**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D. C.  20549FORM 10-K**

[X]  Annual Report Pursuant to Section 13 or 15(d) ofThe Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2003

[   ] Transition Report Pursuant to Section 13 or 15(d) ofthe 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. Employer**  |
| **Incorporation 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 befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period thatthe Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days.   Yes  X         No       ..

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxyor 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 theSecurities Exchange Act of 1934.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule126-2 of the Act).  Yes___  No  X      

Aggregate market value of the voting stock held by non-affiliates of the Registrant as ofJune 28, 2003:  $ 46,260,869 (based upon approximate market value of $44.38/share, the latest sales price known to theRegistrant for the Common Stock at such date, for which there is no established trading market).

As of March 29, 2004, 2,139,163 shares of Common Stock, par value $1.00 per share, wereissued and outstanding.

----

**PART 1**

**ITEM1.                BUSINESS.**

**General**

               Community Bankshares, Inc. (the “Company”) was organized under the laws of Georgia in 1980 and commenced operations in1981.  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”), andCommunity Bank & Trust-Troup (“Community-Troup”)  (collectively, the “Banks”) and the non-banksubsidiaries 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 auditedconsolidated financial statements included in this annual report.

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

**Forward Looking Statements**

**               ** This Form 10-K, bothin the Management’s Discussion and Analysis section and elsewhere, contains forward-looking statements under the PrivateSecurities Litigation Reform Act of 1995 that involve risks and uncertainties.  Although the Company believes the assumptionsunderlying 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 limitedto: economic conditions (both generally and in the markets where the Company operates); competition from other providers offinancial services; government regulation and legislation; changes in interest rates; material unforeseen changes in the financialstability and liquidity of our credit customers; and other risks detailed in the Company’s filings with the Securities andExchange Commission, all of which are difficult to predict and which may be beyond the Company’s control.  The Companyundertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or toreflect 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 commercialchecking accounts, NOW accounts, savings accounts, certificates of deposit, lines of credit and money transfers.  Each Bankfinances commercial and consumer transactions, makes secured and unsecured loans, and provides a variety of other bankingservices.

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

               *Deposits*.  Each Bank offers a full range of depository accounts and services to both consumers and businesses.  AtDecember 31, 2003, our aggregate deposit base, totaling approximately $670.6 million, consisted of approximately $111.6 million innon-interest-bearing demand deposits (16.64% of total deposits), approximately $174 million in interest-bearing demand deposits(including money market accounts) (25.95% of total deposits), approximately $35.2 million in savings deposits (5.25% of totaldeposits), approximately $225.8 million in time deposits in amounts less than $100,000 (33.67% of total deposits), andapproximately $124 million in time deposits of $100,000 or more (18.49% of total deposits).

               *Loans*.  Each Bank makes both secured and unsecured loans to individuals, firms and corporations, and both consumer andcommercial lending operations include various types of credit for customers.  In addition, Community also operates a loanproduction office****in Gainesville, Georgia.  The Gainesville loan production office originates loans guaranteed by theSmall Business Administration (the “SBA”) and resells the guaranteed portion of such loans to others.  Each Bankalso makes direct installment loans to consumers on both a secured and unsecured basis.  At December 31, 2003, consumer andother, real estate (including mortgage and construction loans) and commercial loans represented approximately 10.36%, 80.35% and9.29% 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.

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               Commercial lending is directed principally toward businesses within the market area of the Banks or existing or potential depositcustomers of the Banks.  The Gainesville loan production office, however, makes loans to individuals and businesses that arenot 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 andwillingness to repay the loan, which in turn are impacted by such factors as the borrower’s cash flow and sales trends, aswell as relevant economic conditions.  This category includes loans made to individuals, partnership or corporate borrowersand obtained for a variety of purposes.  Risks associated with these loans can be significant.  Risks include, but arenot limited to, economic downturn in industry trends, deteriorated or non-existing collateral, fraud, bankruptcy and changes ininterest rates.

               Loans secured by real estate, which are made to businesses, are categorized as real estate loans.  Often, real estatecollateral 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 forone-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 offixed-rate and variable-rate products are available, with fixed rate loans generally limited to short-term balloonmaturities.  Risks involved with residential mortgage lending include, but are not limited to, title defects, fraud, generalreal estate market deterioration, inaccurate appraisals, interest rate fluctuations and financial deterioration of theborrower.

               The Banks also make residential construction loans, generally for one-to-four family unit structures.  The Banks require afirst lien position on the loans associated with construction projects.  Loan disbursements require independent, on-siteinspections 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 forsuch loans is 85% of the as-built appraised value for homes built for sale and second homes and 90% for owner occupied primaryresidents.  Loans for built for sale construction can present a high degree of risk depending on, among other things, whetherthe 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 intosingle-family lots on which houses will be built.  The loan-to-value ratio for such loans does not exceed 85% of the developedvalue as defined by an independent appraisal, or 100% of the cost, whichever is less.  Loans for acquisition and developmentcan present a high degree of risk to the Banks, depending upon, among other things, whether the developer can find buyers for thelots, 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 andhousehold purposes, including loans for automobiles and home improvements.  Consumer lending decisions are based on adetermination of the borrower’s ability and willingness to repay the loan, which in turn are affected by such factors as theborrower’s income, job stability, previous credit history and any collateral for the loan.  Risks associated with theseloans 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 creditservices to individuals and entities that meet our credit standards.  Each Bank provides its lending officers with writtenguidelines for lending activities.  Lending authority is delegated by the Board of Directors of the particular Bank to loanofficers, each of whom is limited in the amount of secured and unsecured loans which he or she can make to a single borrower orrelated group of borrowers.  In addition, the Board of Directors delegates lending authority above individual loan officerlimits to the Asset/Liability Committee.

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

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               *Asset/Liability Management*.  The Board of Directors of each Bank is charged with establishing policies to manage theassets and liabilities of each Bank.  Each Board’s task is to manage asset growth, net interest margin, liquidity andcapital.  The Company directs the overall acquisition and allocation of funds based on these policies.  At monthlymeetings, the asset/liability committees of the Banks comprised of senior officers of the respective Bank review a report withregard to the monthly asset and liability funds budget and income and expense budget of the Bank in relation to the actualcomposition and flow of funds, the ratio of the amount of rate-sensitive assets to the amount of rate-sensitive liabilities, theamount of interest rate risk and equity market value exposure under varying rate environments, the ratio of loan loss reserve tooutstanding loans and other variables, such as expected loan demand, investment opportunities, core deposit growth within specifiedcategories, 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 andregulatory constraints.  The policy is reviewed annually by the Board of Directors of each Bank.  Individualtransactions, portfolio composition and performance are reviewed and approved monthly by the Board of Directors of each bank or acommittee thereof.  The President of each Bank reports to the Bank’s full Board of Directors on a monthly basisinformation concerning sales, purchases, resultant gains or losses, average maturity, federal taxable equivalent yields andappreciation 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 subsidiaryof Community.  Financial Supermarkets’ primary business is to provide various consulting and licensing services tofinancial institutions in connection with the establishment of turn-key bank branches in supermarkets and other retaillocations.  These services are marketed to other financial institutions.  Financial Supermarkets enters into agreementsprimarily with major supermarket chains for the right to establish bank branches in particular sites.  Financial Supermarketsthen licenses such rights, along with the right to operate the Supermarket Bank®, to individual financial institutions, inaddition to providing consulting services to such institutions ranging from providing alternative construction designs tocoordinating employee training.

               Since 1984, Financial Supermarkets has assisted clients with the development of over 650 bank facilities in supermarkets and otherretail locations throughout the United States.  Over its 20-year history, Financial Supermarkets has expanded the scope of itsbusiness 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 internetservices.

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

**Employees**

               At December 31, 2003, the Company had 367 full-time employees and 53 part-time employees.  Neither the Company nor any of itssubsidiaries is a party to any collective bargaining agreement, and our management believes that the Company’s employeerelations are good.

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**Supervision and Regulation**

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

               *  General*.  TheCompany is a registered financial holding company subject to regulation by the Federal Reserve under the Bank Holding Company Actof 1956, as amended (the “Bank Holding Company Act”).  The Company is required to file financial information withthe 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 acquiredirect or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) itor any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge orconsolidate with any other bank holding company.  In addition, a financial holding company is generally prohibited fromengaging 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 beclosely related to banking or managing or controlling banks as to be a proper incident thereto.  Some of the activities thatthe 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 closelyrelated or incidental to banking (as discussed above), the Gramm-Leach-Bliley Act became effective in 2000, and relaxed theprevious 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 andinsurance 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 issuingannuities, 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 wellcapitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act.  A bank holdingcompany that falls out of compliance with such requirement may be required to cease engaging in certain activities.  Any bankholding company that does not elect to become a financial holding company remains subject to the current restrictions of theAct.

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

5
                The Company must also register with the Department of Banking and Finance of the State of Georgia (the “DBF”) and fileperiodic information with the DBF.  As part of such registration, the DBF requires information with respect to theCompany’s financial condition, operations, management and inter-company relationships, and related matters.  The DBF mayalso require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and theregulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine the Company and each of theBanks.

              The Company is an “affiliate” of the Banks under the Federal Reserve Act, whichimposes 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” ascollateral for loans by the Banks to a borrower and (4) the purchase of assetsfrom the Company by the Banks.  Further, a bank holding company and itssubsidiaries are prohibited from engaging in certain tie-in arrangements inconnection with any extension of credit, lease or sale of property or furnishingof services.

               Community and Community-Troup, as Georgia banks, are subject to the supervision of, and are regularly examined by, the FederalDeposit Insurance Corporation (the “FDIC”) and the DBF.  Community-Alabama, as an Alabama bank, is subject to thesupervision and examination of the FDIC and the Alabama State Banking Department (the “ABD”).  Both the FDIC andthe DBF must grant prior approval of any merger, consolidation or other corporate reorganization involving Community orCommunity-Troup and the FDIC and ABD must grant prior approval of any merger, consolidation or other corporate reorganizationinvolving 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 theCompany’s revenues result from dividends paid to the Company by the Banks.  There are statutory and regulatoryrequirements applicable to the payment of dividends by the Banks, as well as by the Company to the Company’sshareholders.   

               The Banks are each state-chartered banks regulated by the DBF or ABD, as applicable, and the FDIC.  Under the regulations ofthe DBF, dividends may not be declared out of the retained earnings of a Georgia bank without first obtaining the writtenpermission 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 byregulation); 
-  The aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the netprofits 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 ABDonly 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 netearnings (as defined by regulation) of that year combined with its retained net earnings of the preceding two years, less anyrequired 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 tomaintain adequate capital above regulatory guidelines.  In addition, if, in the opinion of the applicable regulatoryauthority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, dependingupon the financial condition of the Banks, could include the payment of dividends) such authority may require, after notice andhearing, that such bank cease and desist from such practice.  The FDIC has issued a policy statement providing that insuredbanks should generally only pay dividends out of current operating earnings.  In addition to the formal statutes andregulations, 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 theBanks.  At December 31, 2003, retained earnings available from the Banks to pay dividends totaled approximately $4.0 millionwithout regulatory approval.  For 2003, the Company’s cash dividend payout to shareholders was 10.2% of netincome.

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               *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 marketoperations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirementsagainst bank deposits.  In view of changing conditions in the national economy and in the money markets, as well as the effectof actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible futurechanges in interest rates, deposit levels, loan demand or the business and earnings of the Banks.

               *Capital Adequacy*.   The Federal Reserve and the FDIC have implemented substantially identical risk-based rules forassessing bank and bank holding company capital adequacy.  These regulations establish minimum capital standards in relationto assets and off-balance sheet exposures as adjusted for credit risk.  Banks and bank holding companies are required tohave  (1) a minimum level of total capital (as defined) to risk-weighted assets of 8%; (2) a minimum Tier One Capital (asdefined below) to risk-weighted assets of 4%; and  (3) a minimum stockholders’ equity to risk-weighted assets of4%.  In addition, the Federal Reserve and the FDIC have established a minimum 3% leverage ratio of Tier One Capital to totalassets for the most highly-rated banks and bank holding companies.  “Tier One Capital” generally consists ofcommon equity not including unrecognized gains and losses on securities, minority interests in equity accounts ofconsolidated  subsidiaries and certain perpetual preferred stock less certain intangibles. The Federal Reserve and the FDICuse the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holdingcompanies.  The FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve amended,effective January 1, 1997, the capital adequacy standards to provide for the consideration of interest rate risk in the overalldetermination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for therisk.  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 Congressenacted 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 ontheir capital positions.  Regulators are permitted to take increasingly harsh action as a bank’s financial conditiondeclines.  Regulators are also empowered to place in receivership or require the sale of a bank to another depositoryinstitution when a bank’s capital leverage ratio reaches 2%.  Better capitalized institutions are generally subject toless 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 financialinstitutions in the following five categories based upon capitalization ratios:    (1) A “wellcapitalized” institution has a total risk-based capital ratio of at least 10%, a Tier One risk-based ratio of at least 6% anda leverage ratio of at least 5%;  (2)  an “adequately capitalized” institution has a total risk-based capitalratio 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 under4% or a leverage ratio of under 4%;  (4) a “significantly undercapitalized” institution has a total risk-basedcapital 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 thethree undercapitalized categories would be prohibited from declaring dividends or making capital distributions.  The FDICregulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisoryfactors other than capital.  Under the FDIC’s regulations, all of the Banks were “well capitalized”institutions at December 31, 2003.

               Set forth below are pertinent capital ratios for the Company and the Banks as of December 31, 2003.

Community
CommunityAlabama

CommunityTroup
The Company     
Tier One Capital to Risk-based  Assets

11.38%

14.48%

11.48%

12.03%
   
   
Total Capital to Risk-based Assets

12.63%

15.74%

12.73%

13.28%
   
   
Leverage Ratio (Tier One Capital to Average Assets)

    8.50%

10.09%

   8.60%

   9.07%
     
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**Available Information**

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

               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 seven other full-service branchesin Habersham, Jackson, Hall and White counties and thirteen branches in supermarkets and Wal-Mart Stores.  In addition,Community operates seven other branches in supermarkets and Wal-Mart Stores in adjacent counties.  Community-Troup’smain office is located at 201 Broad Street, LaGrange, Georgia it has and one full-service branch,, three branches in supermarketsand Wal-Mart stores and one loan production office in Columbus, Georgia.  Community-Alabama’s main office is located at202 N. Powell Street, Union Springs, Alabama and it has two branches in supermarkets and Wal-Mart stores.

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

**ITEM 3.  LEGAL PROCEEDINGS.**

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

**ITEM4.                SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

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

 

 

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**PART II**

****

**ITEM5.                    MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

               The common stock is not traded in any established public trading market.  At December 31, 2003, there were463    holders of record of the common stock and 2,144,195 shares of common stock issued and outstanding.  Thefollowing table sets forth certain information regarding trades of the common stock known by management for the indicatedperiods.  Included in the information for 2003 is the Company’s purchase of 25,562 shares at a price of $44.38 pershare.  Included in the information for 2002 is the Company’s purchase of 34,573 shares at a price of $41.32 pershare.
 
**Number**
 
**Size of Trades**

**Price of Trades**

**Year**

**of Trades**

**Aggregate Shares**

**Smallest**

**Largest**

**Lowest**

**Highest**

2003

29

30,660

23 shares

8,700 shares

$41.32

$44.38

2002

69

166,976

10 shares

25,143 shares

$41.00

$48.00

                The Company declared cash dividends of $.29, $.25 and $.21 per share in 2003, 2002 and 2001, respectively.  The Companyintends to continue to pay cash dividends.  However, the amount and frequency of dividends will be determined by theCompany’s Board of Directors in light of the earnings, capital requirements and the financial condition of the Company, andno assurances can be given that dividends will be paid in the future. The Company’s ability to pay dividends will also bedependent on cash dividends paid to it by the Banks.  The ability of the Banks to pay dividends to the Company is restrictedby applicable regulatory requirements.  See “ITEM 1 -- BUSINESS -- Supervision and Regulation.”
 
 

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**ITEM6.                SELECTED FINANCIAL DATA**
 
Year Ended December 31, 
2003

2002

2001

2000

1999
  
Dollars in Thousands, Except Per Share Amounts
        
**Selected Statement Of Income Data:**
             
     Total interest income

$43,409

$43,488

$48,502

$47,039

$40,290
        
     Total interest expense

13,228

16,501

23,240

22,303

17,697
       
     Net interest income

30,181

26,987

25,262

24,736

22,593
        
     Provision for loan losses

3,296

3,320

2,364

1,620

1,637
        
     Nonbank subsidiary income

3,122

10,586

10,826

8,915

6,720
        
     Other income

9,102

8,378

6,951

5,678

4,790
        
     Other expenses

31,255

31,182

30,425

27,085

23,831
        
     Net income

6,087

8,123

7,175

7,622

6,076
        
     Earnings per share

2.83

3.73

3.29

3.50

2.80
        
     Diluted earnings per share

2.83

3.72

3.26

3.46

2.80
        
     Cash dividends per share

.29

.25

0.21

0.18

0.15
   
**Selected Balance Sheet Data:**
             
Total assets

$766,185

$700,246

$646,209

$590,323

$516,150
        
Total deposits

670,604

607,354

562,215

507,495

444,056
        
Other borrowings

16,153

16,665

12,070

10,844

16,054
        
Redeemable common stock held
      
     by ESOP net of unearned ESOP shares     related to ESOP debt

15,783

15,194

15,160

15,088

13,982
        
Shareholders’ equity

55,659

51,853

43,443

38,249

30,820
        
Return on assets  (1)

.84%

1.22%

1.17%

1.40%

1.23%
 
Return on equity (2)

8.86%

13.06%

12.73%

16.45%

14.21%
 
Dividend payout ratio (3)

10.24%

6.70%

6.38%

5.14%

5.36%
 
Equity to assets ratio (4)

9.50%

9.32%

9.20%

8.48%

8.65%
 
_________________________________________(1)           Net income divided byaverage total assets.(2)           Net income divided byaverage equity.(3)           Dividends declared per sharedivided by basic earnings per share.(4)           Average equity divided byaverage total assets.

10
**ITEM7.                  MANAGEMENT’SDISCUSSION 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, 2003 and 2002 and the resultsof operations for the three-year period ended December 31, 2003.  The purpose of the discussion is to focus on informationabout the Company’s financial condition and results of operations which are not otherwise apparent from the auditedconsolidated financial statements included in this annual report.  This discussion and analysis should be read in conjunctionwith the consolidated financial statements and related notes and the selected financial information and statistical data presentedelsewhere in this Annual Report.

               *Overview*.  Our principal asset is the ownership of our Banks.  Accordingly, we derive most of our income frominterest we receive on our loans and investments.  Our primary source of funds for making these loans and investments is ourdeposits, on which we pay interest.  Consequently, one of the key measures of our success is our amount of net interestincome, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on ourinterest-bearing liabilities, such as deposits.  Another key measure is the spread between the yield we earn on theseinterest-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 “AverageBalances” table shows the average balance during 2003, 2002 and 2001 of each category of our assets and liabilities, as wellas the yield we earned or the rate we paid with respect to each category.  A review of this table shows that our loanstypically provide higher interest yields than do other types of interest earning assets, which is why we intend to channel asubstantial percentage of our earning assets into our loan portfolio.  Similarly, the “Rate/Volume Analysis” tablehelps 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 haveincluded a “Sensitivity Analysis Table” to help explain this.  Finally, we have included a number of tables thatprovide detail about our investment securities, our loans, and our deposits.

               Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb possible losses on existingloans that may become uncollectible.  We establish and maintain this allowance by charging a provision for loan losses againstour operating earnings.  In the following section we have included a detailed discussion of this process, as well as severaltables 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.  Ournon-bank subsidiary enhances our ability to generate non-interest income.  However, the income generated from FinancialSupermarkets is more susceptible to economic conditions and not as predictable as income generated from our Banks.  Wedescribe the various components of this non-interest income, as well as our non-interest expense, in the followingdiscussion.

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

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

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

               *Balance Sheet Review*.  We experienced moderate growth during 2003.  For the year ended December 31, 2003,consolidated assets grew $65.9 million, or 9.42%, up from 2002 growth of $54 million or 8.36%.  During 2003, our averageassets were $723.6 million, compared with $667.7 million during 2002.  This represents an 8.37% increase in average assetsduring 2003 compared with a 8.98 % increase during 2002.

11
**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 ofinterest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and totalinterest-bearing liabilities, net interest spread and net yield on average interest-earning assets.

  (Dollars in Thousands)

Year Ended December 31,

 
   
2003
  
2002
  
2001
  
Average
 
Average

Average
 
Average

Average
 
Average
 
Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

**Assets:**
         
Interest earning assets
         
   Interest and fees on loans(1)(2)

$511,824

37,729

7.37%

$469,710

$37,423

7.97%

$436,420

$42,522

9.74%

   Interest on taxable securities

62,657

2,454

3.92%

56,091

2,766

4.93%

46,585

2,703

5.80%

   Interest on nontaxable securities

62,516

2,981

4.77%

62,636

2,986

4.77%

51,212

2,494

4.87%

   Interest on Federal funds sold

21,983

226

1.03%

18,861

302

1.60%

20,281

748

3.69%

   Interest on deposits in banks

607

20

3.29%

750

11

1.47%

687

35

5.09%

Total interest earning assets

659,587

43,410

6.58%

608,048

43,488

7.15%

555,185

48,502

8.74%

Total non-interest earning assets

64,003
  
59,619
  
57,458
            
Total assets

723,590
  
667,667
  
612,643
            
**Liabilities and shareholders’ equity:**
         
Interest-bearing liabilities:
         
     Interest on demand deposits

148,886

1,285

.86%

131,621

1,727

1.31%

109,766

2,565

2.34%

     Interest on savings deposits

33,631

192

.57%

29,826

226

.76%

24,851

467

1.88%

     Interest on time deposits

350,000

10,963

3.13%

336,654

13,826

4.11%

322,404

19,511

6.05%

     Interest on other borrowings

16,377

789

4.82%

13,709

722

5.27%

11,501

696

6.05%

Total interest-bearing liabilities

548,894

13,229

2.41%

511,810

16,501

3.22%

468,522

23,239

4.96%

Other non-interest bearing liabilities

105,962
  
93,655
  
87,751
  
Shareholders’ equity (3)

68,734
  
62,202
  
56,370
            
Total liabilities and shareholders’ equity

723,590
  
667,667
  
612,643
            
Excess of interest earning assets
         
    over interest bearing liabilities

$110,693
  
$96,238
  
$86,663
  
Ratio of interest earning assets
         
     to interest bearing liabilities

120%
  
119%
  
118%
  
Net interest income
 
$30,181
  
$26,987
  
$25,263
 
Net interest spread
  
4.17%
  
3.93%
  
3.78%

Net interest margin
  
4.58%
  
4.44%
  
4.55%

_________________________(1) Includes non-accrual loans of 3.18, 4.35, and 3.35 million for the years2003, 2002 and 2001, respectively.(2) Loans are net of unearned fees.(3) Unrealized gains & losses are included in equity, net of taxes and includesredeemable preferred stock.

12
                Our total earning assets, which include investment securities, loans, federal funds sold, and interest-bearing deposits inbanks increased $63.2 million or 10.03% during 2003.  During 2002, earning assets increased $45.1 million, or 7.76% over2001.  Average earning assets for 2003 were $659.6 million, an increase of 8.48% over average earning assets in 2002 whichwere $608 million or an increase of 9.52% over 2001.

               Our total investments decreased in 2003 by $1.3 million or .98% from 2002because of year-end loan growth.  Averageinvestments in 2003 were $125.2 million for 2003, a 5.43% increase over average investments for 2002.  The net increaseoccurred in the available for sale portfolio.  Our total investments increased in 2002 by $19.9 million or 18.27% over2001.  Average investments in 2002 were $118.7 million in 2002, a 21.40% increase over average investments for2001.

**Types of Investments**

               The carrying amounts of securities at the dates indicated are summarized as follows:
** **  
Dollars in Thousands  ** Securities Available-for-Sale** 
2003 
2002** **
2001 
 

Cost

 

Fair Value

 

Cost

 

Fair Value

** **

Cost

 

Fair Value
 
U.S. Government and agency securities

$

370,191

$

38,261

  $

32,542

$

34,095   

  $

31,638

$

32,227
 
State and municipal securities
 
37,436
 
39,088 
 
38,494   
 
39,665   
 
29,802
 
29,188
 
Mortgage-backed securities
 
22,640
 
22,597 
 
20,994
 
21,542   
 
14,579
 
14,611
 
Equity securities (1)
 
    4,755
 
    4,755 
 
   6,270 
 
    6,270   
 
  3,092
 
   3,092
  
Total securities available for sale

$

102,022

$

104,701

$

98,300

$

101,572   

$

79,111

$

  79,118

 
** **  
Dollars in Thousands **Securities Held-to-Maturity** 
2003 
2002** **
2001 
 

Cost

 

Fair Value

 

Cost

 

Fair Value

** **

Cost

 

Fair Value
 
State and municipal securities

$

22,628

$

24,352

  $

27,016

$

28,681   

  $

29,602

$

30,384

__________________________________________(1)           Includes restricted equitysecurities.

               The Banks’ mortgage-backed portfolio consists of seventy-eight U.S. Government corporation collateralized mortgageobligations. The actual maturity of these securities will differ from the contractual maturity because borrowers on the underlyingloans usually have the right to prepay obligations with or without prepayment penalties.  Decreases in interest rates willgenerally 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 anincreasing interest rate environment, the Banks may have an obligation yielding a return less than the current yields onsecurities.  However, because the majority of these mortgage-backed securities have adjustable rates, negative effects ofchanges in interest rates on earnings and carrying values of these securities are mitigated.

               At December 31, 2003, we had net unrealized gains of approximately $2.7 million in the securities available for sale portfolio ascompared to net unrealized gains of approximately $3.3 million at December 31, 2002.  Net unrealized gains represent thedifference 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-rateenvironments to take advantage of higher returns in the long run.  In 2003, we sold $2.5 million of securities classified asavailable for sale, realizing net gains of $77,000.  In 2002, we sold $5.1 million of securities classified as available forsale, realizing net gains of $139,000.  The held to maturity securities portfolio included net unrealized gains ofapproximately $1.7 million at December 31, 2003 compared to net unrealized gains of $1.7 million at December 31, 2002.  Such gains are not recognized in income or equity until such securities are sold.  U.S. Treasury, other U.S. Governmentagencies and corporations and mortgage-backed securities, which provide reasonable returns with limited risk, represent 47.80% ofthe total portfolio.  The remaining portfolio is comprised of municipal securities, and equity securities, which provide, ingeneral, higher returns on a tax equivalent basis, with greater risk elements.  

** **13
**Maturities of Investments**

                The amounts of securities in each category as of December 31, 2003 are shown in thefollowing table according to maturity classifications of one year or less, after one year through five years, after five yearsthrough ten years, and after ten years.
       (Dollars in Thousands)
U.S. Treasury and OtherU.S. Government agenciesand corporations (2)
Municipalsecurities (3)
OtherSecurities (4) 
Amount

Yield

Amount

Yield

Amount

Yield
       
Available for Sale (1)
             
One year or less

$3,354

4.14%

$670

4.34%

$2,041

 1.32%
       
After one year
      
     Through five years

35,064

4.68%

7,604

3.86%

--

 --
       
After five years
      
     Through ten years

14,211

  4.77%

5,357

4.71%
         
After ten years

8,229

4.57%

25,457

5.15%

2,714

1.74%
       
          Total

$60,858

4.66%

$39,088

4.82%

$4,755

1.56%
       
Held to Maturity (1)
             
One year or less
  
$549  

4.44%
         
After one year
      
     Through five years
  
3,580

5.08%
         
After five years
      
     Through ten years
  
10,802

5.14%
         
After ten years
  
7,697

 5.64%
         
          Total
  
$22,628

5.28%
  
**______________________**
(1)Yields were computed usingbook value, coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis overthe life of each security. The weighted average yield for each maturity range was computed using the carrying value of eachsecurity in that range.(2)The above scheduleincludes mortgage-backed securities based on their contractual maturity date. In practice, cash flow in these securities issignificantly faster than their stated maturity schedules due to the normal payments of principal and interest as well as theprepayment of the mortgage loans backing the investment.(3)Yields on municipalsecurities have not been computed on a tax equivalent basis.(4)Other securities consistsof equity securities and are included in the under one-year maturity range because the securities have no contractual maturitydate.
14
**Loans**

               Our total loans grew by $54 million during 2003 for an increase of 11.00% over 2002.  Our total loans grew in 2002 by $35.6million for an increase of 7.81% over 2001.  During 2003, average loans were $511.8 million or an increase of 8.97% over 2002compared to an increase during 2002 of 7.63% over 2001 to $469.7 million.  The increase in loans is primarily the result ofcontinued loan growth in our existing markets and expansion into new market.

**Types of Loans**

                The amounts of loans outstanding at the indicated dates are in the following tableaccording to the type of loan.
 
Year ended December 31,

 
 
2003

2002

2001

2000

1999

 

 
 
(Dollars in Thousands)

 

 
      
 

 

Commercial, financial
     
 

 

     and agricultural

$50,690

$52,852

$53,299

$57,012

$69,429

 

 

Real estate-construction

52,786

40,342

32,397

28,120

24,208

 

 

Real estate-mortgage

385,629

338,772

313,851

274,216

230,139

 

 

Consumer and other (1)

56,361

59,401

56,243

58,561

53,093

 

 
 
$545,466

$491,367

$455,790

$417,909

$376,869

 

 

Less allowance for loan losses

(7,561)

(7,742)

(6,652)

(6,307)

(5,683)

 

 

          Netloans(2)

$537,905

$483,625

$449,138

$411,602

$371,186

 

 
      
 

______________________________________

(1)                Amounts are disclosed net ofunearned loan income.(2)                Commercial, financial andagricultural loans include loans held for sale in 2000 and 1999.  The Company had no                    loans held for sale in 2003, 2002 or2001.

               Loans outstanding as of December 31, 1999 have been reclassified to be consistent with the presentation adopted for the year endedDecember 31, 2003.

 

15
**Maturities And Sensitivities Of Loans To Changes In Interest Rates**

                Total loans as of December 31, 2003 are shown in the following table according to maturityclassifications 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

$

30,844

          Realestate-construction
 
47,732

          All otherloans
 
223,024
  
301,600

   After one year through five years:
  
          Commercial,financial and agricultural
 
17,105

          Realestate-construction
 
5,054

          All otherloans
 
189,114
  
211,273

   After five years:
  
          Commercial,financial and agricultural
 
2,741

          Realestate-construction
 
--

          All otherloans
 
29,852
  
32,593
    
$

545,466
   
               The following table summarizes loans at December 31, 2003 with due dates after one year which have predetermined and floating oradjustable interest rates:
 
(Dollars in Thousands)

          Predeterminedinterest rates

$

174,486

          Floating oradjustable interest rates
 
69,380
 
$

243,866
   
               Federal funds sold increased by $10.4 million or 113.04% from year-end 2002 to 2003.  Average federal funds for 2003 were$21.9 million or a 16.55% increase.  During 2002, average federal funds sold decreased by $1.4 million or 7% as compared to2001.

**Deposits**

               The growth in total assets for the year ended December 31, 2003 was funded mainly by growth in deposits.  Consolidateddeposits grew $63.2 million or 10.41% in 2003 as compared to $45.1 million or 8.03% in 2002.  Much of the increase in totaldeposits was concentrated in interest bearing and noninterest bearing demand deposits.  We experienced a 13.12% increase inaverage interest bearing demand deposits in 2003 with a 18.18% growth in average noninterest bearing demand, a 12.76% growth inaverage savings and a 3.96% increase in average time deposits.  During 2002, we experienced a 19.91% increase ininterest-bearing demand deposits with a 13.98% increase in average noninterest bearing demand, a 20.02% increase in average savingsand a 4.42% increase in average time deposits.

               We borrowed $5 million from Federal Home Loan Bank in 2002 to increase our total outstanding debt to $16.6 million.  The loanproceeds were used to fund loans.

16
**Deposits**

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

(Dollars in Thousands)

Year Ended December 31,
 
2003

2002

2001
  
Average
 
Average
 
Average
 
Balance

Interest Rate

Balance

Interest Rate

Balance

Interest Rate
       
Noninterest-bearing demand

$  98,022
 
$  82,944
 
$  72,773
 
Interest-bearing demand deposits

148,886

.86%

131,621

1.31%

109,766

2.34%

Savings deposits

33,631

.57%

29,826

.76%

24,851

1.88%

Time deposits

350,000

3.13%

336,654

4.11%

322,404

6.05%

          Totaldeposits

$630,539
 
  $581,045
 
$529,794
        
               The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2003 are shown below bycategory, which is based on time remaining until maturity of (1) three months or less, (2) over three through six months, (3) oversix through twelve months and (4) over twelve months.
 
December 31, 2003
 
(Dollars in Thousands)
    
Three months or less

$

29,660
 
Over three through six months
 
25,487
 
Over six through twelve months
 
32,562
 
Over twelve months
 
36,266
  
$

123,975
 
**Results of Operations**

               *Net Income*.  Our net income for 2003 was $6 million, as compared to $8.1 million in 2002, a decrease of 25.06%. The decrease in net income between 2003 and 2002 is primarily attributable to a decrease in non-interest income due primarily to adecrease in non-bank subsidiary income from Financial Supermarkets.  Our net income for 2002 was $8.1 million, as compared to$7.2 million in 2001, an increase of 13.22% from the prior year.  The increase in net income between 2002 and 2001 isprimarily attributable to an increase in non-interest income and net interest income.

               *Net Interest Income*.  Our results of operations are influenced by management’s ability to effectively manageinterest income and expense, to minimize loan and investment losses, to generate non-interest income and to control operatingexpenses.  Because interest rates are determined by market forces and economic conditions beyond our control, our ability togenerate net interest income is dependent upon our ability to obtain an adequate net interest spread between the rate paid oninterest-bearing liabilities and the rate earned on interest-earning assets.  Our net interest income increased by $3.2million for the year ended December 31, 2003 compared to an increase of $1.7 million for the year ended December 31, 2002. The rate earned on interest-earning assets decreased 57 basis points in 2003 from 2002 as compared to a 159 basis points decreasein 2002 from 2001, while the rate paid on interest earning liabilities decreased by 81 basis points in 2003 as compared to adecrease of 174 basis points in 2002.  The increase in average interest earning assets in 2003 of $51.5 million over 2002, netof the increase in average interest-bearing liabilities of $37.1 million, contributed to the 11.83% increase in net interest incomein 2003 as compared to an increase in average interest-earning assets in 2002 of 52.8 million over 2001, net of interest-earningliabilities of $43.3 million, which contributed to a 6.82% increase in net interest income.  The net interest margin increasedfrom 4.44% to 4.58% during the same period.  The increase in net interest income was primarily the result of the 2003 increaseover 2002 of 24 basis points in net interest spread from 3.93% to 4.17% due to a larger decrease in the costs of funds without acomparable decrease in the yield on earning  assets as compared to a decrease in 2002 over 2001 of 15 basis points from 3.78%to 3.93%. 

17
               The Company will continue to actively monitor and maintain the net interest spread to counteract the current markettrends. 

**Rate and Volume Analysis**

               The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets andinterest-bearing liabilities have affected the Company’s interest income and expense during the year indicated.  Foreach 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) acombination of change in rate and change in volume.  The changes in interest income and interest expense attributable to bothvolume and rate have been allocated proportionately to the change due to volume and the change due to rate.
 
Year Ended December 31, 2003 vs. 2002  
Changes Due to: 
  
Rate

Volume

Increase(decrease)
  
(Dollars in Thousands)
 
Increase (decrease) in:
    
     Income from interest-earningassets:
    
     Interest and fees on loans

(2,913)

3,219 

306 
 
     Interest 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)

9 
 
          Total interestincome

(3,633)

3,555 

(78)
  
 
 
  
     Expense  from interest-bearingliabilities:

 
 
  
     Interest expense on interest-bearingdeposits

(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 

67 
 
          Total interestexpense

(4,164)

892 

(3,272)
  
 
 
  
          Net interestincome

531 

2,663 

3,194 
       
Year Ended December 31, 2002 vs. 2001  
Changes Due to:
  
Rate

Volume

Increase(decrease)
  
(Dollars in Thousands)
 
Increase (decrease) in:
    
     Income from interest-earningassets:
    
     Interest and fees on loans

$(8,168)

$3,069 

$ (5,099)
 
     Interest on taxable securities

(441)

504 

63 
 
     Interest on nontaxable securities

(54)

546 

492 
 
     Interest on Federal Funds sold

(397)

(49)

(446)
 
     Interest on deposits in banks

(27)

3 

(24)
 
          Total interestincome

$(9,087)

$4,073 

$ (5,014)
  
 
 
  
     Expense from interest-bearingliabilities:

 
 
  
     Interest expense on interest-bearingdeposits

$ (1,279)

441 

$ (838)
 
     Interest on savings deposits

(320)

79 

(241)
 
     Interest on time deposits

(6,514)

829 

(5,685)
 
     Interest on other borrowings

(97)

123 

26 
 
          Total interestexpense

$ (8,210)

$1,472 

$ (6,738)
  
 
 
  
          Net interestincome

$    (877)

$2,601 

$   1,724
 
18
               *Provision for Loan Loss*.  The provision for loan losses for the year ended December 31, 2003, decreased by $24,000 from$3,320,000 for 2002 to $3,296,000 for 2003.  In 2002, the provision increased $956,000 from the 2001 level of$2,364,000.  The provision for loan losses fluctuates based on loan volume and changes in credit quality.  During 2003and 2002, the provision for loan losses was increased as compared to 2001 due to an increased level of charged-offloans.   Management maintains an allowance for loan losses based on the evaluation of potential problem loans as well asminimal reserves for all loans based on past net charge-off experience.  The guaranteed portions of loans generated by theloan production office are subsequently sold.  Because most loans retained by the loan production office consist of theportion of SBA loans that are not guaranteed and are out-of market, these loans require additional allowances due to the greaterrisk of loss in the event of default.  These loans, however, are subjected to the same underwriting standards and periodicloan review procedures as other loans made by the Banks.

