Supplementing this liquidity, Bancshares has available lines of credit from correspondent banks of approximately $15.0 million and an additional line
of credit with the FHLB equal to 15% of assets (subject to available qualified collateral, with borrowings of $12.8 million outstanding from the FHLB at December 31, 2004). At December 31, 2004, outstanding commitments to extend credit were $7.5
million and available line of credit balances totaled $50.4 million. Management believes that the combined aggregate liquidity position of Bancshares is sufficient to meet the funding requirements of loan demand and deposit maturities and
withdrawals in the near term.



Certificates of deposit represented 58.9% of
Bancshares total deposits at December 31, 2004 a decrease from 63.1% at December 31, 2003 due to increased transactional deposit accounts. Bancshares growth strategy will include efforts focused at increasing the relative volume of
transaction deposit accounts. Certificates of deposit of $100,000 or more represented 31.6% of Bancshares total deposits at December 31, 2004. These deposits are generally considered rate sensitive, but management believes most of them are
relationship-oriented. While Bancshares will need to pay competitive rates to retain these deposits at maturity, there are other subjective factors that will determine Bancshares continued retention of those deposits.



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Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The FDIC and the
Federal Reserve, the primary regulators of the Bank and Bancshares, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions
are expected to maintain a level of capital commensurate with the risk profile assigned to its assets in accordance with these guidelines. At December 31, 2004, both Bancshares and First National maintained capital levels exceeding the minimum
levels for adequately capitalized bank holding companies and banks.



Capital
Ratios



Bancshares and the Bank are subject to minimum capital
requirements. As the following table indicates, at December 31, 2004, we exceeded our regulatory capital requirements.



|                                      |  |                      |   |  |                    |   |  |                             |  
|------------------------------------- |  | -------------------- | - |  | ------------------ | - |  | --------------------------- | -
|                                      |  | At December 31, 2004 |  
|                                      |  | ActualRatio          |   |  | MinimumRequirement |   |  | Well-CapitalizedRequirement |  
|American Community Bank:              |  |                      |   |  |                    |   |  |                             |  
|Total risk-based capital ratio        |  | 9.88                 | % |  | 8.00               | % |  | 10.00                       | %
|Tier 1 risk-based capital ratio       |  | 8.84                 | % |  | 4.00               | % |  | 6.00                        | %
|Leverage ratio                        |  | 7.64                 | % |  | 4.00               | % |  | 5.00                        | %
|                                      |  |                      |  
|First National Bank of the Carolinas: |  |                      |   |  |                    |   |  |                             |  
|Total risk-based capital ratio        |  | 14.40                | % |  | 8.00               | % |  | 10.00                       | %
|Tier 1 risk-based capital ratio       |  | 13.15                | % |  | 4.00               | % |  | 6.00                        | %
|Leverage ratio                        |  | 10.59                | % |  | 4.00               | % |  | 5.00                        | %
|                                      |  |                      |  
|American Community Bancshares:        |  |                      |   |  |                    |   |  |                             |  
|Total risk-based capital ratio        |  | 13.54                | % |  | 8.00               | % |  | NA                          |  
|Tier 1 risk-based capital ratio       |  | 11.01                | % |  | 4.00               | % |  | NA                          |  
|Leverage ratio                        |  | 9.45                 | % |  | 4.00               | % |  | NA                          |  



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Asset/Liability Management



Bancshares asset/liability management, or interest rate risk management, program is focused primarily on evaluating and managing the
composition of its assets and liabilities in view of various interest rate scenarios. Factors beyond Bancshares control, such as market interest rates and competition, may also have an impact on Bancshares interest income and interest
expense.



Interest Rate Gap Analysis. As a part of its interest rate
risk management policy, Bancshares calculates an interest rate gap. Interest rate gap analysis is a common, though imperfect, measure of interest rate risk, which measures the relative dollar amounts of interest-earning
assets and interest-bearing liabilities, which reprice within a specific time period, either through maturity or rate adjustment. The gap is the difference between the amounts of such assets and liabilities that are subject to repricing.
A positive gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing within the same
period. Accordingly, in a declining interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a decrease in the yield on its assets greater than the
decrease in the cost of its liabilities and its income should be negatively affected. Conversely, the cost of funds for an institution with a positive gap would generally be expected to increase more slowly than the yield on its assets
in a rising interest rate environment, and such institutions net interest income generally would be expected to be positively affected by rising interest rates. Changes in interest rates generally have the opposite effect on an institution
with a negative gap.



The following table sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at December 31, 2004, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which
reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market
deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to pay out over a five-year decay schedule. In making the gap computations, standard assumptions regarding prepayment rates and deposit decay
rates have been used for interest-earning assets and interest-bearing liabilities. In addition, the table reflects scheduled principal payments, which will be received throughout the lives of the loans. The interest rate sensitivity of the
Companys assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.



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|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---------------------------- | - | ------- | ----------------------------- |  | - | -------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                              |  | Terms to Repricing at December 31, 2004 |        
|                                                                                              |  | 3 Monthsor Less                         |         |   | More Than3 Monthsto 6 Months |   |         | More Than6 Monthsto 12 Months |  |   | Over 12 Months |   |  | Total |        
|                                                                                              |  | (Dollars in thousands)                  |        
|INTEREST EARNING-ASSETS                                                                       |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|Loans Receivable:                                                                             |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|Real estate mortgage loans                                                                    |  | $                                       | 97,368  |   |                              | $ | 2,542   |                               |  | $ | 4,470          |   |  | $     | 47,246  |   |  | $ | 151,626 |  
|Home equity lines of credit                                                                   |  |                                         | 24,575  |   |                              |   |        |                               |  |   |               |   |  |       |        |   |  |   | 24,575  |  
|Commercial and industrial loans                                                               |  |                                         | 67,934  |   |                              |   | 1,796   |                               |  |   | 2,888          |   |  |       | 13,293  |   |  |   | 85,911  |  
|Loans to individuals                                                                          |  |                                         | 13,428  |   |                              |   | 2,528   |                               |  |   | 2,695          |   |  |       | 12,162  |   |  |   | 30,813  |  
|Lease financing, net                                                                          |  |                                         | 1,923   |   |                              |   | 1,433   |                               |  |   | 2,790          |   |  |       | 9,031   |   |  |   | 15,177  |  
|Interest earning deposits with banks                                                          |  |                                         | 6,521   |   |                              |   |        |                               |  |   |               |   |  |       |        |   |  |   | 6,521   |  
|Investment securities                                                                         |  |                                         | 2,381   |   |                              |   | 5,550   |                               |  |   | 1,160          |   |  |       | 44,928  |   |  |   | 54,019  |  
|Non-marketable equity securities                                                              |  |                                         |        |   |                              |   |        |                               |  |   |               |   |  |       | 2,040   |   |  |   | 2,040   |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|Total interest-earning assets                                                                 |  | $                                       | 214,130 |   |                              | $ | 13,849  |                               |  | $ | 14,003         |   |  | $     | 128,700 |   |  | $ | 370,682 |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|INTEREST-BEARING LIABILITIES                                                                  |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|Deposits:                                                                                     |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|Interest-bearing demand                                                                       |  | $                                       | 29,532  |   |                              | $ | 1,311   |                               |  | $ | 2,622          |   |  | $     | 47,205  |   |  | $ | 80,670  |  
|Time                                                                                          |  |                                         | 26,201  |   |                              |   | 23,788  |                               |  |   | 42,303         |   |  |       | 88,202  |   |  |   | 180,494 |  
|Borrowings (1)                                                                                |  |                                         | 32,541  |   |                              |   |        |                               |  |   | 1,000          |   |  |       | 6,710   |   |  |   | 40,251  |  
|Junior subordinated debentures                                                                |  |                                         | 10,310  |   |                              |   |        |                               |  |   |               |   |  |       | 3,608   |   |  |   | 13,918  |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|Total interest-bearing liabilities                                                            |  | $                                       | 98,584  |   |                              | $ | 25,099  |                               |  | $ | 45,925         |   |  | $     | 145,725 |   |  | $ | 315,333 |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |                |   |  |       |         |   |  |   |         |  
|INTEREST SENSITIVITY GAP PER PERIOD                                                           |  | $                                       | 115,546 |   |                              | $ | (11,250 | )                             |  | $ | (31,922        | ) |  | $     | (17,025 | ) |  | $ | 55,349  |  
|                                                                                              |  |                                         |         |   |                             
|CUMULATIVE INTEREST SENSITIVITY GAP                                                           |  | $                                       | 115,546 |   |                              | $ | 104,296 |                               |  | $ | 72,374         |   |  | $     | 55,349  |   |  | $ | 55,349  |  
|                                                                                              |  |                                         |         |   |                             
|CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS                               |  |                                         | 31.17   | % |                              |   | 28.14   | %                             |  |   | 19.52          | % |  |       | 14.93   | % |  |   | 14.93   | %
|                                                                                              |  |                                         |         |   |                             
|CUMULATIVE INTEREST-EARNING ASSETS AS A PERCENTAGE OF CUMULATIVE INTEREST BEARING LIABILITIES |  |                                         | 217.21  | % |                              |   | 184.33  | %                             |  |   | 142.67         | % |  |       | 117.55  | % |  |   | 117.55  | %

---

|(1) | Includes advances from the Federal Home Loan Bank, securities sold under agreement to repurchase and capital lease obligations.
|--- | -------------------------------------------------------------------------------------------------------------------------------



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Critical Accounting Policies and Estimates



Bancshares discussion and analysis of its financial condition and results of operations are based upon its consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Bancshares to make estimates and judgments regarding uncertainties that
affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, Bancshares evaluates its estimates which are based upon historical experience and on other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or conditions.



Bancshares significant accounting policies are described in Note 1 to the consolidated financial statements. Bancshares considers the following accounting policies to be most critical in their potential effect
on its financial position or results of operations:



Allowance for Loan
Losses



The most critical estimate concerns Bancshares allowance for
loan losses. Bancshares records provisions for loan losses based upon known problem loans and estimated deficiencies in the existing loan portfolio. Bancshares methodology for assessing the appropriations of the allowance for loan losses
consists of two key components, which are a specific allowance for identified problem or impaired loans and a formula allowance for the remainder of the portfolio.



Identified problem and impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the
loans effective interest rate, the loans observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible
to significant change. The adequacy of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of Bancshares and other conditions, such as new loan
products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrowers
ability to repay. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the
current operating environment.



Interest Income Recognition



Interest on loans is included in income as earned based upon interest rates applied to
unpaid principal. Interest is generally not accrued on loans 120 days or more past due unless the loans are adequately secured and in the process of collection. Interest is not accrued on other loans when management believes collection is doubtful.
All loans considered impaired are non-accruing. Interest on non-accruing loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on non-accrual status, all
interest previously accrued is reversed against current-period interest income.



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Commitments, Contingencies and Off-Balance Sheet Arrangements



The Banks are a party to financial instruments with off-balance sheet risk including
commitments to extend credit under existing lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.



Off-balance sheet financial instruments whose contract amounts represent credit and interest
rate risk are summarized as follows:



|                                          |  |                        |        |      |   |       
|----------------------------------------- |  | ---------------------- | ------ | ---- | - | ------
|                                          |  | 2004                   |        | 2003
|                                          |  | (Dollars in thousands)
|Capital South Partnership commitment      |  | $                      | 250    |      | $ | 250   
|Commitments to extend credit              |  |                        | 4,175  |      |   | 5,149 
|Standby letters of credit                 |  |                        | 3,368  |      |   | 2,616 
|Undisbursed lines of credit               |  |                        | 34,655 |      |   | 23,875
|Undisbursed portion of construction loans |  |                        | 15,781 |      |   | 10,671
|                                          |  |                        |        |      |   |       
|Total other commitments                   |  | $                      | 58,229 |      | $ | 42,561
|                                          |  |                        |        |      |   |       



The Bank does not have any special
purpose entities or other similar forms of off-balance sheet financing arrangements.



Commitments to originate loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally expire within 30 to 45 days. Most equity line
commitments are for a term of 15 years, and commercial lines of credit are generally renewable on an annual basis. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customers creditworthiness on a case-by-case basis. The amounts of
collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on managements credit evaluation of the borrower.



Related Party Transactions



Bancshares related party transactions for the same three year period have been limited to 1) loans made to executive officers and directors in the ordinary course
of business and 2) the lease of certain buildings at prevailing market rates. At December 31, 2004, Bancshares had loans outstanding to executive officers and directors totaling approximately $7.3 million. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related borrowers. Management does not believe these loans involve more than the normal risk of collectibility or present
other unfavorable features. The $7.3 million in outstanding related party loans represents 2.3% of Bancshares total loan portfolio. Bancshares has never charged-off a loan to a related party.



Recent Accounting Pronouncements



In December 2003, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP also prohibits companies form carrying over or creating a valuation allowance
in the initial accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP is not expected to have a material impact on
the Companys financial position or results of operations.



In December
2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an
expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. For



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Bancshares we anticipate that the provisions of this Statement are effective for the interim reporting period that begins
July 1, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2005. If we had included the cost of employee stock option compensation in our consolidated financial statements, our net income for the fiscal
years ended December 31, 2004, 2003 and 2002 would have decreased by approximately $79,000, $105,000, and $78,000, respectively. Accordingly, the adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial
statements.



The trust preferred securities presently qualify as Tier 1
regulatory capital and are reported in Federal Reserve regulatory reports as a minority interest in a consolidated subsidiary. The junior subordinated debentures do not qualify as Tier 1 regulatory capital. On July 2, 2003, the Board of Governors of
the Federal Reserve issued a letter, SR 03-13, stating that notwithstanding FIN 46, trust preferred securities will continue to be included in Tier 1 capital until notice is given to the contrary. There can be no assurance that the Federal Reserve
will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. In the event of a disallowance, there would be a reduction in the Companys consolidated capital ratios. However, the
Company believes that the Banks would still exceed the regulatory required minimums for capital adequacy purposes.



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ITEM 7  FINANCIAL STATEMENTS



AMERICAN COMMUNITY BANCSHARES, INC.



TABLE OF
CONTENTS



|                                                        |  |         
|------------------------------------------------------- |  | --------
|                                                        |  | Page No.
|Report of Independent Registered Public Accounting Firm |  | 40      
|                                                        | 
|Consolidated Balance Sheets                             |  | 41      
|                                                        | 
|Consolidated Statements of Operations                   |  | 42      
|                                                        | 
|Consolidated Statements of Stockholders Equity         |  | 43      
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | 44      
|                                                        | 
|Notes to Consolidated Financial Statements              |  | 46      



39



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LOGO



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Stockholders and the Board of Directors

American Community Bancshares, Inc. and Subsidiaries

Monroe, North Carolina



We have audited the accompanying consolidated balance sheets of American Community Bancshares, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.



We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Community
Bancshares, Inc. and Subsidiaries at December 31, 2004 and 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.



