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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2004

Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Commission File Number 33-81890

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

Georgia
  
58-1415887
(State or other jurisdiction of
  
(I. R. S. 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 be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x    No ¨.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   Not applicable. Registrant is not required to be registered under the Securities Exchange Act of 1934.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act). Yes   ¨    No  x.
 
Aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 28, 2004: $43,675,216 (based upon approximate market value of $45.06/share, the latest sales price known to the Registrant for the Common Stock at such date, for which there is no established trading market).

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


PART 1

ITEM 1.    BUSINESS.

General

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

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

Forward Looking Statements

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

Business Description of Banks

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

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

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

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

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

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

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

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

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

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

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

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

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

3

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

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

Business Description of Non-Banking Subsidiaries

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

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

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

Competition

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

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

Employees

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

4

Supervision and Regulation

The following discussion of statutes and regulations affecting bank holding companies and banks is a summary thereof and is qualified in its entirety by reference to such statutes and regulations. This explanation does not purport to describe state or federal supervision and regulation of general business corporations.
 
General. The Company is a registered financial holding company subject to regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Company is required to file financial information with the Federal Reserve periodically and is subject to periodic examination by the Federal Reserve.

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

·  
making or servicing loans and certain types of leases;
·  
performing certain data processing services;
·  
acting as fiduciary or investment or financial advisor;
·  
providing brokerage services;
·  
underwriting bank eligible securities;
·  
underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and
·  
making investments in corporations or projects designed primarily to promote community welfare.

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

·  
lending, exchanging, transferring, investing for others or safeguarding money or securities;
·  
insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;
·  
providing financial, investment, or economic advisory services, including advising an investment company;
·  
issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and
·  
underwriting, dealing in or making a market in securities.

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

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

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

5

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

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

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

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

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

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

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

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

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

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

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

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

6
 

Loans. Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital.

Financial Privacy. In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial institutions in recent years has been aimed at combating terrorist financing. This has generally been accomplished by amending existing anti-money laundering laws and regulations. The USA Patriot Act of 2001 (the “USA Patriot Act”) has imposed significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued a number of implementing regulations which apply to various requirements of the USA Patriot Act to the Company and the Banks. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. Compliance with the USA Patriot Act requires the Banks to engage in additional record keeping and reporting, to obtain identification of account owners or customers of foreign bank account holders, and to restrict or prohibit certain correspondent accounts.
Capital Adequacy. The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. Banks and bank holding companies are required to have (1) a minimum level of total capital (as defined) to risk-weighted assets of 8%; (2) a minimum Tier One Capital (as defined below) to risk-weighted assets of 4%; and (3) a minimum stockholders’ equity to risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC have established a minimum 3% leverage ratio of Tier One Capital to total assets for the most highly-rated banks and bank holding companies. “Tier One Capital” generally consists of common equity not including unrecognized gains and losses on securities, minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock less certain intangibles. The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies. The FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve consider interest rate risk in the overall determination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk. The revised standards have not had a significant effect on the Company’s capital requirements.

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

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

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

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

Available Information

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

7

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

ITEM 2.     PROPERTIES.

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

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

ITEM 3.    LEGAL PROCEEDINGS.

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

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

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

8


PART II

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


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

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

Dividends

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

   
Dividends Paid Per Share
  
   
2004
  
2003
  
First Quarter
  
$
0.08
  
$
0.07
  
Second Quarter
  
$
0.08
  
$
0.07
  
Third Quarter
  
$
0.08
  
$
0.07
  
Fourth Quarter
  
$
0.09
  
$
0.08
  
 
 
The Company intends to continue to pay cash dividends. However, the amount and frequency of dividends will be determined by the Company’s Board of Directors in light of the earnings, capital requirements and the financial condition of the Company, and no assurances can be given that dividends will be paid in the future. The Company’s ability to pay dividends will also be dependent on cash dividends paid to it by the Banks. The ability of the Banks to pay dividends to the Company is restricted by applicable regulatory requirements. See “ITEM 1 -- BUSINESS -- Supervision and Regulation.”
 
Issuer Purchases of Equity Securities

During the fourth quarter of 2004, the Company had one repurchase of 655 shares at $45.06 per share on December 20th.

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

   
Years Ended December 31,
  
     
2004 
 
 
2003 
 
 
2002 
  
Earnings per share:
                    
Basic - as reported
  
$
4.17
  
$
2.83
  
$
3.73
  
Basic - pro forma
  
$
2,087.00
  
$
1,416.00
  
$
1,865.00
  
Diluted - as reported
  
$
4.16
  
$
2.83
  
$
3.72
  
Diluted - pro forma
  
$
2,078.00
  
$
1,414.00
  
$
1,859.00
  

9

ITEM 6.    SELECTED FINANCIAL DATA


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

10


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

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

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

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

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

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

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

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

11


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

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



12


Average Balance Sheet and Net Interest Margin Analysis

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

(Dollars in Thousands: not
taxable equivalent)
  
Year Ended December 31, 
  
   
 2004
  
 2003
  
2002
  
   
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)
  
$
599,390
    
40,866
    
6.82
%
$
511,824
    
37,729
    
7.37
%
$
469,710
  
$
37,423
    
7.97
%
Interest on taxable securities
    
64,755
    
2,366
    
3.65
%
  
62,657
    
2,454
    
3.92
%
  
56,091
    
2,766
    
4.93
%
Interest on nontaxable securities
    
56,254
    
2,663
    
4.73
%
  
62,516
    
2,981
    
4.77
%
  
62,636
    
2,986
    
4.77
%
Interest on Federal funds sold
    
18,943
    
233
    
1.23
%
  
21,983
    
226
    
1.03
%
  
18,861
    
302
    
1.60
%
Interest on deposits in banks
    
440
    
12
    
2.73
%
  
607
    
20
    
3.29
%
  
750
    
11
    
1.47
%
Total interest earning assets
    
739,782
    
46,140
    
6.24
%
  
659,587
    
43,410
    
6.58
%
  
608,048
    
43,488
    
7.15
%
Total non-interest earning assets
    
63,446
                
64,003
                
59,619
              
                                                         
Total assets
    
803,228
                
723,590
                
667,667
              
                                                         
Liabilities and shareholders’ equity:
                                                        
Interest-bearing liabilities:
                                                        
Interest on demand deposits
    
174,539
    
1,576
    
.90
%
  
148,886
    
1,285
    
.86
%
  
131,621
    
1,727
    
1.31
%
Interest on savings deposits
    
38,408
    
204
    
.53
%
  
33,631
    
192
    
.57
%
  
29,826
    
226
    
.76
%
Interest on time deposits
    
363,443
    
10,090
    
2.78
%
  
350,000
    
10,963
    
3.13
%
  
336,654
    
13,826
    
4.11
%
Interest on other borrowings
    
23,850
    
882
    
3.70
%
  
16,377
    
789
    
4.82
%
  
13,709
    
722
    
5.27
%
Total interest-bearing liabilities
    
600,240
    
12,752
    
2.12
%
  
548,894
    
13,229
    
2.41
%
  
511,810
    
16,501
    
3.22
%
Other non-interest bearing liabilities
    
128,723
                
105,962
                
93,655
              
Shareholders’ equity (3)
    
74,265
                
68,734
                
62,202
              
                                                         
Total liabilities and shareholders’ equity
    
803,228
                
723,590
                
667,667
              
                                                         
Excess of interest earning assets
                                                        
over interest bearing liabilities
  
$
139,542
              
$
110,693
              
$
96,238
              
Ratio of interest earning assets
                                                        
to interest bearing liabilities
    
123
%
              
120
%
              
119
%
            
Net interest income
        
$
33,388
              
$
30,181
              
$
26,987
        
Net interest spread
                
4.12
%
              
4.17
%
              
3.93
%
Net interest margin
                
4.51
%
              
4.58
%
              
4.44
%
_________________________
(1) Includes non-accrual loans of  $4.51, $4.16, and $5.51 million for the years 2004, 2003 and 2002, respectively.
(2) Loans are net of unearned fees.
(3) Unrealized gains & losses are included in equity, net of taxes.

13

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

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

Types of Investments

The carrying amounts of securities, which is fair value for available-for-sale and cost for held-to-maturity, at the dates indicated are summarized as follows:
 
    Dollars in Thousands   
Securities Available-for-Sale
    2004    2003  
2002 
  
                           
   
Cost
 
Fair Value
  
Cost
 
Fair Value
  
Cost
 
Fair Value
  
U.S. Government and agency securities
  
$
53,402
  
$
53,502
  
$
37,191
  
$
38,261
  
$
32,542
  
$
34,095
  
State and municipal securities
    
35,037
    
36,507
    
37,436
    
39,088
    
38,494
    
39,665
  
Mortgage-backed securities (1)
    
15,785
    
15,688
    
22,640
    
22,597
    
20,994
    
21,542
  
Equity securities (2)
    
11,655
    
11,655
    
4,755
    
4,755
    
6,270
    
6,270
  
Total securities available for sale
  
$
115,879
  
$
117,352
  
$
102,022
  
$
104,701
  
$
98,300
  
$
101,572
  
 
    Dollars in Thousands   
Securities Held-to-Maturity
  
2004
  
2003
  
2002
  
   
Cost
 
Fair Value
  
Cost
 
Fair Value
  
Cost
 
Fair Value
  
State and municipal securities
  
$
20,217
  
$
21,330
  
$
22,628
  
$
24,352
  
$
27,016
  
$
28,681
  

__________________________________________
(1)  All mortgage-backed securities are government guaranteed.
(2)  Includes restricted equity securities.

