**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D. C. 20549**


**FORM
10-K**





Annual
Report Pursuant to Section 13 or 15(d) of


The
Securities Exchange Act of 1934





For the
Fiscal Year Ended December 31, 2004





Transition
Report Pursuant to Section 13 or 15(d) of


the
Securities Exchange Act of 1934





Commission
File Number 33-81890





Community
      Bankshares, Inc.(Exact name of registrant as specified in its
      charter)





Georgia
    
    58-1415887(State
      or other jurisdiction of
    
    (I.
      R. S. EmployerIncorporation
      or organization)
    
    Identification
      No.)





448 North Main Street, Cornelia, Georgia
      30531(Address of principal executive offices) (Zip
      Code)








Registrant’s
telephone number, including area code: (706) 778-2265





Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to Section 12(g) of the Act: None





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  Not
applicable. Registrant is not required to be registered under the Securities
Exchange Act of 1934.





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
126-2 of the Act). Yes  ̈ No  x .




Aggregate
market value of the voting stock held by non-affiliates of the Registrant as of
June 28, 2004: $43,675,216 (based upon approximate market value of $45.06/share,
the latest sales price known to the Registrant for the Common Stock at such
date, for which there is no established trading market).





As of
March 29, 2005, 2,141,585 shares of Common Stock, par value $1.00 per
share, were issued and outstanding.











**PART
1**





**ITEM
1.** **BUSINESS.**





**General**





Community
Bankshares, Inc. (the “Company”) was organized under the laws of Georgia in 1980
and commenced operations in 1981. The Company is a financial holding 
company registered with the Board of Governors of the Federal Reserve (the
“Federal Reserve”). All of the Company’s activities are currently conducted by
or through its subsidiaries, Community Bank & Trust (“Community”), Community
Bank & Trust-Alabama (“Community-Alabama”), and Community Bank &
Trust-Troup (“Community-Troup”) (collectively, the “Banks”) and the non-bank
subsidiaries of Community, Financial Supermarkets, Inc. (“Financial
Supermarkets”) and Financial Properties, Inc. (“Financial Properties”).
Financial information about the Company’s segments is in note 15 to its audited
consolidated financial statements included in this annual report.





All
references herein to the Company include Community Bankshares, Inc., the Banks,
Financial Supermarkets and Financial Properties unless the context indicates a
different meaning.





**Forward
Looking Statements**





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





**Business
Description of Banks**





*General* . Each of
the Banks is community-oriented and offers customary banking services such as
consumer and commercial checking accounts, NOW accounts, savings accounts,
certificates of deposit, lines of credit and money transfers. Each Bank finances
commercial and consumer transactions, makes secured and unsecured loans, and
provides a variety of other banking services.





Community
operates ten traditional bank branches and twenty-two banking offices in
supermarkets and Wal-Mart stores in nine northeast Georgia counties. Its
traditional branches are located in Habersham, Jackson, Hall **,** Rabun,
Barrow and White Counties. Community-Troup has two traditional branches in Troup
County, Georgia and three in-store offices in Troup and adjacent Muscogee County
(Columbus). Community-Alabama operates one traditional branch in Bulloch County,
Alabama and one traditional branch and two  in-store locations in adjacent
Montgomery County.





*Deposits* . Each
Bank offers a full range of depository accounts and services to both consumers
and businesses. At December 31, 2004, our aggregate deposit base, totaling
approximately $726.9 million, consisted of approximately $119 million in
non-interest-bearing demand deposits (16.38% of total deposits), approximately
$197.9 million in interest-bearing demand deposits (including money market
accounts) (27.23% of total deposits), approximately $39 million in savings
deposits (5.37% of total deposits), approximately $234.9 million in time
deposits in amounts less than $100,000 (32.32% of total deposits), and
approximately $135.9 million in time deposits of $100,000 or more (18.70% of
total deposits).





*Loans* . Each
Bank makes both secured and unsecured loans to individuals, firms and
corporations, and both consumer and commercial lending operations include
various types of credit for customers. In addition, Community also operates a
loan production office **** in
Gainesville, Georgia. The Gainesville loan production office originates loans
guaranteed by the Small Business Administration (the “SBA”) and resells the
guaranteed portion of such loans to others. Each Bank also makes direct
installment loans to consumers on both a secured and unsecured basis. At
December 31, 2004, consumer and other, real estate (including mortgage and
construction loans) and commercial loans represented approximately 9%, 83% and
8% respectively, of our total loan portfolio. Real estate loans made by the
Banks include residential real estate, construction, acquisition and development
loans, as well as loans for other purposes, which are secured by real estate.





2


Commercial
lending is directed principally toward businesses within the market area of the
Banks or existing or potential deposit customers of the Banks. The Gainesville
loan production office, however, makes loans to individuals and businesses that
are not located in its market. Commercial loan collateral includes marketable
securities, certificates of deposit, accounts receivable, inventory and
equipment. Commercial lending decisions are based upon a determination of the
borrower’s ability and willingness to repay the loan, which in turn are impacted
by such factors as the borrower’s cash flow and sales trends, as well as
relevant economic conditions. This category includes loans made to individuals,
partnership or corporate borrowers and obtained for a variety of purposes. Risks
associated with these loans can be significant. Risks include, but are not
limited to, downturn in industry and economic trends, deteriorated or
non-existing collateral, fraud, bankruptcy and changes in interest rates.





Loans
secured by real estate, which are made to businesses, are categorized as real
estate loans. Often, real estate collateral is deemed to be superior to other
collateral available to small- to medium-sized businesses.





The Banks
originate traditional first mortgage loans, through an affiliation with a
mortgage banking company, to individuals for one-to-four family structures. They
offer traditional mortgage loans with loan-to-value amounts up to 95%.





The Banks
also offer nontraditional mortgage loans which they retain in their own loan
portfolios. Various types of fixed-rate and variable-rate products are
available, with fixed rate loans generally limited to short-term balloon
maturities. Risks involved with residential mortgage lending include, but are
not limited to, title defects, fraud, general real estate market deterioration,
inaccurate appraisals, interest rate fluctuations and financial deterioration of
the borrower.





The Banks
also make residential construction loans, generally for one-to-four family unit
structures. The Banks require a first lien position on the loans associated with
construction projects. Loan disbursements require independent, on-site
inspections to assure the project is on budget and that the loan proceeds are
being used in accordance with the plans, specifications, and survey for the
construction project and not being diverted to other uses. The loan-to-value
limit for such loans is 85% of the as-built appraised value for homes built for
sale and second homes and 90% for owner occupied primary residents. Loans for
built for sale construction can present a high degree of risk depending on,
among other things, whether the builder can sell the home and the nature of
changing economic conditions.





Additionally,
the Banks make acquisition and development loans to approved developers for the
purpose of developing acreage into single-family lots on which houses will be
built. The loan-to-value ratio for such loans does not exceed 85% of the
developed value as defined by an independent appraisal, or 100% of the cost,
whichever is less. Loans for acquisition and development can present a high
degree of risk to the Banks, depending upon, among other things, whether the
developer can find buyers for the lots, whether the builders can obtain
financing, and the nature of changing economic conditions.





In
addition, the Banks make consumer loans, consisting primarily of installment
loans to individuals for personal, family and household purposes, including
loans for automobiles and home improvements. Consumer lending decisions are
based on a determination of the borrower’s ability and willingness to repay the
loan, which in turn are affected by such factors as the borrower’s income, job
stability, previous credit history and any collateral for the loan. Risks
associated with these loans include, but are not limited to, deteriorated or
non-existing collateral, a general economic downturn, bankruptcy, layoffs,
fraud, and consumer financial problems.





*Lending
Policy.* The
current lending policy of each Bank is to offer consumer, real estate and
commercial credit services to individuals and entities that meet our credit
standards. Each Bank provides its lending officers with written guidelines for
lending activities. Lending authority is delegated by the Board of Directors of
the particular Bank to loan officers, each of whom is limited in the amount of
secured and unsecured loans which he or she can make to a single borrower or
related group of borrowers. In addition, the Board of Directors delegates
lending authority above individual loan officer limits to the Asset/Liability
Committee.





*Loan
Review and Non-Performing Assets.* The
Company reviews the loan portfolio of each Bank to determine deficiencies and
corrective action to be taken. Senior lending officers at the Banks conduct
periodic reviews of borrowers and ongoing reviews of all past due loans. Past
due loans are reviewed at least weekly by lending officers and a summary report
is reviewed monthly by the particular Bank’s Board of Directors. The Boards of
Directors review all relationships for Community over $400,000 and samples below
$400,000, for Community-Alabama over $150,000 and samples below $150,000 and for
Community-Troup over $275,000 and samples below $275,000, whether current or
past due, are reviewed by the respective Bank’s Board of Directors at least once
annually. In addition, each Bank maintains internal classifications of problem
and potential problem loans.





3





*Asset/Liability
Management* . The
Board of Directors of each Bank is charged with establishing policies to manage
the assets and liabilities of each Bank. Each Board’s task is to manage asset
growth, net interest margin, liquidity and capital. The Company directs the
overall acquisition and allocation of funds based on these policies. At monthly
meetings, the asset/liability committees of the Banks comprised of senior
officers of the respective Bank review a report with regard to the monthly asset
and liability funds budget and income and expense budget of the Bank in relation
to the actual composition and flow of funds, the ratio of the amount of
rate-sensitive assets to the amount of rate-sensitive liabilities, the amount of
interest rate risk and equity market value exposure under varying rate
environments, the ratio of loan loss reserve to outstanding loans and other
variables, such as expected loan demand, investment opportunities, core deposit
growth within specified categories, regulatory changes, monetary policy
adjustments and the overall condition of the local and state
economy.





*Investment
Policy* . Our
investment portfolio policy is to maximize income consistent with liquidity,
asset quality and regulatory constraints. The policy is reviewed annually by the
Board of Directors of each Bank. Individual transactions, portfolio composition
and performance are reviewed and approved monthly by the Board of Directors of
each bank or a committee thereof. The President of each Bank reports to the
Bank’s full Board of Directors on a monthly basis information concerning sales,
purchases, resultant gains or losses, average maturity, federal taxable
equivalent yields and appreciation or depreciation by investment categories.





**Business
Description of Non-Banking Subsidiaries**





*Financial
Supermarkets* .
Financial Supermarkets, formed as a Georgia corporation in 1984, is a
wholly-owned subsidiary of Community. Financial Supermarkets’ primary business
is to provide various consulting and licensing services to financial
institutions in connection with the establishment of turn-key bank branches in
supermarkets and other retail locations. These services are marketed to other
financial institutions. Financial Supermarkets enters into agreements primarily
with major supermarket chains for the right to establish bank branches in
particular sites. Financial Supermarkets then licenses such rights, along with
the right to operate the Supermarket Bank®, to individual financial
institutions, in addition to providing consulting services to such institutions
ranging from providing alternative construction designs to coordinating employee
training.





Since
1984, Financial Supermarkets has assisted clients with the development of over
710 bank facilities in supermarkets and other retail locations throughout the
United States. Over its 20-year history, Financial Supermarkets has expanded the
scope of its business beyond supermarket bank consulting and development to
include regulatory consulting for the financial services industry, marketing
consulting, a travel agency, and owning an interest in a company designed to
provide wholesale internet services.





*Financial
Properties.* Financial Properties is the Century 21® real estate franchisee in Habersham,
Stephens, Jackson and White Counties, Georgia.





**Competition**





*The
Banks* . The
banking business is highly competitive. The Banks compete with other banks,
savings associations, finance companies, credit unions, governmental agencies,
and other financial service organizations in the three markets in which the
Banks operate. Many of these competitors have substantially greater resources
than do the Banks.





*Non-Banking
Subsidiaries.* Financial Supermarkets primarily competes in the in-store bank branch consulting
business with International Banking Technologies of Atlanta, Georgia, and
Memphis-based National Commerce Bank Services, Inc. Financial Properties
competes with other real estate brokers in Habersham, Stephens, Jackson and
White Counties, Georgia.





**Employees**





At
December 31, 2004, the Company had 405 full-time employees and 37 part-time
employees. Neither the Company nor any of its subsidiaries is a party to any
collective bargaining agreement, and our management believes that the Company’s
employee relations are good.





4





**Supervision
and Regulation**





The
following discussion of statutes and regulations affecting bank holding
companies and banks is a summary thereof and is qualified in its entirety by
reference to such statutes and regulations. This explanation does not purport to
describe state or federal supervision and regulation of general business
corporations.








*General* . The
Company is a registered financial holding company subject to regulation by the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (the
“Bank Holding Company Act”). The Company is required to file financial
information with the Federal Reserve periodically and is subject to periodic
examination by the Federal Reserve.





The Act
requires every financial holding company to obtain the Federal Reserve’s prior
approval before (1) it may acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank that it does not already control;
(2) it or any of its non-bank subsidiaries may acquire all or substantially all
of the assets of a bank; and (3) it may merge or consolidate with any other bank
holding company. In addition, a financial holding company is generally
prohibited from engaging in, or acquiring, direct or indirect control of the
voting shares of any company engaged in non-banking activities. This prohibition
does not apply to activities listed in the Act or found by the Federal Reserve,
by order or regulation, to be closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the activities
that the Federal Reserve has determined by regulation or order to be closely
related to banking are:





·
    making
      or servicing loans and certain types of leases;


·
    performing
      certain data processing services;


·
    acting
      as fiduciary or investment or financial advisor;


·
    providing
      brokerage services;


·
    underwriting
      bank eligible securities;


·
    underwriting
      debt and equity securities on a limited basis through separately
      capitalized subsidiaries; and


·
    making
      investments in corporations or projects designed primarily to promote
      community welfare.





Although
the activities of bank holding companies have traditionally been limited to the
business of banking and activities closely related or incidental to banking (as
discussed above), the Gramm-Leach-Bliley Act (the "GLB Act"), and relaxed the
previous limitations thus permitting bank holding companies to engage in a
broader range of financial activities. Specifically, bank holding companies may
elect to become financial holding companies which may affiliate with securities
firms and insurance companies and engage in other activities that are financial
in nature. Among the activities that will be deemed “financial in nature”
include:





·
    lending,
      exchanging, transferring, investing for others or safeguarding money or
      securities;


·
    insuring,
      guaranteeing, or indemnifying against loss, harm, damage, illness,
      disability, or death, or providing and issuing annuities, and acting as
      principal, agent, or broker with respect
thereto;


·
    providing
      financial, investment, or economic advisory services, including advising
      an investment company;


·
    issuing
      or selling instruments representing interests in pools of assets
      permissible for a bank to hold directly;
and


·
    underwriting,
      dealing in or making a market in
securities.





A bank
holding company may become a financial holding company under this statute only
if each of its subsidiary banks is well capitalized, is well managed and has at
least a satisfactory rating under the Community Reinvestment Act. A bank holding
company that falls out of compliance with such requirement may be required to
cease engaging in certain activities. Any bank holding company that does not
elect to become a financial holding company remains subject to the current
restrictions of the Act.





Under
this legislation, the Federal Reserve Board serves as the primary “umbrella”
regulator of financial holding companies with supervisory authority over each
parent company and limited authority over its subsidiaries. The primary
regulator of each subsidiary of a financial holding company will depend on the
type of activity conducted by the subsidiary. For example, broker-dealer
subsidiaries will be regulated largely by securities regulators and insurance
subsidiaries will be regulated largely by insurance authorities.





The
Company must also register with the Department of Banking and Finance of the
State of Georgia (the “DBF”) and file periodic information with the DBF. As part
of such registration, the DBF requires information with respect to the Company’s
financial condition, operations, management and inter-company relationships, and
related matters. The DBF may also require such other information as is necessary
to keep itself informed as to whether the provisions of Georgia law and the
regulations and orders issued thereunder by the DBF have been complied with, and
the DBF may examine the Company and each of the Banks.





5





The
Company is an “affiliate” of the Banks under the Federal Reserve Act, which
imposes certain restrictions on (1 ) loans by the Banks to the Company, (2)
investments in the stock or securities of the Company by the Banks, (3) the
Banks taking the stock or securities of an “affiliate” as collateral for loans
by the Banks to a borrower and (4) the purchase of assets from the Company by
the Banks. Further, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.





Community
and Community-Troup, as Georgia banks, are subject to the supervision of, and
are regularly examined by, the Federal Deposit Insurance Corporation (the
“FDIC”) and the DBF. Community-Alabama, as an Alabama bank, is subject to the
supervision and examination of the FDIC and the Alabama State Banking Department
(the “ABD”). Both the FDIC and the DBF must grant prior approval of any merger,
consolidation or other corporate reorganization involving Community or
Community-Troup and the FDIC and ABD must grant prior approval of any merger,
consolidation or other corporate reorganization involving Community-Alabama. A
bank can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with the default of a commonly-controlled
institution.





*Payment
of Dividends* . The
Company is a legal entity separate and distinct from the Banks. A portion of the
Company’s revenues result from dividends paid to the Company by the Banks. There
are statutory and regulatory requirements applicable to the payment of dividends
by the Banks, as well as by the Company to the Company’s shareholders.





The Banks
are each state-chartered banks regulated by the DBF or ABD, as applicable, and
the FDIC. Under the regulations of the DBF, dividends may not be declared out of
the retained earnings of a Georgia bank without first obtaining the written
permission of the DBF unless such bank meets all of the following requirements:





·
    Total
      classified assets as of the most recent examination of the bank do not
      exceed 80% of equity capital (as defined by regulation);





·
    The
      aggregate amount of dividends declared or anticipated to be declared in
      the calendar year does not exceed 50% of the net profits after taxes but
      before dividends for the previous calendar year; and





·
    The
      ratio of equity capital to adjusted assets is not less than 6%.





Under the
regulations of the ABD, dividends may be declared by a state bank without
obtaining the prior written approval of the ABD only if:





·
    the
      bank’s surplus (as defined by regulation) is equal to at least 20% of its
      capital (as defined by regulation) and





·
    the
      aggregate of all dividends declared or anticipated to be declared in the
      calendar year does not exceed the total of its net earnings (as defined by
      regulation) of that year combined with its retained net earnings of the
      preceding two years, less any required transfers to surplus.





The
payment of dividends by the Company and the Banks may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending upon the financial
condition of the Banks, could include the payment of dividends) such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The FDIC has issued a policy statement providing that insured banks
should generally only pay dividends out of current operating earnings. In
addition to the formal statutes and regulations, regulatory authorities consider
the adequacy of each of the Bank’s total capital in relation to its assets,
deposits and other such items. Capital adequacy considerations could further
limit the availability of dividends to the Banks. At December 31, 2004, retained
earnings available from the Banks to pay dividends totaled approximately $6.2
million without regulatory approval. For 2004, the Company’s cash dividend
payout to shareholders was 7.91% of net income.





*Monetary
Policy* . The
results of operations of the Banks are affected by credit policies of monetary
authorities, particularly the Federal Reserve. The instruments of monetary
policy employed by the Federal Reserve include open market operations in U.S.
government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of actions by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels, loan demand or the business and earnings of the Banks.





6




*Loans.* **** Inter-agency
guidelines adopted by federal bank regulators mandate that financial
institutions establish real estate lending policies with maximum allowable real
estate loan-to-value limits, subject to an allowable amount of non-conforming
loans as a percentage of capital.
 
 *Financial
Privacy.* In
accordance with the GLB Act, federal banking regulators adopted rules that limit
the ability of banks and other financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations
require disclosure of privacy policies to consumers and, in some circumstances,
allow consumers to prevent disclosure of certain personal information to a
nonaffiliated third party. The privacy provisions of the GLB Act affect how
consumer information is transmitted through diversified financial companies and
conveyed to outside vendors.
 
 *Anti-Money
Laundering Initiatives and the USA Patriot Act.* A major
focus of governmental policy on financial institutions in recent years has been
aimed at combating terrorist financing. This has generally been accomplished by
amending existing anti-money laundering laws and regulations. The USA Patriot
Act of 2001 (the “USA Patriot Act”) has imposed significant new compliance and
due diligence obligations, creating new crimes and penalties and expanding the
extra-territorial jurisdiction of the United States. The United States Treasury
Department has issued a number of implementing regulations which apply to
various requirements of the USA Patriot Act to the Company and the Banks. These
regulations impose obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent and report money laundering
and terrorist financing and to verify the identity of their customers. Failure
of a financial institution to maintain and implement adequate programs to combat
terrorist financing, or to comply with all of the relevant laws or regulations,
could have serious legal and reputational consequences for the institution.
Compliance with the USA Patriot Act requires the Banks to engage in additional
record keeping and reporting, to obtain identification of account owners or
customers of foreign bank account holders, and to restrict or prohibit certain
correspondent accounts.


*Capital
Adequacy* . The
Federal Reserve and the FDIC have implemented substantially identical risk-based
rules for assessing bank and bank holding company capital adequacy. These
regulations establish minimum capital standards in relation to assets and
off-balance sheet exposures as adjusted for credit risk. Banks and bank holding
companies are required to have (1) a minimum level of total capital (as defined)
to risk-weighted assets of 8%; (2) a minimum Tier One Capital (as defined below)
to risk-weighted assets of 4%; and (3) a minimum stockholders’ equity to
risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC have
established a minimum 3% leverage ratio of Tier One Capital to total assets for
the most highly-rated banks and bank holding companies. “Tier One Capital”
generally consists of common equity not including unrecognized gains and losses
on securities, minority interests in equity accounts of consolidated
subsidiaries and certain perpetual preferred stock less certain intangibles. The
Federal Reserve and the FDIC use the leverage ratio in tandem with the
risk-based ratio to assess the capital adequacy of banks and bank holding
companies. The FDIC, the Office of the Comptroller of the Currency (the “OCC”)
and the Federal Reserve consider interest rate risk in the overall determination
of a bank’s capital ratio, requiring banks with greater interest rate risk to
maintain adequate capital for the risk. The revised standards have not had a
significant effect on the Company’s capital requirements.





In
addition, Section 38 of the Federal Deposit Insurance Act implemented the prompt
corrective action provisions that Congress enacted as a part of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (the “1991 Act”). The
“prompt corrective action” provisions set forth five regulatory zones in which
all banks are placed largely based on their capital positions. Regulators are
permitted to take increasingly harsh action as a bank’s financial condition
declines. Regulators are also empowered to place in receivership or require the
sale of a bank to another depository institution when a bank’s capital leverage
ratio reaches 2%. Better capitalized institutions are generally subject to less
onerous regulation and supervision than banks with lesser amounts of
capital.





The FDIC
has adopted regulations implementing the prompt corrective action provisions of
the 1991 Act, which place financial institutions in the following five
categories based upon capitalization ratios: (1) A “well capitalized”
institution has a total risk-based capital ratio of at least 10%, a Tier One
risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an
“adequately capitalized” institution has a total risk-based capital ratio of at
least 8%, a Tier One risk-based ratio of at least 4% and a leverage ratio of at
least 4%; (3) an “undercapitalized” institution has a total risk-based capital
ratio of under 8%, a Tier One risk-based ratio of under 4% or a leverage ratio
of under 4%; (4) a “significantly undercapitalized” institution has a total
risk-based capital ratio of under 6%, a Tier One risk-based ratio of under 3% or
a leverage ratio of under 3%; and (5) a “critically undercapitalized”
institution has a leverage ratio of 2% or less. Institutions in any of the three
undercapitalized categories would be prohibited from declaring dividends or
making capital distributions. The FDIC regulations also establish procedures for
“downgrading” an institution to a lower capital category based on supervisory
factors other than capital. Under the FDIC’s regulations, all of the Banks were
“well capitalized” institutions at December 31, 2004.





Set forth
below are pertinent capital ratios for the Company and the Banks as of December
31, 2004.





Community
    Community-
      Alabama
    Community-
      Troup
    The CompanyTier
      One Capital to Risk-based Assets
    10.95%
    15.10%
    11.61%
    11.53%Total
      Capital to Risk-based Assets
    12.21%
    16.35%
    12.65%
    12.79%Leverage
      Ratio (Tier One Capital to Average Assets)
    8.57%
    11.26%
    8.32%
    9.09%





**Available
Information**





The
Company is subject to the information requirements of the Securities Exchange
Act of 1934, which means that it is required to file certain reports and other
information, all of which are available at the Public Reference Section of the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549. You may also obtain copies of the reports and other
information from the Public Reference Section of the SEC, at prescribed rates,
by calling 1-800-SEC-0330. The SEC maintains a World Wide Web site on the
Internet at www.sec.gov where you can access reports, information and
registration statements, and other information regarding registrants that file
electronically with the SEC through the EDGAR system.





7





The
Company’s Internet website address is www.communitybankshares.com.





**ITEM
2.**  **PROPERTIES.**





Community’s
main office is located at 448 North Main Street, Cornelia, Georgia and it has
nine other full-service branches in Habersham, Jackson, Hall, Rabun, Barrow and
White counties; two loan production offices, one in Hall County and one in
Barrow County; and eighteen branches in supermarkets and Wal-Mart Stores. In
addition, Community operates four other branches in supermarkets and Wal-Mart
Stores in adjacent counties. Community-Troup’s main office is located at 201
Broad Street, LaGrange, Georgia and it has one full-service branch, three
branches in supermarkets and Wal-Mart stores and one loan production office in
Columbus, Georgia. Community-Alabama’s main office is located at 202 N. Powell
Street, Union Springs, Alabama and it has two branches in supermarkets and
Wal-Mart stores and one full service branch in Montgomery County.





