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        Commission File No. 000-22054

                           COMMUNITY BANKSHARES, INC.
             (Exact name of registrant as specified in its charter)


         South Carolina                                         57-0966962
(State or other jurisdiction of                                (IRS Employer
incorporation or organization)                               Identification No.)


                   791 Broughton Street, Orangeburg, SC 29115
               (Address of principal executive offices, zip code)

        Registrant's telephone number, including area code (803) 535-1060

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

Title of each class                    Name of each exchange on which registered
Common Stock, No Par Value                           American Stock Exchange

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

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

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.

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act): Yes [ ] No [X]

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates  as of the last  business day of the  registrant's  most recently
completed second fiscal quarter, June 30, 2004 was approximately $59,459,000.

As of March 09, 2005,  there were 4,390,784  shares of the  registrant's  common
stock, no par value, outstanding.


                       DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Registrant's  Proxy Statement for the 2004 Annual Meeting of
Shareholders - Part III





                             10-K TABLE OF CONTENTS



                                                           Part I                                         Page
                                                                                                       
Item 1          Description of Business ...............................................................    3
Item 2          Description of Property ...............................................................   10
Item 3          Legal Proceedings .....................................................................   11
Item 4          Submission of Matters to a Vote of Security Holders ...................................   11

                                                           Part II
Item 5          Market for Registrant's Common Equity, Related Stockholder Matters and
                   Issuer Purchases of Equity Securities ..............................................   12
Item 6          Selected Financial Data ...............................................................   13
Item 7          Management's Discussion and Analysis of Financial Condition and Results of
                   Operations .........................................................................   14
Item 7A         Quantitative and Qualitative Disclosures about Market Risk ............................   32
Item 8          Financial Statements and Supplementary Data ...........................................   36
                Report of Independent Registered Public Accounting Firm ...............................   37
                Consolidated Balance Sheets, December 31, 2004 and 2003 ...............................   38
                Consolidated Statements of Income,
                   Years Ended December 31, 2004, 2003 and 2002 .......................................   39
                Consolidated Statements of Changes in Shareholders' Equity,
                   Years Ended December 31, 2004, 2003 and 2002 .......................................   40
                Consolidated Statements of Cash Flows,
                   Years Ended December 31, 2004, 2003 and 2002 .......................................   41
                Notes to Consolidated Financial Statements ............................................   42
                Quarterly Data for 2004 and 2003 ......................................................   68
Item 9          Changes In and Disagreements with Accountants
                   on Accounting and Financial Disclosure .............................................   69
Item 9A         Controls and Procedures ...............................................................   69
Item 9B         Other Information .....................................................................   69

                                                           Part III
Item 10         Directors and Executive Officers of the Registrant ....................................   *
Item 11         Executive Compensation ................................................................   *
Item 12         Security Ownership of Certain Beneficial Owners and Management and
                   Related Stockholder Matters ........................................................   *
Item 13         Certain Relationships and Related Transactions ........................................   *
Item 14         Principal Accountant Fees and Services ................................................   *

                                                           Part IV
Item 15         Exhibits and Financial Statement Schedules ............................................   71


* Incorporated by reference to Registrant's  Proxy Statement for the 2005 Annual
Meeting of Shareholders



                                       2



                           FORWARD-LOOKING STATEMENTS

         Statements  included in this report which are not  historical in nature
are intended to be, and are hereby  identified as  `forward-looking  statements'
for  purposes  of the safe  harbor  provided  by Section  21E of the  Securities
Exchange Act of 1934, as amended.  Forward-looking statements include statements
concerning plans, objectives,  goals,  strategies,  future events or performance
and underlying  assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified,  without
limitation, by the use the of the words "anticipates,"  "believes," "estimates,"
"expects," "intends," "plans," "predicts,"  "projects," and similar expressions.
The Corporation's expectations, beliefs, estimates and projections are expressed
in good faith and are believed by the  Corporation  to have a reasonable  basis,
including without limitation,  management's  examination of historical operating
trends,  data  contained in the  Corporation's  records and other data available
from  third  parties,   but  there  can  be  no  assurance   that   management's
expectations,  beliefs,  estimates or projections  will result or be achieved or
accomplished.  The Corporation cautions readers that forward-looking statements,
including without  limitation,  those relating to the  Corporation's  recent and
continuing expansion, its future business prospects,  revenues, working capital,
liquidity,  capital needs, interest costs, income, and adequacy of the allowance
for loan losses,  are subject to risks and uncertainties that could cause actual
results  to  differ  materially  from  those  indicated  in the  forward-looking
statements,  due to several important factors herein  identified,  among others,
and other risks and factors  identified  from time to time in the  Corporation's
reports  filed with the  Securities  and Exchange  Commission.  The  Corporation
undertakes  no  obligation  to  publicly  update or revise  any  forward-looking
statements, whether as a result of new information, future events or otherwise.

                        References to our Website Address

         References to our website address throughout this Annual Report on Form
10-K and in any documents  incorporated into this Form 10-K by reference are for
informational  purposes only, or to fulfill specific disclosure  requirements of
the  Securities and Exchange  Commission's  rules or the American Stock Exchange
listing standards. These references are not intended to, and do not, incorporate
the contents of our website by reference into this Form 10-K or the accompanying
materials.

                                     PART I

Item 1.  Description of Business

Form of organization

         Community Bankshares, Inc. (CBI or the Corporation) is a South Carolina
corporation  and a bank holding  company.  CBI  commenced  operations on July 1,
1993, upon effectiveness of the acquisition of the Orangeburg National Bank as a
wholly-owned  subsidiary.  In June  1996 CBI  acquired  all the  stock of Sumter
National  Bank,  which  is also a  wholly-owned  subsidiary.  In July  1998  CBI
acquired all the stock of Florence  National Bank,  which is also a wholly-owned
subsidiary.  In July 2002 CBI acquired by merger Ridgeway Bancshares,  Inc., the
parent company of the Bank of Ridgeway.

         Orangeburg  National  Bank (the  Orangeburg  bank) is a national  bank,
chartered  in 1987,  operating  from two offices  located in  Orangeburg,  South
Carolina.

         Sumter National Bank (the Sumter bank) is a national bank, chartered in
1996, operating from two offices located in Sumter, South Carolina.

         Florence  National  Bank  (the  Florence  bank)  is  a  national  bank,
chartered  in 1998,  operating  from two  offices  located  in  Florence,  South
Carolina. A second office was opened in early 2005.

         Bank  of   Ridgeway   (the   Ridgeway   bank)   is  a  South   Carolina
state-chartered  bank, organized in 1898, operating from one office in Ridgeway,
one office in Winnsboro, and one office in Blythewood, South Carolina.

         In  November  2001,  CBI  acquired  all the  common  stock of  Resource
Mortgage Inc., a Columbia,  South Carolina based mortgage company.  The mortgage
company operates as a wholly-owned  subsidiary of the holding company and is now
named Community Resource Mortgage, Inc. (CRM).


                                       3


Business of banking

         The Orangeburg, Sumter, Florence and Ridgeway banks (hereafter referred
to as the  Banks)  offer a full  array  of  commercial  bank  services.  Deposit
services include business and personal checking accounts, NOW accounts,  savings
accounts,  money market  accounts,  various term  certificates  of deposit,  IRA
accounts,  and other deposit services. The Federal Deposit Insurance Corporation
insures  deposits  up to  applicable  limits.  Most of the Banks'  deposits  are
attracted from individuals and small businesses.

         The Banks  offer  secured  and  unsecured,  short-to-intermediate  term
loans,  with  floating  and fixed  interest  rates for  commercial  and consumer
purposes.  Consumer  loans  include  car loans,  home equity  improvement  loans
secured by first and second mortgages,  personal  expenditure  loans,  education
loans, and the like.  Commercial loans include short-term unsecured loans, short
and  intermediate  term real  estate  mortgage  loans,  loans  secured by listed
stocks,  loans secured by equipment,  inventory,  accounts  receivable,  and the
like.  The Banks do not and will not  discriminate  against  any  applicant  for
credit on the basis of race, color,  creed,  sex, age, marital status,  familial
status, handicap, or derivation of income from public assistance programs.

         Other services  offered by the Banks include safe deposit boxes,  night
depository  service,  VISA  and  Master  Card  brand  charge  cards  (through  a
correspondent),  tax deposits,  sale of U.S. Treasury bonds, notes and bills and
other U. S. government  securities  (through a correspondent),  twenty-four hour
automated teller service,  and Internet banking services.  Each of the Banks has
ATMs and they are all part of the Star and Cirrus networks.

         The  mortgage  company  provides a wide  variety of one to four  family
residential  mortgage  products  in the  Columbia,  Sumter and  Anderson,  South
Carolina markets.

Competition

         The  market  for  financial  institutions  in our  various  markets  is
generally  highly  competitive.  Banks  generally  compete with other  financial
institutions  through the banking services and products offered,  the pricing of
services,  the level of service  provided,  the convenience and  availability of
services,  and the degree of expertise and personal  concern with which services
are offered.  The Banks encounter strong  competition from most of the financial
institutions in their market areas.

         The market area for the Orangeburg  bank generally  encompasses an area
extending  nine miles  around the city of  Orangeburg.  The market  area for the
Sumter bank generally  encompasses the county of Sumter. The market area for the
Florence bank generally  encompasses  the city of Florence.  The market area for
the Ridgeway bank generally  encompasses  Fairfield County (for the Ridgeway and
Winnsboro offices) and the town of Blythewood in Richland County. In the conduct
of certain banking business, the Banks also compete with credit unions, consumer
finance  companies,  insurance  companies,  money market mutual funds, and other
financial  institutions,  some of which are not  subject  to the same  degree of
regulation and restrictions  imposed upon the Banks.  Many of these  competitors
have substantially greater resources and lending limits than the Banks and offer
certain services,  such as international  banking and trust services,  which the
Banks do not provide.  The Banks believe,  however,  that their relatively small
size  permits  them to  offer  more  personalized  services  than  many of their
competitors.  The Banks attempt to compensate  for their lower lending limits by
participating larger loans with other institutions, often with each other.

         Most of the other financial  institutions  in the  Orangeburg,  Sumter,
Florence and most of the  Ridgeway  service  areas are branch  offices of large,
regional banks with offices located throughout South Carolina. At June 30, 2004,
there  were  five  FDIC  insured  financial   institutions  competing  with  the
Corporation in the city of Orangeburg,  eight financial  institutions  competing
with the Corporation in Sumter County, and 15 financial  institutions  competing
with the  Corporation in the city of Florence.  At June 30, 2004, the Orangeburg
bank had the second largest  deposit base in the city of Orangeburg;  the Sumter
bank had the third largest deposit base in Sumter County;  the Florence bank had
the sixth  largest  deposit base in the city of Florence;  and the Ridgeway bank
had the largest  deposit base in  Fairfield  County and  approximately  half the
deposits in the town of Blythewood.

         The  mortgage  company has  offices in  Anderson,  Richland  and Sumter
Counties  of South  Carolina,  where it  competes  with  hundreds  of  financial
institutions and mortgage originators.

                                       4


Dependence on Major Customers

         The Banks do not consider  themselves  dependent on any single customer
or small group of customers, either in the deposit or lending areas.

SUPERVISION AND REGULATION

         Bank  holding  companies  and banks  are  extensively  regulated  under
federal and state law. To the extent that the  following  information  describes
statutory  and  regulatory  provisions,  it is  qualified  in  its  entirety  by
reference to such  statutes and  regulations.  Any change in  applicable  law or
regulation may have a material effect on the business of CBI and the Banks.

         As discussed below under the caption "Gramm-Leach-Bliley Act", Congress
has adopted  extensive  changes in the laws  governing  the  financial  services
industry.  Among the changes  adopted  are  creation  of the  financial  holding
company,  a new type of bank holding  company  with powers that  greatly  exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same  activities  in which a financial  holding  company may engage.  The
legislation  also establishes the concept of functional  regulation  whereby the
various financial activities in which financial institutions engage are overseen
by the  regulator  with the relevant  regulatory  experience.  Accordingly,  the
following  discussion relates to the supervisory and regulatory  provisions that
apply to CBI and the Banks as they currently operate.

Regulation of Bank Holding Companies

General

         As a bank holding company registered under the Bank Holding Company Act
("BHCA"),  CBI is subject to the  regulations  of the Board of  Governors of the
Federal Reserve System (the "Federal Reserve"). Under the BHCA, CBI's activities
and those of its  subsidiaries  are limited to banking,  managing or controlling
banks,  furnishing  services to or performing  services for its  subsidiaries or
engaging in any other  activity  which the Federal  Reserve  determines to be so
closely  related to banking or managing or  controlling  banks as to be a proper
incident  thereto.  The BHCA  prohibits  CBI from  acquiring  direct or indirect
control of more than 5% of the outstanding  voting stock or substantially all of
the  assets of any bank or from  merging  or  consolidating  with  another  bank
holding  company  without prior approval of the Federal  Reserve.  The BHCA also
prohibits CBI from acquiring  control of any bank operating outside the State of
South Carolina unless such action is specifically  authorized by the statutes of
the state where the bank to be acquired is located.

     Additionally,  the BHCA  prohibits CBI from  engaging in or from  acquiring
ownership  or control  of more than 5% of the  outstanding  voting  stock of any
company engaged in a non-banking  business unless such business is determined by
the  Federal  Reserve  to be so closely  related  to  banking as to be  properly
incident thereto. The BHCA generally does not place territorial  restrictions on
the activities of such non-banking-related activities.

         As  discussed  below under  "Gramm-Leach-Bliley  Act",  a bank  holding
company that meets certain  requirements may now qualify as a financial  holding
company  and  thereby  significantly  increase  the  variety of  services it may
provide and the investments it may make.

         CBI is also subject to limited  regulation and supervision by the South
Carolina  State Board of Financial  Institutions  (the "State  Board").  A South
Carolina  bank  holding  company may be required to provide the State Board with
information with respect to the financial condition, operations,  management and
inter-company  relationships  of the holding company and its  subsidiaries.  The
State Board also may require  such other  information  as is  necessary  to keep
itself  informed  about  whether the  provisions  of South  Carolina law and the
regulations  and orders issued  thereunder by the State Board have been complied
with,  and the  State  Board  may  examine  any  bank  holding  company  and its
subsidiaries.  Furthermore,  pursuant to  applicable  law and  regulations,  the
Company must receive  approval of, or give notice to (as  applicable)  the State
Board  prior  to  engaging  in  the   acquisition   of  banking  or  non-banking
institutions or assets.

Obligations of Holding Company to its Subsidiary Banks

         A number of obligations  and  restrictions  are imposed on bank holding
companies  and their  depository  institution  subsidiaries  by Federal  law and
regulatory  policies that are designed to reduce  potential loss exposure to the
depositors of such  depository  institutions  and to the FDIC insurance funds in
the event the depository  institution  is in danger of becoming  insolvent or is
insolvent.  For example, under the policy of the Federal Reserve, a bank holding


                                       5


company is required to serve as a source of financial strength to its subsidiary
depository  institutions and to commit resources to support such institutions in
circumstances  where it might not do so absent such  policy.  In  addition,  the
"cross-guarantee"  provisions of the Federal  Deposit  Insurance Act, as amended
("FDIA"),  require  insured  depository  institutions  under  common  control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings  Association  Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the  FDIC  as a  result  of the  default  of a  commonly  controlled  insured
depository  institution or for any assistance provided by the FDIC to a commonly
controlled  insured  depository  institution in danger of default.  The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best  interest  of the SAIF or the BIF or both.  The FDIC's  claim for
damages  is  superior  to  claims  of  stockholders  of the  insured  depository
institution  or its holding  company but is subordinate to claims of depositors,
secured  creditors and holders of subordinated  debt (other than  affiliates) of
the commonly controlled insured depository institutions.

         The FDIA also provides that amounts  received from the  liquidation  or
other resolution of any insured  depository  institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit  liabilities of
the  institution  prior to payment  of any other  general  or  unsecured  senior
liability,   subordinated  liability,  general  creditor  or  stockholder.  This
provision gives depositors a preference over general and subordinated  creditors
and  stockholders  in the event a receiver is appointed to distribute the assets
of the bank.

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank
regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

         Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment  upon the bank's  shareholders',  pro rata,  and to the
extent  necessary,  if any such assessment is not paid by any shareholder  after
three  months  notice,  to sell the stock of such  shareholder  to make good the
deficiency.

Capital Adequacy Guidelines for Bank Holding Companies and Banks

         The various federal bank regulators,  including the Federal Reserve and
the FDIC,  have adopted  risk-based  and leverage  capital  adequacy  guidelines
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and  off-balance-sheet  exposures,  as  adjusted  for credit  risks.  The
capital  guidelines and CBI's capital  position are summarized in Note 19 to the
Financial Statements,  contained elsewhere in this report. All four of the Banks
are considered well capitalized.

         Failure to meet capital guidelines could subject the Banks to a variety
of enforcement  remedies,  including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.

         The risk-based  capital standards of both the Federal Reserve Board and
the FDIC explicitly identify  concentrations of credit risk and the risk arising
from non-traditional  activities,  as well as an institution's ability to manage
these risks,  as  important  factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital  due to changes in interest  rates be  considered  by the  agencies as a
factor in evaluating a bank's capital  adequacy.  The Federal Reserve Board also
has recently issued  additional  capital  guidelines for bank holding  companies
that engage in certain trading activities.

Payment of Dividends

         CBI is a legal entity separate and distinct from the Banks. Most of the
revenues  of CBI  result  from  dividends  paid to CBI by the  Banks.  There are
statutory and regulatory  requirements applicable to the payment of dividends by
subsidiary banks as well as by CBI to its shareholders.

         Each national banking  association is required by federal law to obtain
the prior  approval of the OCC for the payment of  dividends if the total of all
dividends  declared  by the  board of  directors  of such  bank in any year will
exceed the total of (i) such bank's net profits (as defined and  interpreted  by
regulation)  for that year plus (ii) the  retained  net  profits (as defined and
interpreted  by  regulation)  for the  preceding  two years,  less any  required
transfers to surplus. In addition,  national banks can only pay dividends to the
extent that retained net profits (including the portion  transferred to surplus)
exceed bad debts (as defined by regulation).  South Carolina banking regulations
also restrict the amount of dividends  that South  Carolina  state banks can pay
shareholders.  Any  dividends  by a South  Carolina  state bank that  exceed the

                                       6


bank's total  year-to-date  earnings are subject to prior  approval of the South
Carolina  Commissioner of Banking and are generally  payable only from undivided
profits.  Payment of dividends by a state bank would also be  prohibited  if the
effect  would be to cause the Bank's  capital to fall below  applicable  minimum
capital requirements.

         The payment of  dividends  by CBI and the Banks may also be affected or
limited by other factors,  such as the requirements 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  on 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 OCC has indicated  that paying  dividends that deplete a national
bank's  capital  base to an  inadequate  level  would be an unsafe  and  unsound
banking practice.  The Federal Reserve,  the OCC and the FDIC have issued policy
statements,  which provide that bank holding  companies and insured banks should
generally only pay dividends out of current operating earnings.

Certain Transactions by CBI with its Affiliates

         Federal  law  regulates  transactions  among  CBI and  its  affiliates,
including the amount of the Banks' loans to or investments in nonbank affiliates
and the amount of advances to third parties  collateralized  by securities of an
affiliate.  Further,  a bank holding  company and its  affiliates 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.

FDIC Insurance Assessments

         Because Orangeburg  National Bank's,  Sumter National Bank's,  Florence
National  Bank's and the Bank of  Ridgeway's  deposits  are  insured by the Bank
Insurance  Fund of the  FDIC  ("BIF"),  the  Banks  are  subject  to  semiannual
insurance   assessments  imposed  by  the  FDIC.  Since  January  1,  1997,  the
assessments imposed on all FDIC deposits for deposit insurance have an effective
rate ranging from 0 to 27 basis points per $100 of insured  deposits,  depending
on the institution's  capital position and other supervisory  factors.  However,
legislation  enacted in 1996  requires that both Savings  Association  Insurance
Fund  ("SAIF")  insured and BIF insured  deposits  pay a pro rata portion of the
interest due on the obligations  issued by the Financing  Corporation  ("FICO").
The FICO  assessment is adjusted  quarterly to reflect changes in the assessment
bases of the  respective  funds  based  on  quarterly  Call  Report  and  Thrift
Financial Report submissions.

Regulation of the Banks

         Orangeburg  National Bank,  Sumter National Bank, and Florence National
Bank are also subject to regulation and  examination by the OCC bank  examiners.
The Bank of Ridgeway is subject to regulation  and  examination  by the FDIC and
the State Board.  In addition,  the Banks are subject to various other state and
federal  laws and  regulations,  including  state usury laws,  laws  relating to
fiduciaries,  consumer  credit  laws and laws  relating to branch  banking.  The
Banks' loan operations are subject to certain  federal  consumer credit laws and
regulations promulgated thereunder,  including,  but not limited to: the federal
Truth-In-Lending   Act,  governing  disclosures  of  credit  terms  to  consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information  concerning their mortgage lending; the Equal Credit
Opportunity  Act and the Fair Housing  Act,  prohibiting  discrimination  on the
basis of  certain  prohibited  factors  in  extending  credit;  the Fair  Credit
Reporting  Act,  governing  the use  and  provision  of  information  to  credit
reporting agencies;  the Bank Secrecy Act, dealing with, among other things, the
reporting of certain  currency  transactions;  and the Fair Debt Collection Act,
governing  the manner in which  consumer  debts may be collected  by  collection
agencies.  The  deposit  operations  of the  Banks are  subject  to the Truth in
Savings Act, requiring certain disclosures about rates paid on savings accounts;
the  Expedited  Funds  Availability  Act,  which  deals with  disclosure  of the
availability  of funds  deposited in accounts and the  collection  and return of
checks by banks;  the Right to Financial  Privacy Act,  which  imposes a duty to
maintain  certain   confidentiality   of  consumer  financial  records  and  the
Electronic  Funds Transfer Act and  regulations  promulgated  thereunder,  which
govern  automatic   deposits  to  and  withdrawals  from  deposit  accounts  and
customers'  rights and  liabilities  arising  from the use of  automated  teller
machines and other electronic banking services.

         The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA").  The CRA imposes on financial  institutions  an affirmative and
ongoing  obligation  to meet  the  credit  needs  of  their  local  communities,
including low- and moderate-income  neighborhoods,  consistent with the safe and
sound  operation of those  institutions.  Each  financial  institution's  actual
performance  in  meeting  community  credit  needs is  evaluated  as part of the
examination process, and also is considered in evaluating mergers,  acquisitions
and applications to open a branch or facility.


                                       7


Other Safety and Soundness Regulations

         Prompt  Corrective  Action.  The federal  banking  agencies  have broad
powers under  current  federal law to take prompt  corrective  action to resolve
problems of insured depository institutions.  The extent of these powers depends
upon whether the  institutions in question are "well  capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly    undercapitalized"   or
"critically undercapitalized."

         A bank that is "undercapitalized"  becomes subject to provisions of the
Federal  Deposit   Insurance  Act  ("FDIA")   restricting   payment  of  capital
distributions and management fees; requiring the OCC to monitor the condition of
the  bank;  requiring  submission  by the bank of a  capital  restoration  plan;
restricting  the growth of the bank's  assets and  requiring  prior  approval of
certain expansion proposals. A bank that is "significantly  undercapitalized" is
also subject to restrictions on  compensation  paid to senior  management of the
bank, and a bank that is  "critically  undercapitalized"  is further  subject to
restrictions  on the  activities  of the bank and  restrictions  on  payments of
subordinated  debt of the bank.  The purpose of these  provisions  is to require
banks with less than  adequate  capital to act quickly to restore  their capital
and to have the OCC move  promptly  to take over  banks  that are  unwilling  or
unable to take such steps.

         Brokered Deposits.  Under current FDIC regulations,  "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept  brokered  deposits  with a waiver  from the FDIC  (subject  to
certain restrictions on payments of rates), while  "undercapitalized"  banks may
not accept brokered  deposits.  The regulations  provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the  definitions  adopted by the agencies to implement the prompt  corrective
action provisions described in the previous paragraph.

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 ("Riegle-Neal"),  CBI and any other adequately  capitalized bank holding
company located in South Carolina can acquire a bank located in any other state,
and a bank holding  company located outside South Carolina can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other  restrictions.  Riegle-Neal  also provides that, in any state that has not
previously  elected to prohibit  out-of-state  banks from  operating  interstate
branches within its territory,  adequately  capitalized and managed bank holding
companies can  consolidate  their  multistate bank operations into a single bank
subsidiary and branch interstate through  acquisitions.  De novo branching by an
out-of-state bank is permitted only if it is expressly  permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable  state branching  laws.  South
Carolina  law was amended,  effective  July 1, 1996,  to permit such  interstate
branching but not de novo branching by an out-of-state bank.

         The  Riegle-Neal  Act,  together  with  legislation  adopted  in  South
Carolina,  resulted in a number of South  Carolina banks being acquired by large
out-of-state  bank  holding  companies.  Size  gives the  larger  banks  certain
advantages  in competing for business from larger  customers.  These  advantages
include  higher  lending limits and the ability to offer services in other areas
of South  Carolina  and the  region.  As a result,  the  Banks do not  generally
attempt to compete  for the banking  relationships  of large  corporations,  but
concentrate   their  efforts  on  small  to   medium-sized   businesses  and  on
individuals.  CBI believes its Banks have  competed  effectively  in this market
segment by offering quality, personal service.

Gramm-Leach-Bliley Act

         The  Gramm-Leach-Bliley  Act,  which  makes it easier for  affiliations
between banks,  securities firms and insurance  companies to take place,  became
effective  in March  2000.  The Act  removes  Depression-era  barriers  that had
separated  banks and  securities  firms,  and seeks to  protect  the  privacy of
consumers' financial information.

         Under  provisions of the  legislation  and  regulations  adopted by the
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations  through a holding company  structure or through a
financial subsidiary. The legislation creates a new type of bank holding company
called a "financial  holding  company" which has powers much more extensive than
those of standard holding companies.  These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature;  (2)  incidental  to  activities  that are  financial in nature;  or (3)
complementary  to a  financial  activity  and that do not  impose  a safety  and
soundness risk. Significantly,  the permitted financial activities for financial
holding  companies include authority to engage in merchant banking and insurance
activities,  including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and  have  received  a  rating  of   "satisfactory"   on  their  last  Community
Reinvestment Act examination.

                                       8


         The  legislation  also  creates  another  new type of  entity  called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities,  including real
estate development or investment,  insurance or annuity underwriting,  insurance
portfolio  investing and merchant  banking,  are reserved for financial  holding
companies.  A bank's  investment  in a financial  subsidiary  affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial  subsidiaries  may not be consolidated  with those of the bank. The
bank must also be certain that its risk  management  procedures  are adequate to
protect it from  financial and  operational  risks created both by itself and by
any financial subsidiary.  Further, the bank must establish policies to maintain
the separate corporate  identities of the bank and its financial  subsidiary and
to prevent  each from  becoming  liable for the  obligations  of the other.  The
Florence bank and the Orangeburg  bank each have a financial  subsidiary for the
sale of securities and insurance products.

         The Act also  establishes  the  concept  of  "functional  supervision,"
meaning that  similar  activities  should be  regulated  by the same  regulator.
Accordingly,  the Act spells out the regulatory authority of the bank regulatory
agencies,  the Securities and Exchange Commission and state insurance regulators
so that each type of activity is  supervised by a regulator  with  corresponding
expertise.  The Federal  Reserve Board is intended to be an umbrella  supervisor
with the  authority  to  require a bank  holding  company or  financial  holding
company  or any  subsidiary  of  either  to  file  reports  as to its  financial
condition,  risk management  systems,  transactions with depository  institution
subsidiaries  and  affiliates,  and compliance  with any federal law that it has
authority to enforce.

         Although the Act reaffirms that states are the regulators for insurance
activities  of  all  persons,  including   federally-chartered  banks,  the  Act
prohibits  states from preventing  depository  institutions and their affiliates
from conducting insurance activities.

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.

