7

8

NOTE 4.          SEGMENT INFORMATION

Selected segment information by industry segment for the three and nine month periods ended September 30, 2004 and 2003 is as follows:

9

10

COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Our discussion below is based on the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, under Item 7. Our discussions here focus on our results during or as of the quarter and nine months ended September 30, 2004, and the comparable period of 2003, and, to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that 10-K for more detailed and background information.

Forward Looking Statements

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

Critical Accounting Policies

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

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

Financial Condition

For the quarter ended September 30, 2004, we experienced growth in total assets, total loans and total deposits as compared to December 31, 2003. Total assets, loans, and deposits increased by 8.35%, 13.35% and 6.97% respectively.  The growth in deposits is attributable to our expanding markets and increased efforts to grow our deposit base to help fund our increased loan demand.  The growth in loans was funded by the maturity and sale of securities, advances from Federal Home Loan Bank, the growth in deposits and retention of earnings.

11

Liquidity

As of September 30, 2004, the liquidity ratio was 19.88% which is within our target range of 15 - 20%.  Liquidity is measured by the ratio of net cash, short term and marketable securities to net deposits and short term liabilities.

Interest Rate Risk

Our guideline is to allow no more than an 8% change in net interest income when interest rates rise or fall 200 basis points or more. Our overall interest rate risk within these parameters was less than 2% of net interest income; therefore, we are within policy guidelines. We have attempted to position ourselves to minimize the impact of further changes in rates in either direction

Capital

Banking regulations require the Company and the banks to maintain minimum capital levels in relation to our assets. At September 30, 2004, the bank’s capital ratios were considered well capitalized based on regulatory capital requirements. The minimum capital requirements and the actual consolidated capital ratios are as follows:

Off Balance Sheet Arrangements

Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are advanced or the instruments become payable. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on ­balance sheet instruments. Although these amounts do not necessarily represent future cash requirements, a summary of our commitments as of September 30, 2004 and December 31, 2003 are as follows:

The Company is currently constructing a main banking center in Clayton, Georgia.  The cost to complete this facility is estimated to be approximately $2,100,000 and will be placed into service no later than the first quarter of 2005.

12

A. Results of Operation

Net Income

Net income for the nine month period ended September 30, 2004, was $6,388,000 or an increase of 57.50% compared to the same period of 2003 and for the three month period ended September 30, 2004, was $2,498,000 or an increase of 75.30% over the same period of 2003.  These increases are directly attributed to the increase in revenue of our non-bank subsidiary, increase in net interest income and the increase in service charges on deposit accounts, net of increased provisions for loan losses and increased other expenses.

Net Interest Income

Net interest income for the nine month period ended September 30, 2004 was up 11.70% over the same period of 2003, from $22,223,000 to $24,823,000 and was up 11.21% for the three month period ending September 30, 2004 from $7,630,000 in the same period in 2003 to $8,485,000 in 2004.  These increases were due to an increase in interest earned on earning assets and a decrease in interest expense.  Interest income was up by 4.87% for the nine month period ending September 30, 2004 from $32,471,000 to $34,053,000 and up 8.71% for the three month period ending September 30, 2004 from $10,813,000 to $11,755,000.  The increases were caused by the increase in earning assets.  Earning assets increased by 13.20% or $88,717,000 at September 30, 2004 as compared to September 30, 2003.  The largest increase in earning assets since September 30, 2003 was the increase in loans of $101,136,000 or 19.56%.  The primary reason for the increase in loans is our opening of a stand-alone branch and a loan production office during the later part of 2003.  Securities decreased by $4,928,000 while federal funds decreased by $7,745,000, during the same period.  Interest expense was down 9.93% or $1,018,000 for the nine month period ended September 30, 2004, over the same period in 2003 and up 2.73% or $87,000 for the three month period ending September 30, 2004, as compared to 2003.  Although total deposits increased, interest expense decreased due to the continued re-pricing of interest paid on deposits.

The Company’s net interest margin was 4.69% for the nine month period ended September 30, 2004 compared to 4.72% for the same period in 2003. Management anticipates a stable net interest margin over the next twelve months. Any increase in rates would have a slight positive effect on our net interest margin.