Community
owns the property occupied by the operations center and the trust department in
Cornelia and leases the property occupied by the Loan Production Office in
Gainesville and Winder, Georgia. Financial Supermarkets owns its main office
located in Cornelia, Georgia, and leases an office in Atlanta, Georgia.
Financial Properties leases office space in Habersham, White, Jackson and
Stephens Counties, Georgia.





**ITEM
3.** **LEGAL
PROCEEDINGS.**





The
Company and its subsidiaries periodically are parties to or otherwise involved
in legal proceedings arising in the normal course of business, such as claims to
enforce liens, claims involving the making and servicing of real property loans
and other issues incident to their business. Management does not believe that
there is any pending or threatened proceeding against the Company or its banking
subsidiaries which, if determined adversely, would have a material effect on the
business, results of operations, or financial position of the Company or its
subsidiaries.





**ITEM
4.** **SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





No
matters were submitted to a vote of security holders of the Company during the
fourth quarter of its fiscal year.





8








**PART
II**





**ITEM
5.** **MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.**





Set forth
below is information concerning high and low sales prices by quarter for each of
the last two fiscal years. The Company’s common stock is not traded on any
established pubic trading market. As of March 24, 2005, there were approximately
472 shareholders of record and 2,151,858 shares outstanding. The Company acts as
its own transfer agent, and the information concerning sales prices set forth
below is derived from the Company’s stock transfer records.

**Sales
      Prices by Quarter****High**
    
    **Low****Fiscal
      Year 2004**First
      Quarter
    
    $
    45.06
    
    $
    44.38Second
      Quarter
    
    
    45.06
    
    
    45.06Third
      Quarter
    
    
    45.06
    
    
    45.06Fourth
      Quarter
    
    
    45.06
    
    
    45.06**Fiscal
      Year 2003**First
      Quarter
    
    $
    44.38
    
    $
    44.32Second
      Quarter
    
    
    44.38
    
    
    44.38Third
      Quarter
    
    
    44.38
    
    
    44.38Fourth
      Quarter
    
    
    44.38
    
    
    44.38

**Dividends**

Set forth
below is dividend information for the past two fiscal years.

**Dividends
      Paid Per Share****2004**
    
    **2003**First
      Quarter
    
    $
    0.08
    
    $
    0.07Second
      Quarter
    
    $
    0.08
    
    $
    0.07Third
      Quarter
    
    $
    0.08
    
    $
    0.07Fourth
      Quarter
    
    $
    0.09
    
    $
    0.08








The
Company intends to continue to pay cash dividends. However, the amount and
frequency of dividends will be determined by the Company’s Board of Directors in
light of the earnings, capital requirements and the financial condition of the
Company, and no assurances can be given that dividends will be paid in the
future. The Company’s ability to pay dividends will also be dependent on cash
dividends paid to it by the Banks. The ability of the Banks to pay dividends to
the Company is restricted by applicable regulatory requirements. See “ITEM 1 --
BUSINESS -- Supervision and Regulation.”




**Issuer
Purchases of Equity Securities**


During
the fourth quarter of 2004, the Company had one repurchase of 655 shares at
$45.06 per share on December 20th.
 
 On
January 13, 2005, the Board of Directors of the Company voted unanimously to
declare a one for five-hundred reverse stock split for the primary purpose
of “going private” which will relieve the Company from the expense and burden
associated with compliance with both current and proposed federal securities
laws and regulations. Since the Board of Directors and executive officers, as
defined by securities law, do not collectively control more than 50% of the
voting shares of the Company’s outstanding stock and since the reverse stock
split is subject to regulatory and shareholder approval to amend the
Company’s articles of incorporation, we have not restated the equity section of
the balance sheet or per share amounts. The following table illustrates the
effect on earnings per share if the Company had reflected the one for
five-hundred reverse stock split.
 
 **Years
      Ended December 31,****2004**
    
    
    2003
    
    
    2002Earnings
      per share:Basic
      - as reported
    
    **$**
    **4.17**
    
    $
    2.83
    
    $
    3.73Basic
      - pro forma
    
    **$**
    **2,087.00**
    
    $
    1,416.00
    
    $
    1,865.00Diluted
      - as reported
    
    **$**
    **4.16**
    
    $
    2.83
    
    $
    3.72Diluted
      - pro forma
    
    **$**
    **2,078.00**
    
    $
    1,414.00
    
    $
    1,859.00


9





**ITEM
6.** **SELECTED
FINANCIAL DATA**








Year
      Ended December 31,2004
    
    2003
    
    2002
    
    2001
    
    2000Dollars
      in Thousands, Except Per Share Amounts**Selected
      Statement Of Income Data:**Total
      interest income
    
    $
    46,140
    
    $
    43,409
    
    $
    43,488
    
    $
    48,502
    
    $
    47,039Total
      interest expense
    
    
    12,752
    
    
    13,228
    
    
    16,501
    
    
    23,240
    
    
    22,303Net
      interest income
    
    
    33,388
    
    
    30,181
    
    
    26,987
    
    
    25,262
    
    
    24,736Provision
      for loan losses
    
    
    3,037
    
    
    3,296
    
    
    3,320
    
    
    2,364
    
    
    1,620Nonbank
      subsidiary income
    
    
    6,560
    
    
    3,122
    
    
    10,586
    
    
    10,826
    
    
    8,915Other
      income
    
    
    14,210
    
    
    9,102
    
    
    8,378
    
    
    6,951
    
    
    5,678Other
      expenses
    
    
    38,517
    
    
    31,255
    
    
    31,182
    
    
    30,425
    
    
    27,085Net
      income
    
    
    8,927
    
    
    6,087
    
    
    8,123
    
    
    7,175
    
    
    7,622Earnings
      per share
    
    
    4.17
    
    
    2.83
    
    
    3.73
    
    
    3.29
    
    
    3.50Diluted
      earnings per share
    
    
    4.16
    
    
    2.83
    
    
    3.72
    
    
    3.26
    
    
    3.46Cash
      dividends per share
    
    
    .33
    
    
    .29
    
    
    .25
    
    
    .21
    
    
    .18**Selected
      Balance Sheet Data:**Total
      assets
    
    $
    843,378
    
    $
    766,185
    
    $
    700,246
    
    $
    646,209
    
    $
    590,323Total
      deposits
    
    
    726,975
    
    
    670,604
    
    
    607,354
    
    
    562,215
    
    
    507,495Other
      borrowings
    
    
    25,794
    
    
    16,153
    
    
    16,665
    
    
    12,070
    
    
    10,844Redeemable
      common stock heldby
      ESOP net of unearned ESOP shares
      related
      to ESOP debt
    
    
    18,925
    
    
    15,783
    
    
    15,194
    
    
    15,160
    
    
    15,088Shareholders’
      equity
    
    
    60,115
    
    
    55,659
    
    
    51,853
    
    
    43,443
    
    
    38,249Return
      on assets (1)
    
    
    1.11
    %
    
    .84
    %
    
    1.22
    %
    
    1.17
    %
    
    1.40
    %Return
      on equity (2)
    
    
    12.02
    %
    
    8.86
    %
    
    13.06
    %
    
    12.73
    %
    
    16.45
    %Dividend
      payout ratio (3)
    
    
    7.91
    %
    
    10.24
    %
    
    6.70
    %
    
    6.38
    %
    
    5.14
    %Equity
      to assets ratio (4)
    
    
    9.25
    %
    
    9.50
    %
    
    9.32
    %
    
    9.20
    %
    
    8.48
    %


_________________________________________


(1)  Net
income divided by average total assets.


(2)  Net
income divided by average equity.


(3)  Dividends
declared per share divided by basic earnings per share.


(4)  Average
equity divided by average total assets.





10








**ITEM
7.** **MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.**





The
following is a discussion and analysis of the Company’s financial condition at
December 31, 2004 and 2003 and the results of operations for the three-year
period ended December 31, 2004. The purpose of the discussion is to focus on
information about the Company’s financial condition and results of operations
which are not otherwise apparent from the audited consolidated financial
statements included in this annual report. This discussion and analysis should
be read in conjunction with the consolidated financial statements and related
notes and the selected financial information and statistical data presented
elsewhere in this Annual Report.





*Overview* . Our
principal asset is the ownership of our Banks. Accordingly, we derive most of
our income from interest we receive on our loans and investments. Our primary
source of funds for making these loans and investments is our deposits, on which
we pay interest. Consequently, one of the key measures of our success is our
amount of net interest income, or the difference between the income on our
interest-earning assets, such as loans and investments, and the expense on our
interest-bearing liabilities, such as deposits. Another key measure is the
spread between the yield we earn on these interest-earning assets and the rate
we pay on our interest-bearing liabilities.





We have
included a number of tables to assist in our description of these measures. For
example, the “Average Balances” table shows the average balance during 2004,
2003 and 2002 of each category of our assets and liabilities, as well as the
yield we earned or the rate we paid with respect to each category. A review of
this table shows that our loans typically provide higher interest yields than do
other types of interest earning assets, which is why we intend to channel a
substantial percentage of our earning assets into our loan portfolio. Similarly,
the “Rate/Volume Analysis” table helps demonstrate the impact of changing
interest rates and changing volume of assets and liabilities during the years
shown. We also track the sensitivity of our various categories of assets and
liabilities to changes in interest rates, and we have included a “Sensitivity
Analysis Table” to help explain this. Finally, we have included a number of
tables that provide detail about our investment securities, our loans, and our
deposits.





There are
risks inherent in all loans, so we maintain an allowance for loan losses to
absorb possible losses on existing loans that may become uncollectible. We
establish and maintain this allowance by charging a provision for loan losses
against our operating earnings. In the following section we have included a
detailed discussion of this process, as well as several tables describing our
allowance for loan losses.





In
addition to earning interest on our loans and investments, we earn income
through fees we charge to our customers. Our non-bank subsidiary enhances our
ability to generate non-interest income. However, the income generated from
Financial Supermarkets is not as predictable as income generated from our
Banks. We describe the various components of this non-interest income, as well
as our non-interest expense, in the following discussion.





The
following discussion and analysis also identifies significant factors that have
affected our financial position and operating results during the periods
included in the accompanying financial statements. We encourage you to read this
discussion and analysis in conjunction with the financial statements and the
related notes and the other statistical information also included in this
report.





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





11








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





*Balance
Sheet Review* . We
experienced moderate growth during 2004. For the year ended December 31, 2004,
consolidated assets grew $77.2 million, or 10.07%, up from 2003 growth of $65.9
million or 9.42%. During 2004, our average assets were $803.2 million, compared
with $723.6 million during 2003. This represents an 11.01% increase in average
assets during 2004 compared with an 8.37 % increase during 2003.











12








**Average
Balance Sheet and Net Interest Margin Analysis**





The
following tables set forth the amount of the Company’s interest income and
interest expense for each category of interest-earning assets and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net yield on average interest-earning assets.





(Dollars in Thousands: not
      taxable equivalent)
    
    Year
      Ended December 31,2004
    
    2003
    
    2002Average
    
    
    
    Average
    
    Average
    
    
    
    Average
    
    Average
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate**Assets:**Interest
      earning assetsInterest
      and fees on loans(1)(2)
    
    $
    599,390
    
    
    40,866
    
    
    6.82
    %
    $
    511,824
    
    
    37,729
    
    
    7.37
    %
    $
    469,710
    
    $
    37,423
    
    
    7.97
    %Interest
      on taxable securities
    
    
    64,755
    
    
    2,366
    
    
    3.65
    %
    
    62,657
    
    
    2,454
    
    
    3.92
    %
    
    56,091
    
    
    2,766
    
    
    4.93
    %Interest
      on nontaxable securities
    
    
    56,254
    
    
    2,663
    
    
    4.73
    %
    
    62,516
    
    
    2,981
    
    
    4.77
    %
    
    62,636
    
    
    2,986
    
    
    4.77
    %Interest
      on Federal funds sold
    
    
    18,943
    
    
    233
    
    
    1.23
    %
    
    21,983
    
    
    226
    
    
    1.03
    %
    
    18,861
    
    
    302
    
    
    1.60
    %Interest
      on deposits in banks
    
    
    440
    
    
    12
    
    
    2.73
    %
    
    607
    
    
    20
    
    
    3.29
    %
    
    750
    
    
    11
    
    
    1.47
    %Total
      interest earning assets
    
    
    739,782
    
    
    46,140
    
    
    6.24
    %
    
    659,587
    
    
    43,410
    
    
    6.58
    %
    
    608,048
    
    
    43,488
    
    
    7.15
    %Total
      non-interest earning assets
    
    
    63,446
    
    
    
    
    
    
    
    
    64,003
    
    
    
    
    
    
    
    
    59,619Total
      assets
    
    
    803,228
    
    
    
    
    
    
    
    
    723,590
    
    
    
    
    
    
    
    
    667,667**Liabilities
      and shareholders’ equity:**Interest-bearing
      liabilities:Interest
      on demand deposits
    
    
    174,539
    
    
    1,576
    
    
    .90
    %
    
    148,886
    
    
    1,285
    
    
    .86
    %
    
    131,621
    
    
    1,727
    
    
    1.31
    %Interest
      on savings deposits
    
    
    38,408
    
    
    204
    
    
    .53
    %
    
    33,631
    
    
    192
    
    
    .57
    %
    
    29,826
    
    
    226
    
    
    .76
    %Interest
      on time deposits
    
    
    363,443
    
    
    10,090
    
    
    2.78
    %
    
    350,000
    
    
    10,963
    
    
    3.13
    %
    
    336,654
    
    
    13,826
    
    
    4.11
    %Interest
      on other borrowings
    
    
    23,850
    
    
    882
    
    
    3.70
    %
    
    16,377
    
    
    789
    
    
    4.82
    %
    
    13,709
    
    
    722
    
    
    5.27
    %Total
      interest-bearing liabilities
    
    
    600,240
    
    
    12,752
    
    
    2.12
    %
    
    548,894
    
    
    13,229
    
    
    2.41
    %
    
    511,810
    
    
    16,501
    
    
    3.22
    %Other
      non-interest bearing liabilities
    
    
    128,723
    
    
    
    
    
    
    
    
    105,962
    
    
    
    
    
    
    
    
    93,655Shareholders’
      equity (3)
    
    
    74,265
    
    
    
    
    
    
    
    
    68,734
    
    
    
    
    
    
    
    
    62,202Total
      liabilities and shareholders’ equity
    
    
    803,228
    
    
    
    
    
    
    
    
    723,590
    
    
    
    
    
    
    
    
    667,667Excess
      of interest earning assetsover
      interest bearing liabilities
    
    $
    139,542
    
    
    
    
    
    
    
    $
    110,693
    
    
    
    
    
    
    
    $
    96,238Ratio
      of interest earning assetsto
      interest bearing liabilities
    
    
    123
    %
    
    
    
    
    
    
    
    120
    %
    
    
    
    
    
    
    
    119
    %Net
      interest income
    
    
    
    
    $
    33,388
    
    
    
    
    
    
    
    $
    30,181
    
    
    
    
    
    
    
    $
    26,987Net
      interest spread
    
    
    
    
    
    
    
    
    4.12
    %
    
    
    
    
    
    
    
    4.17
    %
    
    
    
    
    
    
    
    3.93
    %Net
      interest margin
    
    
    
    
    
    
    
    
    4.51
    %
    
    
    
    
    
    
    
    4.58
    %
    
    
    
    
    
    
    
    4.44
    %


_________________________


(1)
Includes non-accrual loans of  $4.51, $4.16, and $5.51 million for the
years 2004, 2003 and 2002, respectively.


(2) Loans
are net of unearned fees.


(3)
Unrealized gains & losses are included in equity, net of taxes.





13





Our total
earning assets, which include investment securities, loans, federal funds sold,
and interest-bearing deposits in banks increased $91.9 million or 13.32% during
2004. During 2003, earning assets increased $63.2 million, or 10.03% over 2002.
Average earning assets for 2004 were $739.8 million, an increase of 12.16% over
average earning assets in 2003 which were $659.6 million or an increase of 8.48%
over 2002.





Our total
investments increased in 2004 by $11.4 million or 9.18% from 2003. Average
investments in 2004 were $121 million, a 3.33% decrease over average investments
for 2003. Our total investments decreased in 2003 by $1.3 million or .98% over
2002. Average investments in 2003 were $125.2 million, a 5.43% increase over
average investments for 2002.





**Types
of Investments**





The
carrying amounts of securities, which is fair value for available-for-sale
and cost for held-to-maturity, at the dates indicated are summarized as
follows:





Dollars in
    Thousands**Securities
      Available-for-Sale**
    
    2004
    
    2003
    
    2002Cost
    
    Fair
      Value
    
    Cost
    
    Fair
      Value
    
    Cost
    
    Fair
      ValueU.S.
      Government and agency securities
    
    $
    53,402
    
    $
    53,502
    
    $
    37,191
    
    $
    38,261
    
    $
    32,542
    
    $
    34,095State
      and municipal securities
    
    
    35,037
    
    
    36,507
    
    
    37,436
    
    
    39,088
    
    
    38,494
    
    
    39,665Mortgage-backed
      securities (1)
    
    
    15,785
    
    
    15,688
    
    
    22,640
    
    
    22,597
    
    
    20,994
    
    
    21,542Equity
      securities (2)
    
    
    11,655
    
    
    11,655
    
    
    4,755
    
    
    4,755
    
    
    6,270
    
    
    6,270Total
      securities available for sale
    
    $
    115,879
    
    $
    117,352
    
    $
    102,022
    
    $
    104,701
    
    $
    98,300
    
    $
    101,572





Dollars in Thousands**Securities
      Held-to-Maturity**
    
    2004
    
    2003
    
    2002Cost
    
    Fair
      Value
    
    Cost
    
    Fair
      Value
    
    Cost
    
    Fair
      ValueState
      and municipal securities
    
    $
    20,217
    
    $
    21,330
    
    $
    22,628
    
    $
    24,352
    
    $
    27,016
    
    $
    28,681





__________________________________________


(1) 
All mortgage-backed securities are government guaranteed.


(2) 
Includes restricted equity securities.





The
Banks’ mortgage-backed portfolio consists of seventy-six U.S. Government
corporation collateralized mortgage obligations. The actual maturity of these
securities will differ from the contractual maturity because borrowers on the
underlying loans usually have the right to prepay obligations with or without
prepayment penalties. Decreases in interest rates will generally cause
prepayments to increase while increases in the interest rates will have the
opposite effect on prepayments. Prepayments of the underlying loans may shorten
the life of the security, thereby adversely effecting the yield to maturity. In
an increasing interest rate environment, the Banks may have an obligation
yielding a return less than the current yields on securities. However, because
the majority of these mortgage-backed securities have adjustable rates, negative
effects of changes in interest rates on earnings and carrying values of these
securities are mitigated.





At
December 31, 2004, we had net unrealized gains of approximately $1.5 million in
the securities available for sale portfolio as compared to net unrealized gains
of approximately $2.7 million at December 31, 2003. Net unrealized gains
represent the difference in the amortized cost of those securities and the fair
value at those dates and are included in shareholders’ equity, net of the tax
effect. Management sells securities to meet liquidity needs and may sell
securities in rising interest-rate environments to take advantage of higher
returns in the long run. In 2004, we sold $9.8 million of securities classified
as available for sale, realizing net gains of $63,000. In 2003, we sold $2.5
million of securities classified as available for sale, realizing net gains of
$77,000. The held to maturity securities portfolio included net unrealized gains
of approximately $1.1 million at December 31, 2004 compared to net unrealized
gains of $1.7 million at December 31, 2003. Such gains are not recognized in
income or equity until such securities are sold. U.S. Treasury, other U.S.
Government agencies and corporations and mortgage-backed securities, which
provide reasonable returns with limited risk, represent 50.29% of the total
portfolio. The remaining portfolio is comprised of municipal securities, and
equity securities, which provide, in general, higher returns on a tax equivalent
basis, with greater risk elements.


****





14





**Maturities
of Investments**





The
amounts of securities in each category as of December 31, 2004 are shown in the
following table according to maturity classifications of one year or less, after
one year through five years, after five years through ten years, and after ten
years.





(Dollars
      in Thousands)
    
    U.
      S. Treasury and OtherU.
      S. Government agenciesand
      corporations(2)
    
    Municipal
      securities(3)
    
    Other
      Securities(4)Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    YieldAvailable
      for Sale (1)One
      year or less
    
    $
    9,351
    
    
    5.51
    %
    $
    1,171
    
    
    3.66
    %
    $
    7,638
    
    
    .54
    %After
      one year
    
    
    40,836
    
    
    3.89
    %
    
    4,664
    
    
    4.16
    %Through
      five yearsAfter
      five yearsThrough
      ten years
    
    
    13,793
    
    
    4.94
    %
    
    6,219
    
    
    4.82
    %After
      ten years
    
    
    5,209
    
    
    4.73
    %
    
    24,454
    
    
    5.07
    %
    
    4,017
    
    
    3.40
    %Total
    
    $
    69,189
    
    
    4.38
    
    $
    36,508
    
    
    4.87
    %
    $
    11,655
    
    
    1.53
    %Held
      to Maturity (1)One
      year or less
    
    
    
    
    
    
    
    
    555
    
    
    4.71
    %After
      one yearThrough
      five years
    
    
    
    
    
    
    
    
    4,299
    
    
    4.87
    %After
      five yearsThrough
      ten years
    
    
    
    
    
    
    
    
    10,043
    
    
    5.37
    %After
      ten years
    
    
    
    
    
    
    
    
    5,320
    
    
    5.45
    %Total
    
    
    
    
    
    
    
    $
    20,217
    
    
    5.27
    %


**______________________**


(1)
    Yields
      were computed using book value, coupon interest, adding discount accretion
      or subtracting premium amortization, as appropriate, on a ratable basis
      over the life of each security. The weighted average yield for each
      maturity range was computed using the carrying value of each security in
      that range.





(2)
    The
      above schedule includes government guaranteed mortgage-backed securities
      based on their contractual maturity date. In practice, cash flow in these
      securities is significantly faster than their stated maturity schedules
      due to the normal payments of principal and interest as well as the
      prepayment of the mortgage loans backing the
investment.





(3)
    Yields
      on municipal securities have not been computed on a tax equivalent
      basis.





(4)
    Other
      securities consists of equity securities and are included in the under
      one-year maturity range because the securities have no contractual
      maturity date.








15





**Loans**





Our total
loans grew by $100 million during 2004 for an increase of 18.34% over 2003. Our
total loans grew in 2003 by $54 million for an increase of 11% over 2002. During
2004, average loans were $599.4 million or an increase of 17.11% over 2003
compared to an increase during 2003 of 8.97% over 2002 to $511.8 million. The
increase in loans is primarily the result of continued loan growth in our
existing markets and expansion into a new market.





**Types
of Loans**





The
amounts of loans outstanding at the indicated dates are in the following table
according to the type of loan.





Year
      ended December 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in Thousands)Commercial,
      financialand
      agricultural
    
    $
    53,602
    
    $
    50,690
    
    $
    52,852
    
    $
    53,299
    
    $
    57,012Real
      estate-construction (1)
    
    
    83,075
    
    
    52,786
    
    
    40,342
    
    
    32,397
    
    
    28,120Real
      estate-mortgage (2)
    
    
    450,896
    
    
    385,629
    
    
    338,772
    
    
    313,851
    
    
    274,216Consumer
      and other(3)
    
    
    57,926
    
    
    56,361
    
    
    59,401
    
    
    56,243
    
    
    58,561$
    645,499
    
    $
    545,466
    
    $
    491,367
    
    $
    455,790
    
    $
    417,909Less
      allowance for loan losses
    
    
    (9,170
    )
    
    (7,561
    )
    
    (7,742
    )
    
    (6,652
    )
    
    (6,307
    )Net
      loans(2)
    
    $
    636,329
    
    $
    537,905
    
    $
    483,625
    
    $
    449,138
    
    $
    411,602





______________________________________





(1)
    Includes
      acquisition and development loans.




(2)
    Amounts
      are disclosed net of unearned loan income and unearned loan
      costs.





(3)
    Commercial,
      financial and agricultural loans include loans held for sale in 2000. The
      Company had no loans held for sale in 2004, 2003, 2002 or
      2001.





16




**Maturities
And Sensitivities Of Loans To Changes In Interest Rates**
 
 Total
loans as of December 31, 2004 are shown in the following table according to
maturity classifications one year or less, after one year through five years and
after five years:





(Dollars
      in Thousands)Maturity:One
      year or less:Commercial,
      financial and agricultural
    
    $
    31,299Real
      estate-construction (1)
    
    
    78,075All
      other loans
    
    
    257,967367,341After
      one year through five years:Commercial,
      financial and agricultural
    
    
    13,944Real
      estate-construction (1)
    
    
    4,667All
      other loans
    
    
    198,379216,990After
      five years:Commercial,
      financial and agricultural
    
    
    6,804Real
      estate-construction (1)
    
    
    333All
      other loans
    
    
    54,03161,168$
    645,499





The
following table summarizes loans at December 31, 2004 with due dates after one
year which have predetermined and floating or adjustable interest
rates:





(Dollars
      in Thousands)Predetermined
      interest rates
    
    $
    177,441Floating
      or adjustable interest rates
    
    
    100,717$
    278,158




(1)    
Includes acquisition and development loans.