         The Act and the  regulations  adopted  pursuant  to the Act  create new
opportunities  for CBI to offer  expanded  services to  customers in the future,
though, except as noted above, CBI has not yet determined what the nature of the
expanded services might be or when CBI might find it feasible to offer them. The
Act has  increased  competition  from  larger  financial  institutions  that are
currently  more  capable  than CBI of taking  advantage  of the  opportunity  to
provide a broader range of services.  However, CBI continues to believe that its
commitment to providing  high quality,  personalized  service to customers  will
permit it to remain competitive in its market area.

Fiscal and Monetary Policy

         Banking is a business  which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other  borrowings,  and the interest  received by a bank on
its loans and  securities  holdings,  constitutes  the major portion of a bank's
earnings.  Thus,  the earnings and growth of CBI are subject to the influence of
economic  conditions  generally,  both  domestic  and  foreign,  and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve.  The Federal Reserve  regulates the supply of money through
various  means,  including  open-market  dealings  in United  States  government
securities,  the  discount  rate at which  banks  may  borrow  from the  Federal
Reserve, and the reserve requirements on deposits.  The nature and timing of any
changes in such policies and their impact on CBI cannot be predicted.

Sarbanes-Oxley Act of 2002

         The Sarbanes-Oxley  Act, which was enacted in 2002,  mandated extensive
reforms and requirements for public companies. The SEC has adopted extensive new
regulations  pursuant  to  the  requirements  of  the  Sarbanes-Oxley  Act.  The
Sarbanes-Oxley   Act  and  the  SEC's  new   regulations   have   increased  the
Corporation's  cost of doing  business,  particularly  its fees for internal and
external  audit services and legal  services,  and the law and  regulations  are
expected to continue to do so. However, the Corporation does not believe that it
will be affected by Sarbanes-Oxley  and the new SEC regulations in ways that are
materially  different or more  onerous  than those of other public  companies of
similar size and in similar businesses.

                                       9


Legislative Proposals

         Legislation which could significantly affect the business of banking is
introduced in Congress from time to time.  CBI cannot  predict the future course
of such legislative proposals or their impact on CBI should they be adopted.

Employees

         At December 31, 2004 the Corporation  employed 182 full time equivalent
employees. Management believes that its employee relations are excellent.

Further Information

         Further information about the business of the Corporation and the Banks
is set forth in this Form  10-K  under  Item 7 -  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations."

Item 2.  Description of Property

         The  Orangeburg  bank owns land  located at 1820  Columbia  Road NE, in
Orangeburg, South Carolina, where the Orangeburg bank maintains its main office.
The Bank operates from a one-story building of approximately  7,000 square feet.
The Orangeburg  bank also owns a building,  which was previously a branch of the
bank,  at the  corner  of  Broughton  and  Glover  Streets  in  Orangeburg.  The
Orangeburg  bank  currently  rents this facility to the  Corporation  for office
space. In June 1999, the Bank moved into a branch facility  located  adjacent to
the old building. This branch office is approximately 6,500 square feet.

         The  Corporation's  Sumter  bank  has fee  simple  title  to land and a
one-story  6,500 square foot building  located at 683 Bultman Drive,  in Sumter,
South Carolina, where the Sumter bank maintains its main office. The Sumter bank
opened a branch  bank on West  Liberty  Street in Sumter in February  2002.  The
branch is a one-story  building of  approximately  3,600 square feet.  The land,
approximately one acre, is leased under a non-cancellable operating lease for an
initial term of twenty years. The lease terms provide for four five-year renewal
options  after the initial  term.  The Sumter bank is  responsible  for property
taxes and improvements.

         The  Florence  bank leases  approximately  1.7 acres of land located at
2009 Hoffmeyer Road in Florence,  South Carolina for its main office.  The lease
is for an initial term of ten years and provides for two ten year renewals and a
final two year renewal.  The Florence bank is responsible for property taxes and
improvements.  The Corporation built a 7,500 square foot, one-story building for
the  Florence   bank  on  the  leased  site.   The  Florence  bank  also  leases
approximately  one quarter acre of land and a 2,000 square foot  building at 812
Second  Loop  Road,  Florence,  SC for its  branch  office.  The lease is for an
initial  term of five years and  contains  both early  termination  and  renewal
options. The Florence bank has also purchased a 1.1 acre lot on the 600 block of
the Pamplico Highway in Florence for  approximately  $600,000.  This property is
intended for future development.

         The Ridgeway bank's main office is located in a two story building on a
quarter acre site owned by the Bank at 100 S. Palmer St. in  Ridgeway.  The bank
also owns a 1,590 square foot one story  branch  office on a .9 acre site at 115
McNulty St. in  Blythewood,  SC, and a 1,900 square foot one story branch office
on a one acre site at 610 West Moultrie St. in Winnsboro, SC. The bank also owns
approximately  1.5 acres of land on Longtown Road in Northeast  Richland County,
SC, where it intends to build a new full-service banking office. Construction is
tentatively scheduled to begin in 2006. The Ridgeway Bank has signed a letter of
intent  to move its  Blythewood,  SC office  from its  present  location  to the
Village,  located off Blythewood  Road near  Interstate 77. The Bank will occupy
approximately  6,600 square feet of a two story building which is expected to be
built by early 2006.

         The  mortgage  company  operates  from  leased  offices  located at 508
Hampton Street, Suite 201, Columbia, SC, 10253 Two Notch Road, Columbia, SC, 304
West Westmark,  Sumter,  SC, and 1704 E. Greenville  Street,  Anderson,  SC. The
Hampton Street,  Columbia office is leased under the terms of a five year lease.
At  the  end  of  that  period,  the  lease  will   automatically   renew  on  a
month-to-month  basis. The other offices are rented under month-to-month  rental
agreements.  The mortgage company expects to move its Sumter operations into the
Sumter National Bank branch located on West Liberty Street in early 2005.

         Information  about future  lease  payments is included in Note 7 to the
consolidated financial statements contained elsewhere in this report.

                                       10


         The Corporation has acquired  approximately  three acres of land in the
northeast  area  of the  City of  Orangeburg  and  expects  to  soon  begin  the
construction  of a two story,  16,000  square foot  corporate  headquarters  and
operations  center  building on that property.  It is  anticipated  that the new
building will be completed in early 2006. The  Corporation  expects this project
to cost approximately $2,000,000.

Item 3.  Legal Proceedings

         The Company,  the Banks and the Mortgage  Company are from time to time
subject  to legal  proceedings  in the  ordinary  course of their  business.  No
proceedings  were  pending at December 31, 2004,  that  management  believes are
likely to have a material adverse effect on the Company or its subsidiaries.

Item 4.  Submission of Matters to a Vote of Security Holders

     No matters were  submitted  for a vote of the security  holders  during the
fourth quarter of 2004.




                                       11


                                     PART II

Item 5. Market for the Registrant's  Common Equity,  Related Stockholder Matters
and Issuer Purchases of Equity Securities

         The  Corporation's  shares of Common  Stock are traded on the  American
Stock Exchange (the AMEX) under the ticker symbol SCB.

         The following table summarizes the range of high and low prices for the
Corporation's  Common Stock as reported on the American  Stock Exchange for each
quarterly period over the last two years.

                       Quarter Ended          High         Low
                       -------------          ----         ---
                         March 31, 2003     $ 17.09     $ 14.50
                          June 30, 2003     $ 16.45     $ 15.00
                     September 30, 2003     $ 18.85     $ 15.91
                      December 31, 2003     $ 19.40     $ 18.10
                         March 31, 2004     $ 20.92     $ 17.70
                          June 30, 2004     $ 19.00     $ 16.80
                     September 30, 2004     $ 18.90     $ 17.30
                      December 31, 2004     $ 19.50     $ 17.37


         During 2004, the  Corporation  had stock sales volume of 385,500 shares
compared with 416,600 shares the prior year.

         There were 2,183  holders of record of the  Corporation's  Common Stock
(no par value) as of December 31, 2004 compared with 2,104 the prior year.

         During  2004,  the  Corporation  authorized  and  paid  quarterly  cash
dividends  totaling 40 cents per share.  The total cost of these  dividends  was
$1,744,000  or  54.3%  of  after  tax  profits.  During  2003,  the  Corporation
authorized and paid quarterly  cash dividends  totaling 36 cents per share.  The
total cost of these dividends was $1,554,000 or 27.6% of after tax profits.  The
dividend  policy of the Corporation is subject to the discretion of the Board of
Directors and depends upon a number of factors,  including  earnings,  financial
condition,  cash needs and general  business  conditions,  as well as applicable
regulatory considerations. Subject to ongoing review of these circumstances, the
Board expects to maintain a reasonable, safe and sound dividend payment policy.

         The current  source of dividends to be paid by the  Corporation  is the
dividends  received  from its banking  subsidiaries.  Accordingly,  the laws and
regulations   that  govern  the  payment  of  dividends   by  national   banking
associations and state chartered banks may restrict the Corporation's ability to
pay  dividends.  National  banks may pay dividends  only out of present and past
earnings  and state  banks may only pay out of current  earnings  without  prior
regulatory approval. Both are subject to numerous limitations designed to ensure
that the Banks have adequate  capital to operate safely and soundly (See Item 1.
Description of Business - Supervision and Regulation - Payment of Dividends). At
December  31,  2004  the  Banks  could  pay up to  approximately  $7,961,000  in
dividends without prior approval of their regulators.

         The information  required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.

         The  Corporation did not purchase any shares of its common stock during
the fourth quarter of 2004. The  Corporation  did not sell any of its securities
in transactions that were not registered under the Securities Act of 1933 during
the year ended December 31, 2004.




                                       12



Item 6.  Selected Financial Data

         The following is a summary of the consolidated  financial  position and
results of operations of the  Corporation  for the years ended December 31, 1999
through 2004.


Community Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data)



                                                                            Years Ended December 31,
                                                                            ------------------------
                                                                                                                          Five Year 
                                                                                                                           Compound 
                                               2004         2003       2002 (1)     2001 (2)       2000         1999     Growth Rate
                                               ----         ----       --------     --------       ----         ----     -----------
INCOME STATEMENT DATA
                                                                                                         
Net interest income ....................    $ 17,843     $ 16,708     $ 14,625     $ 10,940     $ 10,228     $  8,430      16.18%
Provision for loan losses ..............       5,102        1,119        1,033          650          688          612      52.83%
Noninterest income .....................       7,278        9,125        7,194        3,584        1,966        1,479      37.53%
Noninterest expense ....................      15,039       15,932       12,465        7,810        6,552        6,066      19.91%
Net income .............................       3,209        5,635        5,401        3,908        3,147        2,182       8.02%

PER COMMON SHARE (3)
Net income - basic .....................       $0.74        $1.31        $1.42        $1.21        $0.99        $0.68       1.71%
Net income - diluted ...................        0.72         1.27         1.38         1.20         0.98         0.68       1.15%
Cash dividends .........................        0.40         0.36         0.32         0.28         0.22         0.19      16.05%
Book value .............................       11.39        11.10        10.16         8.35         7.24         6.35      12.40%

BALANCE SHEET DATA (YEAR END)
Total assets ...........................    $512,377     $466,580     $437,320     $318,617     $273,323     $228,030      17.58%
Loans held for sale ....................      15,090        8,411       24,664       10,265          343          269     123.76%
Loans, net .............................     389,302      327,900      302,911      237,340      192,996      155,422      20.16%
Deposits ...............................     423,458      378,704      337,062      255,433      218,811      184,364      18.09%
Shareholders' equity ...................      50,027       48,070       43,717       27,547       23,139       20,245      19.83%(4)

FINANCIAL RATIOS
Return on average assets ...............        0.67%        1.25%        1.43%        1.36%        1.26%        1.06%
Return on average equity ...............        6.41%       12.17%       15.10%       15.58%       14.67%       11.12%
Net interest margin ....................        4.00%        3.95%        4.14%        4.00%        4.34%        4.37%

OPERATIONS DATA
Banks' branch offices ..................           9            8            8            4            4            4
Mortgage loan offices ..................           4            3            3            3            -            -
Employees (full-time equivalent) .......         182          190          175          126           84           85


(1)  July, 2002 - Ridgeway Bancshares, Inc. acquired.
(2)  November, 2001 - Community Resource Mortgage, Inc. acquired.
(3)  Per  share  amounts  have been  retroactively  adjusted  to  reflect a five
     percent stock dividend issued in 2000.
(4)  Includes growth from proceeds of issuances of stock.




                                       13


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operation

INTRODUCTION

         The  discussion  and data  presented  below  analyze  major factors and
trends regarding the financial  condition and results of operations of Community
Bankshares  Inc. and its  subsidiaries  for the three year period ended December
31,  2004.  This  information   should  be  reviewed  in  conjunction  with  the
consolidated  financial statements and related notes contained elsewhere in this
report.

Business of the Corporation

         Community  Bankshares  Inc. is a bank  holding  company.  CBI owns four
banking  subsidiaries:  Orangeburg National Bank, Sumter National Bank, Florence
National Bank, and the Bank of Ridgeway  (acquired in July 2002), and a mortgage
company  subsidiary,  Community  Resource  Mortgage,  Inc. (acquired in November
2001).  CBI provides item and data processing and other  technical  services for
its  subsidiaries.  The  consolidated  financial  report for 2004 represents the
operations  of the  holding  company,  its banks and the  mortgage  company on a
consolidated basis.  Condensed parent-only financial statements are presented in
the notes to the consolidated financial statements.

         Orangeburg   National  Bank  is  a  national  banking  association  and
commenced  operations in November  1987. It operates two offices in  Orangeburg,
South  Carolina.  Sumter  National Bank is a national  banking  association  and
commenced  operations  in June 1996.  It operates  two offices in Sumter,  South
Carolina. Florence National Bank is a national banking association and commenced
operations  in July 1998. It operates two offices in Florence,  South  Carolina.
The Bank of Ridgeway is a state  chartered bank and operates from three offices,
located in Ridgeway,  Winnsboro and Blythewood,  SC. The banks provide a variety
of commercial  banking services in their respective  communities.  Their primary
customer markets are consumers and small to medium sized businesses.

         Community Resource Mortgage,  Inc. is a South Carolina corporation that
commenced business in 1996, and was acquired by the Corporation in 2001. It is a
mortgage  brokerage  company  that  provides  a  variety  of one to four  family
residential  mortgage  products,  primarily for resale in the secondary  market,
from offices in Columbia, Sumter and Anderson, South Carolina.

EARNINGS PERFORMANCE

2004 compared with 2003

         For the year ended  December 31,  2004,  the  Corporation  recorded net
income of  $3,209,000,  a decrease of $2,426,000,  or 43.1%,  from net income of
$5,635,000  for 2003. Net income per share for 2004 was $.74 compared with $1.31
for 2003. Diluted net income per share was $.72 for 2004 compared with $1.27 for
2003.  Return on average  assets was .67% for 2004 compared with 1.25% for 2003.
Return on average  shareholders'  equity was 6.41% for 2004 compared with 12.17%
for 2003.

         Net income for 2004 was affected primarily by the following factors:

o        the 2004 loan loss provision  expense increased by $3,983,000 over 2003
         due to problems associated with several large commercial loans,
o        mortgage  loan  brokerage  income  decreased  $2,070,000  because  of a
         significant reduction in residential mortgage loan production,
o        noninterest  expenses  decreased  by $893,000,  primarily  due to lower
         commission  based  salaries  and benefits  paid for mortgage  brokerage
         staffing;
o        increased  average  holdings  of loans and  investments  resulted  in a
         $606,000 increase in interest and dividend income;
o        interest  expense  was  decreased  by $529,000  primarily  due to lower
         interest  rates  paid on time  deposits  and  lower  funding  costs for
         mortgage brokerage activities;
o        income tax expense was reduced by  $1,376,000  due to the net effect of
         the factors enumerated above.

         Net  interest  income for 2004  increased by  $1,135,000  over the 2003
amount due to increases of $587,000 and $90,000 in interest  income on loans and
investment securities,  respectively,  and decreases of $465,000 and $545,000 in
interest   expenses   related  to  time  deposits  and  short-term   borrowings,


                                       14


respectively. Interest expense for long-term debt increased by $401,000 in 2004,
primarily due to the issuance of  $10,000,000 of trust  preferred  securities by
the  Corporation.  The proceeds of this debt were used primarily to increase the
capitalization  of some of the subsidiary Banks, to fund mortgage loan brokerage
production and for other general corporate purposes.

2003 compared with 2002

         For the year ended  December 31,  2003,  the  Corporation  recorded net
income of  $5,635,000,  an increase  of  $234,000,  or 4.3%,  over net income of
$5,401,000 for 2002. Net income per share for 2003 was $1.31 compared with $1.42
for 2002.  Diluted  net  income per share was $1.27 for 2003 and $1.38 for 2002.
Return on average assets was 1.25% for 2003 compared with 1.43% for 2002. Return
on average  shareholders'  equity was 12.17% for 2003  compared  with 15.10% for
2002.  Per  share  income  amounts  were  affected  negatively  in  2003  by the
anticipated  dilutive  effect of the  inclusion  for the entire  year of the one
million  shares issued to acquire the Ridgeway  bank.  Such shares  impacted the
2002  calculation of average shares  outstanding  for only one-half of the year.
Similarly, the 2003 return statistics include the Ridgeway bank's average assets
and average  equity amounts for the full year in 2003, but only one-half year of
such amounts were included in 2002.

Net income for 2003 was substantially influenced by four major factors:

o        interest  rates  were  stable  at  historically  low  levels  which put
         pressure on net interest  margin but also  resulted in extremely  heavy
         volumes of initial financing and refinancing of residential real estate
         loans  (refinancing  activity  diminished  significantly  in the fourth
         quarter)  and  continuing  "call"  activity  by issuers  of  investment
         securities;
o        the  Corporation  recorded  twelve  months  of  operations  for Bank of
         Ridgeway, which was acquired in July of 2002;
o        the Sumter bank opened an additional branch office; and
o        there were  significant  increases in noninterest  income and expenses,
         primarily due to increased fee income in CRM and the recognition of the
         results  of  operations  of the  Ridgeway  bank for a full year in 2003
         compared with only half of a year in 2002.

         Net interest income increased significantly for 2003 despite a 19 basis
point (one basis point equals one  one-hundredth of one percent) decrease in the
net interest margin.  Increased volumes of loans and significantly reduced rates
paid for interest bearing deposit  liabilities  offset,  to a large extent,  the
effects  of a 70 basis  point  reduction  in the  earning  assets  yield.  CBI's
short-term borrowings costs increased, however, due to the funding needs of CRM.
Average  short-term  borrowings for 2003 were  $10,314,000 more than the average
amount  for 2002 and the rate  paid in 2003 was  slightly  higher  than in 2002.
Interest  expense related to this funding source  increased by $272,000 in 2003.
The average  rate paid for  interest  bearing  deposits in 2003  decreased by 62
basis points from the 2002 rate and 2003 deposit interest expenses  decreased by
$831,000 to $5,687,000.

Comprehensive Income

         Comprehensive   income  for  2004,   2003,  and  2002  was  $3,061,000,
$5,595,000,  and  $5,506,000,  respectively.   Accounting  principles  generally
require that recognized revenue,  expenses,  gains and losses be included in net
income.   Other  elements  of  comprehensive  income  for  the  Corporation  are
correlated  directly to the effects that changing  market rates of interest have
on  the  fair  values  of  the  Corporation's   holdings  of  available-for-sale
securities. The resulting changes in unrealized holding gains and losses on such
securities are reported as a separate component of shareholders'  equity.  Those
changes in fair  value,  net of income tax  effects,  are the only  elements  of
comprehensive income.

Net Interest Income

         Net interest income,  the difference between interest income earned and
interest  expense  incurred,  is  the  principal  source  of  the  Corporation's
earnings.  Net interest  income is affected by changes in the levels of interest
rates and by  changes  in the  volume  and mix of  interest  earning  assets and
interest bearing liabilities. During the first six months of 2004 and throughout
2003 and 2002,  market interest rates were generally  stable.  Beginning in 2000
and continuing  until late in the second  quarter of 2004,  the Federal  Reserve
Board's policy was to provide stimulus to the U.S. economy by first setting, and
then maintaining,  interest rates at low levels. The effects of these actions on
the Corporation were varied.  The Corporation's  overall funding costs decreased
during the period,  but there were similar  decreases in the yields  realized on
loans and  investments.  The mortgage  subsidiary  experienced  extremely  large
volumes of  originations  and refinancing  activity,  which strained its ability
both to fund and to process those  transactions  until the volume  diminished in
the fourth quarter of 2003.  Refinancing activity during the first six months of
2004 was driven  primarily by uncertainty  and concern about whether the Federal
Reserve  Board  would  begin to cause  interest  rates to rise,  and, if so, the
magnitude and timing of those increases.  Finally, late in the second quarter of
2004, the Federal Reserve Board implemented a series of "measured increases."

                                       15


         Net interest income was $17,843,000,  $16,708,000,  and $14,625,000 for
2004, 2003, and 2002, respectively.  The amounts of interest income increased in
both 2004 and 2003, and interest  expense  amounts  decreased.  Average  earning
assets and average interest bearing  liabilities amounts increased steadily over
those  two  years,  also.  A  large  percentage  of  the  increase  in  2003  is
attributable to the Ridgeway bank acquisition in July 2002.

         The following table presents the average  balance  sheets,  the average
yield and the interest  earned on earning  assets,  and the average rate and the
interest  expense on interest  bearing  liabilities for the years ended December
31, 2004, 2003, and 2002.




                                       16




                       Average Balances, Yields and Rates



                                                                            Years Ended December 31,
                                                                            ------------------------
                                                        2004                          2003                           2002
                                                        ----                          ----                           ----
                                                      Interest                      Interest                       Interest
                                            Average   Income/  Yields/    Average    Income/  Yields/    Average    Income/  Yields/
                                            Balances  Expense   Rates     Balances   Expense   Rates     Balances   Expense   Rates
                                            --------  -------   -----     --------   -------   -----     --------   -------   -----
                                                                              (Dollars in thousands)
Assets
                                                                                                      
Interest-bearing deposits with other banks   $ 1,086  $    20   1.84%    $    990   $    19   1.92%      $  1,229    $    36   2.93%
Investment securities - taxable               49,546    1,518   3.06%      45,488     1,414   3.11%        43,980      1,970   4.48%
Investment securities - tax exempt (1)         9,201      312   3.39%       9,174       322   3.51%         4,888        217   4.44%
Federal funds sold                            16,950      203   1.20%      26,582       279   1.05%        21,364        347   1.62%
Loans, including held for sale (1) (2)       371,061   22,821   6.15%     340,518    22,234   6.53%       281,907     20,174   7.16%
                                            --------  -------            --------   -------              --------    -------
         Total interest earning assets       447,844   24,874   5.55%     422,752    24,268   5.74%       353,368     22,744   6.44%
Cash and due from banks                       15,587                       14,452                          14,222
Allowance for loan losses                     (4,615)                      (3,861)                         (3,201)
Premises and equipment                         7,327                        6,996                           6,011
Intangible assets                              7,526                        7,772                           4,360
Other assets                                   4,041                        3,400                           3,350
                                              ------                     --------                        -------
         Total assets                       $477,710                     $451,511                        $378,110
                                            ========                     ========                        ========

Liabilities and shareholders' equity
Interest bearing deposits
     Interest bearing transaction accounts  $ 54,918  $   225   0.41%    $ 44,481   $   193   0.43%      $ 41,101    $   285   0.69%
     Savings                                  80,534      814   1.01%      70,552       766   1.09%        55,790        905   1.62%
     Time deposits                           190,290    4,263   2.24%     186,502     4,728   2.54%       162,512      5,328   3.28%
                                            --------  -------            --------   -------              --------    -------
         Total interest bearing deposits     325,742    5,302   1.63%     301,535     5,687   1.89%       259,403      6,518   2.51%
Short-term borrowings                         10,309      205   1.99%      29,026       750   2.58%        18,712        478   2.55%
Long-term debt                                28,601    1,524   5.33%      20,395     1,123   5.51%        20,254      1,123   5.54%
                                            --------  -------            --------   -------              --------    -------
         Total interest bearing liabilities  364,652    7,031   1.93%     350,956     7,560   2.15%       298,369      8,119   2.72%
Noninterest-bearing demand deposits           61,220                       52,047                          41,198
Other liabilities                              1,782                        2,217                           2,783
Shareholders' equity                          50,056                       46,291                          35,760
                                            --------                     --------                        --------
         Total liabilities and 
            shareholders' equity            $477,710                     $451,511                        $378,110
                                            ========                     ========                        ========

Interest rate spread (3)                                        3.62%                         3.59%                            3.72%
Net interest income and net yield
     on earning assets (4)                            $17,843   3.98%               $16,708   3.95%                  $14,625   4.14%


(1)  Interest income on tax-exempt loans and investment  securities has not been
     calculated on a tax-equivalent basis.
(2)  Nonaccruing loans are included in the average balances and income from such
     loans is recognized on a cash basis.
(3)  Total interest earning assets yield less total interest bearing liabilities
     rate.
(4)  Net yield  equals net interest  income  divided by total  interest  earning
     assets.


                                       17


         By year end 2004  compared  with 2003,  gross  loans grew  $61,543,000,
while deposits grew  $44,754,000.  Because the growth in deposit  liabilities in
2004  has not  been  sufficient  to fund  the  Corporation's  growth  in  loans,
management  took  several  actions.  Early in the second  quarter  of 2004,  the
Corporation issued  approximately  $10,000,000 in long-term debt trust preferred
securities to enhance the capital positions of some of the banking  subsidiaries
and to provide a more stable funding source for its mortgage banking operations.
As a result, the Corporation reduced its reliance on short-term, relatively high
cost borrowings in 2004. The Corporation continues to maintain a short-term line
of  credit  with  another  financial  institution  which  can be  used  to  fund
construction  mortgage  loan  demand.  The  Corporation  also  changed its asset
allocation  such that its  investments  in  federal  funds  sold and  securities
available-for-sale  decreased  significantly  by the end of 2004 compared  2003.
This also allowed the  Corporation to invest  significantly  more dollars in the
higher yielding loan earning asset category.

         Time  deposits are the largest  category of the  Corporation's  deposit
liabilities.  Interest  rates paid for such  liabilities  continued  to decrease
during 2004.  Accordingly,  total interest expense  decreased from $8,119,000 in
2002, to  $7,560,000  in 2003 and to $7,031,000 in 2004.  The average rates paid
for time deposits declined from 3.28% in 2002 to 2.24% in 2004. Recent increases
in short-term  market rates of interest are expected to cause the Corporation to
begin  increasing  the  rates it  offers  for  deposit  liabilities.  The  trust
preferred  securities were issued with a variable rate, as well. As a result, it
is expected that the costs of deposits and other  funding  sources will increase
in 2005.

         The table  "Volume and Rate  Variance  Analysis"  provides a summary of
changes in net interest  income  resulting from changes in volume and changes in
rate.  The  changes in volume are the  difference  between the current and prior
year's balances multiplied by the prior year's rate. The changes in rate are the
difference  between the current and prior  year's rate  multiplied  by the prior
year's balance.

         As reflected in the table,  the increases in net interest income during
each of the past two years primarily are due to higher volumes of earning assets
coupled with  reductions in the rates paid on deposit  liabilities.  Loan growth
has been especially prominent in contributing to increases in interest income.