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

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

14

Maturities of Investments

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

(Dollars in Thousands)  
U. S. Treasury and Other
U. S. Government agencies
and corporations(2)
    
Municipal securities(3)
    
Other Securities(4)
  
     
Amount
    
Yield
    
Amount
    
Yield
    
Amount
    
Yield
  
                           
Available for Sale (1)
                                      
                                       
One year or less
   $ 
9,351
    
5.51
%
 $ 
1,171
    
3.66
%
 $ 
7,638
    
.54
%
                                       
After one year
    
40,836
    
3.89
%
  
4,664
    
4.16
%
            
Through five years
                                      
                                       
After five years
                                      
Through ten years
    
13,793
    
4.94
%
  
6,219
    
4.82
%
            
                                       
After ten years
    
5,209
    
4.73
%
  
24,454
    
5.07
%
  
4,017
    
3.40
%
                                       
Total
   $ 
69,189
    
4.38
   $ 
36,508
    
4.87
%
 $ 
11,655
    
1.53
%
                                       
Held to Maturity (1)
                                      
                                       
One year or less
                
555
    
4.71
%
            
                                       
After one year
                                      
Through five years
                
4,299
    
4.87
%
            
                                       
After five years
                                      
Through ten years
                
10,043
    
5.37
%
            
                                       
After ten years
                
5,320
    
5.45
%
            
                                       
Total
               $ 
20,217
    
5.27
%
            
______________________
(1)
Yields were computed using book value, coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. The weighted average yield for each maturity range was computed using the carrying value of each security in that range.

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

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

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


15

Loans

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

Types of Loans

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

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

______________________________________

(1)    
Includes acquisition and development loans.
 
(2)    
Amounts are disclosed net of unearned loan income and unearned loan costs.

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

 
16
 
Maturities And Sensitivities Of Loans To Changes In Interest Rates
 
Total loans as of December 31, 2004 are shown in the following table according to maturity classifications one year or less, after one year through five years and after five years:

   
(Dollars in Thousands)
  
Maturity:
        
One year or less:
        
Commercial, financial and agricultural
  
$
31,299
  
Real estate-construction (1)
    
78,075
  
All other loans
    
257,967
  
 
    
367,341
  
After one year through five years:
        
Commercial, financial and agricultural
    
13,944
  
Real estate-construction (1)
    
4,667
  
All other loans
    
198,379
  
 
    
216,990
  
After five years:
        
Commercial, financial and agricultural
    
6,804
  
Real estate-construction (1)
    
333
  
All other loans
    
54,031
  
     
61,168
  
         
   
$
645,499
  

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

   
(Dollars in Thousands)
  
Predetermined interest rates
  
$
177,441
  
Floating or adjustable interest rates
    
100,717
  
   
$
278,158
  
         
 
(1)     Includes acquisition and development loans.
 
Federal funds sold decreased by $19.6 million or 100.00% from year-end 2003 to 2004. Average federal funds for 2004 were $18.9 million or a 13.83% decrease. During 2003, average federal funds sold increased by $3.1 million or 16.55% as compared to 2002. The decrease in 2004 in federal funds sold was due to funding loan demand.

Deposits

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

17

Deposits

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

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

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

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

Results of Operations

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

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

18

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

Rate and Volume Analysis

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

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

19


               
   
Year Ended December 31, 2003 vs. 2002
  
   
Changes Due to:
  
   
 
Rate
  
 
Volume
  
Increase
(decrease)
  
   
(Dollars in Thousands)
  
Increase (decrease) in:
                    
Income from interest-earning assets:
                    
Interest and fees on loans
   $ 
(2,913
)
 $ 
3,219
   $ 
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 interest income
    
(3,633
)
  
3,555
    
(78
)
                     
Expense from interest-bearing liabilities:
                    
Interest expense on interest-bearing deposits
    
(647
)
  
205
    
(442
)
Interest on savings deposits
    
(60
)
  
26
    
(34
)
Interest on time deposits
    
(3,392
)
  
529
    
(2,863
)
Interest on other borrowings
    
(65
)
  
132
    
67
  
Total interest expense
    
(4,164
)
  
892
    
(3,272
)
                     
Net interest income
   $ 
531
   $ 
2,663
   $ 
3,194
  
                     

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

20


Nonaccrual, Past Due And Restructured Loans

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

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

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

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

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

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

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

21


Allowance for Loan Loss

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

   
December 31,
  
   
2004
  
2003
  
2002
  
2001
  
2000
  
   
(Dollars in Thousands)
  
                       
Balance of allowance for loan losses
                                
at beginning of year
  
$
7,561
  
$
7,742
  
$
6,652
  
$
6,307
  
$
5,683
  
                                 
Loans charged off
                                
Commercial
    
(315
)
  
(1,866
)
  
($697
)
  
($810
)
  
($461
)
Real estate mortgage
    
(592
)
  
(1,170
)
  
(951
)
  
(269
)
  
- -
  
Consumer
    
(887
)
  
(746
)
  
(920
)
  
(1,129
)
  
(693
)
     
(1,794
)
  
(3,782
)
  
($2,568
)
  
($2,208
)
  
($1,154
)
                                 
Loans recovered
                                
Commercial
    
66
  
$
22
  
$
19
  
$
18
  
$
16
  
Real estate mortgage
    
76
    
109
    
121
    
13
    
- -
  
Consumer
    
224
    
174
    
198
    
158
    
141
  
     
366
    
305
  
$
338
  
$
189
  
$
157
  
                                 
Net charge-offs
    
(1,428
)
  
(3,477
)
  
($2,230
)
  
($2,019
)
  
($997
)
                                 
Additions to allowance charged
                                
to operating expense during year
  
$
3,037
  
$
3,296
  
$
3,320
  
$
2,364
  
$
1,621
  
                                 
Balance of allowance for loan losses
                                
at end of year
  
$
9,170
  
$
7,561
  
$
7,742
  
$
6,652
  
$
6,307
  
                                 
Ratio of net loans charged off during
                                
the year to average loans outstanding
    
0.24
%
  
0.68
%
  
0.47
%
  
0.46
%
  
0.25
%
                                 

The provision for possible loan losses is created by direct charges to income. Losses on loans are charged against the allowance in the year in which such loans, in management’s opinion, become uncollectible. Recoveries during the year are credited to this allowance. The factors that influence management’s judgment in determining the amount charged to income are past loan loss experience, composition of the loan portfolio, evaluation of possible future losses, current economic conditions and other relevant factors. The Company’s allowance for loan losses was $9.2 million at December 31, 2004, representing 1.42% of total loans, compared with $7.6 million at December 31, 2003, which represented 1.39% of total loans and $7.7 million at December 31, 2002 representing 1.58% of total loans. The allowance for loan losses is reviewed regularly based on management’s evaluation of current risk characteristics of the loan portfolio, as well as the impact of prevailing and expected economic business conditions.
Historically, management has not allocated the Company’s allowance for loan losses to specific categories of loans. However, based on management’s best estimate and historical experience, the allocation of the allowance for loan losses for December 31, 2004, 2003, 2002, 2001 and 2000 is summarized below:

22



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

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

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

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

23


   
Non-Interest Expense 
  
   
2004    
 
2003    
 
2002    
 
   
(Dollars in Thousands)
  
               
               
Salaries and benefits
  
$
21,057
  
$
16,564
  
$
17,483
  
Equipment expenses
    
3,283
    
2,915
    
2,871
  
Occupancy expenses
    
2,289
    
2,079
    
1,849
  
Data processing expenses
    
1,652
    
1,244
    
967
  
Travel expenses
    
1,171
    
1,164
    
1,127
  
Office supply expenses
    
984
    
890
    
812
  
Other operating expenses
    
8,081
    
6,399
    
6,073
  
     
38,517
    
31,255
    
31,182
  

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

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

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

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

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

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

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

24


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

A commitment to extend credit is an agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the commitments do not necessarily represent future cash requirements.
 
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. These commitments are primarily issued to local businesses.

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

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

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


25

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

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


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

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

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

Capital Resources. At December 31, 2004, the Company and Banks’ capital ratios were considered adequate based on minimum capital requirements of the FDIC and applicable state regulatory agencies. During 2004, the Company increased capital by retaining net earnings of $8.2 million compared to an increase in 2003 of $5.4 million and an increase in 2002 of $7.6 million. In 2004 and 2003, the Company purchased $430,000 and $1.1 million in treasury stock, respectively.
 
For a tabular presentation of the Banks’ capital ratios at December 31, 2004, see “BUSINESS --SUPERVISION AND REGULATION”.

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

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

26

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

27

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

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


28

ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the report of independent accountants are included in this report beginning at page F-1.

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

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

ITEM 9A.         CONTROLS AND PROCEDURES
 
Our management, including the chief executive and chief financial officers, supervised and participated in an evaluation of our disclosure controls and procedures (as defined in federal securities rules) and pursuant to such evaluation, concluded that our disclosure controls and procedures are effective as of December 31, 2004. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.
 
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
 
ITEM 9B.         OTHER INFORMATION.
 
None.
 

PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
Directors and executive officers
The following is a brief description, as of December 31, 2004, of the business experience of each of the directors and executive officers of the Company who, except as otherwise indicated, has been or was engaged in his or her present of last principal employment, in the same or a similar position, for more than five years:
   
Steven C. Adams (56)
Mr. Adams has been an attorney with the firm of Adams, Ellard & Frankum, P.C. since 1973. He has been a director of the Company, Community, and Financial Supermarkets since 1990. He was named a director of Financial Properties in 1998.
   
Edwin B. Burr (71)
Mr. Burr has served as a director of the Company since April of 1995 and Financial Supermarkets since 1992. Mr. Burr has been President of Financial Solutions, a bank consulting firm since 1988. He has been a director of Community - Alabama since 1997. Mr. Burr has been a director of Community since 2003. Mr. Burr has been a director of Community - Troup since 2004.
   
Wesley A. Dodd, Jr. (40)
Mr. Dodd has been Executive Vice President of the Company, Community, Financial Supermarkets and Financial Properties since April 2000. Prior to that, he was Senior Vice President for the Company, Community and Financial Properties.
   
Annette R. Fricks  (60)
Mrs. Fricks has been an Executive Vice President and Corporate Secretary of the Company and Community since 1982 and 1967, respectively, and has also served as Executive Vice President and Corporate Secretary of Financial Supermarkets since 1984. She was named the Executive Vice President and Corporate Secretary for Financial Properties in 1998.
   
David H. Gould, Jr. (58)
Mr. Gould has served as an Executive Vice President of the Company since 2002. Prior to that, he was Consumer Banking Executive for Bank of America.
   