**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,

 
 
2003

2002

2001

2000

1999

 

 
 
(Dollars in Thousands)

 

 
      
  

 

Nonaccrual loans

$1,342

$5,107

$4,421

$1,143

$1,743

 

 
      
 

 

Loans contractually past due ninety days
     
 

 

     or more as to interest orprincipal
     
 

 

      payments and still accruing

2,380

3,529

1,679

1,281

1,572

 

 
      
 

 

Loans, the terms of which have been
     
 

 

      renegotiated to provide areduction
     
 

 

      or deferral of interest orprincipal
     
 

 

      because of deterioration inthe
     
 

 

      financial position of theborrower

      895

  1,051

  1,265

    744

    842

 

 
 
$4,617

$9,687

$7,365

$3,168

$4,157

 

                The reduction in interest income associated with nonaccrual and renegotiated loans as ofDecember 31, 2003 is as follows:
  
Interest income that would have been recorded on nonaccrual
 
      and restructured loans under originalterms

$172
    
Interest income that was recorded on nonaccrual and restructuredloans

 $ 89
  
19
               The Banks’ policy is to discontinue the accrual of interest income when, in the opinion of management, collection of suchinterest becomes doubtful. This status is accorded such interest when (1) there is a significant deterioration in the financialcondition of the borrower and full repayment of principal and interest is not expected, or (2) the principal or interest is morethan ninety days past due, unless the loan is both well-secured and in the process of collection.  Accrual of interest on suchloans is resumed when in management’s judgment the collection of interest and principal become probable.  Loansclassified for regulatory purposes as substandard or special mention that have not been included in the table above do notrepresent or result from trends or uncertainties which management reasonably expects will materially effect future operatingresults, liquidity or capital resources. These classified loans do not represent material credits about which management is awareand which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repaymentterms.

               Nonaccrual loans, delinquent loans greater than 90 days and restructured loans decreased $5 million at year end 2003 compared to a$2.3 million increase in 2002 and a $4.2 million increase in 2001.  Delinquent and nonaccrual loans fluctuate depending oneconomic conditions. Due to economic conditions, the Company experienced a deterioration in credit quality that resulted in anincrease in nonaccrual loans in 2002 and increased charge-off of loans in 2003.  Management has reviewed these loans anddetermined that the likelihood of any significant loss of principal is mitigated due to the value of the collateral securing theseloans.  The ratio of the allowance for loan losses to nonaccrual, delinquent and restructured loans increased from 80% atDecember 31, 2002 to 164% at December 31, 2003.

               The allowance for loan losses as a percentage of total loans outstanding at December 31, 2003, 2002 and 2001 was 1.39%, 1.58% and1.46%, respectively.  Net charge-offs in 2003 were $3,477,000, an increase of  $1,247,000 from $2,230,000 in 2002, andthe net charge-off ratio increased from .47% in 2002 to .68% in 2003.  Based on management’s evaluation of the loanportfolio, including a review of past loan losses, current conditions that may affect borrowers’ ability to repay and theunderlying collateral value of the loans, management considers the allowance for loan losses to be adequate.

**Allowance for Loan Loss**

               The following table summarizes the balances of loans for each year; changes in the allowance for possible loan losses arising fromloans charged off and recoveries on loans previously charged off; additions to the allowance which have been charged to operatingexpense; and the ratio of net charge-offs during the year to average loans.
 
December 31,
 
2003

2002

2001

2000

1999
 
(Dollars in Thousands)
            
Balance of allowance for loan losses
     
      at beginning of year

$7,742 

$6,652 

$6,307 

$5,683 

$4,863 
      
Loans charged off
     
      Commercial

(1,866)

($697)

($810)

($461)

($423)

      Real estate mortgage

(1,170)

(951)

(269)

  - - 

(23)

      Consumer

(746)

(920)

(1,129)

(693)

(632)
 
(3,782)

($2,568)

($2,208)

($1,154)

($1,078)
      
Loans recovered
     
      Commercial

$22 

$19 

$18 

$16 

$45 

      Real estate mortgage

109 

121 

13 

- - 

4 

      Consumer

174 

198 

158 

141 

212 
 
305 

$338 

$189 

$157 

$261 
      
Net charge-offs

(3,477)

($2,230)

($2,019)

($997)

($817)
      
Additions to allowance charged
     
      to operating expense duringyear

$3,296 

$3,320 

$2,364 

$1,621 

$1,637 
      
Balance of allowance for loan losses
     
      at end of year

$7,561 

$7,742 

$6,652 

$6,307 

$5,683 
      
Ratio of net loans charged off during
     
      the year to average loansoutstanding

0.68%

0.47%

0.46%

0.25%

0.23%
      
               The provision for possible loan losses is created by direct charges to income. Losses on loans are charged against the allowance inthe year in which such loans, in management’s opinion, become uncollectible. Recoveries during the year are credited to thisallowance. The factors that influence management’s judgment in determining the amount charged to income are past loan lossexperience, composition of the loan portfolio, evaluation of possible future losses, current economic conditions and other relevantfactors.  The Company’s allowance for loan losses was $7.6 million at December 31, 2003, representing 1.39% of totalloans, compared with $7.7 million at December 31, 2002, which represented 1.58% of total loans and $6.7 million at December 31,2001 representing 1.46% of total loans. The allowance for loan losses is reviewed regularly based on management’s evaluationof current risk characteristics of the loan portfolio, as well as the impact of prevailing and expected economic businessconditions. Management considers the allowance for loan losses adequate to cover possible loan losses at December 31,2003.

               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 December31, 2003, 2002, 2001, 2000 and 1999 is summarized below:
 
December 31,
 
2003

2002

2001

2000

1999
 
(Dollars in Thousands)

                                         
     
Commercial

$1,134

$1,161

$1,330

$1,261

$1,136

Real estate

4,273

4,259

2,130

1,892

2,103

Consumer

2,154

2,322

3,192

3,154

2,444
 
$7,561

$7,742

$6,652

$6,307

$5,683
       
Percent of loans in Each Category of Total Loans
 
      
December 31,
 
2003

2002

2001

2000

1999
  
Commercial

9%

11%

12%

14%

18%

Real estate

81%

77%

76%

72%

68%

Consumer

10%

12%

12%

14%

14%
 
100%

100%

100%

100%

100%
      
 20
Non-Interest Income
 
2003

2002

2001
 
(Dollars in Thousands)
        
Service charges on deposit accounts

$5,605

$5,235

$4,522

Other service charges, commissions and fees

1,923

1,664

1,240

Trust department fees

250

181

130

Nonbank subsidiary income

3,122

10,586

10,826

Gain on sale of loans

297

240

167

Security transactions, net

77

139

48

Other

950

918

844
 
$12,224

$18,963

$17,777
    
*                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 74.5%, or $9.1 million, of total non-interest income for 2003, 44.18%,or $8.4 million, in 2002, and 39.10%, or $6.9 million, in 2001.  The majority of the increase in non-interest income of theBanks is related to the continued growth in deposits.  Service charges on deposit accounts increased by $370,000, $713,000 and$997,000, respectively, for the years ended December 31, 2003, 2002 and 2001 as average demand deposit accounts increased 15.07% in2003 compared to a 17.54% increase in 2002 and a 9.4% increase in 2001.  Included in non-interest income of the Banks aregains on sale of SBA loans recognized by Community of $297,000, $240,000 and $167,000 for 2003, 2002 and 2001, respectively. This represents an increase from 2002 of $57,000 and an increase in 2002 from 2001 of $73,000.  Income associated with thesale of SBA loans fluctuates from year to year depending on loan demand.

               In 2003, non-interest income generated by other subsidiaries decreased by $7.5 million or 71% compared to 2002 and decreased by$240,000 or 2.22% in 2002 compared to 2001.  This was primarily driven by a decrease in installation of supermarket bank unitsby Financial Supermarkets during 2003 as compared to 2002.  This decrease was due to the termination of FinancialSupermarkets’ agreement with Candadian Imperial Bank of Commerce ("CIBC") to establish banking pavilions in Florida.  Inconnection with that termination, Financial Supermarkets received a payment of $2 million in lieu of future income expectations,which was included in income in 2002.  Also during 2002, FinancialSupermarkets received a $1 million payment for the release of the Safewaysupermarket chain from its agreement with CIBC.

 
 Non-Interest Expense 
2003

2002

2001

 
 
(Dollars in Thousands)

 
    
 
    
 

Salaries and benefits

$16,564

$17,483

$16,517

 

Equipment expenses

2,915

2,871

2,779

 

Occupancy expenses

2,079

1,849

1,797

 

Data processing expenses

1,244

967

1,052

 

Travel expenses

1,164

1,127

1,434

 

Office supply expenses

890

812

876

 

Other operating expenses

6,399

6,073

5,970

 
 
31,255

31,182

$30,425

 
    
 

               *Non-Interest Expense*.  Non-interest expenses increased for the year ended December 31, 2003 by $73,000 compared to a$757,000 increase in 2002 and a $3.3 million increase in 2001.  This represented a .23% increase in expenses for 2003,  a2.5% increase for 2002 and a 12.33% increase for 2001.  Salaries and benefits decreased $919,000 or 5.26% in 2003 over 2002due primarily to the reduction of incentive pay for Financial Supermarkets employees.  This compares to an increase of$765,000 or 5.84% in 2002 over 2001, which was primarily due to the staffing of new locations and an increase in incentive pay atFinancial Supermarkets.

               Equipment and occupancy expenses increased by a combined $274,000 or 5.82% in 2003 over 2002 and $143,000 or 3.13% in 2002 over2001.  The increases are due to the increased number of facilities operated by the Banks as well as additions of computerequipment.  We operated 40, 38 and 35 locations at year-end 2003, 2002, and 2001, respectively.  During 2003, we opened anew loan production office in Hall County and branch in Rabun County, Georgia.

               Data processing, travel, office supply and other operating expenses, increased by a combined $718,000 in 2003 compared to andecrease of $353,000 in 2002 and an increase of $801,000 in 2001.  The primary reason for the increase in such expenses during2003 is attributed to the change in our fee structure with our debit cardprovider and an increased effort in business development and marketing of ournon-bank subsidiary as well as increased legal fees due to legal servicesrelated to past due loans and other real estate owned.  Such non-interest expensesincreased during 2001 primarily due to growth of the banking subsidiaries, increased costs associated with day-to-day operationsand increased activity of Financial Supermarkets.

21
               *Income Taxes*.  We incurred income tax expenses of $1.8 million in 2003, which represented an effective tax rateof   22.50%, compared to tax expense of $3.3 million in 2002, or an effective tax rate of 29%.  This decrease in oureffective tax rate is attributable to a reduction in state income taxes due to a reduced level of income at FinancialSupermarkets.  Income tax expense increased $250,000 to $3.3 million in 2002.  The effective tax rate for 2001 was30%.

               *Liquidity*.  The liquidity and capital resources of the Banks are monitored by management and on a periodic basis bystate and federal regulatory authorities.  The individual Banks’ liquidity ratios at December 31, 2003 were consideredsatisfactory under their own guidelines as well as regulatory guidelines.  At that date, the Banks’ cash equivalents andshort-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 receivedon loans, interest received on securities, Federal funds sold, and interest bearing deposits less cash paid for interest andoperating expenses.  Investing activities use cash for the purchase of interest-bearing deposits, securities, fixed assets andto fund loans.  Investing activities also generate cash from the proceeds of matured interest-bearing deposits, maturedsecurities, sales of securities, loan repayments and principal prepayments of securities.  Cash flows from financingactivities generate cash from a net increase in deposit accounts, increases in other borrowed funds and the issuance of commonstock.  Financing activities use cash for the payment of cash dividends and the repayment of other borrowed funds.

               The purpose of liquidity management is to ensure that cash flow is sufficient to satisfy demands for credit, withdrawals, and otherneeds.  Traditional sources of liquidity include asset maturities and growth in deposits.  A company may achieve itsdesired liquidity objectives from the management of assets and liabilities, and through funds provided by operations.  Fundsinvested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from theasset perspective.  Scheduled loan payments are a relatively stable source of funds, but loan payoffs are influenced byinterest rates, general economic conditions and competition and may fluctuate significantly.  The liability base providessources of liquidity through deposit growth and accessibility to market sources of funds.  Our markets have traditionallyprovided us with a growing and stable deposit base.  We attempt to price our deposits to meet our asset/liability, includingliquidity, objectives consistent with local market conditions.  In addition, we have lines of credit available.  Webelieve our sources of liquidity are stable and reliable for the foreseeable future.

                *Off-Balance Sheet Arrangements.*  The Company is a party tocredit related financial obligations with off-balance sheet risk in the normal course of business to meet the financing needs ofits 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 establishedin the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of afee.  Since many of the commitments are expected to expire without being drawn upon, the commitments do not necessarilyrepresent future cash requirements.  The Company evaluates each customer’s creditworthiness on a case‐by-casebasis.  The amount of collateral obtained is based on management’s credit evaluation.  Collateral held varies, butmay include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.

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

               The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit and letters ofcredit is represented by the contractual amount of these instruments.  The Company uses the same credit underwritingprocedures for making commitments and letters of credit as for on-balance-sheet instruments.  The Company evaluates eachcustomer’s creditworthiness on a case-by-case basis and the amount of collateral, if deemed necessary, is based on the creditevaluation.  Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personalproperty or other acceptable collateral.  All of these obligations involve, to varying degrees, elements of credit riskin excess of the amount recognized in the balance sheet.  The total amounts of these obligations does not necessarilyrepresent 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 inliquidity needs or other commitments or that could significantly impact earnings.

22
*                Contractual Obligations andCommercial Commitments*.  The Banks in the normal course of business, commit to extendcredit in the form of letters of credit or lines of credit. The amount of outstanding loan commitments and letters of credit atDecember 31, 2003, 2002 and 2001 were $56.8 million, $38.0 million and $35.6 million, respectively.  Commitments to extendcredit generally have fixed expiration dates or other termination provisions and may require payment of a fee.  Since many ofthe commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cashrequirements.

               The following tables present the Company’s contractual obligations and commercialcommitments as of December 31, 2003. 
 
Payments Due by Period(Dollars in Thousands)
Contractual Obligations

Total
 
Less than 1year
 
1-3 years

4-5 years
 
After 5years

Bank borrowings

$ 1,078
 
$  534
 
$  544 
 
$ -----  
 
$    -----

FHLB borrowings

15,075
 
-----
 
-----
 
5,000
 
10,075

Operating leases

2,471
 
942
 
1,227
 
175
 
127

Total Contractual Cash Obligations

$18,624
 
$1,476
 
$1,771
 
$5,175
 
$10,202

Amount of Commitment Expiration per Period(Dollars in Thousands)
Other Commercial Commitments

Total AmountsCommitted
 
Less than 1year
 
1-3 years
 
4-5 years
 
Over 5years

Commitments to extend credit (1)

$52,733
 
$46,765
 
$5,745
 
$   32  
 
79

Customer letters of credit

4,077
 
4,052
 
25
 
-----
 
-----

Total Commercial Commitments

$56,810
 
$50,817
 
$5,770
 
$   32 
 
79

**

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

**               ***Concentrations ofCredit Risk. *Concentrations of credit risk arise when a number ofborrowers have similar economic characteristics that would cause their abilityto meet contractual obligations to be similarly affected by changes in theeconomy or other conditions.  The Company’s loan portfolio consistsprimarily of commercial and real estate loans located in the geographic marketsserved by the Company, making the value of the portfolio susceptible to declinesin real estate values and other changes in economic conditions in such markets. The Company does not believe it has unreasonable exposure to any individualcustomer.

               *Capital Resources. * At December 31, 2003, the Company and Banks’ capital ratios were considered adequate based onminimum capital requirements of the FDIC and applicable state regulatory agencies.  During 2003, the Company increased capitalby retaining net earnings of $5.4 million compared to an increase in 2002 of $7.6 million and an increase in 2001 of $6.7million.  In 2003 and 2002, the company purchased $1.1 and 1.4 million in treasury stock, respectively.

                For a tabular presentation of the Banks’ capital ratios at December 31, 2003, see “BUSINESS --SUPERVISION ANDREGULATION”.

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

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

23
**ITEM7A.               QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

               The Company is exposed only to U.S. dollar interest rate changes and accordingly, the Company manages exposure by consideringpossible changes in its net interest margin.  The Company does not have any trading instruments nor does it classify anyportion of the investment portfolio as held for trading.  The Company does not engage in any hedging activities or enter intoany derivative instruments other than mortgage backed securities, which are commonly pass through securities.  Finally, theCompany 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 ratechanges is known as “interest rate risk.”  The repricing of interest earning assets and interest-bearingliabilities can influence the changes in net interest income.  As part of the Company’s asset/liability managementprogram, 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 consistentprofitability.  Officers of the Banks are charged with monitoring policies and procedures designed to ensure an acceptableasset/liability mix.  Management’s philosophy is to support asset growth primarily through growth of core depositswithin the Banks’ market areas.

               The Company’s asset/liability mix is monitored regularly with a report reflecting the interest rate sensitive assets andinterest rate sensitive liabilities that is prepared and presented to the Board of Directors of each Banks on at least a quarterlybasis.  Management’s objective is to monitor interest rate sensitive assets and liabilities so as to minimize the impacton earnings of substantial fluctuations in interest rates.  An asset or liability is considered to be interest rate-sensitiveif it will reprice or mature within the time period analyzed, usually one year or less.  The interest rate-sensitivity gap isthe difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within therelevant period.  A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount ofinterest rate-sensitive liabilities.  A gap is considered negative when the amount of interest rate-sensitive liabilitiesexceeds the interest rate-sensitive assets.  During a period of rising interest rates, a negative gap would tend to adverselyaffect 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 apositive gap would tend to adversely affect net interest income.  If the Company’s assets and liabilities were equallyflexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would beminimal.

               A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will beaffected by changes in interest rates.  For example, while interest-bearing transaction accounts are by their termsimmediately repricable, competitive conditions and other circumstances usually do not require repricing such depositsproportionately with changes in rates affecting interest-earning assets.  Accordingly, the Company also evaluates how changesin interest rates impacts the repayment of particular assets and liabilities.  Income associated with interest-earning assetsand costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates.  Inaddition, 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 tochanges in market interest rates.  Interest rates on certain types of assets and liabilities fluctuate in advance of changesin 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 interestrates.  Also, prepayments and early withdrawal levels could deviate significantly from those reflected in the interest rategap.  The Company prepares a report monthly that measures the potential impact on net interest margin by rising or fallingrates.  This report is reviewed monthly by the Asset/Liability Committee and quarterly by each Board ofDirectors. 

               At December 31, 2003, the Company’s cumulative interest rate sensitivity gap ratio for the next twelve monthswas     97%, 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-bearingliabilities as of December 31, 2003, the interest rate sensitivity gap, the cumulative interest rate-sensitivity gap, the interestrate-sensitivity gap ratio and the cumulative interest rate-sensitivity gap ratio.  The table also sets forth the time periodsin which earning assets and liabilities will mature or may reprice in accordance with their contractual terms.  However, thetable does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing ofvarious categories of assets and liabilities is subject to competitive conditions and the needs of the Company’scustomers.  In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice atdifferent times within such period and at different rates.