       Volume and Rate Variance Analysis



                                                                      2004 compared with 2003           2003 compared with 2002
                                                                      -----------------------           -----------------------
                                                                  Volume*      Rate*      Total       Volume*      Rate*      Total
                                                                  -------      -----      -----       -------      -----      -----
                                                                                        (Dollars in thousands)
Interest earning assets                       
                                                                                                               
     Interest-bearing deposits with other banks ............    $     2     $    (1)    $     1     $    (6)    $   (11)    $   (17)
     Investment securities - taxable .......................        124         (20)        104          66        (622)       (556)
     Investment securities - tax exempt ....................          1         (11)        (10)        158         (53)        105
     Federal funds sold ....................................       (111)         35         (76)         73        (141)        (68)
     Loans, including held for sale ........................      1,924      (1,337)        587       3,936      (1,876)      2,060
                                                                -------     -------     -------     -------     -------     -------
             Interest income ...............................      1,940      (1,334)        606       4,227      (2,703)      1,524
                                                                -------     -------     -------     -------     -------     -------
Interest bearing liabilities
     Interest bearing deposits
         Interest bearing transaction accounts .............         43         (11)         32          22        (114)        (92)
         Savings ...........................................        103         (55)         48         204        (343)       (139)
         Time deposits .....................................         94        (559)       (465)        716      (1,316)       (600)
                                                                -------     -------     -------     -------     -------     -------
             Total interest bearing deposits ...............        240        (625)       (385)        942      (1,773)       (831)
     Short-term borrowings .................................       (402)       (143)       (545)        266           6         272
     Long-term debt ........................................        438         (37)        401           8          (8)          -
                                                                -------     -------     -------     -------     -------     -------
             Total interest expense ........................        276        (805)       (529)      1,216      (1,775)       (559)
                                                                -------     -------     -------     -------     -------     -------
             Net interest income ...........................    $ 1,664     $  (529)    $ 1,135     $ 3,011     $  (928)    $ 2,083
                                                                =======     =======     =======     =======     =======     =======


*    The  rate/volume  variance  for  each  category  has  been  allocated  on a
     consistent  basis between rate and volume variances based on the percentage
     of rate or volume variance to the sum of the two absolute  variances except
     in categories having balances in only one period. In such cases, the entire
     variance is attributed to volume variance.


                                       18


         Although management currently expects that interest rates will increase
in 2005,  management  has not presently  identified any factors that it believes
might  cause  interest  rates to  increase  sharply  in a short  period of time.
However,   changes  in  interest  rates  that  can   significantly   affect  the
Corporation,   positively  or  negatively,  are  possible.  In  the  absence  of
significant  changes in market interest rate levels, any significant  changes in
net  interest  income  during 2005 are  expected  to result from  changes in the
volumes of  interest  earning  assets  and  liabilities.  Management  expects to
continue  using its marketing  strategies to increase the  Corporation's  market
share of both  deposits  and  quality  loans  within  its  market  areas.  These
strategies involve offering attractive  interest rates and outstanding  customer
service.

Provision for Loan Losses

         The  provision  for  loan  losses  is  charged  to  earnings  based  on
management's  continuing  review and  evaluation  of the loan  portfolio and its
estimate of the related  allowance for loan losses.  Provisions  for loan losses
totaled $5,102,000,  $1,119,000, and $1,033,000 for the years ended December 31,
2004,  2003  and  2002,  respectively.  The  significant  increase  in the  2004
provision  was   associated   with  several  large   problem   commercial   loan
relationships, most of which were handled by a former lending officer. The other
major component of the increase was a writedown on a large commercial loan which
financed  the  purchase of a business.  Following  the sale the business did not
perform at the level  expected  by the buyer who has  charged  the  seller  with
fraud.  Net  charge-offs  for 2004 were  $4,961,000,  compared with $486,000 and
$734,000  for  2003 and  2002,  respectively.  The  underlying  causes  of these
problems  are believed by  management  to be isolated  and not  indicative  of a
general trend in the loan portfolio. Management continues to monitor these loans
and is pursuing all available legal options.  See "Impaired  Loans,"  "Potential
Problem  Loans,"  "Allowance for Loan Losses," and "The  Application of Critical
Accounting Policies" for further information and a discussion of the methodology
used and the factors  considered  by management in its estimate of the allowance
for loan losses.

Noninterest Income

         Noninterest income for 2004 decreased by $1,847,000 or 20.2% from 2003,
primarily due to a $2,070,000 or 39.8%  decrease in mortgage  brokerage  income.
This decrease  resulted from a  mortgage-industry-wide  slowdown in  refinancing
activity in 2004. The Corporation  inititated measures in 2004 that are intended
to  decrease  the  costs  and  complexity  of  funding  its  mortgage  brokerage
operation.  Service charges on deposit accounts were $112,000 lower in 2004 than
in 2003, as well. This resulted from a slight decrease in the volume of returned
check  charges  and a slowing in demand  for the  automated  overdraft  service.
During 2004, gains on the sale of investment securities totaled $76,000 compared
with losses of $252,000 in 2003.

         Noninterest income for 2003 increased by $1,931,000 or 26.8% over 2002.
Service charges on deposit accounts increased by $589,000 or 21.3% due primarily
to increased  service  charges  assessed on  pre-arranged  overdraft  protection
services.  Also, mortgage brokerage income,  primarily fees and gains associated
with  the  origination  and  sale of  mortgage  loans  for  home  purchases  and
refinancing of existing loans, was $5,198,000 in 2003, an increase of $1,543,000
or 42.2% over the 2002  amount.  The  mortgage  brokerage  subsidiary  and Banks
generally  obtain take-out  commitments for mortgage loans originated for resale
at the same time that they issue commitments to make loans.

Noninterest Expenses

         Noninterest  expenses  for 2004  decreased by $893,000 or 5.6% from the
2003 amount, primarily due to lower expenses for salaries and employee benefits.
Such expenses were reduced because of the decline in mortgage loan  originations
resulting in less commission expense.

         Noninterest expenses for 2003 increased by $3,467,000 or 27.8% over the
2002 amount. Salaries and employee benefits expenses increased by $1,845,000 due
primarily to the opening, in February 2003, of a new branch office of the Sumter
bank and the  commission-driven  compensation  system  employed by the  mortgage
brokerage subsidiary.  Expenses for premises and equipment increased by $360,000
or 24.9% due  primarily  to the opening of the branch  office,  higher  expenses
associated  with  the  rental  of  office  space  for  the  mortgage   brokerage
subsidiary's  operations,  and the  acquisition  and  implementation  of imaging
equipment  and software for customer  statement  rendering  and other  purposes.
Also, other expenses  increased by $981,000.  Approximately 40% of this increase
was directly  attributable  to twelve  months of operation of the Ridgeway  bank
compared with only six months during 2002.  The remaining  increases were normal
increases  associated  with the  operation  of the  other  banks,  the  mortgage
brokerage subsidiary and the holding company.

                                       19


Income Taxes

         Income  tax  expense  for  for  2004  was  $1,771,000,  a  decrease  of
$1,376,000  or 43.7%  from the 2003  amount.  Income  tax  expense  for 2003 was
$3,147,000,  an increase of $227,000 or 7.8% over the 2002 amount. The effective
income tax rate (income tax expense  divided by income  before income taxes) was
35.6%, 35.8%, and 35.1% for 2004, 2003 and 2002, respectively.

INVESTMENT PORTFOLIO

         The Corporation's investment portfolio consists primarily of short- and
intermediate-term  U.S.  Treasury and U.S.  Government  agency debt issues.  The
acquisition   of  the  Ridgeway  bank  in  2002   significantly   increased  the
Corporation's tax exempt portfolio.  Investment  securities averaged $58,747,000
in 2004, $54,662,000 in 2003 and $48,868,000 in 2002.

         The table below  summarizes the amortized cost and estimated fair value
of the Corporation's investment portfolio for the past three years.

        Securities Portfolio Composition



                                                                                           December 31,
                                                                                           ------------
                                                              2004                               2003                 2002
                                                              ----                               ----                 ----
                                                      Amortized    Estimated     Amortized     Estimated     Amortized     Estimated
                                                        cost       fair value      cost        fair value      cost       fair value
                                                        ----       ----------      ----        ----------      ----       ----------
                                                                                        (Dollars in thousands)
                                                                                                              
Securities available-for sale
  U.S. Treasury and U.S.
    Government agencies ........................       $50,619       $50,361      $56,633       $56,477       $41,213       $41,531
  States and political subdivisions ............         4,985         5,110        8,140         8,387         9,114         9,625
                                                       -------       -------      -------       -------       -------       -------
   Total available for sale ....................       $55,604       $55,471      $64,773       $64,864       $50,327       $51,156
                                                       =======       =======      =======       =======       =======       =======

Securities held-to-maturity
  States and political subdivisions ............       $ 1,925       $ 1,907      $ 2,000       $ 2,155       $     -       $     -
                                                       =======       =======      =======       =======       =======       =======


The  following  is a  summary  of  maturities  and  weighted  average  yields of
securities as of December 31, 2004:

           Securities Portfolio Maturities and Yields



                                                                             December 31, 2004
                                                                             -----------------
                                                                 After              After     
                                                                One Year          Five Years
                                              Within            Through            Through            After
                                             One Year         Five Years          Ten Years         Ten Years           Total
                                             --------         ----------          ---------         ---------           -----
                                           Amount  Yield    Amount   Yield     Amount      Yield  Amount  Yield     Amount    Yield
                                           ------  -----    ------   -----     ------      -----  ------  -----     ------    -----
                                                              (Dollars in thousands)
                                                                                                   
U.S Treasury and U.S.
       Government agencies .............  $3,742   2.40%   $35,877    2.96%   $ 9,214      3.79%    $ -     0.00%   $48,833    3.07%
States and political subdivisions (1) ..   1,100   3.85%     3,014    3.60%     2,921      3.69%      -     0.00%     7,035    3.68%
Mortgage-backed securities (2) .........       -   0.00%     1,514    2.33%         -      0.00%     14     5.04%     1,528    2.35%
                                          ------           -------            -------               ---             -------         
       Total ...........................  $4,842   2.73%   $40,405    2.98%   $12,135      3.77%    $14     5.04%   $57,396    3.13%
                                          ======           =======            =======               ===             =======         



(1)  Yields on tax-exempt  securities of states and political  subdivisions have
     not been calculated on a tax-equivalent basis.
(2)  Maturity category based on final stated maturity dates. Average maturity is
     expected  to be  substantially  shorter  because of the  monthly  return of
     principal on certain securities.


                                       20


         On an ongoing basis,  management  assigns securities upon purchase into
one of two categories  (available-for-sale or held-to-maturity) based on intent,
taking into  consideration  other factors including  expectations for changes in
market  rates  of  interest,   liquidity   needs,   asset/liability   management
strategies, and capital requirements.  The Corporation has never held securities
for trading purposes.  No transfers of  available-for-sale  or  held-to-maturity
securities to other categories were made in any of the years 2002 through 2004.

          During 2004,  management  changed the  composition  of the  securities
portfolio, primarily by decreasing the amounts invested in securities throughout
the year. Despite investment  securities being larger in average amount in 2004,
the  Corporation's  investment  in such  instruments  at  December  31, 2004 was
$9,468,000  less than at December  31,  2003.  Proceeds  from sales and calls of
investment  securities  and  reductions in federal funds sold have been used, in
part,  to fund  loan  growth in excess  of the  growth in  deposits,  short-term
borrowings and long-term debt.

          During  the  years  ended  December  31,  2004,  2003  and  2002,  the
Corporation  sold  investment  securities  for gross  proceeds  of  $13,676,000,
$2,068,000, and $20,543,000,  respectively. Realized gains and (losses) on those
transactions  were  $76,000,  ($252,000),  and  $119,000,  for the  years  ended
December  31,  2004,  2003 and  2002,  respectively.  Securities  may be sold to
provide  liquidity,  to reduce  interest rate risk, or for other reasons.  There
were no sales of held-to-maturity securities in any of the periods presented.

         All  mortgage-backed  securities held by the Corporation were issued by
the  Federal  Home Loan  Mortgage  Corporation,  the Federal  National  Mortgage
Association or the Government National Mortgage Association.


LOAN PORTFOLIO

         Management believes the loan portfolio is adequately diversified. There
are  no  significant  concentrations  of  loans  in any  particular  individual,
industry  or groups  of  related  individuals  or  industries,  and there are no
foreign loans.

         The  following  table shows the  composition  of the loan  portfolio by
category:

                                                      Loan Portfolio Composition



                                                                                           December 31,
                                                                                           ------------
                                                              2004            2003            2002             2001           2000
                                                              ----            ----            ----             ----           ----
                                                                                        (Dollars in thousands)

                                                                                                                  
Commercial, financial and agricultural .............        $ 96,275        $ 84,844        $ 78,210        $ 56,515        $ 52,264
Real estate - construction .........................          29,968          23,590          23,345          19,557          15,389
Real estate - mortgage .............................         230,986         188,530         168,499         127,002          98,154
Consumer installment ...............................          36,420          35,142          36,430          26,831          29,270
                                                            --------        --------        --------        --------        --------
      Total loans - gross ..........................        $393,649        $332,106        $306,484        $229,905        $195,077
                                                            ========        ========        ========        ========        ========



         Risk  taking is  inherent  in the  granting  of credit.  To control the
amounts and types of risks  incurred,  and to minimize  losses,  management  has
established  loan policies and  practices.  Such policies and practices  include
limitations  on  loan-to-collateral  values  for  various  types of  collateral,
requirements for appraisals of real estate  collateral,  problem loan management
practices,  collection procedures,  and nonaccrual and charge-off guidelines. On
an ongoing  basis,  management is always  seeking ways to better manage risk and
improve internal control systems.  As part of this continuous  process,  late in
2004 management began seeking a Chief Credit Officer for the  Corporation.  This
position will have specific loan approval  authority over major  commercial loan
relationships  and will  assist  the  subsidiary  banks  in other  areas of loan
operation and administration.  Management is also expanding the nature and scope
of its internal loan review system effective in early 2005.

         Commercial,  financial,  and agricultural loans, primarily representing
loans made to small and medium size businesses,  may be made on either a secured
or an  unsecured  basis.  When  taken,  security  usually  consists  of liens on
inventories,  receivables,  equipment,  and furniture  and  fixtures.  Unsecured
business loans are generally short-term with emphasis on repayment strengths and


                                       21


low debt-to-worth  ratios.  Commercial lending involves significant risk because
repayment usually depends on the cash flows generated by a borrower's  business,
and debt service  capacity can deteriorate  because of downturns in national and
local economic  conditions.  Management  generally  controls risks by conducting
more  in-depth and ongoing  financial  analysis of a  borrower's  cash flows and
other  financial  information.  Each  of  the  banking  subsidiaries  has a Loan
Committee which is responsible for overseeing the credit granting and monitoring
processes.

         Real estate loans consist of construction loans and other loans secured
by mortgages.  Because the Corporation's  subsidiaries are community banks, real
estate loans comprise the bulk of the loan portfolio.  Loan-to-value  ratios for
real estate loans generally are limited to 80%.

         The Banks  generally  do not  compete  with 15 and 30 year  fixed  rate
secondary  market  mortgage  interest  rates, so they have elected to pursue the
origination  of  mortgage  loans  that could  easily be sold into the  secondary
mortgage  market.  CRM also  originates  such  loans  for sale in the  secondary
market.  These loans are generally  pre-qualified  with various  underwriters to
facilitate  the sales process.  In 2004,  2003 and 2002,  the  Corporation  sold
$174,074,000,  $309,914,000,  and $176,011,000 respectively,  of such loans. The
Corporation's  subsidiaries  may  originate  mortgage  loans  for their own loan
portfolios.  Such loans are usually for a shorter term than loans  originated to
sell and  usually  have a variable  rate or reprice  within a three to five year
term.

         Consumer  installment  loans to individuals are generally for personal,
automobile, or household purposes and may be secured or unsecured.

         The  Corporation  has a  geographic  concentration  of loans within the
Banks' market areas  because of the nature of its  business.  As of December 31,
2004,  the  Corporation  had no other  significant  concentrations  of credit to
customers engaged in similar business activities.

Unsecured Loans

         The Corporation  does not  aggressively  seek to make unsecured  loans,
since these loans may be somewhat more risky than  collateralized  loans.  There
are, however,  occasions when it is in the business interests of the Corporation
to provide  short-term,  unsecured loans to certain  customers.  At December 31,
2004,  the  Corporation  had  approximately  $25,000,000,  or 6.4%  of its  loan
portfolio,  in unsecured  loans.  As of December 31, 2003, the  Corporation  had
approximately  $25,400,000 in unsecured  loans,  or 7.6% of its loan  portfolio.
Such loans are made on the basis of  management's  evaluation of the  customer's
ability to repay and net worth.

Maturity and Interest Sensitivity Distribution of Loans

         The  following  table  sets  forth  the  maturity  distribution  of the
Corporation's  loans,  by type,  as of December  31, 2004 as well as the type of
interest requirement on loans due after one year.



                                                                                                December 31, 2004
                                                                                                -----------------
                                                                                           After one
                                                                            Within one   year but within    After five
                                                                               year         five years         years          Total
                                                                               ----         ----------         -----          -----
                                                                                             (Dollars in thousands)

                                                                                                                     
Commercial, financial and agricultural .............................        $ 52,449        $ 35,833        $  7,993        $ 96,275
Real estate ........................................................          63,317         143,315          54,322         260,954
Consumer installment ...............................................           8,824          23,276           4,320          36,420
                                                                            --------        --------        --------        --------
     Total .........................................................        $124,590        $202,424        $ 66,635        $393,649
                                                                            ========        ========        ========        ========

  Predetermined rate, maturity greater than one year ...............        $      -        $140,213        $ 37,395        $177,608
  Variable rate or maturity within one year ........................        $124,590        $ 62,211        $ 29,240        $216,041




                                       22


Impaired Loans

         Impaired loans are those loans on which,  based on current  information
and events,  it is probable that the  Corporation  will be unable to collect all
amounts due  according to the  contractual  terms of the loan  agreement.  Loans
which management has identified as impaired  generally are nonaccrual loans. The
Corporation  had no  restructured  loans in the past five years.  Following is a
summary of the Corporation's nonaccrual and other nonperforming loans:

          Nonaccrual and Past Due Loans



                                                                                           December 31,
                                                                                           ------------
                                                                  2004           2003          2002            2001            2000
                                                                  ----           ----          ----            ----            ----
                                                                                     (Dollars in thousands)

                                                                                                                 
Nonaccrual loans ........................................        $4,941         $2,595         $  796         $  281         $  238
Accruing loans 90 days or more past due .................           137            146          1,740             17             93
                                                                 ------         ------         ------         ------         ------
     Total ..............................................        $5,078         $2,741         $2,536         $  298         $  331
                                                                 ======         ======         ======         ======         ======
     Total as a % of outstanding loans ..................          1.29%          0.83%          0.83%          0.13%          0.17%
Impaired loans (included in non accrual) ................        $4,941         $2,595         $  796         $  281         $  238



         As of  December  31,  2004,  approximately  $2,434,000,  or 49%, of the
Corporation's   nonaccrual   loans   consisted  of  the  balances  of  one  loan
relationship,  net  of  a  partial  charge-off  of  $1,001,000.   Problems  with
information  supplied by a third party  supporting an appraisal  underlying this
credit were discovered in the fourth quarter of 2004. Approximately  $1,093,000,
or 22% of nonaccrual loans, represents the remaining loan balances included in a
former lending officer's  portfolio,  net of partial  charge-offs of $1,200,000.
Management became aware of possible  problems in the former officer's  portfolio
during  the third  quarter  of 2004.  As of  December  31,  2003,  approximately
$1,350,000,  or 52%, of the Corporation's nonaccrual loans consisted of one loan
relationship.  During the first quarter of 2004, the  Corporation  collected all
amounts due under this credit.

         Gross income that would have been recorded for the years ended December
31, 2004,  2003 and 2002, if nonaccrual  loans had been performing in accordance
with their  original  terms was  approximately  $63,000,  $117,000  and $39,000,
respectively.  No cash basis interest  income was  recognized in 2004,  2003 and
2002 on non-accrual loans.

         The Corporation's  accounting policies on nonaccrual and impaired loans
are discussed in Note 2 to the consolidated financial statements.

         Nonaccrual  loans and  impaired  loans were not material in relation to
the portfolio as a whole in 2004.  Management  is aware of no trends,  events or
uncertainties  that would cause a material adverse change in nonaccrual loans in
2005.

Potential Problem Loans

         At December 31, 2004 the Corporation's internal loan review process had
identified  $4,628,000  (1.2% of the portfolio) in various loans,  not including
loans  identified  as nonaccrual  or 90 days past due and still  accruing  loans
shown above,  where  information  about credit  problems of borrowers had caused
management  to have  doubts  about the ability of the  borrowers  to comply with
original repayment terms. The amount identified does not represent  management's
estimate  of the  potential  losses  since a large  portion  of these  loans are
secured by real estate and other collateral.

Other Real Estate

         Other real estate,  consisting of foreclosed properties,  was $252,000,
$327,000,  and $219,000 as of December 31,  2004,  2003 and 2002,  respectively.
Other real estate is initially  recorded at the lower of net loan balance or the
property's  estimated fair value, net of estimated  disposal costs. The estimate
of fair value for other real estate is  determined  by  appraisal at the time of
acquisition.


                                       23


ALLOWANCE FOR LOAN LOSSES

         The table, "Analysis of the Allowance for Loan Losses," summarizes loan
balances  as of the end of each  period  indicated,  averages  for each  period,
changes in the allowance  arising from mergers,  charge-offs  and  recoveries by
loan  category,  and  additions  to the  allowance  which  have been  charged to
expense.

         The  allowance  for loan losses is increased by the  provision for loan
losses,  which is a direct  charge  to  expense.  Losses on  specific  loans are
charged against the allowance in the period in which management  determines that
such loans become uncollectible.  Recoveries of previously charged-off loans are
credited to the allowance.  See "The Application of Critical Accounting Policies
- Provision and Allowance for Loan Losses."

                    Analysis of the Allowance for Loan Losses



                                                                                    Years Ended December 31,
                                                                                    ------------------------
                                                                 2004           2003          2002            2001          2000
                                                                 ----           ----          ----            ----          ----
                                                                                     (Dollars in thousands)

                                                                                                                 
Total amount of loans outstanding at end of year ........      $393,649       $332,106       $306,484       $229,905       $195,077
                                                               ========       ========       ========       ========       ========
Average amount of loans outstanding .....................      $371,061       $340,518       $281,907       $211,901       $179,654
                                                               ========       ========       ========       ========       ========

Allowance for loan losses - January 1 ...................      $  4,206       $  3,573       $  2,830       $  2,424       $  1,936
                                                               --------       --------       --------       --------       --------
Changes incident to merger activities ...................             -              -            444             28              -
                                                               --------       --------       --------       --------       --------
Loans charged-off
  Real estate ...........................................         1,293            250            175              9             78
  Installment ...........................................           387            247            223            202            116
  Credit cards and related plans ........................             -              -              -              9              9
  Commercial and other ....................... ..........         3,400            163            374             87             33
                                                               --------       --------       --------       --------       --------
     Total charge-offs ..................................         5,080            660            772            307            236
                                                               --------       --------       --------       --------       --------
Recoveries
  Real Estate ...........................................            21            105              1              -              3
  Installment ...........................................            67             58             20             33             25
  Credit cards and related plans ........................             -              -              -              2              2
  Commercial and other ..................................            31             11             17              -              6
                                                               --------       --------       --------       --------       --------
     Total recoveries ...................................           119            174             38             35             36
                                                               --------       --------       --------       --------       --------
Net charge-offs .........................................         4,961            486            734            272            200
Provision for loan losses charged to expense ............         5,102          1,119          1,033            650            688
                                                               --------       --------       --------       --------       --------
Allowance for loan losses - December 31 .................      $  4,347       $  4,206       $  3,573       $  2,830       $  2,424
                                                               ========       ========       ========       ========       ========

Ratios
  Net charge-offs to average loans outstanding ..........          1.34%          0.14%          0.26%          0.13%          0.11%
  Net charge-offs to loans outstanding at end of ........          1.26%          0.15%          0.24%          0.12%          0.10%
       year
  Allowance for loan losses to average loans ............          1.17%          1.24%          1.27%          1.34%          1.35%
  Allowance for loan losses to total loans at end .......          1.10%          1.27%          1.17%          1.23%          1.24%
       of year
  Net charge-offs to allowance for losses ...............        114.12%         11.55%         20.54%          9.61%          8.25%
  Net charge-offs to provision for loan losses ..........         97.24%         43.43%         71.06%         41.85%         29.07%



         The  Corporation  operates four  independent  community  banks in South
Carolina.  Under the provisions of law and  regulations  governing  banks,  each
bank's board of directors is  responsible  for  determining  the adequacy of its
bank's loan loss allowance.  In addition,  each bank is supervised and regularly


                                       24


examined by the Office of the  Comptroller  of the Currency  (the "OCC") (or the
South Carolina State Board of Financial  Institutions (the "State Board") in the
case of the Ridgeway bank) or the Federal  Deposit  Insurance  Corporation  (the
"FDIC"). As a normal part of a safety and soundness examination,  bank examiners
assess and comment on the adequacy of a bank's allowance for loan losses and may
require that changes be made in the  allowance.  The allowance  presented in the
consolidated  financial  statements is on an aggregated  basis and as such might
differ from the allowance  that would be presented if the  Corporation  had only
one banking subsidiary.

         The  nature  of  community  banking  is such that the  individual  loan
portfolios  are  predominantly  composed of small and medium size  business  and
individual loans. As community banks, there exists, by definition,  a geographic
concentration of loans within each Bank's respective city or county.  Management
at each bank monitors the loan  concentrations  and loan portfolio quality on an
ongoing  basis  including,  but  not  limited  to:  quarterly  analysis  of loan
concentrations,  monthly reporting of past dues,  nonaccruals,  and watch loans,
and quarterly reporting of loan charge-offs and recoveries.  These efforts focus
on historical  experience  and are bolstered by quarterly  analysis of local and
state  economic  conditions,  which  are part of the  Banks'  assessment  of the
adequacy of their allowances for loan losses.


DEPOSITS

         The average  deposits for the  Corporation for the years ended December
31, 2004, 2003 and 2002 are summarized below:

               Average Deposits



                                                                               Years Ended December 31,
                                                                               ------------------------
                                                           2004                          2003                        2002
                                                           ----                          ----                        ----
                                                  Average        Average        Average        Average       Average        Average
                                                  balance         cost          balance         cost         balance         cost
                                                  -------         ----          -------         ----         -------         ----
                                                                                (Dollars in thousands)        
        
                                                                                                                       
Noninterest-bearing demand ...................   $  61,220            -        $  52,047           -         $  41,198            -
Interest bearing transaction accounts ........      54,918         0.41%          44,481        0.43%           41,101        0.69%
Savings - regular ............................      20,106         0.54%          20,998        0.53%           14,469        1.01%
Savings - money market .......................      60,428         1.17%          49,554        1.32%           41,321        1.85%
Time deposits less than $100 .................     122,125         2.26%         122,488        2.58%          104,509        3.30%
Time deposits greater than $100 ..............      68,165         2.20%          64,014        2.45%           58,003        3.28%
                                                 ---------                     ---------                     ---------
    Total average deposits ...................   $ 386,962                     $ 353,582                     $ 300,601
                                                 =========                     =========                     =========


         Deposits  are the  primary  source of funds for the Banks'  lending and
investing  activities.  Deposits are attracted principally from customers within
the Banks' local market areas through the offering of a variety of products with
varying features and by offering competitive interest rates.

         At December 31, 2004 the Corporation had $86,344,000 in certificates of
deposit of $100,000  or more.  Approximately  $26,040,000  mature  within  three
months,  $16,542,000  mature over three through six months,  $25,944,000  mature
over six months  through  twelve months and  $17,818,000  mature after one year.
This level of large time deposits, as well as the growth in other deposits,  can
be attributed  to planned  growth by  management.  The majority of time deposits
$100,000 and over is acquired within the Company's  market areas in the ordinary
course of business from customers with standing banking  relationships.  It is a
common  industry  practice not to consider  time deposits of $100,000 or more as
core deposits since their retention can be influenced  heavily by rates offered.
Therefore,  such deposits have the  characteristics  of  shorter-term  purchased
funds.  Certificates  of deposit  $100,000 and over require that the Corporation
achieve and maintain an  appropriate  matching of maturity  distributions  and a
diversification of sources to achieve an appropriate level of liquidity.

SHORT-TERM BORROWINGS

         The  Corporation's  short-term  borrowings may consist of federal funds
purchased and securities  sold under  agreements to repurchase,  which generally
have  maturities  ranging from daily to no more than ninety  days,  and mortgage
loan warehouse and general purpose lines of credit  payable.  As of December 31,
2004,  securities sold under agreements to repurchase totaled $4,979,000.  These


                                       25


amounts are secured by pledges of investment securities and the interest rate is
subject to change  daily.  Federal  funds  purchased  totaled  $1,683,000  as of
December 31, 2004 and are unsecured and mature on a daily basis. No amounts were
outstanding under warehouse lines of credit as of December 31, 2004.