Harry L. Stephens (58)
Mr. Stephens has been an Executive Vice President and the Chief Financial Officer of the Company and Community since 1992 and has served as Treasurer of Financial Supermarkets since 1986. He has been Executive Vice President and Chief Financial Officer of Community since 1992. He was named Executive Vice President and Treasurer of Financial Properties, Inc. in 1998.
   
H. Calvin Stovall, Jr. (89)
Mr. Stovall, who is retired, was the President and treasurer of Stovall Tractor Company, a retail farm equipment dealer, from 1948 until November 1995. He served as the Chairman of the Company’s Board of Directors 1981-1998 and was named Chairman Emeritus in 1998. Mr. Stovall has also served as a director of Community, Financial Supermarkets and Community - Troup since 1963, 1984 and November 1994, respectively. He was also named a director of Financial Properties, Inc. in 1998.
   
Dean C. Swanson (73)
Mr. Swanson was President of the Standard Group, a telecommunications company until January 1999. He is a director of Independent Telecommunications Network. Mr. Swanson has served as a director of the Company, Community and Financial Supermarkets since 1981, 1972, and 1984, respectively. He was named a director of Financial Properties, Inc. in 1998.
   
George D. Telford (84)
Mr. Telford is a retired bank executive and has served as a director of the Company and Community since 1981 and 1965, respectively, as well as of Financial Supermarkets since 1993. He was named a director of Financial Properties, Inc. in 1998. 
   
J. Alton Wingate (65)
Mr. Wingate has served as a director and the President and Chief Executive Officer of the Company, Community and Financial Supermarkets since 1981, 1977 and 1984, respectively. Mr. Wingate was named Chairman of the Board in 1998. He has also been the Chairman of the Board of Directors and a director of Community - Alabama, and Community - Troup since 1990 and November 1994, respectively. He was named President and Chief Executive Officer of Financial Properties, Inc. in 1998. Mr. Wingate has been Chairman and Chief Executive Officer of Community since 1996 and has been Chairman, President, and Chief Executive Officer of Financial Supermarkets since 1984. Mr. Wingate has served on the Board of Directors of Ingles Markets since 1988.
   
Dr. A. Dan Windham (66)
Dr. Windham is a partner in Windham Radiology P.C. Dr. Windham has served as a Director of Community since 1996 and was elected to the Company’s Board of Directors in 2001.
   
Lois M. Wood-Schroyer (66)
Ms. Wood-Schroyer is the Chairman, Chief Executive Officer and President of Woods Furniture Co. Ms. Wood-Schroyer has served as a Director of Community since 1990 and was elected to the Company’s Board of Directors in 1999.

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

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

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


29

ITEM 11. EXECUTIVE COMPENSATION.

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

Summary Compensation Table

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

_______________________
(1)
Includes directors’ fees.

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

(3)
Mr. Wingate’s bonus is contractually based on the performance of Financial Supermarkets, with caps and guaranteed rates of return before the bonus can be calculated and paid.
 
(4)
Reflects life insurance premiums ($16,975 for Mr. Wingate, $1,944 for Mr. Stephens, $2,774 for Ms. Fricks, $216 for Mr. Dodd, and $1,032 for Mr. Gould), estimated employee stock ownership plan (“ESOP”) contributions ($13,000 for Mr. Wingate, $13,000 for Mr. Stephens, $13,000 for Ms. Fricks, $12,000 for Mr. Dodd, and $13,000 for Mr. Gould) and 401(K) matching contributions ($2,873 for Mr. Wingate, $2,775 for Mr. Stephens, $3,150 for Ms. Fricks, $2,603 for Mr. Dodd, and $1,700 for Mr. Gould). Final ESOP contributions have not yet been determined for 2005.

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

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

30


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

Name
  
Shares
Acquired o
 Exercise (#)
  
Value
Realized ($)
  
Number of
Securities
Underlying
Unexercised
Options at Fiscal
Year-End
(Exercisable/
Unexercisable)
  
Value of
Unexercised
In-The-Money
Options At Fiscal
Year-End ($)
(Exercisable/
Unexercisable)
                 
J. Alton Wingate
  
—
  
$ —
  
—
  
$     —
Harry L. Stephens
  
—
  
  —
  
2,500/0
  
     47,350
Annette R. Fricks
  
—
  
  —
  
2,500/0
  
     47,350
Wesley A. Dodd, Jr.
  
—
  
  —
  
2,500/0
  
     47,350
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 Category
  
Number of
securities to be
issued upon
exercise of
outstanding
options, warrant
 and rights
  
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
  
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
  
                     
Equity compensation plans
approved by stockholders
    
31,000
  
$
40.15
    
183,000
  
                     
Equity compensation plans not
approved by stockholders
    
—
    
—
    
—
  
                     
Total
    
31,000
  
$
40.15
    
183,000
  

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

31

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

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

Compensation Committee Interlocks and Insider Participation

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

Report on Executive Compensation

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

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

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

32

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

Steven C. Adams
H. Calvin Stovall
Dean C. Swanson
Lois M. Wood-Shroyer


ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
The following table sets forth the percent and number of shares of the Common Stock beneficially owned as of March 20, 2005 by (1) each of the Named Executive Officers, (2) each of the directors of the Company, (3) each shareholder who owns greater than five percent (5%) of the Company’s securities and (4) all executive officers and directors of the Company as a group, without naming such individuals. There were 2,151,858 shares outstanding as of that date.

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

* less than one percent
 
(1) Mrs. Adams’ address is 664 Chenocetah Drive, Cornelia, Georgia 30531.
(2)
Includes an aggregate of 48,000 shares held by the Taft Chatham Trusts I and II with respect to which Messrs. Wingate and Adams are co-trustees and share voting and investment power.
(3)
Includes 362,448 shares held by Community Bankshares, Inc. ESOP with respect to which
Messrs. Wingate, Adams and Collins are co-trustees and share voting and investment power.
(4)
Includes 19,500 shares held by Chatham Transport company with respect to which Messrs. Wingate and Adams share voting power.
(5)
Includes 44,340 shares held by Mr. Adams as trustee for the F. Jack Adams Testamentary Trust, as to which Mr. Adams has voting and investment control.
(6) Mr. Adam’s address is 148 North Main Street, Cornelia Georgia 30531.
 

33
 
(7) 
Does not include 1,000 shares of Common Stock owned by Mr. Burr’s wife, as to which he disclaims beneficial ownership.
(8) Mr. Collins’ address is 1851 North Elm Street, Commerce, Georgia 30329.
(9) 
Includes presently-exercisable options to acquire 2,500 shares of Common Stock.
(10)  The address of the ESOP is 448 North Main Street, Cornelia, Georgia 30531.
(11)
Includes presently-exercisable options to acquire 2,500 shares of common stock.
(12)
Includes presently-exercisable options to acquire 2,500 shares of common stock.
(13)
Does not include 2,770 shares of Common Stock owned by Ms. Fricks’ husband, as to which she disclaims beneficial ownership.
(14)
Includes 500 shares held jointly with Mr. Gould’s wife as to which she claims beneficial ownership.
(15)
Includes presently-exercisable options to acquire 2,500 shares of Common Stock.
(16) 
Mr. Stovall’s address is 215 Grandview Circle, Cornelia, Georgia 30531.
(17)
Does not include 250 shares of Common Stock owned by Mr. Stovall’s wife, as to which he disclaims beneficial ownership.
(18)
Includes 130,925 shares held by Stovall Investments, LLLP with respect to which Mr. Stovall has voting and investment control.
(19)
Mr. Swanson’s address is 222 Mountain Oak Road, Cornelia, Georgia 30531.
(20)
Does not include 4,155 shares of common stock owned by Mr. Swanson’s wife, as to which he disclaims beneficial ownership.
(21)
Mr. Telford’s address is 215 Tower Avenue, Cornelia, Georgia 30531.
(22)
Does not include 10,500 shares of common stock owned by Mr. Telford’s wife, as to which he disclaims beneficial ownership.
(23)
Does not include 3,610 shares of common stock owned jointly by Mr. Telford’s wife and grandchildren, as to which he disclaims beneficial ownership.
(24)
Dr. Windham’s address is 253 Garland Bristol Road, Sautee, Georgia 30571.
(25)
Includes 500 shares held jointly with Dr. Windham’s wife as to which she claims beneficial ownership.
(26)  Mr. Wingate’s address is 186 Hillcrest Heights, Cornelia, Georgia 30531.
(27)
Does not include 4,310 shares of common stock owned by Mr. Wingate’s wife, as to which he disclaims beneficial ownership.
(28)
Ms. Wood-Schroyer’s address is 672 Buck Horn Road, Clarksville, Georgia 30523.
(29)
Includes presently-exercisable options to acquire 10,000 shares of Common Stock.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
Each of the Banks has had, and expects to have in the future, banking transactions in the ordinary course of business with directors and officers of the particular bank and the Company and their associates, including corporations in which such officers or directors are shareholders, directors and/or officers, on the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Such transactions have not involved more than the normal risk of collectibility or presented other unfavorable features.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Mauldin & Jenkins, LLC was the principal independent public accountant for the Company during the year ended December 31, 2004. Representatives of Mauldin & Jenkins, LLC are expected to be present at the annual meeting and will have the opportunity to make a statement if they desire to do so and to respond to appropriate questions. The Company anticipates that Mauldin & Jenkins, LLC will be the Company’s accountants for the 2005 fiscal year.
 
During 2004 and 2003, the Company was billed the following amounts for services rendered by Mauldin & Jenkins, LLC:
 
Audit Fees. In connection with the audit of the Company’s annual consolidated financial statements and review of its Form 10-K and the review of the Company’s interim consolidated financial statements included within Forms 10-Q, the Company was billed approximately $130,610 in 2004 and $126,327 in 2003. This figure includes fees for certain services that were billed to the Company in 2004 in connection with the 2003 annual audit, including out-of-pocket travel costs.
 
Audit-Related fees. The Company was billed approximately $500 in 2004 and $0 in 2003 for Federal Home Loan Bank agreed upon procedures engagement in 2003.
 