Federal
funds sold decreased by $19.6 million or 100.00% from year-end 2003 to 2004.
Average federal funds for 2004 were $18.9 million or a 13.83% decrease. During
2003, average federal funds sold increased by $3.1 million or 16.55% as compared
to 2002. The decrease in 2004 in federal funds sold was due to funding loan
demand.





**Deposits**





The
growth in total assets for the year ended December 31, 2004 was funded mainly by
growth in deposits. Consolidated deposits grew $56.4 million or 8.41% in 2004 as
compared to $63.2 million or 10.41% in 2003. Much of the increase in total
deposits was concentrated in interest bearing and noninterest bearing demand
deposits. We experienced a 17.23% increase in average interest bearing demand
deposits in 2004 with a 21.83% growth in average noninterest bearing demand, a
14.20% growth in average savings and a 3.84% increase in average time deposits.
During 2003, we experienced a 13.12% increase in interest-bearing demand
deposits with an 18.18% increase in average noninterest bearing demand, a 12.76%
increase in average savings and a 3.96% increase in average time deposits.








17





**Deposits**





Average
deposits and average rates paid thereon, classified as to noninterest-bearing
demand deposits, interest-bearing demand and savings deposits and time deposits,
for the years indicated are presented below.





(Dollars
      in Thousands)
    
    Year
      Ended December 31,2004
    
    2003
    
    2002Average
    
    
    
    Average
    
    
    
    AverageBalance
    
    Interest
      Rate
    
    Balance
    
    Interest
      Rate
    
    Balance
    
    Interest
      RateNoninterest-bearing
      demand
    
    $
    119,421
    
    
    
    
    $
    98,022
    
    
    
    
    $
    82,944Interest-bearing
      demand deposits
    
    
    174,539
    
    
    .90
    %
    
    148,886
    
    
    .86
    %
    
    131,621
    
    
    1.31
    %Savings
      deposits
    
    
    38,408
    
    
    .53
    %
    
    33,631
    
    
    .57
    %
    
    29,826
    
    
    .76
    %Time
      deposits
    
    
    363,443
    
    
    2.78
    %
    
    350,000
    
    
    3.13
    %
    
    336,654
    
    
    4.11
    %Total
      deposits
    
    $
    695,811
    
    
    
    
    $
    630,539
    
    
    
    
    $
    581,045





The
amounts of time certificates of deposit issued in amounts of $100,000 or more as
of December 31, 2004 are shown below by category, which is based on time
remaining until maturity of (1) three months or less, (2) over three through six
months, (3) over six through twelve months and (4) over twelve
months.





December
      31, 2004(Dollars
      in ThousandsThree
      months or less
    
    $
    28,811Over
      three through six months
    
    
    24,544Over
      six through twelve months
    
    
    36,184Over
      twelve months
    
    
    46,401$
    135,940





**Results
of Operations**





*Net
Income* . Our net
income for 2004 was $8.9 million, as compared to $6 million in 2003, an increase
of 46.64%. The increase in net income between 2004 and 2003 is attributable
to the increase in revenue of our non-bank subsidiary Financial Supermarkets,
increased net interest income, and the increase in service charges on deposit
accounts. Our net income for 2003 was $6 million, as compared to $8.1 million in
2002, a decrease of 25.06% from the prior year. The decrease in net income
between 2002 and 2003 was primarily attributable to the decrease in non-bank
subsidiary income from Financial Supermarkets.





*Net
Interest Income* . Our
results of operations are influenced by management’s ability to effectively
manage interest income and expense, to minimize loan and investment losses, to
generate non-interest income and to control operating expenses. Because interest
rates are determined by market forces and economic conditions beyond our
control, our ability to generate net interest income is dependent upon our
ability to obtain an adequate net interest spread between the rate paid on
interest-bearing liabilities and the rate earned on interest-earning assets. Our
net interest income increased by $3.2 million for the year ended December 31,
2004 compared to an increase of $3.2 million for the year ended December 31,
2003. The rate earned on interest-earning assets decreased 34 basis points in
2004 from 2003 as compared to a 57 basis points decrease in 2003 from 2002,
while the rate paid on interest earning liabilities decreased by 29 basis points
in 2004 as compared to a decrease of 81 basis points in 2003. The increase in
average interest earning assets in 2004 of $80.2 million over 2003, net of the
increase in average interest-bearing liabilities of $51.3 million, contributed
to the 10.63% increase in net interest income in 2004 as compared to an increase
in average interest-earning assets in 2003 of $51.5 million over 2002, net of
interest-earning liabilities of $37.1 million, which contributed to a 11.83%
increase in net interest income. The net interest margin decreased from 4.58% to
4.51% during the same period. The increase in net interest income was primarily
the result of the increase in average interest earning assets in 2004 over
2003.





18





The
Company will continue to actively monitor and maintain the net interest spread
to counteract the current market trends.





**Rate
and Volume Analysis**





The
following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company’s interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) change in
volume (change in volume multiplied by old rate); (2) change in rate (change in
rate multiplied by old volume); and (3) a combination of change in rate and
change in volume. The changes in interest income and interest expense
attributable to both volume and rate have been allocated proportionately to the
change due to volume and the change due to rate.





Year
      Ended December 31, 2004 vs. 2003Changes
      Due to:Rate
    
    Volume
    
    Increase
      (decrease)(Dollars
      in Thousands)Increase
      (decrease) in:Income
      from interest-earning assets:Interest
      and fees on loans
    
    $
    (2,981
    )
    $
    6,118
    
    $
    3,137Interest
      on taxable securities
    
    
    (168
    )
    
    80
    
    
    (88
    )Interest
      on nontaxable securities
    
    
    (21
    )
    
    (297
    )
    
    (318
    )Interest
      on Federal Funds sold
    
    
    41
    
    
    (34
    )
    
    7Interest
      on deposits in banks
    
    
    (3
    )
    
    (5
    )
    
    (8
    )Total
      interest income
    
    
    (3,132
    )
    
    5,862
    
    
    2,730Expense
      from interest-bearing liabilities:Interest
      expense on interest-bearing deposits
    
    
    62
    
    
    229
    
    
    291Interest
      on savings deposits
    
    
    (14
    )
    
    26
    
    
    12Interest
      on time deposits
    
    
    (1,282
    )
    
    409
    
    
    (873
    )Interest
      on other borrowings
    
    
    (212
    )
    
    305
    
    
    93Total
      interest expense
    
    
    (1,446
    )
    
    969
    
    
    (477
    )Net
      interest income
    
    $
    (1,686
    )
    $
    4,893
    
    $
    3,207





19








Year
      Ended December 31, 2003 vs. 2002Changes
      Due to:Rate
    
    Volume
    
    Increase
      (decrease)(Dollars
      in Thousands)Increase
      (decrease) in:Income
      from interest-earning assets:Interest
      and fees on loans
    
    $
    (2,913
    )
    $
    3,219
    
    $
    306Interest
      on taxable securities
    
    
    (612
    )
    
    300
    
    
    (312
    )Interest
      on nontaxable securities
    
    
    1
    
    
    (6
    )
    
    (5
    )Interest
      on Federal Funds sold
    
    
    (120
    )
    
    44
    
    
    (76
    )Interest
      on deposits in banks
    
    
    11
    
    
    (2
    )
    
    9Total
      interest income
    
    
    (3,633
    )
    
    3,555
    
    
    (78
    )Expense
      from interest-bearing liabilities:Interest
      expense on interest-bearing deposits
    
    
    (647
    )
    
    205
    
    
    (442
    )Interest
      on savings deposits
    
    
    (60
    )
    
    26
    
    
    (34
    )Interest
      on time deposits
    
    
    (3,392
    )
    
    529
    
    
    (2,863
    )Interest
      on other borrowings
    
    
    (65
    )
    
    132
    
    
    67Total
      interest expense
    
    
    (4,164
    )
    
    892
    
    
    (3,272
    )Net
      interest income
    
    $
    531
    
    $
    2,663
    
    $
    3,194





*Provision
for Loan Loss* . The
provision for loan losses for the year ended December 31, 2004, decreased by
$259,000 from $3,296,000 for 2003 to $3,037,000 for 2004. In 2003, the provision
decreased $24,000 from the 2002 level of $3,320,000. The provision for loan
losses fluctuates based on loan volume and changes in credit quality. Management
maintains an allowance for loan losses based on the evaluation of potential
problem loans as well as minimal reserves for all loans based on past net
charge-off experience. The guaranteed portions of loans generated by the loan
production office are subsequently sold. Because most loans retained by the loan
production office consist of the portion of SBA loans that are not guaranteed
and are out-of-market, these loans require additional allowances due to the
greater risk of loss in the event of default. These loans, however, are
subjected to the same underwriting standards and periodic loan review procedures
as other loans made by the Banks.





20








**Nonaccrual,
Past Due And Restructured Loans**





Information
with respect to nonaccrual past due and restructured loans at the indicated
dates is as follows:





Year
      ended December 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in Thousands)Nonaccrual
      loans
    
    $
    5,641
    
    $
    1,342
    
    $
    5,107
    
    $
    4,421
    
    $
    1,143Loans
      contractually past due ninety daysor
      more as to interest or principalpayments
      and still accruing
    
    
    1,768
    
    
    2,380
    
    
    3,529
    
    
    1,679
    
    
    1,281Loans,
      the terms of which have beenrenegotiated
      to provide a reductionor
      deferral of interest or principalbecause
      of deterioration in thefinancial
      position of the borrower
    
    
    894
    
    
    895
    
    
    1,051
    
    
    1,265
    
    
    744$
    8,303
    
    $
    4,617
    
    $
    9,687
    
    $
    7,365
    
    $
    3,168





The
reduction in interest income associated with nonaccrual and renegotiated loans
as of December 31, 2004 is as follows, dollars in thousands:





Interest
      income that would have been recorded on nonaccrualand
      restructured loans under original terms
    
    $
    352Interest
      income that was recorded on nonaccrual and restructured
    loans
    
    $
    105





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





Nonaccrual
loans, delinquent loans greater than 90 days and restructured loans increased
$3.7 million at year end 2004 compared to a $5 million decrease in 2003 and a
$2.3 million increase in 2002. Delinquent and nonaccrual loans fluctuate
depending on economic conditions. The non-accrual loan increase was mostly due
to the addition of one loan of $2.3 million. Management has reviewed this loan,
however, and determined that the likelihood of any significant loss of
principal is mitigated due to the value of the collateral securing these loans.
The ratio of the allowance for loan losses to nonaccrual, delinquent and
restructured loans decreased from 164% at December 31, 2003 to 110% at December
31, 2004.





The
allowance for loan losses as a percentage of total loans outstanding at December
31, 2004, 2003 and 2002 was 1.42%, 1.39% and 1.58%, respectively. Net
charge-offs in 2004 were $1,428,000, a decrease of $2,049,000 from $3,477,000 in
2003, and the net charge-off ratio decreased from .68% in 2003 to .24% in 2004.
Based on management’s evaluation of the loan portfolio, including a review of
past loan losses, current conditions that may affect borrowers’ ability to repay
and the underlying collateral value of the loans, management considers the
allowance for loan losses to be adequate.





21








**Allowance
for Loan Loss**





The
following table summarizes the balances of loans for each year; changes in the
allowance for possible loan losses arising from loans charged off and recoveries
on loans previously charged off; additions to the allowance which have been
charged to operating expense; and the ratio of net charge-offs during the year
to average loans.





December
      31,2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in Thousands)Balance
      of allowance for loan lossesat
      beginning of year
    
    $
    7,561
    
    $
    7,742
    
    $
    6,652
    
    $
    6,307
    
    $
    5,683Loans
      charged offCommercial
    
    
    (315
    )
    
    (1,866
    )
    
    ($697
    )
    
    ($810
    )
    
    ($461
    )Real
      estate mortgage
    
    
    (592
    )
    
    (1,170
    )
    
    (951
    )
    
    (269
    )
    
    -
      -Consumer
    
    
    (887
    )
    
    (746
    )
    
    (920
    )
    
    (1,129
    )
    
    (693
    )(1,794
    )
    
    (3,782
    )
    
    ($2,568
    )
    
    ($2,208
    )
    
    ($1,154
    )Loans
      recoveredCommercial
    
    
    66
    
    $
    22
    
    $
    19
    
    $
    18
    
    $
    16Real
      estate mortgage
    
    
    76
    
    
    109
    
    
    121
    
    
    13
    
    
    -
      -Consumer
    
    
    224
    
    
    174
    
    
    198
    
    
    158
    
    
    141366
    
    
    305
    
    $
    338
    
    $
    189
    
    $
    157Net
      charge-offs
    
    
    (1,428
    )
    
    (3,477
    )
    
    ($2,230
    )
    
    ($2,019
    )
    
    ($997
    )Additions
      to allowance chargedto
      operating expense during year
    
    $
    3,037
    
    $
    3,296
    
    $
    3,320
    
    $
    2,364
    
    $
    1,621Balance
      of allowance for loan lossesat
      end of year
    
    $
    9,170
    
    $
    7,561
    
    $
    7,742
    
    $
    6,652
    
    $
    6,307Ratio
      of net loans charged off duringthe
      year to average loans outstanding
    
    
    0.24
    %
    
    0.68
    %
    
    0.47
    %
    
    0.46
    %
    
    0.25
    %





The
provision for possible loan losses is created by direct charges to income.
Losses on loans are charged against the allowance in the year in which such
loans, in management’s opinion, become uncollectible. Recoveries during the year
are credited to this allowance. The factors that influence management’s judgment
in determining the amount charged to income are past loan loss experience,
composition of the loan portfolio, evaluation of possible future losses, current
economic conditions and other relevant factors. The Company’s allowance for loan
losses was $9.2 million at December 31, 2004, representing 1.42% of total loans,
compared with $7.6 million at December 31, 2003, which represented 1.39% of
total loans and $7.7 million at December 31, 2002 representing 1.58% of total
loans. The allowance for loan losses is reviewed regularly based on management’s
evaluation of current risk characteristics of the loan portfolio, as well as the
impact of prevailing and expected economic business conditions.


Historically,
management has not allocated the Company’s allowance for loan losses to specific
categories of loans. However, based on management’s best estimate and historical
experience, the allocation of the allowance for loan losses for December 31,
2004, 2003, 2002, 2001 and 2000 is summarized below:





22











December
      31,2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in Thousands)Commercial
    
    $
    1,284
    
    $
    1,134
    
    $
    1,161
    
    $
    1,330
    
    $
    1,261Real
      estate
    
    
    6,694
    
    
    4,273
    
    
    4,259
    
    
    2,130
    
    
    1,892Consumer
    
    
    1,192
    
    
    2,154
    
    
    2,322
    
    
    3,192
    
    
    3,154$
    9,170
    
    $
    7,561
    
    $
    7,742
    
    $
    6,652
    
    $
    6,307Percent
      of loans in Each Category of Total LoansDecember
      31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial
    
    
    8
    %
    
    9
    %
    
    11
    %
    
    12
    %
    
    14
    %Real
      estate
    
    
    83
    %
    
    81
    %
    
    77
    %
    
    76
    %
    
    72
    %Consumer
    
    
    9
    %
    
    10
    %
    
    12
    %
    
    12
    %
    
    14
    %100
    %
    
    100
    %
    
    100
    %
    
    100
    %
    
    100
    %





Non-Interest
Income


2004
    
    2003
    
    2002(Dollars
      in Thousands)Service
      charges on deposit accounts
    
    $
    9,721
    
    $
    5,605
    
    $
    5,235Other
      service charges, commissions and fees
    
    
    2,334
    
    
    1,923
    
    
    1,664Trust
      department fees
    
    
    285
    
    
    250
    
    
    181Nonbank
      subsidiary income
    
    
    6,560
    
    
    3,122
    
    
    10,586Gain
      on sale of loans
    
    
    302
    
    
    297
    
    
    240Security
      transactions, net
    
    
    63
    
    
    77
    
    
    139Other
    
    
    1,505
    
    
    950
    
    
    918$
    20,770
    
    $
    12,224
    
    $
    18,963





*Non-Interest
Income* .
Non-interest income consists of income from operations of the Banks, Financial
Properties and Financial Supermarkets. Traditional non-interest income of the
Banks accounted for 68.42%, or $14.2 million, of total non-interest income for
2004, 74.5%, or $9.1 million, in 2003, and 44.18%, or $8.4 million, in 2002. The
majority of the increase in non-interest income of the Banks is related to the
continued growth in deposits. Service charges on deposit accounts increased by
$4,116,000, $370,000 and $713,000, respectively, for the years ended December
31, 2004, 2003 and 2002 as average demand deposit accounts increased 19.06% in
2004 compared to a 15.07% increase in 2003 and a 17.54% increase in 2002.
Service charges on deposits increased primarily as a result of the banks adding
a new overdraft protection program. Although these programs are under
significant regulatory scrutiny at this time, we believe our program complies
with the applicable disclosure rules.  Included in non-interest income of
the Banks are gains on sale of SBA loans recognized by Community of $302,000,
$297,000 and $240,000 for 2004, 2003 and 2002, respectively. This represents an
increase from 2003 of $5,000 and an increase in 2003 from 2002 of $57,000.
Income associated with the sale of SBA loans fluctuates from year to year
depending on loan demand.





In 2004,
non-interest income generated by other subsidiaries increased by $3.4 million or
110% compared to 2003. This was primarily driven by increased sales in
installation of supermarket bank units by Financial Supermarkets, Inc. (FSI)
during 2004 as compared to 2003. The increase in FSI’s sales is attributed to
the increase in the number of sales compared to the prior year due to the
expansion of our sales efforts nationwide and the resale of supermarket bank
units in space released by the Canadian Imperial Bank of Commerce.  
In
2003, non-interest income generated by other subsidiaries decreased by $7.5
million or 71% in 2003 compared to 2002 due to decreased installation of
supermarket bank units by Financial Supermarkets during 2003 compared to 2002.
This decrease was due to the termination of Financial Supermarkets’ agreement
with CIBC to establish banking pavilions in Florida.





23








Non-Interest
      Expense2004
    
    2003
    
    2002(Dollars
      in Thousands)Salaries
      and benefits
    
    $
    21,057
    
    $
    16,564
    
    $
    17,483Equipment
      expenses
    
    
    3,283
    
    
    2,915
    
    
    2,871Occupancy
      expenses
    
    
    2,289
    
    
    2,079
    
    
    1,849Data
      processing expenses
    
    
    1,652
    
    
    1,244
    
    
    967Travel
      expenses
    
    
    1,171
    
    
    1,164
    
    
    1,127Office
      supply expenses
    
    
    984
    
    
    890
    
    
    812Other
      operating expenses
    
    
    8,081
    
    
    6,399
    
    
    6,07338,517
    
    
    31,255
    
    
    31,182





*Non-Interest
Expense* .
Non-interest expenses increased for the year ended December 31, 2004 by
$7,262,000 compared to a $73,000 increase in 2003 and a $757,000 increase in
2002. This represented a 23.23% increase in expenses for 2004, a .23% increase
for 2003 and a 2.5% increase for 2002. Salaries and benefits increased
$4,493,000 or 27.13% in 2004 over 2003. This
increase is primarily attributable to an increase in full time equivalent
employees from 392 December 31, 2003 to approximately 420 at the end 2004. The increase
in full time equivalent employees was due to the addition of two new supermarket
banking centers, one new stand-alone branch and a loan production office during
the later part of 2003 as well as the overall growth of the Company’s banking
operations. In addition, incentive commissions related to sales activity at FSI
have increased due to increased sales over the previous year. In 2003, salaries
and benefits decreased
$919,000 or 5.26% over 2002. This was primarily due to reduction in incentive
pay at Financial Supermarkets.





Equipment
and occupancy expenses increased by a combined $578,000 or 11.57% in 2004 over
2003 and $274,000 or 5.82% in 2003 over 2002. The increases are due to the
increased number of facilities operated by the Banks as well as additions of
computer equipment. We operated 45, 40 and 38 locations at year-end 2004, 2003,
and 2002, respectively.





Data
processing, travel, office supply and other operating expenses, increased by a
combined $2,191,000 in 2004 compared to an increase of $718,000 in 2003 and a
decrease of $358,000 in 2002. The primary reason for the increase in such
expenses during 2004 is attributed to the change in our fee structure with our
debit card provider and an increased effort in business development and
marketing of our non-bank subsidiary as well as increased legal fees due to
past due loans and other real estate owned. Such non-interest expenses increased
during 2003 primarily due to growth of the banking subsidiaries, increased costs
associated with day-to-day operations and increased activity of Financial
Supermarkets.





*Income
Taxes* . We
incurred income tax expenses of $3.7 million in 2004, which represented an
effective tax rate of 29.18%, compared to tax expense of $1.8 million in 2003,
or an effective tax rate of 22.50%. This increase in our effective tax rate is
attributable to a larger percentage of our income being fully taxable
income. Income tax expense decreased $1.5 million to $1.8 million in 2003 from
$3.3 million in 2002. The effective tax rate for 2002 was 29.05%.





*Liquidity* . The
liquidity and capital resources of the Banks are monitored by management and on
a periodic basis by state and federal regulatory authorities. The individual
Banks’ liquidity ratios at December 31, 2004 were considered satisfactory under
their own guidelines as well as regulatory guidelines. At that date, the Banks’
cash equivalents and short-term investments were adequate to cover any
reasonably anticipated immediate need for funds.





Our cash
flows are of three major types. Cash flows from operating activities consist
primarily of interest and fees received on loans, interest received on
securities and Federal funds sold, less cash paid for interest and
operating expenses. Investing activities use cash for the purchase of
interest-bearing deposits, securities, fixed assets and to fund loans. Investing
activities also generate cash from the proceeds of matured interest-bearing
deposits, matured securities, sales of securities, loan repayments and principal
prepayments of securities. Cash flows from financing activities are
generated from a net increase in deposit accounts, increases in other
borrowed funds and the issuance of common stock. Financing activities use cash
for the payment of cash dividends and the repayment of other borrowed
funds.


We
borrowed $10 million from Federal Home Loan Bank in 2004 to increase our total
outstanding debt to $25.8 million. The loan proceeds were used to fund
loans.





24





The
purpose of liquidity management is to ensure that cash flow is sufficient to
satisfy demands for credit, withdrawals, and other needs. Traditional sources of
liquidity include asset maturities and growth in deposits. We attempt to achieve
our desired liquidity objectives from the management of assets and liabilities,
pricing of our deposits and through funds provided by operations. Funds invested
in short-term marketable instruments and the continuous maturing of other
earning assets are sources of liquidity from the asset perspective. Scheduled
loan payments are also relatively stable source of funds, but loan payoffs are
influenced by interest rates, general economic conditions and competition and
may fluctuate significantly. Deposit growth and accessibility to market sources
of funds are also sources of liquidity. Our markets have traditionally provided
us with a growing and stable deposit base. In addition, we have lines of credit
available. We believe our sources of liquidity are stable and reliable for the
foreseeable future.


*Off-Balance
Sheet Arrangements.* The
Company is a party to credit related financial obligations with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial obligations include commitments to extend credit and
letters of credit.





A
commitment to extend credit is an agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the commitments do not necessarily represent future
cash requirements.




Letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. These commitments are primarily issued to local
businesses.





The
exposure to credit loss in the event of nonperformance by the other party to the
commitments to extend credit and letters of credit is represented by the
contractual amount of these instruments. The Company uses the same credit
underwriting procedures for making commitments and letters of credit as for
on-balance-sheet instruments. The Company evaluates each customer’s
creditworthiness on a case-by-case basis and the amount of collateral, if deemed
necessary, is based on the credit evaluation. Collateral held varies, but may
include unimproved and improved real estate, certificates of deposit, personal
property, accounts receivable, inventory, property, plant and equipment
income producing commercial properties, or other acceptable collateral. All
of these obligations involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet. The total amounts of these
obligations does not necessarily represent future cash requirements because a
significant portion of these obligations often expire without being
used.





The
amounts outstanding under these financial obligations are described below as
“Other Commercial Commitments.” We are not involved in off-balance sheet
contractual relationships, other than those disclosed in this report, that could
result in liquidity needs or other commitments or that could significantly
impact earnings.





*Contractual
Obligations and Commercial Commitments* . The Banks
in the normal course of business, commit to extend credit in the form of letters
of credit or lines of credit. The amount of outstanding loan commitments and
letters of credit at December 31, 2004, 2003 and 2002 were $76.8 million, $56.8
million and $38.0 million, respectively. Commitments to extend credit generally
have fixed expiration dates or other termination provisions and may require the
payment of a fee. Since many of the commitments expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.








25





The
following tables present the Company’s contractual obligations and commercial
commitments as of December 31, 2004.