Other Income

Other income increased by $6,815,000 or 82.27% during the nine month period ended September 30, 2004 as compared to the same period of 2003 and the three month period ending September 30, 2004 showed an increase of $2,716,000 or 98.37% for the same three month period in 2003.  These increases are primarily due to increased service charges on deposit accounts of $3,340,000 or 83.29% for the nine month period ended September 30, 2004 as compared to the same period in 2003 and increased sales of $2,942,000 or 162.45% by Financial Supermarkets, Inc. (“FSI”), our nonbank subsidiary, as compared to the same period in 2003. Service charges on deposits increased primarily as a result of the banks adding a new check program that allows customers to overdraw their account, up to a specific limit.  The increase in FSI's sales is attributed to the increase in the number of sales compared to the prior year due to the expansion of our sales efforts nationwide and the resale of supermarket bank units in space released by the Canadian Imperial Bank of Commerce.

Other Expenses

Other expenses increased by 19.48% or $4,617,000 for the nine month period ending September 30, 2004 compared to the same period in 2003 and increased 22.35% or $1,784,000 for the three month period ending September 30, 2004 compared to the same period in 2003.  These increases are primarily attributable to an increase in full time equivalent employees from 395 at the end of September 2003 to 429 at the end of September 2004. The increase in full time equivalent employees was due to the addition of two new supermarket banking centers, one new stand-alone branch and a loan production office during the later part of 2003 as well as the overall growth of the Company’s banking operations. In addition, incentive commissions related to sales activity at FSI have increased due to increased sales over the previous year. These increases caused salaries and benefits to increase by 18.62% or $2,410,000 for the nine month period ended September 30, 2004 and 21.76% or $939,000 for the three month period ended September 30,2004, as compared to the same period in 2003.

13

Also attributable to the two new banking centers and new stand-alone branch, equipment and occupancy expenses were up by 8.87% or $351,000 for the nine month period ending September 30, 2004, and 15.77% or $208,000 for the three month period ended September 30, 2004, as compared to the same period in 2003.

Other operating expenses increased by 27.27% or $1,856,000 for the nine month period ending September 30, 2004 as compared to the same period in 2003. The single largest item included in this increase is attributed to $499,000 of expenses and losses associated with the new check program started in 2004.  In addition, legal fees increased $191,000 or 107.91% as compared to the same period in 2003 due to legal services related to past due loans, other real estate owned and the class action lawsuit described in Part II information Item 1 of this Quarterly Report on From 10-Q.  Data processing expense increased $327,000 or 39.26% as compared to the same period in 2003 due to growth of the banks and improvements in our technology platform.  Advertising and marketing increased $125,000 or 22.20% and travel expense increased $10,000 or 1.2% as compared to the same period in 2003. These increases are attributed to the increased marketing and sales activity of FSI.  Losses related to customer forgeries and fraud increased $60,000 or 36.36 % as compared to the same period in 2003.  Director and advisory director fees increased by $96,000 or 34.16% as compared to the same period in 2003. The Board of Directors added advisory directors for most of the counties that we have significant banking activity.  Our postage expense increased $80,000 or 19.61%, and our printing and office supplies increased $80,000 or 12.42% as compared to the same period in 2003.  These increases are attributed to the growth in banking operations and increased activity. 

For the three month period ended September 30, 2004, other operating expenses increased 27.13% or $637,000 compared to the same period in 2003.  Data processing expense increased $128,000 or 41.29% as compared to the same period in 2003 due to growth of the banks and improvements in our technology platform.  Advertising and marketing increased $28,000 or 14.07% as compared to the same period in 2003. This increase was attributed to the increased marketing and sales activity of FSI.  Director and advisory director fees increased $40,000 or 42.55% as compared to the same period in 2003.  Our printing and office supplies increased $28,000 or 12.90% as compared to the same period in 2003.  These increases are attributed to the growth in banking operations and increased activity.   