24
Consolidated Gap Report
         
After
      
Three

After
     
Months

One
     
But

Year but
    
Within

Within

Within

After
   
ThreeMonths

OneYear

FiveYears

FiveYears
 
Total
 
 (Dollars In  Thousands)
       
Interest earning assets:
      
      Interest-bearing deposits

$       429 

$            0 

$           0

$            0
 
$       429

      Federal funds sold

19,600 

0 

0

0
 
19,600

      Investment securities

804 

8,525 

46,248

71,753
 
127,330

      Loans

219,672 

151,307 

171,064

3,422
 
545,465
 
$240,505 

$159,832 

$217,312

$ 75,175
 
$692,824
       
Interest-bearing liabilities:
      
      Interest-bearing demand

$174,070 
 
$         0

$     0
 
$174,070 

      Savings

35,157 

0 

0

0
 
35,157

      Time deposits, $100,000
      
            andover

29,660 

25,487 

32,562

36,266
 
123,975

      Time deposits, less than
      
            $100,000

50,497 

97,315 

 77,646

382
 
225,840

      Other borrowings

0 

534 

5,544

10,075
 
16,153
 
$289,384 

$123,336 

$115,752

$46,723
 
$575,195
       
Interest rate sensitivity
      
      Gap

$(48,879)

$ 36,496 

$101,560

$28,452
 
$117,629
       
Cumulative interest rate
      
      sensitivity gap

$(48,879)

$(12,383)

$ 89,177

$117,629
         
Interest rate sensitivity
      
      Gap percent

83%

130%

188%

161%
         
Cumulative interest rate
      
     sensitivity gap percent

83%

97%

117%

120%
          
               Gap management alone is not enough to properly manage interest rate sensitivity because interest rates do not respond at the samespeed or at the same level to market rate changes.  For example, savings and money market rates are more stable than loanstied to a “Prime” rate and respond with less volatility to a market rate change.  Thus, the Company uses asimulation model to monitor changes in net interest income due to changes in market rates.  The model of rising, falling andstable interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of marketrate swings.  The analysis of impact on net interest margins as well as market value of equity over a twelve-month period issubjected to a 200 basis point increase and decrease in rate.  The December 2003 model reflects an increase of 2.88% in netinterest income and a 14.06% decrease in market value equity for a 200 basis point increase in rates.  The same model shows a4.07% decrease in net interest income and a 19.54% 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 marketvalue equity for these scenarios.  Therefore, the Company is within its policy guidelines.

25
**ITEM8.                FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

               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 WITHACCOUNTANTS 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 itsaccountants on any matters of accounting principles or practices or financial statement disclosure.

**ITEM9A.           CONTROLS ANDPROCEDURES**

**           **Our management, including the chief executive and chief financial officers, supervised and participated in an evaluationof our disclosure controls and procedures (as defined in federal securities rules) and pursuant to such evaluation, concluded thatour disclosure controls and procedures are effective as of December 31, 2003.  Disclosure controls and procedures are thosecontrols and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated tomanagement and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and ExchangeCommission rules and regulations.

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

**PART III**

****

**ITEM10.                DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

               The following is a brief description, as of December 31, 2003, of the business experience of each of the directors and executiveofficers of the Company who, except as otherwise indicated, has been or was engaged in his or her present of last principalemployment, in the same or a similar position, for more than five years:
                                                   
Steven C. Adams (55)

Mr. Adams has been an attorney with the firm of Adams, Ellard & Frankum, P.C. since1973.  He has been a director of the Company, Community, and Financial Supermarkets since 1990.  He was named a directorof Financial Properties in 1998.
  
Edwin B. Burr (70)

Mr. Burr has served as a director of the Company since April of 1995 and FinancialSupermarkets since 1992.  Mr. Burr has been President of Financial Solutions, a bank consulting firm since 1988.  He hasbeen a director of Community – Alabama since 1997.
   
Wesley A. Dodd, Jr. (39)

Mr. Dodd has been Executive Vice-President of the Company, Community, FinancialSupermarkets and Financial Properties since April 2000.  Prior to that, hewas Senior Vice President for the Company, Community and Financial Properties.
  
Annette R. Fricks  (59)

Mrs. Fricks has been an Executive Vice President and Corporate Secretary of the Companyand Community since 1982 and 1967, respectively, and has also served as Corporate Secretary of Financial Supermarkets since1984.  She was named the Executive Vice President and Corporate Secretary for Financial Properties in 1998.
  
David H. Gould, Jr. (57)

Mr. Gould has served as an ExecutiveVice President of the Company since 2002.  Prior to that, he was ConsumerBanking Executive for Bank of America.
  
Harry L. Stephens (57)

Mr. Stephens has been an Executive Vice President and the Chief Financial Officer of theCompany and Community since 1992 and has served as Treasurer of Financial Supermarkets since 1986.  He has been Executive VicePresident and Chief Financial Officer of Community since 1992.   He was named Executive Vice President and Treasurer ofFinancial Properties, Inc. in 1998

26                                                 
H. Calvin Stovall, Jr. (88)

Mr. Stovall, who is retired, was the President and treasurer of Stovall Tractor Company, aretail farm equipment dealer, from 1948 until November 1995.  He served as the Chairman of the Company’s Board ofDirectors 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 adirector of Financial Properties, Inc. in 1998.
  
Dean C. Swanson (72)

Mr. Swanson was President of the Standard Group, a telecommunications company untilJanuary 1999.  He is a director of Independent Telecommunications Network.  Mr. Swanson has served as a director of theCompany, Community and Financial Supermarkets since 1981, 1972, and 1984, respectively.  He was named a director of FinancialProperties, Inc. in 1998.
  
George D. Telford (83)

Mr. Telford is a retired bank executive and has served as a director of the Company andCommunity since 1981 and 1965, respectively, as well as of Financial Supermarkets since 1993.  He was named a director ofFinancial Properties, Inc. in 1998.      
  
J. Alton Wingate (64)

Mr. Wingate has served as a director and the President and Chief Executive Officer of theCompany, Community and Financial Supermarkets since 1981, 1977 and 1984, respectively.  Mr. Wingate was named Chairman of theBoard in 1998.   He has also been the Chairman of the Board of Directors and a director of Community – Alabama, andCommunity - Troup since  1990 and November 1994, respectively.  He was named President and Chief Executive Officer ofFinancial Properties, Inc. in 1998.  Mr. Wingate has been Chairman and Chief Executive Officer of Community since 1996 and hasbeen Chairman, President, and Chief Executive Officer of Financial Supermarkets since 1984.  Mr. Wingate has served on theBoard of Directors of Ingles Markets since 1988.
  
Dr. A. Dan Windham (65)

Dr. Windham is a partner in Windham Radiology P.C.  Dr. Windham has served as aDirector of Community since 1996 and was elected to the Company’s Board of Directors in 2001.
  
Lois M. Wood-Schroyer (65)

Ms. Wood-Schroyer is the Chairman, Chief Executive Officer and President of WoodsFurniture Co.  Ms. Wood-Schroyer has served as a Director of Community since 1990 and was elected to the Company’s Boardof Directors in 1999.

               Directors are elected at each annual meeting of shareholders and hold office until the next annual meeting and until theirsuccessors are elected and qualified.  The executive officers are elected by the Board of Directors and serve at the will ofthe 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 of1934.

**Code of Ethical Conduct**

               The Company has adopted a Code of Ethical Conduct that applies to the Company’s principal executive officer, principalfinancial officer and principal accounting officer. A copy of our Code of Ethical Conduct is included as Exhibit 14 to this Form10-K.

   

27
**ITEM11.                EXECUTIVECOMPENSATION.**

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

Summary Compensation Table

Annual Compensation

Long-Term Compensation

 Name and PrincipalPosition

Year
Salary (1)

Bonus (2)
 
Securities UnderlyingOptions/SARS (#)

 All OtherCompensation
         
J. Alton Wingate

2003

$345,700

$1,256,068(3)             
 
--

  $60,449(4)
 
President and Chief

2002

  358,815

1,541,154(3)             
 
--

43,907
 
Executive Officer

2001

  341.700

1,427,241(3)             

 

--

61,380
      
   
Harry L. Stephens

2003

124,231

35,000
 
--

24,540(5)
 
Executive Vice

2002

123,077

50,000
 
--

28,437    
 
President and Chief

2001

110,039

52,500
 
--

34,435
 
Financial Officer
    
        
   
Annette R. Fricks

2003

129,423

45,000
 
--

22,801(6)
 
Executive Vice

2002

128,269

70,000
 
--

26,096   
 
President and

2001

113,462

72,500
 
--

32,754    
 
Corporate Secretary
    
           
Wesley A. Dodd, Jr.

2003

110,808

35,000
 
--

16,309(7)
 
Executive Vice

2002

104,404

45,000
 
--

17,260     
 
President of

2001

91,962

47,500
 
--

17,825     
 
Corporate Finance
            
   
David H. Gould, Jr.

2003

130,000

25,000
 
--

16,672(8)
 
Executive Vice

2002

119,191

--
 
--

6,342  
 
President

2001

--

--
 
--

--
         
_______________________
(1) Includes directors’fees.(2) Bonuses are included in thisreport in the year paid.(3) Mr. Wingate’s bonusis contractually based on the performance of Financial Supermarkets, with caps and guaranteed rates of return before the bonus canbe calculated and paid.(4)Included premiums of$27,133 paid for Mr. Wingate’s life insurance policies, estimated employee stock ownership plan (“ESOP”)contributions of $12,000 and 401(K) matching contributions by the Company in the amount of $2,500.  Final ESOP contributionshave not yet been determined for 2004.(5)Includes premiums of$1,944 paid for Mr. Stephens’ life insurance policies, estimated ESOP contributions of $12,000 and 401(K) matchingcontributions by the Company in the amount of $2,389.   ESOP contributions have not yet been determined for2004.(6) Includes premiums of$2,222 paid for Mrs. Fricks’ life insurance policies, estimated ESOP contributions of $12,000 and 401(K) matchingcontributions by the Company in the amount of $2,500.  Final ESOP contributions have not yet been determined for2004.(7) Includes premiums of $216paid for Mr. Dodds’ life insurance policies, estimated ESOP contributions of $ 11,000 and 401(K) matching contributions bythe Company in the amount of $ 2,187.  Final ESOP contributions have not yet been determined for 2004.(8) Includes premiums of$1,032 paid for Mr. Gould’s life insurance policies, estimated ESOP contributions of $11,000 and 401(K) matchingcontributions by the Company in the amount of $1,550.  Final ESOP contributions have not yet been determined for2004.
28
Aggregated Option Exercises In Last Fiscal Year And FY-End OptionValues

Name

Shares Acquiredon 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

6,000

188,848

2,500/0

12,950

Annette R. Fricks

9,000

283,272

2,500/0

12,950

Wesley A. Dodd, Jr.

--

--

2,500/0

12,950

David 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 CategoryNumber ofsecurities to beissued uponexercise ofoutstandingoptions, warrantsand rightsWeighted-average exerciseprice ofoutstandingoptions, warrantsand rightsNumber of securitiesremaining available forfuture issuance underequity compensation plans(excluding securities reflectedin column (a))Equity compensation plans approved by stockholders
34,000
$35.32
188,000    Equity compensation plans not approved by stockholders------                                                   Total34,000$35.32188,000
               *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 theCompany receive $6,000 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 $10,000,  $3,900, $4,800 and$7,000 per year, respectively.

29
               *Agreements with Officers*.  In 2002, Messrs. Wingate, Stephens and Dodd and Ms. Fricks each entered into a Change inControl Severance Agreement with the Company.  The agreement is to remain in effect until the earlier of the termination ofeach executive’s employment without entitlement to the benefits under the agreement or the date that that the executiveattains age 70; provided, however, the agreement may be terminated at any time by mutual written agreement of the executive and theCompany.

               The agreement provides for payment of compensation and benefits to the executive in the event of a Change in Control (as defined inthe agreement), if the executive’s employment is involuntarily terminated by the Company without Cause (as defined in theagreement), or if the executive terminates his employment for Good Reason (as defined in the agreement).  The executive is notentitled to compensation or payments pursuant to the agreement if he is terminated by the Company for Cause, dies, incurs adisability, or voluntarily terminates employment (other than for Good Reason).  If a Change in Control occurs during the termof the agreement and the executive’s employment is terminated within six months prior to or eighteen months following thedate of the Change in Control, and if such termination is an involuntary termination by the Company without Cause (and does notarise as a result of death or Disability) or a termination by the executive for Good Reason, the executive will be entitled tocertain compensation and benefits including his base salary for the entire CIC Severance Period (defined as the lesser of 36 monthsfrom 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 thatthe compensation and benefits provided for under the agreement may be reduced or modified so as to insure that the Company does notpay 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 andMiller and Ms. Fricks and of the Company’s other executive officers for the 2003 fiscal year.  Although Mr. Wingateparticipated in deliberations regarding the salaries of executive officers, Mr. Wingate did not participate in any decisionsregarding 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 tocompensation provided to the Company’s President and Chief Executive Officer and other executive officers.  The SECregulations require a report setting forth a description of the Company’s executive compensation policy in general and theconsiderations that led to the compensation decisions affecting Messrs. Wingate, Stephens, Dodd and Miller and Ms. Fricks.  Infulfillment of this requirement, the Board of Directors and Compensation Committee have prepared the following report for inclusionin this Form 10-K.

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

               *Salary. * The nonemployee members of the Board of Directors of the Company participated in deliberations regardingsalaries 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 executiveofficers (although such information was obtained informally and the Company did not attempt to pay any certain percentage of salaryfor comparable positions with other banks), each executive officer’s performance, contribution to the Company, tenure in hisor 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 bankholding companies, and the increase in earnings of the Company in recent years.  The Board did not assign relative weights tothe factors considered in setting salaries of executive officers, including Mr. Wingate.

               *Annual Bonus.*  Annual bonuses for 2003, paid in the form of a cash bonus during the fourth quarter of the fiscal year,was based on annual consolidated financial results of the Company and of its subsidiaries, including general targets with respectto net income and earnings per share.  Cash bonuses were granted by the Board to Mr. Wingate based on the performance ofFinancial Supermarkets according to contractual obligations.  The Board set a range of bonuses (based on a percentage ofsalary) for all employees other than Mr. Wingate, within which range Mr. Wingate determined each other officer’s bonus, basedon individual performance.

Steven C. AdamsH. Calvin StovallDean C. SwansonLois M. Wood-Shroyer

30
**ITEM12.               SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT.**

               The following table sets forth the percent and number of shares of the Common Stock beneficially owned as of March 24, 2004 by (1)each of the Named Executive Officers, (2) each of the directors of the Company, (3) each shareholder who owns greater than fivepercent (5%) of the Company’s securities and (4) all executive officers and directors of the Company as a group, withoutnaming such individuals.  There were 2,151,858 shares outstanding as of that date.

Name of

Amount of Shares

Percent

Beneficial Owner (1)

Beneficially Owned

Of Class
   
Joye H. Adams

 123,520 (1)

  5.77%

Steven C. Adams

 483,715(2)(3)(4)(5)(6)

22.61%

Edwin B. Burr

     1,343 (7)

     *

Elton S. Collins

 389,375 (3)(8)(9)

18.20%

Community Bankshares, Inc.    Employee Stock Ownership    Planand Trust

  371,875 (3)(10)

 17.38%

Wesley A. Dodd, Jr.

   50,905 (11)(12)

  2.37%

Annette R. Fricks 

   22,126 (13)(14)

  1.03%

David H. Gould, Jr.

        500 (15)

     *

Harry L. Stephens

     8,819 (16)

     *

H. Calvin Stovall

 165,684 (17)(18)(19)

  7.75%

Dean C. Swanson

   27,000 (20)(21)

  1.26%

George D. Telford

   69,675 (22)(23)(24)

  3.26%

Dr. A. Dan Windham

     8,187 (25)(26)

     *

J. Alton Wingate

 695,652 (2)(3)(4)(27)(28)

32.52%

Lois M. Wood-Schroyer

4,093 (29)

     *
   
All executive officers anddirectors as a group (12Persons)

1,098,324 (2)(3)(4)(5)(12)(19)(30)

51.34%

                                              

* less than one percent
(1)Mrs. Adams’ addressis 664 Chenocetah Drive, Cornelia, Georgia 30531.(2)Includes an aggregate of 48,000shares held by the Taft Chatham  Trusts I and II with respect to which Messrs. Wingate and Adams are co-trustees and sharevoting and investment power.(3)Includes 371,875 sharesheld 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 sharesheld by Chatham Transport company with respect to which Messrs. Wingate and Adams share voting power.(5)Includes 44,340 shares held byMr. Adams as trustee for the F. Jack Adams Testamentary Trust, as to which Mr. Adams has voting and investment control.(6)Mr. Adam’s addressis 148 North Main Street, Cornelia Georgia 30531.(7) Does not include 1,000shares 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. 
31(9)Includespresently-exercisable options to acquire 2,500 shares of Common Stock.    (10)The address of the ESOP is 448 NorthMain Street, Cornelia, Georgia 30531.(11) Includes presently-exercisable options toacquire 2,500 shares of common stock.(12) Includes 7,460 shares held by theEstate of Harry H. Purvis with respect to which Mr. Dodd serves as executor and has voting and investment control.(13) Includes presently-exercisable options toacquire 2,500 shares of common stock.(14) Does not include 2,770 shares ofCommon Stock owned by Ms. Fricks’ hsuband, as to which she disclaims beneficial ownership.(15) Includes 500 shares held jointly withMr. Gould’s wife as to which she claims beneficial ownership.(16) Includes presently-exercisableoptions to acquire 2,500 shares of Common Stock.(17)Mr. Stovall’s address is 215Grandview Circle, Cornelia, Georgia 30531.(18)Does not include 250 shares of CommonStock owned by Mr. Stovall’s wife, as to which he disclaims beneficial ownership.(19) Includes 130,925 shares held byStovall Investments, LLLP with respect to which Mr. Stovall has voting and investment control.(20) Mr. Swanson’s address is 222Mountain Oak Road, Cornelia, Georgia 30531.(21)Does not include 4,155 shares ofcommon stock owned by Mr. Swanson’s wife, as to which he disclaims beneficial ownership.    (22) Mr. Telford’s address is 215Tower Avenue, Cornelia, Georgia 30531.(23)Does not include 10,000 shares ofcommon stock owned by Mr. Telford’s wife, as to which he disclaims beneficial ownership.(24) Does not include 4,155 shares ofcommon stock owned jointly by Mr. Telford’s wife and grandchildren, as to which he disclaims beneficial ownership.    (25) Dr. Windham’s address is 253Garland Bristol Road, Sautee, Georgia 30571.(26) Includes 500 shares held jointly withDr. Windham’s wife as to which she claims beneficial ownership.(27) Mr. Wingate’s address is 186Hillcrest Heights, Cornelia, Georgia 30531.(28) Does not include 4,310 shares ofcommon stock owned by Mr. Wingate’s wife, as to which he disclaims beneficial ownership.(29) Ms. Wood-Schroyer’s address is672 Buck Horn Road, Clarksville, Georgia 30523.(30) Includes presently-exercisableoptions to acquire 7,500 shares of Common Stock.
**ITEM13.                CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

               Each of the Banks has had, and expects to have in the future, banking transactions in the ordinary course of business withdirectors and officers of the particular bank and the Company and their associates, including corporations in which such officersor directors are shareholders, directors and/or officers, on the same terms (including interest rates and collateral) as thoseprevailing at the time for comparable transactions with other persons.  Such transactions have not involved more than thenormal 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 31,2003.  Representatives of Mauldin & Jenkins, LLC  are expected to be present at the annual meeting and will have theopportunity to make a statement if they desire to do so and to respond to appropriate questions.  The Company anticipates thatMauldin & Jenkins, LLC  will be the Company’s accountants for the 2004 fiscal year.

               During 2003 and 2002, 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 ofits Form 10‐K and the review of the Company’s interim consolidated financial statements included within Forms10‐Q, the Company was billed approximately $122,094 in 2003 and $112,611 in 2002.  This figure includes fees for certainservices that were billed to the Company in 2004 in connection with the 2003 annual audit, including out‐of‐pockettravel costs.

*                Audit-Relatedfees*.  The Company was billed approximately $0 in 2003 and $3,486 in 2002 fora Federal Home Loan Bank agreed upon procedures engagement  in 2002.

*                Tax Fees*. The Company was billed approximately $6,019 in 2003 and $11,596 in 2002 for  research of various tax-related issues .