         Summary  information  about total short-term  borrowings is provided in
the following table.



                                                                                                      December 31,
                                                                                                      ------------
                                                                                        2004              2003               2002
                                                                                        ----              ----               ----
                                                                                                (Dollars in thousands)
                                                                       
                                                                                                                       
Balance outstanding at end of year ........................................           $ 6,662            $17,960            $34,551
Weighted average interest rate at end of the period .......................              1.54%              2.38%              0.78%
Interest expense ..........................................................           $   205            $   750            $   478
Maximum outstanding at any month-end during the period ....................           $17,940            $39,379            $16,302
Average outstanding during the period .....................................           $10,309            $29,026            $18,712
Weighted average interest rate during the period ..........................              1.99%              2.58%              2.55%



LONG-TERM DEBT

         The Corporation's  banking subsidiaries are members of the Federal Home
Loan Bank of Atlanta ("FHLB").  As such, they have access to long-term borrowing
from the FHLB.  As of  December  31,  2004,  the Banks had  borrowed  a total of
$20,263,000  from the FHLB.  The  borrowings are secured by blanket liens on all
qualifying first lien residential mortgage loans held by the Banks, specifically
excluding such loans originated for resale on the secondary market.

         Early in the second  quarter of 2004,  the  Corporation  sponsored  the
creation of SCB Capital Trust 1 (the "Trust").  The Trust issued trust preferred
debt  securities  totaling  $10,310,000.  The Trust invested the proceeds of its
debt issuance by purchasing a like amount of subordinated  debentures  issued by
the Corporation.  The amount of the  Corporation's  debt is includible in Tier 1
capital for purposes of computing regulatory required capital ratios.


RETURN ON EQUITY AND ASSETS

         The following  table shows the return on assets (net income  divided by
average total assets),  return on equity (net income divided by average equity),
dividend  payout ratio  (dividends  declared per share divided by net income per
share),  and equity to assets ratio  (average  equity  divided by average  total
assets) for the years ended December 31, 2004, 2003 and 2002.

                                                    Years Ended December 31,
                                                    ------------------------
                                                 2004         2003         2002
                                                 ----         ----         ----

Return on assets (ROA) ..................        0.67%        1.25%        1.43%
Return on equity (ROE) ..................        6.41%       12.17%       15.10%
Dividend payout ratio ...................       54.05%       27.48%       22.54%
Equity as a percent of assets ...........       10.48%       10.25%        9.46%


LIQUIDITY

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals in a timely and economical  manner.
The most manageable  sources of liquidity are composed of liabilities,  with the
primary focus of liquidity  management  being on the ability to attract deposits
within the Banks' market areas.  Core deposits (total deposits less certificates
of deposit of  $100,000  or more)  provide a  relatively  stable  funding  base.
Certificates  of deposit of $100,000 or more are  generally  more  sensitive  to
changes  in rates,  so they must be  monitored  carefully.  Asset  liquidity  is
provided by several  sources,  including  amounts due from banks,  federal funds
sold, and investments available-for-sale.


                                       26


         The Corporation maintains an  available-for-sale  investment securities
portfolio.   While  investment  securities  purchased  for  this  portfolio  are
generally purchased with the intent to be held to maturity,  such securities are
marketable  and  occasional  sales may occur  prior to  maturity  as part of the
process of  asset/liability  and  liquidity  management.  The  Corporation  also
occasionally  designates  securities  as  held-to-maturity.  Securities  in this
portfolio are generally not considered a primary source of liquidity. Management
deliberately  maintains  a  relatively  short-term  maturity  schedule  for  its
investments so that there is a continuing  stream of maturing  investments.  The
Corporation intends to maintain a relatively  short-term investment portfolio in
order to continue to be able to supply  liquidity to its loan  portfolio and for
customer withdrawals.

         The Corporation has substantially more liabilities maturing in the next
12 months than it has assets maturing in the same period.  The Corporation  also
has legal  obligations to extend credit pursuant to loan  commitments,  lines of
credit and standby letters of credit which totaled $11,644,000, $43,312,000, and
$2,919,000,  respectively, at December 31, 2004 (see Note 15 to the consolidated
financial statements).  However, based on its historical experience, and that of
similar  companies,  the  Corporation  believes that it is unlikely that so many
deposits  would be withdrawn,  without  being  replaced by other  deposits,  and
extensions of credit would be required,  that the Corporation would be unable to
meet its liquidity needs with the proceeds of maturing  assets,  in the ordinary
course of business.

         The  Corporation  also maintains  various federal funds lines of credit
with  correspondent  banks and is able to borrow from the Federal Home Loan Bank
of Atlanta and the Federal Reserve's discount window.

         The  Corporation,  through  its Banks,  has a  demonstrated  ability to
attract  deposits from its market area.  Deposits grew from  $218,811,000  as of
December 31, 2000 to  $423,458,000  as of December 31, 2004.  This  consistently
growing base of deposits is the major source of operating liquidity.

         In the  opinion of  management,  the current  and  projected  liquidity
position is adequate.


CAPITAL

Dividends

         The   Corporation   exists  as  a  legal  entity   distinct   from  its
subsidiaries. Its main sources of revenues consist of service fees and dividends
paid to it by the Banks.  The Banks are subject to various laws and  regulations
that  limit the  amounts  of  dividends  that  they may pay.  In  addition,  the
Corporation  and the  Banks  are each  subject  to  regulatory  minimum  capital
adequacy  guidelines.   These  regulatory  restrictions  have  not  historically
hindered the Corporation's or the Banks' ability to pay reasonable dividends and
no such future restrictions are anticipated.  During the year ended December 31,
2004, the  Corporation  received  dividends from the Banks totaling  $2,679,000.
Subject  to  restrictions  imposed by state laws and  federal  regulations,  the
Boards of Directors of the Banks could have declared  additional  dividends from
their  retained  earnings of up to  approximately  $7,961,000 as of December 31,
2004.

Capital Adequacy

         The Federal Reserve and federal bank  regulatory  agencies have adopted
risk-based  capital standards for assessing the capital adequacy of bank holding
companies and financial institutions. Under the risk-based capital requirements,
the  Corporation  and each of the Banks are required to maintain a minimum ratio
of  capital  to  risk-weighted   assets  (including  certain   off-balance-sheet
activities,  such as letters  of  credit) of 8%. At least half of total  capital
must be composed of common equity,  retained  earnings and qualifying  perpetual
preferred stock and certain hybrid instruments,  less certain intangibles ("Tier
1 Capital").  The remainder may consist of certain  subordinated  debt or hybrid
capital  instruments,  qualified  preferred  stock and a  limited  amount of the
allowance for loan losses ("Tier 2 Capital,"  which,  along with Tier 1 Capital,
composes "Total  Capital").  Unrealized  gains and losses on  available-for-sale
securities generally are excluded from the calculation of the risk-based capital
ratios.  To  be  considered   well-capitalized   under  the  risk-based  capital
guidelines,  an institution must maintain a total risk-weighted capital ratio of
at least 10% and a Tier 1 risk-weighted ratio of at least 6%.

         Each of the  Federal  bank  regulatory  agencies  also has  established
minimum leverage capital  requirements  for banking  organizations.  Pursuant to
these  requirements,  banking  organizations  generally  must maintain a minimum
ratio of Tier 1 Capital to adjusted average quarterly assets equal to from 4% to
5%, subject to federal bank regulatory  evaluation of the institution's  overall
safety and soundness.


                                       27


         Federal   regulators   may  categorize  an  institution  as  less  than
well-capitalized  based on subjective  criteria.  Management believes that there
are no  conditions  or events that would cause the  Corporation's  or the Banks'
capital  category to be other than  resulting  from  meeting  the minimum  ratio
requirements.

         Under the risk-based  capital  standards and pursuant to the provisions
of the Federal Deposit Insurance  Corporation  Improvement Act of 1991,  federal
bank regulatory agencies are required to implement prescribed "prompt corrective
actions" if an institution's  capital position deteriorates to specified levels.
The corrective  actions become  increasingly  stringent as the capital  position
continues to deteriorate.

         The Banks are each considered to be 'well  capitalized'  for regulatory
purposes.  Detailed  information  on the  Corporation's  and the Banks'  capital
positions can be found in Note 19 to the consolidated financial statements.

         The mortgage subsidiary is also subject to minimum capital requirements
to maintain its  certification  as a HUD-approved  Title II Loan  Correspondent.
Certain investor and warehouse credit line agreements  require that the mortgage
subsidiary  maintain its HUD  certification.  Failure of CRM to meet its capital
requirements   could  result  in  a  significant   limitation  of  the  mortgage
subsidiary's ability to originate,  fund or sell loans, and therefore could have
a direct, material adverse effect on its business and the consolidated financial
statements. As of December 31, 2004, CRM exceeded its minimum regulatory capital
requirement by approximately $1,098,000.

         During the first quarter of 2004, the Corporation  acquired $10,310,000
in proceeds  from the issuance of trust  preferred  securities.  Of this amount,
$3,000,000  was  used  to  provide  additional  capital  to two  of  the  Banks,
approximately  $1,400,000  was used to repay a short-term  line of credit of the
mortgage   subsidiary  and   approximately   $635,000  was  used  to  repay  the
Corporation's  short-term  borrowings.  The  remainder  is  being  used  for the
Corporation's general corporate purposes.  Under current Federal Reserve policy,
the Corporation is allowed to treat the trust preferred  securities,  subject to
certain limitations, as capital for capital adequacy purposes.


INFLATION

         The assets and  liabilities of the  Corporation  are mostly monetary in
nature. Accordingly, the financial results and operations of the Corporation are
much more affected by changes in interest rates than changes in inflation. There
is, however,  a strong correlation  between increasing  inflation and increasing
interest rates. The rate of inflation,  as measured by the average change in the
Consumer Price Index, has been moderate,  but increasing,  over the past several
years,  about 3.3% in 2004 and 1.9% in 2003.  Prospects  appear  reasonable  for
continued moderate inflation, despite some risk related to energy prices and the
political and military situation in the Middle East. Although inflation does not
normally  affect a financial  institution as  dramatically as it does businesses
with large investments in plants and inventories, it does have an effect. During
periods of high inflation there are usually corresponding increases in the money
supply and banks experience above-average growth in assets, loans, and deposits.
General  increases in the prices of goods and services  also result in increased
operating expenses.

OFF-BALANCE-SHEET   ARRANGEMENTS,   CONTRACTUAL   OBLIGATIONS   AND   CONTINGENT
LIABILITIES AND COMMITMENTS

         The  Company  presently  engages  in  only  limited  off-balance  sheet
arrangements.   Such   arrangements   are   defined  as   potentially   material
transactions,  agreements,  or other contractual  arrangements which the Company
has entered  into to which an entity  unconsolidated  with the  registrant  is a
party  and,  under  which  the  Company,  whether  or not it is a  party  to the
arrangement, has, or in the future may have:

o        any  obligation  under  a  direct  or  indirect  guarantee  or  similar
         arrangement;
o        a  retained  or  contingent   interest  in  assets  transferred  to  an
         unconsolidated  entity or similar  arrangement  that  serves as credit,
         liquidity or market risk support to such entity for such assets;
o        derivatives,  to the extent  that the fair  value  thereof is not fully
         reflected as a liability or asset in the financial statements; or
o        any  obligation,  including a contingent  obligation,  arising out of a
         variable  interest  (as  referenced  in  FASB  Interpretation  No.  46,
         Consolidation of Variable  Interest  Entities (January 2003), as may be
         modified or supplemented), in an unconsolidated entity that is held by,
         and material to, the registrant,  where such entity provides financing,
         liquidity,  market  risk or credit  support  to, or engages in leasing,
         hedging or research and development services with, the registrant.

                                       28


         The Company's  off-balance  sheet  arrangements  presently include only
commitments  to extend credit and standby  letters of credit.  Such  instruments
have  elements of credit risk in excess of the amount  recognized in the balance
sheet. The exposure to credit loss in the event of  nonperformance  by the other
parties to these  instruments is represented  by the  contractual,  or notional,
amount  of those  instruments.  Generally,  the same  credit  policies  used for
on-balance  sheet  instruments,  such  as  loans,  are  used in  extending  loan
commitments and letters of credit.  The following table sets out the contractual
or notional amounts of those arrangements:

                                                               December 31,
                                                               ------------
                                                            2004            2003
                                                            ----            ----
                                                         (Dollars in thousands)

Loan commitments ...................................       $11,644       $15,501
Unfunded commitments under lines of credit .........        43,312        36,735
Standby letters of credit ..........................         2,919         4,489


         Loan  commitments  involve  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 some
involve payment of a fee. Many of the commitments are expected to expire without
being fully  drawn;  therefore,  the total amount of loan  commitments  does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon  extension  of credit is based on  management's  credit  evaluation  of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.

         Standby letters of credit are conditional  commitments to guarantee the
performance of a customer to a third party.  The credit risk involved in issuing
standby  letters  of  credit  is the  same  as  that  involved  in  making  loan
commitments to customers.

         As described under  "Liquidity,"  management  believes that its various
sources of liquidity  provide the resources  necessary for the Banks to fund the
loan  commitments  and to perform under standby  letters of credit,  if the need
arises.  Neither  the Company  nor the Banks are  involved in other  off-balance
sheet  contractual  relationships or transactions that could result in liquidity
needs or other commitments or significantly impact earnings.

         The  Corporation's  contractual  cash obligations are summarized in the
following table.



                                                                                     December 31, 2004
                                                                                     -----------------
                                                                                           Payments due by period
                                                                       -------------------------------------------------------------
                                                                       Less than 1 
                                                          Total            Year          1 to 3 Years   3 to 5 Years   After 5 Years
                                                          -----        -----------       ------------   ------------   -------------
                                                                                   (Dollars in thousands)
Contractual Cash Obligations
                                                                                                                  
  Time deposits ...............................         $205,863         $160,652         $ 42,007         $  3,197         $      7
  Long-term debt ..............................           30,573            1,370            1,500            7,500           20,203
  Operating lease obligations .................            2,785              226              446              229            1,884
                                                        --------         --------         --------         --------         --------
        Total .................................         $239,221         $162,248         $ 43,953         $ 10,926         $ 22,094
                                                        ========         ========         ========         ========         ========



THE APPLICATION OF CRITICAL ACCOUNTING POLICIES

         The  consolidated  financial  statements are based on the selection and
application of accounting  principles generally accepted in the United States of
America, which require management to make estimates and assumptions about future
events  that  affect  the  amounts  reported  in the  financial  statements  and
accompanying  notes.  Future events and their effects cannot be determined  with
absolute  certainty.  Therefore,  the  determination  of estimates  requires the
exercise of judgment.  Actual results could differ from those estimates, and any
such  differences  may be  material  to  the  financial  statements.  Management
believes that the  following  policy may involve a higher degree of judgment and
complexity in its application and represents the critical accounting policy used
in the  preparation  of the  Corporation's  financial  statements.  If different
assumptions  or  conditions  were to prevail,  the results  could be  materially
different from the reported results.

                                       29


Provision and Allowance for Loan Losses

         The Corporation is required to estimate the  collectibility of its loan
portfolio  as of each  accounting  period  end  and,  as a  result,  provide  an
allowance for possible  loan losses.  The allowance for loan losses is increased
by the provision for loan losses charged to expense and any recoveries  received
on loans  previously  charged off. The  allowance is decreased by deducting  the
amount of uncollectible loans charged off.

         A considerable degree of judgment is exercised in computing an estimate
of the  allowance  for loan  losses.  Management's  judgment  must be applied in
assessing the current  creditworthiness  of the  Corporation's  borrowers and in
estimating  uncertain  future events and their effects based on currently  known
facts and  circumstances.  Changes in the  estimated  allowance  for loan losses
arising as new events occur or more information is obtained are accounted for as
changes in accounting  estimates in the accounting  period in which such changes
occur.

         Management  reviews its allowance for loan losses utilizing three broad
loan  categories:  commercial,  real estate and  consumer  installment  loans to
individuals.  Within these categories, the allowance for loan losses is composed
of specific and general  amounts.  Specific  allowance  amounts are provided for
individual  loans based on  management's  evaluation of the  Corporation's  loss
exposure taking into account the current payment status,  underlying  collateral
and other known information about the borrower's circumstances. Typically, these
loans are  identified  as  impaired  or  nonperforming,  or have  been  assigned
internal risk grades of management  attention,  special mention,  substandard or
doubtful.  General allowance amounts are provided for all other loans, excluding
those for which specific  amounts were  determined,  by applying  estimated loss
percentages to the portfolio  categorized  using risk grades.  These percentages
are  based  on  management's  current  evaluation  with  consideration  given to
historical  loss  experience,  general  national and local economic and business
conditions affecting key lending market areas, credit quality trends, collateral
values,   loan  volumes,   portfolio   seasoning,   and  any  identified  credit
concentrations. The findings of internal and external credit reviews and results
from external audits and regulatory examinations are also considered.

         The following  table  presents the allocation of the allowance for loan
losses,  as of December 31, 2000 through 2004,  compared with the  percentage of
loans in the applicable categories to total loans.



                                                                                              December 31,
                                                                                              ------------
                                                                   2004           2003           2002           2001         2000
                                                                   ----           ----           ----           ----         ----
                                                                                        (Dollars in thousands)
Amount allocated to loan category
---------------------------------
                                                                                                                 
Commercial, financial and agricultural ..................         $1,960         $1,796         $1,479         $1,019          $801
Real estate .............................................          1,907          1,800          1,548          1,322         1,136
Consumer installment ....................................            480            610            546            489           487
                                                                  ------         ------         ------         ------        ------
     Total ..............................................         $4,347         $4,206         $3,573         $2,830        $2,424
                                                                  ======         ======         ======         ======        ======


                                                                                              December 31,
                                                                                              ------------
                                                                    2004           2003           2002           2001          2000
                                                                    ----           ----           ----           ----          ----
Percentage of loans in category
-------------------------------
                                                                                                                  
Commercial, financial and agricultural ..................           24.5%          25.5%          25.5%          24.6%         26.8%
Real estate .............................................           66.3%          63.9%          62.6%          63.7%         58.2%
Consumer installment ....................................            9.2%          10.6%          11.9%          11.7%         15.0%
                                                                   -----          -----          -----          -----         -----
     Total ..............................................          100.0%         100.0%         100.0%         100.0%        100.0%
                                                                   =====          =====          =====          =====         =====



         The Corporation  utilizes its risk grading system for all loans held in
the  portfolio.   This  system  involves  the  Corporation's  lending  officers'
assigning a risk grade, on a loan-by-loan basis,  considering  information about
the borrower's capacity to repay,  collateral,  payment history, and other known
factors.  Assigned  risk  grades are updated  monthly  for any known  changes in
circumstances  affecting  the borrower or the loan.  The risk grading  system is
monitored on a continuing  basis by management  and the  Corporation's  external
credit review consultant who is independent of the lending function.

         The  provision  for loan losses  charged to expense was  $5,102,000  in
2004, an increase of $3,983,000 or 356% over the amount for 2003.  The allowance


                                       30


for loan  losses at the end of 2004 was  $4,347,000,  an increase of $141,000 or
3.4% over the  allowance of $4,206,000 as of the end of 2003. As a percentage of
total loans  outstanding  at year end,  the  allowance  for loan losses stood at
1.10%,  1.27%  and  1.17%  for  2004,  2003  and  2002,  respectively.  Net loan
charge-offs  were $4,961,000 for 2004, an increase of 921% over the 2003 amount.
As of the end of 2004,  non-performing  loans  (nonaccrual and accruing loans 90
days or more past due) grew to $5,078,000,  up from $2,741,000 and $2,536,000 at
the end of 2003 and 2002,  respectively.  Potential problem loans,  exclusive of
non-performing  loans,  grew to  $4,628,000  at the end of 2004,  compared  with
$3,237,000 and $2,737,000 at the end of 2003 and 2002, respectively.

         As  discussed  under  the  caption,   "Impaired  Loans,"  approximately
$3,527,000,  or 71% of nonperforming loans as of December 31, 2004, consisted of
the remaining balances, net of partial charge-offs, of several loans included in
a former loan officer's portfolio and one other problem relationship.  As of the
end of 2004, approximately $669,000, or 15.4% of the year end allowance had been
specifically  allocated  to these  loans.  As of  December  31,  2003 and  2002,
approximately  $1,350,000,  or 49% and 53%,  respectively,  of the Corporation's
nonperforming   loans  consisted  of  one  commercial  loan  relationship.   The
borrower's principals had been involved in a legal dispute among themselves. The
Corporation  collected  all  amounts  due under this  contract  during the first
quarter of 2004.

         Management has established  loan and credit policies and practices that
are designed to control credit risks as a part of the loan underwriting process.
These policies and practices include, for example, requirements for minimum loan
to collateral  value ratios,  real estate  appraisal  requirements and obtaining
credit and  financial  information  on borrowers.  However,  if the capacity for
borrowers to repay or  collateral  values should  deteriorate  subsequent to the
underwriting  process,  or both, the estimate of the provision and allowance for
loan  losses  might  have  to  increase,   thereby  decreasing  net  income  and
shareholders'  equity.  During the two year period  ending  December  31,  2004,
commercial  loans  increased  $18,065,000  to  $96,275,000.  The  total of loans
secured by real estate mortgages  increased by $69,110,000 from  $191,844,000 at
the end of 2002 to $260,954,000 by the end of 2004. Any  significant,  prolonged
downturn in national and local economic and business conditions could negatively
affect the borrowers'  capacity to repay these loans as well as the value of the
underlying  collateral.  This scenario would be likely to substantially increase
the level of impaired or  non-performing  loans and non-earning  foreclosed real
estate,  and increase  overall credit risk by shrinking the margin of collateral
values as compared with loans  outstanding.  Another factor that could adversely
affect borrowers'  ability to make payments in accordance with loan terms is the
potential  for  increases  in rates  charged for loans.  The  Corporation  has a
significant amount of variable rate loans outstanding.  In addition,  some loans
are refinanced at maturity rather than being paid out in a lump sum. If interest
rates were to increase sharply in a short time period, some loan customers might
not be able to afford payments on loans made or repriced at the higher resulting
interest  rates,  nor would they  necessarily  be able to obtain more  favorable
terms elsewhere. This could also cause an increase in the amounts of impaired or
non-performing assets and other credit risks.

         Management believes that its estimate of the allowance for loan losses,
as of December 31, 2004, is sufficient to absorb any losses inherent in the loan
portfolio.   Management   will  continue  to  monitor   closely  the  levels  of
non-performing  and potential  problem loans and will address the  weaknesses in
those credits to enhance the amount of ultimate  collection or recovery of these
assets.


IMPACT OF RECENT ACCOUNTING CHANGES

Consolidation of Variable Interest Entities - FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities,  an interpretation of ARB No. 51,"
provides a new framework for identifying variable interest entities ("VIEs") and
determining   when  a  company   should   include   the   assets,   liabilities,
noncontrolling  interests and results of activities of a VIE in its consolidated
financial  statements.  FIN 46  requires  that if a  business  enterprise  has a
controlling financial interest in a VIE, the assets,  liabilities and results of
the  activities  of the  VIE  must be  included  in the  consolidated  financial
statements of a business enterprise.  This interpretation also requires existing
unconsolidated  VIEs to be  consolidated by their primary  beneficiaries  if the
entities do not  effectively  disperse risks among parties  involved.  VIEs that
effectively  disperse risks will not be consolidated unless a single party holds
an interest or combination of interests that  effectively  recombines risks that
were  previously  dispersed.  FIN 46 was effective  immediately for VIEs created
after January 31, 2003,  and to VIEs in which an enterprise  obtains an interest
after that date. It applied in the first fiscal year or interim period beginning
after June 15, 2003,  to VIEs in which an enterprise  holds a variable  interest
that it acquired before February 1, 2003. This  Interpretation does not apply to
securitization structures that are qualified special purpose entities as defined
within FASB Statement No. 140. Management does not believe that adoption of this
Interpretation  has had, or will have, any material adverse or beneficial effect
on the Corporation's consolidated financial position or results of operations.

Share-Based  Payment - SFAS No. 123 (revised 2004), "SFAS 123(R)," was issued in
December 2004 and requires that the cost resulting from all share-based  payment
transactions be recognized in the financial  statements.  The statement replaces


                                       31


SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  and supersedes APB
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees."  Several  other
pronouncements are amended or superseded as well. SFAS 123(R) generally requires
use of a fair-value  measurement objective for such transactions and amends SFAS
No. 95 to require that excess tax benefits  resulting from such  transactions be
reported as financing cash flows rather than as a reduction of taxes paid.  SFAS
No.  123(R) is  effective  for  public  companies,  other than  "small  business
filers," as of the  beginning of the first  interim or annual  reporting  period
that begins after June 30, 2005.  Various  transition  methods are available for
the  restatement  of prior period  information.  Management  has not yet decided
which of the  available  transition  methods the  Corporation  will employ,  and
accordingly  is unable to  estimate  the  effect of the  implementation  of this
statement on the Corporation's  financial  position or results of operations for
any period.

Exchanges  of  Nonmonetary  Assets - SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets,  an  amendment  of APB Opinion No. 29,"  eliminates  an exception to the
measurement  of such exchanges at fair value for similar  productive  assets and
replaces it with an exception  for such  exchanges  that do not have  commercial
substance.  The  provisions  of  this  Statement  are  required  to  be  applied
prospectively to exchanges  occurring in fiscal periods beginning after June 15,
2005.  Earlier  application is permitted for such exchanges  occurring in fiscal
periods  beginning after December 16, 2004. It is not expected that adoption and
application of the  provisions of this Statement will have any material  adverse
or beneficial effect on the  Corporation's  consolidated  financial  position or
results of operations.

EITF Issue No. 03-1 - Emerging  Issues  Task Force  ("EITF")  Issue  03-1,  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments,"  requires that companies report information about certain debt and
equity  securities  when the estimated fair values of those  securities are less
than their cost. Implementation of the guidance contained in paragraphs 10-20 of
EITF  Issue No.  03-1was  delayed by the FASB and the  effective  date for those
paragraphs  will be superseded  concurrent  with the final  issuance of proposed
FASB  Staff   Position  EITF  Issue  No.  03-1-a.   Substantially   all  of  the
Corporation's  investment  securities are issued by the U.S.  Government,  or by
U.S.  Government  agencies  and  corporations,  and  generally  do  not  contain
provisions  that would allow the securities to be settled in such a way that the
Corporation would not recover substantially all of its cost. Management intends,
and believes that it has the ability, to hold such securities until a forecasted
recovery of the fair market value, including until maturity. Management does not
believe that  implementation  of this guidance will have any material adverse or
beneficial effect on the Company's consolidated financial position or results of
operations.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

         Market risk is the risk of loss from adverse  changes in market  prices
and rates. The Corporation's  market risk arises  principally from interest rate
risk  inherent in its  lending,  deposit and  borrowing  activities.  Management
actively  monitors and manages its  interest  rate risk  exposure.  Although the
Corporation  manages other risks,  such as credit  quality and liquidity risk in
the normal course of business, management considers interest rate risk to be its
most  significant  market risk and this risk could  potentially have the largest
material  effect  on  the  Corporation's  financial  condition  and  results  of
operations.  Other types of market risks such as foreign currency  exchange risk
and commodity price risk do not arise in the normal course of community  banking
activities.

         Achieving  consistent growth in net interest income is the primary goal
of the  Corporation's  asset/liability  function.  The  Corporation  attempts to
control the mix and maturities of assets and  liabilities to achieve  consistent
growth in net interest  income despite  changes in market  interest  rates.  The
Corporation seeks to accomplish this goal while maintaining  adequate  liquidity
and capital. The Corporation's  asset/liability mix is sufficiently  balanced so
that the effect of interest rates moving in either  direction is not expected to
be material over time.