Income Taxes

We incurred income tax expenses of $1,118,000, which represents an effective rate of 30.92%, for the three month period ended September 30, 2004, as compared to $437,000, which represents an effective tax rate of 23.47%, for the same period in 2003.  In addition, we incurred income tax expenses of $2,676,000, which represents an effective rate of 29.52%, for the nine month period ended September 30, 2004, as compared to $1,061,000, which represents an effective tax rate of 20.73%, for the same period in 2003.  These effective rate increases are due to a larger percentage of our income being fully taxable as a result of our increased taxable income.

14

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

B. Asset Quality

Provision for Loan Loss

The provision for loan losses was $2,537,000 and $1,686,000 for the first nine months of 2004 and 2003, respectively.  For the three month period ended September 30, 2004, and 2003, respectively, the provision for loan losses was $579,000 and $546,000.  Approximately 50% of these increases was due to loan growth.  The reserve at September 30, 2004 represented 244% of non-accrual loans while the reserve at September 30, 2003 represented 476% of non-accrual loans. Non accrual loans have increased from $1,658,000 at September 30, 2003 to $3,773,000 as of September 30, 2004.  The increase in non-accrual loans was mostly due to the addition of one loan of $2.3 million.  Past due loans greater than 90 days and accruing interest have increased from $2,270,000 in 2003 to $2,539,000 in 2004.

Repossessed real estate owned by the bank decreased 20.18% from $5,272,000 at December 31, 2003, to $4,208,000 in September 2004. Other real estate is carried in the books at the lesser of cost or fair market value, less estimated costs to sell, with no significant losses anticipated.

Management has reviewed the non-accrual loans individually and determined that the likelihood of any significant loss of principal is mitigated due to the value of the collateral securing these loans. As of September 30, 2004, non-accrual loans and other real estate owned totaled approximately $7,981,000 as compared to $7,486,000 as of September 30, 2003. The ratio of the loan loss reserve balance to the total loan balance at September 30, 2004 was 1.49% as compared to 1.39% at December 31, 2003.   As of September 30, 2004, management considered our allowance for loan losses adequate to cover any anticipated losses.

Non-accrual, Past Due and Restructured Debt

The following table, dollars in thousands, is a summary of non accrual, past due and restructured debt

September 30, 2004

September 30, 2003

15

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

Allowance for Loan Loss

The following table, dollars in thousands, furnishes information on the loan loss reserve for the current nine month reporting period and the same period for 2003.

Our Company operates in three distinct markets, northeast Georgia, midwest Georgia and mideast Alabama. Each of these markets has seen a modest increase in unemployment and bankruptcy filings.

16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

17

At September 30, 2004, the Company’s cumulative interest rate sensitivity gap ratio for the next twelve months was 105.28% which was within its targeted range of 80% to 120%.

Gap management alone is not enough to properly manage interest rate sensitivity because interest rates do not respond at the same speed or at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a “Prime” rate and thus respond with less volatility to a market rate change. Thus, the Company uses a simulation model to monitor changes in net interest income due to changes in market rates. The model of rising, falling and stable interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as market value of equity over a twelve month period is subjected to a 200 basis point increase and decrease in rate. The September 2004 model reflects an increase of 1.65% in net interest income and a 5.83% decrease in market value equity for a 200 basis point increase in rates. The same model shows a  1.72% decrease in net interest income and a 2.29% increase in market value equity for a 200 basis point decrease in rates. The Company’s policy is to allow no more than +-8% change in net interest income and no more than +-25% change in market value equity for these scenarios. Therefore, the Company is within its policy guidelines.

ITEM 4.           CONTROLS & PROCEDURES

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

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

18

PART II – OTHER INFORMATION

ITEM 1.     Legal Proceedings

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

ITEM 2.     Issuer Purchases of Equity Securities

Issuer Purchases of Equity Securities in the quarter ended September 30, 2004:

________________
(1)           The shares purchased during the third quarter of 2004 were purchased as treasury stock.

ITEM 3.     Defaults upon Senior Securities - None

ITEM 4.     Submission of matters to a vote of Security Holders - None

ITEM 5.     Other Information  - None

ITEM 6.      EXHIBITS

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

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

19

SIGNATURES

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