Edgar Filing: COMMUNITY BANCSHARES INC /DE/

1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NO. 000-16461
COMMUNITY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 63-0868361
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

68149 MAIN STREET, P. O. BOX 1000
BLOUNTSVILLE, ALABAMA 35031
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(205) 429-1000
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(REGISTRANT'S TELEPHONE NUMBER)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
NONE NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, $.10 PAR VALUE
----------------------------------------
(TITLE OF CLASS)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS:

YES [X] NO [ ]

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OF INFORMATION
STATEMENTS INCORPORATED BY REFERENCE TO PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [ ]

AS OF MARCH 28, 2001, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING
STOCK HELD BY NON-AFFILIATES WAS $38,894,565 BASED UPON A SALE PRICE OF $15.00
PER SHARE ON MARCH 28, 2001.

AS OF MARCH 28, 2001, THERE WERE 4,808,331 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.10 PAR VALUE SHARES, OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K: PROXY
STATEMENT FOR THE 2001 ANNUAL MEETING OF SHAREHOLDERS.

PART 1

ITEM 1 - BUSINESS

GENERAL

Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank
holding company registered with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") under the Bank Holding Act of 1956, as amended
(the "Bank Holding Company Act"). The Company was organized in 1983 and
commenced business in 1985. The Company has one bank subsidiary, Community Bank,
an Alabama banking corporation which conducts a general commercial banking
business in north and west-central Alabama and south-central Tennessee. At
December 31, 2000, the Company and its subsidiaries had total assets of
approximately $713,518,000, deposits of approximately $600,901,000 and
shareholders' equity of approximately $41,190,000.

SUBSIDIARY BANK

Community Bank currently conducts business through 30 locations in nine counties
in north Alabama, two counties in west-central Alabama and one county in
south-central Tennessee. It offers a wide range of commercial and retail banking
services, including savings and time deposit accounts, personal and commercial
loans and personal and commercial checking accounts. The majority of loans by
Community Bank are to individuals and small to mid-sized businesses in Alabama
and Tennessee. Community Bank seeks to provide superior service to its customers
and to become a vital component of each of the communities it serves.

Community Bank operates in small non-urban communities, including locations in
Blountsville, Cleveland, Oneonta, Snead and West Blount in Blount County,
Alabama; Fort Payne and Rainsville in DeKalb County, Alabama; Rogersville in
Lauderdale County, Alabama; Elkmont in Limestone County, Alabama; Gurley,
Meridianville and New Hope in Madison County, Alabama; Demopolis in Marengo
County, Alabama; Hamilton in Marion County, Alabama; Arab, Albertville, Boaz and
Guntersville in Marshall County, Alabama; Falkville and Hartselle in Morgan
County, Alabama; Uniontown in Perry County, Alabama; Double Springs and
Haleyville in Winston County, Alabama; and Pulaski in Giles County, Tennessee.
Community Bank operates 26 full service offices as well as four paying and
receiving offices located within Wal-Mart stores, which primarily open deposit
accounts, cash checks and receive deposits and loan payments.

In December 1999, Community Bank established a real estate mortgage department
as an approved seller/servicer for the Federal Home Loan Mortgage Corporation.
The real estate mortgage department, located in the Company's headquarters in
Blountsville, Alabama, offered mortgage loan products at competitive rates to
customers referred by Community Bank and the Company's finance company offices.
In the fourth quarter of 2000, management of Community Bank discontinued
offering loans through its real estate mortgage department and sold the
servicing rights associated with loans originated through the real estate
mortgage department.

SUBSIDIARIES OF COMMUNITY BANK

1st Community Credit Corporation currently operates 12 finance company offices
in 12 Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman,
Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Oneonta,
Alabama. 1st Community Credit Corporation provides loans to a market segment
traditionally not pursued by Community Bank. These loans have typically
generated higher yields and involved greater risk than standard commercial bank
loans. At December 31, 2000, 1st Community Credit Corporation's loan portfolio
totaled approximately $28,857,000.

Community Insurance Corp. serves as an agent in the sale of title, property,
casualty and life insurance products to individuals and businesses through an
office in Huntsville, Alabama. In April 1998, Community Insurance Corp. acquired
100% ownership of the outstanding shares of capital stock of Chafin Insurance
Agency, Inc. and Jim Murphree Insurance Agency, Inc., insurance agencies located
in Graysville and Oneonta, Alabama, respectively. Both agencies merged into
Community Insurance Corp. in January 1999. In April 1998, Community Insurance
Corp. acquired 100% ownership of the outstanding shares of capital stock of
Southern Select Insurance, Inc., a managing general agency which brokers
agricultural, commercial and personal insurance products for several insurance
carriers located outside of the state of Alabama through a network of
approximately 170 insurance agencies located in Alabama. Community Insurance
Corp. acquired a controlling interest in Southern Select Insurance, Inc. in
August 1997. In December 1999, Southern Select Insurance, Inc. relocated its
offices to Huntsville, Alabama from Birmingham, Alabama. In June 1999, Community
Insurance Corp. established an office in Huntsville, Alabama through the
acquisition of certain assets and the assumption of certain liabilities of
Cummings, Gazaway, Gardner and Pate, Inc., a Huntsville-based insurance agency.
In December 1999, Community Insurance Corp. established an office in the
Community Bank building in Hamilton, Alabama. In October 2000, Community
Insurance Corp. closed its office in Hamilton, Alabama and in November 2000 sold
its offices located in Oneonta and Graysville, Alabama.

Community Appraisals, Inc., a subsidiary of Community Bank, operates a real
estate appraisal business through its office located at the Company's
headquarters complex in Blountsville, Alabama. This subsidiary provides
appraisal services in connection with the lending activities of Community Bank
and 1st Community Credit Corporation.

The Company maintains its principal executive offices at 68149 Main Street, P.O.
Box 1000, Blountsville, Alabama 35031, and its telephone number is (205)
429-1000.

MARKET AREAS

The Company's principal market areas are located in north Alabama (Blount,
Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison, Marshall and Morgan
Counties), northwest Alabama (Marion and Winston Counties), west-central Alabama
(Marengo and Perry Counties) and in south-central Tennessee (Giles County). All
of the Company's banking and finance company offices are located in relatively
rural areas, placing an emphasis on personal service.

With the exception of Blount, Marengo, Marion, Perry and Winston Counties in
Alabama, the markets in which the Company operates share one common
characteristic: they are separate and distinct economies, but each is close
enough to Huntsville, Alabama, to share in the economic and employment benefits
of that city. Huntsville is located in Madison County, which has the highest
median income of the Alabama counties at $43,239, as reported by the U.S. Census
Bureau in the March 1998 Current Population Survey (the "1998 Census Bureau
Survey"). Unemployment for Madison County was 2.4% for December 2000 as compared
to 4.5% for Alabama during that period, as reported by the Alabama Department of
Industrial Relations. The

Huntsville Metropolitan Statistical Area (MSA) possesses a diverse economic base
with employers that include the military and aerospace industries, manufacturers
of durable goods, machinery, transportation, as well as retailers and service
industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco,
dairy and poultry farming, also makes up a significant portion of the Huntsville
MSA's economy.

Similarly, Blount County is close enough to Birmingham, Alabama, to share in the
economic and employment benefits of that city. Jefferson County, in which
Birmingham is located, had a 2.7% unemployment rate for December 2000, according
to the Alabama Department of Industrial Relations, and a median household income
of $35,565, 15.5% above the Alabama per capita income of $30,790, according to
the 1998 Census Bureau Survey. The Birmingham area still retains some of the
steel and related manufacturers that built the city, but the economy is now more
diverse with the University of Alabama in Birmingham and the healthcare industry
providing many jobs.

Marion and Winston Counties lie in northwest Alabama, near the Mississippi
border. In both counties the manufacturing sector provides more jobs, and higher
sales or receipts, than the wholesale, retail and service sectors, according to
the U.S. Census Bureau's 1992 Economic Census. Manufactured housing and
furniture production are two prominent industries in these counties, and both
industries have experienced recent economic slowdowns. Marion County was
reported to have an unemployment rate of 9.3% for December 2000, according to
the Alabama Department of Industrial Relations. Median income of $26,919, 13%
below the state average was reported for the county in the 1998 Census Bureau
Survey. Winston County was reported to have a median household income of $25,418
in the 1998 Census Bureau Survey and an unemployment rate of 11% for December
2000 according to the Alabama Department of Industrial Relations.

Marengo and Perry Counties are located in west-central Alabama. According to the
U.S. Census Bureau's 1992 Economic Census, manufacturing provides more jobs in
these counties than the wholesale, retail, and service sectors. In addition,
catfish farming and the timber industry are important components in the economy
of these counties. Median household income for Marengo County was reported as
$25,504 in the 1998 Census Bureau Survey and its unemployment rate reported by
the Alabama Department of Industrial Relations for December 2000 was 3.7%. Perry
County was reported to have a median household income of $18,069, according to
the 1998 Census Bureau Survey and an unemployment rate of 11.3% for December
2000 as reported by the Alabama Department of Industrial Relations.

While certain markets have experienced economic downturn, overall, the Company
remains optimistic about current economic prospects in its market areas, and the
Company attempts to assist those local economies by returning the deposits of
its customers to the communities from which they come in the form of loans.

LENDING ACTIVITIES

Community Bank's lending activities include commercial, real estate and consumer
loans. Community Bank's commercial loan services include term loans, lines of
credit and agricultural loans. A broad range of short to medium term commercial
loans, both secured and unsecured, are made available to businesses for working
capital, business expansion and the purchase of equipment and machinery.
Community Bank's real estate lending activities include fixed and adjustable
rate residential mortgage loans, construction loans, second mortgages, home
improvement loans and home equity lines of credit. Community Bank's consumer
lending services include loans for automobiles, recreation vehicles and boats,
as well as personal (secured and unsecured) and deposit account secured loans.

COMPETITION

The banking business in Alabama and south Tennessee is highly competitive with
respect to loans, deposits and other financial services and is dominated by a
number of major banks and bank holding companies which have numerous offices and
affiliates operating over wide geographic areas. Community Bank competes for
deposits, loans and other business with these banks as well as with savings and
loan associations, credit unions, mortgage companies, insurance companies and
other local financial institutions. Many of the major commercial banks operating
in Community Bank's service areas offer services such as international banking
and investment and trust services, which are not offered by Community Bank.

EMPLOYEES

At December 31, 2000, the Company and its subsidiaries had approximately 397
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans and other benefit programs for their employees. The Company
maintains continuing education and training programs for its employees, designed
to prepare the employees for positions of increasing responsibility in
management or operations. Membership and participation by employees in
professional and industry organizations is encouraged and supported by the
Company.

SUPERVISION AND REGULATION

The following is a brief summary of the regulatory environment in which the
Company and its subsidiaries operate and is not designed to be a complete
discussion of all statutes and regulations affecting such operations, including
those federal and state statutes and regulations specifically mentioned herein.

The Company is a bank holding company and is registered as such with the Federal
Reserve. The Company is subject to regulation and supervision by the Federal
Reserve and is required to file with the Federal Reserve annual reports and such
other information as the Federal Reserve may require. The Federal Reserve may
also conduct examinations of the Company.

The Federal Reserve takes the position that a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary bank
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve's position that, in serving as a source of strength to
its subsidiary bank, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary bank during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary bank.

Community Bank is incorporated under the banking laws of the State of Alabama
and is subject to the applicable provisions of Alabama banking laws and to
regulation and examination by the Alabama Banking Department. Examinations
include a review of Community Bank's conditions and resources, its mode of
conducting and managing its affairs, the actions of its directors, the
investment of its funds, the safety and prudence of its management, compliance
with its charter and law in the administration of its affairs and other aspects
of Community Bank's operations. State regulations in Alabama relate to such
matters as loans, mortgages, consolidations, required reserves, allowable
investments, issuance of securities, payment of dividends, establishment of
branches, filing of periodic reports and other matters affecting the business of
Community Bank.

Deposits in Community Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and, therefore, Community Bank is subject to the
provisions of the Federal Deposit Insurance Act ("FDIA") and

to examination and regulation by the FDIC. The FDIC is authorized to terminate
the deposit insurance of any depository institution, such as Community Bank,
whose deposits are insured by the FDIC if the FDIC determines, after a hearing,
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition or continue operations, or has violated any
applicable law, regulation, order, condition imposed in writing by the FDIC in
connection with the granting of any application or other request by the
depository institution or any written agreement entered into with the FDIC.

Each federal banking regulatory agency is authorized to issue a cease and desist
order to any financial institution for which the agency is the primary federal
banking regulator (which in the case of Community Bank, is the FDIC and, in the
case of the Company, is the Federal Reserve) if the agency determines, after a
hearing, that the institution has engaged, is engaging or is reasonably believed
to be about to engage, in unsafe or unsound practices, or has violated, is
violating or is reasonably believed to be about to violate a law, rule or
regulation, or any condition imposed in writing by the agency in connection with
the granting of any application or other request by the institution or any
written agreement entered into with the agency. The cease and desist order may
require the institution to cease and desist from the violation or practice,
including requiring the institution to make restitution or reimbursement against
loss, restrict its growth, dispose of loans or assets, rescind agreements or
contracts, employ qualified officers or employees and other actions determined
to be appropriate by the agency. The order may also limit the activities of the
institution.

The federal Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") provides, among other things, that commonly controlled federally
insured financial institutions must reimburse the FDIC for losses incurred by
the FDIC in connection with the default of another commonly controlled financial
institution or in connection with the provision of FDIC assistance to such a
commonly controlled financial institution in danger of default. Reimbursement
liability under FIRREA is superior to any obligations to shareholders of such
federally insured institutions (including a bank holding company such as the
Company), arising as a result of their status as a shareholder of a reimbursing
financial institution.

The Company and Community Bank are subject to the provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA
expanded the regulatory powers of federal banking agencies to permit prompt
corrective actions to resolve problems of insured depository institutions
through the regulation of banks and their affiliates, including bank holding
companies. The provisions are designed to minimize the potential loss to
depositors and to FDIC insurance funds if financial institutions default on
their obligations to depositors or become in danger of default. Among other
things, FDICIA provides a framework for a system of supervisory actions based
primarily on the capital levels of financial institutions. FDICIA also provides
for a risk-based deposit insurance premium structure. The FDIC charges an annual
assessment for the insurance of deposits based on the risk a particular
institution poses to its deposit insurance fund.

The federal banking regulatory agencies have adopted a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal stockholder. In addition, the agencies
adopted regulations that authorize, but do not require, an agency to order an
institution that has been given notice by an agency that it is not satisfying
any of such safety and soundness standards to submit a compliance plan, the
agency must issue an order directing action to correct the deficiency and may
issue an

order directing other actions of the types to which an undercapitalized
institution is subject under the prompt corrective action provisions of FDICIA.
If an institution fails to comply with such an order, the agency may seek to
enforce such order in judicial proceedings and to impose civil money penalties.

FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system the federal banking
regulatory agencies are required to rate supervised institutions on the basis of
five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three under-capitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires a federal banking regulatory agency to appoint
a receiver or conservator for an institution that is critically
undercapitalized. The federal banking regulatory agencies have specified by
regulation the relevant capital level for each category.

FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institutions's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply without determining among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.

The Company is required to comply with the risk-based capital guidelines
established by the Federal Reserve, and to other tests relating to capital
adequacy which the Federal Reserve adopts from time to time. Under the
risk-based capital assessment system, assets are weighted by a risk factor and a
ratio is calculated by dividing the qualifying capital by the risk-weighted
assets. Tier I capital generally includes common stock and retained earnings.
Total capital is comprised of Tier I capital and Tier II capital, which includes
certain allowances for loan losses and certain subordinated debt. The Company's
Tier I and total capital ratios exceeded the required minimum levels as of
December 31, 2000.

The Company is a legal entity which is separate and distinct from its
subsidiaries. There are various legal limitations on the extent to which
Community Bank may extend credit, pay dividends or otherwise supply funds to the
Company or its affiliates. In particular, Community Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to the Company
or, with certain exceptions, other affiliates.

The primary source of funds for dividends paid to the Company's shareholders is
dividends paid to the Company by Community Bank. Various federal and state laws
limit the amount of dividends that Community Bank may pay to the Company without
regulatory approval. Under Alabama law, an Alabama state bank, such as Community
Bank, may not pay a dividend in excess of 90% of its net earnings until the
bank's surplus is equal to at least 20% of its capital. Community Bank is also
required by Alabama law to obtain the prior approval of the Superintendent of
the Alabama State Banking Department in order to pay

a dividend if the total of all the dividends declared by Community Bank in any
calendar year will exceed the total of Community Bank's net earnings (as defined
by statute) for that year and its retained net earnings for the preceding two
years, less any required transfers to surplus. At December 31, 2000, Community
Bank could not have declared or paid any dividend without such approval. In
addition, no dividends may be paid from Community Bank's surplus without the
prior written approval of the Superintendent of the Alabama State Banking
Department. Under FDICIA, Community Bank may not pay any dividends, if after
paying the dividend, it would be undercapitalized under applicable capital
requirements. The FDIC also has the authority to prohibit Community Bank from
engaging in business practices which the FDIC considers to be unsafe or unsound,
which, depending on the financial condition of Community Bank, could include the
payment of dividends.

In addition, the Federal Reserve has the authority to prohibit the payment of
dividends by a bank holding company, such as the Company, if its actions
constitute unsafe or unsound practices. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies,
which outlined the Federal Reserve's view that a bank holding company that is
experiencing earnings weaknesses or other financial pressures should not pay
cash dividends that exceed its net income, that are inconsistent with its
capital position or that could only be funded in ways that weaken its financial
health, such as by borrowing or selling assets. The Federal Reserve indicated
that, in some instances, it may be appropriate for a bank holding company to
eliminate its dividends.

The federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") permits adequately capitalized and managed bank holding companies to
acquire control of banks in states other than their home states, subject to
federal regulatory approval, without regard to whether such a transaction is
prohibited by the laws of any state. IBBEA permits states to continue to require
that an acquired bank have been in existence for a certain minimum time period,
which may not exceed five years. A bank holding company may not, following an
interstate acquisition, control more than 10% of the nation's total amount of
bank deposits or 30% of bank deposits in the relevant state (unless the state
enacts legislation to raise the 30% limit). States retain the ability to adopt
legislation to effectively lower the 30% limit. Federal banking

regulators may approve merger transactions involving banks located in different
states, without regard to laws of any state prohibiting such transactions;
except that, mergers may not be approved with respect to banks located in states
that, prior to June 1, 1997, enacted legislation prohibiting mergers by banks
located in such state with out-of-state institutions. Federal banking regulators
may permit an out-of-state bank to open new branches in another state if such
state has enacted legislation permitting interstate branching. Affiliated
institutions are authorized to accept deposits for existing accounts, renew time
deposits and close and service loans for affiliated institutions without being
deemed an impermissible branch of the affiliate.

The federal Community Reinvestment Act of 1977 ("CRA") and its implementing
regulations are intended to encourage regulated financial institutions to meet
the credit needs of their local community or communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
such financial institutions. The regulations provide that the appropriate
regulatory authority will assess CRA reports in connection with applications for
establishment of domestic branches, acquisitions of banks or mergers involving
bank holding companies. An unsatisfactory CRA rating may serve as a basis to
deny an application to acquire or establish a new bank, to establish a new
branch or to expand banking services. At December 31, 2000, the Company had a
"satisfactory" CRA rating.

The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") eliminated prohibitions
in the Glass-Steagall Act against a bank associating with a company engaged
principally in securities activities. The GLBA also permits a bank holding
company to elect to become a "financial holding company," which would expand the
powers of the bank holding company. The repeal of the Glass-Steagall Act
provisions and the availability of financial holding company powers became
effective on March 11, 2000. Financial holding company powers relate to
financial activities that are determined by the Federal Reserve to be financial
in nature, incidental to an activity that is financial in nature, or
complementary to a financial activity (provided that the complementary activity
does not pose a safety and soundness risk). The GLBA itself defines certain
activities as financial in nature, including lending activities, underwriting
and selling insurance, providing financial or investment advice, underwriting,
dealing and making markets in securities and merchant banking. In order to
qualify as a financial holding company, a bank holding company's depository
subsidiaries must be both well capitalized and well managed, and must have at
least a satisfactory rating under the CRA. The bank holding company must also
declare its intention to become a financial holding company to the Federal
Reserve and certify that its depository subsidiaries meet the capitalization and
management requirements. The GLBA establishes the Federal Reserve as the
umbrella regulator of financial holding companies, with subsidiaries of the
financial holding company being more specifically regulated by other regulatory
authorities, such as the Securities and Exchange Commission, the Commodity
Futures Trading Commission and state securities and insurance regulators, based
upon the subsidiaries' particular activities. The GLBA also provides for minimum
federal standards of privacy to protect the confidentiality of personal
financial information of customers and to regulate use of such information by
financial institutions. A bank holding company that does not elect to become a
financial holding company remains subject to the Bank Holding Company Act. The
Company has not determined whether it will elect to become a financial holding
company.

Community Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity and fair credit reporting.

Community Insurance Corp. is a licensed insurance agent and broker for various
insurance companies, and is subject to regulation by the Alabama Insurance
Commission.

The Federal Reserve regulates money, credit and interest rate conditions in
order to influence general economic conditions, primarily through open market
operations in U.S. Government securities, changes in discount rate, reserve
requirements on member bank's deposits and funds availability regulations. The
earnings and growth of the Company and its subsidiaries are subject to the
influence of economic conditions generally and to the monetary and fiscal
policies of the United States and its agencies, particularly the Federal
Reserve. The nature and timing of any changes in such conditions and policies,
and their impact on the Company, cannot be predicted.

On April 9, 2001, the Company's Board of Directors entered into a memorandum of
understanding (the "Memorandum") with the Federal Reserve Bank of Atlanta (the
"Reserve Bank"), which outlines actions to be taken by the Company to address
concerns identified by the Reserve Bank. In the Memorandum, the Company agreed
that, without the prior written approval of the Reserve Bank, it would not
declare or pay any dividends, repurchase shares of its common stock, incur any
additional indebtedness, alter the terms of existing indebtedness or increase
the amount of management fees paid to the Company by Community Bank. In
addition, the Company agreed to maintain a quarterly Tier I leverage ratio (the
ratio of Tier I capital to average assets, less goodwill) of at least 6.5%
during the period in which the Memorandum is in effect, and to periodically
update the Company's plan for maintaining capital and earnings at adequate
levels. The Company also agreed to establish by June 8, 2001, a policy that
provides for target levels of capital and guidelines for payment of dividends
and a plan to strengthen the Company's internal audit program. The Company
further agreed that a committee of non-employee directors of the Company will
review and report by June 8, 2001 on the appropriateness of the compensation
provided under the employment agreement of Kennon R. Patterson, Sr., the
Chairman of the Board, Chief Executive Officer and President of the Company. In
addition, the Company is to provide the Reserve Bank by May 9, 2001 with a
contingency plan for conserving or raising cash and information about loans
extended by Community Bank to facilitate purchases of the Company's common
stock, and to periodically provide the Reserve Bank with certain financial and
other information and a report of actions taken by the Company to ensure
compliance with the Memorandum. Management of the Company cannot currently
estimate the period during which the Company will remain subject to the terms of
the Memorandum, or the effect of the Memorandum on the Company's financial
condition, liquidity and results of operations.

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STATISTICAL DISCLOSURE

Statistical and other information regarding the following items are set forth in
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on the pages indicated below.

Page(s)
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Loan Portfolio and Selected Loan Maturity and Interest Rate Sensitivity.................................. 22

Investment Portfolio..................................................................................... 24

Investment Portfolio Maturity Schedule................................................................... 25

Average Deposit Balances and Rates Paid.................................................................. 26

Maturities of Large Time Deposits........................................................................ 27

Short-term Borrowings.................................................................................... 29

Maturities of Long-term Debt ............................................................................ 30

Rate Shock Analysis...................................................................................... 32

Interest Sensitivity..................................................................................... 33

Capital Adequacy Ratios and Return on Equity and Assets.................................................. 35

Yields, Rates, Interest Rate Spread and Net Interest Margin.............................................. 38

Consolidated Average Balances, Interest Income/Expense and Yields/Rates.................................. 40-41

Rate/Volume Variance Analysis............................................................................ 42-43

Summary of Loan Loss Experience.......................................................................... 46

Allocation of the Allowance for Loan Losses.............................................................. 47

Nonperforming Assets..................................................................................... 48

Noninterest Income....................................................................................... 50

Noninterest Expense...................................................................................... 52

ITEM 2 - PROPERTIES

The corporate headquarters of the Company is housed in a colonial style
two-story building owned by Community Bank and located at 68149 Main Street
(U.S. Highway 231) in Blountsville, Alabama. Community Bank's administrative,
operational and legal functions are housed in three buildings constructed in
1997 and the accounting function is located in the annex building, all of which
are located on the same property as the corporate headquarters.

The flagship banking office of Community Bank is located at 69156 Main Street,
Blountsville, Alabama, in a one story brick building constructed in 1975 and
extensively remodeled during 1994. The premises are owned by Community Bank.

Community Bank owns or leases buildings that are used in the normal course of
business in 11 counties in Alabama, including Blount, DeKalb, Lauderdale,
Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry and Winston
Counties, and in Giles County, Tennessee. 1st Community Credit Corporation owns
or leases buildings that are used in the normal course of business in 10
counties in Alabama, including Blount, Cullman, Marshall, Morgan, Limestone,
Lawrence, Etowah, Madison, DeKalb and Walker Counties. Community Insurance Corp.
and its subsidiary, Southern Select Insurance, Inc., own a building that is used
in the normal course of business in Madison County, Alabama.

For information about the amounts at which bank premises, equipment and other
real estate are recorded in the Company's financial statements and information
relating to commitments under leases, see the Company's Consolidated Financial
Statements included elsewhere in this Report.

ITEM 3 - LEGAL PROCEEDINGS

At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money Community Bank
had paid subcontractors in connection with the construction of a new Community
Bank office. Management of the Company commenced an investigation of the
expenditures. At the request of management, the architects and subcontractors
involved in the construction project made presentations to the Boards of
Directors of the Company and Community Bank on July 15 and July 18, 2000,
respectively. At the July 18, 2000 meeting of the Board of Directors of
Community Bank, another director made a presentation alleging that Community
Bank had been overcharged by subcontractors on that construction project and
another current construction project. On July 18, 2000, the Boards of Directors
of the Company and Community Bank appointed a joint committee comprised of
independent directors of the Company and of Community Bank to investigate the
alleged overcharges. Upon completion of its investigation, the joint committee
is to inform the Boards of Directors of the Company and Community Bank of its
findings and recommendations. The joint committee has retained legal counsel and
an independent accounting firm to assist the committee in its investigation.
Management has also been informed that the directors of Community Bank who
alleged the construction overcharges have contacted bank regulatory agencies and
law enforcement authorities. Management believes that these agencies and
authorities either have conducted or are currently conducting investigations
regarding this matter.

duties, failed to properly supervise officers and agents of the Company and
Community Bank, and permitted waste of corporate assets by allegedly permitting
the subcontractor defendants to overcharge Community Bank in connection with the
construction of two new Community Bank offices, and to perform the construction
work without written contracts, budgets, performance guarantees and assurances
of indemnification. In addition, the complaint alleges that Kennon R. Patterson,
Sr., the Chairman, President and Chief Executive Officer of the Company,
breached his fiduciary duties by allegedly permitting the two named
subcontractors to overcharge for work performed on the two construction projects
in exchange for allegedly discounted charges for work these subcontractors
performed in connection with the construction of Mr. Patterson's residence. The
complaint further alleges that the director defendants knew or should have known
of this alleged arrangement between Mr. Patterson and the subcontractors. The
complaint also alleges that Mr. Patterson, the Community Bank employee and the
two subcontractor defendants made false representations and suppressed
information about the alleged overcharges and arrangement between Mr. Patterson
and the subcontractors. On August 15, 2000, the plaintiffs filed an amended
complaint adding Andy C. Mann, a shareholder of the Company, as a plaintiff and
adding a former director of the Company and Community Bank as a defendant. The
amended complaint generally reiterates the allegations of the original
complaint. In addition, the amended complaint alleges that Community Bank was
overcharged on all construction projects from January 1997 to the present. The
amended complaint also alleges that the defendants breached their fiduciary
duties and are guilty of gross financial mismanagement, including allegations
concerning the making or approval of certain loans and taking allegedly improper
actions to conceal the fact that certain loans were uncollectible. On September
18, 2000 the plaintiffs filed a second amended complaint. The second amended
complaint generally reiterates the allegations of the original and first amended
complaints. In addition, the second amended complaint alleges that the
plaintiffs were improperly denied their rights to inspect and copy certain
records of the Company and Community Bank. The second amended complaint also
alleges that the directors of the Company abdicated their roles as directors
either by express agreement or as a result of wantonness and gross negligence.
The second amended complaint asserts that the counts involving inspection of
corporate records and director abdication are individual, nonderivative claims.
The second amended complaint seeks, on behalf of the Company, an unspecified
amount of compensatory damages in excess of $1 million, punitive damages,
disgorgement of allegedly improperly paid profits and appropriate equitable
relief. Upon motion of the defendants, the case was transferred to the state
Circuit Court in Blount County, Alabama by order dated September 21, 2000, as
amended on October 12, 2000. On August 24, 2000, the Board of Directors of the
Company designated the directors of the Company who serve on the joint
investigative committee as a special litigation committee to investigate and
evaluate the allegations and issues raised in this lawsuit and to arrive at such
decisions and take such action as the special litigation committee deems
appropriate. At a hearing on February 23, 2001 the court stayed discovery with
respect to the Company, Community Bank and the directors, officers and employees
of each until May 24, 2001, at which time the court expects to receive a report
from the special litigation committee. Because the special litigation committee
has not yet completed its investigation, and as a result of the inherent
uncertainties of the litigation process, the Company is unable at this time to
predict the outcome of this lawsuit and its effect on the Company's financial
condition and results of operations. Regardless of the outcome, however, this
lawsuit could be costly, time-consuming and a diversion of management's
attention.

and paid themselves excessive director fees. The complaint also alleged that the
Board of Directors acquiesced in mismanagement and misconduct by Kennon R.
Patterson, Sr., the Chairman of the Board, Chief Executive Officer and President
of the Company, including alleged self dealing, payment of excessive
compensation, misappropriation of corporate opportunities and misappropriation
of funds. The complaint sought an unspecified amount of compensatory and
punitive damages, removal of the current directors, appointment of a new Board
of Directors, and attorneys fees and cost. On December 21, 1998, the Company and
its directors filed a motion with the court seeking to have the complaint
dismissed. On March 1, 1999, the Company's Board of Directors appointed a
special Board committee, comprised of non-employee directors of the Company, to
review the plaintiffs' allegations in accordance with Delaware law. On April 6,
1999, each of the parties to the action requested that the court stay the
litigation and related discovery, motions and hearings, pending completion of
the special committee's review. On April 30, 1999, the court entered an order
staying the litigation and related discovery, motions and hearing in accordance
with the parties' request. On October 15, 1999, the special committee filed its
final report with the court. On October 21, 1999, the parties forwarded to the
court an agreed-upon order governing the confidentiality of the special
committee's report, which the court entered on January 2, 2000. On August 3,
2000, the Company, Community Bank and the Company's directors filed a motion to
stay the proceedings until the Company's and Community Bank's joint
investigative committee had completed its investigation of the alleged
construction overcharges discussed above. At the request of the Company and the
other defendants in the action, the court continued a hearing on the motion to
dismiss. On February 23, 2001, the court indicated that there was no reason to
continue the stay of this action. The parties are awaiting a hearing on the
defendants' motion to dismiss the case. Management of the Company believes that
the plaintiffs' allegations are false and that the action lacks merit. The
Company and its directors intend to defend the action vigorously, and management
of the Company believes that the action will not have a material adverse effect
on the Company's financial condition or results of operations. Regardless of the
outcome, however, this lawsuit could be costly, time consuming and a diversion
of management's attention.