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

32
**ITEM15.               EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

(a)    Financial Statements.

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

Independent Auditor’s Report on the Financial Statement

Consolidated Balance Sheets - December 31, 2003 and 2002

Consolidated Statements of Income for the years ended December 31, 2003, 2002 and2001

Consolidated Statements of Comprehensive Income for the years ended December 31, 2003,2002 and 2001

Consolidated Statements of Shareholder’s Equity for the years ended  December31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and2001

Notes to Consolidated Financial Statements

(b)                Exhibits.

The following exhibits are required to be filed with this Report by Item 601 of RegulationS-K:
3.1Amended and Restated Articlesof Incorporation of the Registrant dated as of June 30, 1997 (included as Exhibit 3.1 to the Registrant’s Form 10-K for theyear 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).4.1See 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.10.1Incentive 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).*10.2Form 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 Exhibit10.3 to the Registrant’s Form 10-K for the year ended December 31, 2002, filed on March 28, 2003 with the Commission andincorporated 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 yearended December 31, 1999, filed on March 30, 2000 with the Commission and incorporated herein by reference).*10.4Amended and RestatedRevolving Credit Term Loan Agreement between the Registrant and SunTrust Bank dated July 30, 2000 (included as Exhibit 10.6 to theRegistrant’s Form 10-K for the year ended December 31, 2001, filed on April 1, 2002 with the Commission and incorporatedherein by reference).10.5Amendment to Amended andRestated Credit Term Loan Agreement between the Registrant and SunTrust Bank dated June 8, 2001 (included as Exhibit 10.7 to theRegistrant’s Form 10-K for the year ended December 31, 2001, filed on April 1, 2002 with the Commission and incorporatedherein by reference).10.6Third Amendment to Amended andRestated Revolving Credit Term Loan Agreement between the Registrant and SunTrust Bank dated May 31, 2003.
3310.7Business Loan and SecurityAgreement dated as of June 8, 2001 among the Registrant, Community Bankshares, Inc. Employee Stock Ownership Plan and Trust, SteveAdams, 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 endedDecember 31, 2001, filed on April 1, 2002 with the Commission and incorporated herein by reference).14Code of EthicalConduct.21List of Subsidiaries    of Registrant.31.1Certification by J. AltonWingate, President and Chief Executive Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of theSarbanes-Oxley  Act of 2002.31.2Certification by Harry L.Stephens, Chief Financial Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley  Actof 2002.32Certification 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 werefiled during the last quarter of 2003.

 

34
 

**COMMUNITY BANKSHARES, INC.AND SUBSIDIARIES**

**CONSOLIDATED FINANCIAL REPORTDECEMBER 31, 2003**

 

**table of contents**

 

 
**Page**

**INDEPENDENT AUDITOR'S REPORT**

**F-2**

**FINANCIAL STATEMENTS**

** **

**       Consolidated balance sheets**

**F-3**

**        Consolidatedstatements of income**

**F-4**

**       Consolidated statements of comprehensive income**

** F-5**

**        Consolidatedstatements of shareholders' equity**

** F-6**

**       Consolidated statements of cash flows**

**F-7 and8**

**        Notes toconsolidated financial statements**

**F- 9-33**

 

F-1
 

 

**INDEPENDENT AUDITOR'S REPORT**

 

**To the Board of DirectorsCommunity Bankshares, Inc.Cornelia, Georgia**

 

                               We have audited the accompanying consolidated balance sheets of **Community Bankshares, Inc. and subsidiaries** as of December31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows foreach of the three years in the period ended December 31, 2003.  These financial statements are the responsibility of theCompany's management.  Our responsibility is to express an opinion on these financial statements based on ouraudits.

                               We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

                               In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of Community Bankshares, Inc.and subsidiaries as of December 31, 2003 and 2002, and the results of their operationsand their cash flows for each of the three years in the period ended December 31, 2003, in conformity with  accountingprinciples generally accepted in the United States of America.
 
                                                                                               

Atlanta,GeorgiaJanuary 23, 2004

F-2
 
**COMMUNITY BANKSHARES, INC.****ANDSUBSIDIARIES ****CONSOLIDATED BALANCESHEETSDECEMBER 31, 2003 AND2002** **Assets****  2003**   2002 ** **    Cash and due from banks
**$****44,728,730 ** 
$44,966,040 Interest-bearing deposits in other banks **429,119**   499,072 Federal funds sold **19,600,000**   9,200,000 Securities available for sale **103,458,121**   100,355,807 Securities held to maturity (fair value $24,352,241     and$28,681,226) **22,628,009**   27,015,673 Restricted equity securities, at cost **1,242,900**   1,215,300      Loans , net of unearned income **545,465,491 **  491,367,564Less allowance for loan losses  **7,560,507**   7,742,356          Loans,net** ****537,904,984**    483,625,208      Premises and equipment, net **15,239,168**   16,295,336Intangible assets, net **1,090,162**   1,372,862Goodwill **968,151**   788,553Other real estate **5,271,635**   3,486,429Other assets **13,623,773**   11,425,747 ** **** **   **          Totalassets****$****766,184,752**  
$700,246,027 ** **** **   
**Liabilities, Redeemable Common Stock and Shareholders'Equity**      Liabilities :       Deposits:         Noninterest-bearing **$****111,561,999**  
$87,649,520    Interest-bearing  **559,042,056**   519,704,807**          Totaldeposits**** ****670,604,055**   607,354,327Other borrowings **16,152,925**   16,664,525Other liabilities **7,986,153**   9,180,811**          Totalliabilities**** ****694,743,133**    633,199,663 ** **** **    Commitments and contingencies              Redeemable common stock held by ESOP, net of     unearned ESOP shares           related to ESOP debtguarantee of $973,675 and     $1,363,831, respectively **15,783,013**   15,193,814 ** **    Shareholders' equity          Common stock, par value $1;5,000,000 shares               authorized; 2,204,330 and2,201,330 shares issued        and outstanding, respectively **2,204,330**   2,201,330    Capital surplus **6,341,383**   6,314,847    Retained earnings **48,068,691**   42,802,454    Accumulated other comprehensive income  **1,607,200**   1,962,475    Less cost of 60,135 and 34,573 shares of treasurystock,        respectively **(2,562,998)**  (1,428,556)**       Total shareholders'equity**** ****55,658,606**    51,852,550 ** **** **   **       Total liabilities, redeemablecommon stock and **     **          shareholders' equity **
**$****766,184,752**  
$700,246,027 ** ****  **   **See Notes to Consolidated FinancialStatements.**       
F-3**COMMUNITY BANKSHARES, INC.****AND SUBSIDIARIES**         **CONSOLIDATED STATEMENTSOF INCOME****YEARS ENDED DECEMBER31, 2003, 2002 AND 2001**                                                                                                               **2003** 2002        2001**Interest income:**** **             Loans,including fees**$****37,729,028** $37,423,486 $42,521,921    Taxablesecurities **2,454,122**  2,766,316  2,702,882   Nontaxable securities **2,980,700**  2,985,608  2,493,558   Interest-bearing deposits in other banks **19,470**  11,133  35,517    Federalfunds sold** ****226,210**  301,631  748,421**      Total interest income**** ****43,409,530**  43,488,174  48,502,299         **Interest expense:**           Deposits **12,439,453**  15,778,448  22,543,182    Otherborrowings **788,864**  722,126  696,345**      Total interest expense**** ** **13,228,317**  16,500,574  23,239,527 ** **** **      **      Net interest income** **30,181,213**  26,987,600  25,262,772**Provision for loan losses ** **3,296,000**  3,320,000  2,364,000**      Net interest income afterprovision for **** **** **      **         loan losses** **26,885,213**  23,667,600  22,898,772 ** **** **      **Other income:**            Servicecharges on deposits accounts **5,604,858**  5,235,085  4,522,010    Otherservice charges, commissions and fees **1,923,125**  1,664,095  1,239,727    Trustdepartment fees **249,659**  181,384  130,316    Nonbanksubsidiary income **3,122,404**  10,585,953  10,826,046    Gain onsale of loans **296,719**  240,248  166,935   Security gains, net **77,155**  138,799  48,167    Otheroperating income **950,476**  918,431  844,077**      Total other income**** ****12,224,396**  18,963,995  17,777,278 ** **** **      **Other expenses:**           Salaries and employee benefits **16,563,875**  17,482,745  16,517,342   Equipment expenses **2,915,152**  2,870,604  2,779,346   Occupancy expenses **2,079,247**  1,849,301  1,797,152    Otheroperating expenses **9,696,659**  8,979,537  9,331,204**      Total other expenses**** ****31,254,933**  31,182,187  30,425,044 ** **** **      **      Income before income taxes** **7,854,676**  11,449,408  10,251,006         **Income tax expense** **1,767,207**  3,325,967  3,076,015 ** **** **      **      Net income****$****6,087,469** $8,123,441 $7,174,991 ** **** **      **Basic earnings pershare****$****                    2.83** $               3.73 $               3.29         **Diluted earnings pershare****$****                    2.83** $               3.72 $               3.26         **See Notes toConsolidated Financial Statements.** 
F-4**COMMUNITY BANKSHARES, INC.****ANDSUBSIDIARIES**         **CONSOLIDATED STATEMENTSOF  COMPREHENSIVE INCOME****YEARS ENDED DECEMBER 31, 2003,2002 AND 2001**                           **2003** 2002 2001                                                                                                                          ** **       **Net income****$****6,087,469**  $8,123,441  $7,174,991  ** **       **Other comprehensive income (loss):**                     Unrealized gains (losses) on securities availablefor sale:                         Unrealized holding gains(losses) arising during period,                    netof taxes (benefits) of $(205,988), $1,361,058                     and$55,834, respectively **(308,982)**  2,041,587    83,751                   Reclassificationadjustment for gains realized                    innet income, net of  taxes of $30,862,                    $55,520 and $19,267, respectively **(46,293)**  (83,279)  (28,900) ** **       **Other comprehensive income (loss)** **(355,275)**  1,958,308   54,851  ** **** **      **Comprehensive income****$****5,732,194**  $10,081,749  $7,229,842  ** **** **               **See Notes to Consolidated FinancialStatements.**        
F-5**COMMUNITY BANKSHARES, INC.****ANDSUBSIDIARIES**                      **CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITY****YEARS ENDEDDECEMBER 31, 2003, 2002 AND 2001**                                  ** Accumulated**                    **Other**      **Total** **Common Stock** **Capital** **Retained** **Comprehensive** **Treasury Stock** **Shareholders'** **Shares**** ****Par Value** **Surplus** **Earnings** **Income(Loss)** **Shares**** ****Amount** **Equity**                                                                                                             **Balance, December 31, 2000**2,181,830 $2,181,830 $6,142,363 $29,975,786 $(50,684) -  $-  $38,249,295    Net income-   -   -   7,174,991  -  -   -   7,174,991    Exercise of stockoptions4,500  4,500  39,804  -   -  -   -   44,304    Cash dividends declared,       $.21 pershare-   -    -   (458,904)  -  -   -   (458,904)    Adjustment for shares       owned byESOP-   -   -   (1,621,336)  -  -   -   (1,621,336)    Other comprehensiveincome -   -   -   -   54,851 -   -   54,851**Balance, December 31, 2001**2,186,330  2,186,330  6,182,167  35,070,537  4,167 -   -   43,443,201    Net income-   -   -   8,123,441  -  -   -   8,123,441    Exercise of stockoptions15,000  15,000  132,680  -   -  -   -   147,680    Cash dividends declared,         $.25 pershare-   -   -   (543,563)  -  -   -   (543,563)    Adjustment for shares owned       byESOP-   -   -   152,039  -  -   -   152,039    Othercomprehensive income-   -   -   -   1,958,308       1,958,308    Purchase of treasurystock-   -   -   -   -  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)  51,852,550    Net income-   -   -   6,087,469  -  -   -   6,087,469    Exercise of stockoptions3,000  3,000  26,536  -   -  -   -   29,536    Cash dividends declared,         $.29 pershare-   -   -   (622,189)  -  -   -   (622,189)    Adjustment for shares         owned byESOP-   -   -   (199,043)  -  -   -   (199,043)    Othercomprehensive income-   -   -   -   (355,275) -   -   (355,275)    Purchase of treasurystock-   -   -   -   -  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) $55,658,606
                       **See Notes to Consolidated FinancialStatements.**
F-6**COMMUNITY BANKSHARES, INC.****ANDSUBSIDIARIES**         **CONSOLIDATED STATEMENTS OF CASHFLOWS****YEARS ENDED DECEMBER 31, 2003,2002 AND 2001**** ** **2003**        2002        2001**OPERATING ACTIVITIES**** **** **          Net income**$****6,087,469** $8,123,441 $7,174,991    Adjustments to reconcile net income to netcash                provided by operatingactivities:                Depreciation **2,230,763**  2,395,178  2,316,552        Amortization and accretion,net **412,255**  613,346  494,064        Provision for loanlosses **3,296,000**  3,320,000  2,364,000        Provision for losses onother real estate  **370,721**  -   -         Deferred incometaxes  **183,438**  (278,766)  (174,404)        Decrease in loans held forsale **- **  -   1,011,458        Net gains on sale ofsecurities available for sale **(77,155)**  (138,799)  (48,167)        Gain on disposal ofpremises and equipment **(41,040)**  (10,682)  (14,929)        Net (gains) losses on saleof other real estate **38,653**  9,284  (19,498)        Decrease in interestreceivable **222,851**  598,875  776,553        Decrease in interestpayable **(930,915)**  (1,339,491)  (877,840)        Increase (decrease) intaxes payable **202,701**  (305,202)  (572,346)        (Increase) decrease inaccounts receivable of                      nonbank subsidiary **(245,471)**  917,641  860,706        (Increase) decrease in workin process of nonbank subsidiary **(82,401)**  392,492  591,874        Increase (decrease) inaccruals and payables of                      nonbank subsidiary **149,706**  (2,344,162)  (4,390,568)        Increase in loan toESOP **- **  -   (1,450,000)        Net other operatingactivities **(2,423,712)**  (1,688,663)  (295,463) ** **** **                    Net cash provided by operatingactivities **9,393,863**  10,264,492  7,746,983 ** **** **      **INVESTING ACTIVITIES**            Purchases of securities available forsale **(31,677,891)**  (35,368,818)  (48,613,986)    Proceeds from sales of securities available forsale **2,486,166**  5,118,419  6,749,258    Proceeds from maturities of securities availablefor sale **25,546,841**  11,198,685  23,956,448    Proceeds from maturities of securities held tomaturity **4,387,664**  2,586,730  1,590,983    Net (increase) decrease in federal fundssold **(10,400,000)**  7,160,000  (4,235,000)    Net (increase) decrease  in interest-bearingdeposits in banks **69,953**  (89,554)  43,946    Net increase in loans **(63,894,160)**  (41,998,377)  (40,891,325)    Purchase of premises and equipment **(1,331,247)**  (2,860,081)  (3,428,735)    Proceeds from sale of premises andequipment **56,313**  32,159  19,500    Proceeds from sale of other real estate **4,123,806**  3,810,767  279,577** **** **                    Net cash used in investingactivities **(70,632,555)**  (50,410,070)  (64,529,334)        **See Notes to Consolidated FinancialStatements.**       
F-7**COMMUNITY BANKSHARES, INC.****ANDSUBSIDIARIES**         **CONSOLIDATED STATEMENTS OF CASHFLOWS****YEARS ENDED DECEMBER 31, 2003,2002 AND 2001 ** **2003**     2002       2001**FINANCING ACTIVITIES**            Net increase in deposits**$****63,249,728** $45,139,429 $54,720,051    Increase in FHLB advances **75,000**  5,000,000  -     Increase in other borrowings **- **  -   1,450,000    Repayment of other borrowings **(586,600)**  (405,350)  (224,100)    Proceeds from issuance of common stock **23**  44  44,304    Purchase of treasury stock **(1,134,442)**  (1,280,920)  -     Dividends paid **(602,327)**  (523,070)  (436,666) ** **** **                Net cashprovided by financing activities **61,001,382**  47,930,133  55,553,589         Net increase (decrease) in cash and due from banks **(237,310)**  7,784,555  (1,228,762)        Cash and due from banks at beginning of year **44,966,040**  37,181,485  38,410,247 ** **** **      Cash and due from banks at end of year**$****44,728,730** $44,966,040 $37,181,485         **SUPPLEMENTAL DISCLOSURES**             Cash paid for:                Interest**$****14,159,232** $17,840,066 $24,117,367                  Income taxes**$****1,381,068** $3,903,215 $3,774,162         **NONCASH TRANSACTIONS**            Principal balances of loans transferred toother                 real estate**$****6,318,384**$4,191,599 $2,441,119                  **See Notes to Consolidated FinancialStatements.**       
F-8
**COMMUNITY BANKSHARES, INC.AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

**                       Nature of Business**

Community Bankshares, Inc. (the “Company”) is a multi-bank holding companywhose business is conducted by its wholly-owned subsidiaries: Community Bank & Trust located in Cornelia, Georgia; CommunityBank & 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 ofbank related products and services to the financial institution industry.  Financial Properties, Inc. is a wholly-ownedsubsidiary of Community Bank & Trust which is a real estate sales agency that provides a variety of real estate relatedservices.

The banking subsidiaries are commercial banks operating independently of one another intheir respective market areas.  The banking subsidiaries in Georgia have identified their primary market areas to be thecounties in which they are located and all surrounding counties.  The Georgia banking subsidiaries are all locatedapproximately 85 miles from the metropolitan Atlanta area.  Community Bank & Trust - Alabama is located approximately 50miles from Montgomery, Alabama, and has identified its primary market area as Bullock County and the south Montgomery metropolitanarea.  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 productsand services are marketed internationally.  Financial Properties, Inc. operates primarily in Cornelia, Habersham County,Georgia.

**                       Basis of Presentation and Accounting Estimates**

The consolidated financial statements include the accounts of the Company and itssubsidiaries.  Significant intercompany transactions and balances are eliminated in consolidation.

In preparing the consolidated statements in accordance with accounting principlesgenerally accepted in the United States of America, management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates. 

Material estimates that are particularly susceptible to significant change relate to thedetermination of the allowance for loan losses, the valuation of foreclosed real estate and contingent assets andliabilities.  The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible tosignificant changes in the economic environment and market conditions. In connection with the determination of the estimated losseson loans and the valuation of foreclosed real estate, management obtains independent appraisals for significantcollateral.

**                       Cash, Due From Banks and Cash Flows**

For purposes of reporting cash flows, cash and due from banks include cash on hand, cashitems 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 FederalReserve Bank, based on a percentage of deposits.  The total of those reserve balances was approximately $16,348,000 and$13,026,000 at December 31, 2003 and 2002, respectively.

F-9
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**                       Securities**

Debt securities that management has the intent and ability to hold to maturity areclassified as held to maturity and recorded at amortized cost.  Securities not classified as held to maturity, includingequity securities with readily determinable fair values, are classified as available for sale and recorded at fair value withunrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income, net of the relateddeferred tax effect.  Equity securities, including restricted equity securities, without a readily determinable fair value areclassified as available for sale and recorded at cost.

The amortization of premiums and accretion of discounts are recognized in interest incomeusing methods approximating the interest method over the life of the securities.  Realized gains and losses, determined on thebasis of the cost of specific securities sold, are included in earnings on the settlement date.  Declines in the fair value ofheld to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected inearnings as realized losses.

**                       Loans**

Loans are reported at their outstanding principal balances less unearned income, netdeferred 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 andrecognized as an adjustment of the related loan yield over the life of the loan using a method that approximates a levelyield.