LOGO



Charlotte, North Carolina

March 14, 2005



40



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003



|                                                                                                                                                |  |      |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                |  | 2004 |             |   | 2003 |  
|ASSETS                                                                                                                                          |  |      |             |   |      |   |             |  
|                                                                                                                                                |  |     
|Cash and due from banks                                                                                                                         |  | $    | 9,511,148   |   |      | $ | 7,329,679   |  
|Interest-earning deposits with banks                                                                                                            |  |      | 6,521,007   |   |      |   | 11,011,931  |  
|Investment securities available for sale, at fair value (cost of $52,002,147 and $50,030,236 at December 31, 2004 and 2003,
respectively)       |  |      | 51,832,859  |   |      |   | 50,178,126  |  
|Investment securities held to maturity, at cost (fair value approximates $2,193,268 and $1,895,671 at December 31, 2004 and 2003,
respectively) |  |      | 2,185,951   |   |      |   | 1,891,368   |  
|                                                                                                                                                |  |     
|Loans                                                                                                                                           |  |      | 307,987,863 |   |      |   | 204,532,505 |  
|Allowance for loan losses                                                                                                                       |  |      | (3,487,548  | ) |      |   | (2,528,825  | )
|                                                                                                                                                |  |      |             |   |      |   |             |  
|NET LOANS                                                                                                                                       |  |      | 304,500,315 |   |      |   | 202,003,680 |  
|                                                                                                                                                |  |     
|Accrued interest receivable                                                                                                                     |  |      | 1,696,701   |   |      |   | 1,131,060   |  
|Bank premises and equipment                                                                                                                     |  |      | 8,740,588   |   |      |   | 5,338,952   |  
|Foreclosed real estate                                                                                                                          |  |      | 311,071     |   |      |   | 116,610     |  
|Non-marketable equity securities, at cost                                                                                                       |  |      | 2,040,299   |   |      |   | 1,041,700   |  
|Goodwill                                                                                                                                        |  |      | 9,838,173   |   |      |   |            |  
|Other assets                                                                                                                                    |  |      | 2,279,530   |   |      |   | 1,209,464   |  
|                                                                                                                                                |  |      |             |   |      |   |             |  
|TOTAL ASSETS                                                                                                                                    |  | $    | 399,457,642 |   |      | $ | 281,252,570 |  
|                                                                                                                                                |  |      |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  |      |             |   |      |   |             |  
|                                                                                                                                                |  |     
|Deposits                                                                                                                                        |  |      |             |   |      |   |             |  
|Demand - noninterest-bearing                                                                                                                    |  | $    | 45,501,369  |   |      | $ | 29,782,031  |  
|Savings                                                                                                                                         |  |      | 11,501,456  |   |      |   | 6,197,384   |  
|Money market and NOW                                                                                                                            |  |      | 69,168,911  |   |      |   | 40,865,287  |  
|Time                                                                                                                                            |  |      | 180,493,620 |   |      |   | 131,318,549 |  
|                                                                                                                                                |  |      |             |   |      |   |             |  
|TOTAL DEPOSITS                                                                                                                                  |  |      | 306,665,356 |   |      |   | 208,163,251 |  
|                                                                                                                                                |  |     
|Borrowings                                                                                                                                      |  |      | 12,777,778  |   |      |   | 13,444,444  |  
|Securities sold under agreement to repurchase                                                                                                   |  |      | 25,762,879  |   |      |   | 19,667,225  |  
|Capital lease obligation                                                                                                                        |  |      | 1,709,896   |   |      |   | 1,707,579   |  
|Accrued expenses and other liabilities                                                                                                          |  |      | 1,651,357   |   |      |   | 581,414     |  
|Trust Preferred Securities                                                                                                                      |  |      |            |   |      |   | 13,500,000  |  
|Junior subordinated deferrable interest debentures                                                                                              |  |      | 13,918,260  |   |      |   |            |  
|                                                                                                                                                |  |      |             |   |      |   |             |  
|TOTAL LIABILITIES                                                                                                                               |  |      | 362,485,526 |   |      |   | 257,063,913 |  
|                                                                                                                                                |  |      |             |   |      |   |             |  
|Stockholders Equity                                                                                                                            |  |      |             |   |      |   |             |  
|Preferred stock, no par value, 1,000,000 shares authorized; none issued                                                                         |  |      |            |   |      |   |            |  
|Common stock, $1 par value, 9,000,000 shares authorized, 3,489,249 and 2,825,709 shares issued and outstanding, respectively                    |  |      | 3,489,249   |   |      |   | 2,825,709   |  
|Additional paid-in capital                                                                                                                      |  |      | 29,054,479  |   |      |   | 19,201,084  |  
|Retained earnings                                                                                                                               |  |      | 4,531,618   |   |      |   | 2,070,985   |  
|Accumulated other comprehensive income (loss)                                                                                                   |  |      | (103,230    | ) |      |   | 90,879      |  
|                                                                                                                                                |  |      |             |   |      |   |             |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                      |  |      | 36,972,116  |   |      |   | 24,188,657  |  
|                                                                                                                                                |  |      |             |   |      |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      |  | $    | 399,457,642 |   |      | $ | 281,252,570 |  
|                                                                                                                                                |  |      |             |   |      |   |             |  



See accompanying notes.



41



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2004, 2003 and 2002



|                                                    |  |      |            |      |   |            |  |   |            |  
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                                    |  | 2004 |            | 2003 |   | 2002       | 
|INTEREST INCOME                                     |  |      |            |      |   |            |  |   |            |  
|Loans, including fees                               |  | $    | 16,387,241 |      | $ | 11,760,641 |  | $ | 10,380,593 |  
|Investment securities:                              |  |      |            |      |   |            |  |   |            |  
|Taxable                                             |  |      | 1,617,946  |      |   | 1,165,636  |  |   | 758,072    |  
|Tax-exempt                                          |  |      | 122,121    |      |   | 53,907     |  |   |           |  
|Interest-earning deposits with banks                |  |      | 89,276     |      |   | 74,781     |  |   | 324,785    |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|TOTAL INTEREST INCOME                               |  |      | 18,216,584 |      |   | 13,054,965 |  |   | 11,463,450 |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|INTEREST EXPENSE                                    |  |      |            |      |   |            |  |   |            |  
|Money market, NOW and savings deposits              |  |      | 404,119    |      |   | 313,515    |  |   | 335,677    |  
|Time deposits                                       |  |      | 4,058,070  |      |   | 3,707,276  |  |   | 4,064,354  |  
|Borrowings                                          |  |      | 545,181    |      |   | 579,540    |  |   | 446,199    |  
|Securities sold under agreement to repurchase       |  |      | 292,543    |      |   | 83,521     |  |   | 3,863      |  
|Capital lease obligation                            |  |      | 140,688    |      |   | 140,506    |  |   | 140,337    |  
|Junior subordinated debentures                      |  |      | 779,595    |      |   |           |  |   |           |  
|Trust preferred securities                          |  |      |           |      |   | 344,751    |  |   | 303,408    |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|TOTAL INTEREST EXPENSE                              |  |      | 6,220,196  |      |   | 5,169,109  |  |   | 5,293,838  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|NET INTEREST INCOME                                 |  |      | 11,996,388 |      |   | 7,885,856  |  |   | 6,169,612  |  
|                                                    |  |      |           
|PROVISION FOR LOAN LOSSES                           |  |      | 573,502    |      |   | 783,611    |  |   | 915,256    |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |      | 11,422,886 |      |   | 7,102,245  |  |   | 5,254,356  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|NON-INTEREST INCOME                                 |  |      |            |      |   |            |  |   |            |  
|Service charges on deposit accounts                 |  |      | 2,305,688  |      |   | 1,739,835  |  |   | 1,231,175  |  
|Mortgage banking operations                         |  |      | 364,506    |      |   | 516,942    |  |   | 488,018    |  
|Accounts receivable financing                       |  |      | 85,194     |      |   | 93,680     |  |   | 95,776     |  
|Gain on sale of investment securities               |  |      | 106,290    |      |   |           |  |   | 40,770     |  
|Gain on sale of assets                              |  |      | 27,504     |      |   |           |  |   |           |  
|Rental income                                       |  |      | 80,320     |      |   | 63,821     |  |   |           |  
|Other                                               |  |      | 367,964    |      |   | 230,190    |  |   | 174,070    |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|TOTAL NON-INTEREST INCOME                           |  |      | 3,337,466  |      |   | 2,644,468  |  |   | 2,029,809  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|NON-INTEREST EXPENSE                                |  |      |            |      |   |            |  |   |            |  
|Salaries and employee benefits                      |  |      | 4,860,411  |      |   | 3,854,140  |  |   | 2,999,608  |  
|Occupancy and equipment                             |  |      | 1,755,367  |      |   | 1,362,645  |  |   | 1,093,897  |  
|Other                                               |  |      | 3,784,705  |      |   | 2,334,913  |  |   | 1,973,106  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|TOTAL NON-INTEREST EXPENSE                          |  |      | 10,400,483 |      |   | 7,551,698  |  |   | 6,066,611  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|INCOME BEFORE INCOME TAXES (BENEFIT)                |  |      | 4,359,869  |      |   | 2,195,015  |  |   | 1,217,554  |  
|                                                    |  |      |           
|INCOME TAXES (BENEFIT)                              |  |      | 1,616,665  |      |   | 807,000    |  |   | (82,657    | )
|                                                    |  |      |            |      |   |            |  |   |            |  
|NET INCOME                                          |  | $    | 2,743,204  |      | $ | 1,388,015  |  | $ | 1,300,211  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|NET INCOME PER COMMON SHARE                         |  |      |            |      |   |            |  |   |            |  
|Basic                                               |  | $    | .84        |      | $ | .49        |  | $ | .51        |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Diluted                                             |  | $    | .75        |      | $ | .48        |  | $ | .51        |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING          |  |      |            |      |   |            |  |   |            |  
|Basic                                               |  |      | 3,274,837  |      |   | 2,824,376  |  |   | 2,569,385  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Diluted                                             |  |      | 3,675,574  |      |   | 2,877,301  |  |   | 2,574,435  |  
|                                                    |  |      |            |      |   |            |  |   |            |  



See accompanying notes.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Years Ended December 31, 2004, 2003 and 2002



|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|------------------------------------------------------- |  | ------------ |  | ------------------------- | --------- |  | ---------------------------- | ---------- | - | ------------------------------------------ | - | --------- | ------------------------ |  | - | -------- | - |  | - | ---------- | -
|                                                        |  | Common stock |  | Additionalpaid-in capital |           |  | Accumulatedearnings(deficit) |            |   | Accumulatedothercomprehensiveincome (loss) |   |           | Totalstockholdersequity | 
|                                                        |  | Shares       |  | Amount                    |           |  |                              |           
|Balance, January 1, 2002                                |  | 1,642,241    |  | $                         | 1,642,241 |  | $                            | 12,239,926 |   |                                            | $ | (391,291  | )                        |  | $ | 86,359   |   |  | $ | 13,577,235 |  
|                                                        |  |              |  |                           |           | 
|Comprehensive income:                                   |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Net income                                              |  |             |  |                           |          |  |                              |           |   |                                            |   | 1,300,211 |                          |  |   |         |   |  |   | 1,300,211  |  
|Unrealized gains on available-for-sale securities, net  |  |             |  |                           |          |  |                              |           |   |                                            |   |          |                          |  |   | 65,330   |   |  |   | 65,330     |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Total comprehensive income                              |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   | 1,365,541  |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Common stock issued pursuant to:                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Stock dividend                                          |  | 164,635      |  |                           | 164,635   |  |                              | (164,635   | ) |                                            |   |          |                          |  |   |         |   |  |   |           |  
|Exercise of stock options                               |  | 17,000       |  |                           | 17,000    |  |                              | 127,930    |   |                                            |   |          |                          |  |   |         |   |  |   | 144,930    |  
|Sale of common stock                                    |  | 1,000,500    |  |                           | 1,000,500 |  |                              | 6,987,999  |   |                                            |   |          |                          |  |   |         |   |  |   | 7,988,499  |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Balance, December 31, 2002                              |  | 2,824,376    |  |                           | 2,824,376 |  |                              | 19,191,220 |   |                                            |   | 908,920   |                          |  |   | 151,689  |   |  |   | 23,076,205 |  
|                                                        |  |              |  |                           |           | 
|Comprehensive income:                                   |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Net income                                              |  |             |  |                           |          |  |                              |           |   |                                            |   | 1,388,015 |                          |  |   |         |   |  |   | 1,388,015  |  
|Unrealized losses on available-for-sale securities, net |  |             |  |                           |          |  |                              |           |   |                                            |   |          |                          |  |   | (60,810  | ) |  |   | (60,810    | )
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Total comprehensive income                              |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   | 1,327,205  |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Cash dividends declared ($.08 per share)                |  |             |  |                           |          |  |                              |           |   |                                            |   | (225,950  | )                        |  |   |         |   |  |   | (225,950   | )
|                                                        |  |              |  |                           |           | 
|Common stock issued pursuant to:                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Exercise of stock options                               |  | 1,333        |  |                           | 1,333     |  |                              | 9,864      |   |                                            |   |          |                          |  |   |         |   |  |   | 11,197     |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Balance, December 31, 2003                              |  | 2,825,709    |  |                           | 2,825,709 |  |                              | 19,201,084 |   |                                            |   | 2,070,985 |                          |  |   | 90,879   |   |  |   | 24,188,657 |  
|                                                        |  |              |  |                           |           | 
|Comprehensive income:                                   |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Net income                                              |  |             |  |                           |          |  |                              |           |   |                                            |   | 2,743,204 |                          |  |   |         |   |  |   | 2,743,204  |  
|Unrealized losses on available-for-sale securities, net |  |             |  |                           |          |  |                              |           |   |                                            |   |          |                          |  |   | (194,109 | ) |  |   | (194,109   | )
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Total comprehensive income                              |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   | 2,549,095  |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Cash dividends declared ($.10 per share)                |  |             |  |                           |          |  |                              |           |   |                                            |   | (282,571  | )                        |  |   |         |   |  |   | (282,571   | )
|                                                        |  |              |  |                           |           | 
|Purchase of FNB Bancshares, Inc.                        |  | 617,343      |  |                           | 617,343   |  |                              | 9,571,919  |   |                                            |   |          |                          |  |   |         |   |  |   | 10,189,262 |  
|                                                        |  |              |  |                           |           | 
|Common stock issued pursuant to:                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Exercise of stock options                               |  | 34,997       |  |                           | 34,997    |  |                              | 175,076    |   |                                            |   |          |                          |  |   |         |   |  |   | 210,073    |  
|Exercise of warrants                                    |  | 11,200       |  |                           | 11,200    |  |                              | 106,400    |   |                                            |   |          |                          |  |   |         |   |  |   | 117,600    |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  
|Balance, December 31, 2004                              |  | 3,489,249    |  | $                         | 3,489,249 |  | $                            | 29,054,479 |   |                                            | $ | 4,531,618 |                          |  | $ | (103,230 | ) |  | $ | 36,972,116 |  
|                                                        |  |              |  |                           |           |  |                              |            |   |                                            |   |           |                          |  |   |          |   |  |   |            |  



See accompanying notes.