On September 14, 2000, another action was filed in the state Circuit Court of
Blount County, Alabama, against the Company, Community Bank and certain
directors and officers of the Company and Community Bank by seven shareholders
of the Company alleging that the directors actively participated in or ratified
the misappropriation of corporate income. The action was not styled as a
shareholder derivative action. On January 3, 2001, the defendants filed a motion
for summary judgment on the basis that these claims are derivative in nature and
cannot be brought on behalf of individual shareholders. The court has not ruled
on the motion. The Company and its directors believe that this lawsuit is
without merit and intend to defend the action vigorously. Although management
currently believes that this action will not have a material adverse effect on
the Company's financial condition or results of operations, regardless of the
outcome, the action could be costly, time consuming and a diversion of
management's attention.

The Company's Certificate of Incorporation provides that, in certain
circumstances, the Company will indemnify and advance expenses to its directors
and officers for judgments, settlements and legal expenses incurred as a result
of their service as officers and directors of the Company. Community Bank's
Bylaws contain a similar provision for indemnification of directors and officers
of Community Bank.

15
The complaint also asserted that the defendants committed fraud,
misrepresentation and deceit by submitting to Community Bank and/or approving
applications for automobile loans which contained false and/or fraudulent
information for the purpose of deceiving, influencing and persuading Community
Bank to provide loans to customers of the automobile dealership who were
otherwise not qualified to receive such loans, and suppressed material facts
regarding the veracity of information contained in loan applications and the
ability of persons seeking the loans to repay them. Community Bank also alleged
in the complaint that the automobile dealership is responsible for the acts of
its officers, agents and employees, and that the dealership and its management
failed to adequately train and/or supervise its employees. The complaint stated
that the defendants participated in a conspiracy to violate RICO and Alabama
statutes dealing with fraud, misrepresentation and suppression of material
facts, and asserted civil liability under Alabama law for violation of federal
statutes dealing with financial institution fraud, mail and wire fraud and
making false statements for the purpose of influencing the actions of a
financial institution upon an application or loan. On June 29, 2000 and August
31, 2000 the court granted Community Bank's motions to dismiss without prejudice
two of the employees of the automobile dealership as defendants in the action.
On September 13, 2000, the court granted Mr. Parrish's motion to dismiss the
complaint, but granted Community Bank 15 days to amend the complaint. On
September 27, 2000, Community Bank filed an amended complaint which generally
reiterated the allegations of the original complaint and added specific
information concerning the allegedly fraudulent activity and the use of the
United States mail, telephone and other wire transmissions in the conduct of
such activity. On December 1, 2000, the court dismissed Community Bank's claims
based upon mail and wire fraud in the amended complaint but otherwise denied Mr.
Parrish's motion to dismiss the complaint. The defendants have filed answers to
the amended complaint which generally deny the material allegations in the
complaint and allege that any injury suffered by Community Bank was the result
of the contributory negligence of Community Bank, its officers, employees and
agents. In the lawsuit, Community Bank seeks damages of an unspecified amount to
recover losses incurred in connection with the loans made at Community Bank's
Wal-Mart office in Ft. Payne, Alabama, along with all costs associated with the
lawsuit. Any amounts received by Community Bank as a result of this litigation
will be treated as a recovery on loan losses. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses."

On November 15, 2000, Michael W. Alred and Michael A. Bean, two former directors
and executive officers of Community Bank, filed suit against Community Bank in
the United States District Court for the Northern District of Alabama alleging
that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees. According to the complaint, the information which these two
individuals provided to authorities concerned certain bank construction
projects, specific loans, charge-offs, expenses and past due accounts. The
complaint seeks reinstatement of the plaintiffs to their former positions as
officers and directors of Community Bank as well as compensatory and punitive
damages. Community Bank and its directors believe this lawsuit is without merit
and intend to defend the action vigorously. Management of the Company believes
that this action will not have a material adverse effect on the Company's
financial condition or results of operations.

The Company and its subsidiaries are from time to time parties to other legal
proceedings arising from the ordinary course of business. Management believes,
after consultation with legal counsel, that no such proceedings, if resulting in
an outcome unfavorable to the Company, will, individually or in the aggregate,
have a material adverse effect on the Company's financial condition or results
of operations.

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

No matter was submitted to a vote of security holders by solicitation of proxies
or otherwise during the fourth quarter of 2000.

[The remainder of this page intentionally left blank]

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, their ages, the positions held by them
with the Company and certain of its subsidiaries and their principal occupations
for the last five years are as follows:

Name, Age and Position Currently Held with the
Company and its Subsidiaries Principal Experience During Past Five Years
---------------------------------------------------------- --------------------------------------------------------

Kennon R. Patterson, Sr. (58) Chairman, President and Chief Executive Officer of the
Chairman, President and Chief Executive Officer of the Company (1985-present); Chairman and Chief Executive
Company; Chairman and Chief Executive Officer of Officer of Community Bank (1993-present)
Community Bank; Chairman of 1st Community Credit
Corporation; Vice Chairman of Community Appraisals, Inc.;
Director of Community Insurance Corp., and Southern Select
Insurance, Inc.

Bishop K. Walker, Jr. (69)
Director, Vice Chairman, Secretary, Senior Executive Vice Vice Chairman, Senior Executive Vice President and
President and General Counsel of the Company; Director, General Counsel of the Company (1987-present); President
Senior Executive Vice President and Secretary of Community and Director of Community Insurance Corp. (1987-1997)
Bank; Chairman of Community Insurance Corp. and Southern
Select Insurance, Inc.

Denny G. Kelly (61)
Director and Executive Vice President of the Company; Vice President of Community Bank (1993-present)
Chairman and President of Community Bank; Vice Chairman
and President of 1st Community Credit Corporation; Director
of Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.

William E. Blackmon (50) Senior Vice President and Controller of Community Bank
Acting Chief Financial Officer of the Company; Senior Vice (1998-present); Vice President and Operations Officer of
President and Controller of Community Bank First National Bank of West Point, West Point, Georgia
(1996- 1998); Vice President and Controller of AuburnBank,
Auburn, Alabama (1989-1996)

William H. Caughran, Jr. (44)
Assistant Secretary and Treasurer of the Company; Senior Vice Senior Vice President and General Counsel of Community
President, General Counsel and Secretary to the Board of Bank (1998-present); Associate Counsel of AmSouth Bank
Directors of Community Bank; Secretary of 1st Community of Alabama (1992-1998)
Credit Corporation, Community Appraisals, Inc., Community
Insurance Corp. and Southern Select Insurance, Inc.

The Company's bylaws provide that the term of office of an executive officer of
the Company is as provided in the officer's employment agreement with the
Company or, if the officer is not a party to an employment agreement or if the
officer's employment agreement does not specify a term of office, as determined
by the Company's Board of Directors and until the officer's successor is elected
and qualified or until the officer's earlier resignation or removal. In May
2000, each of the Company's executive officers was elected by the Company's
Board of Directors to serve a term of one year and until his successor has been
elected and qualified.

PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Shares of the common stock (the "Common Stock") of the Company were held by
approximately 2,350 shareholders of record as of March 28, 2001. There is no
established trading market for the Common Stock, which has been purchased and
sold infrequently in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock is provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.

Estimated Price Range
Per Share
-----------------------
High Low
------- -------

2000:
FIRST QUARTER.................................... $ 25.00 $ 24.00
SECOND QUARTER................................... 25.00 19.00
THIRD QUARTER.................................... 25.00 20.00
FOURTH QUARTER................................... 26.00 20.00

1999:
First Quarter.................................... $ 24.00 $ 20.00
Second Quarter................................... 24.00 24.00
Third Quarter.................................... 24.00 24.00
Fourth Quarter................................... 24.00 24.00

Annual dividends of $.75 per share and $.60 per share were declared by the Board
of Directors on the Company's Common Stock and paid on January 5, 2000 and
January 8, 1999, respectively. The payment of dividends on the Common Stock is
subject to the prior payment of principal and interest on the Company's
long-term debt, the retention of sufficient earnings and capital in the
Company's operating subsidiaries and regulatory restrictions. The Board of
Directors determined that it was in the Company's best interests not to declare
or pay a dividend in the first quarter of 2001, due to regulatory constraints
and the Company's results of operations and financial condition for 2000. The
Board of Directors intends to reassess the Company's financial condition and
results of operations in subsequent quarters to determine whether the Company is
able to declare and pay a dividend under applicable laws, regulations and
restrictions, and, if so, whether such a dividend would be prudent and advisable
at that time. The Board of Directors does not currently anticipate declaring or
paying a dividend in the second or third quarters of 2001. There can be no
assurance that the Company will pay any dividends in the foreseeable future. See
"Item 1 - Business - Supervision and Regulation," "Item 7 - Management's
Discussion of Financial Condition and Results of Operations - Liquidity
Management" and Note 17 to the Company's Consolidated Financial Statements
included elsewhere in this Report.

ITEM 6 - SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the last five years.
All averages are daily averages.

Years Ended December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(Dollars in Thousands Except Per Share Data)

Interest income .................................. $ 61,075 $ 52,194 $ 44,365 $ 37,791 $ 33,600
Interest expense ................................. 33,856 25,522 22,693 19,541 17,426
Net interest income .............................. 27,219 26,672 21,672 18,250 16,174
Provision for loan losses ........................ 9,289 4,459 885 773 834
Non-interest income .............................. 9,906 9,155 8,102 4,891 4,447
Non-interest expense ............................. 31,755 29,208 23,784 17,423 14,902
Net income/(loss) ................................ (2,215) 1,658 3,579 3,512 3,459

Per Share Data:
Earnings/(loss) per share - basic ............ $ (.50) $ .37 $ .90 $ .92 $ .93
Earnings/(loss) per share - diluted .......... (.47) .36 .88 .92 .93
Cash dividends ............................... .75 .60 .50 .38 .25
Shareholders' equity (book value)
at period end ............................ 8.81 9.53 10.16 8.85 8.63

Balance Sheet:
Loans, net of unearned income ................ $ 528,316 $498,726 $433,853 $326,134 $322,762
Deposits ..................................... 600,901 573,261 538,586 440,889 400,338
FHLB borrowings .............................. 38,000 40,000 -0- -0- -0-
Capitalized lease obligations ................ 5,850 -0- -0- -0- -0-
Long-term debt ............................... 5,675 6,637 7,569 7,398 8,281
Guaranteed preferred beneficial interest
in the Company's junior subordinated
deferrable interest debentures ............. 10,000 -0- -0- -0- -0-
Average equity ............................... 41,776 44,203 37,318 33,428 30,079
Average assets ............................... 710,915 632,713 538,470 473,381 421,839
Total assets ................................. 713,518 674,898 603,244 491,839 454,710

Ratios:
Return on average assets ..................... (0.31)% 0.26% 0.67% 0.74% 0.82%
Return on average equity ..................... (5.30)% 3.75% 9.59% 10.51% 11.50%
Dividend payout ratio ........................ (150.00)% 162.16% 55.56% 40.50% 26.90%
Average equity to average assets ............. 5.88% 6.99% 6.93% 7.06% 7.13%
Total risk-based capital ..................... 10.54% 9.37% 11.03% 11.86% 11.45%
Leverage ratio ............................... 6.44% 6.39% 7.79% 6.94% 9.20%

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The purpose of this discussion is to focus on the significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during 1998, 1999 and 2000. This discussion and analysis is
intended to supplement and highlight information contained in the Company's
consolidated financial statements and related notes and the selected financial
data presented elsewhere in this Report.

The discussion of net interest income in this financial review is presented on a
taxable equivalent basis to facilitate performance comparisons among various
taxable and tax-exempt assets.

Certain statements in this Report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are not based on historical facts and may be identified by their
reference to a future period or by the use of forward-looking terminology, such
as "anticipate," "estimate," "expect," "may" and "should." These forward-looking
statements include, without limitation, those relating to the Company's future
growth and profitability, economic prospects of market areas, dividends, pending
litigation, non-compliant and impaired loans originated in Community Bank's Ft.
Payne, Alabama office, capital requirements, operating strategy, deposits,
consumer base, allowance for loan losses, non-performing assets, interest rate
sensitivity, market risk and impact of inflation. We caution you not to place
undue reliance on these forward-looking statements. Actual results could differ
materially from those indicated in such forward-looking statements due to a
variety of factors. These factors include, but are not limited to, changes in
economic conditions and government fiscal and monetary policies, changes in
prevailing interest rates and effectiveness of the Company's interest rate
strategies, laws, regulations and regulatory authorities affecting financial
institutions, changes in and effectiveness of the Company's operating or
expansion strategies, geographic concentration of the Company's assets and
operations, competition from other financial services companies, unexpected
financial results or outcomes of legal proceedings, the Company's ability to
obtain reimbursement from its fidelity bond insurance carrier or other persons
responsible for originating non-compliant and impaired loans in Community Bank's
Ft. Payne, Alabama office and other risks detailed from time to time in the
Company's press releases and filings with the Securities and Exchange
Commission. We undertake no obligation to update these forward-looking
statements to reflect events or circumstances occurring after the date of this
Report.

SUMMARY

The Company's net loss of approximately $2,215,000 for 2000 represented a 233.6%
decline from 1999's net income of approximately $1,658,000, which was a 53.7%
decline from net income of approximately $3,579,000 for 1998. When stated as
changes in basic earnings per share, the 2000 basic loss per share of $0.50
represented a 235.1% decrease from the 1999 basic earnings per share of $0.37,
which represented a 58.9% decrease from the 1998 basic earnings per share of
$0.90. The decline in earnings per share for 2000 primarily resulted from
additional provisions to the Company's allowance for loan losses in connection
with an increase in loans charged-off and certain loans originated in Community
Bank's Double Springs, Alabama location that were determined by management to be
impaired at December 31, 2000, while the decrease in earnings per share for 1999
was primarily due to the recognition of losses associated with certain loans
originated in 1998 in Community Bank's Ft. Payne, Alabama Wal-Mart location that
were determined to be impaired in the fourth quarter of 1999. In 2000 and 1999,
the Company also experienced higher than normal legal and accounting fees
associated with legal proceedings. Basic earnings per share for 1999 were also
negatively impacted by a significant increase in legal, accounting, public
relations and printing costs in connection with the Company's 1999 annual
meeting of shareholders and a related proxy contest. The Company's basic loss
per share during 2000 and basic earnings per share during 1999 and 1998 were
also negatively impacted by increases in non-interest expenses associated with
expansion of Community Bank's

office network, new finance company facilities and additional insurance offices.
See "Noninterest Expenses" below. In addition, the average number of shares
outstanding increased 10.9% during 1999, compared to 1998, due to the issuance
of an additional 500,000 shares of Common Stock in the Company's public offering
during the fourth quarter of 1998.

In 1993, 1995 and 1998, the Company raised capital through the sale of shares of
its Common Stock. All three offerings were closed upon being fully subscribed.
The Company sold to the public and the Company's Employee Stock Ownership Plan
("ESOP"), in the fourth quarter of 1998, 500,000 newly issued shares of Common
Stock at a price of $19.00 per share, raising approximately $9,467,000 after
expenses of the offering.

In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. The
debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines. See Note 8 to
the Company's Consolidated Financial Statements included elsewhere in this
Report.

EARNING ASSETS

The Company's average earning assets in 2000 increased 12.2% over that for 1999,
primarily as a result of increases in the loan portfolio, and accounted for
approximately 88.6% of the Company's average total assets for 2000. This is
compared to a 17.2% increase during 1999 in average earning assets, which
represented 88.7% of the Company's average total assets for 1999, and a 13.3%
increase during 1998 in average earning assets, which represented 89.0% of the
Company's average total assets for 1998.

The Company's mix of average earning assets changed only slightly during 2000,
compared to 1999. Average loans, net of unearned income, represented 82.9%,
82.5% and 78.9% of average earning assets during 2000, 1999 and 1998,
respectively. Average investment securities represented 16.4% of average earning
assets in 2000, compared to 16.9% in 1999 and 18.5% in 1998. The change in the
mix during 1999, compared to 1998, was primarily attributable to an increase in
commercial, financial and agricultural loans during 1999. The other earning
asset categories accounted for less than 3.0% of average earning assets for all
three periods. The increased volume in earning assets contributed to the higher
net interest income reported by the Company during these three periods.

Total loans, net of unearned income, increased approximately $29,590,000, or
5.9%, to approximately $528,316,000 at December 31, 2000 from $498,726,000 at
December 31, 1999, which represented an increase of $64,873,000, or 15.0%, from
$433,853,000 at December 31, 1998. These increases were primarily attributable
to increases in commercial, financial and agricultural loans and real estate -
mortgage loans. Commercial, financial and agricultural loans increased by
approximately $16,528,000, or 13.3%, to approximately $140,773,000 at December
31, 2000 from approximately $124,245,000 at December 31, 1999, which represented
an increase of approximately $30,188,000, or 32.1%, from approximately
$94,057,000 at December 31, 1998. Commercial, financial and agricultural loans
represented 26.6% of total loans at December 31, 2000, compared to 24.9% at
December 31, 1999 and 21.6% at December 31, 1998. In addition, real estate -
mortgage loans increased by approximately $12,463,000, or 5.6%, to approximately
$236,592,000 at December 31, 2000 from $224,129,000 at December 31, 1999, which
represented an increase of approximately $18,672,000, or 9.1%, from
approximately $205,457,000 at December 31, 1998.

As a percentage of total loans, real estate - mortgage loans decreased slightly
to 44.8% at December 31, 2000 from 44.9% at December 31, 1999 and 47.2% at
December 31, 1998. Consumer loans increased by approximately $1,220,000, or
0.9%, to approximately $145,673,000 at December 31, 2000 from approximately
$144,453,000 at December 31, 1999, which represented an increase of
approximately $15,119,000, or 11.7%, from approximately $129,334,000 at December
31, 1998. As a percentage of total loans, consumer loans decreased to 27.6% at
December 31, 2000 from 28.9% at December 31, 1999 and 29.7% at December 31,
1998. Real estate - construction loans decreased by approximately $1,041,000, or
16.1%, to approximately $5,429,000 at December 31, 2000 from approximately
$6,470,000 at December 31, 1999, which represented an increase of approximately
$317,000, or 5.2%, from approximately $6,153,000 at December 31, 1998. As a
percentage of total loans, real estate - construction loans decreased to 1.0% at
December 31, 2000 from 1.3% at December 31, 1999 and 1.4% at December 31, 1998.

The Company's current strategy is to avoid the national market in loans to
finance leveraged buy-outs, intending not to participate in nationally
syndicated leveraged buy-out loans. The Company's strategy also includes
avoiding exposure to lesser developed country ("LDC") debt, and it currently has
no LDC loans in its portfolio.

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The following table shows the classification of loans by major category at
December 31, 2000 and at the end of each of the preceding four years.

LOAN PORTFOLIO

December 31,
----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------ ------------------ -------------------- --------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)

Commercial,
financial and
agricultural ..... $140,773 26.6% $124,245 24.9% $ 94,057 21.6% $ 64,136 19.6% $ 65,634 20.2%

Real estate -
construction ..... 5,429 1.0 6,470 1.3 6,153 1.4 3,499 1.1 5,262 1.6

Real estate -
mortgage ......... 236,592 44.8 224,129 44.9 205,457 47.3 172,504 52.7 162,994 50.3

Consumer ........... 145,673 27.6 144,453 28.9 129,334 29.7 86,945 26.6 90,682 27.9
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
528,467 100.0% 499,297 100.0% 435,001 100.0% 327,084 100.0% 324,572 100.0%
====== ====== ====== ====== ======
Less: Unearned
income ........... 151 571 1,148 950 1,810

Allowance for
loan losses ...... 7,107 2,603 2,971 2,131 2,425
-------- -------- -------- -------- --------

Net loans .......... $521,209 $496,123 $430,882 $324,003 $320,337
======== ======== ======== ======== ========

The following table provides maturities of certain loan classifications and an
analysis of these loans maturing in over one year as of December 31, 2000.

SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

December 31, 2000
----------------------------------------------------------------------------
Rate Structure For Loans
Maturity Maturing Over One Year
-------------------------------------------- ----------------------------
Year
Through Over Predetermined Floating or
Year or Five Five Interest Adjustable
Less Years Years Total Rate Rate
------- ------- ------- -------- ------------- -----------
(in Thousands)

Commercial, financial
and agricultural ...... $56,443 $36,003 $48,327 $140,773 $54,634 $29,696

Real estate -
construction .......... 3,244 2,185 -0- 5,429 884 1,301
------- ------- ------- -------- ------- -------

$59,687 $38,188 $48,327 $146,202 $55,518 $30,997
======= ======= ======= ======== ======= =======

INVESTMENT PORTFOLIO

The composition of the Company's investment securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The primary objectives of the Company's investment
strategy are to maintain an appropriate level of liquidity and provide a tool to
assist in controlling the Company's interest rate position while at the same
time producing adequate levels of interest income. The Company's entire
portfolio is classified as available for sale to appropriately reflect the
nature of the Company's holdings that are available for sale should liquidity
needs dictate. Management of the maturity of the portfolio is necessary to
provide liquidity and to control interest rate risk. During 2000, gross
investment securities sales were approximately $16,230,000 and maturities were
approximately $25,210,000, representing 15.7% and 24.5%, respectively, of the
average portfolio for the year, compared to gross investment securities sales of
$11,628,000 in 1999 and approximately $24,045,000 in 1998 and maturities of
approximately $10,778,000 in 1999 and approximately $21,786,000 in 1998. Net
gains realized on the sales totaled approximately $5,000 during 2000, compared
to approximately $179,000 in 1999 and approximately $466,000 in 1998. At
December 31, 2000, gross unrealized gains in the portfolio were approximately
$1,419,000, compared to approximately $72,000 at December 31, 1999 and
approximately $1,085,000 at December 31, 1998, while gross unrealized losses
amounted to approximately $756,000 at December 31, 2000, compared to
approximately $2,827,000 at December 31, 1999 and approximately $347,000 at
December 31, 1998. These fluctuations in the gross unrealized gains and losses
in the Company's investment portfolio resulted primarily as bond prices reacted
to changes in market interest rates.

Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risk.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Company's mortgage-backed securities
portfolio as of December 31, 2000 and 1999 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
2000 was $190,096, compared to $242,000 at December 31, 1999. The recoverability
of the Company's investment in mortgage-backed securities is reviewed
periodically by management, and if necessary, appropriate adjustments would be
made to income for impaired values.

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The carrying amount of investment securities at the end of each of the last
three years is set forth in the following table:

INVESTMENT PORTFOLIO

December 31,
-----------------------------------------
2000 1999 1998
--------- -------- --------
(in Thousands)

U.S. Treasury and U.S. Government agencies............ $ 46,830 $ 55,870 $ 49,145
Mortgage-backed securities............................ 31,341 30,521 31,324
State and municipal securities........................ 19,499 8,356 15,187
Equity securities..................................... 3,900 2,100 1,736
--------- -------- --------
Total investment securities........................ $ 101,570 $ 96,847 $ 97,392
========= ======== ========

Average investment securities increased 8.4%, 7.6% and 8.0% during 2000, 1999
and 1998, respectively. Average taxable securities accounted for 85.1% of the
investment portfolio in 2000, compared to 83.8% in 1999 and 84.7% in 1998, while
average tax-exempt securities were 14.9% of the investment portfolio in 2000,
compared to 16.2% in 1999 and 15.3% in 1998. Total investment securities
increased approximately $4,723,000, or 4.9%, to approximately $101,570,000 at
December 31, 2000, compared to approximately $96,847,000 at December 31, 1999
and approximately $97,392,000 at December 31, 1998. During 2000, non-taxable
investment securities increased $11,143,000, or 133.4%, to approximately
$19,499,000 from $8,356,000 at December 31, 1999, which represented a decrease
of $6,831,000 or 45.0%, from $15,187,000 at December 31, 1998, while taxable
investment securities declined approximately $6,420,000, or 7.3% during 2000 to
$82,071,000 from approximately $88,491,000 at December 31, 1999, which
represented an increase of $6,286,000, or 7.7%, from approximately $82,205,000
at December 31, 1998. The composition of the investment securities portfolio
changed during 2000 primarily as monies from the sale, pay downs and maturities
of U.S. government and agency securities were reinvested in state and municipal
securities. At December 31, 2000, U.S. government and agency securities
represented 46.1% of the total investment securities portfolio compared to 57.7%
at year-end 1999, while state and municipal securities represented 19.2% and
8.6% of the investment securities portfolio at year-end 2000 and 1999,
respectively. This increase in state and municipal investment securities
resulted as management took advantage of several opportunities to invest in
higher yielding securities while only slightly extending the average maturity of
the investment securities portfolio. In addition, approximately 37.3% of the
funds realized from this increase were reinvested in municipal securities within
Alabama, primarily in markets served by the Company's subsidiaries.

The maturities and weighted average yields of the investments in the year-end
2000 portfolio of investment securities are presented below. Taxable equivalent
adjustments (using a 34% tax rate) have been made in calculating yields on
tax-exempt obligations. The average maturity of the investment portfolio was
6.71 years at year-end 2000 compared to 6.13 years at year-end 1999 with an
average yield of 6.71% and 6.40% at December 31, 2000 and 1999, respectively.
Mortgage-backed securities have been included in the maturity table based upon
the guaranteed payoff date of each security.

INVESTMENT PORTFOLIO MATURITY SCHEDULE

December 31, 2000
-----------------------------------------------------------------------------------------------
Maturing
-----------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------------- --------------------- --------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ -------- ------- -------- ------- -------- ------- -----
(Dollars in Thousands)

Securities- All Available for Sale:

U.S. Treasury .......... $2,500 5.60% $ 3,574 5.63% $ -0- 0.00% $ -0- 0.00%
U.S. Government
agencies .............. 4,990 5.34 35,947 6.49 29,829 6.61 1,331 5.84
State and municipal
securities ........... 200 6.78 523 7.60 1,349 8.70 17,427 8.33
Equity securities ...... -0- 0.00 -0- 0.00 -0- 0.00 3,900 7.02
------ ------- ------- -------
Total ............... $7,690 5.46 $40,044 6.43 $31,178 6.71 $22,658 7.96
====== ======= ======= =======

At December 31, 2000, the Company held two Government National Mortgage
Association ("GNMA") pool securities and one municipal bond whose amortized cost
exceeded 10% of the Company's consolidated shareholders' equity at that date.

Average Federal Funds sold increased 108.9% during 2000, as compared to a
decline of 84.9% during 1999 and an increase of 15.7% during 1998. These
fluctuations resulted from ordinary increases and decreases in loan demand and
the level of deposit balances as well as the short term reinvestment of funds
associated with restructuring of the Company's investment securities portfolio.
As a percentage of average earning assets, these funds represented 0.6% for
2000, compared to 0.3% for 1999 and 2.4% for 1998.

Interest-bearing deposits with other banks accounted for less than 0.3% of the
Company's average earning assets during 2000, 1999 and 1998. The average
balances of interest-bearing deposits with other banks reflected a decrease of
31.9% during 2000, compared to an increase of 33.5% during 1999 and a decrease
of 59.5% during 1998.

There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments.

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DEPOSITS

Community Bank's primary source of funds is its deposits. Dividends from
Community Bank are the Company's primary source of funds. Continued enhancement
of existing products, emphasis upon better customer service and expansion into
new market areas have fueled the growth in Community Bank's deposit base.
Emphasis has been placed upon attracting consumer deposits. It is the Company's
intent to expand its consumer base in order to continue to fund asset growth.

During 2000, the Company's average total deposits increased approximately
$56,921,000, or 10.4%, to approximately $602,143,000 from approximately
$545,222,000 in 1999, which represented an increase of approximately
$61,300,000, or 12.7%, from approximately $483,922,000 in 1998. At December 31,
2000, the Company's total deposits were approximately $600,901,000, an increase
of approximately $27,640,000, or 4.8%, from approximately $573,261,000 at
December 31, 1999.

The following table presents the average amounts outstanding and the average
rates paid for each of the major classifications of deposits for the 12 month
periods ending December 31, 2000, 1999 and 1998:

Average Deposit Balances and Rates Paid
------------------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------ ------------------------
(Dollars in Thousands)
AVERAGE Average Average
AVERAGE RATE Average Rate Average Rate
BALANCE PAID Balance Paid Balance Paid
--------- ------- --------- ------- --------- -------

Noninterest-bearing demand ..... $ 68,785 0.00% $ 69,248 0.00% $ 60,147 0.00%
Interest-bearing demand ........ 102,254 4.92% 94,763 4.36% 85,044 3.86%
Savings ........................ 55,983 4.39% 53,730 3.51% 46,374 3.56%
Time ........................... 375,121 5.92% 327,481 5.37% 292,357 5.82%
--------- --------- ---------
Total(1) ................... $ 602,143 5.57% $ 545,222 4.96% $ 483,922 5.18%
========= ========= =========

----------------------------
(1) The rate paid on total average deposits represents the rate paid on
total average interest-bearing deposits only.