Payments
      Due by Period
      (Dollars
      in Thousands)Contractual
      Obligations
    
    Total
    
    Less
      than
      1year
    
    1-3
      years
    
    4-5
      years
    
    After 5
      yearsBank
      borrowings
    
    $
    544
    
    $
    363
    
    $
    181
    
    $
    —
    
    $
    —FHLB
      borrowings
    
    
    25,250
    
    
    —
    
    
    15,000
    
    
    —
    
    
    10,250Operating
      leases
    
    
    2,802
    
    
    1,035
    
    
    1,155
    
    
    502
    
    
    110Total
      Contractual Cash Obligations
    
    $
    28,596
    
    $
    1,398
    
    $
    16,336
    
    $
    502
    
    $
    10,360








Amount
      of Commitment Expiration per Period
      (Dollars
      in Thousands)Other
      Commercial Commitments
    
    Total
      AmountsCommitted
    
    Less
      than
      1year
    
    1-3
      years
    
    4-5
      years
    
    Over
      5
      yearsCommitments
      to extend credit (1)
    
    $
    73,578
    
    $
    12,167
    
    $
    6,201
    
    $
    55,129
    
    $
    81Customer
      letters of credit
    
    
    3,267
    
    
    3,163
    
    
    104
    
    
    —
    
    
    —Total
      Commercial Commitments
    
    $
    76,845
    
    $
    15,330
    
    $
    6,305
    
    $
    55,129
    
    $
    81





*___________________*


(1)
Commitments to extend credit in the “4-5 years” and "over 5 years" category
primarily represent home equity lines of credit which typically have a five year
draw period.





*Concentrations
of Credit Risk* .
Concentrations of credit risk arise when a number of borrowers have similar
economic characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in the economy or other
conditions. The Company’s loan portfolio consists primarily of commercial and
real estate loans located in the geographic markets served by the Company,
making the value of the portfolio susceptible to declines in real estate values
and other changes in economic conditions in such markets. The Company does not
believe it has unreasonable exposure to any individual customer.





*Capital
Resources.* At
December 31, 2004, the Company and Banks’ capital ratios were considered
adequate based on minimum capital requirements of the FDIC and applicable state
regulatory agencies. During 2004, the Company increased capital by retaining net
earnings of $8.2 million compared to an increase in 2003 of $5.4 million and an
increase in 2002 of $7.6 million. In 2004 and 2003, the Company purchased
$430,000 and $1.1 million in treasury stock, respectively.





For a
tabular presentation of the Banks’ capital ratios at December 31, 2004, see
“BUSINESS --SUPERVISION AND REGULATION”.





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





*Effects
of Inflation* .
Inflation impacts banks differently than non-financial institutions. Banks, as
financial intermediaries, have assets which are primarily monetary in nature and
which tend to fluctuate with inflation. A bank can reduce the impact of
inflation by managing its rate sensitivity gap, which represents the difference
between rate-sensitive assets and rate-sensitive liabilities. We, through our
asset-liability committee, attempt to structure the assets and liabilities and
manage the rate-sensitivity gap, thereby seeking to minimize the potential
effects of inflation.





26





**ITEM
7A.** **QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





The
Company is exposed only to U.S. dollar interest rate changes and accordingly,
the Company manages exposure by considering possible changes in its net interest
margin. The Company does not have any trading instruments nor does it classify
any portion of the investment portfolio as held for trading. The Company does
not engage in any hedging activities or enter into any derivative instruments
other than mortgage backed securities, which are commonly pass through
securities. Finally, the Company has no exposure to foreign currency exchange
rate risk, commodity price risk, and other market risks.





Interest
rates play a major part in the net interest income of a financial institution.
The sensitivity to rate changes is known as “interest rate risk.” The repricing
of interest earning assets and interest-bearing liabilities can influence the
changes in net interest income. As part of the Company’s asset/liability
management program, the timing of repriced assets and liabilities is referred to
as "gap" management.





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





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





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





At
December 31, 2004, the Company’s cumulative interest rate sensitivity gap ratio
for the next twelve months was 101%, which was within its targeted range of 80%
to 120%.





The
following table sets forth the distribution of the repricing of the Company’s
earning assets and interest-bearing liabilities as of December 31, 2004, the
interest rate sensitivity gap, the cumulative interest rate-sensitivity gap, the
interest rate-sensitivity gap ratio and the cumulative interest rate-sensitivity
gap ratio. The table also sets forth the time periods in which earning assets
and liabilities will mature or may reprice in accordance with their contractual
terms. However, the table does not necessarily indicate the impact of general
interest rate movements on the net interest margin since the repricing of
various categories of assets and liabilities is subject to competitive
conditions and the needs of the Company’s customers. In addition, various assets
and liabilities indicated as repricing within the same period may in fact
reprice at different times within such period and at different rates.





27





Consolidated
Gap Report


AfterThree
    
    AfterMonths
    
    OneBut
    
    Year
      butWithin
    
    Within
    
    Within
    
    AfterThree
      Months
    
    One
      Year
    
    Five
      Years
    
    Five
      Years
    
    Total(Dollars
      In Thousands)Interest
      earning assets:Interest-bearing
      deposits
    
    $
    487
    
    $
    0
    
    $
    0
    
    $
    0
    
    $
    487Federal
      funds sold
    
    
    0
    
    
    0
    
    
    0
    
    
    0
    
    
    0Investment
      securities
    
    
    9,303
    
    
    9,412
    
    
    49,799
    
    
    69,055
    
    
    137,569Loans
    
    
    297,334
    
    
    170,724
    
    
    175,430
    
    
    2,011
    
    
    645,499$
    307,124
    
    $
    180,136
    
    $
    225,229
    
    $
    71,067
    
    $
    783,555Interest-bearing
      liabilities:Interest-bearing
      demand
    
    $
    197,927
    
    $
    0
    
    $
    0
    
    $
    0
    
    $
    197,927Savings
    
    
    39,043
    
    
    0
    
    
    0
    
    
    0
    
    
    39,043Time
      deposits, $100,000and
      over
    
    
    28,811
    
    
    60,728
    
    
    46,401
    
    
    0
    
    
    135,940Time
      deposits, less than$100,000
    
    
    57,203
    
    
    96,620
    
    
    81,017
    
    
    128
    
    
    234,968Other
      borrowings
    
    
    0
    
    
    363
    
    
    15,181
    
    
    10,250
    
    
    25,794$
    322,984
    
    $
    157,711
    
    $
    142,599
    
    $
    10,378
    
    $
    633,672Interest
      rate sensitivitygap
    
    $
    (15,860
    )
    $
    22,425
    
    $
    82,630
    
    $
    60,688
    
    $
    149,883Cumulative
      interest ratesensitivity
      gap
    
    $
    (15,860
    )
    $
    6,565
    
    $
    89,195
    
    $
    149,883Interest
      rate sensitivitygap
      ratio
    
    
    95
    %
    
    114
    %
    
    158
    %
    
    685
    %Cumulative
      interest ratesensitivity
      gap ratio
    
    
    95
    %
    
    101
    %
    
    114
    %
    
    124
    %





Gap
management alone is not enough to properly manage interest rate sensitivity
because interest rates do not respond at the same speed or at the same level to
market rate changes. For example, savings and money market rates are more stable
than loans tied to a “Prime” rate and respond with less volatility to a market
rate change. Thus, the Company uses a simulation model to monitor changes in net
interest income due to changes in market rates. The model of rising, falling and
stable interest rate scenarios allows management to monitor and adjust interest
rate sensitivity to minimize the impact of market rate swings. The analysis of
impact on net interest margins as well as market value of equity over a
twelve-month period is subjected to a 200 basis point increase and decrease in
rate. The December 2004 model reflects an increase of 2.56% in net interest
income and a 9.20% decrease in market value equity for a 200 basis point
increase in rates. The same model shows a 2.61% decrease in net interest income
and a 6.62% increase in market value equity for a 200 basis point decrease in
rates. The Company’s policy is to allow no more than 8% change in net interest
income and no more than 25% change in market value equity for these scenarios.
Therefore, the Company is within its policy guidelines.








28





**ITEM
8.** **FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA**





The
      financial statements and the report of independent accountants are
      included in this report beginning at page
F-1.





**ITEM
9.** **CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.**





During
the Company’s two most recent fiscal years, the Company did not change
accountants and had no disagreement with its accountants on any matters of
accounting principles or practices or financial statement
disclosure.





**ITEM
9A.** **CONTROLS
AND PROCEDURES**




Our
management, including the chief executive and chief financial officers,
supervised and participated in an evaluation of our disclosure controls and
procedures (as defined in federal securities rules) and pursuant to such
evaluation, concluded that our disclosure controls and procedures are effective
as of December 31, 2004. Disclosure controls and procedures are those controls
and procedures which ensure that information required to be disclosed in this
filing is accumulated and communicated to management and is recorded, processed,
summarized and reported in a timely manner and in accordance with Securities and
Exchange Commission rules and regulations.




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





**ITEM
9B.         OTHER
INFORMATION.**





None.







**PART
III**





**ITEM
10.** **DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT**




**Directors
and executive officers**


The
following is a brief description, as of December 31, 2004, of the business
experience of each of the directors and executive officers of the Company who,
except as otherwise indicated, has been or was engaged in his or her present of
last principal employment, in the same or a similar position, for more than five
years:


Steven
      C. Adams (56)
    Mr.
      Adams has been an attorney with the firm of Adams, Ellard & Frankum,
      P.C. since 1973. He has been a director of the Company, Community, and
      Financial Supermarkets since 1990. He was named a director of Financial
      Properties in 1998.Edwin
      B. Burr (71)
    Mr.
      Burr has served as a director of the Company since April of 1995 and
      Financial Supermarkets since 1992. Mr. Burr has been President of
      Financial Solutions, a bank consulting firm since 1988. He has been a
      director of Community - Alabama since 1997. Mr. Burr has been a director
      of Community since 2003. Mr. Burr has been a director of Community - Troup
      since 2004.Wesley
      A. Dodd, Jr. (40)
    Mr.
      Dodd has been Executive Vice President of the Company, Community,
      Financial Supermarkets and Financial Properties since April 2000. Prior to
      that, he was Senior Vice President for the Company, Community and
      Financial Properties.Annette
      R. Fricks(60)
    Mrs.
      Fricks has been an Executive Vice President and Corporate Secretary of the
      Company and Community since 1982 and 1967, respectively, and has also
      served as Executive Vice President and Corporate Secretary of Financial
      Supermarkets since 1984. She was named the Executive Vice President and
      Corporate Secretary for Financial Properties in 1998.David
      H. Gould, Jr. (58)
    Mr.
      Gould has served as an Executive Vice President of the Company since 2002.
      Prior to that, he was Consumer Banking Executive for Bank of
      America.Harry
      L. Stephens (58)
    Mr.
      Stephens has been an Executive Vice President and the Chief Financial
      Officer of the Company and Community since 1992 and has served as
      Treasurer of Financial Supermarkets since 1986. He has been Executive Vice
      President and Chief Financial Officer of Community since 1992. He was
      named Executive Vice President and Treasurer of Financial Properties, Inc.
      in 1998.H.
      Calvin Stovall, Jr. (89)
    Mr.
      Stovall, who is retired, was the President and treasurer of Stovall
      Tractor Company, a retail farm equipment dealer, from 1948 until November
      1995. He served as the Chairman of the Company’s Board of Directors
      1981-1998 and was named Chairman Emeritus in 1998. Mr. Stovall has also
      served as a director of Community, Financial Supermarkets and Community -
      Troup since 1963, 1984 and November 1994, respectively. He was also named
      a director of Financial Properties, Inc. in 1998.Dean
      C. Swanson (73)
    Mr.
      Swanson was President of the Standard Group, a telecommunications company
      until January 1999. He is a director of Independent Telecommunications
      Network. Mr. Swanson has served as a director of the Company, Community
      and Financial Supermarkets since 1981, 1972, and 1984, respectively. He
      was named a director of Financial Properties, Inc. in
  1998.George
      D. Telford (84)
    Mr.
      Telford is a retired bank executive and has served as a director of the
      Company and Community since 1981 and 1965, respectively, as well as of
      Financial Supermarkets since 1993. He was named a director of Financial
      Properties, Inc. in 1998.J.
      Alton Wingate (65)
    Mr.
      Wingate has served as a director and the President and Chief Executive
      Officer of the Company, Community and Financial Supermarkets since 1981,
      1977 and 1984, respectively. Mr. Wingate was named Chairman of the Board
      in 1998. He has also been the Chairman of the Board of Directors and a
      director of Community - Alabama, and Community - Troup since 1990 and
      November 1994, respectively. He was named President and Chief Executive
      Officer of Financial Properties, Inc. in 1998. Mr. Wingate has been
      Chairman and Chief Executive Officer of Community since 1996 and has been
      Chairman, President, and Chief Executive Officer of Financial Supermarkets
      since 1984. Mr. Wingate has served on the Board of Directors of Ingles
      Markets since 1988.Dr.
      A. Dan Windham (66)
    Dr.
      Windham is a partner in Windham Radiology P.C. Dr. Windham has served as a
      Director of Community since 1996 and was elected to the Company’s Board of
      Directors in 2001.Lois
      M. Wood-Schroyer (66)
    Ms.
      Wood-Schroyer is the Chairman, Chief Executive Officer and President of
      Woods Furniture Co. Ms. Wood-Schroyer has served as a Director of
      Community since 1990 and was elected to the Company’s Board of Directors
      in 1999.





Directors
are elected at each annual meeting of shareholders and hold office until the
next annual meeting and until their successors are elected and qualified. The
executive officers are elected by the Board of Directors and serve at the will
of the Board. There are no family relationships among executive officers and
directors of the Company.





The
Company is not subject to Section 16(a) of the Securities Exchange Act of
1934.







**Code
of Ethical Conduct**




The
Company has adopted a Code of Ethical Conduct that applies to the Company’s
principal executive officer, principal financial officer and principal
accounting officer. A copy of our Code of Ethical Conduct is included as Exhibit
14 to this Form 10-K.








29





**ITEM
11.**  **EXECUTIVE
COMPENSATION.**





The
following table sets forth the annual and long-term compensation paid by the
Company to the Chief Executive Officer of the Company and the four other most
highly compensated officers of the Company whose salary and bonus exceeded
$100,000 during the last fiscal year (the “Named Executive
Officers”).





Summary
Compensation Table





Annual
      CompensationName
      and PrincipalPosition
    
    Year
    
    Salary
      (1)
    
    Bonus
      (2)
    
    All
      Other
      CompensationJ.
      Alton Wingate
    
    
    2004
    
    
    634,567
    
    
    285,000
    
    
    51,310(4
    )President
      and Chief
    
    
    2003
    
    
    345,700
    
    
    1,256,068(3
    )
    
    60,449(5
    )Executive
      Officer
    
    
    2002
    
    
    358,815
    
    
    1,541,154(3
    )
    
    43,907(6
    )Harry
      L. Stephens
    
    
    2004
    
    
    135,967
    
    
    50,000
    
    
    26,215(4
    )Executive
      Vice
    
    
    2003
    
    
    124,231
    
    
    35,000
    
    
    24,540(5
    )President
      and Chief
    
    
    2002
    
    
    123,077
    
    
    50,000
    
    
    28,437(6
    )Financial
      OfficerAnnette
      R. Fricks
    
    
    2004
    
    
    146,000
    
    
    70,000
    
    
    25,199(4
    )Executive
      Vice
    
    
    2003
    
    
    129,423
    
    
    45,000
    
    
    22,801(5
    )President
      and
    
    
    2002
    
    
    128,269
    
    
    70,000
    
    
    26,096(6
    )Corporate
      SecretaryWesley
      A. Dodd, Jr.
    
    
    2004
    
    
    129,500
    
    
    50,000
    
    
    18,603(4
    )Executive
      Vice
    
    
    2003
    
    
    110,808
    
    
    35,000
    
    
    16,309(5
    )President
      of
    
    
    2002
    
    
    104,404
    
    
    45,000
    
    
    17,260(6
    )Corporate
      FinanceDavid
      H. Gould, Jr.
    
    
    2004
    
    
    134,513
    
    
    30,000
    
    
    20,473(4
    )Executive
      Vice
    
    
    2003
    
    
    130,000
    
    
    25,000
    
    
    16,672(5
    )President
    
    
    2002
    
    
    119,191
    
    
    —
    
    
    6,342(6
    )





_______________________


(1)
    Includes
      directors’ fees.





(2)
    Bonuses
      are included in this report in the year
paid.





(3)
    Mr.
      Wingate’s bonus is contractually based on the performance of Financial
      Supermarkets, with caps and guaranteed rates of return before the bonus
      can be calculated and paid.





(4)
    Reflects
      life insurance premiums ($16,975 for Mr. Wingate, $1,944 for Mr. Stephens,
      $2,774 for Ms. Fricks, $216 for Mr. Dodd, and $1,032 for Mr. Gould),
      estimated employee stock ownership plan (“ESOP”) contributions ($13,000
      for Mr. Wingate, $13,000 for Mr. Stephens, $13,000 for Ms. Fricks, $12,000
      for Mr. Dodd, and $13,000 for Mr. Gould) and 401(K) matching contributions
      ($2,873 for Mr. Wingate, $2,775 for Mr. Stephens, $3,150 for Ms. Fricks,
      $2,603 for Mr. Dodd, and $1,700 for Mr. Gould). Final ESOP contributions
      have not yet been determined for
2005.





(5)
    Reflects
      life insurance premiums ($27,133 for Mr. Wingate, $1,944 for Mr. Stephens,
      $2,222 for Ms. Fricks, $216 for Mr. Dodd, and $1,032 for Mr. Gould),
      estimated employee stock ownership plan (“ESOP”) contributions ($12,000
      for Mr. Wingate, $12,000 for Mr. Stephens, $12,000 for Ms. Fricks, $11,000
      for Mr. Dodd, and $11,000 for Mr. Gould) and 401(K) matching contributions
      ($2,500 for Mr. Wingate, $2,389 for Mr. Stephens, $2,500 for Ms. Fricks,
      $2,187 for Mr. Dodd, and $1,550 for Mr.
    Gould).





(6)
    Reflects
      life insurance premiums ($7,295 for Mr. Wingate, $1,944 for Mr. Stephens,
      $2,222 for Ms. Fricks, $212 for Mr. Dodd, and $1,032 for Mr. Gould),
      estimated employee stock ownership plan (“ESOP”) contributions ($14,500
      for Mr. Wingate, $14,500 for Mr. Stephens, $14,500 for Ms. Fricks, and
      $12,000 for Mr. Dodd) and 401(K) matching contributions ($2,500 for Mr.
      Wingate, $2,400 for Mr. Stephens, $2,383 for Ms. Fricks, and $1,598 for
      Mr. Dodd).





30





Aggregated
Option Exercises In Last Fiscal Year And FY-End Option Values





Name
    
    Shares
      Acquiredo
      Exercise
      (#)
    
    Value
      Realized
      ($)
    
    Number
      of
      Securities
      Underlying
      Unexercised
      Options
      at Fiscal
      Year-End
      (Exercisable/
      Unexercisable)
    
    Value
      of
      Unexercised
      In-The-Money
      Options
      At Fiscal
      Year-End
      ($)
      (Exercisable/
      Unexercisable)J.
      Alton Wingate
    
    —
    
    $
      —
    
    —
    
    $    
      —Harry
      L. Stephens
    
    —
    
    —
    
    2,500/0
    
    47,350Annette
      R. Fricks
    
    —
    
    —
    
    2,500/0
    
    47,350Wesley
      A. Dodd, Jr.
    
    —
    
    —
    
    2,500/0
    
    47,350David
      H. Gould, Jr.
    
    —
    
    —
    
    —
    
    —





Equity
Compensation Plan Information




The
following table gives information as of December 31, 2004 about equity awards
under the Company’s Incentive Stock Option Plan.




(a)
    
    (b)
    
    (c)Plan
      Category
    
    Number
      of
      securities
      to be
      issued
      upon
      exercise
      of
      outstanding
      options,
      warrant
      and
      rights
    
    Weighted-
      average
      exercise
      price
      of
      outstanding
      options,
      warrants
      and
      rights
    
    Number
      of securities
      remaining
      available for
      future
      issuance under
      equity
      compensation plans
      (excluding
      securities
      reflected
      in column (a))Equity
      compensation plans
      approved
      by stockholders
    
    
    31,000
    
    $
    40.15
    
    
    183,000Equity
      compensation plans not
      approved
      by stockholders
    
    
    —
    
    
    —
    
    
    —Total
    
    
    31,000
    
    $
    40.15
    
    
    183,000





*Directors’
Compensation* . The
Chairman Emeritus of the Company’s Board of Directors, Calvin Stovall, currently
receives a fee of $2,500 per month for service as the Chairman of the Board and
other directors of the Board of the Company receive $12,000 a year for service
on the Company’s Board of Directors. The directors of Community, Community -
Alabama, Community - Troup and Financial Supermarkets currently receive fees of
$12,000, $4,800, $4,800 and $6,000 per year, respectively. Directors
who are members of the Company’s audit committee receive $4,000 a year for their
service and directors who are members of Community’s asset liability management
committee receive $4,000 a year for their service.







31





*Agreements
with Officers* . In
2002, Messrs. Wingate, Stephens and Dodd and Ms. Fricks each entered into a
Change in Control Severance Agreement with the Company. The agreement is to
remain in effect until the earlier of the termination of each executive’s
employment without entitlement to the benefits under the agreement or the date
that that the executive attains age 70; provided, however, the agreement may be
terminated at any time by mutual written agreement of the executive and the
Company.





The
agreement provides for payment of compensation and benefits to the executive in
the event of a Change in Control (as defined in the agreement), if the
executive’s employment is involuntarily terminated by the Company without Cause
(as defined in the agreement), or if the executive terminates his employment for
Good Reason (as defined in the agreement). The executive is not entitled to
compensation or payments pursuant to the agreement if he is terminated by the
Company for Cause, dies, incurs a disability, or voluntarily terminates
employment (other than for Good Reason). If a Change in Control occurs during
the term of the agreement and the executive’s employment is terminated within
six months prior to or eighteen months following the date of the Change in
Control, and if such termination is an involuntary termination by the Company
without Cause (and does not arise as a result of death or Disability) or a
termination by the executive for Good Reason, the executive will be entitled to
certain compensation and benefits including his base salary for the entire CIC
Severance Period (defined as the lesser of 36 months from the date of his
termination or the number of months from the date of his termination until he
attains age 70, bonus payments (as determined under the agreement) and certain
other benefits as determined by the agreement. The agreement provides that the
compensation and benefits provided for under the agreement may be reduced or
modified so as to insure that the Company does not pay an Excess Severance
Payment (as defined in the agreement).





**Compensation
Committee Interlocks and Insider Participation**





The
nonemployee members of the Board of Directors of the Company reviewed the
compensation of Messrs.
Wingate, Stephens, Dodd and Gould and Ms. Fricks and of
the Company’s other executive officers for the 2004 fiscal year. Although Mr.
Wingate participated in deliberations regarding the salaries of executive
officers, Mr. Wingate did not participate in any decisions regarding his own
compensation as an executive officer.





**Report
on Executive Compensation**





*General.* Under
rules established by the SEC, the Company is required to provide certain
information with respect to compensation provided to the Company’s President and
Chief Executive Officer and other executive officers. The SEC regulations
require a report setting forth a description of the Company’s executive
compensation policy in general and the considerations that led to the
compensation decisions affecting Messrs. Wingate, Stephens, Dodd and Gould and
Ms. Fricks. In fulfillment of this requirement, the Board of Directors and
Compensation Committee have prepared the following report for inclusion in this
Form 10-K.





The
fundamental policy of the Company’s compensation program is to offer competitive
compensation and benefits for all employees, including the President and Chief
Executive Officer and the other officers of the Company, to compete for and
retain talented personnel who will lead the Company in achieving levels of
financial performance that enhance shareholder value. The Company’s executive
compensation package historically has consisted of salary, annual bonus, and
other customary fringe benefits.





*Salary.* The
nonemployee members of the Board of Directors of the Company participated in
deliberations regarding salaries of executive officers. Mr. Wingate did not
participate in deliberations concerning his own compensation. Although
subjective in nature, factors considered by the Board in setting the salaries of
executive officers were Mr. Wingate’s recommendations (except with respect to
his own salary), compensation paid by comparable banks to their executive
officers (although such information was obtained informally and the Company did
not attempt to pay any certain percentage of salary for comparable positions
with other banks), each executive officer’s performance, contribution to the
Company, tenure in his or her position, and internal comparability
considerations. The Board of Directors set the salary of Mr. Wingate based on
Mr. Wingate’s salary during the preceding fiscal year, his tenure, the salaries
of chief executive officers of comparable bank holding companies, and the
increase in earnings of the Company in recent years. The Board did not assign
relative weights to the factors considered in setting salaries of executive
officers, including Mr. Wingate.