43



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2004, 2003 and 2002



|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                           |  | 2004 |             |   | 2003 |   |             | 2002 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                                 |  | $    | 2,743,204   |   |      | $ | 1,388,015   |      |  | $ | 1,300,211   |  
|Adjustments to reconcile net income to net cash provided by operating activities:          |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                              |  |      | 1,202,223   |   |      |   | 1,003,987   |      |  |   | 569,035     |  
|Provision for loan losses                                                                  |  |      | 573,502     |   |      |   | 783,611     |      |  |   | 915,256     |  
|Deferred income taxes                                                                      |  |      | 191,842     |   |      |   | 142,939     |      |  |   | (147,000    | )
|Gain on sale of investment securities                                                      |  |      | (106,290    | ) |      |   |            |      |  |   | (40,770     | )
|Loss on sale of foreclosed real estate                                                     |  |      | 6,599       |   |      |   | 22,882      |      |  |   | 516         |  
|(Gain) loss on disposal of fixed assets                                                    |  |      | (26,856     | ) |      |   | 760         |      |  |   |            |  
|Interest added to capital lease obligation                                                 |  |      | 2,317       |   |      |   | 2,134       |      |  |   | 1,966       |  
|Change in assets and liabilities:                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Increase in accrued interest receivable                                                    |  |      | (319,870    | ) |      |   | (176,457    | )    |  |   | (39,263     | )
|(Increase) decrease in other assets                                                        |  |      | 477,557     |   |      |   | (260,132    | )    |  |   | (354,350    | )
|Increase (decrease) in accrued expenses and other liabilities                              |  |      | 34,845      |   |      |   | (351,513    | )    |  |   | 166,710     |  
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                  |  |      | 4,779,073   |   |      |   | 2,556,226   |      |  |   | 2,372,311   |  
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Purchases of securities available for sale                                                 |  |      | (22,299,658 | ) |      |   | (55,073,513 | )    |  |   | (40,506,070 | )
|Purchases of securities held to maturity                                                   |  |      | (300,000    | ) |      |   | (1,894,095  | )    |  |   |            |  
|Proceeds from sales of securities available for sale                                       |  |      | 10,837,401  |   |      |   |            |      |  |   | 6,041,478   |  
|Proceeds from maturities, calls and principal re-payments of securities available for sale |  |      | 16,593,908  |   |      |   | 31,782,975  |      |  |   | 19,660,632  |  
|Net increase in loans from originations and repayments                                     |  |      | (47,206,857 | ) |      |   | (39,588,410 | )    |  |   | (24,887,324 | )
|Purchases of bank premises and equipment                                                   |  |      | (1,151,381  | ) |      |   | (1,206,596  | )    |  |   | (1,126,293  | )
|Proceeds from sale of bank premises and equipment                                          |  |      | 148,554     |   |      |   |            |      |  |   |            |  
|Proceeds from sale of foreclosed real estate                                               |  |      | 89,401      |   |      |   | 98,837      |      |  |   | 158,823     |  
|Investment in non-marketable equity securities                                             |  |      | (277,738    | ) |      |   |            |      |  |   |            |  
|Purchase of Federal Home Loan Bank stock                                                   |  |      | (304,700    | ) |      |   | (341,700    | )    |  |   |            |  
|Net cash disbursed in business combination                                                 |  |      | (2,706,716  | ) |      |   |            |      |  |   |            |  
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|NET CASH USED BY INVESTING ACTIVITIES                                                      |  |      | (46,577,786 | ) |      |   | (66,222,502 | )    |  |   | (40,658,754 | )
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in demand deposits                                                            |  |      | 24,312,865  |   |      |   | 23,807,079  |      |  |   | 3,583,653   |  
|Net increase in time deposits                                                              |  |      | 12,921,709  |   |      |   | 10,041,274  |      |  |   | 15,822,642  |  
|Proceeds from issuance of common stock                                                     |  |      | 327,673     |   |      |   | 11,197      |      |  |   | 8,133,429   |  
|Proceeds from issuance of trust preferred securities                                       |  |      |            |   |      |   | 10,000,000  |      |  |   | 1,500,000   |  
|Advances from Federal Home Loan Bank                                                       |  |      |            |   |      |   | 7,000,000   |      |  |   |            |  
|Repayment of Federal Home Loan Bank Advances                                               |  |      | (2,666,666  | ) |      |   | (2,555,556  | )    |  |   |            |  
|Cash dividends paid on common stock                                                        |  |      | (282,571    | ) |      |   | (225,950    | )    |  |   |            |  
|Net increase in securities sold under agreement to repurchase                              |  |      | 4,876,248   |   |      |   | 17,091,628  |      |  |   | 2,575,597   |  
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                  |  |      | 39,489,258  |   |      |   | 65,169,672  |      |  |   | 31,615,321  |  
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       |  |      | (2,309,455  | ) |      |   | 1,503,396   |      |  |   | (6,671,122  | )
|                                                                                           |  |      |            
|CASH AND CASH EQUIVALENTS, BEGINNING                                                       |  |      | 18,341,610  |   |      |   | 16,838,214  |      |  |   | 23,509,336  |  
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|CASH AND CASH EQUIVALENTS, ENDING                                                          |  | $    | 16,032,155  |   |      | $ | 18,341,610  |      |  | $ | 16,838,214  |  
|                                                                                           |  |      |             |   |      |   |             |      |  |   |             |  



See accompanying notes.



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##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended
December 31, 2004, 2003 and 2002



|                                                                       |  |      |             |   |      |   |           |      |  |   |          
|---------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                                       |  | 2004 |             |   | 2003 |   |           | 2002
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                      |  |      |             |   |      |   |           |      |  |   |          
|                                                                       |  |      |            
|Purchase of FNB Bancshares, Inc.                                       |  |      |             |   |      |   |           |      |  |   |          
|Loans, net of reserves                                                 |  | $    | (56,153,741 | ) |      | $ |          |      |  | $ |         
|Investment securities available for sale                               |  |      | (7,421,103  | ) |      |   |          |      |  |   |         
|Non-marketable equity securities                                       |  |      | (416,161    | ) |      |   |          |      |  |   |         
|Bank premises and equipment                                            |  |      | (3,070,947  | ) |      |   |          |      |  |   |         
|Deferred tax asset                                                     |  |      | (108,308    | ) |      |   |          |      |  |   |         
|Other assets acquired                                                  |  |      | (1,409,580  | ) |      |   |          |      |  |   |         
|Goodwill                                                               |  |      | (9,838,173  | ) |      |   |          |      |  |   |         
|Deposits                                                               |  |      | 61,267,531  |   |      |   |          |      |  |   |         
|Securities sold under agreement to repurchase                          |  |      | 1,219,406   |   |      |   |          |      |  |   |         
|Borrowings                                                             |  |      | 2,000,000   |   |      |   |          |      |  |   |         
|Other liabilities assumed                                              |  |      | 1,035,098   |   |      |   |          |      |  |   |         
|Fair value of options exchanged                                        |  |      | 1,615,865   |   |      |   |          |      |  |   |         
|Issuance of stock                                                      |  |      | 8,573,397   |   |      |   |          |      |  |   |         
|                                                                       |  |      |             |   |      |   |           |      |  |   |          
|Net cash distributed in business combination                           |  | $    | (2,706,716  | ) |      | $ |          |      |  | $ |         
|                                                                       |  |      |             |   |      |   |           |      |  |   |          
|Cash paid during the year for:                                         |  |      |             |   |      |   |           |      |  |   |          
|Interest                                                               |  | $    | 6,046,108   |   |      | $ | 5,132,471 |      |  | $ | 5,278,604
|Income taxes                                                           |  |      | 1,168,952   |   |      |   | 1,130,523 |      |  |   | 241,379  
|                                                                       |  |      |            
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |  |      |             |   |      |   |           |      |  |   |          
|Transfer of loans to foreclosed assets                                 |  | $    | 290,461     |   |      | $ | 116,610   |      |  |   | 494,309  
|Change in unrealized gain on available-for-sale securities, net of tax |  |      | (194,109    | ) |      |   | (60,810   | )    |  |   | 65,330   



See accompanying notes.



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##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002



NOTE 1 - ORGANIZATION AND OPERATIONS



In April 2000, American Community Bancshares, Inc. (Bancshares) was formed as a holding company for American Community Bank. Upon formation, one share of
Bancshares $1 par value common stock was exchanged for each of the then outstanding 1,492,063 shares of American Community Banks $5 par value common stock. Bancshares currently has no material operations and conducts no business on its
own other than owning its wholly owned subsidiaries, American Community Bank and First National Bank of the Carolinas.



American Community Bank (ACB) was incorporated on November 13, 1998 and began banking operations on November 16, 1998. The Bank is engaged in general
commercial and retail banking in Union and Mecklenburg Counties, North Carolina, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of
Banks. The Bank undergoes periodic examinations by those regulatory authorities.



First National Bank of the Carolinas (FNB) commenced operations on October 18, 1996 and was purchased by Bancshares on April 15, 2004. The Bank provides banking services to domestic markets principally in Cherokee County, South
Carolina, and is operating under the rules and regulations of the Federal Deposit Insurance Corporation.



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The accompanying
consolidated financial statements include the accounts of American Community Bancshares, Inc., American Community Bank and First National Bank of the Carolinas, together referred to herein as the Company. All significant inter-company
transactions and balances are eliminated in consolidation.



Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses.



Cash Equivalents



For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet captions cash and due from banks and interest-earning deposits with banks.



Investment Securities



Investment securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to maturity. Available-for-sale securities are reported at fair value and consist of securities not classified as trading securities or as held-to-maturity securities.
Unrealized holding gains and losses on available-for-sale securities, net of deferred income taxes, are reported as a net amount in other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the
specific-identification method.



Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings.



Premiums and discounts are recognized in interest income using the interest method over the
period to maturity.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)



Loans



Loans that management has the intent and ability to hold for the foreseeable future or until
maturity are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is
accrued on the unpaid principal balance outstanding. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired/nonaccrual loans is
discontinued when, in managements opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received after the principal balance has been fully collected. Loans are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of
principal and interest. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.



Allowance for Loan Losses



The allowance for loan losses is established as probable losses are estimated to have occurred through a provision for loan losses charged to earnings. The provision for
loan losses is based upon managements best estimate of the amount needed to maintain the allowance for loan losses at an adequate level. Loan losses are charged against the allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.



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 the current status of the portfolio, historical experience, the
nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Management segments the loan portfolio by loan type
in considering each of the aforementioned factors and their impact upon the level of the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require American Community Bank to recognize changes to the allowance for loan losses based on their judgments about
information available to them at the time of their examination.



Loans are
considered impaired when it is probable that all amounts due under the contractual terms of the loan will not be collected. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the
historical effective interest rate, or upon the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the
allowance for loan losses.



Foreclosed Real Estate



Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is
initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations are included in other expenses.



Bank Premises and Equipment



Bank premises and equipment are
stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the shorter of the estimated useful lives of the assets or, for those assets leased under capital leases, the lease term. Estimated useful
lives are 30 years for buildings and 3 to 7 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and
maintenance costs are charged to operations as incurred, and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or
losses are reflected in current operations.



Non-marketable equity
securities



As a requirement for membership, the Banks invest in stock of
the Federal Home Loan Bank of Atlanta (FHLB), Bankers Bank, and the Federal Reserve Bank of Richmond. In addition, the Banks also invest in other equity investments for which the stock is not publicly traded. These investments are
carried at cost.





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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)



Income Taxes



Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the
temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.



Stock Compensation Plans



Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees,whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee
must pay to acquire the stock. Stock options issued under the Companys stock option plans have no intrinsic value at the grant date and, under Opinion No. 25, no compensation cost is recognized for them. The Company has elected to continue
with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied.



At December 31, 2004, the Company had four stock-based compensation plans which are more
fully described in Note 17. The Company accounts for compensation costs related to the Companys stock option plans using the intrinsic value method. Therefore, no compensation costs have been recognized for stock option awards because the
options are granted at exercise prices based on the market value of the Companys stock on the date of grant. Had compensation costs for the Companys stock option plans been determined using the fair value method, the Companys pro
forma net income would have been as follows:



|                                                                                                                                      |  |                        |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                                                                      |  | 2004                   |       |   | 2003 |   |       | 2002 | 
|                                                                                                                                      |  | (Dollars in thousands) |      
|Net income:                                                                                                                           |  |                        |       |   |      |   |       |      |  |   |       |  
|As reported                                                                                                                           |  | $                      | 2,743 |   |      | $ | 1,388 |      |  | $ | 1,300 |  
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax
effects |  |                        | (79   | ) |      |   | (105  | )    |  |   | (78   | )
|                                                                                                                                      |  |                        |       |   |      |   |       |      |  |   |       |  
|Pro forma                                                                                                                             |  | $                      | 2,664 |   |      | $ | 1,283 |      |  | $ | 1,222 |  
|                                                                                                                                      |  |                        |       |   |      |   |       |      |  |   |       |  
|Basic net income per share:                                                                                                           |  |                        |       |   |      |   |       |      |  |   |       |  
|As reported                                                                                                                           |  | $                      | 0.84  |   |      | $ | 0.49  |      |  | $ | 0.51  |  
|Proforma                                                                                                                              |  |                        | 0.81  |   |      |   | 0.45  |      |  |   | 0.48  |  
|                                                                                                                                      |  |                        |      
|Diluted net income per share:                                                                                                         |  |                        |       |   |      |   |       |      |  |   |       |  
|As reported                                                                                                                           |  | $                      | 0.75  |   |      | $ | 0.48  |      |  | $ | 0.51  |  
|Proforma                                                                                                                              |  |                        | 0.72  |   |      |   | 0.45  |      |  |   | 0.47  |  



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)



Comprehensive Income



Accounting principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income. The Companys only component of accumulated other comprehensive income is unrealized gains (losses) on available-for-sale securities.



The components of other comprehensive income and related tax effects are as follows:



|                                                                   |  |      |          |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------ |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                   |  | 2004 |          |   | 2003 |   |         | 2002 | 
|Unrealized holding gains (losses) on available-for-sale securities |  | $    | (207,647 | ) |      | $ | (81,941 | )    |  | $ | 130,067 |  
|Tax effect                                                         |  |      | 78,906   |   |      |   | 21,131  |      |  |   | (37,829 | )
|                                                                   |  |      |          |   |      |   |         |      |  |   |         |  
|Net of tax amount                                                  |  |      | (128,741 | ) |      |   | (60,810 | )    |  |   | 92,238  |  
|                                                                   |  |      |          |   |      |   |         |      |  |   |         |  
|Reclassification adjustment for losses (gains) realized in income  |  |      | (106,290 | ) |      |   |        |      |  |   | (40,770 | )
|Tax effect                                                         |  |      | 40,922   |   |      |   |        |      |  |   | 13,862  |  
|                                                                   |  |      |          |   |      |   |         |      |  |   |         |  
|Net of tax amount                                                  |  |      | (65,368  | ) |      |   |        |      |  |   | (26,908 | )
|                                                                   |  |      |          |   |      |   |         |      |  |   |         |  
|Total net of tax amount                                            |  | $    | (194,109 | ) |      | $ | (60,810 | )    |  | $ | 65,330  |  
|                                                                   |  |      |          |   |      |   |         |      |  |   |         |  



Per Share Results



Basic and diluted net income per common share have been computed by dividing net income
for each period by the weighted average number of shares of common stock outstanding during each period after retroactively adjusting for the stock dividends.



Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate solely to outstanding stock options and warrants and are determined using the treasury stock method.



Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations
divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:



|                                                                                                                             |  |           |  |           |  |          
|---------------------------------------------------------------------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                                                                             |  | 2004      |  | 2003      |  | 2002     
|Weighted average number of common shares used in computing basic net income per share                                        |  | 3,274,837 |  | 2,824,376 |  | 2,569,385
|                                                                                                                             |  |           | 
|Effect of dilutive stock options and warrants                                                                                |  | 400,737   |  | 52,925    |  | 5,050    
|                                                                                                                             |  |           |  |           |  |          
|Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share |  | 3,675,574 |  | 2,877,301 |  | 2,574,435
|                                                                                                                             |  |           |  |           |  |          



For the year ended December 31, 2004,
there were no options or warrants that were antidilutive for the year. During the years ended December 31, 2003 and 2002, there were 19,000 and 316,352 options, respectively, that were antidilutive since the exercise price exceeded the average
market price for the year. The antidilutive options and warrants have been omitted from the calculation of diluted earnings per share for each period indicated.





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##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)



Segment Reporting



SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information,
requires management to report selected financial and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Generally,
disclosures are required for segments internally identified to evaluate performance and resource allocation. In all material respects, the Companys operations are entirely within the commercial banking segment, and the financial statements
presented herein reflect the results of that segment. Also, the Company has no foreign operations or customers.



Recent Accounting Pronouncements



FIN 46



In January 2003, the FASB issued FASB interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. This interpretation addresses the consolidation by business enterprises of variable interest entities as
defined in the interpretation. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provision of FIN 46 and to exempt certain entities from its requirements. FIN 46R is effective for public entities that have
interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by small business issuers to variable interest entities other than special-purpose entities is required for
periods ending after December 15, 2004. FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the
beginning of the first year restated. FIN 46R also required certain disclosures of an entitys relationship with variable interest entities.