The Company's average interest-bearing deposits increased by 12.1%, 12.3% and
14.6% in 2000, 1999 and 1998, respectively. Average interest-bearing demand
deposits, average savings and average time deposits increased 7.9%, 4.2% and
14.6%, respectively, during 2000 compared to an increase of 11.4%, 15.9% and
12.0%, respectively, during 1999, and an increase of 28.3%, a decrease of 8.0%
and an increase of 15.5%, respectively, during 1998. Average noninterest-bearing
demand deposits decreased 0.7% during 2000 compared to an increase of 15.1%
during 1999, and an increase of 8.4% during 1998. Customer confidence and
satisfaction is evidenced by the increase in total average deposits of 10.4% in
2000, 12.7% in 1999, and 13.8% in 1998. The two categories of lowest cost
deposits, noninterest-bearing demand deposits and interest-bearing demand
deposits, comprised the following percentages of total average deposits during
2000, 1999 and 1998, respectively: (i) Average noninterest-bearing demand
deposits - 11.4%, 12.7% and 12.4%; and (ii) average interest-bearing demand
deposits - 17.0%, 17.4% and 17.6%. Community Bank experienced a shift in its
deposit mix during 2000 as interest-bearing demand deposits and savings accounts
decreased $12,922,000, or 13.1%, and $1,242,000, or 1.9%, respectively, while
certificates of deposit of less than $100,000 increased $33,160,000, or 14.6%.
This is as compared to increases in interest-bearing demand deposits by
$8,589,000, or 9.6%, in 1999 and by $18,365,000, or 25.7%, in 1998, increases in
savings accounts by $6,123,000, or 10.4%, in 1999 and by $7,672,000, or 15.0%,
in 1998, and increases in certificates of deposit of less than $100,000 by
$8,503,000, or 3.9%, in 1999 and by $39,451,000, or 22.0%,

in 1998. Certificates of deposit of $100,000 or more increased $3,694,000, or
3.8%, during 2000, compared to an increase of $6,868,000, or 7.6%, during 1999
and $22,023,000, or 32.2%, during 1998. Of total time deposits at December 31,
2000, approximately 20.7% were large denomination certificates of deposit and
other time deposits of $100,000 or more, down from 34.2% at December 31, 1999.

The maturities of the time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 2000 are summarized in
the table below.

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE

December 31, 2000
-----------------------------------------------------
Time Other
Certificates Time
of Deposit Deposits Total
------------- ------------- -------------
(in Thousands)

Maturing in three months or less ............... $ 17,208,818 $ 23,353,824 $ 40,562,642
Maturing in over three through six months ...... 25,788,184 -0- 25,788,184
Maturing in over six through twelve months ..... 34,884,751 -0- 34,884,751
Maturing in over twelve months ................. 23,130,128 -0- 23,130,128
------------- ------------- -------------

Total ....................................... $ 101,011,881 $ 23,353,824 $ 124,365,705
============= ============= =============

BORROWED FUNDS

Community Bank also uses borrowed funds as a source of funds for asset growth in
excess of deposit growth and for short-term liquidity needs. The mixture of
borrowed funds and deposits as sources of funds depends on the relative
availability and costs of those funds and Community Bank's need for funding.

Borrowed funds consist primarily of short-term borrowings, borrowings from the
Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and long-term debt.
Short-term borrowings at year-end 2000 and 1999 consisted of the U. S. Treasury
Tax and Loan Note Option account and securities sold under agreements to
repurchase. Community Bank had $6,000,000 at year-end 2000 and $11,000,000 at
year-end 1999 in available lines to purchase Federal Funds, on an unsecured
basis, from commercial banks. At December 31, 2000 and 1999, Community Bank had
no funds advanced against these lines.

In the fourth quarter of 1998, Community Bank became a member of the
FHLB-Atlanta and was approved to borrow under various short-term and long-term
programs offered by the FHLB-Atlanta. These borrowings are secured under a
blanket lien agreement on certain qualifying mortgage instruments in Community
Bank's loan and investment portfolios. Community Bank's maximum credit
availability with FHLB-Atlanta is established at 10% of Community Bank's total
assets, based on the most recent quarterly financial information submitted to
the FDIC. At December 31, 2000, the maximum credit availability, based on
Community Bank's Consolidated Reports of Condition and Income as of the close of
business September 30, 2000, was approximately $71,000,000. While Community Bank
has drawn up to a maximum of $20,000,000 under the FHLB-Atlanta's "Overnight
Borrowings" program since becoming a member of the FHLB-Atlanta, no funds were
advanced under the "Overnight Borrowings" program at December 31, 2000 and 1999.

Since June 1999, Community Bank has borrowed funds under the FHLB-Atlanta's
"Convertible Advance Program." These advances have had original maturities of 10
years, with stated call features during the life of the obligation, at fixed
interest rates for the life of the obligations. Principal is due at final
maturity or on stated call dates, with interest payable each quarter. On June 1,
1999, Community Bank borrowed $30,000,000 under the FHLB-Atlanta's "Convertible
Advance Program." This advance had a final maturity

of June 1, 2009 (120 months), with a call feature every three months during the
life of the obligation, and carried a fixed rate of 4.62% per annum. These funds
were used to replace $20,000,000 in FHLB-Atlanta overnight borrowings and to
fund loan growth. This obligation was called on September 1, 1999 due to an
increase in market interest rates. As a result of this call, Community Bank
refinanced the original advance and borrowed an additional $10,000,000, to fund
anticipated loan growth, under the same "Convertible Advance Program." This
advance, totaling $40,000,000 at December 31, 1999, had a final maturity of
September 1, 2009 (120 months), with a call feature every six months during the
life of the obligation, and carried a fixed rate of 4.99% per annum. Principal
was due at final maturity or on a call date, with interest payable each quarter.
The first call date for this advance was March 1, 2000. Due to the call of this
obligation on March 1, 2000, Community Bank made a $2,000,000 reduction in the
amount advanced under the FHLB-Atlanta "Convertible Advance Program" and
refinanced $38,000,000. This new obligation has a final maturity of March 1,
2010 (120 months), a call feature every 12 months during the life of the
obligation, and a fixed interest rate of 5.93% per annum. At December 31, 2000,
outstanding funds advanced to Community Bank under the FHLB-Atlanta "Convertible
Loan Program" totaled $38,000,000. The first call date for this advance was
March 1, 2001; the advance was not called on that date.

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28
30
The following table sets forth, for the periods indicated, certain information
about the Company's short-term borrowings:

SHORT-TERM BORROWINGS

At December 31,
------------------------- Maximum
Weighted Outstanding
Average Average Average At Any
Balance Rate Balance Rate Month-end
-------------- -------- ------------ ---------- --------------
(Dollars in thousands)

2000:
FEDERAL FUNDS PURCHASED............... $ -0- 0.00% $ 402,000 6.47% $ 3,000,000
SHORT-TERM FHLB BORROWINGS............ -0- 0.00% 325,000 6.86% -0-
SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE........................ 862,000 6.17% 818,000 6.17% 1,072,000
U.S. TREASURY TAX AND LOAN, NOTE
OPTION............................ 1,403,000 5.72% 1,044,000 6.14% 2,456,000
------------- ------------- --------------
TOTAL....................... $ 2,265,000 5.89% $ 2,589,000 6.30% $ 6,528,000
============= ============= ==============

1999:
Federal funds purchased............... $ -0- 0.00% $ 751,000 5.10% $ 5,000,000
Short-term FHLB borrowings............ -0- 0.00% 4,331,000 5.60% 20,000,000
Securities sold under agreement to
repurchase........................ 264,000 5.26% 558,000 5.08% 353,000
U.S. Treasury Tax and Loan, note
option............................ 2,230,000 4.78% 1,074,000 4.04% 2,230,000
------------- ------------- --------------
Total........................ $ 2,494,000 4.83% $ 6,714,000 4.96% $ 27,583,000
============= ============= ==============

1998:
Federal funds purchased............... $ -0- 0.00% $ 290,000 5.60% $ -0-
Short-term FHLB borrowings............ -0- 0.00% 1,104,000 5.02% 6,000,000
Securities sold under agreement to
repurchase........................ 152,000 6.23% 881,000 6.02% 599,000
U.S. Treasury Tax and Loan, note
option............................ 2,040,000 4.26% 983,000 3.97% 2,040,000
------------- ------------- --------------
Total....................... $ 2,192,000 4.40% $ 3,258,000 5.03% $ 8,639,000
============= ============= ==============

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29
31

Long-term debt consisted of various commitments with scheduled maturities from
one to 20 years. The following table sets forth expected debt service for the
next five years based on interest rates and repayment provisions as of December
31, 2000. A more detailed explanation of long-term debt is included in Note 8 to
the Company's Consolidated Financial Statements included elsewhere in this
Report.

MATURITIES OF LONG-TERM DEBT

2001 2002 2003 2004 2005
------- ------- ------- -------- --------
(in Thousands)

Interest on indebtedness....................... $ 458 $ 368 $ 308 $ 282 $ 253
Repayment of principal......................... 950 972 284 310 339
------- ------- ----- ----- -----

$ 1,408 $ 1,340 $ 592 $ 592 $ 592
======= ======= ===== ===== =====

The Capital Securities accrue and pay distributions semiannually at a rate of
10.875% per annum of the stated liquidation value of $1,000 per capital
security. The Company has entered into an agreement which fully and
unconditionally guarantees payment of: (i) accrued and unpaid distributions
required to be paid on the Capital Securities; (ii) the redemption price with
respect to any Capital Securities called for redemption by the Trust; and (iii)
payments due upon a voluntary or involuntary liquidation, winding up or
termination of the Trust.

The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on March 8, 2030, or upon earlier redemption as provided in the
indenture pursuant to which the debentures were issued. The Company has the
right to redeem the debentures purchased by the Trust: (i) in whole or in part,
on or after March 8, 2010; and (ii) in whole (but not in part) at any time
within 90 days following the occurrence and during the continuation of a tax
event, capital treatment event or investment company event (each as defined in
the indenture). As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.

LIQUIDITY MANAGEMENT

Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Company's ability to meet the day-to-day cash flow requirements
of Community Bank's customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Company would not be able to perform the primary
function of a financial intermediary and would, therefore, not be able to meet
the production and growth needs of the communities it serves.

The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can also meet the
investment objectives

30
32

of its shareholders. Daily monitoring of the sources and uses of funds is
necessary to maintain an acceptable cash position that meets both its customers'
needs and its shareholders' objectives. In a banking environment, both assets
and liabilities are considered sources of liquidity funding and both are,
therefore, monitored on a daily basis. The Company's Board of Directors has
historically declared and paid cash dividends on the Company's Common Stock on
an annual basis. Payment of dividends by the Company is at the discretion of the
Company's Board of Directors, and is dependent upon, among other things, the
Company's earnings, financial condition and capital ratios, as well as
applicable legal and regulatory restrictions and prior payment of principal and
interest on the Company's long-term debt.

Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its shareholders and
other needs. Certain restrictions exist regarding the ability of Community Bank
to transfer funds to the Company in the form of cash dividends, loans or
advances. The approval of the Alabama Banking Department is required to pay
dividends in excess of Community Bank's earnings retained in the current year
plus retained net earnings for the preceding two years less any required
transfers to surplus. At December 31, 2000, Community Bank could not have
declared any dividends without approval of regulatory authorities. See "Item 1 -
Business - Supervision and Regulation."

The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales, maturities, calls and pay downs of investment
securities. Real estate-construction and commercial, financial and agricultural
loans that mature in one year or less totaled approximately $59,687,000, or
11.3% of loans, net of unearned income, at December 31, 2000, and investment
securities maturing in one year or less totaled $7,690,000, or 7.6% of the
investment portfolio, at December 31, 2000. Other sources of liquidity include
cash on deposit with other banks and short-term investments such as Federal
Funds sold and maturing interest-bearing deposits with other banks.

The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. Funds are
also available through the purchase of Federal Funds from other commercial banks
and borrowings against Community Bank's credit availability through the FHLB-
Atlanta. Liquidity management involves the daily monitoring of the sources and
uses of funds to maintain an acceptable Company cash position.

INTEREST RATE SENSITIVITY AND MARKET RISK

The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities. Management monitors
its interest rate risk exposure through the use of a Static Gap analysis and an
Interest Rate Shock analysis.

The static gap analysis measures the amount of repricing risk embedded in the
balance sheet at a specific point in time, by comparing the difference in the
volume of interest-earning assets and interest-bearing liabilities that are
subject to repricing within specific time periods. During 2000, Community Bank
saw its interest earning assets repricing within one year increase while its
interest bearing liabilities repricing during this same period decreased. While
these changes reflect a slight improvement in the Company's static gap position,
as compared to year-end 1999, the Company remained liability sensitive at
December 31, 2000, indicating that it had more interest bearing liabilities than
interest earning assets repricing during the twelve months ending December 31,
2001. The cumulative static gap position of rate sensitive assets to rate
sensitive liabilities at December 31, 2000 was: i) .55% at 30 days; ii) .53% at
90 days; iii) .55% at 180 days; and iv) .52% at 365 days.

31
33

regression analyses while management makes assumptions concerning balance sheet
growth and the magnitude of interest rate movements for certain interest earning
asset and interest-bearing liabilities. Using actual maturity and repricing
opportunities of Community Bank's portfolio, in conjunction with management's
assumptions, a rate shock analysis is performed using a plus 200 basis points
shift and a minus 200 basis points shift in interest rates. Based on the
Company's December 31, 2000 Asset/Liability Analysis, Community Bank's net
interest income would decline $917,000, or 3.22%, over the next twelve months as
a result of a 200 basis points decrease in the interest rate environment. This
interest rate sensitivity in declining interest rate scenario is primarily due
to an estimated increase in prepayment speeds for mortgage-backed securities,
including collateralized mortgage obligations, resulting in the reinvestment of
cash flows at lower rates. A 200 basis points increase in interest rates would
result in a $790,000 or 2.78%, decrease in net interest income for the same
period. The interest rate sensitivity in a rising interest rate scenario is
primarily due to the Company being liability sensitive and the callable FHLB
advance that is projected to be called requiring replacement of this funding at
higher cost.

The following tables estimate the impact of shifts in interest rates on the
Company's net interest income for the 12 months ending December 31, 2001:

RATE SHOCK ANALYSIS

-200 +200
Basis Basis
Points Level Points
------------------------------------
(Dollars in thousands)

Prime Rate.................................................... 7.00% 9.00% 11.00%

Interest Income............................................... $ 57,885 $ 62,488 $ 66,554
Interest Expense.............................................. 30,354 34,040 38,896
-------- -------- --------

Net Interest Income........................................ $ 27,531 $ 28,448 $ 27,658
======== ======== ========

Dollar change from Level...................................... $ (917) $ (790)
Percentage change from Level.................................. (3.22)% (2.78)%

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32
34

INTEREST SENSITIVITY

Percentage Increase (Decrease)
in Interest Income/Expense
Principal Amount of Given Immediate and Sustained
Earning Assets, Interest Rate Shifts
Interest-bearing ------------------------------
Liabilities at Down 200 Up 200
December 31, 2000 Basis Points Basis Points
---------------------- ------------- ------------
(Dollars in Thousands)

Assets which reprice in:
One year or less.............. $ 244,827 (10.12)% 13.14%
Over one year................. 388,097 (5.80) 2.72
---------

$ 632,924 (7.37) 6.51
=========

Liabilities which reprice in:
One year or less.............. $ 472,192 (12.98) 22.07
Over one year................. 117,363 (2.13) (17.30)
---------
$ 589,555 (10.83) 14.27
=========

Total net interest income sensitivity............ (3.22) (2.78)

While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to move downward during the first half of 2001
and remain level for the last half of 2001. Management also believes that the
Company's current interest rate sensitivity analysis fairly reflects its
interest rate risk exposure during the 12 months ending December 31, 2001.
Management continually evaluates the condition of the economy, the pattern of
market interest rates and other economic data to determine the types of
investments that should be made and at what maturities. The amounts shown in the
preceding two tables reflect a specific point in time and may not be reflective
of changes in interest rates as of other dates or in future periods.

CAPITAL RESOURCES

A strong capital position is vital to the continued profitability of the Company
because it promotes depositor and shareholder confidence and provides a solid
foundation for future growth of the organization. In 1993, 1995 and 1998, the
Company raised capital through the sale of shares of its Common Stock. All three
offerings were closed upon being fully subscribed. The Company sold to the
public and the Company's ESOP, in the fourth quarter of 1998, 500,000 newly
issued shares of Common Stock at a price of $19.00 per share, raising
approximately $9,467,000 after reduction for offering expenses. The net proceeds
from all offerings have been available for debt reduction, capital enhancement,
growth and expansion of the Company and general corporate purposes.

33
35

The debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines.

Bank regulatory authorities have issued risk-based capital guidelines that take
into consideration risk factors associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk-adjusted assets to
determine the risk-based capital ratios. The Company's Tier I capital, which
includes common stock, retained earnings and guaranteed preferred beneficial
interest in the Company's junior subordinate deferrable interest debentures,
amounted to approximately $45,956,000 at December 31, 2000 compared to
approximately $39,976,000 at December 31, 1999 and $41,521,000 at December
31,1998. This increase in Tier I capital at December 31, 2000 resulted primarily
from the inclusion of the $10,000,000 aggregate liquidation amount of the junior
subordinated deferrable interest debentures issued by the Company in March of
2000. Tier II capital components include supplemental capital components, such
as qualifying allowance for loan losses and qualifying subordinated debt. Due to
the increase in Community Bank's allowance for loan losses during 2000, the
qualifying portion of the allowance included as a Tier II capital component
resulted in an increase in Total Risk-based capital. Tier I capital plus the
Tier II capital components are referred to as Total Risk-based capital, which
was approximately $53,746,000, $44,067,000 and $46,083,000 at year-end 2000,
1999, and 1998, respectively. The percentage ratios, as calculated under the
guidelines, for Tier I and Total Risk-based capital were 9.01% and 10.54%,
respectively, at December 31, 2000, compared to 8.50% and 9.37%, respectively,
at year-end 1999 and 9.94% and 11.03%, respectively, at December 31,1998. The
Company was considered well capitalized at December 31, 2000, as both Tier I and
Total Risk-based capital exceeded the regulatory minimum ratios of 6% and 10%,
respectively. Applying the current guidelines to 1999 and 1998, the Company was
considered adequately capitalized at year-end 1999 compared to well capitalized
at year-end 1998.

Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The Tier I Leverage ratio is defined as the ratio that the
Company's Tier I capital bears to total average assets minus goodwill. The
Company's Tier I Leverage ratios were 6.44%, 6.39% and 7.79% at December 31,
2000, 1999 and 1998, respectively, exceeding the regulatory minimum requirement
of 4%.

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34
36

The following table illustrates the Company's regulatory capital ratios at
December 31, 2000, 1999 and 1998:

CAPITAL ADEQUACY RATIOS

December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
(Dollars in Thousands)

Tier I Capital ................................. $ 45,956 $ 39,976 $ 41,521
Tier II Capital ................................ 7,790 4,091 4,562
--------- --------- --------

Total Qualifying Capital ................ $ 53,746 $ 44,067 $ 46,083
========= ========= ========

Risk-weighted Total Assets (including
off-balance-sheet exposures) ................. $ 510,161 $ 470,305 $417,945
========= ========= ========

Tier I Risk-based Capital Ratio ................ 9.01% 8.50% 9.94%

Total Risk-based Capital Ratio ................. 10.54% 9.37% 11.03%

Leverage Ratio ................................. 6.44% 6.39% 7.79%

In addition to regulatory requirements, a certain level of capital growth must
be achieved to maintain appropriate ratios of equity to total assets. The
following table summarizes these and other key ratios for the Company for each
of the last three years.

RETURN ON EQUITY AND ASSETS

Year Ended December 31,
--------------------------------------------
2000 1999 1998
--------- --------- ---------

Return on average assets.......................................... (0.31)% 0.26% 0.67%
Return on average equity.......................................... (5.30) 3.75 9.59
Dividend payout ratio............................................. (150.00) 162.16 55.56
Average equity to average assets ratio............................ 5.88 6.99 6.93

The Company's return on average assets ratio, which is computed by dividing net
income by average assets, decreased significantly in 2000 to (0.31)% from 0.26%
in 1999 and 0.67% in 1998. The decrease in 2000 was due to the net loss of
approximately $2,215,000 incurred by the Company in 2000, compared to net income
of approximately $1,658,100 in 1999 and $3,579,500 in 1998, coupled with a 12.4%
increase in average assets during 2000 to approximately $710,915,000, compared
to average assets of approximately $632,713,000 during 1999 and $538,470,000
during 1998. The Company's return on average assets ratio decreased in 1999 due
to a 53.7% decrease in net income and a 17.5% increase in average assets in
1999, compared to 1998.

The Company's return on average equity ratio, which is computed by dividing net
income by average shareholders' equity, decreased significantly in 2000 to
(5.30)%, from 3.75% in 1999 and 9.59% in 1998. The decrease in 2000 was due to
the net loss of approximately $2,215,000 incurred by the Company in 2000,
compared to net income of approximately $1,658,100 in 1999 and $3,579,500 in
1998, which was partially offset by a 5.5% decrease in average shareholders'
equity to approximately $41,776,000 during 2000, compared to approximately
$44,203,000 during 1999 and approximately $37,318,000 during 1998. The Company's
return on average equity ratio decreased in 1999 due to a 53.7% decrease in net
income and an 18.4% increase in average shareholders' equity in 1999, compared
to 1998.

35
37

The Company's dividend payout ratio is determined by dividing the dividends per
share by the basic net earnings or loss per share for the relevant period.
During 2000, the Company's dividend payout ratio was (150.00)% due to an
increase in the amount of cash dividends paid per share coupled with a basic net
loss per share reported for the period. This compares to a dividend payout ratio
of 162.16% and 55.56% for 1999 and 1998, respectively. The significant increase
in 1999 over 1998 resulted from an increase in the amount of cash dividends paid
per share and a decrease in the Company's basic net earnings per share for the
period. During 2000, the amount of cash dividends paid per share increased
$0.15, or 25%, to $0.75 from $0.60 in 1999. In addition, during 2000, the
Company reported a basic net loss per share of $0.50 compared to basic net
earnings per share of $0.37 for 1999.

The Company's average equity to average assets ratio, which is computed by
dividing average shareholders' equity by average assets, decreased in 2000 to
5.88%, from 6.99% in 1999 and 6.93% in 1998. The decrease in 2000 was due to a
5.5% decrease in average shareholders' equity during 2000 to approximately
$41,776,000, compared to average shareholders' equity of approximately
$44,203,000 during 1999 and $37,318,000 during 1998, and a 12.4% increase in
average assets to approximately $710,915,000 during 2000, compared to
approximately $632,713,000 during 1999 and approximately $538,470,000 during
1998. The Company's average equity to average assets ratio increased slightly in
1999, compared to 1998, due to an 18.4% increase in average shareholders'
equity, which offset a 17.5% increase in average assets in 1999.

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36
38

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest-bearing liabilities impact net interest
income. All discussions in this section assume a taxable equivalent basis unless
otherwise noted.

Net interest income for 2000, on a fully taxable equivalent (FTE) basis,
increased approximately $575,000, or 2.1%, to approximately $27,851,000 from
approximately $27,276,000 in 1999, compared to an increase of approximately
$5,024,000, or 22.6%, in 1999 from approximately $22,252,000 in 1998. The
Company experienced growth in both average earning assets and average
interest-bearing liabilities during 2000. However, the rising interest rate
environment during the first half of 2000 coupled with interest-bearing
liabilities repricing more quickly than interest-earning assets resulted in a
relatively small increase in net interest income for 2000. The "Rate/Volume
Variance Analysis" table in the section below provides information about changes
in interest income, interest expense and net interest income due to changes in
average balances and rates.

The Company's FTE interest income increased approximately $8,909,000, or 16.9%,
to $61,707,000 in 2000 from $52,798,000 in 1999, compared to an increase of
approximately $7,853,000, or 17.5%, in 1999 from approximately $44,945,000 in
1998. The increase in 2000 was due to the 12.2% increase in average earning
assets coupled with a 40 basis points increase in the FTE yield on average
earning assets during 2000. The 1999 increase was almost entirely due to the
17.2% increase in average earning assets in 1999 as the FTE yield on average
earning assets rose only two basis points in 1999. The FTE interest income on
loans increased 17.1% during 2000, primarily due to an increase of 12.7% in the
average loan balances outstanding coupled with an increase in the FTE yield on
loans of 38 basis points. During 1999, the FTE interest income on loans
increased 20.5%, primarily due to the 22.5% increase in the average loan
balances outstanding in 1999, as the FTE yield on loans declined 16 basis points
in 1999. The FTE interest income on investment securities increased 13.6% during
2000, compared to 1999, and 8.2% during 1999, compared to 1998, primarily due to
changes in the average investment security balances outstanding.

During 2000, the Company's interest expense increased approximately $8,334,600,
or 32.7%, to approximately $33,856,000 from approximately $25,522,00 in 1999, as
average interest-bearing liabilities outstanding during 2000 increased 16.0% and
the average rate paid on interest-bearing liabilities during 2000 increased 72
basis points. In 1999, interest expenses increased $2,829,000, or 12.5%, to
approximately $25,522,000 from approximately $22,693,000 in 1998, primarily due
to the effect of a 17.7% increase in average interest-bearing liabilities in
1999, coupled with the effect of a 23 basis point decline in the average rate
paid in 1999. Interest-bearing deposits are the major component of interest
bearing liabilities, representing 90.1% in 2000, 93.2% in 1999 and 97.7% in 1998
of average total interest-bearing liabilities outstanding. While average
interest-bearing deposits outstanding increased 12.1% and 12.3% during 2000 and
1999, respectively, the rate paid on these average balances reflected an
increase of 61 basis points during 2000 compared to a decline of 22 basis points
during 1999. The decrease in interest expense on short-term borrowings during
2000 primarily resulted from a decline in the average balances outstanding
during 2000. The increase in interest expense on long-term debt during 2000 was
primarily due to an increase in average balances outstanding during 2000 coupled
with a 170 basis points increase in the average rate paid during 2000. These
increases are associated with the issuance, in March 2000, of the Company's
junior subordinated deferrable interest debentures which carry an annual
interest rate of 10.875%. The increase in interest expense on FHLB borrowings
during 2000 was due to an 81.5% increase in the average balance of borrowings
outstanding during 2000 and an increase of 98 basis points in the average
interest rate paid on these borrowings during 2000. The large increase in the
average balance of borrowings outstanding

37
39

during 2000 was due to Community Bank having funds advanced under the
FHLB-Atlanta's "Convertible Advance Program" for the entire 12 months of 2000
compared to only the last six months of 1999. A new component of interest
expense resulted in 2000 when Community Bank entered into capitalized lease
arrangements on two of its bank locations. The average capitalized lease
obligations outstanding during 2000 were approximately $3,579,000, which
represented 0.6% of the Company's average total interest-bearing liabilities.

The trend in net interest income is also evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing net interest
income by average earning assets. This ratio represents the difference between
the average yield returned on average earning assets and the average rate paid
for funds used to support those earning assets, including both interest-bearing
and noninterest-bearing sources. The Company's FTE net interest margin for 2000
was 4.42%, compared to 4.86% and 4.64% for 1999 and 1998, respectively.

The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest-bearing sources of funds.
The interest rate spread eliminates the impact of noninterest-bearing funds and
gives a more direct perspective to the effect of market interest rate movements.
The FTE net interest spread for 2000 decreased 32 points to 4.08% from the
Company's 1999 spread of 4.40% as the cost of interest-bearing sources of funds
increased 72 basis points while the FTE yield on earning assets increased 40
basis points. The FTE net interest spread for 1998 was 4.15%. See the tables in
this section below entitled "Consolidated Average Balances, Interest
Income/Expenses and Yields/Rates" and "Rate/Volume Variance Analysis" for more
information.

The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:

Years Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
----- ---- ---- ---- ----

Rate earned on earning assets..................... 9.70% 9.30% 9.26% 8.94% 8.85%

Rate paid on borrowed funds....................... 5.72 5.00 5.23 5.14 5.18

Interest rate spread.............................. 3.98 4.30 4.03 3.80 3.67

Net interest margin............................... 4.32 4.75 4.52 4.32 4.26

During 2000, the banking industry saw the prime interest rate move from 8.50% to
9.50%. This increase resulted as the prime interest rate increased by 25 basis
points each in February and March 2000 and increased by 50 basis points in May
2000. In addition, the banking industry experienced an increasing interest rate
environment during 1999 as evidenced by increases of 25 basis points each, in
July, August and November. This is in contrast to a declining interest rate
environment as evidenced by two drops, of 25 basis points each, in the prime
rate during October 1998 and an additional drop of 25 basis points in the prime
rate in November 1998. The Company's net interest income, before the provision
for loan losses, increased 2.1% during 2000, 23.1% in 1999 and 18.8% in 1998.

Net interest income, before provision for loan losses, was $27,219,000,
$26,672,000 and $21,672,000 for the 12 months ended December 31, 2000, 1999 and
1998, respectively. This represented changes of $547,000 from 1999 to 2000 and
$5,000,000 from 1998 to 1999, as reported in the Company's Consolidated
Statements of Income included elsewhere in this Report. The net interest margin,
not modified for assumed tax equivalency, decreased to 4.32% in 2000 from 4.75%
in 1999 and the interest rate spread, not modified for assumed tax equivalency,
decreased to 3.98% for 2000 from 4.30% for 1999. The net interest margin and
interest rate spread, not modified for assumed tax equivalency, were 4.52% and
4.03%, respectively, for 1998.

38
40

The "Consolidated Average Balances, Interest Income/Expenses and Yields/Rates"
and the "Rate/Volume Variance Analysis" tables are presented on the following
four pages. The Consolidated Average Balances/Interest Income/Expenses and
Yields/Rates table presents, for the periods shown, the average balance of
certain balance sheet items, the dollar amount of interest income from average
earning assets and resultant yields, the interest expense and rate paid on
average interest-bearing liabilities, and the net-interest margin. The
Rate/Volume Variance Analysis table presents an analysis of changes in interest
income, interest expense and net interest income attributable to changes in
volume and interest rate. Income from tax-exempt earning assets has been
adjusted to fully taxable equivalent amounts.