32





*Annual
Bonus.* Annual
bonuses for 2004, paid in the form of a cash bonus during the first quarter of
the 20054, were based on annual consolidated financial results of the Company
and of its subsidiaries, including general targets with respect to net income
and earnings per share. Cash bonuses were granted by the Board to Mr. Wingate
based on the performance of Financial Supermarkets according to contractual
obligations. The Board set a range of bonuses (based on a percentage of salary)
for all employees other than Mr. Wingate, within which range Mr. Wingate
determined each other officer’s bonus, based on individual
performance.





Steven C.
Adams


H. Calvin
Stovall


Dean C.
Swanson


Lois M.
Wood-Shroyer








**ITEM
12.** **SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**








The
following table sets forth the percent and number of shares of the Common Stock
beneficially owned as of March 20, 2005 by (1) each of the Named Executive
Officers, (2) each of the directors of the Company, (3) each shareholder who
owns greater than five percent (5%) of the Company’s securities and (4) all
executive officers and directors of the Company as a group, without naming such
individuals. There were 2,151,858 shares outstanding as of that
date.





Name
      of
    Amount
      of Shares
    PercentBeneficial
      Owner(1)
    Beneficially
      Owned
    Of
      ClassJoye
      H. Adams
    123,520
      (1)
    5.76%Steven
      C. Adams
    474,288(2)(3)(4)(5)(6)
    22.14%Edwin
      B. Burr
    1,343
      (7)
    *Elton
      S. Collins
    380,048
      (3)(8)(9)
    17.75%Community
      Bankshares, Inc.
      Employee
      Stock Ownership Plan
      and
      Trust
    362,448
      (3)(10)
    16.92%Wesley
      A. Dodd, Jr.
    43,445
      (11)
    2.03%Annette
      R. Fricks
    22,126
      (12)(13)
    1.03%David
      H. Gould, Jr.
    500
      (14)
    *Harry
      L. Stephens
    8,819
      (15)
    *H.
      Calvin Stovall
    165,684
      (16)(17)(18)
    7.74%Dean
      C. Swanson
    27,000
      (19)(20)
    1.26%George
      D. Telford
    69,171
      (21)(22)(23)
    3.23%Dr.
      A. Dan Windham
    8,187
      (25)(26)
    *J.
      Alton Wingate
    681,285
      (2)(3)(4)(26)(27)
    31.81%Lois
      M. Wood-Schroyer
    4,093
      (28)
    *All
      executive officers and directors as a group (12 Persons)
    1,168,680
      (2)(3)(4)(5)(18)(29)
    54.57%








* less
than one percent





(1)
    Mrs. Adams’ address is 664 Chenocetah Drive, Cornelia,
      Georgia 30531.
 (2)
    Includes
      an aggregate of 48,000 shares held by the Taft Chatham Trusts I and II
      with respect to which Messrs. Wingate and Adams are co-trustees and share
      voting and investment power.


(3)
    Includes
      362,448 shares held by Community Bankshares, Inc. ESOP with respect to
      which


Messrs.
Wingate, Adams and Collins are co-trustees and share voting and investment
power.


(4)
    Includes
      19,500 shares held by Chatham Transport company with respect to which
      Messrs. Wingate and Adams share voting
power.


(5)
    Includes
      44,340 shares held by Mr. Adams as trustee for the F. Jack Adams
      Testamentary Trust, as to which Mr. Adams has voting and investment
      control.
 (6)
    Mr. Adam’s address is 148 North Main Street, Cornelia
      Georgia 30531.








33




(7)
    Does
      not include 1,000 shares of Common Stock owned by Mr. Burr’s wife, as to
      which he disclaims beneficial ownership.
 (8)
    Mr.
      Collins’ address is 1851 North Elm Street, Commerce, Georgia
    30329.
 (9)
    Includes
      presently-exercisable options to acquire 2,500 shares of Common
      Stock.
 (10)
    The
      address of the ESOP is 448 North Main Street, Cornelia, Georgia
      30531.
 (11)
    Includes
      presently-exercisable options to acquire 2,500 shares of common
      stock.


(12)
    Includes
      presently-exercisable options to acquire 2,500 shares of common
      stock.


(13)
    Does
      not include 2,770 shares of Common Stock owned by Ms. Fricks’ husband, as
      to which she disclaims beneficial
ownership.


(14)
    Includes
      500 shares held jointly with Mr. Gould’s wife as to which she claims
      beneficial ownership.


(15)
    Includes
      presently-exercisable options to acquire 2,500 shares of Common
      Stock.
 (16)
    Mr.
      Stovall’s address is 215 Grandview Circle, Cornelia, Georgia
      30531.


(17)
    Does
      not include 250 shares of Common Stock owned by Mr. Stovall’s wife, as to
      which he disclaims beneficial ownership.


(18)
    Includes
      130,925 shares held by Stovall Investments, LLLP with respect to which Mr.
      Stovall has voting and investment control.


(19)
    Mr.
      Swanson’s address is 222 Mountain Oak Road, Cornelia, Georgia
      30531.


(20)
    Does
      not include 4,155 shares of common stock owned by Mr. Swanson’s wife, as
      to which he disclaims beneficial ownership.


(21)
    Mr.
      Telford’s address is 215 Tower Avenue, Cornelia, Georgia
      30531.


(22)
    Does
      not include 10,500 shares of common stock owned by Mr. Telford’s wife, as
      to which he disclaims beneficial ownership.


(23)
    Does
      not include 3,610 shares of common stock owned jointly by Mr. Telford’s
      wife and grandchildren, as to which he disclaims beneficial
      ownership.


(24)
    Dr.
      Windham’s address is 253 Garland Bristol Road, Sautee, Georgia
      30571.


(25)
    Includes
      500 shares held jointly with Dr. Windham’s wife as to which she claims
      beneficial ownership.
 (26)
    Mr. Wingate’s address is 186 Hillcrest Heights, Cornelia,
      Georgia 30531.


(27)
    Does
      not include 4,310 shares of common stock owned by Mr. Wingate’s wife, as
      to which he disclaims beneficial ownership.


(28)
    Ms.
      Wood-Schroyer’s address is 672 Buck Horn Road, Clarksville, Georgia
      30523.


(29)
    Includes
      presently-exercisable options to acquire 10,000 shares of Common
      Stock.





**ITEM
13.** **CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.**





Each of
the Banks has had, and expects to have in the future, banking transactions in
the ordinary course of business with directors and officers of the particular
bank and the Company and their associates, including corporations in which such
officers or directors are shareholders, directors and/or officers, on the same
terms (including interest rates and collateral) as those prevailing at the time
for comparable transactions with other persons. Such transactions have not
involved more than the normal risk of collectibility or presented other
unfavorable features.





**ITEM
14.** **PRINCIPAL
ACCOUNTANT FEES AND SERVICES**




Mauldin
& Jenkins, LLC was the principal independent public accountant for the
Company during the year ended December 31, 2004. Representatives of Mauldin
& Jenkins, LLC are expected to be present at the annual meeting and will
have the opportunity to make a statement if they desire to do so and to respond
to appropriate questions. The Company anticipates that Mauldin & Jenkins,
LLC will be the Company’s accountants for the 2005 fiscal year.




During
2004 and 2003, the Company was billed the following amounts for services
rendered by Mauldin & Jenkins, LLC:




*Audit
Fees* . In
connection with the audit of the Company’s annual consolidated financial
statements and review of its Form 10-K and the review of the Company’s interim
consolidated financial statements included within Forms 10-Q, the Company was
billed approximately $130,610 in 2004 and $126,327 in 2003. This figure includes
fees for certain services that were billed to the Company in 2004 in connection
with the 2003 annual audit, including out-of-pocket travel costs.




*Audit-Related
fees* . The
Company was billed approximately $500 in 2004 and $0 in 2003 for Federal Home
Loan Bank agreed upon procedures engagement in 2003.







34




*Tax
Fees* . The
Company was billed approximately $13,960 in 2004 and $10,782 in 2003 for tax
advice and preparation of tax returns and estimated payment
calculations.




*All
Other Fees* . The
Company was billed no other fee in 2004 or 2003.




The audit
committee approves all audit and non-audit services performed by the Company’s
independent auditor. Certain non-audit services that are permitted under the
federal securities laws may be approved from time to time by the audit
committee.














35





**ITEM
15.** **EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES**





(a) Financial
Statements.





The
following financial statements and notes thereto of the Registrant are included
in the Report:





Independent
Auditor’s Report on the Financial Statement





Consolidated
Balance Sheets - December 31, 2004 and 2003





Consolidated
Statements of Income for the years ended December 31, 2004, 2003 and
2002





Consolidated
Statements of Comprehensive Income for the years ended December 31, 2004, 2003
and 2002





Consolidated
Statements of Shareholder’s Equity for the years ended December 31, 2004, 2003
and 2002





Consolidated
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002





Notes to
Consolidated Financial Statements





(b) Exhibits.





The
following exhibits are required to be filed with this Report by Item 601 of
Regulation S-K:





3.1
    Amended
      and Restated Articles of Incorporation of the Registrant dated as of June
      30, 1997 (included as Exhibit 3.1 to the Registrant’s Form 10-K for the
      year ended December 31, 2001, filed on April 1, 2002 with the Commission
      and incorporated herein by reference).3.2
    Bylaws
      of the Registrant (included as Exhibit 3.2 to the Registrant’s Form S-4
      Registration Statement, Commission File No. 33-81890, filed on July 22,
      1994 with the Commission and incorporated herein by reference).4.1
    See
      exhibits 3.1 and 3.2 for provisions of Articles of Incorporation and
      Bylaws as amended, which define the rights of the holders of Common Stock
      of the Registrant.10.1
    Incentive
      Stock Option Plan, as adopted August 17, 1987 (included as Exhibit 10.1 to
      the Registrant’s Form S-4 Registration Statement, Commission File No.
      33-81890, filed on July 22, 1994 with the Commission and incorporated
      herein by reference).*10.2
    Form
      of Change in Control Agreement, by and between J. Alton Wingate, Harry L.
      Stephens, Annette R. Fricks and Wesley A. Dodd, Jr. and the Company
      (included as Exhibit 10.3 to the Registrant’s Form 10-K for the year ended
      December 31, 2002, filed on March 28, 2003 with the Commission and
      incorporated herein by reference).*10.3
    Community
      Bankshares, Inc. 1999 Stock Award Plan, as adopted December 22, 1999
      (included as Exhibit 10.8 to the Registrant’s Form 10-K for the year ended
      December 31, 1999, filed on March 30, 2000 with the Commission and
      incorporated herein by reference).*10.4
    Amended
      and Restated Revolving Credit Term Loan Agreement between the Registrant
      and SunTrust Bank dated July 30, 2000 (included as Exhibit 10.6 to the
      Registrant’s Form 10-K for the year ended December 31, 2001, filed on
      April 1, 2002 with the Commission and incorporated herein by
      reference).10.5
    Amendment
      to Amended and Restated Credit Term Loan Agreement between the Registrant
      and SunTrust Bank dated June 8, 2001 (included as Exhibit 10.7 to the
      Registrant’s Form 10-K for the year ended December 31, 2001, filed on
      April 1, 2002 with the Commission and incorporated herein by
      reference).10.6
    Third
      Amendment to Amended and Restated Revolving Credit Term Loan Agreement
      between the Registrant and SunTrust Bank dated May 31, 2003.








36








10.7
    Business
      Loan and Security Agreement dated as of June 8, 2001 among the Registrant,
      Community Bankshares, Inc. Employee Stock Ownership Plan and Trust, Steve
      Adams, J. Alton Wingate and Elton Collins, not in their individual
      capacities, but solely as Trustees of the Community Bankshares, Inc.
      Employee Stock Ownership Plan and Trust (included as Exhibit 10.8 to the
      Registrant’s Form 10-K for the year ended December 31, 2001, filed on
      April 1, 2002 with the Commission and incorporated herein by
      reference).10.8
    Fourth
      Amendment to Amended and Restated Revolving Credit Term Loan Agreement
      between the Registrant and SunTrust Bank dated June 30,
    2004.10.9
    Replacement
      Revolving Credit Note between the Registrant and SunTrust Bank dated June
      30, 2004.14
    Code
      of Ethical Conduct (included
      as Exhibit 14 to the Registrant’s Form 10-K for the year ended December
      31, 2003, filed on March 30, 2004, with the commission and incorporated
      herein by reference).21
    List
      of Subsidiaries of Registrant (included
      as Exhibit 21 to the Registrant’s Form 10-K for the year ended December
      31, 2003, filed on March 30, 2004, with the commission and incorporated
      herein by reference).31.1
    Certification
      by J. Alton Wingate, President and Chief Executive Officer of Community
      Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
    Certification
      by Harry L. Stephens, Chief Financial Officer of Community Bankshares,
      Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
    Certification
      by J. Alton Wingate, President and Chief Executive Officier of Community
      Bankshares, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to section 906 of the Sarbanes-Oxley Act of
    200232.2
    Certification
      by Harry L. Stephens, Chief Financial Officier of Community Bankshares,
      Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section
      906 of the Sarbanes-Oxley Act of 2002.








_______________________________


*Management
contract or compensatory plan or arrangement.





(c) No
reports on Form 8-K were filed during the last quarter of 2004.








37






**COMMUNITY
BANKSHARES, INC.**
 **AND
SUBSIDIARIES**
 
 **CONSOLIDATED
FINANCIAL REPORT**
 **DECEMBER
31, 2004**
 
 
 
 **TABLE
OF CONTENTS**
 
 
 **Page****REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
    **F-1****CONSOLIDATED
      FINANCIAL STATEMENTS****Consolidated
      balance sheets**
    **F-2****Consolidated
      statements of income**
    **F-3****Consolidated
      statements of comprehensive income**
    **F-4****Consolidated
      statements of shareholders' equity**
    **F-5****Consolidated
      statements of cash flows**
    **F-6
      and 7****Notes
      to consolidated financial statements**
    **F-
      8-33**
 
  
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 **To
the Board of Directors**
 **Community
Bankshares, Inc. and Subsidiaries**
 **Cornelia,
Georgia**
 
 
 We have
audited the accompanying consolidated balance sheets of **Community
Bankshares, Inc. and subsidiaries** as of
December 31, 2004 and 2003, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Community Bankshares,
Inc. **** and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
 
 /s/
MAULDIN & JENKINS, LLC
 
 
 
 
 
 
 
 Atlanta,
Georgia
 March 25,
2005





****


****


****


****


****


****





F-1






**COMMUNITY
      BANKSHARES, INC.****AND
      SUBSIDIARIES****CONSOLIDATED
      BALANCE SHEETS****DECEMBER
      31, 2004 AND 2003****Assets**
    
    **2004**
    
    2003Cash
      and due from banks
    
    **$**
    **30,506,959**
    
    $
    44,728,730Interest-bearing
      deposits in other banks
    
    
    **486,978**
    
    
    429,119Federal
      funds sold
    
    
    **-**
    
    
    19,600,000Securities
      available for sale
    
    
    **114,883,240**
    
    
    103,458,121Securities
      held to maturity (fair value $21,329,740 and $24,352,241)
    
    
    **20,217,237**
    
    
    22,628,009Restricted
      equity securities, at cost
    
    
    **2,469,000**
    
    
    1,242,900Loans
      , net of unearned income
    
    
    **645,499,828**
    
    
    545,465,491Less
      allowance for loan losses
    
    
    **9,170,354**
    
    
    7,560,507Loans,
      net
    
    
    **636,329,474**
    
    
    537,904,984Premises
      and equipment, net
    
    
    **18,329,887**
    
    
    15,239,168Intangible
      assets, net
    
    
    **812,182**
    
    
    1,090,162Goodwill
    
    
    **968,151**
    
    
    968,151Other
      real estate
    
    
    **3,901,288**
    
    
    5,271,635Other
      assets
    
    
    **14,473,117**
    
    
    13,623,773**Total
      assets**
    
    **$**
    **843,377,513**
    
    $
    766,184,752**Liabilities,
      Redeemable Common Stock and Shareholders'
    Equity**Liabilities
      :Deposits:Noninterest-bearing
    
    **$**
    **119,096,291**
    
    $
    111,561,999Interest-bearing
    
    
    **607,878,825**
    
    
    559,042,056**Total
      deposits**
    
    
    **726,975,116**
    
    
    670,604,055Other
      borrowings
    
    
    **25,793,750**
    
    
    16,152,925Other
      liabilities
    
    
    **11,568,640**
    
    
    7,986,153**Total
      liabilities**
    
    
    **764,337,506**
    
    
    694,743,133Commitments
      and contingenciesRedeemable
      common stock held by ESOP, net of unearned ESOP sharesrelated
      to ESOP debt guarantee of $585,218 and $973,675,
    respectively
    
    
    **18,925,358**
    
    
    15,783,013Shareholders'
      equityCommon
      stock, par value $1; 5,000,000 shares authorized;2,211,330
      and 2,204,330 shares issued, respectively
    
    
    **2,211,330**
    
    
    2,204,330Capital
      surplus
    
    
    **6,476,687**
    
    
    6,341,383Retained
      earnings
    
    
    **53,535,634**
    
    
    48,068,691Accumulated
      other comprehensive income
    
    
    **883,666**
    
    
    1,607,200Less
      cost of 69,745 and 60,135 shares of treasury stock,
      respectively
    
    
    **(2,992,668**
    **)**
    
    (2,562,998
    )**Total
      shareholders' equity**
    
    
    **60,114,649**
    
    
    55,658,606**Total
      liabilities, redeemable common stock and****shareholders'
      equity**
    
    **$**
    **843,377,513**
    
    $
    766,184,752**See
      Notes to Consolidated Financial Statements.**






****


F-2


****COMMUNITY
      BANKSHARES, INC.****AND
      SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF INCOME****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND
      2002****2004**
    
    2003
    
    2002**Interest
      income:**Loans,
      including fees
    
    **$**
    **40,865,511**
    
    $
    37,729,028
    
    $
    37,423,486Taxable
      securities
    
    
    **2,366,440**
    
    
    2,454,122
    
    
    2,766,316Nontaxable
      securities
    
    
    **2,662,815**
    
    
    2,980,700
    
    
    2,985,608Interest-bearing
      deposits in other banks
    
    
    **12,038**
    
    
    19,470
    
    
    11,133Federal
      funds sold
    
    
    **233,440**
    
    
    226,210
    
    
    301,631**Total
      interest income**
    
    
    **46,140,244**
    
    
    43,409,530
    
    
    43,488,174**Interest
      expense:**Deposits
    
    
    **11,870,522**
    
    
    12,439,453
    
    
    15,778,448Other
      borrowings
    
    
    **881,387**
    
    
    788,864
    
    
    722,126**Total
      interest expense**
    
    
    **12,751,909**
    
    
    13,228,317
    
    
    16,500,574**Net
      interest income**
    
    
    **33,388,335**
    
    
    30,181,213
    
    
    26,987,600**Provision
      for loan losses**
    
    
    **3,037,000**
    
    
    3,296,000
    
    
    3,320,000**Net
      interest income after provision for****loan
      losses**
    
    
    **30,351,335**
    
    
    26,885,213
    
    
    23,667,600**Other
      income:**Service
      charges on deposits accounts
    
    
    **9,721,288**
    
    
    5,604,858
    
    
    5,235,085Other
      service charges, commissions and fees
    
    
    **2,334,439**
    
    
    1,923,125
    
    
    1,664,095Trust
      department fees
    
    
    **285,367**
    
    
    249,659
    
    
    181,384Nonbank
      subsidiary income
    
    
    **6,559,828**
    
    
    3,122,404
    
    
    10,585,953Gain
      on sale of loans
    
    
    **301,978**
    
    
    296,719
    
    
    240,248Security
      gains, net
    
    
    **63,311**
    
    
    77,155
    
    
    138,799Other
      operating income
    
    
    **1,503,698**
    
    
    950,476
    
    
    918,431**Total
      other income**
    
    
    **20,769,909**
    
    
    12,224,396
    
    
    18,963,995**Other
      expenses:**Salaries
      and employee benefits
    
    
    **21,057,007**
    
    
    16,563,875
    
    
    17,482,745Equipment
      expenses
    
    
    **3,283,214**
    
    
    2,915,152
    
    
    2,870,604Occupancy
      expenses
    
    
    **2,288,563**
    
    
    2,079,247
    
    
    1,849,301Other
      operating expenses
    
    
    **11,888,185**
    
    
    9,696,659
    
    
    8,979,537**Total
      other expenses**
    
    
    **38,516,969**
    
    
    31,254,933
    
    
    31,182,187**Income
      before income taxes**
    
    
    **12,604,275**
    
    
    7,854,676
    
    
    11,449,408**Income
      tax expense**
    
    
    **3,677,429**
    
    
    1,767,207
    
    
    3,325,967**Net
      income**
    
    **$**
    **8,926,846**
    
    $
    6,087,469
    
    $
    8,123,441**Basic
      earnings per share**
    
    **$**
    **4.17**
    
    $
    2.83
    
    $
    3.73**Diluted
      earnings per share**
    
    **$**
    **4.16**
    
    $
    2.83
    
    $
    3.72**See
      Notes to Consolidated Financial Statements.**
******





F-3








**COMMUNITY
      BANKSHARES, INC.****AND
      SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE
      INCOME****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND
      2002****2004**
    
    2003
    
    2002**Net
      income**
    
    **$**
    **8,926,846**
    
    $
    6,087,469
    
    $
    8,123,441**Other
      comprehensive income (loss):**Unrealized
      gains (losses) on securities available for sale:Unrealized
      holding gains (losses) arising during period,net
      of taxes (benefits) of $(457,032), $(205,988)and
      $1,361,058, respectively
    
    
    **(685,547**
    **)**
    
    (308,982
    )
    
    2,041,587Reclassification
      adjustment for gains realizedin
      net income, net of taxes of $25,324,$30,862
      and $55,520, respectively
    
    
    **(37,987**
    **)**
    
    (46,293
    )
    
    (83,279
    )**Other
      comprehensive income (loss)**
    
    
    **(723,534**
    **)**
    
    (355,275
    )
    
    1,958,308**Comprehensive
      income**
    
    **$**
    **8,203,312**
    
    $
    5,732,194
    
    $
    10,081,749**See
      Notes to Consolidated Financial Statements.**








F-4





**COMMUNITY
      BANKSHARES,
      INC.****AND
      SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS'
      EQUITY****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND
      2002****Accumulated****Other**
    
    
    
    
    
    ******Total****Common
      Stock**
    
    ******Capital**
    
    **Retained**
    
    **Comprehensive**
    
    **Treasury
      Stock**
    
    ******Shareholders'****Shares**
    
    **Par
      Value**
    
    ******Surplus**
    
    **Earnings**
    
    **Income**
    
    **Shares**
    
    **Amount**
    
    ******Equity****Balance,
      December 31, 2001**
    
    
    2,186,330
    
    $
    2,186,330
    
    $
    6,182,167
    
    $
    35,070,537
    
    $
    4,167
    
    
    -
    
    $
    -
    
    $
    43,443,201Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    8,123,441
    
    
    -
    
    
    -
    
    
    -
    
    
    8,123,441Exercise
      of stock options
    
    
    15,000
    
    
    15,000
    
    
    132,680
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    147,680Cash
      dividends declared, $.25 per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (543,563
    )
    
    -
    
    
    -
    
    
    -
    
    
    (543,563
    )Adjustment
      for shares owned by ESOP
    
    
    -
    
    
    -
    
    
    -
    
    
    152,039
    
    
    -
    
    
    -
    
    
    -
    
    
    152,039Other
      comprehensive income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,958,308
    
    
    -
    
    
    -
    
    
    1,958,308Purchase
      of treasury stock
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    34,573
    
    
    (1,428,556
    )
    
    (1,428,556
    )**Balance,
      December 31, 2002**
    
    
    2,201,330
    
    
    2,201,330
    
    
    6,314,847
    
    
    42,802,454
    
    
    1,962,475
    
    
    34,573
    
    
    (1,428,556
    )
    
    51,852,550Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    6,087,469
    
    
    -
    
    
    -
    
    
    -
    
    
    6,087,469Exercise
      of stock options
    
    
    3,000
    
    
    3,000
    
    
    26,536
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    29,536Cash
      dividends declared, $.29 per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (622,189
    )
    
    -
    
    
    -
    
    
    -
    
    
    (622,189
    )Adjustment
      for shares owned by ESOP
    
    
    -
    
    
    -
    
    
    -
    
    
    (199,043
    )
    
    -
    
    
    -
    
    
    -
    
    
    (199,043
    )Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (355,275
    )
    
    
    
    
    
    
    
    (355,275
    )Purchase
      of treasury stock
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    25,562
    
    
    (1,134,442
    )
    
    (1,134,442
    )**Balance,
      December 31, 2003**
    
    
    2,204,330
    
    
    2,204,330
    
    
    6,341,383
    
    
    48,068,691
    
    
    1,607,200
    
    
    60,135
    
    
    (2,562,998
    )
    
    55,658,606Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    8,926,846
    
    
    -
    
    
    -
    
    
    -
    
    
    8,926,846Exercise
      of stock options
    
    
    7,000
    
    
    7,000
    
    
    135,304
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    142,304Cash
      dividends declared, $.33 per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (706,016
    )
    
    -
    
    
    -
    
    
    -
    
    
    (706,016
    )Adjustment
      for shares owned by ESOP
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,753,887
    )
    