The accrual of interest on loans is discontinued when, in management's opinion, theborrower may be unable to meet payments as they become due, unless the loan is well-secured.  All interest accrued but notcollected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believesthat the accrued interest is recoverable through the liquidation of collateral.  Interest income on nonaccrual loans isrecognized on the cash-basis until the loans are returned to accrual status.  Loans are returned to accrual status when allthe 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 andevents, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms ofthe loan agreement.  Impaired loans are measured by either the present value of expected future cash flows discounted at theloan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan iscollateral dependent.  The amount of impairment, if any, and any subsequent changes are included in the allowance for loanlosses.  Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrualstatus.

**                        Allowance for Loan Losses**

The allowance for loan losses is established through a provision for loan losses chargedto expense.  Loan losses are charged against the allowance when management believes the collectibility of the principal isunlikely.  Subsequent recoveries are credited to the allowance. 

F-10
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

 **                       Allowance for Loan Losses (Continued)**

The allowance is an amount that management believes will be adequate to absorb estimatedlosses 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 aschanges in thenature and volume of the loan portfolio, overall portfolio quality, review ofspecific problem loans, concentrations and current economic conditions that mayaffect the borrower's ability to pay.  This evaluation does not include theeffects of expected losses on specific loans or groups of loans that are relatedto future events or expected changes in economic conditions.  Whilemanagement uses the best information available to make its evaluation, futureadjustments to the allowance may be necessary if there are significant changesin economic conditions.  In addition, regulatory agencies, as an integralpart of their examination process, periodically review the Banks’ allowance forloan losses, and may require the Banks to make additions to the allowance basedon their judgment about information available to them at the time of theirexaminations.

                       **Premises and Equipment**

Land iscarried at cost.  Premises and equipment are carried at cost lessaccumulated depreciation computed principally by the straight-line method overthe following estimated useful lives of the assets.

**                                                                          **

**Years**

  

 

Buildings

20-40

Furniture and equipment

3-15

                       **Other Real Estate Owned**

Other realestate owned represents properties acquired through or in lieu of loanforeclosure and is initially recorded at the lower of cost or fair value lessestimated costs to sell.  Any write-down to fair value at the time oftransfer toother real estate owned is charged to the allowance for loan losses.  Costs of improvements are capitalized, whereas costs relating to holding otherreal 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 ina business combination.  Goodwill is required to be tested annually for impairment, or whenever events occur that may indicatethat the recoverability of the carrying amount is not probable.  In the event of an impairment, the amount by which thecarrying amount exceeds the fair value would be charged to earnings.  The Company performed its annual test of impairment inthe second quarter and determined that there was no impairment of the carrying value as of June 30, 2003.

Intangible assets consist of core deposit premiums acquired in connection with thepurchase of two branches.  The core deposit premium is initially recognized based on a valuation performed as of the purchasedate.  The core deposit premium is amortized over the average remaining life of the acquired customer deposits, or 10years. 

F-11
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**                       Income Taxes**

Deferred income tax assets and liabilities are determined using the balance sheetmethod.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporarydifferences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition tochanges in tax rates and laws.

**                       Trust Department**

Trust department income is recognized on the cash basis in accordance with establishedindustry practices.  The results of operations are not materially different than the results which would be obtained byaccounting for such fees on the accrual basis.

Assets of the trust department, other than trust cash on deposit at the Banks, are notincluded 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 onthe completed-contract method of accounting.  Under this method, billings and costs are accumulated during the period ofinstallation, but no profits are recorded before the completion of the work.  Provisions for estimated losses on uncompletedcontracts are made at the time such losses are identified.  The majority of all installation contracts are completed withinten days.  Operating expenses, including indirect costs and administrative expenses, are charged as incurred to income and notallocated to contract costs.  Income from consulting services is recognized as services are provided and as costs and expensesare incurred for each individual contract.

**                       401(k) Plan**

The 401(k) plan contributions are based on a percentage of individual employee’ssalary, not to exceed the amount that can be deducted for federal income tax purposes.  The Company makes matchingcontributions of 25% of the first 6% of each participant’s salary contribution.

**                       Stock Compensation Plan**

At December 31, 2003, the Company has a stock-based employee compensation plan, which isdescribed more fully in Note 8.  The Company accounts for the plan under the recognition and measurement principles of APBOpinion No. 25, *Accounting for Stock Issued to Employees*, and related Interpretations.  No stock-based employeecompensation cost is reflected in net income, as any options granted under the plan would be granted at an exercise price equal tothe market value of the underlying stock on the date of grant.  For the years ended December 31, 2003, 2002 and 2001, therewere no options that vested and all options outstanding were exercisable.  Therefore, there is no effect on net income orearnings per share, had the Company had applied the fair value recognition provisions of Statement of Financial AccountingStandards (SFAS) No. 123, *Accounting for Stock-Based Compensation*, to stock-based employee compensation.

 

F-12
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**                       Earnings Per Share**

Basic earnings per share are computed by dividing net income by the weighted-averagenumber of shares of common stock outstanding.  Diluted earnings per share are computed by dividing net income by the sum ofthe weighted-average number of shares of common stock outstanding and potential common shares.  Potential common sharesconsist of stock options.  All outstanding options have been included in the computation of diluted earnings per share for theyears ended December 31, 2003, 2002 and 2001.

**                        Comprehensive Income**

Accounting principles generally require that recognized revenue, expenses, gains andlosses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses onavailable for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, alongwith net income, are components of comprehensive income.

**                       Recent Accounting Standards**

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASBInterpretation No. 34". The interpretation elaborates on the disclosures to bemade by a guarantor in its interim and annual financial statements about itsobligations under guarantees issued. It also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fairvalue of the obligation undertaken in issuing a guarantee. The initialrecognition and initial measurement provisions of the interpretation areapplicable to guarantees issued or modified after December 31, 2002.  Thedisclosure requirements in the interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002. Theadoption of the interpretation did not have a material effect on the Company’sfinancial condition or results of operations.

In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASBStatement No. 123". The Statement amends Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods oftransition for a voluntary change to the fair value method of accounting forstock-based employee compensation. In addition, the statement amends thedisclosure requirements of Statement No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based compensation and the effect on reported results of operations. Thedisclosure requirements of the statement are required for fiscal years endingafter December 15, 2002 and interim periods beginning after December 15, 2002. The Company has not adopted Statement No. 123 for accounting for stock-basedcompensation as of December 31, 2003; however all required disclosures ofStatement No. 148 are included above under the heading “Stock CompensationPlan”.

 

F-13
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**                       Recent Accounting Standards (Continued)**

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51", and on December 24, 2003,   the FASB issued FASB Interpretation No. (“FIN”) 46 (Revised December 2003), “Consolidation of Variable Interest Entities” which replaced FIN 46. The interpretation addresses consolidation by business enterprises of variable interest entities.  A variable interest entity is defined as an entity subject to consolidation according to the provisions of the interpretation.   The revised interpretation   provided for special effective dates for entities that had fully or partially applied the original interpretation as of December 24, 2003. Otherwise, application of the interpretation is required in financial statements of public entities that have interests in special-purpose entities, or SPEs, for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities (i.e., non-SPEs) is required in financial statements for periods ending after March 15, 2004.  The Interpretations did not have a material effect on the Company’s financial condition or results of operations. 

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of the statement did not have a material effect on the Company’s financial condition or results of operations. 

**NOTE 2.         SECURITIES**

The amortizedcost and fairvalue of securities are summarized as follows:
                                                                  
**Amortized Cost**

 

**Gross Unrealized Gains**

      

**Gross Unrealized Losses**

      

**Fair Value**

**Securities Available for Sale**

     

** **

     

 

** **

 

 

** **

 

  
 
December 31, 2003:

 

** **

 

 

** **

 

 

** **

 

  
 
U.S. Government and agency

 

** **

 

 

** **

 

 

** **

 

  
 
     securities

**$**

**37,190,996**

 

**$  **

**1,115,020**

 

**$  **

**(45,580)**

 

**$  **

**38,260,436**

State and municipal securities

 

**37,435,543**

  

 

**1,690,271**

 

 

**(37,866)**

 

 

**39,087,948**

Mortgage-backed securities

 

**22,640,436**

 

 

**206,995**

  

 

**(250,174)**

 

 

**22,597,257**

Equity securities

 

**3,512,480**

 

 

**-  **

 

 

**-  **

 

 

**3,512,480**

 

**$**

**100,779,455**

 

**$**

**3,012,286**

 

**$**

**(333,620)**

 

**$**

**103,458,121**

            
December 31, 2002:
           
U.S. Government and agency
           
     securities
**$**
32,542,068

 
**$**
1,553,237
 **$**
(641)
 **$**
34,094,664

State and municipal securities
 
38,494,179

 
 
1,198,951
  
(28,409)
  
39,664,721

Mortgage-backed securities
 
20,994,144

 
 
549,750
  
(2,097)
  
21,541,797

Equity securities
 
5,054,625

 
 
-  
  
-  
  
5,054,625

 **$**
97,085,016
 **$**
3,301,938
 **$**
(31,147)
 **$**
100,355,807

   

F-14
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 2.         SECURITIES(Continued)**

**Securities Held to Maturity**

     

** **

       

   

**           **

 

 

**                   **

       

   

** **

December 31, 2003:

 

** **

 

 

** **

 

 

** **

 

 

** **

State and municipal securities

**$**

**22,628,009**

 

**$**

**1,724,232**

      

**$  **

**- **

 

**$  **

**24,352,241**

                                                                                                           
 

** **

  

 

**      **

 

 

** **

 

 

** **

December 31, 2002:

 

** **

 

 

** **

 

 

** **

  

 

** **

State and municipal securities

$

27,015,673

 

$

1,666,101

 

$

(548)

 

$

28,681,226

The amortized cost and fair value of debt securities as of December 31, 2003 bycontractual maturity are shown below.  Actual maturities may differ from contractual maturities because issuers may have theright 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

$  

3,961,945

** **

$  

4,023,840

** **

$  

549,518

** **

$  

560,548

Due from one to five years

** **

36,787,223

** **

** **

38,119,903

** **

** **

3,579,612

** **

** **

3,752,127

Due from five to ten years

** **

9,456,593

** **

** **

9,747,577

** **

** **

10,801,907

** **

** **

11,701,753

Due after ten years

** **

24,420,778

** **

** **

25,457,064

** **

** **

7,696,972

** **

** **

8,337,813

Mortgage-backed securities

** **

22,640,436

** **

** **

22,597,257

** **

** **

-  

** **

** **

-  

** **

$

97,266,975

** **

$

99,945,641

** **

$

22,628,009

** **

$

24,352,241

Securities with a carrying value of $80,709,001 and $72,301,110 at December 31, 2003 and2002, 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 thefollowing:
                                                                                                                             
** Years Ended December 31,** **                                                                                 **
** 2003**

**    **

  2002

** **

  2001

Gross gains

**$  **

**77,155**

**      **

$  

138,799

**      **

$  

91,236 

Gross losses

** **

**-  **

** **

** **

**-  **

** **

** **

(43,069)

Net realized gains

**$**

**77,155**

** **

$

138,799

** **

$

48,167 

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**
 
**FairValue**
      
**Unrealized Losses**

U.S. Government and agency     securities

$  

6,072,031

      

$  

45,580 

      
$  

-   

 
$  

-  

      
$  

6,072,031  

 
$  

45,580 

State and municipal securities

 

1,755,057

 
 
37,866 
  
-    
  
-  
  
1,755,057 
  
37,866 

Mortgage-backed securities

 

13,964,356

 
 
248,423 
  
122,219 
  
1,751 
  
14,086,575 
  
250,174 

 

 

 

 

 

 

  
            
Total temporarily impaired securities

$

21,791,444
 
$

331,869 
 
$  

122,219 
 
$

1,751 
 
$

21,913,663 
 
$

333,620 

 

F-15
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 2.         SECURITIES(Continued)**

The Company currently has nine (9) U.S. Government agencies, four (4) state municipals,and twenty-seven mortgage backed securities with unrealized losses.  Of the forty (40) securities with unrealized losses, onlyone security (a mortgage backed) has been in an unrealized loss position for greater than 12 months.  The unrealized lossrelated to that security has not exceeded $3,376 during the period held in the portfolio.  The unrealized losses in theportfolio are believed to be temporary due to all securities meeting the criteria of acceptable investment grade and all beingbacked by government agencies or municipalities.  In the event that these securities are held to maturity, no losses should berealized.

**NOTE 3.         LOANS**

The composition of loans is summarized as follows:
 
**December 31**
 

**  2003**

 

2002

Commercial,financial and agricultural

**$    **

**50,690,454 **

           

$    

52,852,421 

Real estate – construction

 

**52,785,826 **

 

 

40,341,826 

Real estate – mortgage

 

**385,628,810 **

 

 

338,772,013 

Consumer

 

**52,744,685 **

 

 

53,004,046 

Other

 

**3,789,474 **

 

 

6,632,026 

 

 

**545,639,249 **

 

 

491,602,332 

Unearned income and net deferred fees and costs

 

**(173,758)**

 

 

(234,768)

Allowance for loan losses

 

**(7,560,507)**

 

 

(7,742,356)

Loans, net

**$**

**537,904,984 **

 

$

483,625,208 

Changes in the allowance for loan losses are as follows:
 
**Years Ended December 31,**

 

**2003**

 
 2002 
2001

Balance,beginning of year  

**$   **

**7,742,356 **

       
$   

6,652,093 

       
$    

6,306,620 

      Provision charged to operations

 

**3,296,000 **
  
3,320,000 
  
2,364,000 

      Loans charged off

 

**(3,782,286)**
  
(2,567,679)
  
(2,207,588)

      Recoveries of loans previously charged off

 

**304,437 **
  
337,942 
  
189,061 

Balance, end of year

**$**

**7,560,507 **
 
$

7,742,356 
 
$

6,652,093 

The following is a summary of information pertaining to impaired loans:
 
**December 31,**

 

**  2003**

 

2002

Impaired loans without a valuationallowance 

**$    **

**-**

      

$    

-

Impaired loans with a valuation allowance

 

**3,561,668**

 

 

6,156,732

Total impaired loans

**$**

**3,561,668**

 

$

6,156,732

Valuation allowance related to impaired loans

**$**

**939,817**

 

$

1,362,467

Nonaccrual loans

**$**

**1,341,409**

 

$

5,105,568

Loans past due 90 days or more and still accruing

**$**

**2,380,000**

 

$

3,529,000

 

F-16
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 3.         LOANS(Continued)**

                                                                                

**Years Ended December 31,**

                                                                                                                                                              

**2003**

** **

2002

** **

2001

 

 

** **

        

    

 

        

     

 

Average investment in impaired loans

**$    **

**4,156,759**

 

$    

5,509,950

 

$

4,155,397

Interest income recognized on impaired loans

**$**

**88,624**

 

$

297,339

 

$

110,067

In the ordinary course of business, the Banks have granted loans to certain relatedparties, including directors, executive officers and their affiliates.  The interest rates on these loans were substantiallythe same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan.  Changesin related party loans for the year ended December 31, 2003 are as follows:

Balance, beginning of year    

$    

4,638,206 

     Advances, including renewals

 

2,597,466 

     Repayments, including renewals

 

(2,572,331)

     Change in director

 

(1,004,452)

Balance, end of year

$

3,658,889 

**NOTE 4.         PREMISES ANDEQUIPMENT**

Premises and equipment are summarized as follows:
 
**December 31,**

 

**  2003**

 

2002

Land

**$**

**3,469,345**

 

$

3,465,045

Buildings

 

**10,258,247**

 

 

10,113,352

Equipment

 

**20,286,858**

 

 

19,589,739

Construction in process

 

**21,123**

 

 

-  

 

 

**34,035,573**

 

 

33,168,136

Accumulated depreciation

 

**(18,796,405)**

 

 

(16,872,800)

 

**$**

**15,239,168**

 

$

16,295,336

**                       Leases**

The Company has leased various properties under noncancelable agreements which expire atvarious times through 2011 and require minimum annual rentals.  The leases related to properties also require the payment ofproperty taxes, normal maintenance and insurance.

Future minimum lease payments on noncancelable operating leases are summarized asfollows:

2004 

$    

942,258

2005 

 

722,006

2006 

 

505,447

2007

 

150,348

2008

  

24,281

Thereafter

 

126,532

                                                                                                                               

$

2,470,872

The total rental expense for the years ended December 31, 2003, 2002 and 2001 was$921,251, $754,856 and $712,105 respectively.

F-17
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 5.         INTANGIBLEASSETS**

Following is a summary of information related to acquired intangible assets:

                                                           

**December 31, 2003**

     

December 31, 2002
 
**Gross Carrying Amount**

 

**Accumulated Amortization**

 

Gross Carrying Amount

 

Accumulated Amortization

Amortized intangible assets

 
 
        
  
        

 

 

        

 

 

   Core deposit premiums

**$       **

**2,951,362**

** **

**$  **

**1,886,200**

 

$  

**2,951,362**

 

$  

**1,609,000**

   Other intangibles

** **

**130,000**

** **
 
**105,000**

 

 

**130,000**

 

 

**99,500**

        Total

**$**

**3,081,362**

** **

**$**

**1,991,200**

 

$

**3,081,362**

 

$

**1,708,500**

The amortization expense for the years ended December 31, 2003, 2002 and 2001 was$412,255, $613,346 and $494,064, respectively.

The estimated amortization expense for each of the next five years is asfollows:

2004  

$

282,700

2005

 

282,700

2006

 

282,700

2007

 

239,062

2008

 

3,000

Investment in common stock of Internet EMC, Inc.

The Company accounts for its investment in Internet EMC, Inc., a 31% ownedaffiliate, by the equity method of accounting under which the Company's share ofthe net loss of the affiliate is recognized asexpense in the Company's income statement and subtracted from the investmentaccount.

The carrying value of the Company's investment exceeded its share of theunderlying equity in the net assets of Internet EMC, Inc. by $786,217 and$606,618 at December 31, 2003 and 2002, respectively.  In accordance withgenerally accepted accounting principles, this difference is considered to begoodwill and is evaluated for impairment annually.  The increasein goodwill for the year ended December 31, 2003 represents an increasedinvestment in Internet EMC, Inc. of $312,500, of which $179,598 has beenrecognized as goodwill.

Changes in the carrying amount of goodwill are as follows:

 

**Year Ended December 31,**

 

**2003**

**     **

2002

     

2001

 

** **

 

 

 

 

 

 

 

Beginning balance

**$    **

**788,553**

 

     

788,553

 

$    

788,553

Goodwill acquired

** **

**179,598**

 

 

-  

 

 

-  

Ending balance

**$**

**968,151**

 

 

788,553

 

$

788,553

For the year ended December 31, 2001, net income that would have been reported exclusiveof amortization expense recognized related to goodwill that is no longer being amortized would be $7,228,837, or $3.30 and $3.28per basic and diluted earnings per share, respectively.

F-18
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 6.         DEPOSITS**

The aggregate amount of time deposits in denominations of $100,000 or more at December 31,2003 and 2002 was $123,975,243 and $123,990,612 respectively.  The scheduled maturities of time deposits at December 31, 2003are as follows:

2004

$

235,520,925

2005

 

47,125,487

2006

 

15,047,392

2007

 

22,026,840

2008

 

29,712,596

Thereafter

 

381,748

                                                                                                                          

**$**

349,814,988

Overdraft demand deposits reclassified to loans totaled $866,767 and $391,231 at December31, 2003 and 2002, respectively.