34
 
Tax Fees. The Company was billed approximately $13,960 in 2004 and $10,782 in 2003 for tax advice and preparation of tax returns and estimated payment calculations.
 
All Other Fees. The Company was billed no other fee in 2004 or 2003.
 
The audit committee approves all audit and non-audit services performed by the Company’s independent auditor. Certain non-audit services that are permitted under the federal securities laws may be approved from time to time by the audit committee.
 
 

 

35

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)    Financial Statements.

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

Independent Auditor’s Report on the Financial Statement

Consolidated Balance Sheets - December 31, 2004 and 2003

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

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

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

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

Notes to Consolidated Financial Statements

(b)   Exhibits.

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

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


36


10.7
Business Loan and Security Agreement dated as of June 8, 2001 among the Registrant, Community Bankshares, Inc. Employee Stock Ownership Plan and Trust, Steve Adams, J. Alton Wingate and Elton Collins, not in their individual capacities, but solely as Trustees of the Community Bankshares, Inc. Employee Stock Ownership Plan and Trust (included as Exhibit 10.8 to the Registrant’s Form 10-K for the year ended December 31, 2001, filed on April 1, 2002 with the Commission and incorporated herein by reference).
   
10.8 
Fourth Amendment to Amended and Restated Revolving Credit Term Loan Agreement between the Registrant and SunTrust Bank dated June 30, 2004.
   
10.9
Replacement Revolving Credit Note between the Registrant and SunTrust Bank dated June 30, 2004.
   
14
Code of Ethical Conduct (included as Exhibit 14 to the Registrant’s Form 10-K for the year ended December 31, 2003, filed on March 30, 2004, with the commission and incorporated herein by reference).
   
21
List of Subsidiaries of Registrant (included as Exhibit 21 to the Registrant’s Form 10-K for the year ended December 31, 2003, filed on March 30, 2004, with the commission and incorporated herein by reference).
   
31.1
Certification by J. Alton Wingate, President and Chief Executive Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification by Harry L. Stephens, Chief Financial Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certification by J. Alton Wingate, President and Chief Executive Officier of Community Bankshares, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Certification by Harry L. Stephens, Chief Financial Officier of Community Bankshares, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.


_______________________________
*Management contract or compensatory plan or arrangement.

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


37
 
 

COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2004



TABLE OF CONTENTS

 

 
Page
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-1
     
CONSOLIDATED FINANCIAL STATEMENTS
  
     
 
Consolidated balance sheets
F-2
 
Consolidated statements of income
F-3
 
Consolidated statements of comprehensive income
F-4
 
Consolidated statements of shareholders' equity
F-5
 
Consolidated statements of cash flows
F-6 and 7
 
Notes to consolidated financial statements
F- 8-33



 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
Community Bankshares, Inc. and Subsidiaries
Cornelia, Georgia


We have audited the accompanying consolidated balance sheets of Community Bankshares, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.


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


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

/s/ MAULDIN & JENKINS, LLC







Atlanta, Georgia
March 25, 2005

 
 
 
 
 
 

F-1
 
 

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

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

COMMUNITY BANKSHARES, INC.    
  
AND SUBSIDIARIES    
  
                 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME    
  
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002    
  
                 
   
2004
  
2003 
  
2002 
  
                 
Net income
  
$
8,926,846
  
$
6,087,469
  
$
8,123,441
  
                     
Other comprehensive income (loss):
                    
                     
Unrealized gains (losses) on securities available for sale:
                    
                     
Unrealized holding gains (losses) arising during period,
                    
net of taxes (benefits) of $(457,032), $(205,988)
                   
and $1,361,058, respectively
    
(685,547
)
  
(308,982
)
  
2,041,587
 
                     
Reclassification adjustment for gains realized
                    
in net income, net of taxes of $25,324,
                   
$30,862 and $55,520, respectively
    
(37,987
)
  
(46,293
)
  
(83,279
)
                     
Other comprehensive income (loss)
    
(723,534
)
  
(355,275
)
  
1,958,308
 
                     
Comprehensive income
  
$
8,203,312
  
$
5,732,194
  
$
10,081,749
  
                     
                     
See Notes to Consolidated Financial Statements.
                    
 
 
F-4
 

COMMUNITY BANKSHARES, INC.          
  
AND SUBSIDIARIES          
  
                                        
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY        
     
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002        
     
                                        
                      Accumulated                 
                      Other            
Total 
  
   
Common Stock  
  
Capital 
  
Retained 
   Comprehensive   
Treasury Stock  
  
Shareholders' 
  
   
Shares
   Par Value   
Surplus 
  
Earnings
   Income   
Shares
  
Amount 
  
Equity 
  
                                        
Balance, December 31, 2001
    
2,186,330
 
$
2,186,330
  
$
6,182,167
  
$
35,070,537
  
$
4,167
    
-
 
$
-
  
$
43,443,201
  
Net income
    
-
   
-
   
-
   
8,123,441
   
-
   
-
   
-
   
8,123,441
 
Exercise of stock options
    
15,000
   
15,000
   
132,680
   
-
   
-
   
-
   
-
   
147,680
 
Cash dividends declared, $.25 per share
    
-
   
-
   
-
   
(543,563
)
  
-
   
-
   
-
   
(543,563
)
Adjustment for shares owned by ESOP
    
-
   
-
   
-
   
152,039
   
-
   
-
   
-
   
152,039
 
Other comprehensive income
   
-
   
-
   
-
   
-
   
1,958,308
   
-
   
-
   
1,958,308
 
Purchase of treasury stock
    
-
   
-
   
-
   
-
   
-
   
34,573
   
(1,428,556
)
  
(1,428,556
)
Balance, December 31, 2002
    
2,201,330
   
2,201,330
   
6,314,847
   
42,802,454
   
1,962,475
   
34,573
   
(1,428,556
)
  
51,852,550
 
Net income
    
-
   
-
   
-
   
6,087,469
   
-
   
-
   
-
   
6,087,469
 
Exercise of stock options
    
3,000
   
3,000
   
26,536
   
-
   
-
   
-
   
-
   
29,536
 
Cash dividends declared, $.29 per share
    
-
   
-
   
-
   
(622,189
)
  
-
   
-
   
-
   
(622,189
)
Adjustment for shares owned by ESOP
    
-
   
-
   
-
   
(199,043
)
  
-
   
-
   
-
   
(199,043
)
Other comprehensive loss
    
-
   
-
   
-
   
-
   
(355,275
)
              
(355,275
)
Purchase of treasury stock
    
-
   
-
   
-
   
-
   
-
   
25,562
   
(1,134,442
)
  
(1,134,442
)
Balance, December 31, 2003
    
2,204,330
   
2,204,330
   
6,341,383
   
48,068,691
   
1,607,200
   
60,135
   
(2,562,998
)
  
55,658,606
 
Net income
    
-
   
-
   
-
   
8,926,846
   
-
   
-
   
-
   
8,926,846
 
Exercise of stock options
    
7,000
   
7,000
   
135,304
   
-
   
-
   
-
   
-
   
142,304
 
Cash dividends declared, $.33 per share
    
-
   
-
   
-
   
(706,016
)
  
-
   
-
   
-
   
(706,016
)
Adjustment for shares owned by ESOP
    
-
   
-
   
-
   
(2,753,887
)
  
-
   
-
   
-
   
(2,753,887
)
Other comprehensive loss
    
-
   
-
   
-
   
-
   
(723,534
)
  
-
   
-
   
(723,534
)
Purchase of treasury stock
    
-
   
-
   
-
   
-
   
-
   
9,610
   
(429,670
)
  
(429,670
)
Balance, December 31, 2004
    
2,211,330 
  
$
2,211,330
  
$
6,476,687
  
$
53,535,634
  
$
883,666
    
69,745 
  
$
(2,992,668
)
$
60,114,649
  
                                                   
                                                   
See Notes to Consolidated Financial Statements.
                                                  
 
 
F-5
 

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

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

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Community Bankshares, Inc. (the “Company”) is a multi-bank holding company whose business is conducted by its wholly-owned subsidiaries: Community Bank & Trust located in Cornelia, Georgia; Community Bank & Trust - Alabama located in Union Springs, Alabama; and Community Bank & Trust - Troup located in LaGrange, Georgia. Financial Supermarkets, Inc. is a wholly-owned subsidiary of Community Bank & Trust and provides a variety of bank related products and services to the financial institution industry. Financial Properties, Inc. is a wholly-owned subsidiary of Community Bank & Trust which is a real estate sales agency that provides a variety of real estate related services.

The banking subsidiaries are commercial banks operating independently of one another in their respective market areas. The banking subsidiaries in Georgia have identified their primary market areas to be the counties in which they are located and all surrounding counties. The Georgia banking subsidiaries are all located approximately 85 miles from the metropolitan Atlanta area. Community Bank & Trust - Alabama is located approximately 50 miles from Montgomery, Alabama, and has identified its primary market area as Bullock County and the east Montgomery metropolitan area. The Banks provide a full range of banking services to individual and corporate customers. Financial Supermarkets, Inc. provides products and services primarily to financial institutions in the southeastern United States; however, their products and services are marketed internationally. Financial Properties, Inc. operates primarily in Habersham, Jackson, Stephens, and White County, Georgia.

Basis of Presentation and Accounting Estimates

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

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

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

Cash, Due From Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks include cash on hand, cash items in process of collection and amounts due from banks. Cash flows from interest-bearing deposits in other banks, loans, federal funds sold and deposits are reported net.

The Banks are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $1,746,000 and $16,348,000 at December 31, 2004 and 2003, respectively.


F-8



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities

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

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

Loans

Loans are reported at their outstanding principal balances less unearned income, net deferred fees and the allowance for loan losses. Interest income is accrued on the outstanding principal balance.

Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the related loan yield over the life of the loan using a method that approximates a level yield.

The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on nonaccrual loans is recognized on the cash-basis until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts are brought current and future payments are reasonably assured.

A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.