    -
    
    
    -
    
    
    -
    
    
    (2,753,887
    )Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (723,534
    )
    
    -
    
    
    -
    
    
    (723,534
    )Purchase
      of treasury stock
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    9,610
    
    
    (429,670
    )
    
    (429,670
    )**Balance,
      December 31, 2004**
    
    
    2,211,330
    
    $
    2,211,330
    
    $
    6,476,687
    
    $
    53,535,634
    
    $
    883,666
    
    
    69,745
    
    $
    (2,992,668
    )
    $
    60,114,649**See
      Notes to Consolidated Financial Statements.**






F-5





**COMMUNITY
      BANKSHARES, INC.****AND
      SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF CASH FLOWS****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND
      2002****2004**
    
    2003
    
    2002**OPERATING
      ACTIVITIES**Net
      income
    
    **$**
    **8,926,846**
    
    $
    6,087,469
    
    $
    8,123,441Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
    
    
    **2,432,117**
    
    
    2,230,763
    
    
    2,395,178Amortization
      and accretion, net
    
    
    **366,048**
    
    
    412,255
    
    
    613,346Provision
      for loan losses
    
    
    **3,037,000**
    
    
    3,296,000
    
    
    3,320,000Provision
      for losses on other real estate
    
    
    **150,000**
    
    
    370,721
    
    
    -Deferred
      income taxes
    
    
    **(280,535**
    **)**
    
    183,438
    
    
    (278,766
    )Net
      gains on sale of securities available for sale
    
    
    **(63,311**
    **)**
    
    (77,155
    )
    
    (138,799
    )Gain
      on disposal of premises and equipment
    
    
    **(362,487**
    **)**
    
    (41,040
    )
    
    (10,682
    )Net
      (gains) losses on sale of other real estate
    
    
    **(7,535**
    **)**
    
    38,653
    
    
    9,284(Increase)
      decrease in interest receivable
    
    
    **(913,757**
    **)**
    
    222,851
    
    
    598,875Increase
      (decrease) in interest payable
    
    
    **502,865**
    
    
    (930,915
    )
    
    (1,339,491
    )Increase
      (decrease) in taxes payable
    
    
    **250,764**
    
    
    202,701
    
    
    (305,202
    )(Increase)
      decrease in accounts receivable ofnonbank
      subsidiary
    
    
    **(229,329**
    **)**
    
    (245,471
    )
    
    917,641(Increase)
      decrease in work in process of nonbank subsidiary
    
    
    **(65,488**
    **)**
    
    (82,401
    )
    
    392,492Increase
      (decrease) in accruals and payables ofnonbank
      subsidiary
    
    
    **1,644,989**
    
    
    149,706
    
    
    (2,344,162
    )Net
      other operating activities
    
    
    **2,335,894**
    
    
    (2,423,712
    )
    
    (1,688,663
    )Net
      cash provided by operating activities
    
    
    **17,724,081**
    
    
    9,393,863
    
    
    10,264,492**INVESTING
      ACTIVITIES**Purchases
      of securities available for sale
    
    
    **(32,861,625**
    **)**
    
    (31,677,891
    )
    
    (35,368,818
    )Proceeds
      from sales of securities available for sale
    
    
    **9,849,624**
    
    
    2,486,166
    
    
    5,118,419Proceeds
      from maturities of securities available for sale
    
    
    **9,218,203**
    
    
    25,546,841
    
    
    11,198,685Proceeds
      from maturities of securities held to maturity
    
    
    **2,410,772**
    
    
    4,387,664
    
    
    2,586,730Net
      (increase) decrease in federal funds sold
    
    
    **19,600,000**
    
    
    (10,400,000
    )
    
    7,160,000Net
      (increase) decrease in interest-bearing deposits in banks
    
    
    **(57,859**
    **)**
    
    69,953
    
    
    (89,554
    )Net
      increase in loans
    
    
    **(102,656,107**
    **)**
    
    (63,894,160
    )
    
    (41,998,377
    )Purchase
      of premises and equipment
    
    
    **(5,674,609**
    **)**
    
    (1,331,247
    )
    
    (2,860,081
    )Proceeds
      from sale of premises and equipment
    
    
    **514,260**
    
    
    56,313
    
    
    32,159Proceeds
      from sale of other real estate
    
    
    **2,722,499**
    
    
    4,123,806
    
    
    3,810,767Net
      cash used in investing activities
    
    **$**
    **(96,934,842**
    **)**
    $
    (70,632,555
    )
    $
    (50,410,070
    )








F-6


****


****COMMUNITY
      BANKSHARES, INC.****AND
      SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF CASH FLOWS****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002****2004**
    
    2003
    
    2002**FINANCING
      ACTIVITIES**Net
      increase in deposits
    
    **$**
    **56,371,061**
    
    $
    63,249,728
    
    $
    45,139,429Increase
      in FHLB advances
    
    
    **10,175,000**
    
    
    75,000
    
    
    5,000,000Repayment
      of other borrowings
    
    
    **(534,175**
    **)**
    
    (586,600
    )
    
    (405,350
    )Proceeds
      from issuance of common stock
    
    
    **112,790**
    
    
    23
    
    
    44Purchase
      of treasury stock
    
    
    **(429,670**
    **)**
    
    (1,134,442
    )
    
    (1,280,920
    )Dividends
      paid
    
    
    **(706,016**
    **)**
    
    (602,327
    )
    
    (523,070
    )Net
      cash provided by financing activities
    
    
    **64,988,990**
    
    
    61,001,382
    
    
    47,930,133Net
      increase (decrease) in cash and due from banks
    
    
    **(14,221,771**
    **)**
    
    (237,310
    )
    
    7,784,555Cash
      and due from banks at beginning of year
    
    
    **44,728,730**
    
    
    44,966,040
    
    
    37,181,485Cash
      and due from banks at end of year
    
    $
    30,506,959
    
    $
    44,728,730
    
    $
    44,966,040**SUPPLEMENTAL
      DISCLOSURES**Cash
      paid for:Interest
    
    **$**
    **12,249,044**
    
    $
    14,159,232
    
    $
    17,840,066Income
      taxes
    
    **$**
    **3,707,198**
    
    $
    1,381,068
    
    $
    3,903,215**NONCASH
      TRANSACTIONS**Principal
      balances of loans transferred to otherreal
      estate
    
    **$**
    **3,060,135**
    
    $
    6,318,384
    
    $
    4,191,599Financed
      sales of other real estate owned
    
    **$**
    **1,865,518**
    
    
    -
    
    
    -**See
      Notes to Consolidated Financial Statements.****










F-7










**COMMUNITY
BANKSHARES, INC.**
 **AND
SUBSIDIARIES**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Nature
of Business**
 
 Community
Bankshares, Inc. (the “Company”) is a multi-bank holding company whose business
is conducted by its wholly-owned subsidiaries: Community Bank & Trust
located in Cornelia, Georgia; Community Bank & Trust - Alabama located in
Union Springs, Alabama; and Community Bank & Trust - Troup located in
LaGrange, Georgia. Financial Supermarkets, Inc. is a wholly-owned subsidiary of
Community Bank & Trust and provides a variety of bank related products and
services to the financial institution industry. Financial Properties, Inc. is a
wholly-owned subsidiary of Community Bank & Trust which is a real estate
sales agency that provides a variety of real estate related
services.
 
 The
banking subsidiaries are commercial banks operating independently of one another
in their respective market areas. The banking subsidiaries in Georgia have
identified their primary market areas to be the counties in which they are
located and all surrounding counties. The Georgia banking subsidiaries are all
located approximately 85 miles from the metropolitan Atlanta area. Community
Bank & Trust - Alabama is located approximately 50 miles from Montgomery,
Alabama, and has identified its primary market area as Bullock County and the
east Montgomery metropolitan area. The Banks provide a full range of banking
services to individual and corporate customers. Financial Supermarkets, Inc.
provides products and services primarily to financial institutions in the
southeastern United States; however, their products and services are marketed
internationally. Financial Properties, Inc. operates primarily in Habersham,
Jackson, Stephens, and White County, Georgia.
 
 **Basis
of Presentation and Accounting Estimates**
 
 The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Significant intercompany transactions and balances are eliminated
in consolidation.
 
 In
preparing the consolidated statements in accordance with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
balance sheet date 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, the valuation of foreclosed real
estate and contingent
assets and liabilities. The determination of the adequacy of the allowance for
loan losses is based on estimates that are susceptible to significant changes in
the economic environment and market conditions. In connection with the
determination of the estimated losses on loans and the valuation of foreclosed
real estate, management obtains independent appraisals for significant
collateral.
 
 **Cash,
Due From Banks and Cash Flows**
 
 For
purposes of reporting cash flows, cash and due from banks include cash on hand,
cash items in process of collection and amounts due from banks. Cash flows from
interest-bearing deposits in other banks, loans, federal funds sold and deposits
are reported net.
 
 The Banks
are required to maintain reserve balances in cash or on deposit with the Federal
Reserve Bank, based on a percentage of deposits. The total of those reserve
balances was approximately $1,746,000 and $16,348,000 at December 31, 2004 and
2003, respectively.
 
  F-8
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**
 
 **Securities**
 
 Debt
securities that management has the intent and ability to hold to maturity are
classified as held to maturity and recorded at amortized cost. Securities not
classified as held to maturity, including equity securities with readily
determinable fair values, are classified as available for sale and recorded at
fair value with unrealized gains and losses excluded from earnings and reported
in accumulated other comprehensive income, net of the related deferred tax
effect. Equity securities, including restricted equity securities, without a
readily determinable fair value are classified as available for sale and
recorded at cost.
 
 The
amortization of premiums and accretion of discounts are recognized in interest
income using methods approximating the interest method over the life of the
securities. Realized gains and losses, determined on the basis of the cost of
specific securities sold, are included in earnings on the settlement date.
Declines in the fair value of held to maturity and available for sale securities
below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses.
 
 **Loans**
 
 Loans are
reported at their outstanding principal balances less unearned income, net
deferred fees and the allowance for loan losses. Interest income is accrued on
the outstanding principal balance.
 
 Loan
origination fees, net of certain direct loan origination costs, are deferred and
recognized as an adjustment of the related loan yield over the life of the loan
using a method that approximates a level yield.
 
 The
accrual of interest on loans is discontinued when, in management's opinion, the
borrower may be unable to meet payments as they become due, unless the loan is
well-secured. All interest accrued but not collected for loans that are placed
on nonaccrual or charged off is reversed against interest income, unless
management believes that the accrued interest is recoverable through the
liquidation of collateral. Interest income on nonaccrual loans is recognized on
the cash-basis until the loans are returned to accrual status. Loans are
returned to accrual status when all the principal and interest amounts are
brought current and future payments are reasonably assured.
 
 A loan is
considered impaired when it is probable, based on current information and
events, the Company will be unable to collect all principal and interest
payments due in accordance with the contractual terms of the loan agreement.
Impaired loans are measured by either the present value of expected future cash
flows discounted at the loan’s effective interest rate, the loan’s obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent. The amount of impairment, if any, and any subsequent changes are
included in the allowance for loan losses. Interest on accruing impaired loans
is recognized as long as such loans do not meet the criteria for nonaccrual
status.
 
 **Allowance
for Loan Losses**
 
 The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loan losses are charged against the allowance when
management believes the collectibility of the principal is unlikely. Subsequent
recoveries are credited to the allowance.
  F-9
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**
 
 **Allowance
for Loan Losses (Continued)**
 
 The
allowance is an amount that management believes will be adequate to absorb
estimated losses relating to specifically identified loans, as well as probable
credit losses inherent in the balance of the loan portfolio, based on an
evaluation of the collectibility of existing loans and prior loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, concentrations and current economic conditions that may affect
the borrower's ability to pay. This evaluation does not include the effects of
expected losses on specific loans or groups of loans that are related to future
events or expected changes in economic conditions. While management uses the
best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Banks’ allowance for loan losses,
and may require the Banks to make additions to the allowance based on their
judgment about information available to them at the time of their
examinations.
 
 **Premises
and Equipment**
 
 Land is
carried at cost. Premises and equipment are carried at cost less accumulated
depreciation computed principally by the straight-line method over the following
estimated useful lives of the assets.
 
 YearsBuildings
    20-40Furniture
      and equipment
    3-15
 **Other
Real Estate Owned**
 
 Other
real estate owned represents properties acquired through or in lieu of loan
foreclosure and is initially recorded at the lower of cost or fair value less
estimated costs to sell. Any write-down to fair value at the time of transfer to
other real estate owned is charged to the allowance for loan losses. Costs
of improvements are capitalized, whereas costs relating to holding other real
estate owned and subsequent adjustments to the value are expensed.
 
 **Goodwill
and Intangible Assets**
 
 Goodwill
represents the excess of cost over the fair value of the net assets purchased in
a business combination. Goodwill is required to be tested annually for
impairment, or whenever events occur that may indicate that the recoverability
of the carrying amount is not probable. In the event of an impairment, the
amount by which the carrying amount exceeds the fair value would be charged to
earnings. The Company performed its annual test of impairment in the second
quarter and determined that there was no impairment of the carrying value as of
June 30, 2004.
 
 Intangible
assets consist of core deposit premiums acquired in connection with the purchase
of two branches. The core deposit premium is initially recognized based on a
valuation performed as of the purchase date. The core deposit premium is
amortized over the average remaining life of the acquired customer deposits, or
10 years.
  F-10
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**
 
 **Income
Taxes**
 
 Deferred
income tax assets and liabilities are determined using the balance sheet method.
Under this method, the net deferred tax asset or liability is determined based
on the tax effects of the temporary differences between the book and tax bases
of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
 
 **Trust
Department**
 
 Trust
department income is recognized on the cash basis in accordance with established
industry practices. The results of operations are not materially different than
the results which would be obtained by accounting for such fees on the accrual
basis.
 
 Assets of
the trust department, other than trust cash on deposit at the Banks, are not
included in these financial statements because they are not assets of the
Company.
 
 **Nonbank
Subsidiary Revenue Recognition**
 
 Financial
Supermarkets, Inc. recognizes revenue and costs on its installation contracts on
the completed-contract method of accounting. Under this method, billings and
costs are accumulated during the period of installation, but no profits are
recorded before the completion of the work. Provisions for estimated losses on
uncompleted contracts are made at the time such losses are identified. The
majority of all installation contracts are completed within ten days. Operating
expenses, including indirect costs and administrative expenses, are charged as
incurred to income and not allocated to contract costs. Income from consulting
services is recognized as services are provided and as costs and expenses are
incurred for each individual contract.
 
 **401(k)
Plan**
 
 The
401(k) plan contributions are based on a percentage of individual employee’s
salary, not to exceed the amount that can be deducted for federal income tax
purposes. The Company makes matching contributions of 25% of the first 6% of
each participant’s salary contribution.
 
 
 
 
 
  F-11
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**
 ****
 **Stock
Compensation Plan**
 
 At
December 31, 2004, the Company has a stock-based employee compensation plan,
which is described more fully in Note 8. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under the plan had an exercise price equal
to the market value of the underlying stock on the date of grant. For the year
ended December 31, 2004, there were 5,000 shares granted in 2004 that will
become vested in 2006. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of SFAS Statement No. 123, *Accounting
for Stock-Based Compensation* , to
stock-based employee compensation.
 
 **Years
      Ended December 31,****2004**
    
    2003
    
    2002Net
      income, as reported
    
    **$**
    **8,926,846**
    
    $
    6,087,469
    
    $
    8,123,441Deduct:
      Total stock-based employee compensationExpense
      determined under fair value basedmethod
      for all awards, net of related tax effects
    
    
    **(55,436**
    **)**
    
    -
    
    
    -Pro
      forma net income
    
    **$**
    **8,871,410**
    
    $
    6,087,469
    
    $
    8,123,441Earnings
      per share:Basic
      - as reported
    
    **$**
    **4.17**
    
    $
    2.83
    
    $
    3.73Basic
      - pro forma
    
    **$**
    **4.15**
    
    $
    2.83
    
    $
    3.73Diluted
      - as reported
    
    **$**
    **4.16**
    
    $
    2.83
    
    $
    3.72Diluted
      - pro forma
    
    **$**
    **4.13**
    
    $
    2.83
    
    $
    3.72
 
 **Earnings
Per Share**
 
 Basic
earnings per share are computed by dividing net income by the weighted-average
number of shares of common stock outstanding. Diluted earnings per share are
computed by dividing net income by the sum of the weighted-average number of
shares of common stock outstanding and potential common shares. Potential common
shares consist of stock options. All outstanding options have been included in
the computation of diluted earnings per share for the years ended December 31,
2004, 2003 and 2002.
 
 **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.
  F-12
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**
 
 ****
 **Recent
Accounting Standards**
 
 In
December 2004, the FASB published Statement No. 123 (revised 2004), “Share-Based
Payment” (“FAS 123(R)” or the “Statement”). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. FAS 123(R) covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. FAS 123(R) is a
replacement of FASB Statement No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
its related interpretive guidance (APB 25).
 
 The
effect of the Statement will be to require entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over the period the employee
is required to provide services for the award. FAS 123(R) permits entities to
use any option-pricing model that meets the fair value objective in the
Statement.
 
 The
Company will be required to apply FAS 123(R) as of the beginning of its first
interim period that begins after December 15, 2005, which will be the year
ending December 31, 2006.
 
 FAS
123(R) allows two methods for determining the effects of the transition: the
modified prospective transition method and the modified retrospective method of
transition. Under the modified prospective transition method, an entity would
use the fair value based accounting method for all employee awards granted,
modified, or settled after the effective date. As of the effective date,
compensation cost related to the nonvested portion of awards outstanding as of
that date would be based on the grant-date fair value of those awards as
calculated under the original provisions of Statement No. 123; that is, an
entity would not remeasure the grant-date fair value estimate of the unvested
portion of awards granted prior to the effective date. An entity will have the
further option to either apply the Statement to only the quarters in the period
of adoption and subsequent periods, or apply the Statement to all quarters in
the fiscal year of adoption. Under the modified retrospective method of
transition, an entity would revise its previously issued financial statements to
recognize employee compensation cost for prior periods presented in accordance
with the original provisions of Statement No. 123.
 
 The
Company has not yet completed its study of the transition methods or made any
decisions about how it will adopt FAS 123(R).
 
  F-13
  
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
2.** **SECURITIES**
 
 The
amortized cost and fair value of securities are summarized as
follows:
 
 **Amortized**
      **Cost**
    
    
    **Gross**
      **Unrealized**
      **Gains**
    
    
    **Gross**
      **Unrealized**
      **Losses**
    
    
    **Fair**
      **Value****Securities
      Available for Sale**December
      31, 2004:U.S.
      Government and agencysecurities
    
    **$**
    **53,402,357**
    
    **$******
    ******358,463**
    
    **$******
    ******(259,063**
    ******)**
    **$******
    ******53,501,7577**State
      and municipal securities
    
    
    **35,036,804**
    
    
    **1,477,265**
    
    
    **(6,708**
    **)**
    
    **36,507,361**Mortgage-backed
      securities
    
    
    **15,784,754**
    
    
    **115,281**
    
    
    **(212,462**
    **)**
    
    **15,687,573**Equity
      securities
    
    
    **9,186,549**
    
    
    **-**
    
    
    **-**
    
    
    **9,186,549****$**
    **113,410,464**
    
    **$******
    ******1,951,009**
    
    **$******
    ******(478,233**
    ******)**
    **$******
    ******114,883,240**
 
 December
      31, 2003:U.S.
      Government and agencysecurities
    
    $
    37,190,996
    
    $
    1,115,020
    
    $
    (45,580
    )
    $
    38,260,436State
      and municipal securities
    
    
    37,435,543
    
    
    1,690,271
    
    
    (37,866
    )
    
    39,087,948Mortgage-backed
      securities
    
    
    22,640,436
    
    
    206,995
    
    
    (250,174
    )
    
    22,597,257Equity
      securities
    
    
    3,512,480
    
    
    -
    
    
    -
    
    
    3,512,480$
    100,779,455
    
    $
    3,012,286
    
    $
    (333,620
    )
    $
    103,458,121
 
 **Securities
      Held to Maturity**December
      31, 2004:State
      and municipal securities
    
    **$**
    **20,217,237**
    
    **$******
    ******1,112,503**
    
    $
    -
    
    **$******
    ******21,329,740**December
      31, 2003:State
      and municipal securities
    
    $
    22,628,009
    
    $
    1,724,232
    
    $
    -
    
    $
    24,352,241
 
 The
amortized cost and fair value of debt securities as of December 31, 2004 by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
 
 **Securities
      Available for Sale**
    
    **Securities
      Held to Maturity****Amortized**
      **Cost**
    
    **Fair**
      **Value**
    
    **Amortized**
      **Cost**
    
    **Fair**
      **Value**Due
      within one year
    
    $
    10,405,595
    
    $
    10,521,786
    
    $
    555,389
    
    $
    562,072Due
      from one to five years
    
    
    42,095,442
    
    
    42,214,932
    
    
    4,298,713
    
    
    4,488,236Due
      from five to ten years
    
    
    12,576,318
    
    
    12,818,279
    
    
    10,042,789
    
    
    10,610,951Due
      after ten years
    
    
    23,361,806
    
    
    24,454,121
    
    
    5,320,346
    
    
    5,668,481Mortgage-backed
      securities
    
    
    15,784,754
    
    
    15,687,573
    
    
    **-**
    
    
    **-**$
    104,223,915
    
    $
    105,696,691
    
    $
    20,217,237
    
    $
    21,329,740
 
 
  F-14
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
2.** **SECURITIES
(Continued)**
 
 Securities
with a carrying value of $89,334,249 and $80,709,001 at December 31, 2004 and
2003, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.
 
 Gross
gains and losses on sales of securities available for sale consist of the
following:
  **Years
      Ended December 31,****2004**
    
    
    2003
    
    
    2002Gross
      gains
    
    $
    120,516
    
    $
    77,155
    
    $
    138,799Gross
      losses
    
    
    **(57,205**
    **)**
    
    **-**
    
    
    -Net
      realized gains
    
    $
    63,311
    
    $
    77,155
    
    $
    138,799
 
 The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at December 31, 2004.
 
 **Less
      Than 12 Months**
    
    **12
      Months or More**
    
    **Total****Description
      of Securities:**
    **Fair**
      **Value**
    
    **Unrealized**
      **Losses**
    
    **Fair**
      **Value**
    
    **Unrealized
      Losses**
    
    **Fair**
      **Value**
    
    **Unrealized**
      **Losses**U.S.
      Government andagency
      securities
    $
    31,111,550
    
    $
    (259,063)
    
    $
    -
    
    $
    -
    
    $
    31,111,550
    
    $
    (259,063)State
      and municipal securities
    
    1,102,320
    
    
    (6,708)
    
    
    -
    
    
    -
    
    
    1,102,320
    
    
    (6,708)Mortgage-backed
      securities
    
    1,227,710
    
    
    (18,537)
    
    
    9,951,097
    
    
    (193,925)
    
    
    11,178,807
    
    
    (212,462)Total
      temporarily impaired securities
    $
    33,441,580
    
    $
    (284,308)
    
    $
    9,951,097
    
    $
    (193,925)
    
    $
    43,392,677
    
    $
    (478,233)
 
 The
Company currently has forty-two (42) U.S. Government agencies, six (6) state
municipals, and twenty-seven (27) mortgage backed securities with unrealized
losses. Of the seventy-five (75) securities with unrealized losses, twenty-four
(24) mortgage backed securities have been in an unrealized loss position for
greater than 12 months. The unrealized losses in the portfolio are believed to
be temporary due to all securities meeting the criteria of acceptable investment
grade and all being backed by government agencies or municipalities. In the
event that these securities are held to maturity, no losses should be
realized.
 
 The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at December 31, 2003.
 