**NOTE 7.         OTHER BORROWINGS**

Other borrowings consist of the following:
 
**December 31,**

 

**  2003**

     

 2002

Note payable to bank, principal of $56,025 due quarterly plus interest

** **
  
        

 

 

     at prime minus 1% or 3.00% at December 31, 2003, collateralized 

** **
  
 

 

 

     by 50,000 shares of common stock of Community Bank & Trust,

** **
  
 

 

 

     matures July 31, 2004.

**$  **

**171,675**

 

$

395,775

Revolving credit note to bank, principal of $90,625 due quarterly

** **
  
 

 

 

     plus interest at prime minus 1% or 3.00% at December 31, 2003,

** **
  
 

  

 

     collateralized by 50,000 shares of common stock of Community

** **
  
 

 

 

     Bank & Trust and assignment of note receivable from ESOP,

** **
  
 

 

 

     matures June 30, 2006 (see Note 8).

** **

**906,250**

 

 

1,268,750

Advance from Federal Home Loan Bank with interest due quarterly

** **
  
  

 

 

     at 5.95%, due February 8, 2010.

** **

**10,000,000**

 

  

10,000,000

Advance from Federal Home Loan Bank with interest due quarterly at

** **
  
 

 

 

     2.82%, due September 4, 2007.

** **

**5,000,000**

 

 

5,000,000

Economic Development and Growth Enhancement advance from

** **
 
 

 

 

    Federal Home Loan Bank at 0% due April 1, 2013.

** **

**75,000**

 

 

-  
  
**$**

** 16,152,925**

 

$

16,664,525

Contractual maturities of other borrowings as of December 31, 2003 are asfollows:

2004

$

534,175

2005

 

362,500

2006

 

181,250

2007

 

5,000,000

2008

 

-  

Thereafter

 

10,075,000

         

$

16,152,925

F-19
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 7.         OTHER BORROWINGS(Continued)**

The advances from Federal Home Loan Bank are secured by certain qualifying loans ofapproximately $95,729,000 and Federal Home Loan Bank stock of $1,192,900.

The Company and subsidiaries have available unused lines of credit with various financialinstitutions totaling $57,722,000 at December 31, 2003.  There were no other advances outstanding at December 31, 2003 or2002.

**NOTE 8.         EMPLOYEE BENEFITPLANS**

**                       Incentive Stock Option Plan**

The Company has an Incentive Stock Option Plan in which the Company can grant to keypersonnel options for an aggregate of 225,000 shares of the Company's common stock at not less than the fair market value of suchshares on the date the option is granted.  If the optionee owns shares of the Company representing more than 10% of the totalcombined voting power, then the price shall not be less than 110% of the fair market value of such shares on the date the option isgranted.  The option period will not exceed ten years from date of grant.  Other pertinent information related to theoptions is as follows:
 
**2003**
 
**2002**
 
**2001**
 
**Shares**** **
**Weighted- Average Exercise Price** 
**Shares** 
**Weighted- Average Exercise Price** 
**Shares** 
**Weighted- Average Exercise Price**
Under option, beginning of year

37,000 

** **

**$**

33.25

      

52,000 

      

$

26.50

 

59,000 

 

$

25.66

     Granted

**- **

** **

** **

**  -**

 

**-   **

 

 

**-  **

 

-   

 

 

-  

     Exercised

(3,000)

** **

** **

** **9.85

 

(15,000)

 

 

9.85

 

(4,500)

 

 

9.85

     Forfeited

**- **

** **

** **

 

 

**-   **

 

 

**-  **

 

(2,500)

 

 

36.72

Under option, end of year

34,000 

** **

**$**

35.32

 

37,000 

 

$

33.25

 

52,000 

 

$

26.50

 
 
     ** **

** **

** **

 

 

 

 
 
 

-   

 

 

 

Options exercisable at year-end

34,000 

**  **

**$**

35.32

 

37,000 

 

$

33.25

 

52,000 

 

$

26.50

Weighted-average fair value of
 
** **

** **

** **

 

 

 

 

 

** **
 
 

 

 

     options granted during the year
 
** **

**$**

**-**

 

 

 

$

-  

** **
 
 

$

-  

Information pertaining to options outstanding at December 31, 2003 is asfollows:

 

     

**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**
 
 
 
  

 

  

   

   

  

  

  

  

  

  

$9.85

 

4,500

 

 

1 year

 

 

$9.85

 

4,500

 

 

$9.85

$39.20

 

29,500

 

 

6 years

 

 

$39.20

 

29,500

 

 

$39.20

The fair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model.  There were no options granted during the years ending December 31, 2003,  2002, and2001.

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 allemployees.  Contributions to the plan charged to expense for the years ended December 31, 2003, 2002 and 2001 amounted to$119,586, $122,632 and $115,647, respectively. 

**                       Employee Stock Ownership Plan**

The Company sponsors a leveraged Employee Stock Ownership Plan (ESOP) for thebenefit of employees who meet certain eligibility requirements, subject tocertain IRS limits.  Contributions to the ESOP are determined by the Boardof Directors of the Company taking into consideration the financial conditionand fiscal requirements of the Company and such other factors as the Board ofDirectors may deem pertinent and applicable under the circumstances.  In 2001, the ESOP incurred debt when the Company loaned the ESOP $1,550,000 fromthe proceeds the Company received from its revolving credit note to anindependent financial institution (See Note 7).  All dividends received bythe ESOP are used to pay debt service.  Originally 38,065 ESOP shares werepledged as collateral for its debt.  As the debt is repaid, shares arereleased from collateral and allocated to employees based on the proportion ofdebt service paid in the year.  As shares are released from collateral, theCompany reports compensation expense equal to the difference in the currentmarket price of the shares and the original cost of those shares released. All shares held by the ESOP are considered outstanding for earnings per sharecomputations.  Dividends on allocated ESOP shares are recorded as areduction of retained earnings; dividends on unallocated ESOP shares arerecorded as a reduction of debt and accrued interest.

Contributions to the ESOP were $311,470, $1,077,000 and $771,906 for the yearsended December 31, 2003, 2002 and 2001, respectively.  Dividends paid tothe ESOP for the years ended December 31, 2003, 2002 and 2001 were $104,388,$94,905 and $76,570, respectively.  Interest expense related to the ESOPdebt was $34,194, $55,737 and $22,476 for the years ended December 31, 2003,2002, and 2001 respectively.

In accordance with the ESOP, the Company is expected to honor the rights of certainparticipants to diversify their account balances or to liquidate their ownership of the common stock in the event oftermination.  The purchase price of the common stock would be based on the fair market value of the Company’s commonstock as of the annual valuation date, which precedes the date the put option is exercised. Since the redemption of common stock isoutside the control of the Company, the Company’s maximum cash obligation based on the approximate market prices of commonstock as of the reporting date has been presented outside of shareholders’ equity. The amount presented as redeemable commonstock held by the ESOP in the consolidated balance sheet represents the Company’s maximum cash obligation and has beenreflected as a reduction of retained earnings.  In addition, the unearned compensation recorded in connection with the debtincurred by the ESOP has been offset against the redeemable common stock held by the ESOP.

 

F-21
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 8.         EMPLOYEE BENEFIT PLANS(Continued)**

**                       Employee Stock Ownership Plan (Continued)**

Shares of the Company held by the ESOP at December 31, 2003 and 2002are as follows:

                                                                                                      

**2003**

     

2002

 

 

 

 

 

 

Allocated shares

** **

**338,483**

 

 

326,922

Committed-to-be-released shares

** **

**9,601**

 

 

12,859

Unearned shares

** **

**23,791**

 

 

33,307

 

** **

**371,875**

 

 

373,088

 

** **

** **

 

 

 

Fair value of unreleased (unearned shares)

**$  **

**1,072,022**

 

$

  1,478,165

**NOTE 9.         INCOME TAXES**

The components of income tax expense are as follows:

                                                                               

**Years Ended December 31,**

 

**  2003**

     

2002

     

2001 
 ** **** **      
Current

**$**

**1,583,769**

     

$

3,604,733 

       

$

3,299,022 

Deferred

 

**183,438**

 

 

(278,766)

 

 

(174,404)

Current tax effect of net operating loss carryforward

 

**-  **

 

 

-   

 

 

(48,603)

                                                           

**$**

**1,767,207**

 

$

3,325,967 

 

$

3,076,015 

The Company's income tax expense differs from the amounts computed by applying the federalincome tax statutory rates to income before income taxes.  A reconciliation of the differences is as follows:

                                                                                

**Years Ended December 31,**

 

**2003**

**     **

2002

**     **

2001

 

**      **

** **

** **

      

 

** **

      

 

Tax provision at statutory federal rate

**$**

**2,665,490 **

** **

$

3,892,799 

**   **

$

3,485,342 

     Tax-exempt income

** **

**(991,246)**

** **

** **

(992,748)

** **

** **

(862,465)

     Disallowed interest

** **

**73,403 **

** **

** **

99,655 

**  **

** **

130,720 

     Cash surrender value life insurance

**  **

**(45,333)**

** **

** **

-  

** **

** **

-  

     Current tax effect of net

** **
 
** **

** **
 
**  **

** **
 
          operating loss carryforward

** **

**-  **

** **

** **

-  

** **

** **

(48,603)

     Nondeductible expenses

** **

**31,685 **

** **

** **

109,700 

** **

** **

58,917 

     State income taxes

** **

**56,367 **

** **

** **

232,610 

** **

** **

180,121 

     Other items

** **

**(23,159)**

** **

** **

(16,049)

** **

** **

131,983 

Income tax expense

**$**

**1,767,207 **

** **

$

3,325,967 

** **

$

3,076,015 

F-22
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 9.         INCOME TAXES(Continued)**

The components of deferred income taxes are as follows:

                                                                                                     

**December 31,**

    

** **

**2003**
 

 

2002
Deferred tax assets:

 

** **

 

 

 

     Loan loss reserves

**$**

**2,676,237**

 

$

2,726,646

     Other

 

**379,777**

       

 

277,341

 

 

**3,056,014**

 

 

3,003,987

 

 

** **

 

 

 

Deferred tax liabilities:

 

** **

 

 

 

     Depreciation

 

**547,309**

 

 

213,888

     Accretion

 

**109,266**

 

 

207,222

     Unrealized gain on securities available for sale

 

**1,071,466**

  

 

1,308,316

 

 

**1,728,041**

 

 

1,729,426

 

  

** **

 

 

 

Net deferred tax assets

**$**

**1,327,973**

 

$

1,274,561

**NOTE 10.       EARNINGS PER SHARE**

Diluted earnings per share were computed by dividing net income by the weighted averagenumber of shares of common stock and common stock equivalents outstanding.  The number of common shares was increased by thenumber of shares issuable upon the exercise of the stock options described in Note 8.  This theoretical increase in the numberof common shares was reduced by the number of common shares which are assumed to have been repurchased for the treasury with theproceeds from the exercise of the options; these purchases were assumed to have been made at the price per share that approximatesaverage market price.  The treasury stock method for determining the amount of dilution of stock options is based on theconcept that common shares which could have been purchased with the proceeds of the exercise of common stock options at marketprice are not actually outstanding common shares. 

Presented below is a summary of the components used to calculate basic and dilutedearnings per share.
** ****Years Ended December 31,**** ****2003**
** ****2002**
** ****2001**
Net income

**$**

**6,087,469**

 

$

8,123,441

 

$

7,174,991

 

** **

 

     
 

 

      

 
 
Weighted average common shares outstanding

** **

**2,149,918**

  

 

2,177,962

 

 

2,183,778

Net effect of the assumed exercise of stock

** **

** **

 

 

 

 

 

 

   options based on the treasury stock method

** **

** **

   

 

 

  

 

 

   using average market price for the year

** **

**1,810**

 

 

7,180

 

 

19,211

 

** **
 
 

 
 
 

 

 

Total weighted average common shares and

** **

** **

 

 

 

  

 

 

   common stock equivalents outstanding

** **

**2,151,728**

 

 

2,185,142

 

 

2,202,989

 

** **

** **

 

 

 

 

 

 

Diluted earnings per share

**$**

**2.83**

 

$

3.72

 

$

3.26

 

F-23
 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**NOTE 11.       COMMITMENTS AND CONTINGENCIES**

**Loan Commitments**

The Company is a party to financial instruments with off-balance sheet risk in the normalcourse of business to meet the financing needs of its customers.  These financial instruments include commitments to extendcredit, standby letters of credit and credit card commitments.  Such commitments involve, to varying degrees, elements ofcredit 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 tothe financial instrument for commitments to extend credit, standby letters of credit and credit card commitments is represented bythe contractual amount of those instruments.  The Company uses the same credit policies in making commitments and conditionalobligations as it does for on-balance sheet instruments.  A summary of the Company's commitments is as follows:
 
**December 31,** 
**2003** 
 2002
Commitments to extend credit
**$**

**46,432,605**

 

$

29,656,851

Credit card lines

 

**6,300,295**

 

 
6,143,061

Financial standby letters of credit

 

**4,077,006**

 

 

2,213,825

   

**$**

**56,809,906**

 

$

38,013,737

Commitments to extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Since many of the commitments are expected to expire without beingdrawn 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 guaranteethe performance of a customer to a third party.  Those letters of credit are primarily issued to support public and privateborrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved inextending loans to customers.  Collateral is required in instances which the Company deems necessary.

At December 31, 2003 and 2002, the carrying amount of liabilities related to theCompany’s obligation to perform under financial standby letters of credit was insignificant.  The Company has not beenrequired to perform on any financial standby letters of credit, and the Company has not incurred any losses on financial standbyletters of credit for the years ended December 31, 2003 and 2002.

**Contingencies**

In the normal course of business, the Company is involved in various legalproceedings.  In the opinion of management, any liability resulting from such proceedings would not have a material effect onthe Company's financial statements.

**NOTE 12.       CONCENTRATIONS OF CREDIT**

The banking subsidiaries originate primarily commercial, real estate, and consumer loansto customers in their local communities and surrounding counties.  The ability of the majority of the Banks' customers tohonor their contractual loan obligations is dependent on their local economy as well as the economy in the metropolitan Atlanta andMontgomery areas.

 

F-24
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 12.       CONCENTRATIONS OF CREDIT(Continued)**

Eighty one percent (81%) of the Company's loan portfolio is concentrated in loans securedby real estate.  A substantial portion of  these loans are in the Banks' primary market areas.  In addition, a substantialportion of the other real estate owned is located in those same markets.  Accordingly, the ultimate collectibility of theCompany's loan portfolio and the recovery of the carrying amount of other real estate owned is susceptible to changes in marketconditions in the Banks' primary market areas.

The Company's loan portfolio also includes a concentration, nine percent (9%) of the totalportfolio, of commercial, financial and agricultural loans.  These loans represent loans made primarily to local businesses inthe Banks' market areas.  A portion of these loans are small business loans and residential loans originated by the loanproduction office, a division of Community Bank & Trust, which are outside the Banks' primary market areas.  The Company'slending 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 inexcess of 25% of each individual Bank's statutory capital, or approximately $7,275,000 and $1,300,000 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 notgenerally extend credit to any single borrower or group of related borrowers in excess of 20% of unimpaired capital, orapproximately $1,249,000.

**NOTE 13.       REGULATORY MATTERS**

The Banks are subject to certain restrictions on the amount of dividends that may bedeclared without prior regulatory approval.  At December 31, 2003, approximately $4,028,000 of retained earnings wereavailable for dividend declaration without regulatory approval.

The Company and Banks are subject to various regulatory capital requirements administeredby the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possiblyadditional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financialstatements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company andBanks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certainoff-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are alsosubject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require theCompany and Banks to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, and Tier I capital toaverage assets.  Management believes, as of December 31, 2003 the Banks met all capital adequacy requirements to which theyare subject.

As of December 31, 2003, the most recent notification from the Federal Deposit InsuranceCorporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action.  To becategorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios asset forth in the following table.  There are no conditions or events since that notification that management believes havechanged 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 followingtables.

                                                                        

 

 

 

 

 

 

 

 

 

 

**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, 2003**

** **

** **

** **

** **

** **

** **
 
** **

**   **

** **

** **

** **

** **

** **

   Total Capital to Risk Weighted Assets:

** **

** **

**   **

** **

** **

** **
 
** **

** **

** **

** **

** **

** **

** **

          Consolidated

**$**

**74,751**

** **

**13.28%**

** **

**$**

**45,042**

** **

**8.00%**

** **

** **

**N/A**

** **

**N/A**

          Community 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/A**

          Community Bank & Trust

**$**

**52,536**

** **

**11.38%**

** **

**$**

**18,470**

** **

**4.00%**

** **

**$**

**27,706**

** **

**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/A**

          Community 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%**
               
As of December 31, 2002

 

 

 

 

 

 

 

 

   
 
 

 

 

 

   Total Capital to Risk Weighted Assets:

 

 

  

 

 

 

 

 

 
 
 

 

 

 

          Consolidated

**$**

69,312

** **

13.63%

** **

**$**

40,670

** **

8.00%
 
** **

N/A

** **

N/A

          Community Bank & Trust

**$**

56,340

**  **

13.67%

** **

**$**

32,960

** **

8.00%
 
**$**

41,199

** **

10.00%

          Community Bank & Trust - Alabama

**$**

5,335

** **

14.69%

** **

**$**

2,906

** **

8.00%
 
**$**

3,632

** **

10.00%

          Community Bank & Trust - Troup

**$**

7,086

** **

11.65%

** **

**$**

4,866

** **

8.00%
 
**$**

6,082

** **

10.00%

   Tier I Capital to Risk Weighted Assets:
  
**  **
 
**    **

**  **

   

**    **

   
  
**  **
 
**  **

  

          Consolidated

**$**

62,940

** **

12.38%

** **

**$**

20,335

** **

4.00%
 
** **

N/A

** **

N/A

          Community Bank & Trust

**$**

51,176

** **

12.42%

** **

**$**

16,479

** **

4.00%
 
**$**

24,719

** **

6.00%

          Community Bank & Trust - Alabama

**$**

4,879

** **

13.43%

**  **

**$**

1,453

** **

4.00%
 
**$**

2,179

** **

6.00%

          Community Bank & Trust - Troup

**$**

6,325

** **

10.40%

** **

**$**

2,433

** **

4.00%
 
**$**

3,649

** **

6.00%

   Tier I Capital to Average Assets:

**  **
 
**  **

   

**  **

**  **

   

**  **

   
 
**  **
 
**  **

  

           Consolidated

**$**

62,940

** **

9.17%

** **

**$**

27,441

**  **

4.00%
 
** **

N/A

** **

N/A

          Community Bank & Trust

**$**

51,176

** **

9.17%

** **

**$**

22,326

** **

4.00%

** **

**$**

27,908

** **

5.00%

          Community Bank & Trust - Alabama

**$**

4,879

** **

8.98%

**  **

**$**

2,174

** **

4.00%
 
**$**

2,717

** **

5.00%

          Community Bank & Trust - Troup

**$**

6,325

** **

8.08%

** **

**$**

3,132

** **

4.00%

**   **

**$**

3,915

** **

5.00%

 

F-26
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 14.       FAIR VALUE OF FINANCIALINSTRUMENTS**

The fair value of a financial instrument is the current amount that would be exchangedbetween willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted marketprices.  However, in many instances, there are no quoted market prices for the Company’s various financialinstruments.  In cases where quoted market prices are not available, fair values are based on estimates using discounted cashflows or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including thediscount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediatesettlement of the instrument.  SFAS No. 107, *Disclosures about Fair Values of Financial Instruments*, excludes certainfinancial instruments and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fairvalue 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 fairvalue disclosures for financial instruments. 