The Company adoption of FIN 46R resulted in deconsolidation of the Companys trust preferred subsidiaries, American Community Capital Trust I (Capital Trust
I) and American Community Capital Trust II, Ltd (Capital Trust II) which were created for the sole purpose of issuing trust preferred securities. Historically, the junior subordinated debentures issued by the Company to the Trusts
were included in trust preferred securities in the consolidated balance sheets. As a result of the implementation of FIN 46R, the Companys investment in the common equity of the trusts is now included in the consolidated balance sheets in
other assets. In addition, trust preferred securities have been deconsolidated and junior subordinated debentures are now reflected on the balance sheet.



EITF 03-01



In March 2004, the Emerging Issues Task Force (EITF) released EITF Issue 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.The Issue provides guidance
for determining whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. The recognition and measurement guidance for other-than-temporary impairment has been delayed by the
issuance of FASB Staff Position EITF 03-1-1 on September 30, 2004. The adoption of Issue 03-1 did not result in any other-than-temporary impairment.



SAB 105



On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments(SAB 105). SAB 105 clarifies existing accounting practices relating
to the valuation of issued loan commitments, including interest rate lock commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of
Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan
commitments entered into after March 31, 2004. The adoption of SAB 105 did not have a material impact on the consolidated financial statements.



Reclassifications



Certain amounts in the 2003 and 2002 consolidated financial statements have been reclassified to conform to the 2004 presentation. The reclassifications had no effect on net income or stockholders equity as
previously reported.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 3 - INVESTMENT SECURITIES



The following is a summary of the securities portfolio by major classification at
December 31, 2004 and 2003:



|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|----------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | ---------- | ------- |  | - | ----------
|                                    |  | 2004         
|                                    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Securities available for sale:      |  |               |            |                      |   |                       |  |            |         |  |   |           
|U. S. Government agencies           |  | $             | 5,802,765  |                      | $ | 1,501                 |  | $          | 26,181  |  | $ | 5,778,085 
|Mortgage-backed securities          |  |               | 44,690,312 |                      |   | 85,199                |  |            | 262,564 |  |   | 44,512,947
|State and municipal bonds           |  |               | 1,102,262  |                      |   | 30,242                |  |            |        |  |   | 1,132,504 
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|                                    |  |               | 51,595,339 |                      |   | 116,942               |  |            | 288,745 |  |   | 51,423,536
|                                    |  |               |            |                     
|Marketable equity securities        |  |               | 406,808    |                      |   | 2,515                 |  |            |        |  |   | 409,323   
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|Total securities available for sale |  | $             | 52,002,147 |                      | $ | 119,457               |  | $          | 288,745 |  | $ | 51,832,859
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|                                    |  |               |            |                     
|                                    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Securities held to maturity:        |  |               |            |                      |   |                       |  |            |         |  |   |           
|State and municipal bonds           |  | $             | 2,185,951  |                      | $ | 12,132                |  | $          | 4,815   |  | $ | 2,193,268 
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|Total securities held to maturity   |  | $             | 2,185,951  |                      | $ | 12,132                |  | $          | 4,815   |  | $ | 2,193,268 
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|                                    | 
|                                    |  | 2003         
|                                    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Securities available for sale:      |  |               |            |                      |   |                       |  |            |         |  |   |           
|U. S. Government agencies           |  | $             | 11,307,869 |                      | $ | 70,701                |  | $          | 9,524   |  | $ | 11,369,046
|Mortgage-backed securities          |  |               | 38,722,367 |                      |   | 176,471               |  |            | 89,758  |  |   | 38,809,080
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|Total securities available for sale |  | $             | 50,030,236 |                      | $ | 247,172               |  | $          | 99,282  |  | $ | 50,178,126
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|                                    |  |               |            |                     
|                                    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Securities held to maturity:        |  |               |            |                      |   |                       |  |            |         |  |   |           
|State and municipal bonds           |  | $             | 1,891,368  |                      | $ | 8,326                 |  | $          | 4,023   |  | $ | 1,895,671 
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           
|Total securities held to maturity   |  | $             | 1,891,368  |                      | $ | 8,326                 |  | $          | 4,023   |  | $ | 1,895,671 
|                                    |  |               |            |                      |   |                       |  |            |         |  |   |           





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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 3 - INVESTMENT SECURITIES (Continued)



The amortized cost and fair values of securities at December 31, 2004 by
contractual maturity are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.



|                                       |  |                        |        |           |   |       
|-------------------------------------- |  | ---------------------- | ------ | --------- | - | ------
|                                       |  | At December 31, 2004  
|                                       |  | AmortizedCost          |        | FairValue
|                                       |  | (Dollars in thousands)
|Due within one year                    |  | $                      | 305    |           | $ | 304   
|Due after one year through five years  |  |                        | 6,114  |           |   | 6,089 
|Due after five years through ten years |  |                        | 14,553 |           |   | 14,529
|Due after ten years                    |  |                        | 32,809 |           |   | 32,695
|                                       |  |                        |        |           |   |       
|Total                                  |  | $                      | 53,781 |           | $ | 53,617
|                                       |  |                        |        |           |   |       



For purposes of the maturity table,
mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier
than their weighted-average contractual maturities because of principal prepayments.



For the year ended December 31, 2004, proceeds from sales of investment securities available for sale amounted to $10,837,401. Gross realized gains in 2004 from these sales amounted to $106,290. For the year ended December 31, 2002,
proceeds from sales of investment securities available for sale amounted to $6,041,478. Gross realized gains in 2002 from these sales amounted to $40,770. There were no sales of investment securities for the year ended December 31, 2003.



Securities with carrying values of $5,953,562 and $177,211 at December 31, 2004 and 2003,
respectively, were pledged to secure public monies on deposit as required by law.



The following table shows investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2004 and
2003. The unrealized losses on investment securities are a result of volatility in the market during 2004. All unrealized losses on investment securities are considered by management to be temporary given the credit ratings on these investment
securities and the short duration of the unrealized loss.



|                                      |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|------------------------------------- |  | ------------------- | ---------- | ----------------- | - | ---------- |  | ---------------- | --------- | ---------- | - | ---------------- |  | - | ---------- |  | - | -------
|                                      |  | 2004               
|                                      |  | Less Than 12 Months |            | 12 Months or More |   | Total     
|                                      |  | Fair value          |            | Unrealizedlosses  |   | Fair value |  | Unrealizedlosses |           | Fair value |   | Unrealizedlosses
|Securities available for sale:        |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|U.S. government agencies              |  | $                   | 3,778,705  |                   | $ | 26,181     |  | $                |          |            | $ |                 |  | $ | 3,778,705  |  | $ | 26,181 
|Mortgage-backed securities            |  |                     | 35,187,866 |                   |   | 248,105    |  |                  | 1,135,379 |            |   | 14,459           |  |   | 36,323,245 |  |   | 262,564
|                                      |  |                     |            |                   |   |           
|Held to maturity:                     |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|State and political                   |  |                     | 1,124,466  |                   |   | 4,815      |  |                  |          |            |   |                 |  |   | 1,124,466  |  |   | 4,815  
|                                      |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 40,091,037 |                   | $ | 279,101    |  | $                | 1,135,379 |            | $ | 14,459           |  | $ | 41,226,416 |  | $ | 293,560
|                                      |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|                                      | 
|                                      |  | 2003               
|                                      |  | Less Than 12 Months |            | 12 Months or More |   | Total     
|                                      |  | Fair value          |            | Unrealizedlosses  |   | Fair value |  | Unrealizedlosses |           | Fair value |   | Unrealizedlosses
|Securities available for sale:        |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|U.S. government agencies              |  | $                   | 1,992,190  |                   | $ | 9,524      |  | $                |          |            | $ |                 |  | $ | 1,992,190  |  | $ | 9,524  
|Mortgage-backed securities            |  |                     | 18,826,009 |                   |   | 89,758     |  |                  |          |            |   |                 |  |   | 18,826,009 |  |   | 89,758 
|                                      |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 20,818,199 |                   | $ | 99,282     |  | $                |          |            | $ |                 |  | $ | 20,818,199 |  | $ | 99,282 
|                                      |  |                     |            |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 4  NON-MARKETABLE EQUITY SECURITIES
CARRIED AT COST



The aggregate cost of the Companys cost method
investments totaled $2,040,299 at December 31, 2004. Investments with an aggregate cost of $527,738 were not evaluated for impairment because (a) the Company did not estimate the fair value of those investments in accordance with paragraphs 14 and
15 of Statement 107 and (b) the Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of those investments. Of the remaining $1,512,561 of investments, consisting of
securities in Federal Home Loan Bank, the Federal Reserve Bank and Bankers Bank, amounted to $1,293,400, $143,300 and $75,861, respectively, at December 31, 2004. The Company estimated that the fair value equaled or exceeded the cost of these
investments (that is, the investments were not impaired).



NOTE 5 - LOANS
AND THE ALLOWANCE FOR LOAN LOSSES



Following is a summary of loans at
December 31, 2004 and 2003:



|                                |  |        |             |   |         |        |   |        |   |             |         |  |        |  
|------------------------------- |  | ------ | ----------- | - | ------- | ------ | - | ------ | - | ----------- | ------- |  | ------ | -
|                                |  | 2004   |             |   | 2003    |       
|                                |  | Amount |             |   | Percent |        |   | Amount |   |             | Percent | 
|Real estate mortgage loans:     |  |        |             |   |         |        |   |        |   |             |         |  |        |  
|1-4 family                      |  | $      | 27,160,666  |   |         | 8.81   | % |        | $ | 15,894,273  |         |  | 7.77   | %
|Commercial mortgage             |  |        | 84,621,067  |   |         | 27.47  | % |        |   | 80,394,777  |         |  | 39.32  | %
|Construction/development        |  |        | 39,843,601  |   |         | 12.93  | % |        |   | 28,469,155  |         |  | 13.92  | %
|Home equity lines of credit     |  |        | 24,575,318  |   |         | 7.98   | % |        |   | 16,526,220  |         |  | 8.08   | %
|Commercial and industrial loans |  |        | 85,911,232  |   |         | 27.88  | % |        |   | 41,120,855  |         |  | 20.11  | %
|Loans to individuals            |  |        | 30,812,984  |   |         | 10.00  | % |        |   | 8,671,761   |         |  | 4.25   | %
|Lease financing, net            |  |        | 15,177,153  |   |         | 4.93   | % |        |   | 13,396,864  |         |  | 6.55   | %
|                                |  |        |             |   |         |        |   |        |   |             |         |  |        |  
|Subtotal                        |  |        | 308,102,021 |   |         | 100.00 | % |        |   | 204,473,905 |         |  | 100.00 | %
|                                |  |        |             |   |         |        |   |        |   |             |         |  |        |  
|Allowance for loan losses       |  |        | (3,487,548  | ) |         |        |   |        |   | (2,528,825  | )       |  |        |  
|Net unamortized deferred costs  |  |        | (114,158    | ) |         |        |   |        |   | 58,600      |         |  |        |  
|                                |  |        |             |   |         |        |   |        |   |             |         |  |        |  
|Total                           |  | $      | 304,500,315 |   |         |        |   |        | $ | 202,003,680 |         |  |        |  
|                                |  |        |             |   |         |        |   |        |   |             |         |  |        |  



Loans are primarily made in Union and
Mecklenburg Counties of North Carolina and Cherokee County of South Carolina. Real estate loans can be affected by the condition of the local real estate market. Commercial and installment loans can be affected by the local economic conditions.



At December 31, 2004 and 2003, respectively, there were $1,116,893 and
$596,563 of loans past due 90 days or more which were still accruing interest. Impaired loans consist entirely of nonaccrual loans which aggregated approximately $881,280 and $330,067 and had related allowances for loan losses of $121,678 and
$129,057 at December 31, 2004 and 2003, respectively. The average recorded investment in impaired loans during the years ended December 31, 2004 and 2003 was $518,000 and $244,000, respectively. Nonaccrual loans did not materially affect interest
income for the years ended December 31, 2004, 2003 and 2002.



The Company has
granted loans to certain directors and executive officers of the Bank and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with other borrowers and, in managements opinion, do not involve more than the normal risk of collectibility. All loans to directors and executive officers or their interests are submitted to the Board of Directors for approval. A
summary of loans to directors, executive officers and their related interests follows:



|                                                                |  |   |            |  
|--------------------------------------------------------------- |  | - | ---------- | -
|Loans to directors and officers as a group at January 1, 2004   |  | $ | 5,451,760  |  
|Disbursements during year ended December 31, 2004               |  |   | 3,023,880  |  
|Amounts collected during year ended December 31, 2004           |  |   | (1,164,735 | )
|                                                                |  |   |            |  
|Loans to directors and officers as a group at December 31, 2004 |  | $ | 7,310,905  |  
|                                                                |  |   |            |  



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 5 - LOANS AND THE ALLOWANCE FOR LOAN
LOSSES (Continued)



At December 31, 2004, the Company had pre-approved but
unused lines of credit totaling $3,192,966 to directors, executive officers and their related interests.



An analysis of the allowance for loan losses follows:



|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                              |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Balance at beginning of year                  |  | $    | 2,528,825 |   |      | $ | 2,375,000 |      |  | $ | 1,736,000 |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Provision charged to operations               |  |      | 573,502   |   |      |   | 783,611   |      |  |   | 915,256   |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Charge-offs                                   |  |      | 339,980   |   |      |   | 664,741   |      |  |   | 314,564   |  
|Recoveries                                    |  |      | (40,124   | ) |      |   | (34,955   | )    |  |   | (38,308   | )
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Net charge-offs                               |  |      | 299,856   |   |      |   | 629,786   |      |  |   | 276,256   |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Allowance acquired from First National merger |  |      | 685,077   |   |      |   |          |      |  |   |          |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at end of year                        |  | $    | 3,487,548 |   |      | $ | 2,528,825 |      |  | $ | 2,375,000 |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  



NOTE 6 - BANK PREMISES AND
EQUIPMENT



Following is a summary of bank premises and equipment at
December 31, 2004 and 2003:



|                                          |  |      |            |   |      |   |            |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                          |  | 2004 |            |   | 2003 |  
|Land                                      |  | $    | 1,711,328  |   |      | $ | 661,668    |  
|Buildings and leasehold improvements      |  |      | 5,917,184  |   |      |   | 3,589,226  |  
|Furniture and equipment                   |  |      | 3,348,280  |   |      |   | 2,802,305  |  
|Construction in progress                  |  |      | 59,872     |   |      |   |           |  
|                                          |  |      |            |   |      |   |            |  
|                                          |  |      | 11,036,664 |   |      |   | 7,053,199  |  
|Accumulated depreciation and amortization |  |      | (2,296,076 | ) |      |   | (1,714,247 | )
|                                          |  |      |            |   |      |   |            |  
|Total                                     |  | $    | 8,740,588  |   |      | $ | 5,338,952  |  
|                                          |  |      |            |   |      |   |            |  



Depreciation and amortization expense
amounting to $769,584, $505,528 and $434,077 for the years ended December 31, 2004, 2003 and 2002, respectively, is included in occupancy and equipment expense.



NOTE 7 - DEPOSITS



Time deposits in denominations of $100,000 or more were $96,903,175 and $66,967,693 at December 31, 2004 and 2003, respectively.