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39
41

CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (Dollars in Thousands)

YEAR ENDED DECEMBER 31,
------------------------------------------
2000
------------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
--------- -------- -------

ASSETS
Earning assets:
Loans, net of unearned income(1) ............................... $ 522,301 $54,492 10.43%
Investment securities:
Taxable ....................................................... 87,745 5,644 6.43
Tax-exempt .................................................... 15,366 1,271 8.27
--------- -------
Total investment securities .................................. 103,111 6,915 6.71
Interest bearing deposits in other banks ...................... 915 66 7.21
Federal funds sold ............................................ 3,635 234 6.44
--------- -------
Total earning assets(2) ......................................... 629,962 61,707 9.80

Noninterest-earning assets:
Cash and due from banks ........................................ 26,260
Premises and equipment ......................................... 38,232
Accrued interest and other assets .............................. 19,781
Allowance for loan losses ...................................... (3,320)
---------

Total assets .................................................. $ 710,915
=========

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ................................................ $ 102,254 5,036 4.92
Savings deposits ............................................... 55,983 2,457 4.39
Time deposits .................................................. 375,121 22,218 5.92
--------- -------
533,358 29,711 5.57
Other short-term borrowings .................................... 2,589 163 6.30
FHLB borrowings ................................................ 38,000 2,248 5.93
Capitalized lease obligations .................................. 3,579 327 9.14
Long-term debt ................................................. 14,716 1,407 9.56
--------- -------
Total interest-bearing liabilities ............................ 592,242 33,856 5.72
-------
Noninterest-bearing liabilities:
Demand deposits ................................................ 68,785
Accrued interest and other liabilities ......................... 8,112
Shareholders' equity ........................................... 41,776
---------

Total liabilities and shareholders' equity .................... $ 710,915
=========

Net interest income/net interest spread ........................... $27,851 4.08%
=======

Net interest margin ............................................... 4.42%

Taxable equivalent adjustment:
Loans ........................................................... $ 201
Investment securities ........................................... 431
-------
Total taxable equivalent adjustment ............................ 632
-------

Net interest income ............................................... $27,219
=======

(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.

(2) Tax equivalent adjustments have been based on an assumed tax rate of
34%, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning
assets.

40
42

Years Ended December 31,
-------------------------------------------------------------------------------------
1999 1998
--------------------------------------- --------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- ---------- -------- ----------- --------- --------

$ 463,298 $ 46,549 10.05% $ 378,189 $ 38,616 10.21%

79,733 4,782 6.00 74,952 4,488 5.99
15,412 1,305 8.47 13,488 1,139 8.44
--------- --------- --------- ---------
95,145 6,087 6.40 88,440 5,627 6.36
1,343 74 5.51 1,006 91 9.05
1,740 88 5.06 11,558 611 5.29
--------- --------- --------- ---------
561,526 52,798 9.40 479,193 44,945 9.38

22,332 21,609
32,527 26,986
19,087 13,642
(2,759) (2,960)
--------- ---------

$ 632,713 $ 538,470
=========

$ 94,763 4,131 4.36 $ 85,044 3,286 3.86
53,730 1,886 3.51 46,374 1,651 3.56
327,481 17,577 5.37 292,357 17,026 5.82
--------- --------- --------- ---------
475,974 23,594 4.96 423,775 21,963 5.18
6,714 333 4.96 3,258 164 5.03
20,932 1,037 4.95 -0- -0- 0.00
-0- -0- 0.00 -0- -0- 0.00
7,100 558 7.86 6,878 566 8.23
--------- --------- --------- ---------
510,720 25,522 5.00 433,911 22,693 5.23
--------- ---------

69,248 60,147
8,542 7,094
44,203 37,318
--------- ---------

$ 632,713 $ 538,470
========= =========

$ 27,276 4.40% $ 22,252 4.15%
========= =========

4.86% 4.64%

$ 159 $ 193
444 387
--------- ---------
603 580

$ 26,673 $ 21,672
========= =========

41
43

RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS

Average Volume Change in Volume
---------------------------------- -----------------------
2000 1999 1998 2000-1999 1999-1998
--------- --------- -------- --------- ----------
(Dollars in Thousands)

EARNING ASSETS:
Loans, net of unearned income...................... $ 522,301 $ 463,298 $378,189 $ 59,003 $ 85,109

Investment securities:
Taxable......................................... 87,745 79,733 74,952 8,012 4,781
Tax exempt...................................... 15,366 15,412 13,488 (46) 1,924
--------- --------- -------- -------- ----------

Total investment securities................... 103,111 95,145 88,440 7,966 6,705
Interest-bearing deposits with other banks......... 915 1,343 1,006 (428) 337
Federal funds sold................................. 3,635 1,740 11,558 1,895 (9,818)
--------- --------- -------- -------- ----------

Total earning assets......................... $ 629,962 $ 561,526 $479,193 $ 68,436 $ 82,333
========= ========= ======== ======== ==========

INTEREST-BEARING LIABILITIES:
Deposits:
Demand.......................................... $ 102,254 $ 94,763 $ 85,044 $ 7,491 $ 9,719
Savings......................................... 55,983 53,730 46,374 2,253 7,356
Time............................................ 375,121 327,481 292,357 47,640 35,124
--------- --------- -------- -------- ----------
Total interest-bearing deposits.............. 533,358 475,974 423,775 57,384 52,199

Other short-term borrowings........................ 2,589 6,714 3,258 (4,125) 3,456
FHLB borrowings.................................... 38,000 20,932 -0- 17,068 20,932
Capitalized Lease Obligations...................... 3,579 -0- -0- 3,579 -0-
Long-term borrowings............................... 14,716 7,100 6,878 7,616 222
--------- --------- -------- -------- ----------

Total interest-bearing liabilities........... $ 592,242 $ 510,720 $433,911 $ 81,522 $ 76,809
========= ========= ======== ======== ==========

Net interest income/net interest spread............

Net yield on earning assets........................

Net cost of funds..................................

(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.

42
44

Variance Attributed to (1)
--------------------------------------------
Average Rate Interest Income/Expense Variance 2000 1999
--------------------------- ---------------------------- ---------------------- ------------------- --------------------
2000 1999 1998 2000 1999 1998 2000-1999 1999-1998 VOLUME RATE Volume Rate
------- ------- -------- ------- ------- ------- --------- ---------- -------- ------- -------- --------
(Dollars in Thousands)

10.43% 10.05% 10.21% $54,492 $46,549 $38,616 $ 7,943 $ 7,933 $ 6,125 $ 1,818 $ 8,548 $ (615)

6.43 6.00 5.99 5,644 4,782 4,488 862 294 503 359 287 7
8.27 8.47 8.44 1,271 1,305 1,139 (34) 166 (4) (30) 162 4
------- ------- ------- ------- ------- ------- ------- ------- -------

6.71 6.40 6.36 6,915 6,087 5,627 828 460 499 329 449 11
7.21 5.51 9.05 66 74 91 (8) (17) (27) 19 25 (42)
6.44 5.06 5.29 234 88 611 146 (523) 117 29 (498) (25)
------- ------- ------- ------- ------- ------- ------- ------- -------

9.80 9.40 9.38 61,707 52,798 44,945 8,909 7,853 6,714 2,195 8,524 (671)

4.92 4.36 3.86 5,036 4,131 3,286 905 845 345 560 396 449
4.39 3.51 3.56 2,457 1,886 1,651 571 235 82 489 258 (23)
5.92 5.37 5.82 22,218 17,577 17,026 4,641 551 2,724 1,917 1,936 (1,385)
------- ------- ------- ------- ------- ------- ------- ------- -------
5.57 4.96 5.18 29,711 23,594 21,963 6,117 1,631 3,151 2,966 2,590 (959)

6.30 4.96 5.03 163 333 164 (170) 169 (243) 73 171 (2)
5.93 4.95 -0- 2,248 1,037 -0- 1,211 1,037 976 235 1,037 -0-
9.14 -0- -0- 327 -0- -0- 327 -0- 327 -0- -0- -0-
9.56 7.86 8.23 1,407 558 566 849 (8) 707 142 18 (26)
------- ------- ------- ------- ------- ------- ------- ------- -------

5.72 5.00 5.23 33,856 25,522 22,693 8,334 2,829 4,918 3,416 3,816 (987)
----- ----- ----- ------- ------- ------- ------- ------- ------- ------- ------- -------

4.08% 4.40% 4.15% $27,851 $27,276 $22,252 $ 575 $ 5,024 $ 1,796 $(1,221) $ 4,708 $ 316
===== ===== ===== ======= ======= ======= ======= ======= ======= ======= ======= =======
4.42% 4.86% 4.64%
5.38% 4.54% 4.74%

43
45

PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES

The Company maintains an allowance for loans losses to absorb losses inherent in
the loan portfolio. The allowance is based upon management's estimated range of
those losses. Actual losses for these loans may vary significantly from this
estimate. In January 2000, management decided to increase Community Bank's
allowance for loan losses. In addition, during 2000, management made further
increases in Community Bank's allowance for loan losses. In September 2000,
Community Bank made an additional provision of $3,478,000 to increase its
allowance for loan losses.

At December 31, 2000, the allowance for loan losses was $7,107,000 which
represented an increase of $4,504,000, or 173.0%, over the December 31, 1999
amount of $2,603,000. This increase in the overall level of the allowance for
loan losses was primarily due to additional provisions for loan losses of
$3,478,000 and $501,000 made by the Company in September 2000 and December 2000,
respectively. There was a $368,000, or 12.4%, decline in the allowance for loan
losses at December 31, 1999 as compared to December 31, 1998, in contrast to an
increase of $840,000, or 39.4%, in the allowance for loan losses at year-end
1998 over year-end 1997. The decline in the allowance for loan losses at
December 31, 1999 was primarily due to an increase in net charge-offs in
consumer loans during 1999. The increase in the allowance for loan losses during
1998 was primarily due to approximately $1,281,000 of reserves acquired through
acquisitions during 1998 and a provision for loan losses of approximately
$885,000 during 1998 which more than offset net loan charge-offs of
approximately $1,326,000 during 1998. This represented a 14.5% increase in the
1998 provision for loan losses, as compared to 1997, and a 23.4% increase in net
loan charge-offs during 1998, as compared to 1997. As a percentage of total
loans, net of unearned income, the allowance for loan losses increased to 1.35%
at December 31, 2000, compared to 0.52%, 0.68%, 0.65% and 0.75% at December 31,
1999, 1998, 1997 and 1996, respectively. Management believes that the allowance
for loan losses at December 31, 2000 is adequate to absorb known risks in the
Company's loan portfolio based upon the Company's historical experience. No
assurance can be given, however, that increased loan volume, adverse economic
conditions or other circumstances will not result in increased losses in the
Company's loan portfolio or additional provisions to the allowance for loan
losses.

The provision for loan losses is charged to current earnings to bring the
allowance for loan losses to a level deemed appropriate by management. Actual
loan losses, net of recoveries, are charged directly to the allowance for loan
losses. The amount of the provision for loan losses is based on the growth of
the loan portfolio, the amount of net loan losses incurred and management's
estimation of potential future losses based on an evaluation of the risk in the
loan portfolio. The provision for loan losses was $9,289,000, $4,459,000 and
$885,000 in 2000, 1999 and 1998, respectively. This represented increases of
$4,830,000, or 108.3%, in 2000 and $3,574,000, or 403.8%, in 1999. The provision
for loan losses in 2000 included additional provisions of $3,478,000 in
September 2000 and $501,000 in December 2000. The increase in 2000 resulted from
management's decision to make provisions for current losses and actual growth in
the loan portfolio and to increase the overall level of the allowance for loan
losses due to aggressive lending in new expansion markets. The additional
provision in December 2000 was made with respect to the estimated impairment of
certain loans made through Community Bank's Double Springs, Alabama location,
which are discussed in the following paragraph. The increase in the provision
during 1999 was primarily due to an increase in the monthly provision for
Community Bank, based on anticipated loan growth, an increase in the provision
for 1st Community Credit Corporation due to an increase in consumer loan
charge-offs and a provision of $2,631,000 related to the impaired balances of
certain loans originated in 1998 in Community Bank's Ft. Payne, Alabama Wal-Mart
location, which were determined by management to be impaired in the fourth
quarter of 1999. Excluding the effect of these impaired loans, the provision for
loan losses would have increased $943,000, or 106.6%, during 1999.

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46
In March 2001, management of Community Bank became aware that an employee in
Community Bank's Double Springs, Alabama location had improperly originated
approximately $1,200,000 in loans primarily during 2000 and the first quarter
of 2001 in violation of Community Bank's lending policies, and had manipulated
loan payments to make it falsely appear that payments under the loans were
current. The bank employee has admitted wrongdoing in connection with the loans
and his employment with Community Bank has been terminated. Management has
notified federal and state banking regulatory authorities, law enforcement
authorities and the Company's fidelity bond carrier, and is cooperating with
law enforcement authorities in their investigation of the matter. While the
Company has not completed its investigation of these loans, management's
estimate of the impairment of such loans at December 31, 2000 was approximately
$501,000. As a result of this estimate, the Company made a provision and
increased its allowance for loan losses as of December 31, 2000 by $501,000 to
reflect the estimated impairment of these loans. An appropriate charge with
respect to actual losses determined will be made to the Company's allowance for
loan losses during 2001.

In September 1998, Community Bank determined that $9,360,000 in motor vehicle
loans that were originated in Community Bank's Ft. Payne, Alabama Wal-Mart
location primarily during a four-month period beginning in May 1998 were not in
compliance with Community Bank's lending policy. By December 31, 1999, borrowers
had defaulted on approximately $5,594,000 of these loans. Community Bank took
into possession and resold 362 vehicles that served as collateral
for these loans, which resulted in proceeds of approximately $2,963,000, which
was applied to the outstanding balances of the defaulted loans. In the fourth
quarter of 1999, management determined that these unpaid balances were impaired
and, therefore, made a charge of approximately $2,631,000 to the Company's
allowance for loan losses in December 1999. Concurrently, a provision for loan
losses, in the same amount, was made in order to return the allowance for loan
losses to its balance prior to the charge for the impaired loans. During 2000,
Community Bank, including its subsidiary 1st Community Credit Corporation,
charged an additional $567,000 to its allowance for loan losses with respect to
these defaulted Ft. Payne loans. On June 20, 2000, Community Bank filed an
action in the United States District Court for the Northern District of Alabama
against an automobile dealership, several employees and former employees of the
dealership and a former employee of Community Bank. The lawsuit seeks damages of
an unspecified amount to recover losses incurred by Community Bank in connection
with the Ft. Payne loans, along with all costs associated with the legal action.
Any amounts received by Community Bank as a result of this litigation will be
treated as a recovery on loan losses. See "Item 3 - Legal Proceedings."

Loan charge-offs exceeded recoveries by $4,785,000 during 2000, which
represented a decrease of $41,000, or 0.9%, from $4,826,000 during 1999, which
represented an increase of $3,500,000, or 264.0%, from $1,326,000 during 1998.
Net loan charge-offs remained at the same level in 2000 compared to 1999
primarily due to an increase in assets classified as loss during 2000, which
resulted from aggressive lending in new expansion markets. The increase in 1999
was primarily due to the charge-off of the impaired balances of certain loans
originated in 1998 in Community Bank's Ft. Payne, Alabama Wal-Mart location.
Excluding the effect of the isolated occurrence of the impaired loans in the Ft.
Payne, Alabama office, net loan charge-offs for 1999 would have increased
$869,000, or 65.5%. Net charge-offs of consumer loans represented 80.6% of total
net charge-offs for 2000, compared to 96.9% for 1999 and 82.7% in 1998.

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47

The following table sets forth certain information with respect to the Company's
loans, net of unearned income, and the allowance for loan losses for the five
years ended December 31, 2000.

SUMMARY OF LOAN LOSS EXPERIENCE

2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in Thousands)

Allowance for loan losses at beginning of period.......... $ 2,603 $ 2,971 $ 2,131 $ 2,425 $ 2,209
Loans charged off:
Commercial, financial and agricultural.................. 620 282 190 80 392
Real estate - mortgage.................................. 319 92 50 325 158
Consumer................................................ 4,114 4,814 1,223 783 680
-------- -------- -------- -------- --------
Total loans charged off............................... 5,053 5,188 1,463 1,188 1,230
-------- -------- -------- -------- --------

Recoveries on loans previously charged off:
Commercial, financial and agricultural.................. 10 220 11 5 10
Real estate - mortgage.................................. 2 4 -0- 9 1
Consumer................................................ 256 138 126 97 72
-------- -------- -------- -------- --------
Total recoveries...................................... 268 362 137 111 83
-------- -------- -------- -------- --------

Net loans charged off..................................... 4,785 4,826 1,326 1,077 1,147
Reserves acquired through acquisitions.................... -0- -0- 1,281 10 529
Provision for loan losses................................. 9,289 4,458 885 773 834
-------- -------- -------- -------- --------

Allowance for loan losses at end of period................ $ 7,107 $ 2,603 $ 2,971 $ 2,131 $ 2,425
======== ======== ======== ======== ========

Loans, net of unearned income, at end of period........... $528,209 $498,726 $433,853 $326,134 $322,762
======== ======== ======== ======== ========

Average loans, net of unearned income,
outstanding for the period.............................. $522,301 $463,298 $378,189 $324,745 $276,878
======== ======== ======== ======== ========

2000 1999 1998 1997 1996
--------- -------- -------- -------- --------

Ratios:
Allowance for loan losses to loans, net of
unearned income, at end of period..................... 1.35% .52% .68% .65% .75%
Allowance for loan losses at end of period to average
loans, net of unearned income......................... 1.36 .56 .79 .66 .88
Net charge-offs to average loans, net of
unearned income....................................... .92 1.04 .35 .33 .41
Net charge-offs to allowance for loan losses,
at end of period ..................................... 67.33 185.40 44.63 50.54 47.30
Recoveries to prior year charge-offs.................... 5.17 24.74 11.53 9.02 16.31

In assessing the adequacy of the allowance for loan losses, management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of the portfolio in the aggregate. This
review takes into consideration the judgments of the responsible lending
officers and senior management, and also those of bank regulatory agencies that
review the loan portfolio as part of the regular bank examination process. Loans
identified as having increased credit risk are classified in accordance with the
Company's loan policy and appropriate reserves are established for each loan
classification category based on pre-determined reserve percentages. Reserves
are established for the remaining unclassified portion of the loan portfolio
based on actual historical loss factors associated with certain loan types.

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48

In evaluating the allowance, management also considers the historical loan loss
experience of Community Bank, the amount of past due and nonperforming loans,
current and anticipated economic conditions, lender requirements and other
appropriate information. Community Bank allocates its allowance for loan losses
to specific loan categories based on an average of net losses for each loan type
during the previous five years.

Management allocated the allowance for loan losses to specific loan classes, as
of the dates indicated, as follows:

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

December 31,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- -------------------- -------------------- -------------------- -------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- -------- -------- ------- -------- ------- --------
(Dollars in Thousands)

Domestic loans
Commercial,
financial and
and agricultural $ 711 10% $ 234 9% $ 526 18% $ 149 7% $ 800 33%
Real estate -
mortgage............ 497 7 182 7 357 12 618 29 340 14
Consumer............. 5,899 83 2,187 84 2,088 70 1,364 64 1,285 53
------- ---- -------- --- -------- --- -------- --- -------- ---

$ 7,107 100% $ 2,603 100% $ 2,971 100% $ 2,131 100% $ 2,425 100%
======= ==== ======== === ======== === ======== === ======== ===

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49

NONPERFORMING ASSETS

Nonperforming assets as of December 31, 2000 increased approximately $1,522,000,
or 31.7%, to approximately $6,329,000 from approximately $4,807,000 at year-end
1999, which represented an increase of approximately $124,000 or 2.6%, from
approximately $4,683,000 at December 31, 1998. Nonperforming loans include loans
classified as nonaccrual or renegotiated and those past due 90 days or more for
which interest was still being accrued. During 2000, nonaccruing loans decreased
30.7% to $1,877,000 at December 31, 2000, while loans past due 90 days or more
increased 93.0% to $2,571,000 at December 31, 2000. During 1999, nonaccruing
loans increased 69.3% to $2,709,000 at December 31, 1999, while loans past due
90 days or more declined 44.1% to $1,332,000 at December, 31, 1999. Other real
estate was $1,881,000 and $766,000 at December 31, 2000 and 1999, respectively,
which represented increases of 145.6% and 9.6%, respectively, from the prior
year-end. There were no commitments to lend any additional funds on nonaccrual
or renegotiated loans at December 31, 2000. The following table summarizes the
Company's nonperforming assets at December 31 during each of the last five
years.

NONPERFORMING ASSETS

December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- ---------
(Dollars in Thousands)

Nonaccruing loans................................. $ 1,877 $ 2,709 $ 1,600 $ 1,093 $ 565
Loans past due 90 days or more.................... 2,571 1,332 2,384 975 470
Restructured loans................................ -0- -0- -0- -0- -0-
--------- --------- -------- -------- ---------
Total nonperforming loans......................... 4,448 4,041 3,984 2,068 1,035
Other real estate................................. 1,881 766 699 656 791
--------- --------- -------- -------- ---------

Total nonperforming assets...................... $ 6,329 $ 4,807 $ 4,683 $ 2,724 $ 1,826
========= ========= ======== ======== =========

Ratios:
Allowance for loan losses to
total nonperforming assets...................... 112.29% 54.15% 63.44% 78.23% 132.80%
Total nonperforming loans to total
loans (net of unearned income).................. 0.84% 0.81% 0.90% 0.63% 0.32%
Total nonperforming assets
to total assets................................. 0.89% 0.71% 0.78% 0.55% 0.40%

The ratio of allowance for loan losses to total nonperforming assets increased
107.4% during 2000, to 112.29% at December 31, 2000, compared to declines of
14.6% during 1999, to 54.15% at December 31, 1999, and 18.9% during 1998 to
63.44% at December 31, 1998. The significant increase in this ratio for 2000
resulted from the substantial increase in the Company's allowance for loan
losses during 2000. The ratio of total nonperforming loans to total loans, net
of unearned income, decreased 3.7% during 2000, to 0.84% at December 31, 2000,
compared to 0.81% and 0.90% at year-end 1999 and 1998, respectively. The ratio
of total nonperforming assets to total assets increased 25.4% during 2000 to
0.89% at year-end 2000, compared to 0.71% at year-end 1999 and 0.78% at year-end
1998. Only slight changes have occurred in these latter two ratios over the past
five years. Management is aware of no factors which should suggest that they are
prone to significant increases in 2001.

In September 1998, Community Bank determined that approximately $9,360,000 in
motor vehicle loans that were originated in Community Bank's Ft. Payne, Alabama
Wal-Mart location primarily during a four-month period beginning in May 1998
were not in compliance with Community Bank's lending policy. By December 31,
1999, borrowers had defaulted on approximately $5,594,000 of these loans.
Community Bank took into possession and resold

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50

362 vehicles that served as collateral for these loans, which resulted in
proceeds of approximately $2,963,000, which was applied to the outstanding
balances of the defaulted loans. In the fourth quarter of 1999, management
determined that these unpaid balances were impaired and, therefore, made a
charge of approximately $2,631,000 to the Company's allowance for loan losses in
December 1999. Concurrently, a provision for loan losses, in the same amount,
was made in order to return the allowance for loan losses to its balance prior
to the charge for the impaired loans. In 2000, Community Bank, including its
subsidiary 1st Community Credit Corporation, charged an additional $567,000 to
its allowance for loan losses with respect to those defaulted Ft. Payne loans.
On June 20, 2000, Community Bank filed an action in the United States District
Court for the Northern District of Alabama against an automobile dealership,
several employees and former employees of the dealership and a former employee
of Community Bank. The lawsuit seeks damages of an unspecified amount to recover
losses incurred by Community Bank in connection with the Ft. Payne loans, along
with all costs associated with the legal action. Any amounts received by
Community Bank as a result of this litigation will be treated as a recovery on
loan losses. See "Item 3 - Legal Proceedings."

At December 31, 2000, the Company's recorded investment in loans considered to
be impaired was approximately $924,000, of which $128,000 related to loans on
non-accrual status and $796,000 related to certain loans improperly originated
through Community Bank's Double Springs, Alabama location (which are discussed
above under "--Provision for Loan Losses, Net Charge and Allowance for Loan
Losses"). At December 31,1999, the Company's recorded investment in loans
considered to be impaired was approximately $345,000 of which all were on
nonaccrual status. The related valuation allowance for impaired loans, included
as a component of the allowance for loan losses, was $520,000 at December 31,
2000 and $52,000 at December 31,1999. With the exception of these loans
originated through Community Bank's Double Springs, Alabama location, there was
no amount of interest income recognized on impaired loans during 2000 and 1999.

The difference between the gross interest income that would have been recorded
in each period if nonaccruing loans had been current in accordance with their
original terms and the amount of interest income on those loans that was
included in each period's net income was approximately $113,000 for 2000,
$115,000 for 1999 and $59,000 for 1998.

There were no concentrations of loans exceeding 10% of total loans which are not
otherwise disclosed as a category of loans at December 31, 2000, 1999 and 1998.

It is the general policy of Community Bank to stop accruing interest income and
place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Accrual of interest income on
consumer installment loans is suspended when any payment of principal or
interest, or both, is more than 90 days delinquent. When a loan is placed on a
nonaccrual basis any interest previously accrued but not collected is reversed
against current income unless the collateral for the loan is sufficient to cover
the accrued interest or a guarantor assures payment of interest.

NONINTEREST INCOME

Noninterest income for 2000 increased approximately $751,000, or 8.2%, to
approximately $9,906,000 from approximately $9,155,000 in 1999, which
represented an increase of approximately $1,053,000, or 13.0%, from
approximately $8,102,000 in 1998. These amounts are primarily from service
charges on deposit accounts, insurance commissions, bank club dues (a deposit
account packaged with other financial services) and debt cancellation fees. The
increases in service charges on deposit accounts are primarily a reflection of
the deposit

49
51

growth of the Company as it has expanded into new markets. Insurance commissions
increased 7.3% to approximately $2,406,000 in 2000 after remaining relatively
flat during 1999 and 1998. The level of insurance commissions during the past
three years is primarily a result of the activities of Community Insurance
Corp., a subsidiary of Community Bank, in the areas of property, casualty and
life insurance. Bank club dues remained relatively flat during 2000, reflecting
a decline of 0.4% to approximately $703,000, compared to increases of 11.9%
during 1999 and 12.3% during 1998. The increases in 1999 and 1998 were primarily
due to the continued geographic expansion of Community Bank, leading to
increases in the transaction accounts which generate these types of fees. Other
operating income increased 6.3%, to approximately $1,890,000 during 2000
compared to increases of 79.1% and 32.6% in 1999 and 1998, respectively. Debt
cancellation fees increased 22.0% to approximately $759,000, during 2000
compared to a 9.6% decline in 1999 and an increase of 150.2% during 1998. The
increase in 2000 was primarily due to increased volume in debt cancellation
coverage associated with growth in Community Bank's loan portfolio. Components
of other operating income reflecting increases during 2000 were fee income
associated with wire transfers, non-customer check cashing, ATM access and other
miscellaneous service fees. The Company also recognized gains on the sale of
investment securities in connection with its asset/liability management during
2000 and 1999, and the restructuring of its investment portfolio in October
1998.

NONINTEREST INCOME

Years Ended December 31, Percent Change
-------------------------------------- ---------------------------
2000 1999 1998 2000/1999 1999/1998
---------- ---------- ----------- ------------ -----------
(Dollars in Thousands)

Service charges on deposits............... $ 4,144 $ 3,627 $ 3,055 14.3% 18.7%
Insurance commissions..................... 2,406 2,243 2,269 7.3 (1.1)
Investment securities gains (losses)...... 4 179 466 (97.8) (61.6)
Bank club dues............................ 703 706 631 (0.4) 11.9
Debt cancellation fees.................... 759 622 688 22.0 (9.6)
Other..................................... 1,890 1,778 993 6.3 79.1
------- ------- -------
$ 9,906 $ 9,155 $ 8,102 8.2 13.0
======= ======= =======

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52

NONINTEREST EXPENSES

Noninterest expenses totaled approximately $31,755,000 in 2000, $29,208,000 in
1999 and $23,784,000 in 1998. These levels represent increases of 8.7%, 22.8%
and 36.5% for 2000, 1999 and 1998, respectively. The primary component of
noninterest expenses is salaries and employee benefits, which increased
$2,284,000, or 13.4%, during 2000 to $19,294,000, compared to $17,010,000 and
$14,189,000 for 1999 and 1998, respectively. The increase in salaries and
employee benefits during 2000 resulted primarily from merit increases and
incentive payments for existing personnel in addition to increased contributions
to the Company's pension plan and ESOP. Director and committee fees were
$675,000 in 2000, $601,000 in 1999 and $711,000 in 1998. The increase in 2000
resulted primarily from the payment of retainer fees to non-employee directors.
This represents a 12.3% increase in 2000 compared to a decrease of 15.5% in
1999. The decline in director and committee fees during 1999 reflected the
initiation in 1999 of a Company policy under which only non-employee directors
are paid for their service and participation on the boards of directors and
various committees of the Company and its subsidiaries. Employee directors no
longer receive board or committee fees. Occupancy expense increased 2.5% in 2000
to $2,722,000, compared to $2,655,000 in 1999 and $2,113,000 in 1998, while
furniture and equipment expenses increased 8.0% in 2000 to approximately
$1,908,000, as compared to $1,767,000 in 1999 and $1,544,000 in 1998. These
increases reflect the higher costs associated with the Company's expansion
activities during 1999 and 1998. Other operating expenses decreased 0.3% in 2000
to approximately $7,156,000, compared to $7,174,000 in 1999 which represented a
37.3% increase from $5,226,000 in 1998. The increase in other operating expenses
during 1999 was primarily due to increases in telephone and supply costs
associated with expansion activities, and accounting fees, legal fees, and
public relations, printing and advertising costs associated with the Company's
1999 annual shareholders' meeting and a related proxy contest.

In the first quarter of 2000, management took steps to reduce the rate of growth
of the Company's non-interest expenses. These steps included close scrutiny of
monies spent for travel and entertainment, social dues, advertising and
promotions, education and training and donations. As a result of these actions,
the Company reduced expenses in these areas by approximately $437,000, or 50.0%,
during 2000, as compared to 1999, including a $211,000, or 65.9%, decrease in
advertising expense, and a $202,000, or 79.2%, decrease in training and
education expense. These reductions, however, were offset by increased costs in
postage, telephone, audit and exam fees, and professional fees. Additional cost
reduction measures were identified in October 2000 and initiated in the fourth
quarter of 2000 and the first quarter of 2001. These actions include salary
reductions at the executive officer level of Community Bank and the Company,
staff reduction through attrition and down-sizing and a reduction in the number
of automobiles owned or leased by the Company and its subsidiaries.