**Cash, Due From Banks, Interest-Bearing Deposits in Other Banks andFederal Funds Sold: **The carrying amounts of cash, due from banks, interest-bearing deposits in other banks, and federal funds soldapproximate fair values.

**Securities: ** Fair values for securities are based on available quoted marketprices.  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 nosignificant change in credit risk, fair values are based on carrying values.  For other loans, the fair values are estimatedbased on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowerswith similar credit quality.  Fair values for impaired loans are estimated using discounted contractual cash flows orunderlying collateral values, where applicable.

**Deposits: ** The carrying amounts of demand deposits, savings deposits andvariable-rate certificates of deposit approximate their fair values.  Fair values for fixed-rate certificates of deposit areestimated using discounted contractual cash flows using interest rates currently being offered for certificates of similarmaturities.

**Other Borrowings: ** The fair values of the Company's fixed rate otherborrowings are estimated based on discounted contractual cash flows using the Company’s current incremental borrowing ratesfor similar types of borrowing arrangements.  The carrying amounts of all other variable rate borrowings approximate theirfair values.

**Accrued Interest: ** The carrying amounts of accrued interest approximate theirfair values.

**Redeemable Common Stock: ** The carrying amount of the Company's redeemablecommon 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’soff-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements.  Since themajority of the Company’s off-balance-sheet instruments consist of nonfee-producing, variable-rate commitments, the Companyhas determined they do not have a distinguishable fair value.

The estimated fair values and related carrying amounts of the Company'sfinancial instruments were as follows:

                                                                

**December 31, 2003**

   

December 31, 2002

 

**Carrying Amount**

 

**Fair Value**

 

Carrying Amount

 

Fair Value

                                                                                    

     
 
      

    

**      **

      

   

 

      

    

 

Financial assets:

 

** **

 

 

** **

 

    

 

 

 

 

     Cash, due from banks, interest-bearing

 

** **

 

 

** **

 

 

 

 

 

 

          deposits in other banks, and federal

 

** **

 

 

** **

 

 

 

 

 

 

         funds sold

**$**

**64,757,849**

** **

**$**

**64,757,849**

 

$

54,665,112

 

$

54,665,112

Securities available for sale

** **

**103,458,121**

** **

** **

**103,458,121**

 

 

100,355,807

 

 

100,355,807

Securities held to maturity

** **

**22,628,009**

** **

** **

**24,352,241**

 

 

27,015,673

 

 

28,681,226

Restricted equity securities

** **

**1,242,900**

** **

** **

**1,242,900**

 

 

1,215,300

 

 

1,215,300

Loans

** **

**537,904,984**

** **

** **

**536,181,203**

 

 

483,625,208

 

 

485,913,998

Accrued interest receivable

** **

**5,655,344**

** **

** **

**5,655,344**

 

 

5,878,195

 

 

5,878,195

 

** **

** **

** **

** **

** **

 

 

 

 

 

 

Financial liabilities:

** **

** **

** **

** **

** **

 

 

 

 

 

 

Deposits

** **

**670,604,055**

** **

** **

**676,931,514**

 

 

607,354,327

 

 

612,083,135

Other borrowings

** **

**16,152,925**

** **

** **

**15,794,042**

 

 

16,664,525

 

 

21,547,525

Accrued interest payable

** **

**2,951,406**

** **

** **

**2,951,406**

 

 

3,882,321

 

 

3,882,321

Redeemable common stock

** **

**15,783,013**

** **

** **

**15,783,013**

 

 

15,193,814

 

 

15,193,814

**NOTE 15.       SEGMENT INFORMATION**

The Company's operations have been classified into two reportable segments, banking andbank consulting services.  The banking segment involves traditional banking services offered through its three wholly-ownedbank subsidiaries.  Financial Supermarkets, Inc. provides various consulting and licensing services to financial institutionsin connection with the establishment of bank branches in supermarkets.  In connection with the establishment of a SupermarketBank, Financial Supermarkets provides consulting services ranging from providing alternative construction designs to coordinatingemployee training.  Financial Solutions, a division of Financial Supermarkets, Inc. was formed to provide various consultingservices to the financial institution industry including compliance, operational, advertising, marketing and travel relatedservices.

The Company’s reportable segments are organizations that offer different productsand services.  They are managed separately because of products and services, marketing strategies, and the regulatoryenvironments in which the Banks operate.  In addition, the Banks geographically are located in the Southeast and employsimilar business strategies, and are evaluated using similar performance expectations.  The bank consulting segment operatesthroughout the United States.

Total revenue by industry segment includes revenues from unaffiliated customers andaffiliates. Revenues from affiliates are eliminated in consolidation.  Interest income, interest expenses, data processingfees, management fees and other various revenues and expenses between affiliates are recorded on the accrual basis of accountingconsistent 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, 2003**
     
**Banking**
    
**Financial Supermarkets   **
 
**All Other**
     
**Total**

** **

** **

 
 
** **

** **
 
** **

**    **

 

** **

** **

 

Interest income

 

$

43,391,726 

 

$

17,804 

 

$ 

-   

 

$

43,409,530

Interest expense

 

 

13,185,549 

 

 

-   

 

 

42,768 

 

 

13,228,317

Intersegment net interest income (expense)

  

 

(167,673)

 

 

129,611 

 

 

38,062 

 

 

-  

Net interest income (loss)

  

 

30,038,504 

 

 

147,415 

 

 

(4,706)

 

  

30,181,213

Other revenue from external customers

 

 

8,510,006 

 

 

3,107,749 

 

 

606,641 

 

 

12,224,396

Intersegment other revenues

  

 

-   

 

 

254,588 

 

  

2,340,000 

 

 

2,594,588

Depreciation and amortization

 

 

2,112,392 

 

 

275,655 

  

 

346,594 

 

 

2,734,641

Provision for loan losses

 

 

3,296,000 

 

 

-   

 

 

-   

 

 

3,296,000

Segment profit (loss)

  

 

7,321,452 

 

 

(342,245)

 

 

(927,047)

 

 

6,052,159

Segment assets

 

 

766,880,156 

 

 

14,339,631 

 

 

5,516,265 

 

 

786,736,052

Expenditures 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

 

$

-   

 

$

43,488,174

Interest expense

** **

 

16,429,794 

 

  

-

 

 

70,780 

 

 

16,500,574

Intersegment net interest income (expense)

** **

 

(407,722)

 

 

345,660

 

 

62,062 

 

 

-

Net interest income (loss)

** **

 

26,644,513 

 

 

351,805

 

 

(8,718)

 

 

26,987,600

Other revenue from external customers

** **

 

7,982,903 

 

 

10,509,667

 

 

471,425 

 

 

18,963,995

Intersegment other revenues

** **

 

-   

 

 

308,743

 

 

2,187,600 

 

 

2,496,343

Depreciation and amortization

** **

 

2,053,725 

 

 

670,468

 

 

367,203 

 

 

3,091,396

Provision for loan losses

** **

 

3,320,000 

 

 

-

 

 

-   

 

 

3,320,000

Segment profit (loss)

** **

 

6,287,644 

 

 

3,132,173

 

 

(1,243,768)

 

  

8,176,049

Segment assets

** **

 

700,549,312 

 

 

17,287,304

 

 

4,854,392 

 

 

722,691,008

Expenditures for premises and equipment

** **

 

2,382,700 

 

 

51,622

 

 

575,759 

 

 

3,010,081
             
**For the Year Ended December 31, 2001**

**    **

**Banking**

**    **

**Financial Supermarkets**

**    **

**All Other**

**    **

**Total**

**                                                                       **

** **
 
 

** **

** **

 

** **

** **

  

** **

** **

 

Interest income

 

$

48,486,116 

 

$

16,183

 

$

-   

 

$

48,502,299

Interest expense

 

 

23,172,832 

 

 

-  

 

 

66,695 

 

 

23,239,527

Intersegment net interest income (expense)

 

 

(859,808)

 

 

810,836

 

 

48,972 

 

 

-  

Net interest income (loss)

 

 

24,453,476 

 

 

827,019

 

 

(17,723)

 

 

25,262,772

Other revenue from external customers

 

 

6,550,016 

 

 

10,714,956

 

 

512,306 

 

 

17,777,278

Intersegment other revenues

 

  

-   

 

 

291,212

 

 

1,898,400 

 

 

2,189,612

Depreciation and amortization

 

 

1,932,966 

 

 

368,401

 

 

576,287 

 

 

2,877,654

Provision for loan losses

 

 

2,364,000 

 

 

-  

 

 

-   

 

 

2,364,000

Segment profit (loss)

 

 

5,272,935 

 

 

3,062,564

 

 

(1,135,122)

 

 

7,200,377

Segment assets

 

 

644,710,872 

 

 

24,232,122

 

 

4,781,293 

 

 

673,724,287

Expenditures for premises and equipment

 

 

2,083,921 

 

 

1,107,310

 

 

387,504 

 

 

3,578,735

F-29
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 15.       SEGMENT INFORMATION(Continued)**
   2003   2002  2001
Net Income

 

** **

** **

 

 

  

 

 

 

                                                                                          

         

**       **
 
      

      

  

      

    

 

Total profit for reportable segments

 

$

6,979,207 

 

$

9,419,817 

 

$

8,335,499 

Non-reportable segment loss

 

 

(927,048)

 

 

(1,243,768)

 

 

(1,135,122)

Elimination of intersegment gains (losses)

   

 

35,310 

 

 

(52,608)

 

 

(25,386) 

     Total consolidated net income

   

$

6,087,469 

 

$

8,123,441 

 

$

7,174,991 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets for reportable segments

 

$

781,219,787 

 

$

717,836,616 

 

$

668,942,994 

Non-reportable segment assets

 

 

5,516,265 

 

 

4,854,392 

 

 

4,781,293 

Elimination of intersegment assets

 

 

(20,551,300)

 

 

(22,444,981)

 

 

(27,515,568)

     Total consolidated assets

 

$

766,184,752 

 

$

700,246,027 

 

$

646,208,719  

 

 

 

 

 

 

 

 

 

 

Expenditures for Premises and Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenditures for reportable segments

 

$

1,134,328 

 

$

2,434,322 

 

$

3,191,231 

Non-reportable segment assets

 

 

246,919 

 

 

575,759 

 

 

387,504 

Elimination of intersegment gains

 

 

(50,000)

 

 

(150,000)

 

 

(150,000)

     Total consolidated expenditures for

 

 

 

 

 

 

 

 

 

        premises and equipment

 

$

1,331,247 

 

$

2,860,081 

 

$

3,428,735 

**NOTE 16.       SUPPLEMENTAL FINANCIAL DATA**

Components of other operating expenses in excess of 1% of total revenue are asfollows:

                                                                                                      

**Years Ended December 31,**

 

**2003**

      

2002

     

  2001

 

 

** **

 

 

 

 

 

 

Data processing

**$**

**1,244,160**

 

$

966,786

 

$

1,052,441

Travel expenses

 

**1,163,906**

 

 

1,126,738

 

 

1,434,305

Office supply expenses

 

**889,704**

 

 

811,511

 

 

876,095

Advertising

 

**780,394**

 

 

808,499

 

 

840,655

F-30
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 17.       PARENT COMPANY ONLY FINANCIALINFORMATION**

The following information presents the condensed balance sheets as of December 31, 2003and 2002 and condensed statements of income and cash flows of Community Bankshares, Inc. for the years ended December 31, 2003,2002 and 2001:
**CONDENSED BALANCE SHEETS ** **2003**** ****2002**
Assets

 

** **

 

 

 

     Cash

**$**

**2,894,770**

 

$

978,973

     Investment in subsidiaries

** **

**69,097,327**

 

 

66,491,332

     Equipment

** **

**547,549**

 

 

636,035

     Other assets

** **

**1,824,268**

 

 

2,838,784

 

** **

** **

 

 

 

                    Total assets

**$**

**74,363,914**

 

$

70,945,124

 

** **

** **

 

 

 

Liabilities

** **

** **

 

 

 

     Other borrowings

**$   **

**1,077,925**

 

$

1,664,525

     Other liabilities

** **

**754,029**

 

 

738,738

 

** **

** **

 

 

 

                    Total liabilities

** **

**1,831,954**

 

 

2,403,263

 

** **

** **

 

 

 

Redeemable common stock

** **

**15,783,013**

 

 

16,557,646

 

** **

** **

 

 

 

Shareholders' equity

** **

**56,748,947**

 

 

51,984,215

 

** **

** **

 

 

 

                     Total liabilities, redeemable common stock,

** **

** **

 

 

 

                        and shareholders' equity

**$**

**74,363,914**

 

$

70,945,124

F-31
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 17.       PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued)**
**CONDENSED STATEMENTS OF INCOME ** ** 2003**** **** 2002**** ****2001**
Income

** **

** **

** **

** **
 
** **

** **

** **

     Dividends from subsidiaries

**$  **

**4,040,000 **

**      **

$  

3,660,000 

**     **

$  

1,680,000 

     Interest

** **

**38,062 **

** **

** **

62,062 

** **

** **

48,972 

     Other income

** **

**2,441,648 **

** **

** **

2,275,425 

** **

** **

2,056,550 

** **

** **

**6,519,710 **

** **

** **

5,997,487 

** **

** **

3,785,522 

** **

** **

** **

** **

** **

 

** **

** **

 

Expense

** **

** **

** **

** **

 

** **

** **

 

     Interest

** **

**42,768 **

** **

** **

70,780 

** **

** **

66,695 

     Salaries and employee benefits

** **

**2,347,297 **

** **

** **

2,718,005 

** **

** **

1,859,824 

     Equipment expense

** **

**627,300 **

** **

** **

451,299 

** **

** **

682,559 

     Other expense 

** **

**948,818 **

** **

** **

991,961 

** **

** **

1,123,242 

                                                                                                                                                       

** **

**3,966,183 **

** **

** **

4,232,045 

** **

** **

3,732,320 

** **

** **

**  **

** **

** **

 

** **

** **

 

          Income before income tax benefits and equity

** **

**  **

**  **

** **

 

** **

** **

 

               in undistributed income of subsidiaries

** **

**2,553,527 **

** **

** **

1,765,442 

** **

** **

53,202 

** **

** **
 
** **

** **

 

** **

** **

 

Income tax benefits

** **

**(553,428)**

** **

** **

(749,699)

**  **

** **

(628,586)

** **

** **

** **

** **

** **

 

** **

** **

 

          Income before equity in undistributed income

** **

** **

** **

** **

 

** **

** **

 

               of subsidiaries

** **

**3,106,955 **

** **

** **

2,515,141 

** **

** **

681,788 

** **

** **

** **

** **

** **

 

** **

** **

 

Equity in undistributed income of subsidiaries

** **

**2,965,514 **

** **

** **

5,647,049 

** **

** **

6,536,953 

** **

** **

** **

** **

** **

 

** **

** **

 

Net income

**$**

**6,072,469 **

** **

$

8,162,190 

** **

$

7,218,741 

 

F-32
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 17.       PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued)**

**CONDENSED STATEMENTS OF CASH FLOWS**

** **
 
 

**  2003**

     

 

2002

     
 
2001
** **        
**OPERATING ACTIVITIES**

 

 

 

 

 

     
  
   Net income

**$**

**6,072,469 **

 

$

8,162,190 

 

$

7,218,741 

   Adjustments to reconcile net income to net

** **

** **

 

 

 

 
 
 

        cash provided by operating activities:

** **

** **

 

 

 

 
 
 

        Depreciation and amortization

** **

**323,291 **

 

 

292,002 

 
 
494,787 

       Undistributed income of subsidiaries

** **

**(2,965,514)**

 

 

(5,647,049)

 
 
(6,536,953)

        Other operating activities

** **

**653,544 **

 

 

(153,431)

 
 
(654,778)

 

** **

** **

 

 

 

 
 
 

                    Net cash provided by operating activities

** **

**4,083,790 **

 

 

2,653,712 

 
 
521,797 

 

** **

** **

 

 

 

 
 
 

**INVESTING ACTIVITIES**

** **

** **

 

 

 

 
 
 

   Purchases of premises and equipment

** **

**(234,805)**

 

 

(473,638)

 
 
(286,941)

   (Increase) decrease in notes receivable from ESOP

** **

**390,158 **

 

 

193,750 

 
 
(1,550,000)

 

** **

** **

 

 

 

 
 
 

                   Net cash provided by (used in) investing activities

** **

**155,353 **

 

 

(279,888)

 
 
(1,836,941)

 

** **

** **

 

 

 

 
 
 

**FINANCING ACTIVITIES**

** **

** **

 

 

 

 
 
 

   Increase in other borrowings

** **

**-   **

 

 

-   

 
 
1,450,000 

   Repayment of other borrowings

** **

**(586,600)**

 

 

(405,350)

 
 
(224,100)

   Proceeds from exercise of stock options

** **

**23 **

 

 

44 

 
 
44,304 

   Dividends paid

** **

**(602,327)**

 

 

(523,070)

 
 
(436,666)

   Purchase of treasury stock

** **

**(1,134,442)**

 

 

(1,280,920)

 
 
-   

 

** **

**  **

 

 

 

 
 
 

                   Net cash provided by (used in) financing activities

** **

**(2,323,346)**

 

 

(2,209,296)

 
 
833,538 

 

** **

** **

 

 

 

 
 
 

Net increase (decrease) in cash

** **

**1,915,797 **

 

 

164,555 

 
 
(481,606)

 

** **

** **

 

 

 

 
 
 

Cash at beginning of year

** **

**978,973 **

 

 

814,418 

 
 
1,296,024 

 

** **

**  **

 

 

 

 
 
 

Cash at end of year

**$**

**2,894,770 **

 

$

978,973 

 

$

814,418 

F-33

 

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the, thereunto duly authorized, in theCity of Cornelia, State of Georgia, on the 29th of March, 2004.
 **COMMUNITY BANKSHARES, INC.**
By:  /s/ J. Alton Wingate     J. 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 constitutesand appoints J. Alton Wingate or Harry L. Stephens and either of them (with full power in each to act alone), as true and lawfulattorneys-in-fact, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to signany amendments to this Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or theirsubstitute 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 hasbeen signed by the following persons in the capacities indicated on the 29th day of March, 2004.

    Signature
    Title/s/ J.    Alton WingateJ. Alton WingatePresident    and Chief Executive Officer and Director/s/    Steven C. AdamsSteven C. AdamsDirector/s/    Edwin B. Burr     Edwin B. BurrDirector/s/ H.    Calvin Stovall, Jr.     H. Calvin Stovall, Jr.Director     /s/ Dean C. Swanson  Dean C. SwansonDirector/s/    George D. TelfordGeorge D. TelfordDirector/s/    Dr. A. Don WindhamDr. A. Don WindhamDirector/s/    Lois M. Wood-SchroyerLois M. Wood-SchroyerDirector/s/    Harry L. StephensHarry L. StephensExecutive    Vice President and    Chief Financial Officer    (Principal Financial and    Accounting Officer)
40
 

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TOSECTION 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, andcopies of such documents have been furnished to the Commission for its information.
 
 

 

 

 

 

41
**EXHIBIT INDEX**
10.11Third Amendment to Amended and RestatedRevolving Credit/Term Loan Agreement between the Registrant and SunTrust Bank dated May 31, 2003.14Code of EthicalConduct21List of Subsidiariesof Registrant.31.1 Certification by J. AltonWingate, President and Chief Executive Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of theSarbanes-Oxley  Act of 2002.31.2Certification by Harry L.Stephens, Chief Financial Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley  Actof 2002.32Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.