Allowance for Loan Losses

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

F-9



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses (Continued)

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower's ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks’ allowance for loan losses, and may require the Banks to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation computed principally by the straight-line method over the following estimated useful lives of the assets.
 

   
Years
     
 
Buildings
20-40
 
Furniture and equipment
  3-15
Other Real Estate Owned

Other real estate owned represents properties acquired through or in lieu of loan foreclosure and is initially recorded at the lower of cost or fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Costs of improvements are capitalized, whereas costs relating to holding other real estate owned and subsequent adjustments to the value are expensed.

Goodwill and Intangible Assets

Goodwill represents the excess of cost over the fair value of the net assets purchased in a business combination. Goodwill is required to be tested annually for impairment, or whenever events occur that may indicate that the recoverability of the carrying amount is not probable. In the event of an impairment, the amount by which the carrying amount exceeds the fair value would be charged to earnings. The Company performed its annual test of impairment in the second quarter and determined that there was no impairment of the carrying value as of June 30, 2004.

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

F-10



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

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

Trust Department

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

Assets of the trust department, other than trust cash on deposit at the Banks, are not included in these financial statements because they are not assets of the Company.

Nonbank Subsidiary Revenue Recognition

Financial Supermarkets, Inc. recognizes revenue and costs on its installation contracts on the completed-contract method of accounting. Under this method, billings and costs are accumulated during the period of installation, but no profits are recorded before the completion of the work. Provisions for estimated losses on uncompleted contracts are made at the time such losses are identified. The majority of all installation contracts are completed within ten days. Operating expenses, including indirect costs and administrative expenses, are charged as incurred to income and not allocated to contract costs. Income from consulting services is recognized as services are provided and as costs and expenses are incurred for each individual contract.
 
401(k) Plan

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






F-11



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Stock Compensation Plan

At December 31, 2004, the Company has a stock-based employee compensation plan, which is described more fully in Note 8. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant. For the year ended December 31, 2004, there were 5,000 shares granted in 2004 that will become vested in 2006. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

   
Years Ended December 31, 
  
   
2004 
 
2003 
 
2002 
  
                
Net income, as reported
  
$
8,926,846
  
$
6,087,469
  
$
8,123,441
  
Deduct: Total stock-based employee compensation
                    
Expense determined under fair value based
                    
method for all awards, net of related tax effects
    
(55,436
)
  
-
   
-
 
Pro forma net income
  
$
8,871,410
  
$
6,087,469
  
$
8,123,441
  
Earnings per share:
                    
Basic - as reported
  
$
4.17
  
$
2.83
  
$
3.73
  
Basic - pro forma
  
$
4.15
  
$
2.83
  
$
3.73
  
Diluted - as reported
  
$
4.16
  
$
2.83
  
$
3.72
  
Diluted - pro forma
  
$
4.13
  
$
2.83
  
$
3.72
  

Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares of common stock outstanding and potential common shares. Potential common shares consist of stock options. All outstanding options have been included in the computation of diluted earnings per share for the years ended December 31, 2004, 2003 and 2002.

Comprehensive Income

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

F-12

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Recent Accounting Standards

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

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

The Company will be required to apply FAS 123(R) as of the beginning of its first interim period that begins after December 15, 2005, which will be the year ending December 31, 2006.

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

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


F-13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.         SECURITIES

The amortized cost and fair value of securities are summarized as follows:

     
Amortized
Cost 
    
Gross
Unrealized
Gains 
    
Gross
Unrealized
Losses 
    
Fair
Value 
  
Securities Available for Sale
                         
December 31, 2004:
                          
U.S. Government and agency
                          
securities
  
$
53,402,357
  
$
358,463
  
$
(259,063
)
$
53,501,7577
  
State and municipal securities
    
35,036,804
    
1,477,265
    
(6,708
)
  
36,507,361
  
Mortgage-backed securities
    
15,784,754
    
115,281
    
(212,462
)
  
15,687,573
  
Equity securities
    
9,186,549
    
-
   
-
   
9,186,549
  
   
$
113,410,464
  
$
1,951,009
  
$
(478,233
)
$
114,883,240
  

December 31, 2003:
                          
U.S. Government and 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
  

Securities Held to Maturity
                          
December 31, 2004:
                          
State and municipal securities
  
$
20,217,237
  
$
1,112,503
  
$
-
  
$
21,329,740
  
                           
December 31, 2003:
                          
State and municipal securities
  
$
22,628,009
  
$
1,724,232
  
$
-
  
$
24,352,241
  

The amortized cost and fair value of debt securities as of December 31, 2004 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Securities Available for Sale 
  
Securities Held to Maturity 
  
   
Amortized
Cost 
  
Fair
Value 
  
Amortized
Cost 
  
Fair
Value 
  
                      
Due within one year
  
$
10,405,595
  
$
10,521,786
  
$
555,389
  
$
562,072
  
Due from one to five years
    
42,095,442
    
42,214,932
    
4,298,713
    
4,488,236
  
Due from five to ten years
    
12,576,318
    
12,818,279
    
10,042,789
    
10,610,951
  
Due after ten years
    
23,361,806
    
24,454,121
    
5,320,346
    
5,668,481
  
Mortgage-backed securities
    
15,784,754
    
15,687,573
    
-
   
-
 
   
$
104,223,915
  
$
105,696,691
  
$
20,217,237
  
$
21,329,740
  



F-14



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.         SECURITIES (Continued)

Securities with a carrying value of $89,334,249 and $80,709,001 at December 31, 2004 and 2003, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Gross gains and losses on sales of securities available for sale consist of the following:
 
   
Years Ended December 31,
  
     
2004  
    
2003 
    
2002 
  
                     
Gross gains
  
$
120,516
  
$
77,155
  
$
138,799
  
Gross losses
   
(57,205
)
  
-
   
-
 
Net realized gains
  
$
63,311
  
$
77,155
  
$
138,799
  

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2004.

 
Less Than 12 Months
    12 Months or More  
Total
Description of Securities:
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized Losses
  
Fair
Value
  
Unrealized
Losses
U.S. Government and
                                 
agency securities
$
31,111,550
  
$
(259,063)
  
$
-  
  
$
-  
  
$
31,111,550
  
$
(259,063)
State and municipal securities
  
1,102,320
    
(6,708)
    
-  
    
-  
    
1,102,320
    
(6,708)
Mortgage-backed securities
  
1,227,710
    
(18,537)
    
9,951,097
    
(193,925)
    
11,178,807
    
(212,462)
                                   
Total temporarily impaired securities
$
33,441,580
  
$
(284,308)
  
$
9,951,097
  
$
(193,925)
  
$
43,392,677
  
$
(478,233)

The Company currently has forty-two (42) U.S. Government agencies, six (6) state municipals, and twenty-seven (27) mortgage backed securities with unrealized losses. Of the seventy-five (75) securities with unrealized losses, twenty-four (24) mortgage backed securities have been in an unrealized loss position for greater than 12 months. The unrealized losses in the portfolio are believed to be temporary due to all securities meeting the criteria of acceptable investment grade and all being backed by government agencies or municipalities. In the event that these securities are held to maturity, no losses should be realized.

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2003.

 
Less Than 12 Months
  
12 Months or More
  
Total
Description of Securities:
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized Losses
  
Fair
Value
  
Unrealized
Losses
U.S. Government and
                                 
agency securities
$
6,072,031
  
$
(45,581)
  
$
-  
  
$
-  
  
$
6,072,031
  
$
(45,581)
State and municipal securities
  
1,755,057
    
(37,865)
    
-  
    
-  
    
1,755,057
    
(37,865)
Mortgage-backed securities
  
13,964,356
    
(248,423)
    
122,219
    
(1,751)
    
14,086,575
    
(250,174)
                                   
Total temporarily impaired securities
$
21,791,44
  
$
(331,869)
  
$
122,219
  
$
(1,751)
  
$
21,913,663
  
$
(333,620)

At December 31, 2003, nine (9) U. S. Government agencies, four (4) state municipals, and twenty-seven (27) mortgage backed securities with unrealized loss. Of the forty securities with unrealized losses only one security (a mortgage backed) has had an unrealized loss for greater than 12 months. The unrealized loss has not exceeded $3,376.

F-15



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.        LOANS

The composition of loans is summarized as follows:

 
     
December 31, 
  
     
2004 
    
2003 
  
               
Commercial, financial and agricultural
  
$
53,602,078
  
$
50,690,454
  
Real estate - construction
    
83,074,664
    
52,785,826
  
Real estate - mortgage
    
450,896,433
    
385,628,810
  
Consumer
   
53,676,852
    
52,744,685
  
Other
    
4,186,225
    
3,789,474
  
     
645,436,252
    
545,639,249
  
Unearned income and net deferred fees and costs
    
63,576
    
(173,758
)
Allowance for loan losses
    
(9,170,354
)
  
(7,560,507
)
Loans, net
  
$
636,329,474
  
$
537,904,984
  

Changes in the allowance for loan losses are as follows:

 
   
Years Ended December 31,
  
     
2004 
    
2003 
    
2002 
  
                     
Balance, beginning of year
  
$
7,560,507
  
$
7,742,356
  
$
6,652,093
  
Provision charged to operations
    
3,037,000
    
3,296,000
    
3,320,000
  
Loans charged off
    
(1,794,123
)
  
(3,782,286
)
  
(2,567,679
)
Recoveries of loans previously charged off
    
366,970
    
304,437
    
337,942
  
Balance, end of year
  
$
9,170,354
  
$
7,560,507
  
$
7,742,356
  

The following is a summary of information pertaining to impaired loans.
     