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53

NONINTEREST EXPENSES

Year Ended December 31, Percent Change
-------------------------------------- ---------------------------
2000 1999 1998 2000/1999 1999/1998
---------- ---------- ---------- ------------ -----------
(Dollars in Thousands)

Salaries and employee benefits............ $19,294 $17,010 $14,189 13.4% 19.9%
Occupancy expense......................... 2,722 2,655 2,113 2.5 25.7
Furniture and equipment expense........... 1,908 1,767 1,544 8.0 14.4
Director and committee fees............... 675 601 711 12.3 (15.5)
Amortization of intangibles............... 554 493 440 12.4 12.0
Advertising............................... 109 320 93 (65.9) 244.1
Insurance................................. 298 171 130 74.3 31.5
Legal Fees................................ 785 894 116 (12.2) 670.7
Professional fees......................... 220 166 360 32.5 (53.9)
Supplies.................................. 515 623 471 (17.3) 32.3
Postage................................... 443 380 364 16.6 4.4
Telephone................................. 920 769 554 19.6 38.8
Training and Education.................... 53 25 256 (79.2) (0.4)
Other..................................... 3,259 3,104 2,443 5.0 27.1
------- ------- -------

$31,755 $29,208 $23,784 8.7 22.8
======= ======= =======

INCOME TAXES

The Company experienced a tax benefit of $1,704,000, or 43.5% effective tax
benefit rate, on a pre-tax loss of $3,919,000 for 2000, compared to income tax
liabilities of $502,000, or 23.3% effective tax rate, on pre-tax income of
$2,161,000 for 1999 and $1,526,000, or 29.9% effective tax rate on pre-tax
income of $5,106,000 for 1998. The effective tax benefit rate of 43.5% for 2000
is above the Federal statutory tax rate of 34%. This change is in part due to
the shift to a tax benefit position in 2000 from a tax liability position for
1999 and reflects the additional benefit of tax-free interest income. The tax
amounts and rates for 1999 and 1998 are lower than the statutory Federal tax
rate of 34% primarily due to investments in loans and securities earning
interest income that is exempt from Federal taxation. As proportionately fewer
available funds are invested in tax-exempt assets, the effective tax rate will
more closely approximate the statutory Federal tax rate. In 2000, the effective
tax benefit rate was 127.9% of the statutory Federal tax rate, compared to tax
rates which were 68.5% and 87.9% of the statutory Federal tax rate in 1999 and
1998, respectively. The Company attempts to maximize any tax benefits and
minimize any tax liabilities through active tax planning. A more detailed
explanation of income tax expense is included in Note 10 to the Company's
Consolidated Financial Statements included elsewhere in this Report.

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54

IMPACT OF INFLATION AND CHANGING PRICES

A bank's asset and liability structure is substantially different from that of
an industrial company in that virtually all assets and liabilities of a bank are
monetary in nature. Management believes the impact of inflation on financial
results depends upon the Company's ability to react to changes in interest rates
and by such reaction to reduce the inflationary impact on performance. Interest
rates do not necessarily move in the same direction, or at the same magnitude,
as the prices of other goods and services. As discussed above, management seeks
to manage the relationship between interest-sensitive assets and liabilities in
order to protect against wide interest rate fluctuations, including those
resulting from inflation.

Various information shown elsewhere in this Report should assist in an
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the composition of the loan and
security portfolios and the data on the interest sensitivity of loans and
deposits should be considered.

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55

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The interest rate shock analysis measures the impact on Community Bank's net
interest income as a result of immediate and sustained shift in interest rates.
The movement in market rates are based on statistical regression analyses while
management makes assumptions concerning balance sheet growth and the magnitude
of interest rate movements for certain interest earning asset and
interest-bearing liabilities. Using actual maturity and repricing opportunities
of Community Bank's portfolio, in conjunction with management's assumptions, a
rate shock analysis is performed using a plus 200 basis points shift and a minus
200 basis points shift in interest rates. Based on the Company's December 31,
2000 Asset/Liability Analysis, Community Bank's net interest income would
decline $917,000, or 3.22%, over the next twelve months as a result of a 200
basis points decrease in the interest rate environment. This interest rate
sensitivity in declining interest rate scenario is primarily due to an estimated
increase in prepayment speeds for mortgage-backed securities, including
collateralized mortgage obligations, resulting in the reinvestment of cash flows
at lower rates. A 200 basis points increase in interest rates would result in a
$790,000 or 2.78%, decrease in net interest income for the same period. The
interest rate sensitivity in a rising interest rate scenario is primarily due to
callable FHLB advances that are expected to be called requiring replacement of
this funding at higher cost.

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56

The following tables estimate the impact of shifts in interest rates on the
Company's net interest income for the 12 months ending December 31, 2001:

RATE SHOCK ANALYSIS

-200 +200
Basis Basis
Points Level Points
-------------------------------------
(Dollars in thousands)

Prime Rate.................................................... 7.00% 9.00% 11.00%

Interest Income............................................... $ 57,885 $62,488 $ 66,554
Interest Expense.............................................. 30,354 34,040 38,896
-------- ------- ---------

Net Interest Income........................................ $ 27,531 $28,448 $ 27,658
======== ======= =========

Dollar change from Level...................................... $ (917) $ (790)
Percentage change from Level.................................. (3.22)% (2.78)%

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55
57

INTEREST SENSITIVITY

Percentage Increase (Decrease)
in Interest Income/Expense
Principal Amount of Given Immediate and Sustained
Earning Assets, Interest Rate Shifts
Interest-bearing ---------------------------------
Liabilities at Down 200 Up 200
December 31, 2000 Basis Points Basis Points
---------------------- ---------------- --------------
(Dollars in Thousands)

Assets which reprice in:
One year or less........................... $ 244,827 (10.12)% 13.14%
Over one year.............................. 388,097 (5.80) 2.72
-----------

$ 632,924 (7.37) 6.51
===========

Liabilities which reprice in:
One year or less........................... $ 472,192 (12.98) 22.07
Over one year.............................. 117,363 (2.13) 17.30
-----------

$ 589,555 (10.83) 14.27
===========

Total net interest income sensitivity......... (3.22) (2.78)

[The remainder of this page intentionally left blank]

56
58

MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION

COMMUNITY BANCSHARES, INC.

The management of Community Bancshares, Inc. is responsible for the preparation,
integrity, and objectivity of the consolidated financial statements, related
financial data, and other information in this annual report. The consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States and include amounts based on
management's best estimates and judgment where appropriate. Financial
information appearing throughout this annual report is consistent with the
consolidated financial statements.

In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting systems and
related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded, and (iii) proper and
reliable records are maintained.

The concept of reasonable assurance is based on the recognition that the cost of
internal control systems should not exceed the related benefits. As an integral
part of internal control systems, the Company maintains a professional staff of
internal auditors who monitor compliance and assess the effectiveness of
internal control systems and coordinate audit coverage with independent
certified public accountants.

The responsibility of the Company's independent certified public accountants is
limited to an expression of their opinion as to the fairness of the consolidated
financial statements presented. Their opinion is based on an audit conducted in
accordance with generally accepted auditing standards as described in their
report.

The Board of Directors is responsible for insuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the consolidated financial statements. The Audit
Committee meets periodically with both management and the independent certified
public accountants to assure that each is carrying out its responsibilities. The
independent certified public accountants have full and free access to the Audit
Committee and Board of Directors and may meet with them, with and without
management being present, to discuss auditing and financial reporting matters.

57
59

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by Regulation S-X and
by Item 302 of Regulation S-K are set forth in the pages listed below.

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Financial Statements Page(s)
-------

Independent Auditor's Report................................................................................ 59

Consolidated Statements of Financial Condition as of December 31, 2000 and 1999............................. 60

Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998.......................................................................... 61

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998.......................................................................... 62

Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................................................................... 63-64

Notes to Consolidated Financial Statements -
December 31, 2000, 1999 and 1998......................................................................... 65-113

Quarterly Results (Unaudited)............................................................................. 114

58
60
INDEPENDENT AUDITOR'S REPORT

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

We have audited the consolidated statements of financial condition of Community
Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community
Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

Birmingham, Alabama
April 16, 2001

/S/ DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

December 31,
----------------------------------
2000 1999
------------- -------------

ASSETS
Cash ................................................................... $ 7,627,215 $ 11,698,392
Due from banks ......................................................... 18,379,396 15,099,119
Interest-bearing deposits with banks ................................... 700,000 700,000
Federal funds sold ..................................................... 3,000,000 -0-
Securities available for sale .......................................... 101,569,818 96,847,273
Loans .................................................................. 528,467,345 499,297,647
Less: Unearned income .................................................. 151,184 571,295
Allowance for loan losses ........................................ 7,107,430 2,603,128
------------- -------------
NET LOANS .............................................. 521,208,731 496,123,224
Premises and equipment, net ............................................ 39,325,645 35,683,614
Accrued interest ....................................................... 8,432,321 6,537,114
Intangibles, net ....................................................... 5,757,055 7,156,449
Other real estate ...................................................... 1,880,548 766,005
Other assets ........................................................... 5,637,313 4,287,061
------------- -------------
TOTAL ASSETS ........................................... $ 713,518,042 $ 674,898,251
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................. $ 67,285,705 $ 64,840,153
Interest-bearing .................................................... 533,615,062 508,420,641
------------- -------------
TOTAL DEPOSITS ......................................... 600,900,767 573,260,794
Other short-term borrowings ............................................ 2,265,231 2,493,842
Accrued interest ....................................................... 5,375,725 3,743,606
FHLB borrowing ......................................................... 38,000,000 40,000,000
Capitalized lease obligations .......................................... 5,850,225 -0-
Long-term debt ......................................................... 5,675,204 6,637,162
Guaranteed preferred beneficial interest in the Company's junior
subordinated deferrable interest debentures ........................ 10,000,000 -0-
Other liabilities ...................................................... 4,261,120 4,287,471
------------- -------------
TOTAL LIABILITIES ...................................... 672,328,272 630,422,875

Shareholders' equity
Preferred stock, par value $.01 per share, 200,000 shares
authorized, no shares issued .................................... -0- -0-
Common stock, par value $.10 per share, 20,000,000
shares authorized, 4,674,995 and 4,665,514 shares
issued, as of December 31, 2000 and 1999, respectively .......... 467,499 466,551
Capital surplus ..................................................... 29,804,921 29,411,513
Retained earnings ................................................... 13,490,799 19,038,875
Treasury Stock, 20,830 shares held as of December 31, 2000 and
no shares held as of December 31, 1999 .......................... (396,768) -0-
Unearned ESOP shares - 199,877 and 221,321 shares
as of December 31, 2000 and 1999, respectively .................. (2,574,002) (2,788,442)
Accumulated other comprehensive (loss) income ....................... 397,321 (1,653,121)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ............................. 41,189,770 44,475,376
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............. $ 713,518,042 $ 674,898,251
============= =============

See notes to consolidated financial statements

60
62

CONSOLIDATED STATEMENTS OF INCOME

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Years Ended December 31,
---------------------------------------------
2000 1999 1998
------------ ----------- -----------

INTEREST INCOME
Interest and fees on loans .............................................. $ 54,291,413 $46,390,060 $38,422,899
Interest on investment securities:
Taxable securities .................................................... 5,644,293 4,781,553 4,488,336
Securities exempt from federal income taxes ........................... 839,587 860,689 752,013
Interest on federal funds sold .......................................... 234,432 87,702 611,030
Interest on deposits in other banks ..................................... 65,576 74,250 90,641
------------ ----------- -----------
TOTAL INTEREST INCOME ................................... 61,075,301 52,194,254 44,364,919
------------ ----------- -----------
INTEREST EXPENSE
Interest on deposits .................................................... 29,711,253 23,593,922 21,963,493
Interest on other short-term borrowings ................................. 162,801 332,551 163,673
Interest on capitalized lease obligations ............................... 326,812 -0- -0-
FHLB borrowings ......................................................... 2,248,055 1,036,704 -0-
Interest on long-term debt .............................................. 567,579 558,484 565,887
Interest on guaranteed preferred beneficial interest in the Company's
junior subordinated deferrable interest debentures .................. 839,791 -0- -0-
------------ ----------- -----------
TOTAL INTEREST EXPENSE .................................. 33,856,291 25,521,661 22,693,053
------------ ----------- -----------

NET INTEREST INCOME ....................................................... 27,219,010 26,672,593 21,671,866
Provision for loan losses ................................................. 9,289,362 4,458,636 884,682
------------ ----------- -----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ....................... 17,929,648 22,213,957 20,787,184

NONINTEREST INCOME
Service charges on deposits ............................................. 4,143,775 3,626,448 3,055,298
Insurance commissions ................................................... 2,406,183 2,243,358 2,268,680
Bank club dues .......................................................... 702,534 706,080 630,427
Debt cancellation fees .................................................. 758,825 622,048 688,859
Other operating income .................................................. 1,890,220 1,777,641 993,152
Investment securities gains ............................................. 4,587 179,303 465,982
------------ ----------- -----------
TOTAL NONINTEREST INCOME ................................ 9,906,124 9,154,878 8,102,398
------------ ----------- -----------

NONINTEREST EXPENSES
Salaries and employee benefits .......................................... 19,293,662 17,010,366 14,189,168
Occupancy expense ....................................................... 2,722,441 2,654,567 2,113,400
Furniture and equipment expense ......................................... 1,908,086 1,767,388 1,543,634
Director and committee fees ............................................. 674,739 601,312 711,358
Other operating expenses ................................................ 7,156,251 7,174,614 5,226,325
------------ ----------- -----------
TOTAL NONINTEREST EXPENSES .............................. 31,755,179 29,208,247 23,783,885
------------ ----------- -----------

Income/(loss) before income taxes ......................................... (3,919,407) 2,160,588 5,105,697
Income tax expense/(benefit) .............................................. (1,704,476) 502,478 1,526,204
------------ ----------- -----------
NET INCOME/(LOSS) ....................................... $ (2,214,931) $ 1,658,110 $ 3,579,493
============ =========== ===========

Earnings/(Loss) Per Common Share - basic .................................. $ (.50) $ .37 $ .90
Earnings/(Loss) Per Common Share - diluted ................................ $ (.47) $ .36 $ .88

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Accumulated
Unearned Other
Common Capital Retained ESOP Comprehensive Treasury
Stock Surplus Earnings Shares Income Stock Total
-------- ----------- ----------- ----------- ------------- --------- -----------

Balance at January 1, 1998 ..... $203,161 $18,524,301 $18,824,795 $(2,002,902) $ 429,693 $ $35,979,048

Net Income - 1998 .............. 3,579,493 3,579,493

Other comprehensive income, net
of tax and reclassification
adjustments:
Net Change in Unrealized Gains
(Losses) on Securities ........ 13,246 13,246
-----------

Comprehensive Income ........... 3,592,739
-----------

Cash dividends: Common ......... (2,031,608) (2,031,608)

2:1 Stock split ................ 203,161 (203,161) -0-

Issuance of Common Stock ....... 58,470 10,576,082 10,634,552

Release of ESOP shares ......... 135,628 135,628

Pledging of additional ESOP
shares ........................ (1,076,958) (1,076,958)
-------- ----------- ----------- ----------- ----------- --------- -----------

Balance at December 31, 1998 ... 464,792 29,100,383 20,169,519 (2,944,232) 442,939 47,233,401

Net Income - 1999 .............. 1,658,110 1,658,110

Other comprehensive income, net
of tax and reclassification
adjustments:
Net Change in Unrealized Gains
(Losses) on Securities ........ (2,096,060) (2,096,060)
-----------

Comprehensive Income ........... (437,950)
-----------

Cash dividends: Common ......... (2,788,754) (2,788,754)

Issuance of Common Stock ....... 1,759 311,130 312,889

Release of ESOP shares ........ 155,790 155,790
-------- ----------- ----------- ----------- ----------- --------- -----------

Balance at December 31, 1999 .. 466,551 29,411,513 19,038,875 (2,788,442) (1,653,121) 44,475,376

NET LOSS - 2000 ................ (2,214,931) (2,214,931)

OTHER COMPREHENSIVE LOSS, NET
OF TAX AND RECLASSIFICATION
ADJUSTMENTS:
NET CHANGE IN UNREALIZED GAINS
(LOSSES) ON SECURITIES ........ 2,050,442 2,050,442
-----------

COMPREHENSIVE LOSS ............. (164,489)
-----------

CASH DIVIDENDS: COMMON ......... (3,333,145) (3,333,145)

ISSUANCE OF COMMON STOCK ....... 948 221,856 222,804

RELEASE OF ESOP SHARES ......... 171,552 214,440 385,992

PURCHASE OF TREASURY STOCK ..... (396,768) (396,768)
-------- ----------- ----------- ----------- ----------- --------- -----------

BALANCE AT DECEMBER 31, 2000 ... $467,499 $29,804,921 $13,490,799 $(2,574,002) $ 397,321 $(396,768) $41,189,770
======== =========== =========== =========== =========== ========= ===========

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Years Ended December 31,
-----------------------------------------------
2000 1999 1998
------------ ------------ -------------

OPERATING ACTIVITIES:
Net income/(loss) ..................................................... $ (2,214,931) $ 1,658,110 $ 3,579,493
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Provision for loan losses .......................................... 9,289,362 4,458,636 884,682
Provision for depreciation and amortization ........................ 3,467,187 2,296,843 1,990,250
Amortization of investment security
premiums and accretion of discounts .............................. 149,261 162,032 166,455
Deferred tax (benefit) expense ..................................... (2,198,860) 225,413 308,759
Realized investment security gains ................................. (4,587) (179,303) (465,982)
Loss on sale of premises and equipment ............................. 144,398 4,396 26,599
Increase in accrued interest receivable ............................ (1,895,207) (545,526) (901,823)
Increase in accrued interest payable ............................... 1,632,119 162,672 668,648
Other .............................................................. (2,157,701) 1,460,171 (3,520,039)
------------ ------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................... 6,211,041 9,703,444 2,737,042
------------ ------------ -------------

INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale .................. 16,229,953 11,627,522 24,045,040
Proceeds from maturity of securities available for sale ............... 25,210,217 10,778,482 21,785,801
Purchase of securities available for sale ............................. (42,889,985) (25,337,831) (57,808,777)
Net decrease in interest-bearing
deposits with other banks ........................................... -0- 250,000 1,564,558
Cash used in acquisition of insurance operations ...................... -0- (750,000) (5,321,041)
Loans purchased ....................................................... -0- (2,312,592) -0-
Net increase in loans to customers .................................... (34,374,869) (67,674,628) (99,903,246)
Proceeds from sale of premises and equipment .......................... 162,914 72,680 87,630
Capital expenditures .................................................. (5,986,652) (7,254,322) (8,452,082)
Net proceeds from sale of other real estate ........................... 853,961 415,941 1,119,355
------------ ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES .......................... (40,794,461) (80,184,748) (122,882,762)
------------ ------------ -------------

FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts,
savings and time open deposit accounts .............................. (9,214,288) 16,952,243 30,636,345
Net increase in certificates of deposit ............................... 36,854,261 17,723,030 61,416,395
Net (decrease) increase in short-term borrowings .................... (228,611) 302,001 (438,546)
(Decrease) increase in borrowings from FHLB ........................... (2,000,000) 40,000,000 -0-
Net increase in capitalized lease obligations ......................... 5,850,225 -0- -0-
Repayment of long-term debt ........................................... (961,958) (775,764) (770,226)
Issuance of guaranteed preferred beneficial interest in Company's
junior subordinated deferrable interest debentures ................ 10,000,000 -0- -0-
Issuance of common stock .............................................. 222,804 312,889 10,634,552
Purchase of treasury stock ............................................ (396,768) -0- -0-
Cash dividends ........................................................ (3,333,145) (2,788,754) (2,031,608)
------------ ------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................................ 36,792,520 71,725,645 99,446,912
------------ ------------ -------------

Net increase (decrease) in cash and cash equivalents .................... 2,209,100 1,244,341 (20,698,808)

Cash and cash equivalents at beginning of year .......................... 26,797,511 25,553,170 46,251,978
------------ ------------ -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR ................................ $ 29,006,611 $ 26,797,511 $ 25,553,170
============ ============ =============

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Years Ended December 31,
-----------------------------------------------
2000 1999 1998
------------ ------------ -------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:
Interest ............................................................ $ 35,488,410 $ 25,684,333 $ 22,024,405
Income taxes ........................................................ 859,978 1,121,889 843,623

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Other real estate of $1,824,857, $840,902 and $792,518 was acquired in 2000,
1999 and 1998, respectively, through foreclosure. Other assets acquired by
foreclosure amounted to $2,975,936 in 2000, $3,969,795 in 1999, $277,675 in
1998.

Upon the pledging of additional shares to obtain additional ESOP debt of
$1,076,958 on December 1, 1998 and $1,260,007 on May 17, 1996, long-term debt
was increased and equity was decreased. The debt was reduced and shares were
released by $182,218, $155,790 and $135,628, respectively, during each of the
years ended December 31, 2000, 1999, and 1998 as a result of payments made by
the Company's ESOP on the outstanding ESOP debt.

In August 1997, the Company issued 11,770 shares of its common stock to the
owners of Southern Select Insurance, Inc. as a portion of the consideration
given in exchange for 51% of its issued and outstanding common stock. The
Company issued an additional 22,306 shares of its common stock, in April 1998,
to the owners of Southern Select Insurance, Inc. as a portion of the
consideration in exchange for the remaining 49% of its issued and outstanding
common stock. In April 1998 the Company issued 10,833 shares of its common stock
to the owners of Chafin Insurance Agency, Inc. as a portion of the consideration
given in exchange for 100% of the issued and outstanding shares of common stock.
The Company also issued 6,667 shares of its common stock to the owner of the Jim
Murphree Insurance Agency, Inc. as a portion of the consideration given in
exchange for 100% of the issued and outstanding shares of common stock. In
November 2000, Community Insurance Corp., received 10,833 shares of the
Company's common stock, previously issued to the owners of the Chafin Insurance
Agency, Inc., as a portion of the consideration for the sale of the Graysville,
Alabama insurance office to the original owners. Community Insurance Corp. also
received 6,667 shares of the Company's common stock, previously issued to the
owner of the Jim Murphree Insurance Agency, Inc., as a portion of the
consideration for the sale of the Oneonta, Alabama insurance office to its
original owner.

[The remainder of this page intentionally left blank]

See notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the
accounts of Community Bancshares, Inc. and its wholly owned subsidiaries (the
"Company"), Community Bank, Community Appraisals, Inc., Community Insurance
Corp. and 1st Community Credit Corporation (collectively, the "Bank.") All
significant intercompany balances and transactions have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.

Investments in Securities: The Company's investments in securities must be
classified as either "Investment Securities Held to Maturity" or "Investment
Securities Available for Sale" and accounted for as follows:

- Securities Held to Maturity. Bonds, notes and debentures for which the Bank
has the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums and accretion of discounts which
are recognized in interest income using methods which approximate level
yields over the period to maturity.

- Securities Available for Sale. Securities available for sale consist of
bonds, notes, debentures, and certain equity securities not classified as
securities held to maturity.

The Company and its subsidiaries have no trading securities. At December 31,
2000 and 1999, all of the Company's investments in securities were classified as
securities available for sale.

Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders'
equity (Accumulated Other Comprehensive Income) until realized.

Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.

Revenue Recognition: Interest on loans is accrued and credited to operations
based upon the principal amount outstanding, except for interest on certain
consumer loans which is recognized over the term of the loan using a method
which approximates level yields.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
loan is impaired. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.

Generally, all nonaccrual loans not meeting the definition of smaller balance
homogeneous loans are considered impaired. Smaller balance homogeneous loans
include, but are not limited to, residential mortgages and consumer installment
loans. For those loans classified as impaired, impairment is measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor shall measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable. The
Company's policy for recognizing interest income on impaired loans is consistent
with its nonaccrual policy.

Allowance for Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential loan losses in the
loan portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loan loss experience, current
domestic and international economic conditions, collateral values of properties
securing loans, volume, growth and composition of the loan portfolio, and other
relevant factors. Unfavorable changes in any of these, or other factors, or the
availability of new information, could require that the allowance for loan
losses be increased in future periods. The method used to determine the amount
of loss inherent in the loan portfolio and thereby assess the adequacy of the
recorded balance of the allowance for loan losses involves identifying portfolio
loans with similar characteristics for which estimates of inherent future
probably losses can be made. The estimates are based on historical loss factors
as adjusted for current business and economic conditions. The loss factors are
applied to the representative portfolios in order to determine the overall
adequacy of the allowance for loan losses. Loans deemed uncollectible are
charged to the allowance. Provisions for loan losses and recoveries on loans
previously charged off are added to the allowance.

Loan Fees: The Company accounts for loan fees and origination costs in
accordance with Statement of Financial Accounting Standards No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Direct Costs of Leases. The basic requirement of this statement calls for
the Company to treat loan fees, net of direct costs, as an adjustment to the
yield of the related loan over the term of the loan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Expenditures for additions and major improvements that
significantly extend the useful lives of the assets are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred. The
carrying value of assets traded in are used to adjust the carrying values of the
new assets acquired by trade. Assets which are disposed of are removed from the
accounts and the resulting gains or losses are recorded in operations.

Depreciation is provided generally by accelerated and straight-line methods
based on the estimated useful lives of the respective assets.

Other Real Estate: Other real estate comprises properties acquired through a
foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These
properties are carried at the lower of cost or fair market value based on
appraised value at the date acquired. Loan losses arising from the acquisition
of such properties are charged against the allowance for loan losses.

Earnings Per Common Share: Basic earnings per common share are computed by
dividing earnings available to stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflect
per share amounts that would have resulted if dilutive potential common stock
had been converted to common stock, as prescribed by Statement of Financial
Accounting Standards No. 128, Earnings per Share. The following reconciles the
weighted average number of shares outstanding:

2000 1999 1998
---------- ---------- ----------

Weighted average of common shares outstanding................. 4,460,295 4,429,303 3,994,798
Effect of dilutive options.................................... 211,135 165,769 57,461
---------- ---------- ----------
Weighted average of common shares
outstanding effected for dilution.......................... 4,671,430 4,595,072 4,052,259
========== ========== ==========

Income Taxes: Provisions for income taxes are based on amounts reported in the
statement of income (after exclusion of non-taxable income such as interest on
state and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred tax assets and liabilities are included in the
financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.

The Company and its subsidiaries file a consolidated federal income tax return.
Each subsidiary provides for income taxes on a separate-return basis, and remits
to the Company amounts determined to be currently payable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Pension and Employee Stock Ownership Plans: The Company and its subsidiaries
have various employee benefit plans which cover substantially all employees.
Pension expense is determined based on an actuarial valuation. The Company
contributes amounts to the pension fund sufficient to satisfy funding
requirements of the Employee Retirement Income Security Act. Contributions to
the Employee Stock Ownership Plan ("ESOP") are determined by the Board of
Directors but may not be less than the amount required to cover the debt service
on the ESOP loan. In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132, Employer's
Disclosures about Pensions and Other Postretirement Benefits. This Statement
standardizes the disclosure requirement for pensions and other post-retirement
benefits to the extent practicable, and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain other disclosures
previously required. The adoption of this statement had no material impact on
the financial condition or results of operations of the Company.

Intangibles: Intangibles consist of legal organizational cost and goodwill. In
April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Cost of Startup Activities" (SOP
98-5), effective for fiscal years beginning after December 15, 1998. SOP 98-5
requires that startup and organizational costs be expensed as they are incurred.
With the Company's initial application of SOP 98-5 effective January 1999, there
were no startup or organizational costs required to be reported as a cumulative
effect of a change in accounting principle. Prior to the Company's adoption of
SOP 98-5, organizational costs were stated at cost, net of accumulated
amortization, and amortized using the straight-line method over five years. The
goodwill intangible represents premiums paid on the purchase of assets and
deposit liabilities. Goodwill assets are stated at cost, net of accumulated
amortization, and amortized using the straight-line method over the estimated
useful life of approximately 15 and 20 years.

Off Balance Sheet Financial Instruments: In the ordinary course of business the
Company has entered into off balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.

The Company also has available as a source of short-term financing the purchase
of federal funds from other commercial banks from available lines of up to
$6,000,000. In addition, Community Bank has credit availability from the Federal
Home Loan Bank of Atlanta (FHLB-Atlanta). This credit availability is
established at 10% of the Bank's total assets, based on the most recent
quarterly financial information submitted to the appropriate regulatory agency.
At December 31, 2000, the established credit availability from FHLB-Atlanta was
approximately $71,000,000, of which Community Bank had drawn $38,000,000 against
this credit availability under the FHLB-Atlanta "Convertible Advance Program."

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Debt Cancellation Contracts: The Company began issuing debt cancellation
contracts on certain loans to customers as of October 1, 1995. The contract
represents an agreement by the Company to cancel the debt of the borrower upon
said borrower's death. Contracts may not be written on loans in excess of
$25,000 per borrower. The Company charges fees equivalent to that authorized by
the state banking authorities and establishes a reserve account, from fees
collected, to cover potential claims. The reserve for debt cancellation
contracts totaled $168,001 and $151,866 at December 31, 2000 and 1999,
respectively.

Cash Flow Information: For purposes of the statements of cash flows, the Company
considers cash, due from banks and federal funds sold as cash and cash
equivalents.

Stock Based Compensation: The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 became effective for years beginning after December
15, 1995, and allows for the option of continuing to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
the related Interpretations or selecting the fair value method of expense
recognition as described in SFAS No. 123. The Company has elected to follow APB
No. 25 in accounting for its employee stock options.

Repurchase Agreements: In June 1996, the Financial Accounting Standards board
issued Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
relating to repurchase agreements, securities lending and other similar
transactions, and pledged collateral. This statement established new criteria
for determining whether a transfer of financial assets in exchange for cash or
other consideration should be accounted for as a sale or as a pledge of
collateral. Subsequently, Statement of Financial Accounting Standards No. 127,
Deferral of the Effective Date of Certain Provisions of SFAS No. 125 was issued
and deferred implementation of certain aspects of the original statement until
January 1, 1998. The adoption of these provisions did not have a material impact
on the Company's financial position or results of operations.

Earnings Per Share: The Company also adopted SFAS No. 128, Earnings Per Share,
during 1997. See Note 1 - Earnings per Share, and Note 11 - Prior Period
Restatement.

Reclassification: Certain amounts in 1999 and 1998 have been reclassified to
conform with the 2000 presentation.

Comprehensive Income: In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes reporting and presentation
standards for comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during the period from transactions
and other events and circumstances arising from nonowner sources. The adoption
of this statement, on January 1, 1998, had no material impact on the Company's
financial condition or results of operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Segment Information: In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information. The provisions of this
statement establishes standards for the way that public business enterprises
report information about operating segments in annual and interim financial
reports issued to shareholders. This statement also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement requires the reporting of financial and descriptive
information about an enterprise's reportable operating segments. This statement
is effective for financial statements for periods beginning after December 15,
1997. All of the Company's subsidiaries offer similar products and services, are
located in the same geographic region, and serve the same customer segments of
the market. As a result, management considers all units as one operating segment
and therefore feels that the basic financial statements and related footnotes
provide details related to segment reporting.