At December 31, 2004, the scheduled maturities of certificates of deposit were as follows:



|           |  |                   |            |                  |   |            |  |   |            
|---------- |  | ----------------- | ---------- | ---------------- | - | ---------- |  | - | -----------
|           |  | Less than$100,000 |            | $100,000 or more |   | Total     
|2005       |  | $                 | 48,008,779 |                  | $ | 44,282,863 |  | $ | 92,291,642 
|2006       |  |                   | 24,515,059 |                  |   | 36,268,532 |  |   | 60,783,591 
|2007       |  |                   | 6,838,199  |                  |   | 9,050,816  |  |   | 15,889,015 
|2008       |  |                   | 2,182,899  |                  |   | 1,029,946  |  |   | 3,212,845  
|2009       |  |                   | 2,045,509  |                  |   | 6,271,018  |  |   | 8,316,527  
|Thereafter |  |                   |           |                  |   |           |  |   |           
|           |  |                   |            |                  |   |            |  |   |            
|Total      |  | $                 | 83,590,445 |                  | $ | 96,903,175 |  | $ | 180,493,620
|           |  |                   |            |                  |   |            |  |   |            



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 8 - BORROWINGS



Borrowings consist of advances from the Federal Home Loan Bank of Atlanta, securities sold
under agreements to repurchase, and obligations under a capitalized lease for the Banks main office facility. At December 31, 2004 and 2003, Federal Home Loan Bank advances were as follows:



|                                             |  |                                       |  |        |            |      |            
|-------------------------------------------- |  | ------------------------------------- |  | ------ | ---------- | ---- | -----------
|2004                                         |  | Call Feature                          |  | Amount |            | Rate
|Due on October 3, 2005                       |  | None                                  |  | $      | 1,000,000  |      | 2.00% Fixed
|Due on February 24, 2006                     |  | None                                  |  |        | 777,778    |      | 2.16% Fixed
|Due on December 19, 2011                     |  | Callable by FHLB on December 19, 2006 |  |        | 5,000,000  |      | 4.85% Fixed
|Due on July 16, 2012                         |  | Callable by FHLB on January 18, 2005  |  |        | 1,000,000  |      | 3.90% Fixed
|Due on February 25, 2013                     |  | Callable by FHLB on February 25, 2005 |  |        | 5,000,000  |      | 3.45% Fixed
|                                             |  |                                       |  |        |            |      |            
|Total FHLB borrowings/ weighted average rate |  |                                       |  | $      | 12,777,778 |      | 3.84%      
|                                             |  |                                       |  |        |            |      |            
|                                             |  |                                       | 
|2003                                         |  | Call Feature                          |  | Amount |            | Rate
|Due on June 28, 2004                         |  | None                                  |  | $      | 2,000,000  |      | 5.24% Fixed
|Due on February 24, 2006                     |  | None                                  |  |        | 1,444,444  |      | 2.16% Fixed
|Due on December 19, 2011                     |  | Callable by FHLB on December 19, 2006 |  |        | 5,000,000  |      | 4.85% Fixed
|Due on February 25, 2013                     |  | Callable by FHLB on February 25, 2004 |  |        | 5,000,000  |      | 3.45% Fixed
|                                             |  |                                       |  |        |            |      |            
|Total FHLB borrowings/ weighted average rate |  |                                       |  | $      | 13,444,444 |      | 4.10%      
|                                             |  |                                       |  |        |            |      |            



Pursuant to a collateral agreement
with the FHLB, advances are collateralized by all the Companys FHLB stock of $1,293,400, qualifying first mortgage loans and qualifying commercial real estate. The balance of qualifying first mortgage loans and qualifying commercial real
estate as of December 31, 2004 was approximately $20,442,000. This agreement with the FHLB provides for a line of credit up to 15% of the Banks assets.



Securities sold under agreements to repurchase at December 31, 2004 consisted of daily repurchase agreements which generally mature within one to four days of $10,762,879
and agreements to repurchase with commercial brokers with fixed maturities as follows:



|                      |  |              |  |        |            |      |            
|--------------------- |  | ------------ |  | ------ | ---------- | ---- | -----------
|2004                  |  | Call Feature |  | Amount |            | Rate
|Due on March 11, 2005 |  | None         |  | $      | 15,000,000 |      | 2.08% Fixed



Securities sold under agreements to
repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. As of December 31, 2004, collateral
pledged on securities sold under agreements to repurchase was $26,218,890.



Securities sold under agreements to repurchase at December 31, 2003 consisted of daily repurchase agreements which generally mature within one to four days of $4,667,225 and agreements to repurchase with commercial brokers with fixed
maturities as follows:



|                                                                            |  |              |            |        |            |      |            
|--------------------------------------------------------------------------- |  | ------------ | ---------- | ------ | ---------- | ---- | -----------
|2004                                                                        |  | Call Feature |            | Amount |            | Rate
|Due on March 16, 2004                                                       |  | None         |            | $      | 5,000,000  |      | 1.20% Fixed
|Due on March 22, 2004                                                       |  | None         |            |        | 10,000,000 |      | 1.16% Fixed
|                                                                            |  |              |            |        |            |      |            
|Total securities sold under agreements to repurchase/ weighted average rate |  | $            | 15,000,000 |        | 1.17%     
|                                                                            |  |              |            |        |            |      |            



The Company also had available lines
of credit totaling $15.0 million from correspondent banks at December 31, 2004.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 9 - LEASES



Operating Leases



The Company has entered into non-cancelable operating leases for the land on which its main office is located and for other branch
facilities and equipment. These leases have terms from five to thirty years. In 2002, the Company entered into a sale-leaseback arrangement. Under the arrangement, the Company sold its Marshville branch property and leased it back for a period of
ten years with two renewal options for five years each. The leaseback has been accounted for as an operating lease. The gain of $147,156 realized in this transaction has been deferred and is being amortized to income in proportion to rental expense
over the term of the lease. Future rentals under these leases are as follows:



|            |  |               |           |       |   |           |  |   |          
|----------- |  | ------------- | --------- | ----- | - | --------- |  | - | ---------
|            |  | Related party |           | Other |   | Total    
|2005        |  | $             | 254,050   |       | $ | 256,947   |  | $ | 510,997  
|2006        |  |               | 222,813   |       |   | 169,327   |  |   | 392,140  
|2007        |  |               | 222,813   |       |   | 169,327   |  |   | 392,140  
|2008        |  |               | 222,813   |       |   | 169,327   |  |   | 392,140  
|2009        |  |               | 222,813   |       |   | 153,700   |  |   | 376,513  
|2010 - 2019 |  |               | 1,866,766 |       |   | 656,648   |  |   | 2,523,414
|            |  |               |           |       |   |           |  |   |          
|Total       |  | $             | 3,012,068 |       | $ | 1,575,276 |  | $ | 4,587,344
|            |  |               |           |       |   |           |  |   |          



Total rent expense under operating
leases was approximately $623,000, $582,000 and $400,000 for the years ended December 31, 2004, 2003 and 2002, respectively.



Capital Lease Obligation



The Company leases its main office facility under a capital lease. Leases that meet the criteria for capitalization are recorded as assets and the related obligations are
reflected as capital lease obligations on the accompanying balance sheets. Amortization of property under capital lease is included in depreciation expense. Included in premises and equipment at December 31, 2004 and 2003 is $1.7 million as the
capitalized cost of the Companys main office and accumulated amortization of $217,990 and $174,392 at December 31, 2004 and 2003, respectively.



At December 31, 2004, aggregate future minimum lease payments due under this capital lease obligation are as follows:



|                                            |  |   |            |  
|------------------------------------------- |  | - | ---------- | -
|2005                                        |  | $ | 148,057    |  
|2006                                        |  |   | 148,057    |  
|2007                                        |  |   | 148,057    |  
|2008                                        |  |   | 148,057    |  
|2009                                        |  |   | 148,057    |  
|2010 - 2029                                 |  |   | 3,516,912  |  
|                                            |  |   |            |  
|Total minimum lease payments                |  |   | 4,257,197  |  
|Less amount representing interest           |  |   | (2,547,301 | )
|                                            |  |   |            |  
|Present value of net minimum lease payments |  | $ | 1,709,896  |  
|                                            |  |   |            |  



Both the operating and capital leases
regarding the Companys main office discussed above are leased from a director. Prior to the main facility being completed in November 2000, the Company leased land for its temporary banking facility from that same director. In addition, the
Marshville facility is leased from another director. In January 2003, the Company signed an operating lease for a new branch facility in Mint Hill, North Carolina, with another director. The lease has an initial term of ten years with two renewal
options for five years each. Total lease payments of $419,553, $464,755 and $382,117 were paid to these directors under these leases during 2004, 2003 and 2002, respectively.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 10  JUNIOR SUBORDINATED DEFERRABLE
INTEREST DEBENTURES



In 2004, the Company adopted FIN 46R, with no
restatement of prior periods, resulting in the deconsolidation of American Community Capital Trust I and American Community Capital Trust II, Ltd, statutory trusts (the Trusts), which were created for the sole purpose of issuing trust
preferred securities. The implementation of FIN 46R resulted in the Companys $418,260 investment in the common equity of the Trusts being included in the condensed consolidated balance sheets as other assets with a corresponding increase in
junior subordinated debentures. The Company is now recording greater interest expense and income received from the Trusts with no effect on net income. The income and interest expense received from and paid to the Trusts, respectively, is being
included in the consolidated statements of income and comprehensive income as other non-interest income and expense. The increases to other non-interest income and expense would have been $344,751 and $303,408 for the years ended December 31, 2003
and 2002, respectively, had FIN 46R implemented on January 1, 2002.



The
Company has Junior Subordinated Deferrable Interest Debentures (the Junior Subordinated Debentures) outstanding. The Junior Subordinated Debentures were issued from funds invested from the sale of trust preferred securities by American
Community Capital Trust I and American Community Capital Trust II, Ltd., both of which are wholly owned by the Company.



On December 31, 2001 and March 1, 2002, $2.0 million and $1.5 million, respectively, of trust preferred securities were placed through American Community Capital Trust I
(the Capital Trust I). The preferred securities pay cumulative cash distributions quarterly at an annual rate of 9%. The dividends paid to holders of the capital trust preferred securities, which will be recorded as interest expense, are
deductible for income tax purposes. The quarterly distributions may, at the option of the Company, be deferred up to five years. Unpaid distributions will be accrued as a component of interest expense. The preferred securities issued in 2001 and
2002 are redeemable on March 1, 2007 or afterwards at the par of $1,000 per share. Redemption is mandatory at March 1, 2032. The proceeds of the preferred securities were invested by Capital Trust I in $3.5 million principal amount of 9% junior
subordinated debentures of the Company due March 1, 2032.



On December 15,
2003, $10.0 million of trust preferred securities were placed through American Community Capital Trust II, Ltd. (the Capital Trust II). The preferred securities pay cumulative cash distributions quarterly at a rate priced off 90-day
LIBOR. The dividends paid to holders of the capital trust preferred securities, which will be recorded as interest expense, are deductible for income tax purposes. The preferred securities issued in 2003 are redeemable on December 15, 2008 or
afterwards at par. Redemption is mandatory at December 15, 2033. The proceeds of the preferred securities were invested by Capital Trust II in $10.0 million principal amount of junior subordinated debentures of the Company due December 15, 2033.



The Company fully and unconditionally guarantees the preferred securities
through the combined operation of the debentures and other related documents. The Companys obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. A portion of the preferred
securities qualify as Tier I capital for regulatory capital purposes.



A
description of the Junior Subordinated Debentures, previously classified as trust preferred securities, outstanding is as follows:



|                   |  |                 |  |              |      |              |      |  |              |  |                  |            |  |   |           
|------------------ |  | --------------- |  | ------------ | ---- | ------------ | ---- |  | ------------ |  | ---------------- | ---------- |  | - | ----------
|Issuing Entity     |  | Date ofIssuance |  | SharesIssued |      | InterestRate |      |  | MaturityDate |  | Principal Amount
|                   |  |                 |  |              | 2004 |              | 2003
|American Community |  |                 |  |              |      |              |      |  |              |  |                  |            |  |   |           
|Capital Trust I    |  | 12/31/2001      |  | 2,000        |      | 9.00         | %    |  | 03/01/2032   |  | $                | 2,061,863  |  | $ | 2,000,000 
|American Community |  |                 |  |              |      |              |      |  |              |  |                  |            |  |   |           
|Capital Trust I    |  | 03/01/2002      |  | 1,500        |      | 9.00         | %    |  | 03/01/2032   |  |                  | 1,546,397  |  |   | 1,500,000 
|American Community |  |                 |  |              |      |              |      |  |              |  |                  |            |  |   |           
|Capital Trust II   |  | 12/15/2003      |  | 10,000       |      | 4.4775       | %    |  | 12/15/2033   |  |                  | 10,310,000 |  |   | 10,000,000
|                   |  |                 |  |              |      |              |      |  |              |  |                  |            |  |   |           
|Total              |  |                 |  |              |      |              |      |  |              |  | $                | 13,918,260 |  | $ | 13,500,000
|                   |  |                 |  |              |      |              |      |  |              |  |                  |            |  |   |           



NOTE 11 - OTHER CONTRACTS



The Company has entered into a non-cancelable contract with a third party
for data processing services. The future minimum payment required under this contract for the year ending December 31, 2004 is as follows:



|     |  |   |        
|---- |  | - | -------
|2004 |  | $ | 170,000
|     |  |   |        



The above future payments are based
upon the anticipated future growth of the Company and can therefore vary from the above estimates in any year.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 12 - INCOME TAXES



The significant components of the provision for income taxes for the periods ended December
31, 2004, 2003 and 2002 are as follows:



|                                                                                             |  |                        |       |   |      |   |      |  |   |      |  
|-------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ---- |  | - | ---- | -
|                                                                                             |  | 2004                   |       |   | 2003 |   | 2002 | 
|                                                                                             |  | (Dollars in thousands) |      
|Current tax provision:                                                                       |  |                        |       |   |      |   |      |  |   |      |  
|Federal                                                                                      |  | $                      | 1,300 |   |      | $ | 537  |  | $ | 481  |  
|State                                                                                        |  |                        | 280   |   |      |   | 127  |  |   | 62   |  
|                                                                                             |  |                        |       |   |      |   |      |  |   |      |  
|                                                                                             |  |                        | 1,580 |   |      |   | 664  |  |   | 543  |  
|                                                                                             |  |                        |       |   |      |   |      |  |   |      |  
|Deferred tax provision (benefit):                                                            |  |                        |       |   |      |   |      |  |   |      |  
|Federal                                                                                      |  |                        | 61    |   |      |   | 117  |  |   | (121 | )
|State                                                                                        |  |                        | (24   | ) |      |   | 26   |  |   | (26  | )
|                                                                                             |  |                        |       |   |      |   |      |  |   |      |  
|                                                                                             |  |                        | 37    |   |      |   | 143  |  |   | (147 | )
|                                                                                             |  |                        |       |   |      |   |      |  |   |      |  
|Provision for income tax expense before adjustment to deferred tax asset valuation allowance |  |                        | 1,617 |   |      |   | 807  |  |   | 396  |  
|                                                                                             |  |                        |      
|Decrease in valuation allowance                                                              |  |                        |      |   |      |   |     |  |   | (479 | )
|                                                                                             |  |                        |       |   |      |   |      |  |   |      |  
|Net provision for income taxes (benefit)                                                     |  | $                      | 1,617 |   |      | $ | 807  |  | $ | (83  | )
|                                                                                             |  |                        |       |   |      |   |      |  |   |      |  



The difference between the provision
for income taxes and the amounts determined by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:



|                                                   |  |                        |       |   |      |   |     |      |  |   |      |  
|-------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | --- | ---- |  | - | ---- | -
|                                                   |  | 2004                   |       |   | 2003 |   |     | 2002 | 
|                                                   |  | (Dollars in thousands) |      
|Benefits computed at statutory rate of 34%         |  | $                      | 1,482 |   |      | $ | 746 |      |  | $ | 414  |  
|                                                   |  |                        |      
|Effect of state income taxes                       |  |                        | 184   |   |      |   | 101 |      |  |   | 24   |  
|U. S. Government interest                          |  |                        | (57   | ) |      |   | (30 | )    |  |   | (31  | )
|Other                                              |  |                        | (8    | ) |      |   | (10 | )    |  |   | (11  | )
|Decrease in deferred tax asset valuation allowance |  |                        |      |   |      |   |    |      |  |   | (479 | )
|                                                   |  |                        |       |   |      |   |     |      |  |   |      |  
|Net provision for income taxes (benefit)           |  | $                      | 1,617 |   |      | $ | 807 |      |  | $ | (83  | )
|                                                   |  |                        |       |   |      |   |     |      |  |   |      |  