         The Corporation's  Asset/Liability Committee uses a simulation model to
assist in  achieving  consistent  growth in net interest  income while  managing
interest rate risk.  The model takes into account  interest rate changes as well
as changes in the mix and volume of assets and liabilities.  The model simulates
the  Corporation's  balance sheet and income  statement under several  different
rate  scenarios.  The model's inputs (such as interest rates and levels of loans
and  deposits)  are  updated  on a  quarterly  basis in order to obtain the most
accurate  forecast   possible.   The  forecast   presents   information  over  a
twelve-month  period. It reports a base case in which interest rates remain flat
and  variations  that occur when rates  increase and  decrease  100, 200 and 300
basis points. According to the model, as of December 31, 2004 the Corporation is
positioned so that net interest  income would  increase  $332,000 and net income
would  increase  $208,000 if interest rates were to rise 100 basis points in the
next twelve months.  Conversely,  net interest income would decline $432,000 and
net income would  decline  $272,000 if interest  rates were to decline 100 basis

                                       32


points. Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions,  including relative levels of market interest
rates and loan prepayment, and should not be relied upon as indicative of actual
results.   Further,   the  computations  do  not  contemplate  any  actions  the
Corporation  could  undertake  in response  to changes in interest  rates or the
effects of responses by others, including borrowers and depositors.

         The following table summarizes the Corporation's  interest  sensitivity
position as of December 31, 2004.

                  Interest Sensitivity Analysis



                                                               Within        Within           Within 
                                                              3 months     4-12 months       1-5 years      Over 5 years      Total
                                                              --------     -----------       ---------      ------------      -----
                                                                                      (Dollars in thousands)
Interest earning assets
                                                                                                                  
    Interest-bearing deposits ........................      $     852       $       -        $       -      $       -      $     852
    Taxable investment securities ....................         12,670          24,298           12,394          2,924         52,286
    Tax exempt investment securities .................            577             777            3,539            217          5,110
    Other investments ................................          2,642               -                -              -          2,642
    Federal funds sold ...............................         12,571               -                -              -         12,571
    Loans held for sale (1) ..........................         15,090               -                -              -         15,090
    Loans ............................................        191,274          20,110          141,401         40,864        393,649
                                                            ---------       ---------        ---------      ---------      ---------
          Total interest earning assets ..............        235,676          45,185          157,334         44,005        482,200
                                                            ---------       ---------        ---------      ---------      ---------

Interest bearing liabilities 
    Savings ..........................................      $  85,679       $       -        $       -      $       -      $  85,679
    Interest bearing transaction accounts ............         64,870               -                -              -         64,870
    Time deposits < $100 .............................         26,823          65,303           27,385              8        119,519
    Time deposits > $100 .............................         26,040          42,486           17,818              -         86,344
    Short-term borrowings ............................          6,662               -                -              -          6,662
    Long-term debt ...................................         10,310           1,370            9,000          9,893         30,573
                                                            ---------       ---------        ---------      ---------      ---------
          Total interest bearing liabilities .........        220,384         109,159           54,203          9,901        393,647
                                                            ---------       ---------        ---------      ---------      ---------

Interest sensitivity gap .............................      $  15,292       $ (63,974)       $ 103,131      $  34,104      $  88,553
Cumulative gap .......................................      $  15,292       $ (48,682)       $  54,449      $  88,553
RSA/RSL (2) ..........................................            107%             41%
Cumulative RSA/RSL (2) ...............................            107%             85%

(1)  Loans held for sale are reflected in the period of expected sale.
(2)  RSA- rate sensitive assets; RSL- rate sensitive liabilities

         The above table  reflects the balances of interest  earning  assets and
interest  bearing  liabilities  at the  earlier of their  repricing  or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing  loans are reflected at the earliest date at which they
may be repriced  contractually.  Deposits in other banks and debt securities are
reflected at each instrument's  ultimate maturity date.  Overnight federal funds
sold are reflected as instantly  repriceable.  Interest bearing liabilities with
no  contractual  maturity,   such  as  savings  deposits  and  interest  bearing
transaction  accounts,  are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at their maturity dates.

         The static interest rate sensitivity gap position, while not a complete
measure  of  interest  sensitivity,  is also  reviewed  periodically  to provide
insights  related to the static  repricing  structure  of the Banks'  assets and
liabilities.  At December 31, 2004 on a cumulative  basis through twelve months,
rate sensitive  liabilities  exceeded rate sensitive assets by $48,682,000.  The
liability  sensitive  position is largely due to the assumption  that the Banks'
$150,549,000 in interest bearing  transaction  accounts,  savings accounts,  and
money market accounts will reprice within a year. This assumption may or may not
be valid,  since these  accounts vary greatly in their  sensitivity  to interest
rate changes in the market.  Rising  interest  rates would be likely to diminish
net interest income of banks in a liability sensitive position if the assumption
is valid and in the absence of factors which would be likely to occur.

         The  Market  Risk  table,  which  follows  this  discussion,  shows the
Corporation's  financial  instruments  that are sensitive to changes in interest
rates.  The  Corporation  uses certain  assumptions  to estimate fair values and
expected maturities.  For assets, expected maturities are based upon contractual
maturity, projected repayments, and prepayment of principal and potential calls.
For core deposits without contractual maturity (i.e., interest checking, savings


                                       33


and money market  accounts),  the table  presents  principal cash flows based on
management's judgment concerning their most likely runoff. The actual maturities
and runoff  could vary  substantially  if future  prepayments,  runoff and calls
differ from the Corporation's historical experience.


                                       34




                                                                                    December 31, 2004
                                                   ---------------------------------------------------------------------------------
                                       2004 Year-
                                          End
                                        Average                                                                          Estimated 
                                          Rate      2005       2006     2007      2008      2009   Thereafter   Balance  Fair Value
                                          ----      ----       ----     ----      ----      ----   ----------   -------  ----------
                                                                          (Dollars in thousands)
Interest earning assets
                                                                                                      
  Interest-bearing deposits
    with other banks .................    2.10%  $    852   $    -     $    -    $     -    $     -    $     -   $    852   $    852
  Investment securities ..............    3.13%    38,321    8,805      2,815      3,129      1,185      3,141     57,396     57,378
  Federal funds sold .................    1.97%    12,571        -          -          -          -          -     12,571     12,571
  Loans held for sale ................    5.66%    15,090        -          -          -          -          -     15,090     15,090
  Loans ..............................    6.36%   124,578   41,119     49,996     40,755     70,618     66,583    393,649    383,625
                                                  
                                                  
Interest bearing liabilities                    
  Savings ............................    0.53%  $ 67,046  $     -    $     -    $     -    $   $ -    $     -   $ 67,046   $ 67,046
  Interest bearing                                
    transaction accounts .............    1.04%    64,870        -          -          -          -          -     64,870     64,870
  Time deposits ......................    2.50%   160,652   31,950     10,057      2,909        295          -    205,863    207,028
                                                  -------   ------     ------      -----        ---    -------    -------    -------
   Total interest bearing deposits....    1.83%   292,568   31,950     10,057      2,909        295          -    337,779    338,944
  Short-term borrowings ..............    1.54%     6,662        -          -          -          -          -      6,662      6,662
  Long-term debt .....................    5.28%     1,370      500      1,000      2,500      5,000     20,203     30,573     31,486






                                       35



Item 8.  Financial Statements and Supplementary Data











                           COMMUNITY BANKSHARES, INC.





                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                           PAGE

Report of Independent Registered Public Accounting Firm ................    37
Consolidated Balance Sheets, December 31, 2004 and 2003 ................    38
Consolidated Statements of Income, Years Ended December 31,
     2004, 2003, and 2002 ..............................................    39
Consolidated Statements of Changes in Shareholders' Equity,
     Years Ended December 31, 2004, 2003, and 2002 .....................    40
Consolidated Statements of Cash Flows, Years Ended December 31, 
     2004, 2003, and 2002 ..............................................    41
Notes to Consolidated Financial Statements ............................. 42-68




                                       36











             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders and
     Board of Directors of
     Community Bankshares, Inc.


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, changes in shareholders' equity, and
cash flows for each of the years in the  three-year  period  ended  December 31,
2004. These  consolidated  financial  statements are the  responsibility  of the
Corporation's  management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  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 at December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended  December 31, 2004,  in  conformity  with U.S.  generally  accepted
accounting principles.



Columbia, South Carolina                        s/ J. W. Hunt and Company LLP
February 7, 2005











                                       37


COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS


                                                                                                                  December 31,
                                                                                                                  ------------
                                                                                                            2004              2003
                                                                                                            ----              ----
                                                                                                            (Dollars in thousands)
Assets                                                                                
                                                                                                                           
     Cash and due from banks ..................................................................         $  14,397          $  16,554
     Federal funds sold .......................................................................            12,571             25,321
                                                                                                        ---------          ---------
             Total cash and cash equivalents ..................................................            26,968             41,875
     Interest-bearing deposits with other banks ...............................................               852              1,124
     Securities available-for-sale ............................................................            55,471             64,864
     Securities held-to-maturity (estimated fair value
     $1,907 for 2004 and $2,155 for 2003) .....................................................             1,925              2,000
     Other investments ........................................................................             2,642              2,038
     Loans held for sale ......................................................................            15,090              8,411
     Loans, net of allowance for loan
     losses of $4,347 for 2004 and $4,206 for 2003 ............................................           389,302            327,900
     Premises and equipment - net .............................................................             7,739              6,915
     Accrued interest receivable ..............................................................             2,419              2,186
     Net deferred income tax assets ...........................................................               599                805
     Goodwill .................................................................................             4,321              4,321
     Core deposit intangible assets ...........................................................             3,083              3,329
     Prepaid expenses and other assets ........................................................             1,966                812
                                                                                                        ---------          ---------

             Total assets .....................................................................         $ 512,377          $ 466,580
                                                                                                        =========          =========

Liabilities
     Deposits
         Demand, noninterest-bearing ..........................................................         $  67,046          $  59,337
         Interest-bearing transaction accounts ................................................            64,870             57,221
         Savings ..............................................................................            85,679             77,216
         Certificates of deposit of $100 and over .............................................            86,344             68,388
         Other time deposits ..................................................................           119,519            116,542
                                                                                                        ---------          ---------
             Total deposits ...................................................................           423,458            378,704
     Short-term borrowings ....................................................................             6,662             17,960
     Long-term debt ...........................................................................            30,573             20,140
     Accrued interest payable .................................................................               691                585
     Accrued expenses and other liabilities ...................................................               966              1,121
                                                                                                        ---------          ---------
             Total liabilities ................................................................         $ 462,350          $ 418,510
                                                                                                        ---------          ---------

     Commitments and contingent liabilities

Shareholders' equity
     Common  stock - no par value, 12,000,000 authorized shares; issued and
       outstanding - 4,390,784 shares for 2004
       and 4,331,460 shares for 2003 ..........................................................            30,042             29,402
     Retained earnings ........................................................................            20,075             18,610
     Accumulated other comprehensive income (loss) ............................................               (90)                58
                                                                                                        ---------          ---------
             Total shareholders' equity .......................................................            50,027             48,070
                                                                                                        ---------          ---------

             Total liabilities and shareholders' equity .......................................          $512,377           $466,580
                                                                                                        =========          =========


See accompanying notes to consolidated financial statements.

                                       38


COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME


                                                                                                 Years Ended December 31,
                                                                                                 ------------------------
                                                                                      2004               2003               2002
                                                                                      ----               ----               ----
                                                                                         (Dollars in thousands, except per share)
Interest and dividend income                        
                                                                                                                        
     Loans, including fees ............................................            $ 22,821            $ 22,234             $ 20,174
     Interest-bearing deposits with other banks .......................                  20                  19                   36
     Debt securities
        Taxable .......................................................               1,441               1,341                1,872
        Tax exempt ....................................................                 312                 322                  217
     Dividends ........................................................                  77                  73                   98
     Federal funds sold ...............................................                 203                 279                  347
                                                                                   --------            --------             --------
           Total interest and dividend income .........................              24,874              24,268               22,744
                                                                                   --------            --------             --------
Interest expense
     Deposits
        Interest-bearing transaction accounts .........................                 225                 193                  285
        Savings .......................................................                 814                 766                  905
        Certificates of deposit of $100 and over ......................               1,498               1,568                1,876
        Other time deposits ...........................................               2,765               3,160                3,452
                                                                                   --------            --------             --------
           Total interest on deposits .................................               5,302               5,687                6,518
     Short-term borrowings ............................................                 205                 750                  478
     Long-term debt ...................................................               1,524               1,123                1,123
                                                                                   --------            --------             --------
           Total interest expense .....................................               7,031               7,560                8,119
                                                                                   --------            --------             --------
Net interest income ...................................................              17,843              16,708               14,625
Provision for loan losses .............................................               5,102               1,119                1,033
                                                                                   --------            --------             --------
Net interest income after provision ...................................              12,741              15,589               13,592
                                                                                   --------            --------             --------
Noninterest income
     Service charges on deposit accounts ..............................               3,237               3,349                2,760
     Mortgage brokerage income ........................................               3,128               5,198                3,655
     Gains (losses) on sales of securities ............................                  76                (252)                 119
     Deposit box rent .................................................                  51                  50                   39
     Bank card fees ...................................................                  30                  32                   29
     Loan related insurance commissions ...............................                  83                  77                   62
     Other ............................................................                 673                 671                  530
                                                                                   --------            --------             --------
           Total noninterest income ...................................               7,278               9,125                7,194
                                                                                   --------            --------             --------
Noninterest expenses
     Salaries and employee benefits ...................................               8,228               9,657                7,812
     Premises and equipment ...........................................               2,021               1,804                1,444
     Marketing ........................................................                 445                 441                  338
     Regulatory fees ..................................................                 247                 233                  205
     Supplies .........................................................                 288                 337                  284
     Director fees ....................................................                 298                 283                  190
     FDIC insurance ...................................................                  54                  54                   50
     Other ............................................................               3,458               3,123                2,142
                                                                                   --------            --------             --------
           Total noninterest expenses .................................              15,039              15,932               12,465
                                                                                   --------            --------             --------
Income before income taxes ............................................               4,980               8,782                8,321
Income tax expense ....................................................               1,771               3,147                2,920
                                                                                   --------            --------             --------
Net income ............................................................            $  3,209            $  5,635             $  5,401
                                                                                   ========            ========             ========

Earnings per share
     Basic ............................................................            $   0.74            $   1.31             $   1.42
     Diluted ..........................................................                0.72                1.27                 1.38


See accompanying notes to consolidated financial statements

                                       39


COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY



                                                                    Common Stock
                                                                    ------------                         Accumulated
                                                              Number of                    Retained  Other Comprehensive
                                                               Shares         Amount       Earnings       Income (Loss)       Total
                                                               ------         ------       --------       -------------       -----
                                                                          (Dollars in thousands, except per share)

                                                                                                                 
Balance, January 1, 2002 .............................      3,299,674      $  17,208      $  10,346       $      (7)      $  27,547

Comprehensive income
    Net income .......................................              -              -          5,401               -           5,401
                                                                                                                          ---------
    Unrealized holding gains arising
      during the period, net of
      income tax effects of $102 .....................              -              -              -             181             181
    Reclassification adjustment,
      net of income tax effects of $43 ...............              -              -              -             (76)            (76)
                                                                                                                          ---------
        Total other comprehensive income .............              -              -              -               -             105
                                                                                                                          ---------
          Total comprehensive income .................              -              -              -               -           5,506
                                                                                                                          ---------
Common stock issued in purchase of
    Ridgeway Bancshares, Inc., net
    of issuance costs of $178 ........................      1,000,000         11,842              -               -          11,842
Exercise of stock options ............................          4,710             40              -               -              40
Cash dividends ($.32 per share) ......................              -              -         (1,218)              -          (1,218)
                                                            ---------      ---------      ---------       ---------       ---------
Balance, December 31, 2002 ...........................      4,304,384         29,090         14,529              98          43,717

Comprehensive income
    Net income .......................................              -              -          5,635               -           5,635
                                                                                                                          ---------
    Unrealized holding losses arising
      during the period, net of
      income tax effects of $113 .....................              -              -              -            (201)           (201)
    Reclassification adjustment,
      net of income tax effects of $91 ...............              -              -              -             161             161
                                                                                                                          ---------
        Total other comprehensive income (loss) ......              -              -              -               -             (40)
                                                                                                                          ---------
          Total comprehensive income .................              -              -              -               -           5,595
                                                                                                                          ---------
Exercise of stock options ............................         27,076            312              -               -             312
Cash dividends ($.36 per share) ......................              -              -         (1,554)              -          (1,554)
                                                            ---------      ---------      ---------       ---------       ---------
Balance, December 31, 2003 ...........................      4,331,460         29,402         18,610              58          48,070

Comprehensive income
    Net income .......................................              -              -          3,209               -           3,209
                                                                                                                          ---------
    Unrealized holding losses arising
      during the period, net of
      income tax effects of $56 ......................              -              -              -            (100)           (100)
    Reclassification adjustment,
      net of income tax effects of $26 ...............              -              -              -             (48)            (48)
                                                                                                                          ---------
        Total other comprehensive income (loss) ......              -              -              -               -            (148)
                                                                                                                          ---------
          Total comprehensive income .................              -              -              -               -           3,061
                                                                                                                          ---------
Exercise of stock options ............................         59,324            640              -               -             640
Cash dividends ($.40 per share) ......................              -              -         (1,744)              -          (1,744)
                                                            ---------      ---------      ---------       ---------       ---------
Balance, December 31, 2004 ...........................      4,390,784      $  30,042      $  20,075       $     (90)      $  50,027
                                                            =========      =========      =========       =========       =========


See accompanying notes to consolidated financial statements.

                                       40


COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                                   Years Ended December 31,
                                                                                                   ------------------------
                                                                                              2004            2003           2002
                                                                                              ----            ----           ----
                                                                                                     (Dollars in thousands)
Operating activities                                                    
                                                                                                                    
     Net income ....................................................................      $   3,209       $   5,635       $   5,401
     Adjustments to reconcile net income to net cash provided
         (used) by operating activities
           Provision for loan losses ...............................................          5,102           1,119           1,033
           Depreciation ............................................................            926             793             643
           Writedowns of other real estate .........................................             50               -               -
           Amortization of definite-lived purchased intangibles ....................            246             246             123
           Deferred income taxes ...................................................            288              47             (15)
           Securities accretion and premium amortization ...........................            162             420               9
           (Gain) loss on sale of available-for-sale securities ....................            (76)            252            (119)
           (Increase) decrease in accrued interest receivable ......................           (233)            (55)           (369)
           Increase (decrease) in accrued interest payable .........................            106            (174)           (187)
           Gain on sale of other real estate .......................................             (9)              -               -
           (Increase) decrease in prepaid expenses and other assets ................         (1,243)           (433)            504
           (Decrease) increase in accrued expenses and other liabilities ...........           (155)             65            (191)
           Originations of loans held for sale .....................................       (180,753)       (293,706)       (190,410)
           Proceeds of sales of loans held for sale ................................        174,074         309,914         176,011
                                                                                          ---------       ---------       ---------
              Net cash provided (used) by operating activities .....................          1,694          24,123          (7,567)
                                                                                          ---------       ---------       ---------
Investing activities
     Net decrease (increase) in interest-bearing deposits with other banks .........            272            (613)          1,865
     Purchases of held-to-maturity securities ......................................              -          (2,000)              -
     Purchases of available-for-sale securities ....................................        (35,749)        (80,633)        (91,018)
     Maturities of held-to-maturity securities .....................................             75               -             500
     Maturities of available-for-sale securities ...................................         31,150          64,145          60,831
     Proceeds from sale of available-for-sale securities ...........................         13,676           2,068          20,543
     Purchases of other investments ................................................           (604)           (352)              -
     Proceeds from sales of other investments ......................................              -             224               -
     Acquisitions accounted for using the purchase method ..........................              -               -           8,922
     Cash paid in connection with purchase acquisition .............................              -               -          (4,000)
     Net increase in loans made to customers .......................................        (66,592)        (26,063)        (76,869)
     Purchases of premises and equipment ...........................................         (1,750)         (1,332)         (1,842)
     Proceeds from sales of other real estate ......................................            136               -               -
                                                                                          ---------       ---------       ---------
              Net cash used by investing activities ................................        (59,386)        (44,556)        (81,068)
                                                                                          ---------       ---------       ---------
Financing activities
     Net increase in deposits ......................................................         44,754          41,642          81,629
     Net (decrease) increase in short-term borrowings ..............................        (11,298)        (16,591)         21,352
     Proceeds from issuance of long-term debt ......................................         10,503               -               -
     Repayments of long-term debt ..................................................            (70)            (70)            (70)
     Exercise of stock options .....................................................            640             312              40
     Issuance costs of common stock in business combinations .......................              -               -            (178)
     Cash dividends paid ...........................................................         (1,744)         (1,554)         (1,218)
                                                                                          ---------       ---------       ---------
              Net cash provided by financing activities ............................         42,785          23,739         101,555
                                                                                          ---------       ---------       ---------
(Decrease) increase in cash and cash equivalents ...................................        (14,907)          3,306          12,920
Cash and cash equivalents, beginning ...............................................         41,875          38,569          25,649
                                                                                          ---------       ---------       ---------
Cash and cash equivalents, ending ..................................................      $  26,968       $  41,875       $  38,569
                                                                                          =========       =========       =========

Supplemental disclosures of cash flow information
Cash payments for interest expense .................................................      $   6,925       $   7,734       $   8,306
Cash payments for income taxes .....................................................          2,498           3,054           3,130

Supplemental disclosures of non-cash investing activities
Transfers of loans receivable to other real estate .................................      $      88       $     353       $     219
Fair value of common stock issued in business combinations .........................              -               -          12,020
Other comprehensive income (loss) ..................................................           (148)            (40)            105


See accompanying notes to consolidated financial statements.


                                       41


COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION

Community Bankshares, Inc. (the "Corporation"),  was organized under the laws of
the State of South  Carolina  and was  chartered  as a business  corporation  on
November  30,  1992.  Pursuant to the  provisions  of the Federal  Bank  Holding
Company  Act,  an  application  was  filed  with and  approved  by the  Board of
Governors of the Federal  Reserve  System for the  Corporation  to become a bank
holding company by the acquisition of Orangeburg National Bank (ONB).

In June 1996,  Sumter National Bank (SNB), and in July 1998,  Florence  National
Bank  (FNB),  commenced  operations  in Sumter  and  Florence,  South  Carolina,
respectively,  following  approval by the  Comptroller of the Currency and other
regulators.  Upon completion of their organization,  the common stock of SNB and
FNB was acquired by the Corporation.

In November  2001,  the  Corporation  acquired  all the common stock of Resource
Mortgage, Inc., a Columbia, South Carolina based mortgage brokerage company. The
Corporation issued 95,454 shares of its common stock in exchange for 100% of the
common stock of Resource  Mortgage,  Inc. The subsidiary  was renamed  Community
Resource Mortgage, Inc. (CRM).

In July 2002,  Ridgeway  Bancshares,  Inc., the holding  company for the Bank of
Ridgeway (BOR),  merged into the Corporation.  The Corporation  issued 1,000,000
shares of its common stock and paid  $4,000,000 cash in exchange for 100% of the
common stock of Ridgeway  Bancshares,  Inc. The  transaction  was consummated on
July 1, 2002.

ONB, SNB, FNB and BOR (the "Banks") and CRM operate as wholly-owned subsidiaries
of the Corporation with separate Boards of Directors and operating  policies and
they  provide a variety of  financial  services to  individuals  and  businesses
throughout South Carolina.  The primary deposit  products are checking,  savings
and term  certificate  accounts.  The primary  lending  products  are  consumer,
commercial and mortgage loans.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The consolidated  financial statements include the
accounts of the Corporation and its subsidiaries.  All significant  intercompany
balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES - The  preparation  of  consolidated  financial  statements  in
conformity with accounting principles generally accepted in the United States of
America  requires  management to make estimates and assumptions  that affect the
reported  amounts of assets and liabilities at the date of the balance sheet 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 in the near term relate to the
determination of the allowance for loan losses.

SIGNIFICANT  GROUP  CONCENTRATIONS  OF CREDIT  RISK - Most of the  Corporation's
activities are with customers  located within South  Carolina.  Note 4 discusses
the types of securities the Corporation purchases. Note 6 discusses the types of
lending in which the Corporation engages.  The Banks grant commercial,  consumer
and mortgage loans to customers  throughout  South Carolina.  Although the Banks
have  diversified  loan  portfolios,  a  substantial  portion of their  debtors'
ability to honor their  contracts  is  dependent  upon the  economies of various
South Carolina communities.  The mortgage brokerage company generally originates
and sells loans into the secondary market; but it sometimes  maintains loans for
its own portfolio on a limited basis.

CASH AND CASH EQUIVALENTS - For purposes of the consolidated  statements of cash
flows,  the Corporation  has defined cash and cash  equivalents as those amounts
included in the balance sheets under the caption,  "Cash and due from banks" and
"Federal funds sold," all of which mature within ninety days.

INTEREST-BEARING  DEPOSITS  WITH OTHER BANKS -  Interest-bearing  deposits  with
other banks generally mature within one year and are carried at cost.


                                       42


SECURITIES - Securities that management has both the ability and positive intent
to hold to maturity  are  classified  as  held-to-maturity  and carried at cost,
adjusted for  amortization  of premium and accretion of discounts  using methods
approximating  the  interest  method.  The  Corporation  has  made a  management
decision  generally  to avoid  acquiring  further  held-to-maturity  securities.
Securities  that may be sold prior to maturity  for  asset/liability  management
purposes,  or that may be sold in response to changes in interest rates, changes
in prepayment risk,  increase in regulatory  capital,  or other similar factors,
are  classified as  available-for-sale  and are carried at estimated fair value.
Unrealized gains and losses on securities  available-for-sale  are excluded from
earnings and  reported in other  comprehensive  income.  Gains and losses on the
sale of  securities  available-for-sale  are  recorded on the trade date and are
determined using the specific  identification method. 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.

Interest and dividends on securities, including the amortization of premiums and
the  accretion  of  discounts,   are  reported  in  interest  and  dividends  on
securities.

No securities are being held for short-term resale;  therefore,  the Corporation
does not currently use a trading account classification.

LOANS HELD FOR SALE - The  Corporation  originates  loans held for sale to other
financial institutions under commitments or other arrangements in place prior to
loan  origination.  Loans  originated  and  intended  for sale  are  residential
mortgage  loans and are carried at the lower of cost or estimated  fair value in
the  aggregate.  Gains  and  losses,  if any,  on the  sale of  such  loans  are
determined using the specific  identification  method. All fees and other income
from these activities are recognized in income when loan sales are completed.

LOANS - The  Corporation  grants  mortgage,  commercial  and  consumer  loans to
customers.  The ability of the Corporation's debtors to honor their contracts is
dependent  upon the  general  economic  conditions  in its market  areas.  Loans
receivable  that  management  has  the  intent  and  ability  to  hold  for  the
foreseeable  future or until  maturity  or  pay-off  generally  are  carried  at
principal amounts  outstanding,  increased or reduced by deferred net loan costs
or fees and any unamortized  purchase premiums or discounts.  Interest income on
loans is recognized  using the interest method based upon the principal  amounts
outstanding.  Loan  origination  and  commitment  fees and  certain  direct loan
origination costs (principally  salaries and employee benefits) are deferred and
amortized as an adjustment of the related loan's yield. Generally, these amounts
are amortized over the contractual life of the related loans or commitments.

The accrual of interest on mortgage and commercial  loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well collateralized and
in process of collection.  Residential real estate loans are typically placed on
nonaccrual  at the  time the loan is 120  days  delinquent.  Unsecured  personal
credit lines and certain  consumer  finance loans are  typically  charged off no
later than the time the loan is 180 days delinquent.

Other consumer loans are typically  charged off at the time the loan is 120 days
delinquent.  Generally,  loans are placed on  nonaccrual  or  charged  off at an
earlier date if collection of principal or interest is considered doubtful.

All interest  accrued but not  collected for loans that are placed on nonaccrual
or charged off is reversed against interest income.  The interest on these loans
is  accounted  for on the cash basis or cost  recovery  method,  until the loans
qualify for return to accrual status.  Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.

ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established through
a provision for loan losses charged against  earnings as losses are estimated to
have occurred.  Loan losses are charged  against the allowance  when  management
believes  the  uncollectibility  of a  loan  balance  is  confirmed.  Subsequent
recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management  and
is based upon management's periodic review of the collectibility of the loans in
light of  historical  experience,  the nature and volume of the loan  portfolio,
adverse  situations that may affect the borrowers'  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.
Management  of each Bank  reviews its  allowance  for loan losses in three broad
categories: commercial and industrial, loans secured by real estate and loans to
individuals,  and  assigns  an  estimated  percentage  factor  to  each  in  the
determination of the estimate of the allowance for loan losses. Where the Banks'
internal and external loan review  programs  identify  loans that are subject to
specific weaknesses such loans are reviewed for a specific loan loss allowance.

                                       43


A loan is considered  impaired when, based on current information and events, it
is  probable  that the  Corporation  will be unable  to  collect  the  scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement.  Factors considered by management in determining  impairment
include  payment  status,  collateral  value,  and the probability of collecting
scheduled  principal  and  interest  payments  when due.  Loans that  experience
insignificant payment delays and payment shortfalls generally are not classified
as  impaired.  Management  determines  the  significance  of payment  delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
known circumstances surrounding the loan and the borrower,  including the length
of the delay,  the reasons for the delay,  the borrower's  prior payment record,
and the amount of the shortfall in relation to the principal and interest  owed.
Impairment is measured on a loan-by-loan  basis for commercial and  construction
loans 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.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.

DERIVATIVE FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards  ("SFAS") No. 133,  Accounting for
Derivative  Instruments and Hedging  Activities,  as amended,  requires that all
derivatives  be  recognized  as assets or  liabilities  in the balance sheet and
measured at fair value.

In April,  2003, the Financial  Accounting  Standards Board issued Statement No.
149,  "Amendment  of  Statement  133  on  Derivative   Instruments  and  Hedging
Activities."  Among  other  requirements,  this  Statement  provides  that  loan
commitment contracts entered into or modified after June 30, 2003 that relate to
the  origination of mortgage loans that will be held for sale shall be accounted
for  as  derivative  instruments  by the  issuer  of the  loan  commitment.  The
Corporation issues mortgage loan rate lock commitments to potential borrowers to
facilitate its  origination of home mortgage loans that are intended to be sold.
Between the time that the  Corporation  issues its commitments and the time that
the loans close and are sold,  the  Corporation is subject to variability in the
selling  prices related to those  commitments  due to changes in market rates of
interest.  However,  the Corporation offsets this variability through the use of
so-called "forward sales contracts" to investors in the secondary market.  Under
these  arrangements,  an  investor  agrees to  purchase  the  closed  loans at a
predetermined  price.  The Corporation  generally enters into such forward sales
contracts  at the same  time  that  rate  lock  commitments  are  issued.  These
arrangements effectively insulate the Corporation from the effects of changes in
interest rates during the time that the  commitments  are  outstanding,  but the
arrangements do not qualify, and are not designated, as fair value hedges. These
derivative  financial  instruments are carried in the balance sheet at estimated
fair value and changes in the  estimated  fair values of these  derivatives  are
recorded  in the  statement  of income in net gains or losses on loans  held for
sale.  Because  the  Corporation  has  effectively  matched  its  forward  sales
contracts to investors and rate lock commitments to potential borrowers,  no net
gains or losses due to changes in market  interest  rates have been  recorded in
the statement of income for 2004.

Derivative financial  instruments are written in amounts referred to as notional
amounts.  Notional  amounts  provide  only the  basis for  calculating  payments
between  counterparties  and do not  represent  amounts to be exchanged  between
parties or a measure of financial  risk.  The table below  presents the notional
principal  amounts of rate lock  commitments  and forward sales  contracts as of
December 31, 2004 and 2003,  and the  estimated  fair values of those  financial
instruments included in other assets and liabilities in the balance sheets as of
those dates.



                                                                                              December 31,
                                                                                              ------------
                                                                                     2004                            2003
                                                                                     ----                            ----
                                                                             Notional      Estimated        Notional      Estimated 
                                                                              Amount       Fair Value        Amount       Fair Value
                                                                              ------       ----------        ------       ----------
                                                                                          (Dollars in thousands)

                                                                                                                     
Commitments to originate loans to be held for sale .................        $(2,612)        $    (4)        $(8,817)           $(35)
Forward sales commitments ..........................................          2,612               4           8,817              35
                                                                            -------         -------         -------         -------
              Total ................................................        $     -         $     -         $     -         $     -
                                                                            =======         =======         =======         =======



STOCK-BASED  COMPENSATION - Statement of Financial Accounting Standards ("SFAS")
No. 123,  Accounting for Stock-Based  Compensation,  as amended,  encourages all


                                       44


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

Had compensation cost for the  Corporation's  stock option plans been determined
based on the fair value at the grant dates for awards under the plans consistent
with the method  prescribed  by SFAS No. 123, the  Corporation's  net income and
earnings per share would have been adjusted to the pro forma  amounts  indicated
below:



                                                                                              Years Ended December 31,
                                                                                              ------------------------
                                                                                   2004                 2003                 2002
                                                                                   ----                 ----                 ----
                                                                                   (Dollars in thousands, except per share)

                                                                                                                        
Net income, as reported ............................................            $   3,209             $   5,635             $  5,401
Deduct:  Total stock-based employee
     compensation expense determined under
     fair value based method for all awards,
     net of any related tax effects ................................                 (626)                    -                    -
                                                                                ---------             ---------             --------
Pro forma net income ...............................................            $   2,583             $   5,635             $  5,401
                                                                                =========             =========             ========

Net income per share, basic
     As reported ...................................................            $    0.74             $    1.31             $   1.42
     Pro forma .....................................................                 0.59                  1.31                 1.42
Net income per share, assuming dilution
     As reported ...................................................            $    0.72             $    1.27             $   1.38
     Pro forma .....................................................                 0.58                  1.27                 1.38



OTHER REAL  ESTATE - Other  real  estate,  which is  included  in other  assets,
consists  of  properties  acquired  through  foreclosure  or in full or  partial
satisfaction of the related loan and is held for sale.

Other real estate is  initially  recorded at the lower of cost or the  estimated
fair market value,  less estimated  selling costs.  Loan losses arising from the
acquisition  of such property are charged to the  allowance for loan losses.  An
allowance for losses on  foreclosed  properties  is  maintained  for  subsequent
downward  valuation  adjustments.  Revenues and expenses from operation of other
real  estate and  changes  in the  valuation  allowance  are  included  in other
expenses.

PREMISES  AND  EQUIPMENT  - Premises  and  equipment  are  stated at cost,  less
accumulated  depreciation  computed principally on the straight-line method over
the  estimated  useful lives of the assets.  Useful lives of assets are outlined
below:

     Buildings                                                   32 - 40 years
     Building components                                          5 - 30 years
     Vault doors, safe deposit boxes, night depository, etc.     32 - 40 years
     Furniture, fixtures and equipment                            5 - 25 years


INCOME  TAXES - Deferred  income tax assets and  liabilities  are  reflected  at
currently  enacted  income  tax  rates  applicable  to the  period  in which the
deferred tax assets or  liabilities  are expected to be realized or settled.  As
changes in tax laws or rates are enacted,  deferred  tax assets and  liabilities
are adjusted through the provision for income taxes.

                                       45


OFF-BALANCE-SHEET  CREDIT RELATED FINANCIAL INSTRUMENTS - In the ordinary course
of business the Banks enter into  commitments to extend credit and grant standby
letters of credit. Such off-balance-sheet  financial instruments are recorded in
the consolidated financial statements when they are funded.

SEGMENTS - Community  Bankshares,  Inc. through its banking  subsidiaries,  ONB,
SNB,  FNB,  BOR and its  mortgage  subsidiary,  CRM,  provides a broad  range of
financial  services to  individuals  and  businesses  in South  Carolina.  These
services  include demand,  time, and savings  deposits;  lending  services;  ATM
processing;  and similar financial  services.  While the Corporation's  decision
makers  monitor  the  revenue  streams of the  various  financial  products  and
services,  operations  are managed and financial  performance  is evaluated on a
corporate-wide basis. Accordingly,  the subsidiary operations are not considered
by management to comprise more than one reportable operating segment.

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
securities  available-for-sale,  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. Currently, the Corporation's only components
of other comprehensive income (loss) are unrealized gains (losses) on securities
available-for-sale.

TRANSFERS OF FINANCIAL  ASSETS - Transfers of financial assets are accounted for
as sales  when  control  over the  assets  has been  surrendered.  Control  over
transferred  assets is deemed to be  surrendered  when (1) the assets  have been
isolated from the  Corporation,  (2) the  transferee  obtains the right (free of
conditions  that constrain it from taking  advantage of that right) to pledge or
exchange  the  transferred  assets,  and (3) the  Corporation  does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.

ACCOUNTING CHANGES

Consolidation of Variable Interest Entities - FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities,  an interpretation of ARB No. 51,"
provides a new framework for identifying variable interest entities ("VIEs") and
determining   when  a  company   should   include   the   assets,   liabilities,
noncontrolling  interests and results of activities of a VIE in its consolidated
financial  statements.  FIN 46  requires  that if a  business  enterprise  has a
controlling financial interest in a VIE, the assets,  liabilities and results of
the  activities  of the  VIE  must be  included  in the  consolidated  financial
statements of a business enterprise.  This interpretation also requires existing
unconsolidated  VIEs to be  consolidated by their primary  beneficiaries  if the
entities do not  effectively  disperse risks among parties  involved.  VIEs that
effectively  disperse risks will not be consolidated unless a single party holds
an interest or combination of interests that  effectively  recombines risks that
were  previously  dispersed.  FIN 46 was effective  immediately for VIEs created
after January 31, 2003,  and to VIEs in which an enterprise  obtains an interest
after that date. It applied in the first fiscal year or interim period beginning
after June 15, 2003,  to VIEs in which an enterprise  holds a variable  interest
that it acquired before February 1, 2003. This  Interpretation does not apply to
securitization structures that are qualified special purpose entities as defined
within FASB Statement No. 140. Management does not believe that adoption of this
Interpretation  has had, or will have, any material adverse or beneficial effect
on the Corporation's consolidated financial position or results of operations.

Share-Based  Payment - SFAS No. 123 (revised 2004), "SFAS 123(R)," was issued in
December 2004 and requires that the cost resulting from all share-based  payment
transactions be recognized in the financial  statements.  The statement replaces
SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  and supersedes APB
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees."  Several  other
pronouncements are amended or superseded as well. SFAS 123(R) generally requires
use of a fair-value  measurement objective for such transactions and amends SFAS
No. 95 to require that excess tax benefits  resulting from such  transactions be
reported as financing cash flows rather than as a reduction of taxes paid.  SFAS
No.  123(R) is  effective  for  public  companies,  other than  "small  business
filers," as of the  beginning of the first  interim or annual  reporting  period
that begins after June 30, 2005.  Various  transition  methods are available for
the  restatement  of prior period  information.  Management  has not yet decided
which of the  available  transition  methods the  Corporation  will employ,  and
accordingly  is unable to  estimate  the  effect of the  implementation  of this
statement on the Corporation's  financial  position or results of operations for
any period.

Exchanges  of  Nonmonetary  Assets - SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets,  an  amendment  of APB Opinion No. 29,"  eliminates  an exception to the
measurement  of such exchanges at fair value for similar  productive  assets and
replaces it with an exception  for such  exchanges  that do not have  commercial
substance.  The  provisions  of  this  Statement  are  required  to  be  applied
prospectively to exchanges  occurring in fiscal periods beginning after June 15,
2005.  Earlier  application is permitted for such exchanges  occurring in fiscal
periods  beginning after December 16, 2004. It is not expected that adoption and


                                       46


application of the  provisions of this Statement will have any material  adverse
or beneficial effect on the  Corporation's  consolidated  financial  position or
results of operations.

EITF Issue No. 03-1 - Emerging  Issues  Task Force  ("EITF")  Issue  03-1,  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investment,"  requires that companies report  information about certain debt and
equity  securities  when the estimated fair values of those  securities are less
than their cost. Implementation of the guidance contained in paragraphs 10-20 of
EITF  Issue No.  03-1was  delayed by the FASB and the  effective  date for those
paragraphs  will be superseded  concurrent  with the final  issuance of proposed
FASB  Staff   Position  EITF  Issue  No.  03-1-a.   Substantially   all  of  the
Corporation's  investment  securities are issued by the U.S.  Government,  or by
U.S.  Government  agencies  and  corporations,  and  generally  do  not  contain
provisions  that would allow the securities to be settled in such a way that the
Corporation would not recover substantially all of its cost. Management intends,
and believes that it has the ability, to hold such securities until a forecasted
recovery of the fair market value, including until maturity. Management does not
believe that  implementation  of this guidance will have any material adverse or
beneficial effect on the Company's consolidated financial position or results of
operations.

ADVERTISING COSTS - The cost of advertising is expensed as incurred.

OTHER  -  Certain  amounts  previously  reported  in the  statements  have  been
reclassified  to conform  to the  current  year's  presentation  and  disclosure
requirements.  These  reclassifications  had no effect on reported net income or
retained earnings.


NOTE 3 - CASH AND DUE FROM BANKS

The Banks are required to maintain  average  reserve  balances  with the Federal
Reserve or in available cash. The average daily reserve balance  requirements at
December  31,  2004 and  2003  were  approximately  $3,893,000  and  $2,140,000,
respectively.  At  December  31, 2004 the  Corporation  had cash  balances  with
unrelated  correspondent  banks  totaling  approximately  $9,016,000,  of  which
$1,159,000 was fully insured by the FDIC.


NOTE 4 - SECURITIES

Securities consist of the following:



                                                                                    December 31,
                                                                                    ------------
                                                                    2004                                    2003
                                                                    ----                                    ----
                                                              Gross      Gross                        Gross      Gross
                                                           Unrealized Unrealized Estimated          Unrealized Unrealized  Estimated
                                                 Amortized   Holding   Holding     Fair   Amortized   Holding   Holding      Fair
                                                    Cost      Gains    Losses     Value     Cost       Gains     Losses      Value
                                                    ----      -----    ------     -----     ----       -----     ------      -----
                                                                                     (Dollars in thousands)
Securities available-for-sale           
                                                                                                        
     U.S. Treasury and U.S. ...................
         Government agencies ..................   $50,619   $     9   $   267    $50,361    $56,633   $   146    $   302    $56,477
     States and political                                                                                                  
         subdivisions .........................     4,985       126         1      5,110      8,140       249          2      8,387
                                                  -------   -------   -------    -------    -------   -------    -------    -------
         Total securities available-for-sale ..   $55,604   $   135   $   268    $55,471    $64,773   $   395    $   304    $64,864
                                                  =======   =======   =======    =======    =======   =======    =======    =======
                                                                                                                           
Securities held-to-maturity                                                                                                
     States and political                                                                                                  
         subdivisions .........................   $ 1,925   $     -   $    18    $ 1,907    $ 2,000   $   155    $     -    $ 2,155
                                                  =======   =======   =======    =======    =======   =======    =======    =======



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


                                       47




                                                                                           December 31, 2004
                                                                                           -----------------
                                                                          Available-for-sale                   Held-to-maturity
                                                                          ------------------                   ----------------
                                                                      Amortized         Estimated         Amortized       Estimated
                                                                         Cost           Fair Value          Cost         Fair Value
                                                                         ----           ----------          ----         ----------
                                                                                            (Dollars in thousands)
Securities available-for-sale
                                                                                                                     
   Due within one year .....................................           $ 4,850           $ 4,842           $     -           $     -
   Due after one through five years ........................            40,534            40,405                 -                 -
   Due after five through ten years ........................            10,203            10,210             1,925             1,907
   Due after ten years .....................................                17                14                 -                 -
                                                                       -------           -------           -------           -------
     Total securities available-for-sale ...................           $55,604           $55,471           $ 1,925           $ 1,907
                                                                       =======           =======           =======           =======



The following  tables provide  information  about the  Corporation's  securities
holdings which were maintained in an unrealized loss position as of December 31,
2004 and 2003:



                                                                                  December 31, 2004
                                                                                  -----------------
                                                                   Continuously in Unrealized Loss Position for a Period of
                                                                   --------------------------------------------------------
                                                       Less than 12 Months           12 Months or more                Total
                                                       -------------------           -----------------                -----
                                                      Estimated     Unrealized     Estimated    Unrealized     Estimated  Unrealized
                                                      Fair Value       Loss       Fair Value        Loss       Fair Value     Loss
                                                      ----------       ----       ----------        ----       ----------     ----
                                                                               (Dollars in thousands)
                                                                                                               
Description of Securities
    U.S. Treasury and ..........................       $20,806       $   102       $18,875       $   165       $39,681       $   267
      U.S. Government agencies
  States and political subdivisions ............         1,907            18           101             1         2,008            19
                                                       -------       -------       -------       -------       -------       -------
        Total securities .......................       $22,713       $   120       $18,976       $   166       $41,689       $   286
                                                       =======       =======       =======       =======       =======       =======



                                                                                  December 31, 2003
                                                                                  -----------------
                                                                   Continuously in Unrealized Loss Position for a Period of
                                                                   --------------------------------------------------------
                                                       Less than 12 Months           12 Months or more                Total
                                                       -------------------           -----------------                -----
                                                      Estimated     Unrealized     Estimated    Unrealized     Estimated  Unrealized
                                                      Fair Value       Loss       Fair Value        Loss       Fair Value     Loss
                                                      ----------       ----       ----------        ----       ----------     ----
                                                                               (Dollars in thousands)
                                                                                                               
Description of Securities
    U.S. Treasury and ..........................       $17,132       $   293       $   528       $     9       $17,660       $   302
      U.S. Government agencies
  States and political subdivisions ............             -             -           204             2           204             2
                                                       -------       -------       -------       -------       -------       -------
        Total securities .......................       $17,132       $   293       $   732       $    11       $17,864       $   304
                                                       =======       =======       =======       =======       =======       =======


At December 31, 2004,  the  Corporation  held 28 securities  that had been in an
unrealized loss position for less than 12 months and 16 securities that had been
in an  unrealized  loss  position  for 12  months  or  more.  Unrealized  losses
reflected in this table  generally  are the result of interest rate changes that
have occurred since the securities were purchased. No loss is expected on any of
these securities if they are held until their maturities.

At December 31, 2004 and 2003,  investment  securities  with a carrying value of
$25,255,000  and  $31,418,000,  respectively,  were  pledged  to  secure  public
deposits, repurchase agreements and for other purposes required and permitted by
law.

                                       48


For the years ended  December 31, 2004,  2003 and 2002,  proceeds  from sales of
securities   available-for-sale   amounted  to  $13,676,000,   $2,068,000,   and
$20,543,000,  respectively.  Gross realized gains totaled $107,000,  $73,000 and
$122,000, respectively. Gross realized losses were $31,000, $325,000 and $3,000,
respectively.  The tax benefit (provision)  applicable to the net realized gains
and losses amounted to $(27,000), $90,000 and $(43,000), respectively.


NOTE 5 - OTHER INVESTMENTS

Other  investments  consist of restricted  stocks of the Federal Reserve Bank of
Richmond,  the Federal  Home Loan Bank of Atlanta,  and  correspondent  Bankers'
Banks  which  are  carried  at cost.  Management  periodically  evaluates  these
investments for impairment, with any appropriate downward adjustments being made
when necessary.


NOTE 6 - LOANS

The following is a summary of loans by category:

                                                              December 31,
                                                              ------------
                                                          2004            2003
                                                          ----            ----
                                                         (Dollars in thousands)

Commercial, financial and agricultural .........      $  96,275       $  84,844
Real estate- construction ......................         29,968          23,590
Real estate - mortgage .........................        230,986         188,530
Consumer installment ...........................         36,420          35,142
                                                      ---------       ---------
        Total ..................................        393,649         332,106
Allowance for loan losses ......................         (4,347)         (4,206)
                                                      ---------       ---------
        Loans - net ............................      $ 389,302       $ 327,900
                                                      =========       =========


Overdrawn demand deposits  totaling $379,000 and $564,000 have been reclassified
as loan balances at December 31, 2004 and 2003, respectively.

Gross  proceeds  from  sales  of  mortgage  loans  originated  for  resale  were
approximately $174,074,000,  $309,914,000,  and $176,011,000 for the years ended
December 31, 2004,  2003, and 2002,  respectively.  Income from this activity is
recognized as mortgage brokerage income.

Loans outstanding to directors,  executive officers, principal holders of equity
securities,  or to any of their  associates  totaled  $6,795,000 at December 31,
2004 and  $7,416,000  at December 31, 2003. A total of  $5,720,000 in loans were
made or added,  while a total of $6,341,000 were repaid or deducted during 2004.
Related party loans are made on substantially the same terms, including interest
rates  and  collateral,   as  those   prevailing  at  the  time  for  comparable
transactions  with unrelated persons and do not involve more than normal risk of
collectibility.  Changes in the  composition  of the board of  directors  or the
group  comprising  executive  officers also result in additions to or deductions
from loans outstanding to directors,  executive officers or principal holders of
equity securities.

As of December 31, 2004 and 2003,  there were no significant  concentrations  of
credit risk in any single  borrower or groups of  borrowers.  The  Corporation's
loan  portfolio  consists  primarily of extensions  of credit to businesses  and
individuals in its local market areas in Orangeburg, Sumter, Florence, Richland,
Fairfield and Anderson  counties of South Carolina.  The Banks and CRM regularly
monitor  various  segments  of  their  credit  portfolios  to  assess  potential
concentration risks and to obtain collateral when considered necessary.

Changes in the allowance for loan losses were as follows:

                                       49


                                                    Years Ended December 31,
                                                    ------------------------
                                                  2004        2003        2002
                                                  ----        ----        ----
                                                      (Dollars in thousands)

Balance at January 1 .......................    $ 4,206     $ 3,573     $ 2,830
Changes incident to merger activities ......          -           -         444
Provision charged to expense ...............      5,102       1,119       1,033
Recoveries .................................        119         174          38
Charge-offs ................................     (5,080)       (660)       (772)
                                                -------     -------     -------
Balance at December 31 .....................    $ 4,347     $ 4,206     $ 3,573
                                                =======     =======     =======


The following is summary information pertaining to impaired loans:

                                                               December 31,
                                                               ------------
                                                             2004          2003
                                                             ----          ----
                                                          (Dollars in thousands)

Impaired loans without a valuation allowance .........       $    -       $    -
Impaired loans with a valuation allowance ............        4,941        2,595
                                                             ------       ------
    Total impaired loans .............................       $4,941       $2,595
                                                             ======       ======
Allowance for loan losses on impaired
 loans at year end ...................................       $  881       $  389
                                                             ======       ======

Average total investment in impaired loans
 during the year .....................................       $2,818       $1,983


No additional  funds are  committed to be advanced in  connection  with impaired
loans.

Nonaccrual and past due loans at December 31, 2004 and 2003, were as follows:

                                                              December 31,
                                                              ------------
                                                            2004          2003
                                                            ----          ----
                                                          (Dollars in thousands)

Nonaccrual loans .................................         $4,941         $2,595
Accruing 90 days or more past due ................            137            146
                                                           ------         ------
       Total .....................................         $5,078         $2,741
                                                           ======         ======


Gross interest income that would have been recorded for the years ended December
31, 2004,  2003, and 2002 if nonaccrual  loans had been performing in accordance
with their  original terms was  approximately  $63,000,  $117,000,  and $39,000,
respectively.  No cash basis  income was  recognized  on such loans during 2004,
2003 and 2002.


NOTE 7 - PREMISES AND EQUIPMENT; OPERATING LEASES

Premises and equipment at December 31, 2004 and 2003 consist of the following:


                                       50


                                                               December 31,
                                                               ------------
                                                           2004            2003
                                                           ----             ----
                                                          (Dollars in thousands)

Land ...........................................         $ 2,258         $ 1,260
Buildings and components .......................           3,884           3,884
Furniture, fixtures and equipment ..............           6,341           5,713
Construction in process ........................              67               -
                                                         -------         -------
     Total .....................................          12,550          10,857
Less, accumulated depreciation .................           4,811           3,942
                                                         -------         -------
     Premises and equipment - net ..............         $ 7,739         $ 6,915
                                                         =======         =======


Depreciation expense was approximately $926,000, $793,000, and $643,000, for the
years ended December 31, 2004, 2003, and 2002, respectively.

As  of  December  31,  2003  future  minimum  rent  commitments   under  various
non-cancelable operating leases are as follows:

                     Year                               Amount
                     ----                               ------
                              (Dollars in thousands)

                      2005                             $   227
                      2006                                 230
                      2007                                 216
                      2008                                 135
                      2009                                 135
                 Thereafter                              1,884
                                                       -------
                           Total                       $ 2,827
                                                       =======


Total rent expense for the years ended  December 31,  2004,  2003,  and 2002 was
$308,000,  $205,000,  and $149,000,  respectively.  Some leases  provide for the
payment of executory costs and contain options to renew.


NOTE 8 - INTANGIBLE ASSETS

Changes in the  carrying  amounts of goodwill  for the years ended  December 31,
2004 and 2003 are as follows:


                                                       Years Ended December 31,
                                                       ------------------------
                                                       2004               2003
                                                       ----               ----
                                                        (Dollars in thousands)

Balance, beginning of year .......................      $4,321         $4,321
Goodwill acquired during the year ................           -              -
Impairment losses ................................           -              -
                                                        ------         ------
Balance, end of year .............................      $4,321         $4,321
                                                        ======         ======


Goodwill is tested for impairment annually by an independent consulting firm. As
of December 31, 2004 no impairment has been determined.

                                       51


As part of the  valuation  of Ridgeway  Bancshares,  Inc.,  conducted by a third
party firm, a core deposit intangible was computed.  All amortizable  intangible
assets are  evaluated  annually  to  determine  whether any  revisions  of their
estimated useful lives are warranted.  For the years ended December 31, 2004 and
2003, and for 2002, no such revisions have resulted.

The  following  tables  present  the  gross  carrying  amounts  and  accumulated
amortization for the Corporation's  amortizable intangible assets as of December
31,  2004 and 2003,  and the  estimated  amounts of  amortization  expense to be
recognized for each of the five succeeding fiscal years, as of December 31, 2004
and 2003. Such assets are being amortized on a straight-line  basis over fifteen
years.





                                                                                          December 31,
                                                                                          ------------
                                                                              2004                              2003
                                                                    Gross     ----                     Gross    ----
                                                                  Carrying         Accumulated       Carrying        Accumulated
                                                                    Amount         Amortization        Amount        Amortization
                                                                    ------         ------------        ------        ------------
                                                                                      (Dollars in thousands)

Amortizable intangible asset class
                                                                                                                
  Core deposit intangible ..................................       $3,698            $  615            $3,698            $  369
                                                                   ======            ======            ======            ======



Estimated  amounts of amortization  expense to be recognized in each of the next
five succeeding years:


                                                    December 31,
                                                    ------------
                                               2004               2003
                                               ----               ----
                        Year                    (Dollars in thousands)
                        ----

                        2004                  $  -              $ 246
                        2005                   246                246
                        2006                   246                246
                        2007                   246                246
                        2008                   246                246
                        2009                   246                 NA


NOTE 9 - DEPOSITS

At December 31, 2004, the scheduled  maturities of  certificates  of deposit and
other time deposits are as follows:


                         Year                              Amount
                         ----                              ------
                                 (Dollars in thousands)

                          2005                           $ 160,652
                          2006                              31,950
                          2007                              10,057
                          2008                               2,909
                          2009                                 288
                     Thereafter                                  7
                                                         ---------
                               Total                     $ 205,863
                                                         =========


Deposits of directors and officers and their related business  interests totaled
approximately   $4,739,000  and  $6,982,000  at  December  31,  2004  and  2003,
respectively.