Recently Issued Accounting Standards: In June 1998, the Financial Accounting
Standards Board also issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative is to be determined
based upon the intended use of the derivative. For certain hedge designations
(cash flow and foreign currency exposure) the derivative's gain or loss is
reported as a component of other comprehensive income. Other designations
require the gain or loss to be recognized in earnings in the period of change.
This statement, amended as to effective date by SFAS No. 137, is effective for
financial statements for periods beginning after June 15, 2000. In June 2000,
the Financial Accounting Standards Board also issued SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an Amendment
of SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did
not have a material impact on the Company's financial statements.

In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - a replacement of FASB Statement No. 125. While SFAS No. 140
carries over most of the provisions of SFAS No. 125, Accounting Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, it provides
new standards for reporting financial assets transferred as collateral and new
standards for the derecognition of financial assets, in particular transactions
involving the use of special purpose entities. SFAS No. 140 also prescribes
additional disclosures for collateral transactions and for securitization
transactions accounted for as sales. The new collateral standards and disclosure
requirements are effective for fiscal years ending after December 15, 2000,
while the new standards for the derecognition of financial assets are effective
for transfers made after March 31, 2001. The adoption of this statement did not
have a material effect on the Company's financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Bank is required to maintain average reserve balances either in vault cash
or on deposit with the Federal Reserve. The amount of those reserves required at
December 31, 2000 was approximately $205,000.

During 1998 the Bank implemented a system, which under Regulation D and recent
Federal Reserve Rulings, allows the Bank to segregate its transaction accounts
into a transaction sub-account component and a non-transaction sub-account
component. The transaction sub-account component remains subject to the higher
10% reserve requirement while the non-transaction sub-account component is
subject to a 3% reserve requirement. This process allows the Bank to maintain
lower reserves required by the Federal Reserve System.

NOTE 3 - INVESTMENT SECURITIES

At December 31, 2000 and 1999, the Company's investment securities are
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Unrealized holding gains and losses,
net of applicable deferred taxes, are included as a component of shareholders'
equity, (Accumulated Other Comprehensive Income) until realized.

At December 31, 2000, the Company's available-for-sale securities reflected net
unrealized gains of $662,202, which resulted in an increase in shareholders'
equity of $397,321, net of deferred tax expense, compared to net unrealized
losses of $2,755,202 and a resultant decrease in stockholders' equity of
$1,653,121, net of deferred tax liability, at December 31, 1999.

[The remainder of this page intentionally left blank]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The carrying amounts of investment securities as shown in the consolidated
statements of financial condition of the Company and their approximate fair
values at December 31, 2000 and 1999 are presented below.

GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------

AS OF DECEMBER 31, 2000:

SECURITIES AVAILABLE FOR SALE:

U.S. GOVERNMENT AND AGENCY SECURITIES ....... $ 46,826,740 $ 350,714 $ 347,680 $ 46,829,774

STATE AND MUNICIPAL SECURITIES .............. 18,591,183 914,593 6,445 19,499,331

MORTGAGE-BACKED SECURITIES .................. 31,580,186 153,284 392,757 31,340,713

EQUITY SECURITIES ........................... 3,909,507 -0- 9,507 3,900,000
------------ ---------- ---------- ------------

$100,907,616 $1,418,591 $ 756,389 $101,569,818
============ ========== ========== ============
As of December 31, 1999:

Securities available for sale:

U. S. government and agency securities ...... $ 57,109,784 $ 8,303 $1,248,220 $ 55,869,867

State and municipal securities .............. 8,696,808 53,277 393,563 8,356,522

Mortgage-backed securities .................. 31,695,883 10,380 1,185,379 30,520,884

Equity securities ........................... 2,100,000 -0- -0- 2,100,000
------------ ---------- ---------- ------------

$ 99,602,475 $ 71,960 $2,827,162 $ 96,847,273
============ ========== ========== ============

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The contractual maturities of securities available for sale at December 31, 2000
are shown 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.

Estimated
Amortized Fair
Cost Value
------------ ------------

AS OF DECEMBER 31, 2000:

DUE IN ONE YEAR OR LESS ..................... $ 7,717,137 $ 7,689,652
DUE AFTER ONE YEAR THROUGH FIVE YEARS ....... 40,045,764 40,044,386
DUE AFTER FIVE YEARS THROUGH TEN YEARS ...... 31,274,758 31,178,154
DUE AFTER TEN YEARS ......................... 17,960,450 18,757,626
EQUITY SECURITIES ........................... 3,909,507 3,900,000
------------ ------------

$100,907,616 $101,569,818
============ ============

Mortgage-backed securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.

Gross realized gains and losses on investments in debt securities available for
sale for each of the years ended December 31, 2000, 1999 and 1998 were as
follows:

2000 1999 1998
-------- -------- --------

Gross realized gains $ 45,362 $186,853 $472,904
Gross realized losses 40,775 7,550 6,922

The carrying value of investment securities pledged to secure public funds on
deposit, securities sold under agreements to repurchase, and for other purposes
as required by law amounted to approximately $80,503,000 and $82,331,000 at
December 31, 2000 and 1999, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 4 - LOANS

The Bank grants loans to customers primarily in north and west-central Alabama
and south-central Tennessee.

The major classifications of loans as of December 31, 2000 and 1999 were as
follows:

DECEMBER 31,
--------------------------------
2000 1999
------------ ------------

Commercial, financial and agricultural ...... $140,773,063 $124,244,731
Real estate - construction .................. 5,429,141 6,469,943
Real estate - mortgage ...................... 236,591,919 224,129,260
Consumer .................................... 145,673,222 144,453,713
------------ ------------
528,467,345 499,297,647
Unearned income ............................. 151,184 571,295
Allowance for loan losses ................... 7,107,430 2,603,128
------------ ------------

Net loans ................................... $521,208,731 $496,123,224
============ ============

At December 31, 2000, the Company's recorded investment in loans considered to
be impaired was approximately $924,000, of which $128,000 related to loans on
non-accrual status and $796,000 related to certain loans originated through
Community Bank's Double Springs, Alabama location which management became aware
in March 2001 had been improperly originated and that the payments for such
loans had been manipulated by a since terminated Bank employee to make it
falsely appear that payments under the loans were current. At December 31, 1999
the Company's recorded investment in loans considered to be impaired was
approximately $345,000 of which all were on nonaccrual status. The related
valuation allowance for impaired loans, included as a component of the allowance
for loan losses, was $520,000 at December 31, 2000 and $52,000 at December 31,
1999. With the exception of these loans originated through Community Bank's
Double Springs, Alabama location, there was no amount of interest income
recognized on impaired loans during 2000 and 1999.

Other nonaccrual loans at December 31, 2000 and 1999 amounted to approximately
$1,748,637 and $2,363,755, respectively. The difference between gross interest
income that would have been recorded in each period if nonaccruing loans had
been current in accordance with their original terms and the amount of interest
income on those loans that was included in each period's net income was $113,038
for the year ended December 31, 2000, $115,098 for the year ended December 31,
1999 and $58,829 for the year ended December 31, 1998.

The Bank has no commitments to loan additional funds to the borrowers of
nonaccrual loans.

[The remainder of this page intentionally left blank]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 5 - ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for each of the years ended December
31, 2000, 1999 and 1998, were as follows:

2000 1999 1998
----------- ----------- -----------

Balance at beginning of year ............... $ 2,603,128 $ 2,970,597 $ 2,131,354

Charge-offs ................................ (5,053,052) (5,188,037) (1,463,450)
Recoveries ................................. 267,992 361,932 137,264
----------- ----------- -----------
Net charge-offs .......................... (4,785,060) (4,826,105) (1,326,186)

Provision for loan losses .................. 9,289,362 4,458,636 884,682

Reserves acquired through acquisitions ..... -0- -0- 1,280,747
----------- ----------- -----------

Balance at end of year ..................... $ 7,107,430 $ 2,603,128 $ 2,970,597
=========== =========== ===========

NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2000 and 1999 was as follows:

December 31,
--------------------------------
2000 1999
------------ ------------

Land .......................................................... $ 3,402,209 $ 3,497,061
Buildings, land improvements and construction in process ...... 25,161,118 26,711,593
Capitalized leases ............................................ 5,880,626 -0-
Furniture and equipment ....................................... 12,719,546 11,328,601
Automobiles ................................................... 1,690,867 1,896,663
Leasehold improvements ........................................ 853,690 1,073,148
------------ ------------
49,708,056 44,507,066
Less allowance for depreciation ............................... 10,382,411 8,823,452
------------ ------------

$ 39,325,645 $ 35,683,614
============ ============

The provisions for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 2000, 1999 and 1998 were $2,037,309,
$1,798,679 and $1,549,920, respectively. The Bank capitalized $244,971 and
$241,167 in interest costs related to building construction in 2000 and 1999,
respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 7 - DEPOSITS

The major classifications of deposits as of December 31, 2000 and 1999, were as
follows:

December 31,
--------------------------------
2000 1999
------------ ------------

Noninterest-bearing demand ..................... $ 67,285,705 $ 64,840,153
Interest-bearing demand ........................ 85,475,801 98,397,437
Savings ........................................ 63,603,383 64,845,420
Time ........................................... 260,170,173 227,009,814
Certificates of deposit of $100,000 or more .... 101,011,881 97,317,970
Other time deposits ............................ 23,353,824 20,850,000
------------ ------------

$600,900,767 $573,260,794
============ ============

The maturities of time deposits following December 31, 2000, were as follows:

2001................................................ $300,403,019
2002................................................ 62,201,813
2003................................................ 12,809,381
2004................................................ 3,324,886
2005................................................ 5,688,264
Thereafter.......................................... 108,515
------------
$384,535,878
============

NOTE 8 - FHLB BORROWINGS AND LONG TERM DEBT

At December 31, 2000 and 1999, the Company had notes payable totaling
$53,675,204 and $46,637,162, respectively.

On December 17, 1992, the Company entered into a loan agreement with a regional
bank for amounts up to $6,500,000. At December 31, 2000 and 1999, the amounts
outstanding were $1,423,003 and $2,134,505, respectively, due December 17, 2002,
bearing interest at a floating prime rate, collateralized by 100% of the common
stock of Community Bank. The note agreement contains provisions which limit the
Company's right to transfer or issue shares of Community Bank's stock. Principal
payments of $59,292 are due monthly; however, the Company has the option of
postponing up to twenty-four monthly principal payments, provided that no more
than six consecutively scheduled installments are deferred.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 8 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED

On November 3, 1993, the Trustees of the Company's ESOP executed a promissory
note of $1,200,000 in order to purchase common stock from the Company's public
offering of new common stock. The note was originally secured by 80,000 shares
of purchased stock. The promissory note had been refinanced in years subsequent
to 1993 as additional shares were purchased by the ESOP. On December 1, 1998,
this note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments due
monthly through November 16, 2010, with all remaining principal, if any, due
upon that date. The initial principal and interest payment on this debt was
$31,677. As changes occur in the interest rate on the loan, appropriate
adjustments are made to the monthly principal and interest payments. At December
31, 2000, the monthly payment was $33,852. The Company has guaranteed this debt
and in accordance with the applicable accounting and reporting guidelines the
debt has been recognized on the Company's statement of condition, with an
offsetting charge against equity. As principal payments are made by the ESOP,
the debt and offsetting charge against equity are reduced. The shares securing
the note are released on a prorata basis by the lender as monthly payments of
principal and interest are made. The outstanding balance of this note was
$2,606,224 at December 31, 2000, secured by 199,877 of unreleased shares of
Company stock. (See Note 16)

On October 4, 1994, the Company entered into a twenty-year, subordinated
installment capital note due October 1, 2014 for the purchase of treasury stock.
Monthly principal and interest payments of $15,506 are made on the note, which
bears interest at the fixed annual rate of 7%. The Company maintains the right
to prepay the note at its sole discretion. The balance of the note was
$1,645,977 and $1,714,215 at December 31, 2000 and 1999, respectively.

Since June 1999, Community Bank has borrowed funds under the Federal Home Loan
Bank of Atlanta's (FHLB-Atlanta) "Convertible Advance Program." These advances
have had original maturities of 10 years, with stated call features during the
life of the obligation, at fixed interest rates for the life of the obligations.
Principal is due at final maturity or on stated call dates, with interest
payable each quarter. On June 1, 1999, Community Bank, the Company's bank
subsidiary, borrowed $30,000,000 under the FHLB-Atlanta's "Convertible Advance
Program." This advance had a final maturity of June 1, 2009 (120 months), with a
call feature every three months during the life of the obligation, and carried a
fixed interest rate of 4.62% per annum. This obligation was called on September
1, 1999 due to an increase in market interest rates. As a result of this call,
Community Bank refinanced the original advance and borrowed an additional
$10,000,000 under the same "Convertible Advance Program." This advance, totaling
$40,000,000 at December 31, 1999, had a final maturity of September 1, 2009 (120
months), with a call feature every six months during the life of the obligation,
and carried a fixed rate of 4.99% per annum. Due to the call of this obligation
on March 1, 2000, Community Bank made a $2,000,000 reduction in the amount
advanced under the FHLB-Atlanta "Convertible Advance Program" and refinanced
$38,000,000. This new obligation has a final maturity of March 1, 2010 (120
months), a call feature every 12 months during the life of the obligation, and a
fixed interest rate of 5.93% per annum. At December 31, 2000, outstanding funds
advanced to Community Bank under the FHLB-Atlanta "Convertible Advance Program"
totaled $38,000,000. The first call date for this advance is March 1, 2001.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 8 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED

[The remainder of this page intentionally left blank]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 8 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED

Maturities and stated calls of long-term debt and FHLB borrowings following
December 31, 2000 are as follows:

Trust
Note Subordinated FHLB Preferred
Payable Debt Borrowings Securities
----------- ------------ ----------- ------------

2001 ........................................ $ 877,255 $ 73,171 $38,000,000 $ -0-
2002 ........................................ 893,705 78,461 -0- -0-
2003 ........................................ 200,287 84,133 -0- -0-
2004 ........................................ 220,165 90,215 -0- -0-
2005 ........................................ 242,015 96,737 -0- -0-
Thereafter .................................. 1,595,801 1,223,260 -0- 10,000,000
----------- ----------- ----------- -----------

$ 4,029,228 $ 1,645,977 $38,000,000 $10,000,000
=========== =========== =========== ===========

NOTE 9 - OTHER OPERATING EXPENSES

Other operating expenses consist of the following:

Years Ended December 31,
----------------------------------------------
2000 1999 1998
---------- ---------- ----------

Amortization of intangibles ..... $ 553,521 $ 493,602 $ 440,330
Insurance ....................... 298,052 171,165 129,572
Legal fees ...................... 785,192 893,874 116,482
Professional fees ............... 219,990 166,021 359,981
Supplies ........................ 514,633 622,980 471,676
Postage ......................... 442,930 380,060 363,948
Telephone ....................... 920,029 768,944 553,693
Other ........................... 3,421,904 3,677,968 2,790,643
---------- ---------- ----------

$7,156,251 $7,174,614 $5,226,325
========== ========== ==========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 10 - INCOME TAXES

Federal and state income taxes receivable as of December 31, 2000 and 1999
included in other assets and other liabilities, respectively, were as follows:

December 31,
---------------------------------
2000 1999
------------ ------------

Current
Federal ................................... $ 1,187,883 $ 829,614
============ ============
State ..................................... $ 2,666 $ 15,781
============ ============

The components of the net deferred income tax asset and (liability) as of
December 31, 2000 and 1999 included in other assets and other liabilities,
respectively, are as follows:

December 31,
---------------------------------
2000 1999
------------ ------------

Deferred tax asset:
Federal ........................................ $ 2,602,500 $ 1,469,530
State .......................................... 323,179 231,276
------------ ------------
Total gross deferred income tax asset ......... 2,925,679 1,700,806
------------ ------------
Deferred tax liability:
Federal ........................................ (1,301,142) (991,638)
State .......................................... (173,114) (122,789)
------------ ------------
Total gross deferred income tax liability ..... (1,474,256) (1,114,427)
------------ ------------

Net deferred income tax asset (liability) ........ $ 1,451,423 $ 586,379
============ ============

The tax effects of each type of income and expense item that gave rise to
deferred taxes are:

December 31,
---------------------------------
2000 1999
------------ ------------

Net unrealized losses (gains) on securities
available for sale ............................. $ (264,881) $ 1,102,081
Depreciation ..................................... (1,190,043) (1,072,654)
Pension expense .................................. 387,136 309,774
Provision for loan losses ........................ 1,900,848 210,819
Deferred compensation ............................ 11,662 15,596
Provision for debt cancellation .................. 61,606 55,691
Alternative minimum tax credit carryforward ...... 351,505 -0-
Loss carryforward ................................ 191,353 -0-
Other ............................................ 2,237 (34,928)
------------ ------------

$ 1,451,423 $ 586,379
============ ============

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 10 - INCOME TAXES - CONTINUED

The components of income tax expense for each of the years ended December 31,
2000, 1999 and 1998 were:

2000 1999 1998
------------------------------ --------------------------- ----------------------------
CURRENT DEFERRED Current Deferred Current Deferred
--------- ------------ --------- --------- ----------- ---------

Federal ...... $ 501,709 $ (1,985,384) $ 277,441 $ 213,177 $ 1,070,862 $ 264,234
State ........ (7,325) (213,476) (376) 12,236 146,583 44,525
--------- ------------ --------- --------- ----------- ---------

$ 494,384 $ (2,198,860) $ 277,065 $ 225,413 $ 1,217,445 $ 308,759
========= ============ ========= ========= =========== =========

The principal sources of temporary differences resulting in deferred income
taxes included in the accompanying consolidated statements of income and the tax
effect of each are as follows:

2000 1999 1998
----------- ----------- -----------

Depreciation ........................ $ 117,389 $ 127,338 $ 205,360
Provision for loan losses ........... (1,690,029) 124,631 135,538
Pension expense ..................... (77,362) (49,695) (109,558)
Alternative minimum tax credit
carryforward .................... (351,505) -0- -0-
Loss carryforward ................... (191,353) -0- -0-
Other ............................... (6,000) 23,139 77,419
----------- ----------- -----------

$(2,198,860) $ 225,413 $ 308,759
=========== =========== ===========

Tax effects of securities transactions resulted in an increase (decrease) in
income taxes for 2000, 1999 and 1998 of $1,682, $65,750 and $170,876,
respectively.

The following is a reconciliation of the difference in the effective tax rate
and the federal statutory rate:

Years Ended December 31,
--------------------------------------
2000 1999 1998
------ ------ ------

Statutory federal income tax rates ................. 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities ............................ 7.3 (13.5) (5.0)
Tax-exempt loan income ........................... 3.4 (4.9) (2.5)
State income tax, net of federal tax benefit ..... 3.7 0.5 2.5
Interest expense disallowance .................... (1.2) 1.9 0.6
Other items ........................................ (3.7) 5.3 0.3
------ ------ ------
Effective income tax rate .......................... 43.5% 23.3% 29.9%
====== ====== ======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 11 - PRIOR PERIOD RESTATEMENT

Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, was adopted by the Company during 1997. Earnings per share amounts for
1997 have been restated to give effect for the 2 for 1 stock split effected in
the form of a 100% stock dividend paid on March 26, 1998.

NOTE 12 - SHAREHOLDERS' EQUITY

On January 7, 1999, the Board of Directors of the Company adopted a Share
Purchase Rights Plan and declared a dividend of one preferred share purchase
right (a "Right") for each outstanding share of common stock of the Company to
shareholders of record on January 7, 1999. Each Right entitles the stockholder
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company at a price of $84 per one
one-hundredth of a preferred share. In the event that any person or group of
affiliated or associated persons acquires beneficial ownership of 15% or more of
the outstanding common stock of the Company (an "Acquiring Person"), each holder
of a purchase right, other than the Acquiring Person, will thereafter have the
right to receive upon exercise of the Right that number of shares of common
stock of the Company having a market value of two times the exercise price of
the Right. If the Company is acquired in a merger or other business combination
transaction or 50% or more of its assets or earning power are sold after a
person or group has become an Acquiring Person, each holder of a Right, other
than an Acquiring Person, will thereafter have the right to receive that number
of shares of common stock of the acquiring company which at the time of such
transaction have a market value of two times the exercise price of the Right. At
any time after a person or group becomes an Acquiring Person and prior to the
acquisition of 50% or more of the outstanding common stock of the Company by
such person or group, the Board of Directors of the Company may exchange the
Rights, other than Rights owned by an Acquiring Person, in whole or in part, at
an exchange ratio of one common share or one one-hundredth of preferred share.
The purchase price and the number of shares issuable upon exercise of the Rights
are subject to adjustment in the event of a stock split, stock dividend,
reclassification or certain distributions with respect to the preferred stock.
The Rights will expire January 13, 2009 unless such date is extended or unless
the Rights are redeemed or exchanged prior to such date.

In 1998, the Board of Directors passed a resolution authorizing the preparation
of a Registration Statement for the proposed sale of up to 500,000 newly issued
shares of the Company's $.10 par value common stock. Shares were offered to the
public, at a purchase price of $19.00 per share, in accordance with the
Company's Prospectus dated August 14, 1998. The offering was closed on December
1, 1998 upon full subscription of all shares offered for sale, raising
$9,468,655 of capital after reduction for offering costs.

In March 1996, the Company issued options to purchase a total of 270,000 shares
of the Company's common stock. The options were issued to the directors based
upon their years of service and their positions with the Company. Each of the
options has an exercise price of $10.00 per share, the market value (as
determined by the Board of Directors) of the Company's common stock at the time
of issuance. The options are exercisable through March 27, 2001. In March 1997,
an additional 103,000 options were issued to the Company's directors with an
exercise price of $12.50 per share, the market value (as determined by the Board
of Directors) of the Company's common stock at the time of issuance. These
options are exercisable through

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 12 - SHAREHOLDERS' EQUITY - (CONTINUED)

March 26, 2002. In March 1998, 203,331 options were issued to directors and
certain senior officers with an exercise price of $15.00 per share, the market
value (as determined by the Board of Directors) of the Company's common stock at
the time of issuance. These options are exercisable through March 25, 2003. In
December 1999, an additional 204,000 options were issued to directors and
certain senior officers with an exercise price of $20.00 per share, the market
value (as determined by the Board of Directors) of the Company's common stock at
the time of issuance. These options are exercisable through December 3, 2004. In
August 2000, the Company granted options to purchase an aggregate of 15,000
shares of common stock to certain senior officers of Community Bank. Each of
these options has an exercise price of $18.00 per share, the market value (as
determined by the Board of Directors) of the Company's common stock at the time
of issuance. These options are exercisable through August 24, 2005. The Company
did not receive any payment in exchange for granting any of such options, which
were granted in reliance upon an exemption from registration under Section 4(2)
of the Securities Act of 1933.

[The remainder of this page intentionally left blank]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 12 - SHAREHOLDERS' EQUITY - (CONTINUED)

The following sets forth certain information regarding stock options for the
years ended December 31, 2000, 1999 and 1998:

Number Wgt. Average
Of Shares Exercise Price
--------- --------------

Balance, December 31, 1997 ............................... 343,000 $ 10.74

Granted, Year Ended December 31, 1998 .................... 203,331 15.00
Exercised, Year Ended December 31, 1998 .................. (32,000) (11.72)
--------- --------

Balance, December 31, 1998 ............................... 514,331 12.36

Granted, Year Ended December 31, 1999 .................... 204,000 20.00
Exercised, Year Ended December 31, 1999 .................. (27,000) (14.81)
--------- --------

Balance, December 31, 1999 ............................... 691,331 14.52

GRANTED, YEAR ENDED DECEMBER 31, 2000 .................... 15,000 18.00
EXERCISED AND EXPIRED, YEAR ENDED DECEMBER 31, 2000 ...... (2,500) (20.00)
--------- --------

BALANCE, DECEMBER 31, 2000 ............................... 703,831 $ 14.57
========= ========

Expiration Options
Number Date Exercisable
-------- ---------- -----------

Options with Exercise Price of $10.00................. 222,000 3-27-2001 222,000
Options with Exercise Price of $12.50................. 97,000 3-26-2002 97,000
Options with Exercise Price of $15.00................. 168,331 3-25-2003 168,331
Options with Exercise Price of $20.00................. 201,500 12-03-2004 201,500
Options with Exercise Price of $18.00................. 15,000 8-24-2005 15,000
-------- ---------- --------
Total outstanding, December 31, 2000.................. 703,831 703,831
======== ========

The number of shares and weighted average exercise price have been restated to
give effect for the 2 for 1 stock split effected in the form of a 100% stock
dividend paid on March 26, 1998.

In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, Accounting and Disclosure of Stock-Based Compensation ("SFAS 123"). SFAS
123 is effective for years beginning after December 15, 1995, and allows for the
option of continuing to follow Accounting Principles Board Opinion No. 25,
Accounting for Stocks Issued to Employees, and the related Interpretations or
selecting the minimum value method of expense recognition as described in SFAS
123. The Company has elected to apply APB Opinion No. 25 in accounting for its
incentive stock options; accordingly, no compensation cost has been recognized
by the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 2000, 1999 and 1998, was estimated at
the date of grant using a Black-Scholes option pricing model. The Black-Scholes
option pricing model was originally developed for use in estimating the fair
value of traded options which have different characteristics from the Company's
employee stock options. The model is also sensitive to changes in the subjective
assumptions which can materially affect the fair value estimate. As a result,
management believes that the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.

The Company's options outstanding have a weighted average contractual life of
2.02 years. The weighted average fair value of options granted was $4.12 in
2000, $3.10 in 1999 and $3.68 in 1998. The fair value of each option granted is
estimated using the following weighted-average assumptions in the option pricing
model: expected dividend yield of 2.78% for 2000, 4.25% for 1999 and 3.33% for
1998; an expected option life of five years; expected volatility of 0.250 for
2000, 0.164 for 1999 and 0.289 for 1998; and a risk free interest rate of 5.08%,
6.60% and 5.49% for 2000, 1999 and 1998, respectively.

If compensation cost for the Company's stock-based compensation plan had been
determined consistent with SFAS No. 123, net income/(loss) and earnings/(loss)
per share would have been as presented below for the years ended December 31:

2000 1999 1998
--------- ------- -------

Pro forma net income/(loss) ($000's)............................ $ (2,254) $ 1,258 $ 3,101
Pro forma earnings/(loss) per Common Share - basic.............. (.51) .28 .78
Pro forma earnings/(loss) per Common Share - diluted............ (.48) .27 .77

These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent average number of shares
outstanding on a diluted basis to be 211,135 greater than that used to calculate
basic earnings/(loss) per share for 2000. Average shares outstanding when
assuming dilution were greater than average shares outstanding for basic
earnings per share by 165,769 for 1999 and 57,461 for 1998. The dilutive effect
on earnings/(loss) per share was $(.03) for the year ended December 31, 2000,
$.01 for the year ended December 31, 1999 and $.02 for the year ended December
31, 1998.

The effects of applying SFAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board of Directors.

Annual dividends of $.75 per share, $.60 per share and $.50 per share were
declared by the Company's Board of Directors on its common stock and paid in
January of 2000, 1999 and 1998, respectively. The payment of dividends on common
stock is subject to the prior payment of principal and interest on the Company's
long-term debt, maintenance of sufficient earnings and capital of the
subsidiaries, and to regulatory restrictions. (See Notes 8 and 17).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 13 - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements. Commitments to extend credit, credit card arrangements, commercial
letters of credit and standby letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extensions of credit that are recorded on the consolidated
statements of financial condition. Because these instruments have fixed maturity
dates, and because many of them expire without being drawn upon, they do not
generally present any significant liquidity risk to the Company. The Company has
not been required to perform on any financial guarantees nor has it incurred any
losses on its commitments in either 2000 or 1999. Following is a discussion of
these commitments:

Standby Letters of Credit: These agreements are used by the Company's customers
as a means of improving their credit standings in their dealings with others.
Under these agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do so. As of December
31, 2000 and 1999, the Company has issued standby letters of credit of
approximately $978,000 and $1,235,000, respectively.

Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of the
Company's allowance for loan losses. Management does not anticipate any material
losses as a result of these letters of credit.

Loan Commitments: As of December 31, 2000 and 1999, the Company had commitments
outstanding to extend credit totaling approximately $19,868,000 and $18,165,000,
respectively. These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.

Litigation: At a meeting of Community Bank's Board of Directors on June 20,
2000, a director brought to the attention of the Board the total amount of money
Community Bank had paid subcontractors in connection with the construction of a
new Community Bank office. Management of the Company commenced an investigation
of the expenditures. At the request of management, the architects and
subcontractors involved in the construction project made presentations to the
Boards of Directors of the Company and Community Bank on July 15 and July 18,
2000, respectively. At the July 18, 2000 meeting of the Board of Directors of
Community Bank, another director made a presentation alleging that Community
Bank had been overcharged by subcontractors on that construction project and
another current construction project. On July 18, 2000, the Boards of Directors
of the Company and Community Bank appointed a joint committee comprised of
independent directors of the Company and of Community Bank to investigate the
alleged overcharges. Upon completion of its investigation, the joint committee
is to inform the Boards of Directors of the Company and Community Bank of its
findings and recommendations. The joint committee has retained legal counsel and
an independent accounting firm to assist the committee in its investigation.
Management has also been

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

informed that the directors of Community Bank who alleged the construction
overcharges have contacted bank regulatory agencies and law enforcement
authorities. Management believes that these agencies and authorities either have
conducted or are currently conducting investigations regarding this matter.