 **Less
      Than 12 Months**
    
    **12
      Months or More**
    
    **Total****Description
      of Securities:**
    **Fair**
      **Value**
    
    **Unrealized**
      **Losses**
    
    **Fair**
      **Value**
    
    **Unrealized
      Losses**
    
    **Fair**
      **Value**
    
    **Unrealized**
      **Losses**U.S.
      Government andagency
      securities
    $
    6,072,031
    
    $
    (45,581)
    
    $
    -
    
    $
    -
    
    $
    6,072,031
    
    $
    (45,581)State
      and municipal securities
    
    1,755,057
    
    
    (37,865)
    
    
    -
    
    
    -
    
    
    1,755,057
    
    
    (37,865)Mortgage-backed
      securities
    
    13,964,356
    
    
    (248,423)
    
    
    122,219
    
    
    (1,751)
    
    
    14,086,575
    
    
    (250,174)Total
      temporarily impaired securities
    $
    21,791,44
    
    $
    (331,869)
    
    $
    122,219
    
    $
    (1,751)
    
    $
    21,913,663
    
    $
    (333,620)
 
 At
December 31, 2003, nine (9) U. S. Government agencies, four (4) state
municipals, and twenty-seven (27) mortgage backed securities with unrealized
loss. Of the forty securities with unrealized losses only one security (a
mortgage backed) has had an unrealized loss for greater than 12 months. The
unrealized loss has not exceeded $3,376.
  F-15
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
3.** **LOANS**
 
 The
composition of loans is summarized as follows:
 
 **December
      31,****2004**
    
    
    2003Commercial,
      financial and agricultural
    
    **$**
    **53,602,078**
    
    $
    50,690,454Real
      estate - construction
    
    
    **83,074,664**
    
    
    52,785,826Real
      estate - mortgage
    
    
    **450,896,433**
    
    
    385,628,810Consumer
    
    
    **53,676,852**
    
    
    52,744,685Other
    
    
    **4,186,225**
    
    
    3,789,474**645,436,252**
    
    
    545,639,249Unearned
      income and net deferred fees and costs
    
    
    **63,576**
    
    
    (173,758
    )Allowance
      for loan losses
    
    
    **(9,170,354**
    **)**
    
    (7,560,507
    )Loans,
      net
    
    **$**
    **636,329,474**
    
    $
    537,904,984
 
 Changes
in the allowance for loan losses are as follows:
 
 **Years
      Ended December 31,****2004**
    
    
    2003
    
    
    2002Balance,
      beginning of year
    
    **$**
    **7,560,507**
    
    $
    7,742,356
    
    $
    6,652,093Provision
      charged to operations
    
    
    **3,037,000**
    
    
    3,296,000
    
    
    3,320,000Loans
      charged off
    
    
    **(1,794,123**
    **)**
    
    (3,782,286
    )
    
    (2,567,679
    )Recoveries
      of loans previously charged off
    
    
    **366,970**
    
    
    304,437
    
    
    337,942Balance,
      end of year
    
    **$**
    **9,170,354**
    
    $
    7,560,507
    
    $
    7,742,356
 
 The
following is a summary of information pertaining to impaired
loans.
 **December
      31,****2004**
    
    
    2003Impaired
      loans without a valuation allowance
    
    **$**
    **-**
    
    $
    -Impaired
      loans with a valuation allowance
    
    
    **6,535,537**
    
    
    3,561,668Total
      impaired loans
    
    **$**
    **6,535,537**
    
    $
    3,561,668Valuation
      allowance related to impaired loans
    
    **$**
    **1,866,846**
    
    $
    939,817Nonaccrual
      loans
    
    **$**
    **5,641,199**
    
    $
    1,341,409Loans
      past due 90 days or more and still accruing
    
    **$**
    **1,768,000**
    
    $
    2,380,000
 
 **Years
      Ended December 31,****2004**
    
    2003
    
    2002Average
      investment in impaired loans
    
    $
    4,510,560
    
    $
    4,156,759
    
    $
    5,509,950Interest
      income recognized on impaired loans
    
    $
    104,738
    
    $
    88,624
    
    $
    297,339
 
 In the
ordinary course of business, the Banks have granted loans to certain related
parties, including directors, executive officers and their affiliates. The
interest rates on these loans were substantially the same as rates prevailing at
the time of the transaction and repayment terms are customary for the type of
loan. Changes in related party loans for the year ended December 31, 2004 are as
follows:
 
 Balance,
      beginning of year
    
    $
    3,658,889Advances,
      including renewals
    
    
    2,221,847Repayments,
      including renewals
    
    
    (1,181,184
    )Change
      in director
    
    
    (2,003,791
    )Balance,
      end of year
    
    $
    2,695,761
  F-16
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
4.** **PREMISES
AND EQUIPMENT**
 
 Premises
and equipment are summarized as follows:
 **December
      31,****2004**
    
    
    2003Land
    
    $
    5,779,331
    
    $
    3,469,345Buildings
    
    
    **10,342,557**
    
    
    10,258,247Equipment
    
    
    **21,760,240**
    
    
    20,286,858Construction
      in process ($1,500,000 estimated cost to complete)
    
    
    **1,004,823**
    
    
    21,123**38,886,951**
    
    
    34,035,573Accumulated
      depreciation
    
    
    **(20,557,064**
    **)**
    
    (18,796,405
    )$
    18,329,887
    
    $
    15,239,168
 
 **Leases**
 
 The
Company has leased various properties under noncancelable agreements which
expire at various times through 2011 and require minimum annual rentals. The
leases related to properties also require the payment of property taxes, normal
maintenance and insurance.
 
 Future
minimum lease payments on noncancelable operating leases are summarized as
follows:
 
 2005
    
    $
    1,034,5262006
    
    
    764,3472007
    
    
    390,7982008
    
    
    259,7312009
    
    
    242,566Thereafter
    
    
    109,565$
    2,801,533
 
 The total
rental expense for the years ended December 31, 2004, 2003 and 2002 was
$1,063,458, $924,061 and $754,856 respectively.
 
 **NOTE
5.** **INTANGIBLE
ASSETS**
 
 The
following is a summary of information related to acquired intangible
assets:
 
 **December
      31, 2004**
    
    December
      31, 2003**Gross**
      **Carrying**
      **Amount**
    
    **Accumulated**
      **Amortization**
    
    Gross
      Carrying
      Amount
    
    Accumulated
      AmortizationAmortized
      intangible assetsCore
      deposit premiums
    **$**
    **2,951,362**
    
    **$**
    **2,163,400**
    
    $
    2,951,362
    
    $
    1,886,200Other
      intangibles
    
    **135,150**
    
    
    **110,500**
    
    
    130,000
    
    
    105,000Total
    **$**
    **3,086,512**
    
    **$**
    **2,273,900**
    
    $
    3,081,362
    
    $
    1,991,200
 
 The
amortization expense for the years ended December 31, 2004, 2003 and 2002
was $366,048, $412,255 and $613,346, respectively.
 
  F-17
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
5.** **INTANGIBLE
ASSETS (Continued)**
 
 The
estimated amortization expense for each of the next five years is as
follows:
 
 2005
    
    $
    281,2152006
    
    
    281,2152007
    
    
    237,5772008
    
    
    4,0152009
    
    
    4,015
 
 Investment
in common stock of Internet EMC, Inc.
 
 The
Company accounts for its investment in Internet EMC, Inc., a 31% owned
affiliate, by the equity method of accounting under which the Company's share of
the net loss of the affiliate is recognized as expense in the Company's income
statement and subtracted from the investment account.
 
 The
carrying value of the Company's investment exceeded its share of the underlying
equity in the net assets of Internet EMC, Inc. by $786,217 at December 31, 2004
and 2003. In accordance with generally accepted accounting principles, this
difference is considered to be goodwill and is evaluated for impairment
annually. The increase in goodwill for the year ended December 31, 2003
represents an increased investment in Internet EMC, Inc. of $312,500, of which
$179,598 has been recognized as goodwill.
 
 Changes
in the carrying amount of goodwill are as follows:
 
 **Year
      Ended December 31,****2004**
    
    2003
    
    2002Beginning
      balance
    
    **$**
    **968,151**
    
    
    788,553
    
    $
    788,553Goodwill
      acquired
    
    
    **-**
    
    
    179,598
    
    
    -Ending
      balance
    
    **$**
    **968,151**
    
    
    968,151
    
    $
    788,553
 
 **NOTE
6.** **DEPOSITS**
 
 The
aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2004 and 2003 was $135,940,480 and $123,975,243 respectively. The
scheduled maturities of time deposits at December 31, 2004 are as
follows:
 
 
 2005
    
    $
    243,362,2892006
    
    
    25,612,2752007
    
    
    38,442,9662008
    
    
    38,858,3512009
    
    
    24,504,481Thereafter
    
    
    128,224$
    370,908,586
 
 Overdraft
demand deposits reclassified to loans totaled $878,765 and $866,767 at December
31, 2004 and 2003, respectively.
 
  F-18
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
7.** **OTHER
BORROWINGS**
 
 Other
borrowings consist of the following:
  **December
      31,****2004**
    
    
    2003Note
      payable to bank, principal of $56,025 due quarterly plus interestat
      prime minus 1% or 3.00% at December 31, 2003, collateralizedby
      50,000 shares of common stock of Community Bank &
    Trust,matures
      July 31, 2004.
    
    **$**
    **-**
    
    $
    171,675Revolving
      credit note to bank, principal of $90,625 due quarterlyplus
      interest at prime minus 1% or 4.25% at December 31, 2004,collateralized
      by 50,000 shares of common stock of CommunityBank
      & Trust and assignment of note receivable from ESOP,matures
      June 30, 2006 (see Note 8).
    
    
    **543,750**
    
    
    906,250Advance
      from Federal Home Loan Bank with interest due quarterlyat
      5.95%, due February 8, 2010.
    
    
    **10,000,000**
    
    
    10,000,000Advance
      from Federal Home Loan Bank with interest due quarterly at2.82%,
      due September 4, 2007.
    
    
    **5,000,000**
    
    
    5,000,000Advance
      from Federal Home Loan Bank with interest due quarterlyat
      three month libor plus 2% due March 17, 2006.
    
    
    **10,000,000**
    
    
    **-**Economic
      Development and Growth Enhancement advance fromFederal
      Home Loan Bank at 0% due April 1, 2013.
    
    
    **250,000**
    
    
    75,000**$**
    **25,793,750**
    
    $
    16,152,925
 
 Contractual
maturities of other borrowings as of December 31, 2004 are as follows:
 
 2005
    
    $
    362,5002006
    
    
    10,181,2502007
    
    
    5,000,0002008
    
    
    -2009
    
    
    -Thereafter
    
    
    10,250,000$
    25,793,750
 
 The
advances from Federal Home Loan Bank are secured by certain qualifying loans of
approximately $114,750,000 and Federal Home Loan Bank stock of
$2,399,000.
 
 The
Company and subsidiaries have available unused lines of credit with the Federal
Home Loan Bank totaling $60,812,000 at December 31, 2004. There were no other
advances outstanding at December 31, 2004 or 2003.
 
  F-19
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
8.** **EMPLOYEE
BENEFIT PLANS**
 
 **Incentive
Stock Option Plan**
 
 The
Company has an Incentive Stock Option Plan in which the Company can grant to key
personnel options for an aggregate of 225,000 shares of the Company's common
stock at not less than the fair market value of such shares on the date the
option is granted. If the optionee owns shares of the Company representing more
than 10% of the total combined voting power, then the price shall not be less
than 110% of the fair market value of such shares on the date the option is
granted. The option period will not exceed ten years from date of grant. Other
pertinent information related to the options is as follows:
 
 **2004**
    
    2003
    
    2002****
    
    
    **Shares**
    
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    
    Shares
    
    
    Weighted-
      Average
      Exercise
      Price
    
    
    Shares
    
    
    Weighted-
      Average
      Exercise
      Price
 
 Under
      option, beginning of year
    
    
    **34,000**
    
    **$******
    **35.32**
    
    
    37,000
    
    $
    33.25
    
    
    52,000
    
    $
    26.50Granted
    
    
    **5,000**
    
    
    **45.06**
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -Exercised
    
    
    **(7,000**
    **)**
    
    **20.33**
    
    
    (3,000
    )
    
    9.85
    
    
    (15,000
    )
    
    9.85Forfeited
    
    
    **(1,000**
    **)**
    
    **39.20**
    
    
    **-**
    
    
    
    
    
    -
    
    
    -Under
      option, end of year
    
    
    **31,000**
    
    **$******
    **40.15**
    
    
    34,000
    
    $
    35.32
    
    
    37,000
    
    $
    33.25Options
      exercisable at year-end
    
    
    **26,000**
    
    **$******
    **39.20**
    
    
    34,000
    
    $
    35.32
    
    
    37,000
    
    $
    33.25Weighted-average
      fair value ofoptions
      granted during the year
    
    
    
    
    **$******
    **17.89**
    
    
    
    
    $
    -
    
    
    
    
    $
    -
 
 Information
pertaining to options outstanding at December 31, 2004 is as
follows:
 
 **Options
      Outstanding**
    
    **Options
      Exercisable****Range
      of**
      **Exercise
      Prices**
    
    **Options**
      **Outstanding**
    
    **Weighted-**
      **Average**
      **Remaining**
      **Contractual**
      **Life**
    
    **Weighted-**
      **Average**
      **Exercise
      Price**
    
    **Options**
      **Exercisable**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**$39.20
    
    26,000
    
    
    5
      years
    
    $
    39.20
    
    26,000
    
    $
    39.20$45.06
    
    5,000
    
    
    10
      years
    
    $
    45.06
    
    -
    
    
    N/A
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. There were 10 shares granted during the year
ending December 31, 2004.
 
 **Years
      Ended December 31,****2004**
    
    2003
    
    2002Dividend
      yield
    **0.18%**
    
    N/A
    
    N/AExpected
      life
    **10
      years**
    
    N/A
    
    N/AExpected
      volatility
    **17.83%**
    
    N/A
    
    N/ARisk-free
      interest rate
    **4.48%**
    
    N/A
    
    N/A
  F-20
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
8.** **EMPLOYEE
BENEFIT PLANS (Continued)**
 
 **401(k)
Plan**
 
 The
Company has a contributory 401(k) retirement plan covering substantially all
employees. Contributions to the plan charged to expense for the years ended
December 31, 2004, 2003 and 2002 amounted to $138,115, $119,586 and $122,632,
respectively.
 
 **Employee
Stock Ownership Plan**
 
 The
Company sponsors a leveraged Employee Stock Ownership Plan (ESOP) for the
benefit of employees who meet certain eligibility requirements, subject to
certain IRS limits. Contributions to the ESOP are determined by the Board of
Directors of the Company taking into consideration the financial condition and
fiscal requirements of the Company and such other factors as the Board of
Directors may deem pertinent and applicable under the circumstances. In 2001,
the ESOP incurred debt when the Company loaned the ESOP $1,550,000 from the
proceeds the Company received from its revolving credit note to an independent
financial institution (See Note 7). All dividends received by the ESOP are used
to pay debt service. Originally 38,065 ESOP shares were pledged as collateral
for its debt. As the debt is repaid, shares are released from collateral and
allocated to employees based on the proportion of debt service paid in the year.
As shares are released from collateral, the Company reports compensation expense
equal to the difference in the current market price of the shares and the
original cost of those shares released. All shares held by the ESOP are
considered outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt and
accrued interest.
 
 Contributions
to the ESOP were $960,164, $311,470 and $1,077,000 for the years ended December
31, 2004, 2003 and 2002, respectively. Dividends paid to the ESOP for the years
ended December 31, 2004, 2003 and 2002 were $117,599, $104,388 and $94,905,
respectively. Interest expense related to the ESOP debt was $23,623, $34,194 and
$55,737 for the years ended December 31, 2004, 2003, and 2002
respectively.
 
 In
accordance with the ESOP, the Company is expected to honor the rights of certain
participants to diversify their account balances or to liquidate their ownership
of the common stock in the event of termination. The purchase price of the
common stock would be based on the fair market value of the Company’s common
stock as of the annual valuation date, which precedes the date the put option is
exercised. Since the redemption of common stock is outside the control of the
Company, the Company’s maximum cash obligation based on the approximate market
prices of common stock as of the reporting date has been presented outside of
shareholders’ equity. The amount presented as redeemable common stock held by
the ESOP in the consolidated balance sheet represents the Company’s maximum cash
obligation and has been reflected as a reduction of retained earnings. In
addition, the unearned compensation recorded in connection with the debt
incurred by the ESOP has been offset against the redeemable common stock held by
the ESOP.
 
 S hares of
the Company held by the ESOP at December 31, 2004 and 2003 are as
follows:
 
 **2004**
    
    
    2003Allocated
      shares
    
    **338,657**
    
    
    338,483Committed-to-be-released
      shares
    
    **9,516**
    
    
    9,601Unearned
      shares
    
    **14,275**
    
    
    23,791**362,448**
    
    
    371,875Fair
      value of unreleased (unearned shares)
    **$**
    **768,423**
    
    $
    1,072,022
 
  F-21
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
9.** **INCOME
TAXES**
 
 The
components of income tax expense are as follows:
  **Years
      Ended December 31,****2004**
    
    
    2003
    
    
    2002Current
    
    **$**
    **3,957,964**
    
    $
    1,583,769
    
    $
    3,604,733Deferred
    
    
    **(280,535**
    **)**
    
    183,438
    
    
    (278,766
    )**$**
    **3,677,429**
    
    $
    1,767,207
    
    $
    3,325,967
 
 The
Company's income tax expense differs from the amounts computed by applying the
federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
 
 **Years
      Ended December 31,****2004**
    
    2003
    
    2002Tax
      provision at statutory federal rate
    
    **$**
    **4,280,355**
    
    $
    2,665,490
    
    $
    3,892,799Tax-exempt
      income
    
    
    **(886,656**
    **)**
    
    (991,246
    )
    
    (992,748
    )Disallowed
      interest
    
    
    **59,414**
    
    
    73,403
    
    
    99,655Cash
      surrender value life insurance
    
    
    **5,933**
    
    
    (45,333
    )
    
    -Nondeductible
      expenses
    
    
    **37,170**
    
    
    31,685
    
    
    109,700State
      income taxes
    
    
    **221,804**
    
    
    56,367
    
    
    232,610Other
      items
    
    
    **(40,591**
    **)**
    
    (23,159
    )
    
    (16,049
    )Income
      tax expense
    
    **$**
    **3,677,429**
    
    $
    1,767,207
    
    $
    3,325,967
 
 The
components of deferred income taxes are as follows:
 
 **December
      31,****2004**
    
    
    2003Deferred
      tax assets:Loan
      loss reserves
    **$**
    **3,233,582**
    
    $
    2,676,237Other
    
    **181,107**
    
    
    379,777**3,414,689**
    
    
    3,056,014Deferred
      tax liabilities:Depreciation
    
    **624,139**
    
    
    547,309Accretion
    
    **110,578**
    
    
    109,266Unrealized
      gain on securities available for sale
    
    **589,111**
    
    
    1,071,466**1,323,828**
    
    
    1,728,041Net
      deferred tax assets
    **$**
    **2,090,861**
    
    $
    1,327,973
 
  F-22
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
10.** **EARNINGS
PER SHARE**
 
 Diluted
earnings per share were computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding. The
number of common shares was increased by the number of shares issuable upon the
exercise of the stock options described in Note 8. This theoretical increase in
the number of common shares was reduced by the number of common shares which are
assumed to have been repurchased for the treasury with the proceeds from the
exercise of the options; these purchases were assumed to have been made at the
price per share that approximates average market price. The treasury stock
method for determining the amount of dilution of stock options is based on the
concept that common shares which could have been purchased with the proceeds of
the exercise of common stock options at market price are not actually
outstanding common shares.
  Presented
below is a summary of the components used to calculate basic and diluted
earnings per share.
 
 **Years
      Ended December 31,****2004**
    
    
    2003
    
    
    2002Net
      income
    
    **$**
    **8,926,846**
    
    $
    6,087,469
    
    $
    8,123,441Weighted
      average common shares outstanding
    
    
    **2,139,026**
    
    
    2,149,918
    
    
    2,177,962Net
      effect of the assumed exercise of stockoptions
      based on the treasury stock methodusing
      average market price for the year
    
    
    **9,133**
    
    
    1,810
    
    
    7,180Total
      weighted average common shares andcommon
      stock equivalents outstanding
    
    
    **2,148,159**
    
    
    2,151,728
    
    
    2,185,142Diluted
      earnings per share
    
    **$**
    **4.16**
    
    $
    2.83
    
    $
    3.72
 
 
 **NOTE
11.** **COMMITMENTS
AND CONTINGENCIES**
 
 **Loan
Commitments**
 
 The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and credit card commitments. Such commitments involve, to varying
degrees, elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
 
 The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, standby
letters of credit and credit card commitments is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. A summary of the Company's commitments is as follows:
 
 **December
      31,****2004**
    
    
    2003Commitments
      to extend credit
    
    **$**
    **67,045,725**
    
    $
    46,432,605Credit
      card lines
    
    
    **6,531,882**
    
    
    6,300,295Financial
      standby letters of credit
    
    
    **3,267,000**
    
    
    4,077,006**$**
    **76,844,607**
    
    $
    56,809,906
 
  F-23
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
11.** **COMMITMENTS
AND CONTINGENCIES (Continued)**
 
 **Loan
Commitments (Continued)**
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
 
 Credit
card commitments are granted on an unsecured basis.
 
 Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Those letters of credit are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Collateral is required in
instances which the Company deems necessary.
 
 At
December 31, 2004 and 2003, the carrying amount of liabilities related to the
Company’s obligation to perform under financial standby letters of credit was
insignificant. The Company has not been required to perform on any financial
standby letters of credit, and the Company has not incurred any losses on
financial standby letters of credit for the years ended December 31, 2004 and
2003.
 
 **Contingencies**
 
 In the
normal course of business, the Company is involved in various legal proceedings.
In the opinion of management, any liability resulting from such proceedings
would not have a material effect on the Company's financial
statements.
 
 
 **NOTE
12.** **CONCENTRATIONS
OF CREDIT**
 
 The
banking subsidiaries originate primarily commercial, real estate, and consumer
loans to customers in their local communities and surrounding counties. The
ability of the majority of the Banks' customers to honor their contractual loan
obligations is dependent on their local economy as well as the economy in the
metropolitan Atlanta and Montgomery areas.
 
 Eighty
three percent (83%) of the Company's loan portfolio is concentrated in loans
secured by real estate. A substantial portion of these loans are in the Banks'
primary market areas. In addition, a substantial portion of the other real
estate owned is located in those same markets. Accordingly, the ultimate
collectibility of the Company's loan portfolio and the recovery of the carrying
amount of other real estate owned is susceptible to changes in market conditions
in the Banks' primary market areas.
 
 The
Company's loan portfolio also includes a concentration, eight percent (8%) of
the total portfolio, of commercial, financial and agricultural loans. These
loans represent loans made primarily to local businesses in the Banks' market
areas. A portion of these loans are small business loans and residential loans
originated by the loan production office, a division of Community Bank &
Trust, which are outside the Banks' primary market areas. The Company's lending
policies require loans of all types to be adequately collateralized and
supported by adequate cash flows.
 
 Other
significant concentrations of credit by type of loan are set forth in Note 3.
The Georgia banks, as a matter of policy, do not generally extend credit to any
single borrower or group of related borrowers in excess of 25% of each
individual Bank's statutory capital, or approximately $7,275,000 and $2,323,000
for Community Bank & Trust and Community Bank & Trust - Troup,
respectively. Senior management has chosen to keep the lending limit at
$4,775,000 for Community Bank & Trust. Community Bank & Trust - Alabama,
as a matter of policy, does not generally extend credit to any single borrower
or group of related borrowers in excess of 20% of unimpaired capital, or
approximately $1,767,000.
  F-24
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
13.** **REGULATORY
MATTERS**
 
 The Banks
are subject to certain restrictions on the amount of dividends that may be
declared without prior regulatory approval. At December 31, 2004, approximately
$6,242,000 of retained earnings were available for dividend declaration without
regulatory approval.
 
 The
Company and 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 financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and Banks
must meet specific capital guidelines that involve quantitative measures of the
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.
 
 Quantitative
measures established by regulation to ensure capital adequacy require the
Company and Banks to maintain minimum amounts and ratios of Total and Tier I
capital to risk-weighted assets, and Tier I capital to average assets.
Management believes, as of December 31, 2004 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 the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the Banks' category. Prompt corrective action provisions are not
applicable to bank holding companies.
  F-25
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
13.** **REGULATORY
MATTERS (Continued)**
 
 The
Company and Banks' actual capital amounts and ratios are presented in the
following tables.
 