                                       52


NOTE 10 - SHORT-TERM BORROWINGS

The  Corporation's  short-term  borrowings  generally  consist of federal  funds
purchased and  securities  sold under  agreements to  repurchase.  Federal funds
purchased and  securities  sold under  agreements  with  customers to repurchase
generally mature within one to four days from the transaction  date.  Securities
sold under agreements to repurchase are reflected at the amount of cash received
in connection with the transaction.  The Corporation  monitors the fair value of
the  underlying  securities  on a daily  basis  and it is the  Banks'  policy to
maintain a collateral  value greater than the principal and accrued  interest of
the    transaction.    All   securities    underlying   these   agreements   are
institution-owned securities.

Short-term borrowings are summarized as follows:


                                                              December 31,
                                                              ------------
                                                           2004          2003
                                                           ----          ----
                                                        (Dollars in thousands)

Securities sold under agreements to repurchase .........   $ 4,979     $ 8,090
Federal funds purchased ................................     1,683           -
Warehouse lines of credit ..............................         -       7,743
Other short-term debt ..................................         -       2,127
                                                           -------     -------
Total ..................................................   $ 6,662     $17,960
                                                           =======     =======


The following summarizes  information about short-term borrowings during each of
the periods presented:


                                                                 December 31,
                                                                 ------------
                                                               2004       2003
                                                               ----       ----
                                                          (Dollars in thousands)

Balance outstanding at end of year .......................   $ 6,662    $17,960
Weighted average interest rate at end of the period ......      1.54%      2.38%
Interest expense .........................................   $   205    $   750
Maximum outstanding at any month end during the period ...   $17,940    $39,379
Average outstanding during the period ....................   $10,309    $29,026
Weighted average interest rate during the period .........      1.99%      2.58%



As of  December  31,  2004,  the Banks had unused  credit  availabilities  under
federal funds lines  established  with  unrelated  correspondent  banks totaling
$34,017,000.





                                       53



NOTE 11 - LONG-TERM DEBT

Long-term debt is summarized as follows:


                                                                  December 31,
                                                                  ------------
                                                               2004        2003
                                                               ----        ----
                                                          (Dollars in thousands)

Advances from Federal Home Loan Bank of Atlanta to0
  subsidiary banks, varying maturities to
  2023 with interest rates from 2.00% to 6.94% ...........     $20,263   $20,140

Junior Subordinated Debt to Unconsolidated Trusts (1), 
  dated April 7, 2004, maturing April 7, 2034,
  with variable interest rate based on 3-month LIBOR......     10,310          -
                                                              -------    -------
                Total long-term debt .....................    $30,573    $20,140
                                                              =======    =======
--------------------
(1) Securities qualify as Tier 1 capital under the regulatory risk-based capital
guidelines, subject to certain limitations.


Collateral  for the Advances from Federal Home Loan Bank of Atlanta  consists of
blanket liens on the Banks' one-to-four  family first lien residential  mortgage
loans and all of the Banks' stock in the FHLB.  Such  collateral  was carried in
the consolidated  balance sheet at approximately  $71,462,000 and $54,623,000 at
December 31, 2004 and 2003, respectively.

Under the blanket lien agreements,  the Banks  collectively  have the ability to
borrow an additional $33,674,000 from the FHLB as of December 31, 2004. Any such
borrowings  would be subject to the FHLB's normal approval  process and would be
subject  to  interest  rates  established  by the FHLB at the time of each  such
transaction. The FHLB may terminate the availability at any time.

On March 8, 2004, the  Corporation  sponsored the creation of a Delaware  trust,
SCB  Capital  Trust  I (the  "Trust"),  and  is the  sole  owner  of the  common
securities  issued by the Trust.  The Trust is a variable  interest entity under
FIN  46R,  but  is  not  subject  to  consolidation  by  the  Corporation  since
substantially  all risk of loss has been  transferred to other entities  through
the Trust's  March 10, 2004  issuance of  $10,000,000  in floating  rate capital
securities.  The  proceeds  of this  issuance,  and the amount of CBI's  capital
investment,  were used to acquire $10,310,000 principal amount of CBI's floating
rate junior subordinated deferrable interest debt securities  ("Debentures") due
April  7,  2034,  which  securities,  and  the  accrued  interest  thereon,  now
constitute the Trust's sole assets.  The interest rate  associated with the debt
securities, and the distribution rate on the common securities of the Trust, was
established initially at 3.91% and is adjustable quarterly at 3 month LIBOR plus
280 basis  points.  The index rate  (LIBOR) may not be lower than  1.11%.  As of
December 31, 2004, the interest rate associated with the debt was 4.87%. CBI may
defer interest payments on the Debentures for up to twenty consecutive quarters,
but not beyond the stated  maturity  date of the  Debentures.  In the event that
such interest payments are deferred by CBI, the Trust may defer distributions on
the common securities.  In such an event, CBI would be restricted in its ability
to pay  dividends on its common stock and perform under other  obligations  that
are not senior to the junior subordinated Debentures.

The  Debentures are redeemable at par at the option of CBI, in whole or in part,
on any interest  payment date on or after April 7, 2009. Prior to that date, the
Debentures  are  redeemable at 105% of par upon the occurrence of certain events
that  would have a  negative  effect on the Trust or that  would  cause it to be
required to be registered as an investment  company under the Investment Company
Act of 1940 or that would cause trust preferred securities not to be eligible to
be treated as Tier 1 capital by the Federal  Reserve  Board.  Upon  repayment or
redemption of the Debentures, the Trust will use the proceeds of the transaction
to redeem an equivalent  amount of trust  preferred  securities and trust common
securities.  The Trust's  obligations  under the trust preferred  securities are
unconditionally guaranteed by CBI.

The Company's investment in the Trust is carried at cost in other assets and the
debentures are included in long-term debt in the consolidated balance sheet.


                                       54


Required future principal  reductions of the  Corporation's  long-term debts are
summarized as follows:


                                       Year                     Amount
                                       ----                     ------
                                            (Dollars in thousands)

                                        2005                  $  1,370
                                        2006                       500
                                        2007                     1,000
                                        2008                     2,500
                                        2009                     5,000
                                  Thereafter                    20,203
                                                              --------
                                             Total            $ 30,573
                                                              ========



NOTE 12 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES

Under the Corporation's  Dividend  Reinvestment Plan,  shareholders may reinvest
all or part of their cash  dividends in shares of common stock and also purchase
additional  shares of common stock.  During the three-year period ended December
31, 2004 all shares purchased under this plan were purchased in the market,  not
issued by the Corporation.

At December 31, 2004, 302,783 of the Corporation's authorized common shares were
reserved for future grant  pursuant to an employee stock option plan and 624,655
common shares were reserved for issuance  pursuant to the dividend  reinvestment
and additional stock purchase plan.

During 2001, the Corporation  amended its 1997 Stock Option Plan (the "Plan") to
increase  by 200,000  shares the number of shares  reserved  for  issuance  upon
exercise  of options  and to permit  participation  in the plan by  non-employee
directors.  During 2003, the Corporation amended the Plan to increase by 300,000
shares the number of shares  reserved  for  issuance  upon  exercise of employee
incentive  stock  options.  Under the Plan, as amended,  up to 785,600 shares of
common  stock  were  authorized  to  be  granted  to  selected  officers,  other
employees, and non-employee directors of the Corporation and/or its subsidiaries
pursuant  to exercise of  incentive  and  nonqualified  stock  options.  Of such
shares,  590,050 were  reserved  for issuance  pursuant to exercise of incentive
stock  options and 195,550 were  reserved  for issuance  pursuant to exercise of
nonqualified stock options.

The exercise price of any incentive option granted is equal to the fair value of
the common stock on the date the option is granted.  Nonqualified options can be
issued for less than fair value;  however,  the  Corporation  has not elected to
issue  these  options  for less than fair  value at the date of the  grant.  The
options become vested and may be exercised one year after issuance.

A summary of the status of options issued  pursuant to the  Corporation's  stock
option plan is presented below:





                                                                            Years Ended December 31,             
                                                                            ------------------------
                                                    2004                             2003                             2002
                                                    ----                             ----                             ----
                                                          Weighted                         Weighted                        Weighted
                                                          Average                          Average                          Average
                                           Number of      Exercise          Number of      Exercise          Number of     Exercise
                                             Shaves        Price              Shares        Price              Shares       Price 
                                             ------        -----              ------        -----              ------       ----- 
                                                                                                             
Outstanding at beginning of year .......    543,991       $ 13.85            384,667       $ 11.26            396,718      $ 11.21
Granted ................................     27,000       $ 17.74            195,750       $ 18.85                  -      $     -
Exercised ..............................    (59,324)      $ 10.80            (27,076)      $ 11.57             (4,710)     $  8.63
Forfeited or expired ...................    (28,850)      $ 18.85             (9,350)      $ 18.85             (7,341)     $ 10.26
                                            -------                          -------                          -------
Outstanding at end of year .............    482,817       $ 14.14            543,991       $ 13.85            384,667      $ 11.26
                                            =======                         ========                          =======
                                          
Options exercisable at year end ........    455,817       $ 13.93            543,991       $ 11.24            384,667      $ 11.26


                                       55


The weighted average fair values of options granted each year are computed using
the Black-Scholes option pricing model using the assumptions detailed below:

                                                   Years Ended December 31,
                                                   ------------------------
                                                2004          2003         2002
                                                ----          ----          ----
Weighted average fair value of options
     granted during the year                  $ 4.74        $ 4.33        $   -
Risk-free interest rate                         3.74%         3.72%        0.00%
Expected life (years)                           7.00          6.01            -
Expected volatility                            26.15%        24.01%        0.00%
Yield                                           2.18%         2.00%        0.00%


The following table summarizes information about the options outstanding:



                                                                               December 31, 2004
                                                                               -----------------
                                                      Options Outstanding                      Options Exercisable
                                                      -------------------                      -------------------
                                                            Weighted
                                                             Average         Weighted                              Weighted
                                                            Remaining        Average                                Average
                                          Number         Contractual Life    Exercise         Number               Exercise
          Range of Exercise Prices     Outstanding            (Years)          Price        Outstanding             Price
          ------------------------     -----------            -------          -----        -----------             -----
                                                                                                 
             $ 7.62  to   $ 11.00         182,410               5.5           $ 10.37         182,410             $ 10.37
             $12.83       $ 18.85         300,407               7.1           $ 16.43         273,407             $ 16.30
                                          -------                                             -------
                                          482,817               6.5           $ 14.14         455,817             $ 13.93
                                          =======                                             =======



The  Corporation  applies  APB Opinion  No. 25 and  related  interpretations  in
accounting for its stock-based compensation plans. Accordingly,  no compensation
cost has been recognized.


NOTE 13 - INCOME TAXES

The Corporation files consolidated federal income tax returns on a calendar-year
basis.

The provision for income taxes consists of the following:


                                                    Years Ended December 31,
                                                    ------------------------
                                                 2004        2003        2002
                                                 ----        ----        ----
                                                     (Dollars in thousands)
Current
    Federal ...............................      $1,367      $2,820      $2,687
    State .................................         117         280         248
                                                -------     -------     -------
            Total current .................       1,484       3,100       2,935
                                                -------     -------     -------

Deferred ..................................         287          47         (15)
                                                -------     -------     -------
            Total income tax expense ......      $1,771      $3,147     $ 2,920
                                                =======     =======     =======


The provision  for income taxes  differs from that computed by applying  federal
statutory  rates at 34% to income  before income tax expense as indicated in the
following summary:

                                       56



                                                    Years Ended December 31,
                                                    ------------------------
                                                2004          2003        2002
                                                ----          ----        ----
                                                     (Dollars in thousands)

Tax expense at statutory rate ..............     $1,693      $2,986      $2,829
State income tax, net of federal
    income tax benefit .....................        184         174         156
Tax-exempt interest income .................       (133)       (136)        (78)
Amortization of organization costs and
    core deposit intangibles ...............         84          63          25
Other, net .................................        (57)         60         (12)
                                                -------     -------     -------
            Total ..........................     $1,771      $3,147      $2,920
                                                =======     =======     =======

Temporary  differences,  which give rise to deferred tax assets and liabilities,
are as follows:


                                                                December 31,
                                                                ------------
                                                             2004         2003
                                                             ----         ----
                                                          (Dollars in thousands)
Deferred tax assets
    Allowance for loan losses ........................       $1,073       $1,378
    Unrealized net holding losses on
      available-for-sale securities ..................           50            -
    Other ............................................           67           82
                                                             ------       ------
            Gross deferred tax assets ................        1,190        1,460
    Valuation allowance ..............................            -            -
                                                             ------       ------
            Total ....................................        1,190        1,460
                                                             ------       ------

Deferred tax liabilities
    Accelerated depreciation .........................          486          462
    Accretion ........................................            8           10
    Unrealized net holding gains on
      available-for-sale securities ..................            -           30
    Purchase adjustments - securities ................           44           92
    Purchase adjustments - loans .....................           44           61
    Other ............................................            9            -
                                                             ------       ------
            Gross deferred tax liabilities ...........          591          655
                                                             ------       ------
Net deferred income tax assets .......................       $  599       $  805
                                                             ======       ======


NOTE 14 - EMPLOYEE BENEFIT PLANS

The Corporation  provides a defined  contribution  plan with an Internal Revenue
Code Section  401(k)  provision.  All employees who have  completed 500 hours of
service  during a six-month  period and have attained age 21 may  participate in
the plan.

A participant  may elect to make tax deferred  contributions  up to a maximum of
12% of eligible  compensation.  The Corporation will make matching contributions
on behalf of each participant for 100% of the elective  deferral,  not exceeding
3% of the participant's  compensation.  The Corporation may also make additional
contributions determined at the discretion of the Board of Directors.

                                       57


The Corporation's  contributions for 401(k) related profit sharing for the years
ended  December  31,  2004,  2003,  and  2002  totaled  approximately  $285,000,
$170,000,  and $132,000,  respectively.  Since 2001, the senior  officers of the
Corporation are no longer included in this profit sharing program.

The Bank of Ridgeway  maintains a defined  benefit  pension  plan  covering  the
majority of its  employees.  This plan was in place  prior to the  Corporation's
acquisition  of Ridgeway  Bancshares,  Inc. in 2002.  Because  there are no such
plans  for the  Corporation's  other  subsidiaries,  and  there  are no plans to
establish  any other such plans,  the  Corporation  froze  benefit  accruals and
discontinued  additional  participation and voluntary  contributions in the plan
during 2003.  Management has no immediate  plans to formally  terminate the plan
and distribute  its assets.  The changes in the pension plan have been accounted
for as  curtailments  in  accordance  with the  provisions  of SFAS No.  88. The
following table shows the activity and status of that plan:




                                                                                                    As of December 31,
                                                                                                    ------------------
                                                                                       2004                 2003               2002
                                                                                       ----                 ----               ----
                                                                                                    (Dollars in thousands)
Change in Benefit Obligation
                                                                                                                       
   Benefit obligation as of January 1 .....................................             $ 710              $ 796              $   -
   Service cost ...........................................................                 -                 11                 59
   Interest cost ..........................................................                46                 50                 50
   Curtailments ...........................................................                 -               (169)                 -
   Actuarial (gain) loss ..................................................               106                 27                (41)
   Acquisition ............................................................                 -                  -                728
   Benefits paid ..........................................................              (110)                (5)                 -
                                                                                        -----              -----              -----
   Benefit obligation as of December 31 ...................................               752                710                796
                                                                                        -----              -----              -----
Change in Plan Assets
   Fair value of plan assets as of January 1 ..............................               656                632                  -
   Actual return (loss) on plan assets ....................................                88                (27)              (100)
   Acquisition ............................................................                 -                  -                672
   Employer contributions .................................................                60                 56                 60
   Benefits paid ..........................................................              (110)                (5)                 -
                                                                                        -----              -----              -----
   Fair value of plan assets as of December 31 ............................               694                656                632
                                                                                        -----              -----              -----
Funded Status of the Plan .................................................               (58)               (54)              (164)
   Unrecognized transition obligation .....................................                 -                  -                 28
   Unrecognized net loss ..................................................               101                 38                113
                                                                                        -----              -----              -----
   Prepaid (accrued) benefit liability ....................................             $  43              $ (16)             $ (23)
                                                                                        =====              =====              =====
Amount Recognized in the Consolidated
   Balance Sheets consists of:

   Prepaid (accrued) benefit cost .........................................             $  43              $ (16)             $ (23)
                                                                                        =====              =====              =====



The  actuarial  assumptions  used to  determine  the  benefit  obligation  as of
December 31, 2004 and 2003 were as follows:

                                                              December 31,
                                                              ------------
                                                         2004     2003     2002
                                                         ----     ----     ----
Pension Benefits Weighted Average Assumptions
   Discount rate ....................................    6.25%    7.25%    7.25%
   Rate of compensation increase ....................    3.00%    5.00%    5.00%



The components of net periodic pension cost were as follows:

                                       58


                                                      Years Ended December 31,
                                                      ------------------------
                                                     2004        2003      2002
                                                     ----        ----     ----
                                                      (Dollars in thousands)
Components of Net Periodic Benefit Cost
   Service cost ...............................     $   -      $  11      $  59
   Interest cost ..............................        46         50         50
   Expected return on plan assets .............       (47)       (41)       (39)
   Recognized net actuarial loss (gain) .......         -        169          -
   Amortization of transition obligation ......         -          -          3
   Amortization of unrecognized net loss ......         2          1          3
   Curtailment (gain) loss ....................         -       (169)         -
                                                    -----      -----      -----
     Net periodic benefit cost ................     $   1      $  21      $  76
                                                    =====      =====      =====



For the years ended December 31, 2004,  2003 and 2002, the  assumptions  used to
determine net periodic pension cost were as follows:


                                                      Years Ended December 31,
                                                      ------------------------
                                                      2004      2003      2002
                                                      ----      ----      ----
Pension Cost Weighted Average Assumptions
   Discount rate .................................    6.25%     7.25%     7.25%
   Expected long-term rate of
      return on plan asets .......................    7.25%     7.25%     7.25%
   Rate of compensation increase .................    3.00%     5.00%     5.00%


As of December 31, 2004 and 2003, pension plan assets consisted primarily of the
following:

                                                       Percentage of Plan Assets
                                                            at December 31,
                                                            ---------------
Asset Category                                           2004             2003
                                                         ----             ----
  Equities .....................................          53%              69%
  Bonds ........................................          24%              10%
  Cash .........................................           0%               3%
  Stable value instruments .....................          23%              18%
                                                         ---              ---
             Total .............................         100%             100%
                                                         ===              ===


As of December 31, 2003,  plan assets  included a $22,000 Bank of Ridgeway money
market account bearing  interest at the rate of 1.00%. The plan did not hold any
direct investment in the Corporation's common stock.

The Bank of Ridgeway expects to contribute $60,000 to the pension plan in 2005.

Estimated future benefit payments are as follows:


    Year                                          Amount
    ----                                          ------
                                      (Dollars in thousands)
    2005                                               $ 1
    2006                                                18
    2007                                                33
    2008                                                34
    2009                                                47
Years 2010 through 2014                                296



The Corporation maintains no postretirement or post employment benefit plans.


                                       59


NOTE 15 - OFF-BALANCE-SHEET COMMITMENTS

The  Banks  are   parties  to  credit   related   financial   instruments   with
off-balance-sheet  risk in the normal  course of business to meet the  financing
needs of their customers.  These financial  instruments  include  commitments to
extend  credit and  standby  letters of credit.  Such  commitments  involve,  to
varying  degrees,  elements  of credit and  interest  rate risk in excess of the
amount recognized in the consolidated balance sheets.

The Banks'  exposure to credit loss is represented by the  contractual  notional
amount of these commitments. The Banks generally use the same credit policies in
making these commitments as they do for on-balance-sheet instruments.

At  December  31,  2004 and  2003,  the  following  financial  instruments  were
outstanding whose contract amounts represent credit risk:


                                                              December 31,
                                                              ------------
                                                          2004             2003
                                                          ----             ----
                                                         (Dollars in thousands)

Loan commitments ...................................     $11,644       $15,501
Unfunded commitments under lines of credit .........      43,312        36,735
Standby letters of credit ..........................       2,919         4,489


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.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation  of the  borrower.  Collateral  held varies but may include  personal
residences, accounts receivable,  inventory, property, plant, and equipment, and
income-producing commercial properties.

Standby  letters of credit are  conditional  commitments  issued by the Banks to
guarantee  the  performance  of a customer to a third  party.  Those  letters of
credit are  primarily  issued to support  private  borrowing  arrangements.  All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is  essentially  the same as that  involved in extending  loan
facilities to customers.  The Banks generally hold collateral  supporting  those
commitments if deemed necessary. Since many of the standby letters of credit are
expected to expire  without being drawn upon, the total letter of credit amounts
do not necessarily  represent  future cash  requirements.  To reduce credit risk
related to the use of credit-related financial instruments,  the Bank might deem
it  necessary  to obtain  collateral.  The amount  and nature of the  collateral
obtained is based on the Banks' credit  evaluation  of the customer.  Collateral
held varies but may include cash,  securities,  accounts receivable,  inventory,
property, plant and equipment and real estate.


NOTE 16 - EARNINGS PER SHARE

Basic  earnings per share  represent  income  available  to common  shareholders
divided by the  weighted-average  number of shares  outstanding during the year.
Diluted earnings per share reflect additional common shares that would have been
outstanding  if all  dilutive  potential  stock  options  were  exercised at the
beginning  of  each  year  and  the  proceeds  used to  purchase  shares  of the
Corporation's common stock at the average market price during the year. Dilutive
potential  common shares that may be issued by the Corporation  relate solely to
outstanding stock options.


                                       60



Earnings per common share were computed based on the following:




                                                                                                Years Ended December 31,
                                                                                                ------------------------
                                                                                        2004              2003              2002
                                                                                        ----              ----              ----
                                                                                          (Dollars in thousands, except per share)
Net income per share, basic
                                                                                                                        
  Numerator - net income ..................................................         $    3,209         $    5,635         $    5,401
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          4,357,919          4,313,437          3,803,737
                                                                                    ==========         ==========         ==========
             Net income per share, basic ..................................         $      .74         $     1.31         $     1.42
                                                                                    ==========         ==========         ==========

Net income per share, assuming dilution
  Numerator - net income ..................................................         $    3,209         $    5,635         $    5,401
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          4,357,919          4,313,437          3,803,737
    Effect of dilutive stock options ......................................            114,500            113,966            110,313
                                                                                    ----------         ----------         ----------
             Total shares .................................................          4,472,419          4,427,403          3,914,050
                                                                                    ==========         ==========         ==========
             Net income per share, assuming dilution ......................         $      .72         $     1.27         $     1.38
                                                                                    ==========         ==========         ==========



NOTE 17 - 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  Corporation's  various
financial  instruments.  In cases where quoted market prices are not  available,
fair  values  are based on  estimates  using  present  value or other  valuation
techniques. These 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  Value  of  Financial
Instruments,"  as  amended,  excludes  certain  financial  instruments  and  all
non-financial  instruments from its disclosure  requirements.  Accordingly,  the
aggregate  fair  value  amounts  presented  may not  necessarily  represent  the
underlying fair value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:

     Cash  and  cash  equivalents.   The  carrying  amounts  of  cash  and  cash
     equivalents approximate fair values.

     Interest-bearing  deposits  with  other  banks.  The  carrying  amounts  of
     interest-bearing deposits with banks approximate their fair values.

     Securities   available-for-sale  and  held-to-maturity.   Fair  values  for
     securities  are based on quoted market  prices.  The market values of state
     and local  government  securities are established with the assistance of an
     independent  pricing  service.  The values  are based on data  which  often
     reflect  transactions  of  relatively  small  size and are not  necessarily
     indicative of the value of the securities when traded in large volumes.

     Other  investments.  Fair  values  of  other  investments,   consisting  of
     restricted  securities,  approximate the carrying  amounts and are based on
     the redemption provisions of the issuers.

     Loans held for sale. The carrying amounts approximate their fair values.

     Loans.  Fair values for certain  mortgage  loans (for example,  one-to-four
     family  residential)  and other  consumer  loans are based on quoted market
     prices  of  similar   loans  sold,   adjusted  for   differences   in  loan


                                       61


     characteristics.  Fair values for all other  performing loans are estimated
     using  discounted cash flow analyses,  using interest rates currently being
     offered  for loans  with  similar  terms to  borrowers  of  similar  credit
     quality.   Fair  values  for  non-performing   loans  are  estimated  using
     discounted  cash flow  analyses  or  underlying  collateral  values,  where
     applicable.

     Accrued interest.  The carrying amounts of accrued interest  receivable and
     payable approximate fair value.

     Deposits. The fair values disclosed for demand deposits are, by definition,
     equal to the amount payable on demand at the reporting date (that is, their
     carrying  amounts).  Fair values for certificates of deposit and other time
     deposits  are  estimated  using a  discounted  cash flow  calculation  that
     applies  interest  rates  currently  being  offered  on  certificates  to a
     schedule of aggregated expected monthly maturities on time deposits.

     Short-term borrowings.  The carrying amounts of federal funds purchased and
     borrowings  under  repurchase  agreements  approximate  their  fair  values
     because of the associated variable interest rates.

     Long-term  debt.  The fair value of fixed-rate  long-term debt is estimated
     using  discounted  cash flow analyses  based on the  Corporation's  current
     incremental  borrowing  rates for similar types of borrowing  arrangements.
     The fair value of variable-rate long-term debt is estimated at the carrying
     amount of the debt.

     Off-balance-sheet    commitments.   Fair   values   for   off-balance-sheet
     commitments  are based on fees  currently  charged  to enter  into  similar
     agreements,  taking into account the remaining  terms of the agreements and
     the counterparties' credit standings. The vast majority of loan commitments
     do not involve the charging of a fee, and costs associated with outstanding
     letters  of credit  are not  material.  For loan  commitments  and  standby
     letters of credit,  the  committed  interest  rates are either  variable or
     approximate  current  interest  rates  offered  for  similar   commitments.
     Therefore, the estimated fair values of these off-balance-sheet commitments
     are nominal.

The  estimated  fair  values and related  carrying  or  notional  amounts of the
Corporation's  financial  instruments  at  December  31,  2004 and 2003,  are as
follows:



                                                                                             December 31,
                                                                                             ------------
                                                                                 2004                             2003
                                                                                 ----                             ----
                                                                      Carrying         Estimated         Carrying        Estimated
                                                                       Amount         Fair Value          Amount        Fair Value
                                                                     of Assets         of Assets         of Assets       of Assets
                                                                     (Liabilities)   (Liabilities)     (Liabilities)   (Liabilities)
                                                                     -------------   -------------     -------------   -------------
                                                                                         (Dollars in thousands)
                                                    
                                                                                                                  
Cash and cash equivalents ..................................        $  26,968         $  26,968         $  41,875         $  41,875
Interest bearing deposits with other banks .................              852               852             1,124             1,124
Securities available-for-sale ..............................           55,471            55,471            64,864            64,864
Securities held-to-maturity ................................            1,925             1,907             2,000             2,155
Other investments ..........................................            2,642             2,642             2,038             2,038
Loans held for sale ........................................           15,090            15,090             8,411             8,411
Loans, net .................................................          389,302           383,625           327,900           328,432
Accrued interest receivable ................................            2,419             2,419             2,186             2,186
Deposits ...................................................         (423,458)         (424,623)         (378,704)         (379,761)
Short-term borrowings ......................................           (6,662)           (6,662)          (17,960)          (17,960)
Long-term debt .............................................          (30,573)          (31,486)          (20,140)          (21,665)
Accrued interest payable ...................................             (691)             (691)             (585)             (585)

Off-balance-sheet commitments
  Loan commitments .........................................        $ (11,644)        $       -         $ (15,501)        $       -
  Unfunded commitments under lines of credit ...............          (43,312)                -           (36,735)                -
  Standby letters of credit ................................           (2,919)                -            (4,489)                -




                                       62


NOTE 18 - CONTINGENCIES

The  Corporation  is subject at times to claims and lawsuits  arising out of the
normal  course of business.  As of December 31, 2004, no claims or lawsuits were
pending or threatened which, in the opinion of management,  are likely to have a
material effect on the Corporation's consolidated financial statements.