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 12 - INCOME TAXES (Continued)



Significant components of deferred taxes at December 31, 2004 and 2003
are as follows:



|                                                       |  |                        |       |   |      |   |      |  
|------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ---- | -
|                                                       |  | 2004                   |       |   | 2003 |  
|                                                       |  | (Dollars in thousands) |      
|Deferred tax assets:                                   |  |                        |       |   |      |   |      |  
|Allowance for loan losses                              |  | $                      | 1,140 |   |      | $ | 819  |  
|Capital lease                                          |  |                        | 88    |   |      |   | 70   |  
|Deferred gain on sale-leaseback                        |  |                        | 39    |   |      |   | 44   |  
|Nondeductible accrued expenses                         |  |                        | 231   |   |      |   |     |  
|Net unrealized losses on available-for-sale securities |  |                        | 66    |   |      |   |     |  
|Other                                                  |  |                        | 20    |   |      |   | 10   |  
|                                                       |  |                        |       |   |      |   |      |  
|Total deferred tax assets                              |  |                        | 1,584 |   |      |   | 943  |  
|Valuation allowance                                    |  |                        |      |   |      |   |     |  
|                                                       |  |                        |       |   |      |   |      |  
|Net deferred tax assets                                |  |                        | 1,584 |   |      |   | 943  |  
|                                                       |  |                        |       |   |      |   |      |  
|Deferred tax liabilities:                              |  |                        |       |   |      |   |      |  
|Premises and equipment                                 |  |                        | (288  | ) |      |   | (270 | )
|Core deposit intangible                                |  |                        | (265  | ) |      |   |     |  
|Prepaid expenses                                       |  |                        | (114  | ) |      |   |     |  
|Net unrealized gains on available-for-sale securities  |  |                        |      |   |      |   | (57  | )
|                                                       |  |                        |       |   |      |   |      |  
|Total deferred tax liabilities                         |  |                        | (667  | ) |      |   | (327 | )
|                                                       |  |                        |       |   |      |   |      |  
|Net recorded deferred tax assets                       |  | $                      | 917   |   |      | $ | 616  |  
|                                                       |  |                        |       |   |      |   |      |  



Management has not recorded a
valuation allowance at December 31, 2004 because they believe realization of the deferred tax assets is more likely than not.



NOTE 13 - OTHER NON-INTEREST EXPENSE



The major components of other non-interest expense for the years ended December 31, 2004, 2003 and 2002 are as follows:



|                                          |  |      |           |      |   |           |  |   |          
|----------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                          |  | 2004 |           | 2003 |   | 2002     
|Postage, printing and office supplies     |  | $    | 317,654   |      | $ | 315,447   |  | $ | 236,956  
|Advertising and promotion                 |  |      | 134,581   |      |   | 139,874   |  |   | 105,489  
|Travel, meals, dues and subscriptions     |  |      | 180,588   |      |   | 161,591   |  |   | 132,789  
|Telephone                                 |  |      | 168,765   |      |   | 111,451   |  |   | 103,405  
|Data processing and technology            |  |      | 553,614   |      |   | 535,298   |  |   | 411,838  
|Professional fees and contracted services |  |      | 841,414   |      |   | 444,915   |  |   | 383,088  
|Lawsuit settlement charge                 |  |      | 600,000   |      |   |          |  |   |         
|Other                                     |  |      | 988,089   |      |   | 626,337   |  |   | 599,541  
|                                          |  |      |           |      |   |           |  |   |          
|Total                                     |  | $    | 3,784,705 |      | $ | 2,334,913 |  | $ | 1,973,106
|                                          |  |      |           |      |   |           |  |   |          



NOTE 14 - REGULATORY MATTERS



The Company (on a consolidated basis) and the Banks are subject to
various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Companys and Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.



The primary
sources of funds for the payment of dividends by American Community Bancshares, Inc. are dividends received from its subsidiaries, American Community Bank and First National Bank of the Carolinas, combined with the proceeds from stock sold by the
Company. American Community, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of
dividends by any bank when it is determined that such limitation is in the public interest and is necessary to ensure a banks financial soundness.



59



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 14 - REGULATORY MATTERS (Continued)



Quantitative measures established by regulation to ensure capital
adequacy require the Company and its bank subsidiaries to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of December 31, 2004 and 2003, that the Company and the Banks met all capital adequacy requirements to which they are subject.



As of December 31, 2004, the most recent notification from the Federal Deposit Insurance
Corporation categorized American Community Bank as adequately capitalized under the regulatory framework for prompt corrective action. As of December 31, 2004, the most recent notification from the Federal Deposit Insurance Corporation categorized
First National Bank of the Carolinas as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Banks category. Prompt corrective action provisions are not applicable to bank holding companies.
The Companys and the Banks actual capital amounts and ratios as of December 31, 2004 and 2003 are presented in the following table.



|                                        |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|--------------------------------------- |  | ---------------------- | ------ | ----- | ------------------------------ | - | ------ | --------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                        |  | Actual                 |        |       | Minimum For CapitalRequirement |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                        |  | Amount                 |        | Ratio |                                |   | Amount |                                                                       | Ratio  |  |      | Amount |  | Ratio |       
|                                        |  | (Dollars in thousands) |       
|December 31, 2004:                      |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Total Capital to Risk Weighted Assets:  |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  | $                      | 43,445 |       | 13.54                          | % |        | $                                                                     | 25,674 |  | 8.00 | %      |  | $     | N/A    |  | N/A   |  
|American Community Bank                 |  |                        | 26,080 |       | 9.88                           | % |        |                                                                       | 21,107 |  | 8.00 | %      |  |       | 26,384 |  | 10.00 | %
|First National Bank of the Carolinas    |  |                        | 8,414  |       | 14.40                          | % |        |                                                                       | 4,675  |  | 8.00 | %      |  |       | 5,843  |  | 10.00 | %
|                                        |  |                        |        |       |                                |  
|Tier 1 Capital to Risk Weighted Assets: |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |                        | 35,329 |       | 11.01                          | % |        |                                                                       | 12,837 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank                 |  |                        | 23,335 |       | 8.84                           | % |        |                                                                       | 10,553 |  | 4.00 | %      |  |       | 15,830 |  | 6.00  | %
|First National Bank of The Carolinas    |  |                        | 7,684  |       | 13.15                          | % |        |                                                                       | 2,337  |  | 4.00 | %      |  |       | 3,506  |  | 6.00  | %
|                                        |  |                        |        |       |                                |  
|Tier 1 Capital to Average Assets:       |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |                        | 35,329 |       | 9.45                           | % |        |                                                                       | 14,948 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank                 |  |                        | 23,335 |       | 7.64                           | % |        |                                                                       | 12,221 |  | 4.00 | %      |  |       | 15,277 |  | 5.00  | %
|First National Bank of The Carolinas    |  |                        | 7,684  |       | 10.59                          | % |        |                                                                       | 2,903  |  | 4.00 | %      |  |       | 3,629  |  | 5.00  | %



|                                        |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|--------------------------------------- |  | ---------------------- | ------ | ----- | ------------------------------ | - | ------ | --------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                        |  | Actual                 |        |       | Minimum For CapitalRequirement |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                        |  | Amount                 |        | Ratio |                                |   | Amount |                                                                       | Ratio  |  |      | Amount |  | Ratio |       
|                                        |  | (Dollars in thousands) |       
|December 31, 2003:                      |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Total Capital to Risk Weighted Assets:  |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  | $                      | 40,127 |       | 18.12                          | % |        | $                                                                     | 17,719 |  | 8.00 | %      |  | $     | N/A    |  | N/A   |  
|American Community Bank                 |  |                        | 21,094 |       | 9.48                           | % |        |                                                                       | 17,716 |  | 8.00 | %      |  |       | 22,145 |  | 10.00 | %
|                                        |  |                        |        |       |                                |  
|Tier 1 Capital to Risk Weighted Assets: |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |                        | 32,130 |       | 14.51                          | % |        |                                                                       | 8,860  |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank                 |  |                        | 18,473 |       | 8.34                           | % |        |                                                                       | 8,858  |  | 4.00 | %      |  |       | 13,287 |  | 6.00  | %
|                                        |  |                        |        |       |                                |  
|Tier 1 Capital to Average Assets:       |  |                        |        |       |                                |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |                        | 32,130 |       | 11.68                          | % |        |                                                                       | 11,003 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank                 |  |                        | 18,473 |       | 6.76                           | % |        |                                                                       | 10,934 |  | 4.00 | %      |  |       | 13,667 |  | 5.00  | %



60



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 15  COMMITMENTS, CONTINGENCIES AND
OFF-BALANCE SHEET RISK



The Company is a party to financial instruments
with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial
instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on managements credit evaluation of the borrower.
Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.



A summary of the contract amounts of the Companys exposure to off-balance sheet credit risk as of December 31, 2004 is as follows:



Financial instruments whose contract amounts represent credit risk:



|                                          |  |   |           
|----------------------------------------- |  | - | ----------
|Capital South Partnership commitment      |  | $ | 250,000   
|Standby letters of credit                 |  |   | 3,368,297 
|Commitments to extend credit              |  |   | 4,175,330 
|Undisbursed lines of credit               |  |   | 34,654,903
|Undisbursed portion of construction loans |  |   | 15,780,581



In the normal course of business, the
Company is involved in various legal proceedings. The amount of any liability that may result from those proceedings, other than amounts disclosed in Note 21, in which the Company is currently involved cannot be determined at this time.



NOTE 16 - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS



Financial instruments for which fair value disclosures are required include cash and due
from banks, interest-earning deposits with banks, investment securities, loans, Federal Home Loan bank stock, accrued interest, deposits, borrowings, securities sold under agreements to repurchase, trust preferred securities and junior subordinated
debentures. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for
sale at one time the Companys entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Companys financial instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly affect the estimates.



The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:



Cash and Due from Banks and Interest-earning Deposits with Banks



The carrying amounts for cash and due from banks and interest-earning deposits with banks
approximate fair value because of the short maturities of those instruments.



Investment Securities



Fair values for investment securities
are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.



estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 16 - DISCLOSURES ABOUT FAIR VALUES OF
FINANCIAL INSTRUMENTS (Continued)



Loans



For certain homogenous categories of loans, such as residential mortgages, fair value is
estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is



Non-marketable equity securities



The carrying value of Federal Home Loan Bank stock, Bankers Bank stock, and Federal Reserve stock, approximates fair value based on the redemption provisions of the
Banks.



Accrued Interest



The carrying amount is a reasonable estimate of fair value.



Deposits



The fair value of demand deposits, savings, money market, and NOW accounts is the amount payable on demand at the reporting date. The fair
value of time deposits is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.



Borrowings, Securities Sold Under Agreements to Repurchase, Junior subordinated debentures, and Trust Preferred Securities



The fair values are based on discounting expected cash flows at the interest rate for debt
with the same or similar remaining maturities and collateral requirements.



Financial Instruments with Off-Balance Sheet Risk



With regard
to financial instruments with off-balance sheet risk discussed in Note 15, it is not practicable to estimate the fair value of future financing commitments. The large majority of commitments to extend credit and standby letters of credit are at
variable rates and/or have relatively short terms to maturity. Therefore, the fair value for these financial instruments is considered to be immaterial.



The carrying amounts and estimated fair values of the Companys financial instruments, none of which are held for trading purposes, are as follows at December 31,
2004 and 2003:



|                                              |  |                        |         |                     |   |                |  |                     |         |  |   |        
|--------------------------------------------- |  | ---------------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                                              |  | 2004                   |         | 2003               
|                                              |  | Carryingamount         |         | Estimatedfair value |   | Carryingamount |  | Estimatedfair value
|                                              |  | (Dollars in thousands)
|Financial assets:                             |  |                        |         |                     |   |                |  |                     |         |  |   |        
|Cash and due from banks                       |  | $                      | 9,511   |                     | $ | 9,511          |  | $                   | 7,330   |  | $ | 7,330  
|Interest-earning deposits with banks          |  |                        | 6,521   |                     |   | 6,521          |  |                     | 11,012  |  |   | 11,012 
|Securities available for sale                 |  |                        | 52,002  |                     |   | 51,833         |  |                     | 50,178  |  |   | 50,178 
|Securities held to maturity                   |  |                        | 2,186   |                     |   | 2,193          |  |                     | 1,892   |  |   | 1,896  
|Loans                                         |  |                        | 304,500 |                     |   | 305,009        |  |                     | 202,004 |  |   | 202,928
|Accrued interest receivable                   |  |                        | 1,697   |                     |   | 1,697          |  |                     | 1,131   |  |   | 1,131  
|Non-marketable equity securities              |  |                        | 1,513   |                     |   | 1,513          |  |                     | 792     |  |   | 792    
|                                              |  |                        |         |                    
|Financial liabilities:                        |  |                        |         |                     |   |                |  |                     |         |  |   |        
|Deposits                                      |  |                        | 306,665 |                     |   | 284,540        |  |                     | 208,163 |  |   | 193,172
|Borrowings                                    |  |                        | 12,778  |                     |   | 12,899         |  |                     | 13,444  |  |   | 12,954 
|Securities sold under agreement to repurchase |  |                        | 25,763  |                     |   | 25,763         |  |                     | 19,667  |  |   | 19,667 
|Junior subordinated debentures                |  |                        | 13,918  |                     |   | 13,471         |  |                     |        |  |   |       
|Trust preferred securities                    |  |                        |        |                     |   |               |  |                     | 13,500  |  |   | 14,040 



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 17 - EMPLOYEE AND DIRECTOR BENEFIT PLANS



401(k) Retirement Plan



The Company has adopted a 401(k) retirement plan that covers all eligible employees. The
Company matches contributions of 3.0% of each employees salary. Contributions are funded when accrued. Expenses totaled $68,430, $54,494 and $45,491 for the years ended December 31, 2004, 2003 and 2002, respectively.



Stock Option Plans



The Company has four stock option plans; the 1999 Employee Stock Option Plan (the
Employee Plan), the 1999 Director Stock Option Plan (the Director Plan), the 2002 Incentive Stock Option Plan (the Incentive Plan), and the 2003 Nonstatutory Stock Option Plan (the Nonstatutory Plan).
The 1999 plans each make available options to purchase 164,126 shares of the Companys common stock for an aggregate number of common shares reserved for options under these plans of 328,252. The options granted under the Director Plan vested
immediately at the time of grant, while the options granted under the Employee Plan vest over a five-year period. The Incentive Plan makes available options to purchase 90,200 shares of the Companys common stock at a price not less than the
fair value of the Companys common shares on the date of grant. The options granted under the Incentive Plan vest over a five-year period. During 2003 the Company adopted, with shareholder approval, the Nonstatutory Plan. The Nonstatutory plan
makes available options to purchase 25,000 shares on the date of grant. The options granted to directors under the Nonstatutory Option Plan vest over a three-year period, beginning one year from the date of grant.