December 31,
  
     
2004 
    
2003 
  
               
Impaired loans without a valuation allowance
  
$
-
  
$
-
  
Impaired loans with a valuation allowance
    
6,535,537
    
3,561,668
  
Total impaired loans
  
$
6,535,537
  
$
3,561,668
  
Valuation allowance related to impaired loans
  
$
1,866,846
  
$
939,817
  
Nonaccrual loans
  
$
5,641,199
  
$
1,341,409
  
Loans past due 90 days or more and still accruing
  
$
1,768,000
  
$
2,380,000
  

   
Years Ended December 31, 
  
 
 
2004 
  
2003
  
2002
  
                 
Average investment in impaired loans
  
$
4,510,560
  
$
4,156,759
  
$
5,509,950
  
Interest income recognized on impaired loans
  
$
104,738
  
$
88,624
  
$
297,339
  

In the ordinary course of business, the Banks have granted loans to certain related parties, including directors, executive officers and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the year ended December 31, 2004 are as follows:

Balance, beginning of year
  
$
3,658,889
  
Advances, including renewals
    
2,221,847
  
Repayments, including renewals
    
(1,181,184
)
Change in director
    
(2,003,791
)
Balance, end of year
  
$
2,695,761
  

F-16



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.        PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:
   
December 31,
  
     
2004 
    
2003 
  
               
Land
  
$
5,779,331
  
$
3,469,345
  
Buildings
    
10,342,557
    
10,258,247
  
Equipment
    
21,760,240
    
20,286,858
  
Construction in process ($1,500,000 estimated cost to complete)
    
1,004,823
    
21,123
  
     
38,886,951
    
34,035,573
  
Accumulated depreciation
    
(20,557,064
)
  
(18,796,405
)
   
$
18,329,887
  
$
15,239,168
  

Leases

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

Future minimum lease payments on noncancelable operating leases are summarized as follows:

2005
 
$
1,034,526
  
2006
   
764,347
  
2007
   
390,798
  
2008
    
259,731
  
2009
    
242,566
  
Thereafter
    
109,565
  
   
$
2,801,533
  

The total rental expense for the years ended December 31, 2004, 2003 and 2002 was $1,063,458, $924,061 and $754,856 respectively.
 
NOTE 5.        INTANGIBLE ASSETS

The following is a summary of information related to acquired intangible assets:

 
December 31, 2004
  
December 31, 2003
 
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Gross
Carrying
Amount
  
Accumulated
Amortization
Amortized intangible assets
                      
Core deposit premiums
$
2,951,362
  
$
2,163,400
  
$
2,951,362
  
$
1,886,200
Other intangibles
  
135,150
    
110,500
    
130,000
    
105,000
Total
$
3,086,512
  
$
2,273,900
  
$
3,081,362
  
$
1,991,200

The amortization expense for the years ended December 31, 2004, 2003 and 2002 was $366,048, $412,255 and $613,346, respectively.


F-17



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.    INTANGIBLE ASSETS (Continued)

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

2005
  
$
281,215
  
2006
    
281,215
  
2007
    
237,577
  
2008
    
4,015
  
2009
    
4,015
  

Investment in common stock of Internet EMC, Inc.

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

The carrying value of the Company's investment exceeded its share of the underlying equity in the net assets of Internet EMC, Inc. by $786,217 at December 31, 2004 and 2003. In accordance with generally accepted accounting principles, this difference is considered to be goodwill and is evaluated for impairment annually. The increase in goodwill for the year ended December 31, 2003 represents an increased investment in Internet EMC, Inc. of $312,500, of which $179,598 has been recognized as goodwill.

Changes in the carrying amount of goodwill are as follows:

   
Year Ended December 31, 
  
   
2004 
  
2003 
  
2002 
  
                 
Beginning balance
  
$
968,151
    
788,553
  
$
788,553
  
Goodwill acquired
    
-
   
179,598
    
-
 
Ending balance
  
$
968,151
    
968,151
  
$
788,553
  

NOTE 6.     DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2004 and 2003 was $135,940,480 and $123,975,243 respectively. The scheduled maturities of time deposits at December 31, 2004 are as follows:


2005
  
$
243,362,289
  
2006
    
25,612,275
  
2007
    
38,442,966
  
2008
    
38,858,351
  
2009
    
24,504,481
  
Thereafter
    
128,224
  
   
$
370,908,586
  

Overdraft demand deposits reclassified to loans totaled $878,765 and $866,767 at December 31, 2004 and 2003, respectively.


F-18



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.     OTHER BORROWINGS

Other borrowings consist of the following:
 
     
December 31, 
  
     
2004 
    
2003 
  
               
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
  
Revolving credit note to bank, principal of $90,625 due quarterly
             
plus interest at prime minus 1% or 4.25% at December 31, 2004,
              
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).
    
543,750
    
906,250
  
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
  
Advance from Federal Home Loan Bank with interest due quarterly
              
at three month libor plus 2% due March 17, 2006.
    
10,000,000
    
-
  
Economic Development and Growth Enhancement advance from
              
Federal Home Loan Bank at 0% due April 1, 2013.
    
250,000
    
75,000
  
   
$
25,793,750
  
$
16,152,925
  

Contractual maturities of other borrowings as of December 31, 2004 are as follows:

2005
  
$
362,500
  
2006
    
10,181,250
  
2007
    
5,000,000
  
2008
    
-
  
2009
    
-
  
Thereafter
    
10,250,000
  
   
$
25,793,750
  

The advances from Federal Home Loan Bank are secured by certain qualifying loans of approximately $114,750,000 and Federal Home Loan Bank stock of $2,399,000.

The Company and subsidiaries have available unused lines of credit with the Federal Home Loan Bank totaling $60,812,000 at December 31, 2004. There were no other advances outstanding at December 31, 2004 or 2003.


F-19



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.    EMPLOYEE BENEFIT PLANS

Incentive Stock Option Plan

The Company has an Incentive Stock Option Plan in which the Company can grant to key personnel options for an aggregate of 225,000 shares of the Company's common stock at not less than the fair market value of such shares on the date the option is granted. If the optionee owns shares of the Company representing more than 10% of the total combined voting power, then the price shall not be less than 110% of the fair market value of such shares on the date the option is granted. The option period will not exceed ten years from date of grant. Other pertinent information related to the options is as follows:

   
2004
  
2003
  
2002
  
 
    
Shares 
    
Weighted-
Average
Exercise
Price
    
Shares
    
Weighted-
Average
Exercise Price
    
Shares
    
Weighted-
Average
Exercise
Price
  

Under option, beginning of year
    
34,000
  
$
35.32
    
37,000
  
$
33.25
    
52,000
  
$
26.50
  
Granted
    
5,000
    
45.06
    
-
    
-
    
-
    
-
  
Exercised
    
(7,000
)
  
20.33
    
(3,000
)
  
9.85
    
(15,000
)
  
9.85
  
Forfeited
    
(1,000
)
  
39.20
    
-
          
-
    
-
  
Under option, end of year
    
31,000
  
$
40.15
    
34,000
  
$
35.32
    
37,000
  
$
33.25
  
                                       
Options exercisable at year-end
    
26,000
  
$
39.20
    
34,000
  
$
35.32
    
37,000
  
$
33.25
  
Weighted-average fair value of
                                      
options granted during the year
        
$
17.89
        
$
-
        
$
-
  

Information pertaining to options outstanding at December 31, 2004 is as follows:

   
Options Outstanding
  
Options Exercisable
Range of
Exercise Prices
  
 
 
 
Options
Outstanding
  
Weighted-
Average
Remaining
Contractual
Life
  
Weighted-
Average
Exercise Price
  
Options
Exercisable
  
Weighted-
Average
Exercise
Price
                           
$39.20
  
26,000
    
5 years
  
$
39.20
  
26,000
  
$
39.20
$45.06
  
5,000
    
10 years
  
$
45.06
  
-
    
N/A

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were 10 shares granted during the year ending December 31, 2004.

 
Years Ended December 31,
 
2004
  
2003
  
2002
           
Dividend yield
0.18%
  
N/A
  
N/A
Expected life
10 years
  
N/A
  
N/A
Expected volatility
17.83%
  
N/A
  
N/A
Risk-free interest rate
4.48%
  
N/A
  
N/A

F-20



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.    EMPLOYEE BENEFIT PLANS (Continued)

401(k) Plan

The Company has a contributory 401(k) retirement plan covering substantially all employees. Contributions to the plan charged to expense for the years ended December 31, 2004, 2003 and 2002 amounted to $138,115, $119,586 and $122,632, respectively.

Employee Stock Ownership Plan

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

Contributions to the ESOP were $960,164, $311,470 and $1,077,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Dividends paid to the ESOP for the years ended December 31, 2004, 2003 and 2002 were $117,599, $104,388 and $94,905, respectively. Interest expense related to the ESOP debt was $23,623, $34,194 and $55,737 for the years ended December 31, 2004, 2003, and 2002 respectively.

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

Shares of the Company held by the ESOP at December 31, 2004 and 2003 are as follows:

   
2004 
    
2003 
  
             
Allocated shares
  
338,657
    
338,483
  
Committed-to-be-released shares
  
9,516
    
9,601
  
Unearned shares
  
14,275
    
23,791
  
   
362,448
    
371,875
  
             
Fair value of unreleased (unearned shares)
$
768,423
  
$
1,072,022
  


F-21



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.     INCOME TAXES

The components of income tax expense are as follows:
 
   
Years Ended December 31,
  
     
2004 
    
2003 
    
2002 
  
                     
Current
  
$
3,957,964
  
$
1,583,769
  
$
3,604,733
  
Deferred
   
(280,535
)
  
183,438
    
(278,766
)
   
$
3,677,429
  
$
1,767,207
  
$
3,325,967
  

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

   
Years Ended December 31,
  
   
2004 
  
2003 
  
2002 
  
                 
Tax provision at statutory federal rate
  
$
4,280,355
  
$
2,665,490
  
$
3,892,799
  
Tax-exempt income
    
(886,656
)
  
(991,246
)
  
(992,748
)
Disallowed interest
    
59,414
    
73,403
    
99,655
  
Cash surrender value life insurance
    
5,933
    
(45,333
)
  
-
 
Nondeductible expenses
    
37,170
    
31,685
    
109,700
  
State income taxes
    
221,804
    
56,367
    
232,610
  
Other items
    
(40,591
)
  
(23,159
)
  
(16,049
)
Income tax expense
  
$
3,677,429
  
$
1,767,207
  
$
3,325,967
  

The components of deferred income taxes are as follows:

 
 
December 31,
   
2004 
    
2003
           
Deferred tax assets:
          
Loan loss reserves
$
3,233,582
  
$
2,676,237
Other
  
181,107
    
379,777
   
3,414,689
    
3,056,014
           
Deferred tax liabilities:
          
Depreciation
  
624,139
    
547,309
Accretion
  
110,578
    
109,266
Unrealized gain on securities available for sale
  
589,111
    
1,071,466
   
1,323,828
    
1,728,041
           
Net deferred tax assets
$
2,090,861
  
$
1,327,973


F-22

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10.     EARNINGS PER SHARE

Diluted earnings per share were computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. The number of common shares was increased by the number of shares issuable upon the exercise of the stock options described in Note 8. This theoretical increase in the number of common shares was reduced by the number of common shares which are assumed to have been repurchased for the treasury with the proceeds from the exercise of the options; these purchases were assumed to have been made at the price per share that approximates average market price. The treasury stock method for determining the amount of dilution of stock options is based on the concept that common shares which could have been purchased with the proceeds of the exercise of common stock options at market price are not actually outstanding common shares.
 