 **To
      Be Well****For
      Capital**
    
    **Capitalized
      Under****Adequacy**
    
    **Prompt
      Corrective****Actual**
    
    **Purposes**
    
    **Action
      Provisions****Amount**
    
    **Ratio**
    
    **Amount**
    
    **Ratio**
    
    **Amount**
    
    **Ratio****(Dollars
      in Thousands)****As
      of December 31, 2004**
    
    
    
    
    
    
    
    
    ****Total
      Capital to Risk Weighted Assets:Consolidated
    **$**
    **84,326**
    
    **12.79%**
    
    **$**
    **52,760**
    
    **8.00%**
    
    
    **N/A**
    
    **N/A**Community
      Bank & Trust
    **$**
    **66,447**
    
    **12.21%**
    
    **$**
    **43,553**
    
    **8.00%**
    
    **$**
    **54,451**
    
    **10.00%**Community
      Bank & Trust - Alabama
    **$**
    **7,022**
    
    **16.35%**
    
    **$**
    **3,436**
    
    **8.00%**
    
    **$**
    **4,295**
    
    **10.00%**Community
      Bank & Trust - Troup
    **$**
    **9,154**
    
    **12.65%**
    
    **$**
    **5,789**
    
    **8.00%**
    
    **$**
    **7,237**
    
    **10.00%**Tier
      I Capital to Risk Weighted Assets:Consolidated
    **$**
    **76,071**
    
    **11.53%**
    
    **$**
    **26,380**
    
    **4.00%**
    
    
    **N/A**
    
    **N/A**Community
      Bank & Trust
    **$**
    **59,629**
    
    **10.95%**
    
    **$**
    **21,776**
    
    **4.00%**
    
    **$**
    **32,665**
    
    **6.00%**Community
      Bank & Trust - Alabama
    **$**
    **6,485**
    
    **15.10%**
    
    **$**
    **1,718**
    
    **4.00%**
    
    **$**
    **2,577**
    
    **6.00%**Community
      Bank & Trust - Troup
    **$**
    **8,403**
    
    **11.61%**
    
    **$**
    **2,895**
    
    **4.00%**
    
    **$**
    **4,342**
    
    **6.00%**Tier
      I Capital to Average Assets:Consolidated
    **$**
    **76,071**
    
    **9.09%**
    
    **$**
    **33,487**
    
    **4.00%**
    
    
    **N/A**
    
    **N/A**Community
      Bank & Trust
    **$**
    **59,629**
    
    **8.57%**
    
    **$**
    **27,816**
    
    **4.00%**
    
    **$**
    **34,770**
    
    **5.00%**Community
      Bank & Trust - Alabama
    **$**
    **6,485**
    
    **11.26%**
    
    **$**
    **2,304**
    
    **4.00%**
    ****
    **$**
    **2,880**
    
    **5.00%**Community
      Bank & Trust - Troup
    **$**
    **8,403**
    
    **8.32%**
    
    **$**
    **4,041**
    
    **4.00%**
    ****
    **$**
    **5,052**
    
    **5.00%**
 
 As
      of December 31, 2003Total
      Capital to Risk Weighted Assets:Consolidated
    $
    74,751
    
    13.28%
    
    $
    45,042
    
    8.00%
    
    
    N/A
    
    N/ACommunity
      Bank & Trust
    $
    58,313
    
    12.63%
    
    $
    36,941
    
    8.00%
    
    $
    46,176
    
    10%Community
      Bank & Trust - Alabama
    $
    6,125
    
    15.74%
    
    $
    3,114
    
    8.00%
    
    $
    3,892
    
    10%Community
      Bank & Trust - Troup
    $
    7,971
    
    12.73%
    
    $
    5,009
    
    8.00%
    
    $
    6,261
    
    10%Tier
      I Capital to Risk Weighted Assets:Consolidated
    $
    67,707
    
    12.03%
    
    $
    22,521
    
    4.00%
    
    
    N/A
    
    N/ACommunity
      Bank & Trust
    $
    52,536
    
    11.38%
    
    $
    18,470
    
    4.00%
    
    $
    27,706
    
    6%Community
      Bank & Trust - Alabama
    $
    5,637
    
    14.48%
    
    $
    1,557
    
    4.00%
    
    $
    2,335
    
    6%Community
      Bank & Trust - Troup
    $
    7,188
    
    11.48%
    
    $
    2,505
    
    4.00%
    
    $
    3,757
    
    6%Tier
      I Capital to Average Assets:Consolidated
    $
    67,707
    
    9.07%
    
    $
    29,859
    
    4.00%
    
    
    N/A
    
    N/ACommunity
      Bank & Trust
    $
    52,536
    
    8.50%
    
    $
    24,732
    
    4.00%
    
    $
    30,915
    
    5%Community
      Bank & Trust - Alabama
    $
    5,637
    
    10.09%
    
    $
    2,236
    
    4.00%
    
    $
    2,795
    
    5%Community
      Bank & Trust - Troup
    $
    7,188
    
    8.60%
    
    $
    3,342
    
    4.00%
    
    $
    4,178
    
    5%
 
 
  F-26
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
14.** **FAIR
VALUE OF FINANCIAL INSTRUMENTS**
 
 The fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there
are no quoted market prices for the Company’s various financial instruments. In
cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flows or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
No. 107, *Disclosures
about Fair Values of Financial Instruments* ,
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the
Company.
 
 The
following methods and assumptions were used by the Company in estimating the
fair value disclosures for financial instruments.
 
 **Cash,
      Due From Banks, Interest-Bearing Deposits in Other Banks and Federal Funds
      Sold:**The
      carrying amounts of cash, due from banks, interest-bearing deposits in
      other banks, and federal funds sold approximate fair
    values.
 
 **Securities:**Fair
      values for securities are based on available quoted market prices. The
      carrying values of equity securities with no readily determinable fair
      value approximate fair values.
 
 **Loans:**For
      variable-rate loans that reprice frequently and have no significant change
      in credit risk, fair values are based on carrying values. For other loans,
      the fair values are estimated based on discounted contractual cash flows,
      using interest rates currently being offered for loans with similar terms
      to borrowers with similar credit quality. Fair values for impaired loans
      are estimated using discounted contractual cash flows or underlying
      collateral values, where applicable.
 
 **Deposits:**The
      carrying amounts of demand deposits, savings deposits and variable-rate
      certificates of deposit approximate their fair values. Fair values for
      fixed-rate certificates of deposit are estimated using discounted
      contractual cash flows using interest rates currently being offered for
      certificates of similar maturities.
 
 **Other
      Borrowings:**The
      fair values of the Company's fixed rate other borrowings are estimated
      based on discounted contractual cash flows using the Company’s current
      incremental borrowing rates for similar types of borrowing arrangements.
      The carrying amounts of all other variable rate borrowings approximate
      their fair values.
 
 **Accrued
      Interest:**The
      carrying amounts of accrued interest approximate their fair
      values.
 
 **Redeemable
      Common Stock:**The
      carrying amount of the Company's redeemable common stock approximates fair
      value.
  F-27
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
14.** **FAIR
VALUE OF FINANCIAL INSTRUMENTS (Continued)**
 
 **Off-Balance-Sheet
      Instruments:**Fair
      values of the Company’s off-balance-sheet financial instruments are based
      on fees currently charged to enter into similar agreements. Since the
      majority of the Company’s off-balance-sheet instruments consist of
      nonfee-producing, variable-rate commitments, the Company has determined
      they do not have a distinguishable fair
value.
 
 The
      estimated fair values and related carrying amounts of the Company's
      financial instruments were as follows:
  **December
      31, 2004**
    
    December
      31, 2003**Carrying**
      **Amount**
    
    **Fair**
      **Value**
    
    Carrying
      Amount
    
    Fair
      ValueFinancial
      assets:Cash,
      due from banks, interest-bearingdeposits
      in other banks, and federalfunds
      sold
    **$**
    **30,993,937**
    
    **$**
    **30,993,937**
    
    $
    64,757,849
    
    $
    64,757,849Securities
      available for sale
    
    **114,883,240**
    
    
    **114,883,240**
    
    
    103,458,121
    
    
    103,458,121Securities
      held to maturity
    
    **20,217,237**
    
    
    **21,329,740**
    
    
    22,628,009
    
    
    24,352,241Restricted
      equity securities
    
    **2,469,000**
    
    
    **2,469,000**
    
    
    1,242,900
    
    
    1,242,900Loans
    
    **636,329,474**
    
    
    **632,314,000**
    
    
    537,904,984
    
    
    536,181,203Accrued
      interest receivable
    
    **6,478,800**
    
    
    **6,478,800**
    
    
    5,565,043
    
    
    5,565,043Financial
      liabilities:Deposits
    
    **726,975,116**
    
    
    **728,293,000**
    
    
    670,604,055
    
    
    676,931,514Other
      borrowings
    
    **25,793,750**
    
    
    **25,312,750**
    
    
    16,152,925
    
    
    15,794,042Accrued
      interest payable
    
    **3,609,204**
    
    
    **3,609,204**
    
    
    3,106,339
    
    
    3,106,339Redeemable
      common stock
    
    **18,925,358**
    
    
    **18,925,358**
    
    
    15,783,013
    
    
    15,783,013
 
 
 **NOTE
15.** **SEGMENT
INFORMATION**
 
 The
Company's operations have been classified into two reportable segments, banking
and bank consulting services. The banking segment involves traditional banking
services offered through its three wholly-owned bank subsidiaries. Financial
Supermarkets, Inc. provides various consulting and licensing services to
financial institutions in connection with the establishment of bank branches in
supermarkets. In connection with the establishment of a Supermarket Bank,
Financial Supermarkets provides consulting services ranging from providing
alternative construction designs to coordinating employee training. Financial
Solutions, a division of Financial Supermarkets, Inc. was formed to provide
various consulting services to the financial institution industry including
compliance, operational, advertising, marketing and travel related
services.
 
 The
Company’s reportable segments are organizations that offer different products
and services. They are managed separately because of products and services,
marketing strategies, and the regulatory environments in which the Banks
operate. In addition, the Banks geographically are located in the Southeast and
employ similar business strategies, and are evaluated using similar performance
expectations. The bank consulting segment operates throughout the United
States.
 
 Total
revenue by industry segment includes revenues from unaffiliated customers and
affiliates. Revenues from affiliates are eliminated in consolidation. Interest
income, interest expenses, data processing fees, management fees and other
various revenues and expenses between affiliates are recorded on the accrual
basis of accounting consistent with similar transactions with customers outside
the consolidated group.
  F-28
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
15.** **SEGMENT
INFORMATION (Continued)**
 
 Selected
segment information by industry segment is as follows:
 
 **Reportable
      Segments****For
      the Year Ended December 31, 2004**
    
    **Banking**
    
    **Financial**
      **Supermarkets**
    
    **All**
      **Other**
    
    **Total**Interest
      income
    
    $
    46,263,126
    
    $
    142,289
    
    $
    30,402
    
    $
    46,435,817Interest
      expense
    
    
    12,986,202
    
    
    -
    
    
    35,348
    
    
    13,021,550Intersegment
      net interest income (expense)
    
    
    (138,987
    )
    
    133,837
    
    
    5,150
    
    
    -Net
      interest income (loss)
    
    
    33,276,924
    
    
    142,289
    
    
    (4,946
    )
    
    33,414,267Other
      revenue from external customers
    
    
    13,408,988
    
    
    6,468,364
    
    
    896,009
    
    
    20,773,361Intersegment
      other revenues
    
    
    -
    
    
    246,620
    
    
    2,253,000
    
    
    2,499,620Depreciation
      and amortization
    
    
    2,205,496
    
    
    272,138
    
    
    414,653
    
    
    2,892,287Provision
      for loan losses
    
    
    3,037,000
    
    
    -
    
    
    -
    
    
    3,037,000Segment
      profit (loss)
    
    
    9,424,747
    
    
    1,276,512
    
    
    (1,868,536
    )
    
    8,832,723Segment
      assets
    
    
    845,938,303
    
    
    17,561,448
    
    
    4,733,272
    
    
    868,233,023Expenditures
      for premises and equipment
    
    
    4,991,492
    
    
    98,950
    
    
    584,167
    
    
    5,674,609
 
 
 **For
      the Year Ended December 31, 2003**
    
    **Banking**
    
    **Financial**
      **Supermarkets**
    
    **All**
      **Other**
    
    **Total**Interest
      income
    
    $
    43,391,726
    
    $
    17,804
    
    $
    -
    
    $
    43,409,530Interest
      expense
    
    
    13,185,549
    
    
    -
    
    
    42,768
    
    
    13,228,317Intersegment
      net interest income (expense)
    
    
    (167,673
    )
    
    129,611
    
    
    38,062
    
    
    -Net
      interest income (loss)
    
    
    30,038,504
    
    
    147,415
    
    
    (4,706
    )
    
    30,181,213Other
      revenue from external customers
    
    
    8,510,006
    
    
    3,107,749
    
    
    606,641
    
    
    12,224,396Intersegment
      other revenues
    
    
    -
    
    
    254,588
    
    
    2,340,000
    
    
    2,594,588Depreciation
      and amortization
    
    
    2,112,392
    
    
    275,655
    
    
    346,594
    
    
    2,734,641Provision
      for loan losses
    
    
    3,296,000
    
    
    -
    
    
    -
    
    
    3,296,000Segment
      profit (loss)
    
    
    7,321,452
    
    
    (342,245
    )
    
    (927,047
    )
    
    6,052,159Segment
      assets
    
    
    766,880,156
    
    
    14,339,631
    
    
    5,516,265
    
    
    786,736,052Expenditures
      for premises and equipment
    
    
    1,040,552
    
    
    93,776
    
    
    246,919
    
    
    1,381,247
 
 
 **For
      the Year Ended December 31, 2002**
    
    **Banking**
    
    **Financial**
      **Supermarkets**
    
    **All**
      **Other**
    
    **Total**Interest
      income
    
    $
    43,482,029
    
    $
    6,145
    
    $
    -
    
    $
    43,488,174Interest
      expense
    
    
    16,429,794
    
    
    -
    
    
    70,780
    
    
    16,500,574Intersegment
      net interest income (expense)
    
    
    (407,722
    )
    
    345,660
    
    
    62,062
    
    
    -Net
      interest income (loss)
    
    
    26,644,513
    
    
    351,805
    
    
    (8,718
    )
    
    26,987,600Other
      revenue from external customers
    
    
    7,982,903
    
    
    10,509,667
    
    
    471,425
    
    
    18,963,995Intersegment
      other revenues
    
    
    -
    
    
    308,743
    
    
    2,187,600
    
    
    2,496,343Depreciation
      and amortization
    
    
    2,053,725
    
    
    670,468
    
    
    367,203
    
    
    3,091,396Provision
      for loan losses
    
    
    3,320,000
    
    
    -
    
    
    -
    
    
    3,320,000Segment
      profit (loss)
    
    
    6,287,644
    
    
    3,132,173
    
    
    (1,243,768
    )
    
    8,176,049Segment
      assets
    
    
    700,549,312
    
    
    17,287,304
    
    
    4,854,392
    
    
    722,691,008Expenditures
      for premises and equipment
    
    
    2,382,700
    
    
    51,622
    
    
    575,759
    
    
    3,010,081
  F-29
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
15.** **SEGMENT
INFORMATION (Continued)**
 
 **2004**
    
    
    2003
    
    
    2002Net
      IncomeTotal
      profit for reportable segments
    
    **$******
    ******10,701,259**
    
    $
    6,979,207
    
    $
    9,419,817Non-reportable
      segment loss
    
    
    **(1,868,536**
    **)**
    
    (927,048
    )
    
    (1,243,768
    )Elimination
      of intersegment gains (losses)
    
    
    **94,123**
    
    
    35,310
    
    
    (52,608
    )Total
      consolidated net income
    
    **$******
    ******8,926,846**
    
    $
    6,087,469
    
    $
    8,123,441Total
      AssetsTotal
      assets for reportable segments
    
    **$******
    ******863,499,751**
    
    $
    781,219,787
    
    $
    717,836,616Non-reportable
      segment assets
    
    
    **4,733,272**
    
    
    5,516,265
    
    
    4,854,392Elimination
      of intersegment assets
    
    
    **(24,855,510**
    **)**
    
    (20,551,300
    )
    
    (22,444,981
    )Total
      consolidated assets
    
    **$******
    ******843,377,513**
    
    $
    766,184,752
    
    $
    700,246,027Expenditures
      for Premises and EquipmentTotal
      expenditures for reportable segments
    
    **$******
    ******5,090,442**
    
    $
    1,134,328
    
    $
    2,434,322Non-reportable
      segment assets
    
    
    **584,167**
    
    
    246,919
    
    
    575,759Elimination
      of intersegment gains
    
    
    **-**
    
    
    (50,000
    )
    
    (150,000
    )Total
      consolidated expenditures forpremises
      and equipment
    
    **$******
    ******5,674,609**
    
    $
    1,331,247
    
    $
    2,860,081
 
 
 **NOTE
16.**  **SUPPLEMENTAL
FINANCIAL DATA**
 
 Components
of other operating expenses in excess of 1% of total revenue are as
follows:
 
 **Years
      Ended December 31,****2004**
    
    2003
    
    2002Data
      processing
    
    **$**
    **1,652,070**
    
    $
    1,244,160
    
    $
    966,786Travel
      expenses
    
    
    **1,171,060**
    
    
    1,163,906
    
    
    1,126,738Office
      supply expenses
    
    
    **984,364**
    
    
    889,704
    
    
    811,511Advertising
    
    
    **983,927**
    
    
    780,394
    
    
    808,499
 
 **NOTE
17.** **SUBSEQUENT
EVENT**
 
 On
January 1 3 , 2005,
the Board of Directors of the Company voted unanimously to
declare a one for five-hundred reverse stock split for the primary purpose
of “going private” which will relieve the Company from the expense and burden
associated with compliance with both current and proposed federal securities
laws and regulations. Since the
Board of Directors and executive officers, as defined by securities law, do not
collectively control more than 50% of the voting shares of the Company’s
outstanding stock and since t he
reverse stock split is subject to regulatory and shareholder approval t o
amend  the
Company’s articles of incorporation , we have
not restated the equity section of the balance sheet or per share
amounts . The
following table illustrates the effect on earnings per share if the Company had
reflected the one for five-hundred reverse stock split.
 
 Years
      Ended December 31,**2004**
    
    
    2003
    
    
    2002Earnings
      per share:Basic
      - as reported
    
    **$**
    **4.17**
    
    $
    2.83
    
    $
    3.73Basic
      - pro forma
    
    **$**
    **2,087.00**
    
    $
    1,416.00
    
    $
    1,865.00Diluted
      - as reported
    
    **$**
    **4.16**
    
    $
    2.83
    
    $
    3.72Diluted
      - pro forma
    
    **$**
    **2,078.00**
    
    $
    1,414.00
    
    $
    1,859.00
 
  F-30
   
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
18.** **PARENT
COMPANY ONLY FINANCIAL INFORMATION**
 
 The
following information presents the condensed balance sheets as of December 31,
2004 and 2003 and condensed statements of income and cash flows of Community
Bankshares, Inc. for the years ended December 31, 2004, 2003 and
2002:
 
 **CONDENSED
      BALANCE SHEETS****2004**
    
    2003AssetsCash
    
    **$**
    **1,335,271**
    
    $
    2,894,770Investment
      in subsidiaries
    
    
    **77,030,447**
    
    
    69,097,327Equipment
    
    
    **704,060**
    
    
    547,549Other
      assets
    
    
    **2,370,509**
    
    
    1,824,268Total
      assets
    
    **$**
    **81,440,287**
    
    $
    74,363,914LiabilitiesOther
      borrowings
    
    **$**
    **543,750**
    
    $
    1,077,925Other
      liabilities
    
    
    **1,169,647**
    
    
    754,029Total
      liabilities
    
    
    **1,713,397**
    
    
    1,831,954Redeemable
      common stock
    
    
    **18,925,358**
    
    
    15,783,013Shareholders'
      equity
    
    
    **60,801,532**
    
    
    56,748,947Total
      liabilities, redeemable common stock,and
      shareholders' equity
    
    **$**
    **81,440,287**
    
    $
    74,363,914
 
  F-31
  
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
18.** **PARENT
COMPANY ONLY FINANCIAL INFORMATION (Continued)**
 
 **CONDENSED
      STATEMENTS OF INCOME****2004**
    
    
    2003
    
    
    2002IncomeDividends
      from subsidiaries
    
    **$******
    ******2,200,000**
    
    $
    4,040,000
    
    $
    3,660,000Interest
    
    
    **30,402**
    
    
    38,062
    
    
    62,062Other
      income
    
    
    **2,363,101**
    
    
    2,441,648
    
    
    2,275,425**4,593,503**
    
    
    6,519,710
    
    
    5,997,487ExpenseInterest
    
    
    **35,348**
    
    
    42,768
    
    
    70,780Salaries
      and employee benefits
    
    
    **3,513,510**
    
    
    2,347,297
    
    
    2,718,005Equipment
      expense
    
    
    **796,334**
    
    
    627,300
    
    
    451,299Other
      expense
    
    
    **1,235,830**
    
    
    948,818
    
    
    991,961**5,581,022**
    
    
    3,966,183
    
    
    4,232,045Income
      (loss) before income tax benefits and equityin
      undistributed income of subsidiaries
    
    
    **(987,519**
    **)**
    
    2,553,527
    
    
    1,765,442Income
      tax benefits
    
    
    **(1,242,711**
    **)**
    
    (553,428
    )
    
    (749,699
    )Income
      before equity in undistributed incomeof
      subsidiaries
    
    
    **255,192**
    
    
    3,106,955
    
    
    2,515,141Equity
      in undistributed income of subsidiaries
    
    
    **8,656,654**
    
    
    2,965,514
    
    
    5,647,049Net
      income
    
    **$******
    ******8,911,846**
    
    $
    6,072,469
    
    $
    8,162,190
 
  F-32
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
18.** **PARENT
COMPANY ONLY FINANCIAL INFORMATION (Continued)**
 
 **CONDENSED
      STATEMENTS OF CASH FLOWS****2004**
    
    2003
    
    2002**OPERATING
      ACTIVITIES**Net
      income
    
    **$**
    **8,911,846**
    
    $
    6,072,469
    
    $
    8,162,190Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
      and amortization
    
    
    **389,505**
    
    
    323,291
    
    
    292,002Undistributed
      income of subsidiaries
    
    
    **(8,656,654**
    **)**
    
    (2,965,514
    )
    
    (5,647,049
    )Other
      operating activities
    
    
    **(489,566**
    **)**
    
    653,544
    
    
    (153,404
    )Net
      cash provided by operating activities
    
    
    **155,131**
    
    
    4,083,790
    
    
    2,653,739**INVESTING
      ACTIVITIES**Purchases
      of premises and equipment
    
    
    **(546,016**
    **)**
    
    (234,805
    )
    
    (473,638
    )(Increase)
      decrease in notes receivable from ESOP
    
    
    **388,457**
    
    
    390,158
    
    
    193,750Net
      cash provided by (used in) investing activities
    
    
    **(157,559**
    **)**
    
    155,353
    
    
    (279,888
    )**FINANCING
      ACTIVITIES**Repayment
      of other borrowings
    
    
    **(534,175**
    **)**
    
    (586,600
    )
    
    (405,350
    )Proceeds
      from exercise of stock options
    
    
    **112,790**
    
    
    23
    
    
    44Dividends
      paid
    
    
    **(706,016**
    **)**
    
    (602,327
    )
    
    (523,070
    )Purchase
      of treasury stock
    
    
    **(429,670**
    **)**
    
    (1,134,442
    )
    
    (1,280,920
    )Net
      cash provided by (used in) financing activities
    
    
    **(1,557,071**
    **)**
    
    (2,323,346
    )
    
    (2,209,296
    )Net
      increase (decrease) in cash
    
    
    **(1,559,499**
    **)**
    
    1,915,797
    
    
    164,555Cash
      at beginning of year
    
    
    **2,894,770**
    
    
    978,973
    
    
    814,418Cash
      at end of year
    
    **$**
    **1,335,271**
    
    $
    2,894,770
    
    $
    978,973








F-33





**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the, thereunto duly authorized, in the City of Cornelia, State of
Georgia, on the 31st day of March, 2005.






**COMMUNITY
      BANKSHARES, INC.**By:
    /s/  J. Alton WingateJ.
      Alton Wingate
      President
      and Chief Executive Officer
      (Principal
      Executive Officer)


**POWER
OF ATTORNEY**





KNOW ALL
MEN BY THESE PRESENTS that each person whose signature appears below constitutes
and appoints J. Alton Wingate or Harry L. Stephens and either of them (with full
power in each to act alone), as true and lawful attorneys-in-fact, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any amendments to this Report on Form 10-K and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or their substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.





Pursuant
to the requirements of the Securities Act of, this Registration Statement has
been signed by the following persons in the capacities indicated on
the 31st day of March, 2005.





Signature
    
    Title/s/
      J. Alton Wingate
    
    President,
      Chief Executive OfficerJ.
      Alton Wingate
    
    and
      Director/s/
      Steven C. Adams
    
    DirectorSteven
      C. Adams/s/
      Edwin B. Burr
    
    DirectorEdwin
      B. Burr/s/
      H. Calvin Stovall, Jr.
    
    DirectorH.
      Calvin Stovall, Jr./s/
      Dean C. Swanson
    
    DirectorDean
      C. Swanson/s/
      George D. Telford
    
    DirectorGeorge
      D. Telford/s/
      Dr.
      A. Dan Windham
    
    DirectorDr.
      A. Dan Windham

















/s/
      Lois M. Wood-Schroyer
    
    DirectorLois
      M. Wood-Schroyer/s/
      Harry L. Stephens
    
    Executive
      Vice President andHarry
      L. Stephens
    
    Chief
      Financial Officer(Principal
      Financial andAccounting
      Officer)

















SUPPLEMENTAL
INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE
ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12
OF THE ACT.





The
Registrant has furnished annual reports and proxy material to security holders,
and copies of such documents have been furnished to the Commission for its
information.








39





**EXHIBIT
INDEX**








10.11
    Fourth
      Amendment to Amended and Restated Revolving Credit/Term Loan Agreement
      between the Registrant and SunTrust Bank dated June 30,
    2004.31.1
    Certification
      by J. Alton Wingate, President and Chief Executive Officer of Community
      Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
    Certification
      by Harry L. Stephens, Chief Financial Officer of Community Bankshares,
      Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
    Certification
      by J. Alton Wingate, President and Chief Executive Officier of Community
      Bankshares, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to section 906 of the Sarbanes-Oxley Act of
    2002.32.2
    Certification
      by Harry L. Stephens, Chief Financial Officier of Community Bankshares,
      Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section
      906 of the Sarbanes-Oxley Act of 2002.