Unexercised options for all of the aforementioned plans expire ten years after the date of
grant. The exercise price of all options granted to date is the fair value of the Companys common shares on the date of grant. A summary of the Companys option plans as of and for the years ended December 31, 2004, 2003 and 2002, after
retroactively adjusting for the stock dividend paid in 2003, is as follows:



|                                                    |  |                                 |   |  |                     |   |  |                              |         |  
|--------------------------------------------------- |  | ------------------------------- | - |  | ------------------- | - |  | ---------------------------- | ------- | -
|                                                    |  |                                 |   |  | Outstanding Options |  
|                                                    |  | Sharesavailablefor futuregrants |   |  | Numberoutstanding   |   |  | Weightedaverageexerciseprice |        
|At December 31, 2000                                |  |                                |   |  | 328,253             |   |  | $                            | 8.33    |  
|Adoption of the 2002 Incentive Option Plan          |  | 90,200                          |   |  |                    |   |  |                              |        |  
|Options granted                                     |  | (41,208                         | ) |  | 41,208              |   |  |                              | 7.11    |  
|Options exercised                                   |  |                                |   |  |                    |   |  |                              |        |  
|Options forfeited                                   |  | 1,452                           |   |  | (1,452              | ) |  |                              | 8.33    |  
|                                                    |  |                                 |   |  |                     |   |  |                              |         |  
|At December 31, 2001                                |  | 50,444                          |   |  | 368,009             |   |  |                              | 8.20    |  
|Adoption of the 2003 Nonstatutory Stock Option Plan |  | 25,000                          |   |  |                    |   |  |                              |        |  
|Options granted                                     |  | (35,200                         | ) |  | 35,200              |   |  |                              | 9.02    |  
|Options exercised                                   |  |                                 |   |  | (17,399             | ) |  |                              | 8.33    |  
|Options forfeited                                   |  | 23,850                          |   |  | (23,850             | ) |  |                              | 8.13    |  
|                                                    |  |                                 |   |  |                     |   |  |                              |         |  
|At December 31, 2002                                |  | 64,094                          |   |  | 361,960             |   |  |                              | 8.27    |  
|Options granted                                     |  | (19,000                         | ) |  | 19,000              |   |  |                              | 11.90   |  
|Options exercised                                   |  |                                 |   |  | (1,333              | ) |  |                              | 8.40    |  
|Options forfeited                                   |  | 5,940                           |   |  | (5,940              | ) |  |                              | 7.62    |  
|                                                    |  |                                 |   |  |                     |   |  |                              |         |  
|At December 31, 2003                                |  | 51,034                          |   |  | 373,687             |   |  |                              | 8.47    |  
|FNB options                                         |  |                                 |   |  | 195,826             |   |  |                              | 5.55    |  
|Options granted                                     |  | (48,034                         | ) |  | 48,034              |   |  |                              | 13.34   |  
|Options exercised                                   |  |                                 |   |  | (34,997             | ) |  |                              | 6.00    |  
|Options forfeited                                   |  | 8,132                           |   |  | (8,132              | ) |  |                              | 8.60    |  
|                                                    |  |                                 |   |  |                     |   |  |                              |         |  
|At December 31, 2004                                |  | 11,132                          |   |  | 574,418             |   |  | $                            | 8.08    |  
|                                                    |  |                                 |   |  |                     |   |  |                              |         |  
|                                                    |  |                                 |  
|                                                    |  | 2004                            |   |  | 2003                |   |  | 2002                         |        
|Assumptions in estimating option values:            |  |                                 |   |  |                     |   |  |                              |         |  
|Risk-free interest rate                             |  | 2.25                            | % |  | 2.25                | % |  |                              | 2.50    | %
|Dividend yield                                      |  | .97                             | % |  | .97                 | % |  |                              |        |  
|Volatility                                          |  | 14.50                           | % |  | 14.70               | % |  |                              | 13.27   | %
|Expected life                                       |  | 7 years                         |   |  | 7 years             |   |  |                              | 7 years |  



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 17 - EMPLOYEE AND DIRECTOR BENEFIT PLANS
(Continued)



At December 31, 2004, there were 486,400 exercisable options
with a weighted average exercise price of $7.42. At December 31, 2003, there were 285,321 exercisable options with a weighted average exercise price of $8.24. Of the total options outstanding at December 31, 2004 and 2003, the remaining average
contractual lives were five and six years, respectively. The range of exercise prices associated with options outstanding at December 31, 2004 was $5.55 to $8.33 and $8.40 to $13.38. The range of exercise prices associated with options outstanding
at December 31, 2003 was $8.13 to $11.90.



Employment Agreement



The Company has entered into employment agreements with certain officers
to ensure a stable and competent management base. These agreements provide for terms ranging from three to five years, with automatic extension for an additional year at the end of the initial term and annually thereafter. The agreements provide for
benefits as spelled out in the contract and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers right to receive certain vested rights, including compensation. In the event of a change in control
of the Company and in certain other events, as defined in the agreements, the Company or any successor to the Company will be bound to the terms of the contracts.



NOTE 18 - SALE OF COMMON STOCK



The Company completed the sale of 1,000,500 units, which consisted of one share of common stock and one warrant to buy one share of common stock, at $9.00 per share on
April 29, 2002. Expenses associated with the sale amounted to $1,016,001 resulting in net proceeds from the offering of $7,988,499. The warrants entitle the holder to purchase one share of common stock at $10.50 per share and expire on April 30,
2005.



NOTE 19 - PARENT COMPANY FINANCIAL DATA



Following are condensed financial statements of American Community Bancshares, Inc. as of
December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002:



Condensed Statements of Financial Condition

December 31, 2004 and 2003



|                                                        |  |      |            |   |      |   |           
|------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------
|                                                        |  | 2004 |            |   | 2003
|Assets:                                                 |  |      |            |   |      |   |           
|Cash and due from banks                                 |  | $    | 142,983    |   |      | $ | 86,058    
|Interest earning deposits with banks                    |  |      | 7,696,900  |   |      |   | 17,936,029
|Investment in securities available for sale             |  |      | 403,469    |   |      |   |          
|Investment in American Community Bank                   |  |      | 23,213,898 |   |      |   | 18,563,584
|Investment in First National Bank of the Carolinas      |  |      | 18,318,937 |   |      |   |          
|Investment in American Community Capital Trust I        |  |      | 108,260    |   |      |   | 108,260   
|Investment in American Community Capital Trust II, Ltd. |  |      | 310,000    |   |      |   | 310,000   
|Due from American Community Bank                        |  |      | 650,969    |   |      |   |          
|Other assets                                            |  |      | 256,182    |   |      |   | 1,102,986 
|                                                        |  |      |            |   |      |   |           
|Total Assets                                            |  | $    | 51,101,598 |   |      | $ | 38,106,917
|                                                        |  |      |            |   |      |   |           
|Liabilities and Stockholders Equity:                   |  |      |            |   |      |   |           
|Liabilities:                                            |  |      |            |   |      |   |           
|Due to American Community Capital Trust I               |  | $    | 3,608,260  |   |      | $ | 3,608,260 
|Due to American Community Capital Trust II, Ltd.        |  |      | 10,310,000 |   |      |   | 10,310,000
|Due to First National Bank of the Carolinas             |  |      | 211,222    |   |      |   |          
|                                                        |  |      |            |   |      |   |           
|Total Liabilities                                       |  |      | 14,129,482 |   |      |   | 13,918,260
|                                                        |  |      |            |   |      |   |           
|Stockholders Equity:                                   |  |      |            |   |      |   |           
|Common stock                                            |  |      | 3,489,249  |   |      |   | 2,825,709 
|Additional paid-in capital                              |  |      | 29,054,479 |   |      |   | 19,201,084
|Retained earnings                                       |  |      | 4,531,618  |   |      |   | 2,070,985 
|Accumulated other comprehensive income (loss)           |  |      | (103,230   | ) |      |   | 90,879    
|                                                        |  |      |            |   |      |   |           
|Total stockholders equity                              |  |      | 36,972,116 |   |      |   | 24,188,657
|                                                        |  |      |            |   |      |   |           
|Total Liabilities and Stockholders Equity              |  | $    | 51,101,598 |   |      | $ | 38,106,917
|                                                        |  |      |            |   |      |   |           



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 19 - PARENT COMPANY FINANCIAL DATA
(Continued)



Condensed Statements of
Operations

Years Ended December 31, 2004, 2003 and 2002



|                                                                                   |  |      |           |   |      |   |           |  |   |          
|---------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- |  | - | ---------
|                                                                                   |  | 2004 |           |   | 2003 |   | 2002     
|Interest income:                                                                   |  |      |           |   |      |   |           |  |   |          
|Interest-earning deposits with banks                                               |  | $    | 664,925   |   |      | $ | 341,346   |  | $ | 98,239   
|                                                                                   |  |      |           |   |      |   |           |  |   |          
|Interest expense:                                                                  |  |      |           |   |      |   |           |  |   |          
|Junior subordinated debentures issued to American Community Capital Trust I and II |  |      | 779,595   |   |      |   | 344,751   |  |   | 303,408  
|                                                                                   |  |      |           |   |      |   |           |  |   |          
|Non-interest income:                                                               |  |      |           |   |      |   |           |  |   |          
|Equity in earnings of American Community Bank                                      |  |      | 2,162,823 |   |      |   | 1,440,542 |  |   | 1,555,552
|Equity in earnings of First National Bank of the Carolinas                         |  |      | 677,000   |   |      |   |          |  |   |         
|                                                                                   |  |      |           |   |      |   |           |  |   |          
|Total non-interest income                                                          |  |      | 2,839,823 |   |      |   | 1,440,542 |  |   | 1,555,552
|                                                                                   |  |      |           |   |      |   |           |  |   |          
|Non-interest expense:                                                              |  |      |           |   |      |   |           |  |   |          
|Professional fees                                                                  |  |      | 18,138    |   |      |   | 27,380    |  |   | 12,908   
|Other                                                                              |  |      | 30,811    |   |      |   | 21,742    |  |   | 37,264   
|                                                                                   |  |      |           |   |      |   |           |  |   |          
|Total non-interest expense                                                         |  |      | 48,949    |   |      |   | 49,122    |  |   | 50,172   
|                                                                                   |  |      |           |   |      |   |           |  |   |          
|Income before taxes                                                                |  |      | 2,676,204 |   |      |   | 1,388,015 |  |   | 1,300,211
|Income tax benefit                                                                 |  |      | (67,000   | ) |      |   |          |  |   |         
|                                                                                   |  |      |           |   |      |   |           |  |   |          
|Net income                                                                         |  | $    | 2,743,204 |   |      | $ | 1,388,015 |  | $ | 1,300,211
|                                                                                   |  |      |           |   |      |   |           |  |   |          



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 19 - PARENT COMPANY FINANCIAL DATA
(Continued)



Condensed Statements of Cash Flows

Years Ended December 31, 2004, 2003 and 2002



|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                             |  | 2004 |             |   | 2003 |   |            | 2002 | 
|Cash flows from operating activities:                                        |  |      |             |   |      |   |            |      |  |   |            |  
|Net income                                                                   |  | $    | 2,743,204   |   |      | $ | 1,388,015  |      |  | $ | 1,300,211  |  
|Equity in earnings of subsidiaries                                           |  |      | (2,839,823  | ) |      |   | (1,440,542 | )    |  |   | (1,555,552 | )
|Decrease (increase) in other assets                                          |  |      | 195,835     |   |      |   | (918,743   | )    |  |   | (261,470   | )
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Net cash used by operating activities                                        |  |      | 99,216      |   |      |   | (971,270   | )    |  |   | (516,811   | )
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities:                                        |  |      |             |   |      |   |            |      |  |   |            |  
|Upstream dividends received from American Community Bank                     |  |      |            |   |      |   |           |      |  |   | 292,500    |  
|Purchases of investments available for sale                                  |  |      | (403,469    | ) |      |   |           |      |  |   |           |  
|Investment in American Community Bank                                        |  |      | (2,700,000  | ) |      |   |           |      |  |   | (1,500,000 | )
|Investment in First National Bank of the Carolinas                           |  |      | (7,434,275  | ) |      |   |            |      |  |   |            |  
|Investment in American Community                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Capital Trust I                                                              |  |      |            |   |      |   |           |      |  |   | (46,400    | )
|Investment in American Community                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Capital Trust II                                                             |  |      |            |   |      |   | (310,000   | )    |  |   |           |  
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Net cash used by investing activities                                        |  |      | (10,537,744 | ) |      |   | (310,000   | )    |  |   | (1,253,900 | )
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities:                                        |  |      |             |   |      |   |            |      |  |   |            |  
|Junior subordinated debentures issued to American Community Capital Trust I  |  |      |            |   |      |   |           |      |  |   | 1,546,400  |  
|Junior subordinated debentures issued to American Community Capital Trust II |  |      |            |   |      |   | 10,310,000 |      |  |   |           |  
|Proceeds from advances from subsidiaries                                     |  |      | 211,222     |   |      |   |           |      |  |   |           |  
|Proceeds from issuance of common stock                                       |  |      | 327,673     |   |      |   | 11,197     |      |  |   | 8,133,429  |  
|Cash dividends paid on common stock                                          |  |      | (282,571    | ) |      |   | (225,950   | )    |  |   |           |  
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Net cash provided by financing activities                                    |  |      | 256,324     |   |      |   | 10,095,247 |      |  |   | 9,679,829  |  
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Increase (decrease) in cash and cash equivalents                             |  |      | (10,182,204 | ) |      |   | 8,813,977  |      |  |   | 7,909,118  |  
|                                                                             |  |      |            
|Cash and cash equivalents, beginning                                         |  |      | 18,022,087  |   |      |   | 9,208,110  |      |  |   | 1,298,992  |  
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, ending                                            |  | $    | 7,839,883   |   |      | $ | 18,022,087 |      |  | $ | 9,208,110  |  
|                                                                             |  |      |             |   |      |   |            |      |  |   |            |  



NOTE 20- BUSINESS COMBINATION



On November 5, 2003, the Company entered into an Agreement and Plan of
Merger with FNB Bancshares, Inc., a bank holding company headquartered in Gaffney, SC, which is the parent company of First National Bank of the Carolinas. The acquisition was approved at a special shareholders meeting on March 4, 2004 and the
transaction took place effective at the close of business on April 15, 2004. First National shareholders could elect to receive $22.64 in cash for each share of First National stock they owned, exchange each share of First National stock for 1.6347
shares of American Community Bancshares, Inc. stock, or a combination of stock and cash. As a result of the combination, the Company paid $7.1 million for shares exchanged for cash and has issued 619,044 additional shares of stock. The acquisition
was accounted for using the purchase method of accounting, with the operating results of First National subsequent to April 15, 2004 included in the Companys financial statements.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 20- BUSINESS COMBINATION (Continued)



A summary of the total purchase price of the transaction is as follows:



|                                      |  |                        |       
|------------------------------------- |  | ---------------------- | ------
|                                      |  | (Dollars in thousands)
|                                      | 
|Fair value of common stock issued     |  | $                      | 8,574 
|Cash paid for shares                  |  |                        | 7,080 
|Fair value of stock options exchanged |  |                        | 1,616 
|Transaction costs                     |  |                        | 392   
|                                      |  |                        |       
|Total purchase price                  |  | $                      | 17,662
|                                      |  |                        |       



A summary of the estimated fair value
of the First National assets acquired and liabilities assumed is as follows:



|                                              |  |                        |         |  
|--------------------------------------------- |  | ---------------------- | ------- | -
|                                              |  | (Dollars In thousands) |        
|                                              | 
|Cash and cash equivalents                     |  | $                      | 4,374   |  
|Investment securities available for sale      |  |                        | 7,421   |  
|Non-marketable securities                     |  |                        | 416     |  
|Loans receivable                              |  |                        | 56,839  |  
|Allowance for loan losses                     |  |                        | (685    | )
|Premises and equipment                        |  |                        | 3,071   |  
|Deferred tax asset                            |  |                        | 108     |  
|Goodwill                                      |  |                        | 9,838   |  
|Other assets                                  |  |                        | 1,410   |  
|Deposits                                      |  |                        | (61,268 | )
|Borrowings                                    |  |                        | (2,000  | )
|Securities sold under agreement to repurchase |  |                        | (1,219  | )
|Other liabilities                             |  |                        | (1,035  | )
|                                              |  |                        |         |  
|Net assets acquired                           |  |                        | 17,270  |  
|Transaction costs                             |  |                        | 392     |  
|                                              |  |                        |         |  
|Total purchase price                          |  | $                      | 17,662  |  
|                                              |  |                        |         |  



The following table reflects the
unaudited pro forma combined results of operations for the years ended December 31, 2004 and 2003, assuming the acquisition had occurred at the beginning of the fiscal year 2003.



|                                     |  |                                       |        |      |   |       
|------------------------------------ |  | ------------------------------------- | ------ | ---- | - | ------
|                                     |  | 2004                                  |        | 2003
|                                     |  | (In Thousands, except per share data)
|Net interest income                  |  | $                                     | 12,897 |      | $ | 10,947
|Net income                           |  |                                       | 3,074  |      |   | 1,856 
|Net income per common share- Basic   |  |                                       | .89    |      |   | .54   
|Net income per common share- Diluted |  |                                       | .80    |      |   | .53   



The pro forma net income for the
twelve months ended December 31, 2004 does not reflect approximately $398,000 in acquisition related costs incurred by First National. In managements opinion, these unaudited results are not necessarily indicative of what actual combined
results of operations might have been if the acquisition had been effective at the beginning of fiscal year 2004.