Presented below is a summary of the components used to calculate basic and diluted earnings per share.

   
Years Ended December 31,
  
     
2004 
    
2003 
    
2002 
  
                     
Net income
  
$
8,926,846
  
$
6,087,469
  
$
8,123,441
  
                     
Weighted average common shares outstanding
    
2,139,026
    
2,149,918
    
2,177,962
  
Net effect of the assumed exercise of stock
                    
options based on the treasury stock method
                    
using average market price for the year
    
9,133
    
1,810
    
7,180
  
                     
Total weighted average common shares and
                    
common stock equivalents outstanding
    
2,148,159
    
2,151,728
    
2,185,142
  
                     
Diluted earnings per share
  
$
4.16
  
$
2.83
  
$
3.72
  


NOTE 11.     COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and credit card commitments. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and credit card commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Company's commitments is as follows:

   
December 31,
  
     
2004 
    
2003 
  
               
Commitments to extend credit
  
$
67,045,725
  
$
46,432,605
  
Credit card lines
    
6,531,882
    
6,300,295
  
Financial standby letters of credit
    
3,267,000
    
4,077,006
  
   
$
76,844,607
  
$
56,809,906
  


F-23

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11.     COMMITMENTS AND CONTINGENCIES (Continued)

Loan Commitments (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Credit card commitments are granted on an unsecured basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Company deems necessary.

At December 31, 2004 and 2003, the carrying amount of liabilities related to the Company’s obligation to perform under financial standby letters of credit was insignificant. The Company has not been required to perform on any financial standby letters of credit, and the Company has not incurred any losses on financial standby letters of credit for the years ended December 31, 2004 and 2003.

Contingencies

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


NOTE 12.     CONCENTRATIONS OF CREDIT

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

Eighty three percent (83%) of the Company's loan portfolio is concentrated in loans secured by real estate. A substantial portion of these loans are in the Banks' primary market areas. In addition, a substantial portion of the other real estate owned is located in those same markets. Accordingly, the ultimate collectibility of the Company's loan portfolio and the recovery of the carrying amount of other real estate owned is susceptible to changes in market conditions in the Banks' primary market areas.

The Company's loan portfolio also includes a concentration, eight percent (8%) of the total portfolio, of commercial, financial and agricultural loans. These loans represent loans made primarily to local businesses in the Banks' market areas. A portion of these loans are small business loans and residential loans originated by the loan production office, a division of Community Bank & Trust, which are outside the Banks' primary market areas. The Company's lending policies require loans of all types to be adequately collateralized and supported by adequate cash flows.

Other significant concentrations of credit by type of loan are set forth in Note 3. The Georgia banks, as a matter of policy, do not generally extend credit to any single borrower or group of related borrowers in excess of 25% of each individual Bank's statutory capital, or approximately $7,275,000 and $2,323,000 for Community Bank & Trust and Community Bank & Trust - Troup, respectively. Senior management has chosen to keep the lending limit at $4,775,000 for Community Bank & Trust. Community Bank & Trust - Alabama, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 20% of unimpaired capital, or approximately $1,767,000.

F-24



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.    REGULATORY MATTERS

The Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2004, approximately $6,242,000 of retained earnings were available for dividend declaration without regulatory approval.

The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, and Tier I capital to average assets. Management believes, as of December 31, 2004 the Banks met all capital adequacy requirements to which they are subject.

As of December 31, 2004, the most recent notification from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Banks' category. Prompt corrective action provisions are not applicable to bank holding companies.

F-25

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.    REGULATORY MATTERS (Continued)

The Company and Banks' actual capital amounts and ratios are presented in the following tables.

                     
To Be Well
           
For Capital
  
Capitalized Under
           
Adequacy
  
Prompt Corrective
 
Actual
  
Purposes
  
Action Provisions
 
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
 
(Dollars in Thousands)
As of December 31, 2004
                
 
          
Total Capital to Risk Weighted Assets:
                            
Consolidated
$
84,326
  
12.79%
  
$
52,760
  
8.00%
    
N/A
  
N/A
Community Bank & Trust
$
66,447
  
12.21%
  
$
43,553
  
8.00%
  
$
54,451
  
10.00%
Community Bank & Trust - Alabama
$
7,022
  
16.35%
  
$
3,436
  
8.00%
  
$
4,295
  
10.00%
Community Bank & Trust - Troup
$
9,154
  
12.65%
  
$
5,789
  
8.00%
  
$
7,237
  
10.00%
Tier I Capital to Risk Weighted Assets:
                            
Consolidated
$
76,071
  
11.53%
  
$
26,380
  
4.00%
    
N/A
  
N/A
Community Bank & Trust
$
59,629
  
10.95%
  
$
21,776
  
4.00%
  
$
32,665
  
6.00%
Community Bank & Trust - Alabama
$
6,485
  
15.10%
  
$
1,718
  
4.00%
  
$
2,577
  
6.00%
Community Bank & Trust - Troup
$
8,403
  
11.61%
  
$
2,895
  
4.00%
  
$
4,342
  
6.00%
Tier I Capital to Average Assets:
                            
Consolidated
$
76,071
  
9.09%
  
$
33,487
  
4.00%
    
N/A
  
N/A
Community Bank & Trust
$
59,629
  
8.57%
  
$
27,816
  
4.00%
  
$
34,770
  
5.00%
Community Bank & Trust - Alabama
$
6,485
  
11.26%
  
$
2,304
  
4.00%
 
$
2,880
  
5.00%
Community Bank & Trust - Troup
$
8,403
  
8.32%
  
$
4,041
  
4.00%
 
$
5,052
  
5.00%

As of December 31, 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 - Alabama
$
5,637
  
14.48%
  
$
1,557
  
4.00%
  
$
2,335
  
6%
Community Bank & Trust - Troup
$
7,188
  
11.48%
  
$
2,505
  
4.00%
  
$
3,757
  
6%
Tier I Capital to Average Assets:
                            
Consolidated
$
67,707
  
9.07%
  
$
29,859
  
4.00%
    
N/A
  
N/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%



F-26

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.    FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments.

Cash, Due From Banks, Interest-Bearing Deposits in Other Banks and Federal Funds Sold: The carrying amounts of cash, due from banks, interest-bearing deposits in other banks, and federal funds sold approximate fair values.
Securities: Fair values for securities are based on available quoted market prices. The carrying values of equity securities with no readily determinable fair value approximate fair values.
Loans: For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Fair values for impaired loans are estimated using discounted contractual cash flows or underlying collateral values, where applicable.
Deposits: The carrying amounts of demand deposits, savings deposits and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.
Other Borrowings: The fair values of the Company's fixed rate other borrowings are estimated based on discounted contractual cash flows using the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of all other variable rate borrowings approximate their fair values.
Accrued Interest: The carrying amounts of accrued interest approximate their fair values.
Redeemable Common Stock: The carrying amount of the Company's redeemable common stock approximates fair value.

F-27

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Off-Balance-Sheet Instruments: Fair values of the Company’s off-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of the Company’s off-balance-sheet instruments consist of nonfee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.
The estimated fair values and related carrying amounts of the Company's financial instruments were as follows:
 
 
December 31, 2004
  
December 31, 2003
 
Carrying
Amount
  
Fair
Value
  
Carrying
Amount
  
Fair
Value
                       
Financial assets:
                      
Cash, due from banks, interest-bearing
                      
deposits in other banks, and federal
                     
funds sold
$
30,993,937
  
$
30,993,937
  
$
64,757,849
  
$
64,757,849
Securities available for sale
  
114,883,240
    
114,883,240
    
103,458,121
    
103,458,121
Securities held to maturity
  
20,217,237
    
21,329,740
    
22,628,009
    
24,352,241
Restricted equity securities
  
2,469,000
    
2,469,000
    
1,242,900
    
1,242,900
Loans
  
636,329,474
    
632,314,000
    
537,904,984
    
536,181,203
Accrued interest receivable
  
6,478,800
    
6,478,800
    
5,565,043
    
5,565,043
                       
Financial liabilities:
                      
Deposits
  
726,975,116
    
728,293,000
    
670,604,055
    
676,931,514
Other borrowings
  
25,793,750
    
25,312,750
    
16,152,925
    
15,794,042
Accrued interest payable
  
3,609,204
    
3,609,204
    
3,106,339
    
3,106,339
Redeemable common stock
  
18,925,358
    
18,925,358
    
15,783,013
    
15,783,013


NOTE 15.    SEGMENT INFORMATION

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

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

Total revenue by industry segment includes revenues from unaffiliated customers and affiliates. Revenues from affiliates are eliminated in consolidation. Interest income, interest expenses, data processing fees, management fees and other various revenues and expenses between affiliates are recorded on the accrual basis of accounting consistent with similar transactions with customers outside the consolidated group.