On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community Bank. The complaint alleges that the
directors, officers and employee named as defendants in the complaint breached
their fiduciary duties, failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of corporate assets by allegedly
permitting the subcontractor defendants to overcharge Community Bank in
connection with the construction of two new Community Bank offices, and to
perform the construction work without written contracts, budgets, performance
guarantees and assurances of indemnification. In addition, the complaint alleges
that Kennon R. Patterson, Sr., the Chairman, President and Chief Executive
Officer of the Company, breached his fiduciary duties by allegedly permitting
the two named subcontractors to overcharge for work performed on the two
construction projects in exchange for allegedly discounted charges for work
these subcontractors performed in connection with the construction of Mr.
Patterson's residence. The complaint further alleges that the director
defendants knew or should have known of this alleged arrangement between Mr.
Patterson and the subcontractors. The complaint also alleges that Mr. Patterson,
the Community Bank employee and the two subcontractor defendants made false
representations and suppressed information about the alleged overcharges and
arrangement between Mr. Patterson and the subcontractors. On August 15, 2000,
the plaintiffs filed an amended complaint adding Andy C. Mann, a shareholder of
the Company, as a plaintiff and adding a former director of the Company and
Community Bank as a defendant. The amended complaint generally reiterates the
allegations of the original complaint. In addition, the amended complaint
alleges that Community Bank was overcharged on all construction projects from
January 1997 to the present. The amended complaint also alleges that the
defendants breached their fiduciary duties and are guilty of gross financial
mismanagement, including allegations concerning the making or approval of
certain loans and taking allegedly improper actions to conceal the fact that
certain loans were uncollectible. On September 18, 2000 the plaintiffs filed a
second amended complaint. The second amended complaint generally reiterates the
allegations of the original and first amended complaints. In addition, the
second amended complaint alleges that the plaintiffs were improperly denied
their rights to inspect and copy certain records of the Company and Community
Bank. The second amended complaint also alleges that the directors of the
Company abdicated their roles as directors either by express agreement or as a
result of wantonness and gross negligence. The second amended complaint asserts
that the counts involving inspection of corporate records and director
abdication are individual, nonderivative claims. The second amended complaint
seeks, on behalf of the Company, an unspecified amount of compensatory damages
in excess of $1 million, punitive damages, disgorgement of allegedly improperly
paid profits and appropriate equitable relief. Upon motion of the defendants,
the case was transferred to the state Circuit Court in Blount County, Alabama by
order dated September 21, 2000, as amended on October 12, 2000. On August 24,
2000, the Board of Directors of the Company designated

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

the directors of the Company who serve on the joint investigative committee as a
special litigation committee to investigate and evaluate the allegations and
issues raised in this lawsuit and to arrive at such decisions and take such
action as the special litigation committee deems appropriate. At a hearing on
February 23, 2001 the court stayed discovery with respect to the Company,
Community Bank and the directors, officers and employees of each until May 24,
2001, at which time the court expects to receive a report from the special
litigation committee. Because the special litigation committee has not yet
completed its investigation, and as a result of the inherent uncertainties of
the litigation process, the Company is unable at this time to predict the
outcome of this lawsuit and its effect on the Company's financial condition and
results of operations. Regardless of the outcome, however, this lawsuit could be
costly, time-consuming and a diversion of management's attention.

On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. The complaint alleged that the directors of the Company
breached their fiduciary duty to the Company and its shareholders, engaged in
fraud, fraudulent concealment, suppression of material fact and suppression of
the plaintiff shareholders, failed to supervise management, and conspired to
conceal wrongful acts from the Company's shareholders and paid themselves
excessive director fees. The complaint also alleged that the Board of Directors
acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the
Chairman of the Board, Chief Executive Officer and President of the Company,
including alleged self dealing, payment of excessive compensation,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint sought an unspecified amount of compensatory and punitive damages,
removal of the current directors, appointment of a new Board of Directors, and
attorneys fees and cost. On December 21, 1998, the Company and its directors
filed a motion with the court seeking to have the complaint dismissed. On March
1, 1999, the Company's Board of Directors appointed a special Board committee
comprised of non-employee directors of the Company, to review the plaintiffs'
allegations in accordance with Delaware law. On April 6, 1999, each of the
parties to the action requested that the court stay the litigation and related
discovery, motions and hearings, pending completion of the special committee's
review. On April 30, 1999, the court entered an order staying the litigation and
related discovery, motions and hearing in accordance with the parties' request.
On October 15, 1999, the special committee filed its final report with the
court. On October 21, 1999, the parties forwarded to the court an agreed-upon
order governing the confidentiality of the special committee's report, which the
court entered on January 2, 2000. On August 3, 2000, the Company, Community Bank
and the Company's directors filed a motion to stay the proceedings until the
Company's and Community Bank's joint investigative committee had completed its
investigation of the alleged construction overcharges discussed above. At the
request of the Company and the other defendants in the action, the court
continued a hearing on the motion to dismiss. On February 23, 2001, the court
indicated that there was no reason to continue the stay of this action. The
parties are awaiting a hearing on the defendants' motion to dismiss the case.
Management of the Company believes that the plaintiffs' allegations are false
and that the action lacks merit. The Company and its directors intend to defend
the action vigorously, and management of the Company believes that the action
will not have a material adverse

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

effect on the Company's financial condition or results of operations. Regardless
of the outcome, however, this lawsuit could be costly, time consuming and a
diversion of management's attention.

On June 28, 2000, Community Bank filed an action in the United States District
Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc.,
an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug
Broaddus, the owners of the dealership, several employees and former employees
of the dealership and Gerald Scot Parrish, a former employee of Community Bank,
with respect to certain loans originated during 1998 in Community Bank's
Wal-Mart office in Ft. Payne, Alabama. In the complaint Community Bank alleged
that the defendants willingly and knowingly conducted, participated in, were
employed by or associated with, or aided and abetted an enterprise within the
meaning of the Racketeer Influenced and Corrupt Organizations Act (RICO) for the
purpose of defrauding Community Bank. The complaint also asserted that the
defendants committed fraud, misrepresentation and deceit by submitting to
Community Bank and/or approving applications for automobile loans which
contained false and/or fraudulent information for the purpose of deceiving,
influencing and persuading Community Bank to provide loans to customers of the
automobile dealership who were otherwise not qualified to receive such loans,
and suppressed material facts regarding the veracity of information contained in
loan applications and the ability of persons seeking the loans to repay them.
Community Bank also alleged in the complaint that the automobile dealership is
responsible for the acts of its officers, agents and employees, and that the
dealership and its management failed to adequately train and/or supervise its
employees. The complaint stated that the defendants participated in a conspiracy
to violate RICO and Alabama statutes dealing with fraud, misrepresentation and
suppression of material facts, and asserted civil liability under Alabama law
for violation of federal statutes dealing with financial institution fraud, mail
and wire fraud and making false statements for the purpose of influencing the
actions of a financial institution upon an application or loan. On June 29, 2000
and August 31, 2000, the court granted Community Bank's motions to dismiss
without prejudice two of the employees of the automobile dealership as
defendants in the action. On September 13, 2000, the court granted Mr. Parrish's
motion

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

to dismiss the complaint, but granted Community Bank 15 days to amend the
complaint. On September 27, 2000, Community Bank filed an amended complaint
which generally reiterated the allegations of the original complaint and added
specific information concerning the allegedly fraudulent activity and the use of
the United States mail, telephone and other wire transmissions in the conduct of
such activity. On December 1, 2000, the court dismissed Community Bank's claims
based upon mail and wire fraud in the amended complaint but otherwise denied Mr.
Parrish's motion to dismiss the complaint. The defendants have filed answers to
the amended complaint which generally deny the material allegations in the
complaint and allege that any injury suffered by Community Bank was the result
of the contributory negligence of Community Bank, its officers, employees and
agents. In the lawsuit, Community Bank seeks damages of an unspecified amount to
recover losses incurred in connection with the loans made at Community Bank's
Wal-Mart office in Ft. Payne, Alabama, along with all costs associated with the
lawsuit. Any amounts received by Community Bank as a result of this litigation
will be treated as a recovery on loan losses.

The Company and its subsidiaries are from time to time parties to other legal
proceedings arising in the ordinary course of business. Management believes,
after consultation with legal counsel, that no such proceedings, if resulting in
an outcome unfavorable to the Company, will, individually or in the aggregate,
have a material adverse effect on the Company's financial condition or results
of operations.

All of the Company's loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Company. Investments in state and municipal
securities also involve governmental entities within the Company's market area.
The concentrations of credit by type of loan are set forth in Note 4. The
commitments to extend credit relate primarily to consumer cash lines which
represented approximately $2,277,256 and $2,277,256 of the unused commitment
balances at December 31, 2000 and 1999. All remaining commitments consist
primarily of unused real estate commitment lines.

90
92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 14 - CONCENTRATIONS OF CREDIT

The Company maintains cash deposits, including certificates of deposit, with
various commercial banks in Alabama. The total cash balances are insured by the
FDIC up to $100,000. Total uninsured balances held at other commercial banks
amounted to $15,474,227 and $14,205,879, at December 31, 2000 and 1999,
respectively.

In addition to cash deposits, Community Bank had $3,000,000 in unsecured federal
funds sold to one of its correspondent banks at December 31, 2000.

NOTE 15 - PENSION PLAN

The Company has a defined benefit plan that provides retirement and disability
benefits for substantially all employees of the Company and its subsidiaries,
and death benefits for their beneficiaries. An employee will become a
participant in the Pension Plan on January 1 or July 1 after completing 12
months of employment during which the employee works at least 1,000 hours. All
employees are eligible to become participants in the Pension Plan regardless of
age on the date they begin employment and the normal retirement age is age 65.
In addition, participants in the Pension Plan accrue benefits after they have
attained the normal retirement age.

Benefits under the Pension Plan depend upon a participant's years of credited
service with the Company or any of its subsidiaries and his average monthly
earnings for the highest five consecutive years out of the participants final 10
years of employment. An employee who becomes a participant on or after January
1, 1996 will not be vested in any benefit until he completes five years of
service at which time the employee will be 100% vested. An employee who became a
participant before January 1, 1996, is 20% vested in his accrued benefits after
completion of two years of service, 40% vested after three years of service, 60%
vested after four years of service and becomes fully vested upon completion of
five years of service. An employee who completes ten years of service and
attains age 55 is eligible for early retirement benefits. Plan assets consist
primarily of corporate stocks and bonds.

The Company contributes amounts to the pension funds sufficient to satisfy
funding requirements of the Employee Retirement Income Security Act.

Effective January 1, 1995, the Company established a nonqualified benefit plan
for certain key executives called the Community Bancshares, Inc. Benefit
Restoration Plan, the purpose of which is to provide the amount of the benefit
which would otherwise be paid under the Company's Pension Plan but which cannot
be paid under that plan due to the limitations imposed by the Internal Revenue
Code of 1986, as amended.

[The remainder of this page intentionally left blank]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 15 - PENSION PLAN - CONTINUED

The following tables set forth the funding status and the amount recognized for
both the Pension Plan and the Benefit Restoration Plan in the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income.

Pension Plan as of December 31:

2000 1999
----------- -----------

Change in benefit obligation:
Benefit obligation at beginning of year .............. $ 5,279,613 $ 5,320,518
Service cost ......................................... 620,489 485,701
Interest cost ........................................ 446,220 366,805
Amendments ........................................... -0- -0-
Actuarial (gain) or loss ............................. 885,026 (733,903)
Benefits paid ........................................ (200,459) (159,508)
----------- -----------
Benefit obligation at end of year .................... $ 7,030,889 $ 5,279,613
=========== ===========

Change in plan assets:
Fair value of plan assets at beginning of year ....... $ 4,983,127 $ 4,796,405
Actual return on plan assets ......................... (66,986) 346,230
Employer contribution ................................ 438,244 -0-
Benefits paid from plan assets ....................... (200,459) (159,508)
----------- -----------
Fair value of plan assets at end of year ............. $ 5,153,926 $ 4,983,127
=========== ===========

Funded status of plan:
Funded status of plan ................................ $(1,876,963) $ (296,486)
Unrecognized actuarial (gain) or loss ................ 1,186,539 (294,873)
Unrecognized prior service cost ...................... 89,036 100,735
Unrecognized transition asset ........................ (20,673) (37,552)
----------- -----------
Accrued benefit cost ............................... $ (622,061) $ (528,176)
=========== ===========
Weighted average rate assumptions used in
determining pension cost and the projected
benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year ..... 7.50% 8.00%
Expected long-term rate of return on plan
assets for the year ................................ 10.00% 10.00%
Expected rate of increase in future
compensation levels ................................ 6.00% 6.00%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 15 - PENSION PLAN - CONTINUED

Pension plan net periodic benefit cost:

2000 1999 1998
--------- --------- ---------

Service cost ........................... $ 620,489 $ 485,701 $ 410,795
Interest cost .......................... 446,220 366,805 334,729
Expected return on plan assets ......... (529,400) (470,474) (395,136)
Amortization of prior service cost ..... 11,699 11,699 11,699
Amortization of transitional asset ..... (16,879) (16,879) (16,879)
Recognized actuarial loss .............. -0- -0- -0-
--------- --------- ---------
Net periodic benefit cost .............. $ 532,129 $ 376,852 $ 345,208
========= ========= =========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 15 - PENSION PLAN - CONTINUED

Benefit Restoration Plan as of December 31:

2000 1998
-------------- --------------

Change in benefit obligation:
Benefit obligation at beginning of year .............. $ 2,082,163 $ 1,188,395
Service cost ......................................... 141,048 85,940
Interest cost ........................................ 170,368 96,712
Amendments ........................................... -0- -0-
Actuarial loss ....................................... 284,587 711,116
Benefits paid ........................................ -0- -0-
-------------- --------------
Benefit obligation at end of year .................... $ 2,678,166 $ 2,082,163
============== ==============

Change in plan assets:
Fair value of plan assets at beginning of year ....... $ -0- $ -0-
Actual return on plan assets ......................... -0- -0-
Employer contribution ................................ -0- -0-
Benefits paid from plan assets ....................... -0- -0-
-------------- --------------
Fair value of plan assets at end of year ............. $ -0- $ -0-
============== ==============

Funded status of plan:
Funded status of plan ................................ $ (2,678,166) $ (2,082,163)
Unrecognized actuarial loss .......................... 1,298,222 1,077,383
Unrecognized prior service cost ...................... 133,346 168,253
Unrecognized transition (asset) or obligation ........ -0- -0-
-------------- --------------
Accrued benefit cost ................................. $ (1,246,598) $ (836,527)
============== ==============

Weighted average rate assumptions used in
determining pension cost and the projected
benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year ..... 7.50% 8.00%
Expected long-term rate of return on plan
assets for the year ................................ 10.00% 10.00%
Expected rate of increase in future
compensation levels ................................ 6.00% 6.00%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 15 - PENSION PLAN - CONTINUED

Benefit Restoration plan net periodic benefit cost:

2000 1999 1998
------------- ------------ -------------

Service cost................................................ $ 141,048 $ 85,940 $ 68,927
Interest cost............................................... 170,368 96,712 74,466
Expected return on plan assets.............................. -0- -0- -0-
Amortization of prior service cost.......................... 34,907 34,907 34,907
Amortization of transitional (asset) or obligation.......... -0- -0- -0-
Recognized actuarial loss................................... 63,748 38,399 25,967
------------- ------------ --------------
Net periodic benefit cost................................... $ 410,071 $ 255,958 $ 204,267
============= ============ ==============

NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. An employee becomes a participant in
the ESOP on June 30 or December 31 after completing 12 months of employment
during which the employee is credited with 1,000 or more hours of service.
Contributions to the ESOP are made at the discretion of the Company's Board of
Directors, but may not be less than the amount required to cover the debt
service on the ESOP loan. Employer contributions are allocated to eligible
participants in proportion to their compensation, which equals W-2 wages plus
pre-tax reductions for the Company's cafeteria plan. The Internal Revenue Code
imposes a limit ($170,000 in 2000) on the amount of compensation which may be
considered under the plan.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. The promissory note has been refinanced in years subsequent to
1993 as additional shares were purchased by the ESOP. On December 31, 1998, this
note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments due
monthly through November 16, 2010, with the remaining principal, if any, due
upon that date. The initial principal and interest payment on this debt in
December 1998 was $31,677. As changes occur in the interest rate on the loan,
appropriate adjustments are made to the monthly principle and interest payments.
At December 31, 2000, the monthly payment was $33,852. The Company has
guaranteed this debt and in accordance with the applicable accounting and
reporting guidelines the debt has been recognized on the Company's statement of
condition, with an offsetting charge against equity. As principal payments are
made by the ESOP, the debt and offsetting charge against equity are reduced. The
shares securing the note are released on a prorata basis by the lender as
monthly payments of principal and interest are made. As of December 31, 2000,
there were 199,877 unreleased shares with a fair value, based on an independent
valuation of $18 per share, of approximately $3,597,786. These shares are
subtracted from outstanding shares for earnings per share calculations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP 93-6,
the employer must recognize the indebtedness of its sponsored ESOP on its
financial statement and reduce its stockholders' equity for shares of stock
which have not been released by a lender to the ESOP for allocation to its
participating employees. The portion of payments made by the Company to the ESOP
on behalf of its participating employees which are used to pay interest on the
ESOP debt ($251,976, $237,589 and $165,808 in 2000, 1999 and 1998, respectively)
is classified as interest expense on the Company's income statement.

Dividends paid on released ESOP shares are credited to the accounts of the
participants to whom the shares are allocated. Dividends on unreleased shares
may be used to repay debt associated with the ESOP or treated as other income of
the ESOP and allocated to the participants.

At December 31, 2000 and 1999, the Company's financial statements reflected
long-term debt related to the ESOP of $2,606,224 and $2,788,442, respectively.
The corresponding contra-equity account was $2,574,002 at December 31, 2000 and
$2,788,442 at December 31, 1999.

Company contributions to the ESOP amounted to $568,346, $452,739 and $316,008
for 2000, 1999 and 1998, respectively.

NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its stockholders and
other needs. Certain restrictions exist regarding the ability of the Bank to
transfer funds to the Company in the form of cash dividends, loans or advances.
Under Alabama law, the approval of the Alabama Superintendent of Banks is
required to pay dividends in excess of the Bank's net earnings for the current
year plus retained net earnings for the preceding two years less any required
transfers to surplus. Under these guidelines, Community Bank could not have
declared or paid any dividend at December 31, 2000, without prior approval of
the state regulatory authorities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 18 - REGULATORY CAPITAL

The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the state and federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if taken, could have a
direct material effect on the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Community Bank must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings and other
factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and Community Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2000 and 1999, that the Bank meets all capital adequacy requirements to which it
is subject.

At December 31, 2000, under applicable banking regulations, the Company and
Community Bank, were considered well capitalized compared to both being
classified as adequately capitalized at year-end 1999. The Company is entitled
to treat the aggregate liquidation amount of the junior subordinated deferrable
interest debentures, purchased by Community (AL) Capital Trust I, as Tier I
capital under Federal Reserve guidelines. At December 31, 2000, the aggregate
liquidation amount of the debentures included in Tier I capital was $10,000,000.
(See Note 8)

Community Bank's allowance for loan losses, limited to 1.25% of risk weighted
assets, is a component of Tier II capital under capital adequacy guidelines. Due
to the significant increase in the allowance for loan losses during 2000, this
Tier II component contributed to the increases in the Company's and Community
Bank's capital ratios. The amount of the allowance for loan losses included in
Tier II capital at December 31, 2000 was $6,386,034 for the Company and
$6,356,770 for Community Bank, compared to $2,603,128 for the both the Company
and Community Bank at December 31, 1999.

[The remainder of this page intentionally left blank]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 18 - REGULATORY CAPITAL - CONTINUED

The following table sets forth the actual capital ratios at December 31, 2000
and 1999, for the Company and the Bank, as well as the minimum total risk-base,
Tier 1 risked based and Tier 1 leverage ratios required to be classified as
adequately capitalized and well capitalized.

For Capital To Be
Actual Adequacy Purposes Well Capitalized
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
(Dollars In Thousands)

AS OF DECEMBER 31, 2000:
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 53,746 10.54% $ 40,813 8.00% $ 51,016 10.00%
COMMUNITY BANK 52,763 10.39 40,623 8.00 50,779 10.00

TIER 1 CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 45,956 9.01% $ 20,406 4.00% $ 30,610 6.00%
COMMUNITY BANK 46,406 9.14 20,312 4.00 30,467 6.00

TIER 1 CAPITAL
(TO AVERAGE ASSETS):
CONSOLIDATED $ 45,956 6.44% $ 28,539 4.00% $ 35,674 5.00%
COMMUNITY BANK 46,406 6.54 28,375 4.00 35,469 5.00

As of December 31, 1999:
Total Capital
(to Risk Weighted Assets):
Consolidated $ 44,067 9.37% $ 37,624 8.00% $ 47,031 10.00%
Community Bank 46,192 9.87 37,437 8.00 46,797 10.00

Tier 1 Capital
(to Risk Weighted Assets):
Consolidated $ 39,976 8.50% $ 18,812 4.00% $ 28,218 6.00%
Community Bank 43,589 9.31 18,719 4.00 28,078 6.00

Tier 1 Capital
(to Average Assets):
Consolidated $ 39,976 6.39% $ 25,024 4.00% $ 32,280 5.00%
Community Bank 43,589 6.97 25,030 4.00 31,288 5.00

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 19 - COMPREHENSIVE INCOME

In June, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes reporting and presentation standards for comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances arising
from nonowner sources. The adoption of SFAS No. 130 in 1998 did not have a
material impact on the Company's financial condition or its results of
operations.

The following is a summary of the components of other comprehensive income:

Year Ended December 31,
---------------------------------------
2000 1999 1998
---------- ----------- ---------

Unrealized holding gains (losses) arising during period
before income tax and reclassification adjustments ........ $3,421,991 $(3,314,131) $ 488,059

Reclassification adjustments for net (gains) losses
included in net income .................................... 4,587 (179,303) (465,982)
---------- ----------- ---------

Other comprehensive income (loss), before income tax ........ 3,417,404 (3,493,434) 22,077

Income tax expense (benefit) related to other
comprehensive income ...................................... 1,366,962 (1,397,374) 8,831
---------- ----------- ---------

Other comprehensive income (loss), net of income tax ........ $2,050,442 $(2,096,060) $ 13,246
========== =========== =========

NOTE 20 - RELATED PARTY TRANSACTIONS

Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 2000 and 1999. Except as noted below, all such loans are made in the
ordinary course of business on substantially the same credit terms, including
interest rates and collateral and do not represent more than a normal risk of
collection or present other unfavorable features. Total loans to these persons
at December 31, 2000 and 1999 amounted to approximately $14,034,000 and
$8,779,000, respectively. An analysis of activity during 2000 in loans to
related parties resulted in additions of approximately $10,105,000, representing
new loans, reductions of approximately $7,644,000, representing payments, and an
increase of approximately $2,794,000, representing a change in the composition
of related parties.

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED

The Company, through Community Bank, its wholly owned subsidiary, offers all
regular full-time employees, including executive officers, loans at interest
rates which are 1% below the prevailing market rate. As of December 31, 2000,
executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interests, had loans outstanding pursuant to this policy
with total indebtedness of approximately $4,290,000.

The Company, through Community Bank, also offers first mortgage real estate
loans on the primary residence, at a rate of 5%, to employees who are required
to relocate in the course of their employment. As of December 31, 2000,
executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interests, had relocation loans outstanding with total
indebtedness of approximately $1,807,000.

In June 2000, Community Bank loaned $1,696,576 to Debter Properties, LLC, an
Alabama limited liability company of which a director of the Company is a
member, to fund the purchase from Community Bank of the real property in which
Community Bank's Boaz, Alabama office is located. The loan amortizes over a
20-year period and is collateralized by a first mortgage on the real property.
The loan carries a prime rate of interest that adjusts each time there is a
change in the prime rate. As adjustments occur in the interest rate on the loan,
appropriate increases or decreases are made to the monthly loan payment.
Concurrently with this loan and the purchase of the real property, Community
Bank entered into a lease agreement with Debter Properties, LLC to lease back
this real property from Debter Properties, LLC for a term of 20 years, with
monthly rental payments equal to the monthly amount of principal and interest
due under the loan to Debter Properties, LLC plus applicable real estate taxes,
assessments, levies and insurance.

The Company previously reported as a related party transaction the arrangement
whereby Community Bank loaned $4,184,051 to REM, LLC, an Alabama limited
liability company of which a former director of Community Bank was a member, to
fund the purchase from Community Bank of the real property in which Community
Bank's Hamilton, Alabama office is located. As a result of this individual
ceasing to serve as a director of Community Bank in October 2000, this loan is
no longer considered a related party transaction.

Maintenance Contract: The Bank had no service contracts during 2000 with
Heritage Valley Farms, an unincorporated business owned by Kennon R. Patterson,
Sr., a director and officer of the Company. Heritage Valley Farms did perform
upkeep and maintenance of the external grounds for five of the Bank's locations
for the entire year of 1999. External grounds upkeep and maintenance was also
performed for most of 1999 for five additional Bank locations and two 1st
Community Credit Corporation locations. Maintenance expense under this contract
amounted to $62,323 and $51,465 for the years ended December 31, 1999 and 1998
respectively, a monthly average of $588 and $468 per location.

100

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED

Interior Design: The Company and the Bank, including the Bank's subsidiaries,
have used the services of Heritage Interiors, a decorating and design firm owned
and operated by the wife of Kennon R. Patterson, Sr., a director and officer of
the Company, for the interior design, furniture, appliances, fixtures, hardware,
carpets, wall coverings, paint, drapes and accessories for new facilities and
similar work associated with the renovation of existing locations. At the
request of Mrs. Patterson in January 2000, the Company's contract with Heritage
Interiors was canceled, but at the Board of Directors' request, Mrs. Patterson
agreed to complete projects then pending. During 2000, Heritage Interiors was
paid $145,038 in connection with the completion of the Boaz and Hamilton,
Alabama banks. In addition, Community Bank paid Heritage Interiors $41,827 in
connection with the completion of the renovation of the first floor of the
headquarters building and the furnishings and decorating of three departments at
the headquarters complex in Blountsville, Alabama. Additional payments totaling
$25,064 were made to Heritage Interiors during 2000 in connection with 21 other
banking locations and the parent company. 1st Community Credit Corporation paid
Heritage Interiors $22,003 for the furnishings and decorating in connection with
the relocation of its Hartselle, Alabama office and $4,845 in connection with
the remodeling of its Albertville, Alabama office. Additional payments totaling
$7,317 were made to Heritage Interiors during 2000 in connection with nine other
finance company locations. Community Insurance Corp. paid Heritage Interiors
$156,158 during 2000 for furnishings and decorating in connection with the
renovation of its Huntsville, Alabama office. In addition, payments totaling
$4,848 were made to Heritage Interiors during 2000 for furnishings at the
Oneonta, Alabama insurance office. Total payments to Heritage Interiors in 2000
were $407,100. All pending projects were completed prior to year-end 2000.

During 1999, Heritage Interiors was paid $262,912 in connection with the opening
of the Boaz, Alabama bank and the opening and completion of the Demopolis,
Alabama bank. The Bank also paid Heritage Interiors $279,026 in connection with
the renovation and expansion of its new permanent location in Fite House located
in Hamilton, Alabama. As a result of being listed on the state and national
register of historical places, a portion of the cost associated with furnishing
and decorating the Fite House was to preserve the architectural style and
historical significance of the building. The Bank also paid Heritage Interiors
$120,080 during 1999 in connection with the renovation of three offices
furnished to the Bank's Area Executive Vice Presidents and the first floor of
the Company's headquarters building. Additional payments totaling $16,121 were
made to Heritage Interiors during 1999 in connection with 24 other banking
offices. 1st Community Credit Corporation paid Heritage Interiors $23,835 for
furnishings and decorating associated with the opening of its new office in
Oneonta, Alabama and $7,469 in connection with their location of its office in
Hartselle, Alabama. 1st Community Credit Corporation also paid Heritage
Interiors $78,632 during 1999 in connection with the renovation of five of its
offices located in Boaz, Gadsden, Huntsville, Ft. Payne and Jasper, Alabama.
Additional payments totaling $12,931 were made to Heritage Interiors by 1st
Community Credit Corporation during 1999, relating to the other five locations
and its administrative offices. The Company, Community Insurance Corp. and
Southern Select Insurance, Inc. made payments totaling $35,848 to Heritage
Interiors for various services rendered during 1999. Total payments to Heritage
Interiors in 1999 were $836,854.

101

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED

During 1998, Heritage Interiors was paid $265,066 in connection with the
completion of three new buildings with a total of approximately 60,000 square
feet and $31,876 for the renovation of an existing building at the Company's
headquarters in Blountsville, $150,723 in connection with the opening of a
permanent location in Double Springs, $38,647 in connection with the opening of
bank offices in Albertville, Boaz and Guntersville, $44,610 in connection with
the opening of six offices of 1st Community Credit Corporation, and additional
amounts relating to 23 other offices of the Company, Community Bank or its
subsidiaries. Total payments to Heritage Interiors in 1998 were $666,492.

Accounting Services: The Company has engaged the accounting firm of Schauer,
Taylor, Cox, Vise and Morgan, P.C. to perform certain accounting services. Doug
Schauer, a member of the firm, is Kennon R. Patterson, Sr.'s son-in-law. Other
than preparing work papers during the first quarter of 2000 for the Company's
independent auditors in connection with the Company's 1999 external audit,
services performed by Schauer, Taylor, Cox, Vise and Morgan, P.C. for the
Company in 2000 have been limited to preparation of the Company's quarterly tax
accruals, preparation and filing the Company's federal and state tax returns and
consultation regarding interpretation and application of accounting standards.
In the future, management anticipates using Schauer, Taylor, Cox, Vise and
Morgan P.C. primarily for tax-related matters. During 1999 and 1998, services
performed by Schauer, Taylor, Cox, Vice and Morgan, P.C., included the review of
work papers and reports prepared by Community Bank's internal audit department,
preparation of work papers for the Company's independent auditors in connection
with the Company's external audits, preparation and filing the Company's federal
and state tax returns and consultation regarding interpretation and application
of accounting standards. The Company and its subsidiaries paid Schauer, Taylor,
Cox, Vise and Morgan, P.C. $117,898, $143,000, and $134,000 for services
rendered during 2000, 1999 and 1998, respectively.

Leases: In June 2000, Community Bank entered into a lease agreement, as the
tenant, with Debter Properties, LLC, an Alabama limited liability company,
pursuant to which Community Bank leased the real property in which Community
Bank's Boaz, Alabama office is located. Mr. Glynn Debter, a director of the
Company is a member of Debter Properties, LLC. In connection with the lease
agreement, Community Bank loaned funds to Debter Properties, LLC to finance its
purchase of the real property from Community Bank. The term of the lease is 20
years; provided, however, that in no event shall the term of the lease expire
prior to the time when the loan obtained by the lessor to purchase the leased
property is paid in full. The monthly rent on this lease is an amount equal to
the monthly debt amortization of funds which the lessor borrowed to purchase the
leased property. Because the interest rate on the loan used to purchase the
property adjusts with fluctuation in the prime rate, the monthly lease payments
are subject to change. At December 31, 2000, the amount of the monthly rental
payment was $15,821. Lease payments to Debter Properties, LLC during 2000
totaled approximately $110,746. In addition, Community Bank agreed to pay the
lessor an additional sum to be adjusted periodically to coincide with the cost
to the lessor of the real estate taxes and other items and insurance. Community
Bank is responsible for maintenance, repairs and utilities for the real
property. Community Bank is also responsible for maintaining fire and extended
coverage and general liability insurance coverage for the real property. The
Company has the option to purchase the leased premises from the lessor at any
time during the term of the lease for an amount equal to the lessor's cost in
acquiring and/or constructing such leased premises. In an Addendum to the Lease
Agreement and Loan Agreement, dated June 1, 2000, Community Bank agreed to
maintain and continue in force fire and extended coverage

102

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED

insurance and general liability insurance upon the leased premises. In return,
the lessor agreed to reimburse Community Bank on a quarterly basis the amount of
the insurance premium which is included in payments made by Community Bank under
the lease.