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AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
2004, 2003 and 2002



NOTE 21  GOODWILL AND OTHER INTANGIBLE
ASSETS



Goodwill arose from the 2004 purchase of First National. Pursuant
to Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill acquired will not be amortized but will be subject to an annual impairment test. Goodwill recorded by the Company in
conjunction with the business combination of First National amounted to $9,838,173 as of December 31, 2004.



Other intangible assets were acquired in conjunction with the purchase of First National. Subject to the provisions of SFAS No. 142, such other intangible assets, which consist entirely of deposit base premiums
acquired through business acquisitions, are amortized over the lives of the related acquired deposit relationships. In accordance with the Companys estimate of approximate lives of the acquired deposit relationships, an 8 year straight-line
amortization schedule has been established for the other intangible assets. The Company will continue to evaluate amortization periods and such amortization periods could be revised downwards (but not upwards) in the future if circumstances warrant.
The initial deposit premium associated with the purchase of First National was $854,329. Amortization of these other intangible assets amounted to $75,650 for the year ended December 31, 2004. The estimated amortization expense on intangible assets
acquired from First National for the years ending December 31, 2005 through 2008 is $106,800 annually. The Company had no other intangible assets.



NOTE 22  SUBSEQUENT EVENT



On May 11, 2004, a Mecklenburg County, North Carolina jury returned a $631,600 verdict against ACB. The verdict was the result of a suit brought by MC Contractors, Inc.,
f/k/a Mann Contractors (Mann). The case involved an account opened at ACB in 2001 on behalf of Mann by a person, who was, at the time, Vice President, Secretary, Director and a 50% owner of Mann. Reflected in the 2004 financials is a
$600,000 charge to pre-tax earnings for a proposed settlement of the lawsuit. The lawsuit was subsequently settled in February of 2005 for $600,000.



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ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



Not Applicable.



ITEM 8a  CONTROLS AND PROCEDURES



Management, including the Companys President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Companys President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective,
in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.



There have been no changes in the Companys internal control over financial reporting
identified in connection with the evaluation that occurred during the Companys last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Companys internal control over financial reporting.



ITEM 8b  OTHER INFORMATION



Not applicable.



PART III



ITEM 9  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT



The information contained in the sections captioned Proposal 1: Election of Directors, Executive Officers, and Required Reports of
Beneficial Ownership in the 2005 Annual Meeting Proxy Statement is incorporated herein by reference.



The Company has adopted a code of ethics that applies, among others, to its principal executive officer and principal financial officer. The Companys code of ethics is available at
http://www.americancommunitybank.com.



ITEM 10  EXECUTIVE COMPENSATION



The
information contained in the sections captioned Director Compensation and Executive Compensation in the 2005 Annual Meeting Proxy Statement is incorporated herein by reference.



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ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information contained in the sections captioned Ownership of Voting Securities in the 2005 Annual Meeting Proxy Statement is incorporated herein by reference.



Set forth below is certain information regarding the Registrants various stock option
plans.



|                                                           |  |                                                                                              |  |                                                                           |       |                                                                                                                                        |       
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ----- | -------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants, and rights |  | Weighted-average exerciseprice of outstandingoptions, warrants, andrights |       | Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in
column (a))
|                                                           |  | (a)                                                                                          |  | (b)                                                                       |       | (c)                                                                                                                                   
|Equity compensation plans approved by security holders     |  | 1999 Incentive:                                                                              |  |                                                                           |       |                                                                                                                                        |       
|                                                           |  | 146,595                                                                                      |  | $                                                                         | 9.05  |                                                                                                                                        | 132   
|                                                           |  | 1999 Nonstatutory:                                                                           |  |                                                                           |       |                                                                                                                                        |       
|                                                           |  | 164,127                                                                                      |  | $                                                                         | 8.33  |                                                                                                                                        | -0-   
|                                                           |  | 2001 Incentive:                                                                              |  |                                                                           |       |                                                                                                                                        |       
|                                                           |  | 78,200                                                                                       |  | $                                                                         | 10.51 |                                                                                                                                        | 10,000
|                                                           |  | 2002 Nonstatutory:                                                                           |  |                                                                           |       |                                                                                                                                        |       
|                                                           |  | 22,667                                                                                       |  | $                                                                         | 9.75  |                                                                                                                                        | 1,000 
|                                                           |  | 1997 FNB Plan:                                                                               |  |                                                                           |       |                                                                                                                                        |       
|                                                           |  | 162,829                                                                                      |  | $                                                                         | 5.55  |                                                                                                                                        | -0-   
|                                                           |  |                                                                                              | 
|Equity compensation plans not approved by security holders |  | None                                                                                         |  |                                                                           | None  |                                                                                                                                        | None  
|                                                           |  |                                                                                              |  |                                                                           |       |                                                                                                                                        |       
|Total                                                      |  | 574,418                                                                                      |  | $                                                                         | 8.08  |                                                                                                                                        | 11,132
|                                                           |  |                                                                                              |  |                                                                           |       |                                                                                                                                        |       



ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information contained in the sections captioned Director Relationships and Indebtedness of and Transactions with Management in the 2005 Annual Meeting Proxy Statement is incorporated herein
by reference.



ITEM 13  EXHIBITS



(a)
Index to Exhibits



|               |  |                                         
|-------------- |  | ----------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF EXHIBIT                  
|3.1            |  | Registrants Articles of Incorporation* 
|               | 
|3.2            |  | Registrants Bylaws*                    
|               | 
|4.1            |  | Specimen Stock Certificate*             
|               | 
|4.2            |  | Specimen Warrant Certificate**          
|               | 
|4.3            |  | Warrant Agreement**                     
|               | 
|10.1           |  | Employment Agreement of Randy P. Helton*
|               | 
|10.2           |  | 1999 Incentive Stock Option Plan*       



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|           |  |                                                                                                                                                                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3       |  | 1999 Nonstatutory Stock Option Plan*                                                                                                                                                                                                            
|           | 
|10.4       |  | 401(k) Plan*                                                                                                                                                                                                                                    
|           | 
|10.5(i)    |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Indenture, dated December 31, 2001**                                                                                                                              
|           | 
|10.5(ii)   |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Expense Agreement, dated December 31, 2001**                                                                                                                      
|           | 
|10.5(iii)  |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Amended and Restated Trust Agreement, dated March 1, 2002**                                                                                                       
|           | 
|10.5(iv)   |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Supplemental Indenture, dated March 1, 2002**                                                                                                                     
|           | 
|10.5(v)    |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Subordinated Debenture, dated March 1, 2002 ($2,061,860) **                                                                                                       
|           | 
|10.5(vi)   |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Subordinated Debenture, dated March 1, 2002 ($1,546,000) **                                                                                                       
|           | 
|10.5(vii)  |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Amended and Restated Preferred Securities Guarantee Agreement, dated March 1, 2002**                                                                              
|           | 
|10.5(viii) |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Amended and Restated Declaration of Trust, dated December 15, 2003***                                                                                      
|           | 
|10.5(ix)   |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Indenture, dated December 15, 2003***                                                                                                                      
|           | 
|10.5(x)    |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Guarantee Agreement, dated December 31, 2003***                                                                                                            
|           | 
|10.5(xi)   |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Form of Floating Rate Junior Subordinated Debenture of American Community Bancshares, Inc. (incorporated
by reference to Exhibit A of Exhibit 10.5(ix)) ***



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|       |  |                                                                                                                 
|------ |  | ----------------------------------------------------------------------------------------------------------------
|10.6   |  | 2001 Incentive Stock Option Plan****                                                                            
|       | 
|10.7   |  | 2002 Nonstatutory Stock Option Plan*****                                                                        
|       | 
|21     |  | Subsidiaries of Registrant (Filed herewith)                                                                     
|       | 
|31(i)  |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith) 
|       | 
|31(ii) |  | Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
|       | 
|32(i)  |  | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith) 
|       | 
|32(ii) |  | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith) 
|       | 
|99     |  | Registrants Definitive Proxy Statement******                                                                   

---

|       |  |                                                                                                                               
|------ |  | ------------------------------------------------------------------------------------------------------------------------------
|*      |  | Incorporated by reference from exhibits to Registrants Registration Statement on Form S-4 (File No. 333-31148)               
|**     |  | Incorporated by reference from exhibits to Registrants Registration statement on Form SB-2 (File No. 333-84484)              
|***    |  | Incorporated by reference from Registrants Current Report on Form 8-K dated December 18, 2003 (File No. 000-30517)           
|****   |  | Incorporated by reference from Exhibit 10.5 to Registrants Annual Report on Form 10-KSB for the year ended December 31, 2000.
|*****  |  | Incorporated by reference from Registrants Registration Statement on Form S-8 (File No. 333-101208)                          
|****** |  | Filed with the Commission pursuant to Rule 14a-6.                                                                             



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ITEM 14  PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information contained in the sections captioned Report of the Audit Committee and Proposal 2: Ratification of Independent Public Accountants in the 2005 Annual Meeting Proxy Statement are incorporated herewith by
reference.



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##### Table of Contents

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|               |  |                                      
|-------------- |  | -------------------------------------
|March 25, 2005 |  | /s/ Randy P. Helton                  
|               |  | Randy P. Helton                      
|               |  | President and Chief Executive Officer



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##### Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                                                    |  |               
|----------------------------------------------------------------------------------- |  | --------------
|/s/ Randy P. HeltonRandy P. Helton, President, Chief Executive Officer and Director |  | March 25, 2005
|                                                                                    | 
|/s/ Dan R. Ellis, Jr.Dan R. Ellis, Jr., Chief Financial Officer                     |  | March 25, 2005
|                                                                                    | 
|/s/ Robert D. DinsmoreRobert D. Dinsmore, Director                                  |  | March 25, 2005
|                                                                                    | 
|/s/ Frank L. GentryFrank L. Gentry, Director                                        |  | March 25, 2005
|                                                                                    | 
|/s/ Thomas J. HallThomas J. Hall, Director                                          |  | March 25, 2005
|                                                                                    | 
|/s/ Larry S. HelmsLarry S. Helms, Director                                          |  | March 25, 2005
|                                                                                    | 
|/s/ Bill H. MasonBill H. Mason, Director                                            |  | March 25, 2005
|                                                                                    | 
|/s/ V. Stephen MossV. Stephen Moss, Director                                        |  | March 25, 2005
|                                                                                    | 
|/s/ Peter A. PappasPeter A. Pappas, Director                                        |  | March 25, 2005
|                                                                                    | 
|/s/ L. Steven PhillipsL. Steven Phillips, Director                                  |  | March 25, 2005
|                                                                                    | 
|/s/ Alison J. SmithAlison J. Smith, Director                                        |  | March 25, 2005
|                                                                                    | 
|/s/ L. Carlton TysonL. Carlton Tyson, Director                                      |  | March 25, 2005
|                                                                                    | 
|/s/ David D. WhitleyDavid D. Whitley, Director                                      |  | March 25, 2005
|                                                                                    | 
|/s/ Gregory N. WylieGregory N. Wylie, Director                                      |  | March 25, 2005



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|               |  |                                                                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                                                                                                      
|3.1            |  | Registrants Articles of Incorporation *                                                                                                                                                                                    
|               | 
|3.2            |  | Registrants Bylaws *                                                                                                                                                                                                       
|               | 
|4.1            |  | Specimen Stock Certificate*                                                                                                                                                                                                 
|               | 
|4.2            |  | Specimen Warrant Certificate**                                                                                                                                                                                              
|               | 
|4.3            |  | Warrant Agreement**                                                                                                                                                                                                         
|               | 
|10.1           |  | Employment Agreement of Randy P. Helton*                                                                                                                                                                                    
|               | 
|10.2           |  | 1999 Incentive Stock Option Plan*                                                                                                                                                                                           
|               | 
|10.3           |  | 1999 Nonstatutory Stock Option Plan*                                                                                                                                                                                        
|               | 
|10.4           |  | 401(k) Plan*                                                                                                                                                                                                                
|               | 
|10.5(i)        |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Indenture, dated December 31, 2001**                                                                                                          
|               | 
|10.5(ii)       |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Expense Agreement, dated December 31, 2001**                                                                                                  
|               | 
|10.5(iii)      |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Amended and Restated Trust Agreement, dated March 1, 2002**                                                                                   
|               | 
|10.5(iv)       |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Supplemental Indenture, dated March 1, 2002**                                                                                                 
|               | 
|10.5(v)        |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Subordinated Debenture, dated March 1, 2002 ($2,061,860) **                                                                                   
|               | 
|10.5(vi)       |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Subordinated Debenture, dated March 1, 2002 ($1,546,000) **                                                                                   
|               | 
|10.5(vii)      |  | Issuance of Trust Preferred Securities by American Community Capital Trust I: Amended and Restated Preferred Securities Guarantee Agreement, dated March 1, 2002**                                                          
|               | 
|10.5(viii)     |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Amended and Restated Declaration of Trust, dated December 15, 2003***                                                                  
|               | 
|10.5(ix)       |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Indenture, dated December 15, 2003***                                                                                                  
|               | 
|10.5(x)        |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Guarantee Agreement, dated December 31, 2003***                                                                                        
|               | 
|10.5(xi)       |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Form of Floating Rate Junior Subordinated Debenture of American Community Bancshares, Inc. (included as
Exhibit A of Exhibit 10(ix))***
|               | 
|10.6           |  | 2001 Incentive Stock Option Plan****                                                                                                                                                                                        
|               | 
|10.7           |  | 2002 Nonstatutory Stock Option plan*****                                                                                                                                                                                    
|               | 
|21             |  | Subsidiaries of Registrant (Filed herewith)                                                                                                                                                                                 



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|   |  |                                               
|-- |  | ----------------------------------------------
|99 |  | Registrants Definitive Proxy Statement ******

---

|       |  |                                                                                                                               
|------ |  | ------------------------------------------------------------------------------------------------------------------------------
|*      |  | Incorporated by reference from exhibits to Registrants Registration Statement on Form S-4 (File No. 333-31148)               
|**     |  | Incorporated by reference from exhibits to Registrants Registration statement on Form SB-2 (File No. 333-84484)              
|***    |  | Incorporated by reference from Registrants Current Report on Form 8-K dated December 18, 2003 (File No. 000-30517)           
|****   |  | Incorporated by reference from exhibit 10.5 to Registrants Annual Report for the year ended December 31, 2000 on Form 10-KSB.
|*****  |  | Incorporated by reference from Registrants Registration Statement on Form S-8 (File No. 333-101208)                          
|****** |  | Filed with the Commission pursuant to Rule 14a-6.                                                                             



77