F-28



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.    SEGMENT INFORMATION (Continued)

Selected segment information by industry segment is as follows:

    Reportable Segments   
 
For the Year Ended December 31, 2004
  
 
Banking
  
Financial
Supermarkets
  
All
Other
  
 
Total
  
                       
Interest income
  
$
46,263,126
  
$
142,289
  
$
30,402
  
$
46,435,817
  
Interest expense
    
12,986,202
    
-
    
35,348
    
13,021,550
  
Intersegment net interest income (expense)
    
(138,987
)
  
133,837
    
5,150
    
-
  
Net interest income (loss)
    
33,276,924
    
142,289
    
(4,946
)
  
33,414,267
  
Other revenue from external customers
    
13,408,988
    
6,468,364
    
896,009
    
20,773,361
  
Intersegment other revenues
    
-
    
246,620
    
2,253,000
    
2,499,620
  
Depreciation and amortization
    
2,205,496
    
272,138
    
414,653
    
2,892,287
  
Provision for loan losses
    
3,037,000
    
-
    
-
    
3,037,000
  
Segment profit (loss)
    
9,424,747
    
1,276,512
    
(1,868,536
)
  
8,832,723
  
Segment assets
    
845,938,303
    
17,561,448
    
4,733,272
    
868,233,023
  
Expenditures for premises and equipment
    
4,991,492
    
98,950
    
584,167
    
5,674,609
  


 
For the Year Ended December 31, 2003
  
 
Banking
  
Financial
Supermarkets
  
All
Other
  
 
Total
  
                       
Interest income
  
$
43,391,726
  
$
17,804
  
$
-
  
$
43,409,530
  
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
  

F-29



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.    SEGMENT INFORMATION (Continued)

       
2004 
    
2003 
    
2002 
  
Net Income
                    
                     
Total profit for reportable segments
  
$
10,701,259
  
$
6,979,207
  
$
9,419,817
  
Non-reportable segment loss
    
(1,868,536
)
  
(927,048
)
  
(1,243,768
)
Elimination of intersegment gains (losses)
    
94,123
    
35,310
   
(52,608
)
Total consolidated net income
  
$
8,926,846
  
$
6,087,469
  
$
8,123,441
  
                     
Total Assets
                    
                     
Total assets for reportable segments
  
$
863,499,751
  
$
781,219,787
  
$
717,836,616
  
Non-reportable segment assets
    
4,733,272
    
5,516,265
   
4,854,392
  
Elimination of intersegment assets
    
(24,855,510
)
  
(20,551,300
)
  
(22,444,981
)
Total consolidated assets
  
$
843,377,513
  
$
766,184,752
  
$
700,246,027
  
                     
Expenditures for Premises and Equipment
                    
                     
Total expenditures for reportable segments
  
$
5,090,442
  
$
1,134,328
  
$
2,434,322
  
Non-reportable segment assets
    
584,167
    
246,919
   
575,759
  
Elimination of intersegment gains
    
-
    
(50,000
)
  
(150,000
)
Total consolidated expenditures for
                    
premises and equipment
  
$
5,674,609
  
$
1,331,247
  
$
2,860,081
  


NOTE 16. SUPPLEMENTAL FINANCIAL DATA

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

   
Years Ended December 31, 
  
   
2004
  
 2003
  
 2002
  
                 
Data processing
  
$
1,652,070
  
$
1,244,160
  
$
966,786
  
Travel expenses
    
1,171,060
    
1,163,906
    
1,126,738
  
Office supply expenses
    
984,364
    
889,704
    
811,511
  
Advertising
    
983,927
    
780,394
    
808,499
  

NOTE 17.    SUBSEQUENT EVENT
 
On January 13, 2005, the Board of Directors of the Company voted unanimously to declare a one for five-hundred reverse stock split for the primary purpose of “going private” which will relieve the Company from the expense and burden associated with compliance with both current and proposed federal securities laws and regulations. Since the Board of Directors and executive officers, as defined by securities law, do not collectively control more than 50% of the voting shares of the Company’s outstanding stock and since the reverse stock split is subject to regulatory and shareholder approval to amend the Company’s articles of incorporation, we have not restated the equity section of the balance sheet or per share amounts. The following table illustrates the effect on earnings per share if the Company had reflected the one for five-hundred reverse stock split.

   
 Years Ended December 31,
  
     
2004 
    
2003 
    
2002 
  
Earnings per share:
                    
Basic - as reported
  
$
4.17
  
$
2.83
  
$
3.73
  
Basic - pro forma
  
$
2,087.00
  
$
1,416.00
  
$
1,865.00
  
Diluted - as reported
  
$
4.16
  
$
2.83
  
$
3.72
  
Diluted - pro forma
  
$
2,078.00
  
$
1,414.00
  
$
1,859.00
  
 

F-30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18.    PARENT COMPANY ONLY FINANCIAL INFORMATION

The following information presents the condensed balance sheets as of December 31, 2004 and 2003 and condensed statements of income and cash flows of Community Bankshares, Inc. for the years ended December 31, 2004, 2003 and 2002:

CONDENSED BALANCE SHEETS
  
           
   
 2004 
  
 2003 
  
             
Assets
              
Cash
  
$
1,335,271
  
$
2,894,770
  
Investment in subsidiaries
    
77,030,447
    
69,097,327
  
Equipment
   
704,060
    
547,549
  
Other assets
    
2,370,509
    
1,824,268
  
               
Total assets
  
$
81,440,287
  
$
74,363,914
  
               
Liabilities
              
Other borrowings
  
$
543,750
  
$
1,077,925
  
Other liabilities
   
1,169,647
    
754,029
  
               
Total liabilities
    
1,713,397
    
1,831,954
  
               
Redeemable common stock
    
18,925,358
    
15,783,013
  
               
Shareholders' equity
    
60,801,532
    
56,748,947
  
               
Total liabilities, redeemable common stock,
             
and shareholders' equity
  
$
81,440,287
  
$
74,363,914
  


F-31



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18.    PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)

 
CONDENSED STATEMENTS OF INCOME
  
   
     
2004
   
2003
   
2002
 
                     
Income
                    
Dividends from subsidiaries
  
$
2,200,000
  
$
4,040,000
  
$
3,660,000
  
Interest
    
30,402
    
38,062
    
62,062
  
Other income
   
2,363,101
    
2,441,648
    
2,275,425
  
     
4,593,503
    
6,519,710
    
5,997,487
  
                     
Expense
                    
Interest
   
35,348
    
42,768
    
70,780
  
Salaries and employee benefits
    
3,513,510
    
2,347,297
    
2,718,005
  
Equipment expense
    
796,334
    
627,300
    
451,299
  
Other expense
    
1,235,830
    
948,818
    
991,961
  
     
5,581,022
    
3,966,183
    
4,232,045
  
                     
Income (loss) before income tax benefits and equity
                    
in undistributed income of subsidiaries
    
(987,519
)
  
2,553,527
    
1,765,442
  
                     
Income tax benefits
    
(1,242,711
)
  
(553,428
)
  
(749,699
)
                     
Income before equity in undistributed income
                    
of subsidiaries
    
255,192
    
3,106,955
    
2,515,141
  
                     
Equity in undistributed income of subsidiaries
    
8,656,654
    
2,965,514
    
5,647,049
  
                     
Net income
 
$
8,911,846
  
$
6,072,469
  
$
8,162,190
  


F-32

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18.    PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS
  
               
   
2004 
  
2003
  
2002
  
               
OPERATING ACTIVITIES
                
Net income
 
$
8,911,846
  
$
6,072,469
  
$
8,162,190
  
Adjustments to reconcile net income to net
                    
cash provided by operating activities:
                    
Depreciation and amortization
    
389,505
    
323,291
    
292,002
  
Undistributed income of subsidiaries
    
(8,656,654
)
  
(2,965,514
)
  
(5,647,049
)
Other operating activities
    
(489,566
)
  
653,544
    
(153,404
)
                     
Net cash provided by operating activities
    
155,131
    
4,083,790
    
2,653,739
  
                     
INVESTING ACTIVITIES
                    
Purchases of premises and equipment
   
(546,016
)
  
(234,805
)
  
(473,638
)
(Increase) decrease in notes receivable from ESOP
    
388,457
    
390,158
    
193,750
  
                     
Net cash provided by (used in) investing activities
    
(157,559
)
  
155,353
    
(279,888
)
                     
FINANCING ACTIVITIES
                    
Repayment of other borrowings
    
(534,175
)
  
(586,600
)
  
(405,350
)
Proceeds from exercise of stock options
    
112,790
    
23
    
44
  
Dividends paid
    
(706,016
)
  
(602,327
)
  
(523,070
)
Purchase of treasury stock
    
(429,670
)
  
(1,134,442
)
  
(1,280,920
)
                     
Net cash provided by (used in) financing activities
    
(1,557,071
)
  
(2,323,346
)
  
(2,209,296
)
                     
Net increase (decrease) in cash
    
(1,559,499
)
  
1,915,797
    
164,555
  
                     
Cash at beginning of year
    
2,894,770
    
978,973
    
814,418
  
                     
Cash at end of year
  
$
1,335,271
  
$
2,894,770
  
$
978,973
  
                     


 
 
F-33
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the, thereunto duly authorized, in the City of Cornelia, State of Georgia, on the 31st day of March, 2005.
 
 
     
  COMMUNITY BANKSHARES, INC.
 
 		  
 		  
 
By:   /s/  J. Alton 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 constitutes and appoints J. Alton Wingate or Harry L. Stephens and either of them (with full power in each to act alone), as true and lawful attorneys-in-fact, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

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

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





     
     
 /s/ Lois M. Wood-Schroyer
  
Director
Lois M. Wood-Schroyer
    
     
     
 /s/ Harry L. Stephens
  
Executive Vice President and
Harry L. Stephens
  
Chief Financial Officer
   
(Principal Financial and
   
Accounting Officer)




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

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


39

EXHIBIT INDEX


   
10.11
Fourth Amendment to Amended and Restated Revolving Credit/Term Loan Agreement between the Registrant and SunTrust Bank dated June 30, 2004.
   
31.1
Certification by J. Alton Wingate, President and Chief Executive Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification by Harry L. Stephens, Chief Financial Officer of Community Bankshares, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
 
Certification by J. Alton Wingate, President and Chief Executive Officier of Community Bankshares, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 
Certification by Harry L. Stephens, Chief Financial Officier of Community Bankshares, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.