NOTE 21 - LEASES

The Company has a number of operating lease agreements, involving land and
buildings. The operating leases are noncancellable and expire on various dates
through the year 2018. The leases provide for renewal options and generally
require the Company to pay maintenance, insurance and property taxes. Options to
purchase are also included in some leases. For the years ended December 31,
2000, 1999, and 1998, rental expense for operating leases was approximately
$523,524, $687,994 and $539,655, respectively.

During 2000, Community Bank entered into sale/leaseback arrangements on its
Hamilton, Alabama and Boaz, Alabama bank locations. Due to the structure of
these transactions, the leases qualified and are accounted for under capitalized
lease rules.

In May 2000, Community Bank entered into a lease agreement, as the tenant, with
REM, LLC, an Alabama limited liability company of which a former director of
Community Bank was a member, pursuant to which Community Bank leased the real
property on which Community Bank's Hamilton, Alabama office is located. This
individual ceased to serve as a director of Community Bank in October 2000. In
connection with the lease agreement, Community Bank loaned funds to REM, LLC to
finance its purchase of the real property from Community Bank. The term of the
lease is 30 years; provided, however, that in no event shall the term of the
lease expire prior to the time when the loan obtained by the lessor to purchase
the leased property is paid in full. The monthly rent on this lease is an amount
equal to the monthly debt amortization of funds which the lessor borrowed to
purchase the leased property. Because the interest rate on the loan used to
purchase the property adjusts with fluctuations in the prime rate, the monthly
lease payments are subject to change. At December 31, 2000, the amount of the
monthly lease payment was $35,209. Lease payments made to REM, LLC during 2000
totaled approximately $246,465. In addition, Community Bank agreed to pay the
lessor an additional sum to be adjusted periodically to coincide with the cost
to the lessor of the real estate taxes and other items and insurance. Community
Bank is responsible for maintenance, repairs and utilities for the real
property. Community Bank is also responsible for maintaining fire and extended
coverage and general liability insurance coverage for the real property. The
Company has the option to purchase the leased premises from the lessor at any
time during the term of the lease for an amount equal to the lessor's cost in
acquiring and/or constructing such leased premises. In an Addendum to the Lease
Agreement and Loan Agreement, dated May 31, 2000, Community Bank agreed to
maintain and continue in force fire and extended coverage insurance and general
liability insurance upon the leased premises. In return, the lessor agreed to
reimburse Community Bank on a quarterly basis the amount of the insurance
premium which is included in payments made by Community Bank under the lease.

In June 2000, Community Bank entered into a lease agreement, as the tenant, with
Debter Properties, LLC, an Alabama limited liability company of which a director
of the Company is a member, pursuant to which Community Bank leased the real
property in which Community Bank's Boaz, Alabama office is located. In

103

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 21 - LEASES - CONTINUED

connection with the lease agreement, Community Bank loaned funds to Debter
Properties, LLC to finance its purchase of the real property from Community
Bank. The term of the lease is 20 years; provided however that in no event shall
the term of the lease expire prior to the time when the loan obtained by the
lessor to purchase the leased property is paid in full. The monthly rent on this
lease is an amount equal to the monthly debt amortization of funds which the
lessor borrowed to purchase the leased property. Because the interest rate on
the loan used to purchase the property adjusts with fluctuation in the prime
rate, the monthly lease payments are subject to change. At December 31, 2000,
the amount of the monthly lease payment was $15,821. Lease payments to Debter
Properties, LLC during 2000 totaled approximately $110,746. In addition,
Community Bank agreed to pay the lessor an additional sum to be adjusted
periodically to coincide with the cost to the lessor of the real estate taxes
and other items and insurance. Community Bank is responsible for maintenance,
repairs and utilities for the real property. Community Bank is also responsible
for maintaining fire and extended coverage and general liability insurance
coverage for the real property. The Company has the option to purchase the
leased premises from the lessor at any time during the term of the lease for an
amount equal to the lessor's cost in acquiring and/or constructing such leased
premises. In an Addendum to the Lease Agreement and Loan Agreement, dated June
1, 2000, Community Bank agreed to maintain and continue in force fire and
extended coverage insurance and general liability insurance upon the leased
premises. In return, the lessor agreed to reimburse Community Bank on a
quarterly basis the amount of the insurance premium which is included in
payments made by Community Bank under the lease.

Future minimum lease payments for all leases at December 31, 2000 are as
follows:

Operating Capitalized
----------- -----------

Years Ending December 31,
2001 ....................... $ 393,051 $ 612,363
2002 ....................... 248,233 612,363
2003 ....................... 147,396 612,363
2004 ....................... 92,700 612,363
2005 ....................... 19,200 613,363
Thereafter ................. 272,800 13,002,305
----------- -----------
Total minimum lease payments $ 1,173,380 $16,064,120
=========== ===========

NOTE 22 - BUSINESS COMBINATIONS

On March 6, 1998, 1st Community Credit Corporation, a subsidiary of Community
Bank, opened offices in Boaz and Gadsden, Alabama as a result of the acquisition
of certain assets and the assumption of certain liabilities from Valley Finance,
a subsidiary of Home Bank, Guntersville, Alabama. In exchange for $6,544,000 in
cash, 1st Community Credit Corporation acquired assets of $5,652,000, net of
$1,373,000 in unearned income on loans and $900,000 in reserve for loan losses,
recorded $1,000,000 in goodwill and assumed $108,000 in liabilities. The effect
of this business combination was not material to the Company's financial
statements for periods prior to the acquisition date.

104

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 22 - BUSINESS COMBINATIONS - CONTINUED

Effective August 1, 1997, Community Insurance Corp., a subsidiary of Community
Bank, acquired a controlling interest in Southern Select Insurance, Inc., a
property and casualty insurance general agency located in Birmingham, Alabama.
Community Insurance Corp. paid $382,564 for 51% of the common stock of Southern
Select Insurance, Inc., paying a premium of $344,341. On April 1, 1998, Southern
Select Insurance, Inc. became a wholly owned subsidiary of Community Insurance
Corp. as a result of Community Insurance Corp. acquiring the remaining 49% of
the common stock of Southern Select Insurance, Inc. in exchange for a
combination of cash and shares of the Company's common stock, totaling $383,014.
The entire amount was recorded as an intangible. The effect of this business
combination was not material to the consolidated financial statements of the
Company for periods prior to the date of acquisition.

On April 1, 1998, Community Insurance Corp. established an office in Oneonta,
Alabama through the acquisition of 100% of the common stock of the Murphree
Insurance Agency. Community Insurance Corp. exchanged a combination of cash and
shares of the Company's common stock, totaling $375,000, acquiring $7,884 in
fixed assets and paying a premium of $367,116. This transaction was not material
to the financial statements of the Company for periods prior to the acquisition
date. In November 2000, the original owner of the Murphree Insurance Agency, in
exchange for shares of the common stock of Community Bancshares, Inc. totaling
$120,006 and a promissory note in the amount of $100,000 payable to Community
Insurance Corp., purchased certain assets and assumed certain liabilities of
Community Insurance Corp.'s Oneonta, Alabama office. The promissory note is
payable in monthly installments over 15 years and bears a fixed interest rate of
6% per annum. The net loss recorded by Community Insurance Corp. as a result of
this transaction was approximately $47,045.

Also effective April 1, 1998, Community Insurance Corp. established an office in
Graysville, Alabama as a result of the acquisition of the Chafin Insurance
Agency. Community Insurance Corp. exchanged a combination of cash and shares of
the Company's common stock, totaling $700,000, acquiring $62,488 in assets and
paying a premium of $637,512. This transaction was not material to the financial
statements of the Company for periods prior to the acquisition date. In November
2000, the original owners of the Chafin Insurance Agency, in exchange for shares
of the common stock of Community Bancshares, Inc. totaling $276,762 and a
promissory note in the amount of $220,000 payable to Community Insurance Corp.,
purchased certain assets and assumed certain liabilities of Community Insurance
Corp.'s Graysville, Alabama office. The promissory note is payable in monthly
installments over 10 years and bears a fixed interest rate of 6% per annum. The
net loss recorded by Community Insurance Corp. as a result of this transaction
was approximately $193,300.

Effective June 15, 1998, Community Bank consummated the transaction to purchase
certain assets and assumed certain liabilities from the Uniontown, Alabama
branch of the First National Bank of West Point, Georgia. In exchange for cash
totaling $2,615,000, the Bank received approximately $2,500,000 in additional
loans, net of unearned interest and loan loss reserve, $295,000 in other assets,
$5,672,000 in additional deposit liabilities, and $262,000 of intangible assets.
This transaction had no material effect on the financial statements of the
Company for periods prior to the date of acquisition.

105

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 22 - BUSINESS COMBINATIONS - CONTINUED

On June 1, 1999, Community Insurance Corp., established an office in Huntsville,
Alabama through the acquisition of certain assets and the assumption of certain
liabilities of Cummings, Gazaway, Gardner, and Pate, Inc., a Huntsville-based
insurance company. Community Insurance Corp. agreed to pay cash totaling
$1,600,000 over five years, subject to adjustment based on revenues of the
acquired agency. As a result of this acquisition, Community Insurance Corp.
acquired $759,310 in premises, furniture and equipment and $229,626 in accounts
receivable, assumed accounts payable of $233,916 and paid a premium of $844,980.
This transaction was not material to the financial statements of the Company and
therefore required no restatement of the Company's financial statements for
periods prior to the acquisition date.

All business combinations were accounted for using the purchase method of
accounting for business combinations.

NOTE 23 - OTHER SHORT-TERM BORROWINGS

Other short-term borrowings at December 31, 2000 and 1999 consisted of the U.S.
Treasury Tax and Loan Note Option account, and securities sold under agreements
to repurchase. The Company had no federal funds purchased or overnight funds
purchased from FHLB-Atlanta at December 31, 2000 and 1999.

Information concerning securities sold under agreements to repurchase is
summarized as follows:

2000 1999
----------- --------

Average balance during the year........................... $ 818,345 $ 558,551
Average interest rate during the year..................... 6.17% 5.08%
Maximum month-end balance during the year................. $ 1,072,219 381,658

U.S. government and agency securities underlying the agreements at year-end:

2000 1999
------------ ------------

Carrying Value............................................ $ 1,018,419 $ 996,237
Estimated Fair Value...................................... 1,010,412 996,633
Accrued Interest Receivable............................... 63,363 19,008

Securities sold under agreements to repurchase are generally treated as
collateralized financing transactions. It is the Company's policy to deliver
underlying securities to custodian accounts for customers.

106

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash and Short-Term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.

Investment Securities : For securities and marketable equity securities held for
investment purposes, fair values are based on quoted market prices or dealer
quotes. For other securities held as investments, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.

Loan Receivables: For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other consumer loans, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.

Deposit Liabilities: The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposit of similar remaining maturities.

FHLB Borrowings, Long-term Debt and Capital Securities: The fair value of the
Company's fixed rate borrowings are estimated using discounted cash flows, based
on the Company's current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amount of the Company's variable rate
borrowing approximates their fair values.

Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written: The fair value of commitments and letters of credit is
estimated to be approximately the same as the notional amount of the related
commitment.

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107

109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The estimated fair values of the Company's financial instruments as of December
31, 2000 and 1999 are as follows:

2000 1999
----------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- --------------
(in Thousands) (in Thousands)

FINANCIAL ASSETS:
Cash and short-term investments......... $ 26,707 $ 26,707 $ 27,498 $ 27,498
Federal funds sold...................... 3,000 3,000
Investment securities................... 101,570 101,570 96,847 96,847
Loans................................... 528,316 498,726 -0-
Less: allowance for loan losses......... 7,107 2,603 -0-
------------- -------------
Net Loans............................... 521,209 519,754 496,123 493,121
------------- ------------- ------------- --------------

TOTAL FINANCIAL ASSETS.................. $ 652,486 $ 651,031 $ 620,468 $ 617,466
============= ============= ============= ==============

FINANCIAL LIABILITIES:
Deposits................................ $ 600,901 $ 604,172 $ 573,261 $ 574,097
Short-term borrowings................... 2,265 2,265 2,494 2,494
FHLB borrowings......................... 38,000 37,067 40,000 37,478
Long-term debt.......................... 5,675 5,586 6,637 6,645
Guaranteed preferred beneficial interest
in the Company's junior subordinated
deferrable interest debentures........ 10,000 10,756 -0- -0-
------------- ------------- ------------- --------------

TOTAL FINANCIAL LIABILITIES............. $ 656,841 $ 659,846 $ 622,392 $ 620,714
============= ============= ============= ==============

UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit............ $ -0- $ 19,868 $ -0- $ 18,165
Standby letters of credit............... -0- 978 -0- 1,235
------------- ------------- ------------- --------------

TOTAL UNRECOGNIZED
FINANCIAL INSTRUMENTS................. $ -0- $ 20,846 $ -0- $ 19,400
============= ============= ============= ==============

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108

110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION

STATEMENTS OF FINANCIAL CONDITION

December 31,
--------------------------------
2000 1999
-------------- --------------

ASSETS

Cash and due from banks..................................................... $ 3,573,341 $ 1,475,219
Investment in subsidiaries (equity method) -
eliminated upon consolidation.............................................. 51,950,325 48,089,079
Premises and equipment, net................................................. 22,779 82,305
Intangibles, net............................................................ 920,178 1,003,489
Deferred tax assets......................................................... 825,817 33,421
Refundable Income taxes-current............................................. 1,793,397 1,081,964
Other assets................................................................ 806,171 375,611
-------------- --------------

TOTAL ASSETS.......................................................... $ 59,892,008 $ 52,141,088
============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt.............................................................. $ 5,675,204 $ 6,637,162
Guaranteed preferred beneficial interest in the Company's
junior subordinated deferrable interest debentures...................... 10,310,000 -0-
Other liabilities........................................................... 2,320,266 1,028,550
-------------- --------------
TOTAL LIABILITIES..................................................... 18,305,470 7,665,712

TOTAL SHAREHOLDERS' EQUITY............................................ 41,586,538 44,475,376
-------------- --------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 59,892,008 $ 52,141,088
============== ==============

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109
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF INCOME

Years Ended December 31,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------

INCOME
From subsidiaries - eliminated upon consolidation
Dividends ............................................... $ 4,878,562 $ 3,702,566 $ 3,017,970
Management fees ......................................... 300,000 600,000 600,000
Interest ................................................ 169,455 51,578 22,222
Other Income ............................................ 27,759 3,620 3,740
----------- ----------- -----------
5,375,776 4,357,764 3,643,932
----------- ----------- -----------
EXPENSES
Salaries and employee benefits ........................... 2,193,107 1,857,053 1,751,593
Interest ................................................. 1,433,404 320,895 400,079
Other expenses ........................................... 1,340,281 1,692,028 666,862
----------- ----------- -----------
4,966,792 3,869,976 2,818,534
----------- ----------- -----------
Income/(loss) before income taxes and equity in
undistributed earnings of subsidiaries ................... 408,984 487,788 825,398
Income tax benefit .......................................... (1,506,160) (1,059,075) (753,387)
----------- ----------- -----------

Income before equity in undistributed earnings/(loss)
of subsidiaries .......................................... 1,915,144 1,546,863 1,578,785
Equity in undistributed earnings/(loss) of subsidiaries ..... (4,130,075) 111,247 2,000,708
----------- ----------- -----------

NET INCOME/(LOSS) ............................... $(2,214,931) $ 1,658,110 $ 3,579,493
=========== =========== ===========

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110

112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF CASH FLOWS

Years Ended December 31,
------------------------------------------------------
2000 1999 1998
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ............................................. $ (2,214,931) $ 1,658,110 $ 3,579,493
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries ............. 4,130,075 (111,247) (2,000,708)
Provision for depreciation, amortization and accretion ..... 108,362 94,629 118,571
Increase in other assets ................................... (1,547,353) (191,731) (378,456)
Increase in other liabilities .............................. 1,291,716 86,792 271,490
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................ 1,767,869 1,536,553 1,590,390
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of securities available for sale ....... -0- -0- 822,713
Increase in interest-bearing deposits with banks .............. -0- -0- -0-
Proceeds from sale of assets .................................. 33,431 15,599 -0-
Capitalization of subsidiaries ................................ (5,940,879) -0- (7,500,000)
Capital expenditures ............................................ -0- (28,538) (34,543)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ............................ (5,907,448) (12,939) (6,711,830)
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................................... (961,958) (775,764) (770,226)
Issuance of guaranteed preferred beneficial interest in
Company's junior subordinated deferrable interest
Debentures .................................................. 10,310,000 -0- -0-
Issuance of common stock ...................................... 222,804 312,889 10,634,552
Cash dividends ................................................ (3,333,145) (2,788,754) (2,031,608)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ 6,237,701 (3,251,629) 7,832,718
------------ ------------ ------------

Net increase (decrease) in cash and cash equivalents ............ 2,098,122 (1,728,015) 2,711,278

Cash and due from banks at beginning of year .................... 1,475,219 3,203,234 491,956
------------ ------------ ------------

CASH AND DUE FROM BANKS AT END OF YEAR .......................... $ 3,573,341 $ 1,475,219 $ 3,203,234
============ ============ ============

111

113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

Years Ended December 31,
------------------------------------------------------
2000 1999 1998
------------ ------------ ------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest.................................................... $ 1,791,212 $ 317,671 $ 402,209
Income taxes................................................ (126,972) (1,019,219) (780,000)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Upon the pledging of purchased shares to obtain additional ESOP debt of
$1,076,958 on December 1, 1998 and $1,260,007 on May 17, 1996 long-term debt
was increased and equity was decreased. The debt was reduced and shares were
released by $182,218, $155,790 and $135,628, respectively, during each of the
years ended December 31, 2000, 1999 and 1998 as a result of payments made by
the Company's ESOP on the outstanding ESOP debt.

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112

114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 2000, 1999 AND 1998

NOTE 26 - SUBSEQUENT EVENTS

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113

115

QUARTERLY RESULTS (UNAUDITED)

A summary of the unaudited results of operations for each quarter of 2000 and
1999 follows:

First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In Thousands Except Per Share Data)

2000:
TOTAL INTEREST INCOME ....................... $ 14,315 $ 15,223 $ 15,825 $ 15,712
TOTAL INTEREST EXPENSE ...................... 7,465 8,440 8,900 9,051
PROVISION FOR LOAN LOSSES ................... 1,008 1,329 4,619 2,333
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ................. 5,842 5,454 2,306 4,829
INVESTMENT SECURITIES GAINS (LOSSES) ........ (27) -0- 45 (13)
TOTAL NONINTEREST INCOME .................... 2,522 2,638 2,512 2,229
TOTAL NONINTEREST EXPENSE ................... 7,669 7,694 7,749 8,644
INCOME TAX EXPENSE .......................... 214 95 (1,128) (886)
NET INCOME (LOSS) ........................... 454 303 (1,758) (1,214)
PER COMMON SHARE:
BASIC EARNINGS (LOSS) ...................... $ .10 $ .06 $ (.39) $ (.27)
DILUTED EARNINGS (LOSS) .................... .10 .06 (.38) (.25)

1999:
Total interest income ....................... $ 12,138 $ 12,596 $ 13,566 $ 13,894
Total interest expense ...................... 6,017 6,184 6,635 6,685
Provision for loan losses ................... 380 464 545 3,070
Net interest income after
provision for loan losses ................. 5,741 5,948 6,385 4,139
Investment securities gains (losses) ........ -0- -0- 7 173
Total noninterest income .................... 1,866 2,114 2,275 2,719
Total noninterest expense ................... 6,833 7,262 7,052 8,061
Income tax expense .......................... 188 214 589 (489)
Net income (loss) ........................... 586 586 1,027 (541)

Per Common Share:
Basic earnings (loss) ...................... $ .13 $ .13 $ .23 $ (.12)
Diluted earnings (loss) .................... .13 .13 .22 (.12)

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

See the Company's Current Report on Form 8-K filed on May 16, 2000, an amendment
thereto on Form 8-K/A filed on May 30, 2000, a Current Report on Form 8-K filed
on September 28, 2000, an amendment thereto on Form 8-K/A filed on October 10,
2000 and a Current Report on Form 8-K filed on February 15, 2001.

114

116

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item with respect to the directors and nominees for
director of the Company is incorporated by reference from the sections entitled
"Election of Directors" and "Executive Compensation and Other Information" in
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
during 2001. Information regarding the executive officers of the Company is
included in Part I of this Report.

Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference from the section
entitled "Election of Directors - Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for the annual meeting of
shareholders to be held during 2001.

ITEM 11 - EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from the section
entitled "Executive Compensation" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held during 2001.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Information required by this item is incorporated by reference from the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
during 2001.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference from the section
entitled "Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held during 2001.

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115

117

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Index of documents filed as part of this report:

Community Bancshares, Inc. and Subsidiaries
Financial Statements

Page(s)
-------

Auditor's Report............................................................................. 59

Consolidated Statements of Financial Condition as of
December 31, 2000 and 1999................................................................. 60

Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998........................................................... 61

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998........................................................... 62

Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998........................................................... 63-64

Notes to Consolidated Financial Statements -
December 31, 2000, 1999 and 1998........................................................... 65-113

Quarterly Results (Unaudited)................................................................ 114

(b) Reports on Form 8-K

The Company filed the following report on Form 8-K during the fourth quarter
ended December 31, 2000:

1. Amendment to Current Report on Form 8-K filed September 28,
2000 and reporting change in certifying accountant under Item
4, filed on October 10, 2000

3.1 Certificate of Incorporation, as amended and restated May
2000(1)

3.2 By-Laws of Registrant, as amended and restated May 2000(2)

4.1 Rights Agent Agreement, dated January 13, 1999, between
Community Bancshares, Inc. and the Bank of New York(3)

4.2 Indenture, dated March 23, 2000, by and between Community
Bancshares, Inc. and The Bank of New York(4)

10.1 Promissory Note, Guaranty and Pledge Agreement, dated December
1, 1998, by and between Community Bancshares, Inc. and
Colonial Bank, N.A.(5)

10.2 Plan document for the Community Bancshares, Inc. Benefit
Restoration Plan adopted April 12, 1994, effective January 1,
1995(6)(*)

10.3 Subordinated Promissory Note, dated October 4, 1994, between
Community Bancshares, Inc. as borrower and Jeffrey K.
Cornelius as holder(7)

116
118

10.4 Employment Agreement, dated March 28, 1996 by and between
Kennon R. Patterson, Sr. and Community Bancshares, Inc.
(8)(*)

10.5 Amendment to Employment Agreement, dated October 14, 1999, by
and between Kennon R. Patterson, Sr. and Community Bancshares,
Inc.(9)(*)

10.6 Employment Agreement, dated March 28, 1996, by and between
Bishop K. Walker, Jr. and Community Bancshares, Inc.(10)(*)

10.7 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 28, 1996(11)(*)

10.8 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, dated March 28, 1996(12)(*)

10.9 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 28, 1996(13)(*)

10.10 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 28, 1996(14)(*)

10.11 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 28, 1996(15)(*)

10.12 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins, dated March 28, 1996(16)(*)

10.13 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam, dated March 28, 1996(17)(*)

10.14 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter, dated March 28, 1996(18)(*)

10.15 Stock Option Agreement between Community Bancshares, Inc. and
Robert O. Summerford, dated March 28, 1996(19)(*)

10.16 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 27, 1997(20)(*)

10.17 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr., dated March 27, 1997(21)(*)

10.18 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 27, 1997(22)(*)

10.19 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 27, 1997(23)(*)

10.20 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 27, 1997(24)(*)

10.21 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins, dated March 27, 1997(25)(*)

10.22 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam, dated March 27, 1997(26)(*)

10.23 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter, dated March 27, 1997(27)(*)

10.24 Stock Option Agreement between Community Bancshares, Inc. and
Robert O. Summerford, dated March 27, 1997(28)(*)

10.25 Stock Option Agreement between Community Bancshares, Inc. and
John J. Lewis, Jr., dated March 27, 1997(29)(*)

10.26 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 26, 1998(30)(*)

10.27 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr., dated March 26, 1998(31)(*)

10.28 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 26, 1998(32)(*)

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119

10.29 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 26, 1998(33)(*)

10.30 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 26, 1998(34)(*)

10.31 Form of Stock Option Agreement between Community Bancshares,
Inc. and grantees, dated March 26, 1998(35)(*)

10.32 Form of Change in Control Agreement between Community
Bancshares, Inc. and each of Kennon R. Patterson, Sr., Bishop
K. Walker, Jr., Denny Kelly, Hodge Patterson, III, Loy
McGruder, Michael A. Bean and William H. Caughran, Jr., dated
December 4, 1999(36)(*)

10.33 Form of Stock Option Agreement for Non-Employee Directors
between Community Bancshares, Inc., and each of Glynn Debter,
Roy B. Jackson, John J. Lewis, Jr., Merritt Robbins, Robert O.
Summerford and Wayne Washam, dated December 4, 1999(37)(*)

10.34 Form of Stock Option Agreement for Employees between Community
Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop
K. Walker, Jr., Denny Kelly, Hodge Patterson, III, Loy
McGruder, Michael A. Bean and William H. Caughran, Jr., dated
December 4, 1999(38)(*)

10.35 Amended and Restated Declaration of Trust, dated March 23,
2000, by and between The Bank of New York(Delaware), The Bank
of New York, Community Bancshares, Inc. and Community(AL)
Capital Trust I(39)

10.36 Guarantee Agreement, dated March 23, 2000, by and between
Community Bancshares, Inc. and The Bank of New York(40)

10.37 Placement Agreement, dated March 23, 2000, between Community
(AL) Capital Trust I, Community Bancshares, Inc. and Salomon
Smith Barney, Inc.(41)

10.38 Lease Agreement, dated May 31, 2000, between REM, LLC, as
lessor, and Community Bank, as lessee(42)

10.39 Addendum to Lease Agreement and Loan Agreement, dated May
31,2000, between REM, LLC and Community Bank(43)

10.40 Lease Agreement, dated June 1, 2000, between Debter
Properties, LLC, as lessor, and Community Bank, as lessee(44)

10.41 Addendum to Lease Agreement and Loan Agreement, dated June 1,
2000, between Debter Properties, LLC and Community Bank(45)

10.42 Stock Option Agreement, dated August 24, 2000, between
Community Bancshares, Inc. and William H. Caughran, Jr.
(46)(*)

10.43 Stock Option Agreement, dated August 24, 2000, between
Community Bancshares, Inc. and William E. Blackmon(47)(*)

10.44 Change in Control Agreement, dated August 24, 2000, between
Community Bancshares, Inc. and William E. Blackmon(48)(*)

10.45 Form of Amendment to Nonqualified Stock Option Agreement,
between Community Bancshares, Inc. and grantee, dated December
12, 2000(*)(49)

11 Statement of computation of per share earnings(50)

12 Statement of computation of ratios(51)

21 Subsidiaries of the Registrant(52)

Notes to Exhibits:

(1) Filed as Exhibit 3.2 to Form 10-Q for the quarter ended June
30, 2000, and incorporated herein by reference

(2) Filed as Exhibit 3.1 to Form 10-Q for the quarter ended June
30, 2000, and incorporated herein by reference

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120

(3) Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and
incorporated herein by reference

(4) Filed as Exhibit 4.4 to Form 10-Q for the quarter ended March
31, 2000, and incorporated herein by reference

(5) Filed as Exhibit 10.2 to Form 10-K for the year ended December
31, 1998, and incorporated herein by reference

(6) Filed as Exhibit 10.13 to Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference

(7) Filed as Exhibit 10.15 to Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference

(8) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended
September 30, 1998, and incorporated herein by reference

(9) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference

(10) Filed as Exhibit 10.2 to Form 10-Q/A-2 for the quarter ended
September 30, 1998, and incorporated herein by reference

(11) Filed as Exhibit 10.20 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(12) Filed as Exhibit 10.21 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(13) Filed as Exhibit 10.22 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(14) Filed as Exhibit 10.23 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(15) Filed as Exhibit 10.24 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(16) Filed as Exhibit 10.27 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(17) Filed as Exhibit 10.28 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(18) Filed as Exhibit 10.29 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(19) Filed as Exhibit 10.30 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference

(20) Filed as Exhibit 10.37 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(21) Filed as Exhibit 10.38 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(22) Filed as Exhibit 10.39 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(23) Filed as Exhibit 10.40 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(24) Filed as Exhibit 10.41 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(25) Filed as Exhibit 10.44 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(26) Filed as Exhibit 10.45 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(27) Filed as Exhibit 10.46 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

119

121

(28) Filed as Exhibit 10.47 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(29) Filed as Exhibit 10.50 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

(30) Filed as Exhibit 10.36 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference

(31) Filed as Exhibit 10.37 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference

(32) Filed as Exhibit 10.38 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference

(33) Filed as Exhibit 10.39 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference

(34) Filed as Exhibit 10.40 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference

(35) Filed as Exhibit 10.41 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference

(36) Filed as Exhibit 10.32 to Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference

(37) Filed as Exhibit 10.33 to From 10-K for the year ended
December 31, 1999, and incorporated herein by reference

(38) Filed as Exhibit 10.34 to Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference

(39) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended March
31, 2000, and incorporated herein by reference

(40) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended March
31, 2000, and incorporated herein by reference

(41) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended March
31, 2000, and incorporated herein by reference

(42) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June
30, 2000, and incorporated herein by reference

(43) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June
30, 2000, and incorporated herein by reference

(44) Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June
30, 2000, and incorporated herein by reference

(45) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended June
30, 2000, and incorporated herein by reference

(46) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended
September 30, 2000, and incorporated herein by reference

(47) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended
September 30, 2000, and incorporated herein by reference

(48) Filed as Exhibit 10.3 to Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference

(49) Filed as Exhibit 10.45 to Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference

(50) Filed as Exhibit 11 to Form 10-K for the year ended December
31, 2000, and incorporated herein by reference

(51) Filed as Exhibit 12 to Form 10-K for the year ended December
31, 2000, and incorporated herein by reference

(52) Filed as Exhibit 21 to Form 10-K for the year ended December
31, 2000, and incorporated herein by reference

(*) Management contract or compensation plan or arrangement

Certain financial statements schedules and exhibits have been omitted because
they are not applicable.

120

122

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, hereunto duly authorized, in the city of
Blountsville, State of Alabama, on May 8, 2001.

COMMUNITY BANCSHARES, INC.

By: /s/ Kennon R. Patterson, Sr.
----------------------------------
KENNON R. PATTERSON, SR.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER

By: /s/ William E. Blackmon
----------------------------------
WILLIAM E. BLACKMON
ACTING CHIEF FINANCIAL OFFICER

121

123

122