NOTE 19 - REGULATORY MATTERS

The Banks are subject to the dividend  restrictions set forth by various banking
regulators.  Under such restrictions,  the national banks may not, without prior
approval,  declare dividends in excess of the sum of the current year's earnings
(as defined)  plus the retained  earnings (as defined)  from the prior two years
and the state bank may not declare  dividends  in excess of the  current  year's
earnings.  At December  31, 2004,  the  dividends  that the Banks could  declare
without the approval of their primary bank regulator  amounted to  approximately
$7,961,000. In addition, dividends paid by the Banks to the Corporation would be
prohibited if the effect  thereof  would cause the Banks'  capital to be reduced
below applicable minimum capital requirements.  The Banks are also restricted by
law as to the amount they may lend to any  non-depository  affiliate,  including
the Corporation  and CRM. Such loans are subject to the  requirements of Section
23A of the Federal  Reserve Act including a general  limitation to not more than
10% of  capital  and  specified  ratios of the fair  market  value of  allowable
collateral to loan amounts.

The  Corporation  (on a  consolidated  basis) and the Banks are each  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 adverse effect on the Corporation's and
the Banks'  financial  statements.  Under capital  adequacy  guidelines  and the
regulatory framework for prompt corrective action, the Corporation and the Banks
must meet specific  capital  guidelines  that involve  quantitative  measures of
their assets,  liabilities,  and certain  off-balance-sheet  items as calculated
under regulatory  accounting  practices.  The capital amounts and classification
are also subject to qualitative  judgments by the regulators  about  components,
risk weightings,  and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.

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

As of December 31, 2004, for ONB, for SNB, for FNB, and for BOR, the most recent
notifications  from the FDIC 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 table.  There are no
conditions  or events since the  notifications  that  management  believes  have
changed the Banks'  categories.  The Corporation's and the Banks' actual capital
amounts and ratios are also presented in the following table.


                                       63




                                                                                               Minimum for          Minimum to be   
                                                                        Actual               Capital Adequacy     Well Capitalized
                                                                        ------               ----------------     ----------------
                                                                 Amount        Ratio       Amount       Ratio    Amount        Ratio
                                                                 ------        -----       ------       -----    ------        -----
December 31, 2004                                                                         (Dollars in thousands)
     Tier I Capital (to Average Assets)
                                                                                                               
         Consolidated .......................................    $52,713        10.7%    $19,720        4.0%    $29,580         6.0%
         ONB ................................................     18,037         8.9%      8,118        4.0%     12,177         6.0%
         SNB ................................................     10,540         7.8%      5,379        4.0%      8,068         6.0%
         FNB ................................................      6,202         8.6%      2,872        4.0%      4,308         6.0%
         BOR ................................................      7,426         8.7%      3,413        4.0%      5,120         6.0%

     Tier I Capital (to Risk Weighted Assets)
         Consolidated .......................................    $52,713        13.7%    $15,408        4.0%    $23,112         6.0%
         ONB ................................................     18,037        12.0%      6,037        4.0%      9,055         6.0%
         SNB ................................................     10,540         9.5%      4,459        4.0%      6,688         6.0%
         FNB ................................................      6,202         9.6%      2,573        4.0%      3,859         6.0%
         BOR ................................................      7,426        13.0%      2,292        4.0%      3,437         6.0%

     Total Capital (to Risk Weighted Assets)
         Consolidated .......................................    $57,060        14.8%    $20,816        8.0%    $38,520        10.0%
         ONB ................................................     19,763        13.1%     12,074        8.0%     15,092        10.0%
         SNB ................................................     11,714        10.5%      8,917        8.0%     11,146        10.0%
         FNB ................................................      6,781        10.5%      5,146        8.0%      6,432        10.0%
         BOR ................................................      7,914        13.8%      4,583        8.0%      5,729        10.0%

December 31, 2003
     Tier I Capital (to Average Assets)
         Consolidated .......................................    $40,380         9.1%    $17,709        4.0%    $26,564         6.0%
         ONB ................................................     16,285         9.1%      7,125        4.0%     10,688         6.0%
         SNB ................................................      9,058         7.6%      4,741        4.0%      7,111         6.0%
         FNB ................................................      5,047         8.9%      2,266        4.0%      3,399         6.0%
         BOR ................................................      6,906         8.2%      3,377        4.0%      5,065         6.0%

     Tier I Capital (to Risk Weighted Assets)
         Consolidated .......................................    $40,380        12.0%    $13,473        4.0%    $20,210         6.0%
         ONB ................................................     16,285        12.5%      5,213        4.0%      7,820         6.0%
         SNB ................................................      9,058         9.0%      4,015        4.0%      6,022         6.0%
         FNB ................................................      5,047         9.9%      2,042        4.0%      3,063         6.0%
         BOR ................................................      6,906        14.4%      1,921        4.0%      2,881         6.0%

     Total Capital (to Risk Weighted Assets)
         Consolidated .......................................    $44,385        13.2%    $26,947        8.0%    $33,684        10.0%
         ONB ................................................     17,916        13.8%     10,427        8.0%     13,034        10.0%
         SNB ................................................     10,313        10.3%      8,030        8.0%     10,037        10.0%
         FNB ................................................      5,591        11.0%      4,083        8.0%      5,104        10.0%
         BOR ................................................      7,338        15.3%      3,841        8.0%      4,802        10.0%


The mortgage brokerage  subsidiary is subject to a minimum  regulatory  adjusted
net worth requirement to maintain its  certification as a HUD-approved  Title II
Loan  Correspondent.  Certain  investor  and  warehouse  credit line  agreements
require  that  the   mortgage   subsidiary   maintain  its  HUD   certification.
Accordingly, failure to maintain the minimum regulatory adjusted net worth could
result in a  significant  limitation  of the  mortgage  subsidiary's  ability to
originate,  fund or sell  loans,  and  therefore  could have a direct,  material
adverse  effect on its business  and the  Corporation's  consolidated  financial
statements.



                                       64


CRM's actual  regulatory  adjusted net worth and the minimum amount  required by
HUD were as follows:


                                                       December 31,
                                                       ------------
                                                 2004                2003
                                                 ----                ----
                                                  (Dollars in thousands)

Actual adjusted net worth ..................    $ 1,161            $ 1,502
Minimum required ...........................         63                 63

HUD regulations  require that 20%, up to a maximum of $100,000,  of the adjusted
net worth amount be held in liquid  assets.  CRM's liquid assets for  regulatory
purposes totaled $1,331,000 and $1,310,000,  respectively,  as of December,  31,
2004 and 2003.


NOTE 20 - CONDENSED FINANCIAL STATEMENTS

Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only):

COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)


                                                                  December 31,
                                                                  ------------
                                                                2004        2003
                                                                ----        ----
                                                          (Dollars in thousands)
Condensed Balance Sheets
     Assets
        Cash .............................................    $ 3,991    $ 1,340
        Investment in banking subsidiaries ...............     48,598     44,082
        Investment in nonbanking subsidiary ..............      1,471      1,502
        Securities available-for-sale, at fair value .....         96         96
        Loans to nonbanking subsidiary ...................      4,883          -
        Premises and equipment - net .....................      1,037      1,009
        Goodwill .........................................        921        921
        Other assets .....................................         96        179
                                                              -------    -------
           Total assets ..................................    $61,093    $49,129
                                                              =======    =======
     Liabilities
        Short-term borrowings ............................    $     -    $   635
        Long-term debt ...................................     10,310          -
        Other liabilities ................................        756        424
     Shareholders' equity ................................     50,027     48,070
                                                              -------    -------
           Total liabilities and shareholders' equity ....    $61,093    $49,129
                                                              =======    =======

                                       65




                                                                                                   Years Ended December 31,
                                                                                                   ------------------------
                                                                                              2004            2003            2002
                                                                                              ----            ----            ----
                                                                                                   (Dollars in thousands)
Condensed Statements of Income                                                       
     Income                                                                   
                                                                                                                       
        Management fees from subsidiaries ..........................................        $ 2,286         $ 2,066         $ 1,725
        Dividends received from banking subsidiaries ...............................          2,679           1,741           1,550
        Interest income ............................................................            180              17              32
        Other income ...............................................................             16              11              11
                                                                                            -------         -------         -------
           Total income ............................................................          5,161           3,835           3,318
                                                                                            -------         -------         -------
     Expenses
        Salaries and employee benefits .............................................          1,397           1,373           1,159
        Premises and equipment .....................................................            628             435             217
        Supplies ...................................................................            109              92              79
        Directors' fees ............................................................             53              49              24
        Interest expense ...........................................................            408               9               -
        Other expenses .............................................................            918             701             541
                                                                                            -------         -------         -------
           Total expenses ..........................................................          3,513           2,659           2,020
                                                                                            -------         -------         -------
     Income before income taxes and equity in
        undistributed earnings of subsidiaries .....................................          1,648           1,176           1,298
     Income tax (benefit) ..........................................................           (364)           (192)            (91)
     Equity in undistributed earnings of banking subsidiaries ......................          1,664           3,725           3,566
     Equity in undistributed earnings (loss) of nonbanking subsidiary ..............           (467)            542             446
                                                                                            -------         -------         -------
     Net income ....................................................................        $ 3,209         $ 5,635         $ 5,401
                                                                                            =======         =======         =======



                                       66




                                                                                                   Years Ended December 31,
                                                                                                   ------------------------
                                                                                            2004             2003             2002
                                                                                            ----             ----             ----
                                                                                                    (Dollars in thousands)
Condensed Statements of Cash Flows
     Operating activities
                                                                                                                       
        Net income ..............................................................        $  3,209         $  5,635         $  5,401
           Adjustments to reconcile net income to net
               cash provided by operating activities
                  Equity in undistributed earnings
                    of subsidiaries .............................................          (1,197)          (4,267)          (4,012)
                  Depreciation and amortization .................................             332              205              130
                  Loss on disposal of premises and equipment ....................               -                9                -
                  Decrease (increase) in other assets ...........................              83              225              (84)
                  Increase in other liabilities .................................             332              268               37
                                                                                         --------         --------         --------
                    Net cash provided by
                       operating activities .....................................           2,759            2,075            1,472
                                                                                         --------         --------         --------
     Investing activities
        Purchase of securities available-for-sale ...............................               -              (46)               -
        Net increase in loans to nonbanking subsidiaries ........................          (4,883)               -                -
        Investment in Bank of Ridgeway ..........................................               -                -             (621)
        Investment in SCB Capital Trust .........................................            (310)               -                -
        Investments in banking subsidiaries .....................................          (3,000)               -                -
        Investment in nonbanking subsidiary .....................................            (126)               -                -
        Purchases of premises and equipment .....................................            (360)            (794)            (182)
                                                                                         --------         --------         --------
                    Net cash used by investing activities .......................          (8,679)            (840)            (803)
                                                                                         --------         --------         --------
     Financing activities
        (Decrease) increase in short-term borrowings, net .......................            (635)             635                -
        Proceeds of issuing long-term debt ......................................          10,310                -                -
        Issuance costs of common stock in business combinations .................               -                -             (178)
        Exercise of stock options ...............................................             640              312               40
        Cash dividends paid .....................................................          (1,744)          (1,554)          (1,218)
                                                                                         --------         --------         --------
                    Net cash provided (used) by financing activities ............           8,571             (607)          (1,356)
                                                                                         --------         --------         --------
     Increase (decrease) in cash and cash equivalents ...........................           2,651              628             (687)
     Cash and cash equivalents, beginning .......................................           1,340              712            1,399
                                                                                         --------         --------         --------
     Cash and cash equivalents, ending ..........................................        $  3,991         $  1,340         $    712
                                                                                         ========         ========         ========


                                       67


NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)



                                                                                 Years Ended December 31,
                                                                                 ------------------------
                                                                       2004                                    2003
                                                                       ----                                    ----
                                                    Fourth       Third    Second    First     Fourth       Third    Second    First
                                                    Quarter     Quarter   Quarter   Quarter   Quarter    Quarter   Quarter   Quarter
                                                    -------     -------   -------   -------   -------    -------   -------   -------
                                                                       (Dollars in thousands, except per share)

                                                                                                        
Interest and dividend income ...................   $ 6,785    $ 6,253   $ 5,928    $ 5,908    $ 5,979   $ 6,155   $ 6,285    $ 5,849
Interest expense ...............................     1,972      1,757     1,662      1,640      1,705     1,894     1,960      2,001
                                                   -------    -------   -------    -------    -------   -------   -------    -------

Net interest income ............................     4,813      4,496     4,266      4,268      4,274     4,261     4,325      3,848
Provision for loan losses ......................     2,963      1,648       258        233        344       232       279        264
                                                   -------    -------   -------    -------    -------   -------   -------    -------

Net interest income after provision ............     1,850      2,848     4,008      4,035      3,930     4,029     4,046      3,584
Noninterest income .............................     1,581      1,839     1,932      1,850      1,971     2,523     2,374      2,509
Gains (losses) on sales of securities ..........        71         10        (1)        (4)         -         -      (298)        46
Noninterest expense ............................     3,705      3,826     3,775      3,733      3,870     4,109     4,218      3,735
                                                   -------    -------   -------    -------    -------   -------   -------    -------

Income (loss) before income taxes ..............      (203)       871     2,164      2,148      2,031     2,443     1,904      2,404
Provision for income taxes .....................       (67)       306       769        763        734       871       719        823
                                                   -------    -------   -------    -------    -------   -------   -------    -------

Net income (loss) ..............................   $  (136)   $   565   $ 1,395    $ 1,385    $ 1,297   $ 1,572   $ 1,185    $ 1,581
                                                   =======    =======   =======    =======    =======   =======   =======    =======

Earnings (loss) per share
   Basic .......................................   $ (0.03)   $  0.13   $  0.32    $  0.32    $  0.31   $  0.36   $  0.27    $  0.37
   Diluted .....................................     (0.03)      0.12      0.31       0.31       0.29      0.35      0.27       0.36



In the third  quarter of 2004,  management  became  aware of  possible  problems
regarding  several large commercial  loans. In most cases, the loans were single
payment term loans and management decided to seek collection as the loans became
due contractually.  Using the information available at the end of third quarter,
management  increased  the  provision for loan losses to raise the allowance for
loan losses to cover its  estimate of possible  future  losses on these loans as
well as the overall  portfolio.  During the fourth quarter,  most of these loans
became  delinquent and  management  pursued legal options which resulted in some
loan  payoffs.  As of  December  31,  2004,  management  charged off most of the
balances of the  remaining  problem  loans.  This  action  resulted in a further
significant  increase in the provision for loan losses in the fourth  quarter to
replenish the allowance for loan losses to an amount  estimated by management to
be adequate for the portfolio as a whole as of year end.


                                       68



Item 9.  Changes  In  and  Disagreements  with  Accountants on  Accounting  and
         Financial Disclosure

         There were no disagreements with or changes in accountants.

Item 9A. Controls and Procedures

         Based on the evaluation required by 17 C.F.R. Section  240.13a-15(b) or
240.15d-15(b)  of the  Corporation's  disclosure  controls  and  procedures  (as
defined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Corporation's
chief executive officer and chief financial officer concluded that such controls
and procedures,  as of the end of the period covered by this annual report, were
effective.

         No disclosure is required under 17 C.F.R.  Section  229.308 (a) or (b).
There  has been no change  in the  Company's  internal  control  over  financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.

Item 9B. Other Information

No  information  required  to be  disclosed  in a report on Form 8-K  during the
fourth quarter of 2004 was not so disclosed.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

         The information set forth under the captions  "Management - Directors,"
"Management  - Executive  Officers,"  "Management  - Committees  of the Board of
Directors - Audit Committee" and "Section 16(a) Beneficial  Ownership  Reporting
Compliance"  in the  Proxy  Statement  to be used in  conjunction  with the 2005
Annual  Meeting of  Shareholders  (the "Proxy  Statement"),  which will be filed
within 120 days of the Corporation's  fiscal year end, is incorporated herein by
reference.

         Phil P. Leventis  (age 59) has served as a director of the  Corporation
since 1996.  His term as a director  will  expire at the 2005 annual  meeting of
shareholders  and he has  chosen  not to be  nominated  for  another  term.  Mr.
Leventis is President and Chief Executive Officer of Dixie Central  Distributing
Co., Inc., a wholesale  beverage  distributor.  He is also a member of the South
Carolina State Senate.  Mr. Leventis has also served as Chairman of the Board of
Directors of Sumter National Bank since June 1996.

Audit Committee Financial Expert

         The   Corporation's   board  of  directors  has  determined   that  the
Corporation does not have an "audit committee financial expert," as that term is
defined by Item 401(h) of  Regulation  S-K  promulgated  by the  Securities  and
Exchange  Commission,  serving on its audit committee.  The Corporation's  audit
committee is a committee of directors  who are elected by the  shareholders  and
who are independent of the  Corporation and its management.  After reviewing the
experience and training of all of the Corporation's  independent directors,  the
board of directors has concluded  that no  independent  director meets the SEC's
very demanding definition.  Therefore, it would be necessary to find a qualified
individual willing to serve as both a director and member of the audit committee
and have that  person  elected  by the  shareholders  in order to have an "audit
committee  financial expert" serving on the Corporation's  audit committee.  The
Corporation's  audit  committee is,  however,  authorized to use  consultants to
provide  financial  accounting  expertise in any instance  where  members of the
committee believe such assistance would be useful. Accordingly,  the Corporation
does not believe that it needs to have an "audit committee  financial expert" on
its audit committee.

Code of Ethics

         The  Corporation  has  adopted a code of ethics  (as  defined by C.F.R.
229.406) that applies to its principal executive officer and principal financial
officer.  The  code  of  ethics  is  posted  on  the  Corporation's  website  at
www.communitybanksharesinc.com.

Item 11.  Executive Compensation

         With the  exception  of the  information  set forth under the  captions
"Board  Report  on  Executive  Officer  Compensation"  and  "Shareholder  Return
Performance  Graph",  which information is not incorporated herein by reference,
the information  set forth under the caption  "Management  Compensation"  in the
Proxy Statement is incorporated herein by reference.

                                       69


Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters

         The  information  set forth under the caption  "Security  Ownership  of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.


         Equity  Compensation Plan  Information.  The following table sets forth
aggregated  information  as of December 31, 2004 about all of the  Corporation's
compensation plans (including individual compensation  arrangements) under which
equity securities of the Corporation are authorized for issuance.




                                                                                                        Number of securities
                                                                                                       remaining available for
                                            Number of securities to be        Weighted average           future issuance under
                                              issued upon exercise of          exercise price of       equity compensation plans
                                                outstanding options           outstanding options,      (excluding securities
                                                warrants and rights           warrants and rights       reflected in column (a))
Stock option plan                                      (a)                            (b)                          (c)  
                                                -------------------           -------------------       ------------------------
                                                                                                      
                                                                                                             
Equity compensation plans
 approved by security holders .............          482,817                        $14.14                        302,783

Equity compensation plans                                                                              
 not approved by security holders .........               NA                            NA                             NA
                                                     -------                         ------                       -------

Total .....................................          482,817                        $14.14                        302,783
                                                     =======                        ======                        =======



The  Corporation's  1997 Stock Option Plan, and issuance of up to 785,600 shares
under that plan, have previously been approved by shareholders.


Item 13.  Certain Relationships and Related Transactions

         The information set forth under the caption "Certain  Relationships and
Related   Transactions"  in  the  Proxy  Statement  is  incorporated  herein  by
reference.

                                       70
 

Item 14. Principal Accountant Fees and Services

         The  information  set  forth  under  the  caption  "Independent  Public
Accountants  - Fees  Billed  by  Independent  Auditors"  and "- Audit  Committee
Pre-Approval  of  Audit  and  Permissible   Non-Audit  Services  of  Independent
Auditors" in the Proxy Statement is incorporated herein by reference.


Item 15.  Exhibits and Financial Statement Schedules

(a) (1) All financial statements:

Consolidated Balance Sheets, December 31, 2004 and 2003
Consolidated Statements of Income, Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
     December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows, Years Ended December 31, 2004, 2003
     and 2002
Notes to Consolidated Financial Statements

(2) Financial statement schedules:

Quarterly Data for 2004 and 2003



(3)
Exhibit No.            Description
(from item 601 of
S-K)

                                                                                            
         3.1           Articles  of  Incorporation,  as  amended  (incorporated  by  reference  to
                            exhibits filed in the  Registrant's  Form 10-QSB for the quarter ended
                            September 30, 1997).
         3.2           Bylaws,  as amended  (incorporated  by reference to Registrant's  Form 8-K,
                            filed February 4, 2005).
          4            Stock  certificate  (incorporated  by  reference  to exhibits  filed in the
                            Registrant's  Registration  Statement on Form S-2, filed September 11,
                            1995, Commission File No. 33-96746).
        10.1           1997 Stock Option Plan, as amended  (incorporated  by reference to exhibits
                            to Registrant's Form S-8 (File No. 333-118119)).
        10.2           Lease for site of Florence  National  Bank  (incorporated  by  reference  to
                            Registrant's Form 10-K for the year ended December 31, 1999).
        10.3           Change of Control  Agreements  between the Registrant and each of William W.
                            Traynham and Michael A. Wolfe (incorporated by reference to exhibits to
                            Registrant's Form 10-QSB for the quarter ended June 30, 1999).
        10.4           Warehouse  Credit and Security  Agreement,  dated October 5, 2004,  between
                            Community Resource Mortgage, Inc. and Branch Bank and Trust Company.
        10.5           Guaranty,  dated October 5, 2004, by Registrant of obligations of Community
                            Resource Mortgage, Inc. to Branch Bank and Trust Company.
        10.6           Indenture,  dated as of March 1, 2004,  between  Registrant and Wells Fargo
                            Bank,  National  Association  (incorporated  by  reference to exhibits
                            filed with  Registrant's  Form 10-Q for the  quarter  ended  March 31,
                            2004 ("First Quarter 2004 Form 10-Q").


                                       71


        10.7           Amended and Restated  Declaration of Trust,  dated March 10, 2004, among the
                            Trustees  and  Administrators  named  therein and SCB  Capital  Trust I
                            (incorporated by reference to the First Quarter 2004 Form 10-Q).
        10.8           Guaranty  Agreement,  dated as of March 10, 2004,  between  Registrant  and
                            Wells Fargo Bank, National  Association  (incorporated by reference to
                            the First Quarter 2004 Form 10-Q).
        10.9           Employment  Agreement between Community  Resource Mortgage Inc. and A. Wade
                            Douroux   (incorporated   by  reference  to  exhibits   filed  in  the
                            Registrant's Form S-4, Commission File No. 333-819000).
        10.10          Form of  Employment  Agreement  between  the  Corporation  and  William  A.
                            Harwell   (incorporated   by  reference  to  exhibits   filed  in  the
                            Registrant's Form S-4, Commission File No. 333-819000).
        10.11          Form of Employment Agreement between the Corporation and Samuel L. Erwin.
        10.12          Form of Employment  Agreement  between the  Corporation and each of William
                            W. Traynham, Michael A Wolfe, Robert B. Smith, and Keith W. Buckhouse.
         21            Subsidiaries of the registrant
         23            Consent of J. W. Hunt and Company, LLP
        31.1           Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer
        31.2           Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer
         32            18 U.S.C. Section 1350 Certifications






                                       72



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 to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                                           DATED: March 28, 2005

By:  s/ Samuel L. Erwin
   --------------------------------
Chief Executive Officer


By  s/ William W. Traynham, Jr.
  ----------------------------------
Chief Financial Officer


                                       73


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


s/ E. J. Ayers, Jr.                              Date: March 28, 2005
---------------------------------
E. J. Ayers, Jr., Director

s/ Alvis J. Bynum                                Date: March 28, 2005
---------------------------------
Alvis J. Bynum, Director


s/ Martha Rose C. Carson                         Date: March 28, 2005
---------------------------------
Martha Rose C. Carson, Director


s/ Anna O. Dantzler                              Date: March 28, 2005
---------------------------------
Anna O. Dantzler, Director


s/ Thomas B. Edmunds                             Date: March 28, 2005
---------------------------------
Thomas B. Edmunds, Director


s/Samuel L. Erwin                                 Date: March 28, 2005
----------------------------------                                              
Samuel L. Erwin, Director


s/J. M. Guthrie                                  Date: March 28, 2005 
---------------------------------
J. M. Guthrie, Director


s/Richard L. Havekost                            Date: March 28, 2005
---------------------------------
Richard L. Havekost, Director


s/ Phil P. Leventis                              Date: March 28, 2005
---------------------------------
Phil P. Leventis, Director


s/John V. Nicholson                              Date: March 28, 2005
---------------------------------
John V. Nicholson, Director


s/ Samuel F. Reid, Jr.                           Date: March 28, 2005
---------------------------------
Samuel F. Reid, Jr., Director


s/ J. Otto Warren, Jr.                           Date: March 28, 2005
---------------------------------
J. Otto Warren, Jr., Director


s/Wm. Reynolds Williams                          Date: March 28, 2005 
---------------------------------
Wm. Reynolds Williams, II, Director


                                       74




                                  EXHIBIT INDEX




Exhibit No.            Description
(from item 601 of
S-K)

                                                                                            
         3.1           Articles  of  Incorporation,  as  amended  (incorporated  by  reference  to
                            exhibits filed in the  Registrant's  Form 10-QSB for the quarter ended
                            September 30, 1997).
         3.2           Bylaws,  as amended  (incorporated  by reference to Registrant's  Form 8-K,
                            filed February 4, 2005).
          4            Stock  certificate  (incorporated  by  reference  to exhibits  filed in the
                            Registrant's  Registration  Statement on Form S-2, filed September 11,
                            1995, Commission File No. 33-96746).
        10.1           1997 Stock Option Plan, as amended  (incorporated  by reference to exhibits
                            to Registrant's Form S-8 (File No. 333-118119)).
        10.2           Lease for site of Florence  National  Bank  (incorporated  by  reference  to
                            Registrant's Form 10-K for the year ended December 31, 1999).
        10.3           Change of Control  Agreements  between the Registrant and each of William W.
                            Traynham and Michael A. Wolfe (incorporated by reference to exhibits to
                            Registrant's Form 10-QSB for the quarter ended June 30, 1999).
        10.4           Warehouse  Credit and Security  Agreement,  dated October 5, 2004,  between
                            Community Resource Mortgage, Inc. and Branch Bank and Trust Company.
        10.5           Guaranty,  dated October 5, 2004, by Registrant of obligations of Community
                            Resource Mortgage, Inc. to Branch Bank and Trust Company.
        10.6           Indenture,  dated as of March 1, 2004,  between  Registrant and Wells Fargo
                            Bank,  National  Association  (incorporated  by  reference to exhibits
                            filed with  Registrant's  Form 10-Q for the  quarter  ended  March 31,
                            2004 ("First Quarter 2004 Form 10-Q").
        10.7           Amended and Restated  Declaration of Trust,  dated March 10, 2004, among the
                            Trustees  and  Administrators  named  therein and SCB  Capital  Trust I
                            (incorporated by reference to the First Quarter 2004 Form 10-Q).
        10.8           Guaranty  Agreement,  dated as of March 10, 2004,  between  Registrant  and
                            Wells Fargo Bank, National  Association  (incorporated by reference to
                            the First Quarter 2004 Form 10-Q).
        10.9           Employment  Agreement between Community  Resource Mortgage Inc. and A. Wade
                            Douroux   (incorporated   by  reference  to  exhibits   filed  in  the
                            Registrant's Form S-4, Commission File No. 333-819000).
        10.10          Form of  Employment  Agreement  between  the  Corporation  and  William  A.
                            Harwell   (incorporated   by  reference  to  exhibits   filed  in  the
                            Registrant's Form S-4, Commission File No. 333-819000).
        10.11          Form of Employment Agreement between the Corporation and Samuel L. Erwin.
        10.12          Form of Employment  Agreement  between the  Corporation and each of William
                            W. Traynham, Michael A Wolfe, Robert B. Smith, and Keith W. Buckhouse.
         21            Subsidiaries of the registrant
         23            Consent of J. W. Hunt and Company, LLP
        31.1           Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer
        31.2           Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer
         32            18 U.S.C. Section 1350 Certifications



                                       75