Edgar Filing: COMMUNITY BANCSHARES INC /DE/

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

FORM 10-Q

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

For The Quarterly Period Ended June 30, 2001

[ ] 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
----------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)

68149 Main Street, P. O. Box 1000, Blountsville, AL 35031
--------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (205) 429-1000
--------------

No Change
---------
(Former name, former address and former fiscal year, if changed since last
report)

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 [ ]

As of July 31, 2001, there were 4,600,159 shares of the Registrant's Common
Stock, $.10 par value per share, outstanding.

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INDEX
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION PAGE
----

Item 1. Financial Statements (Unaudited)

Consolidated Statements of Financial Condition - June 30, 2001 and December 31, 2000........... 3

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income-
Three months ended June 30, 2001 and 2000...................................................... 4-5

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income-
Six months ended June 30, 2001 and 2000........................................................ 6-7

Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000................ 8

Notes to Consolidated Financial Statements..................................................... 10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 19

Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 28

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................................................ 29

Item 4. Submission of Matters to a Vote of Security Holders.............................................. 29

Item 6. Exhibits and Reports on Form 8-K................................................................. 31

SIGNATURES

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

JUNE 30, December 31,
2001 2000
---------------- --------------
(UNAUDITED)

ASSETS
Cash ......................................................................... $ 6,544,846 $ 7,627,215
Due from banks ............................................................... 21,303,650 18,379,396
Federal funds sold ........................................................... 19,000,000 3,000,000
Interest-bearing deposits with banks ......................................... 200,000 700,000
Securities available-for-sale ................................................ 118,158,239 101,569,818
Loans ........................................................................ 515,984,327 528,467,345
Less: Unearned income ........................................................ 85,036 151,184
Allowance for loan losses ........................................... 6,676,049 7,107,430
------------- -------------
NET LOANS ......................................................... 509,223,242 521,208,731

Premises and equipment, net .................................................. 39,874,832 39,325,645
Accrued interest ............................................................. 7,420,732 8,432,321
Intangibles, net ............................................................. 5,521,447 5,757,055
Other real estate ............................................................ 3,295,023 1,880,548
Other assets ................................................................. 5,612,411 5,637,313
------------- -------------
TOTAL ASSETS ...................................................... $ 736,154,422 $ 713,518,042
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ...................................................... $ 69,243,271 $ 67,285,705
Interest-bearing ......................................................... 544,360,229 533,615,062
------------- -------------
TOTAL DEPOSITS .................................................... 613,603,500 600,900,767
Other short-term borrowings .................................................. 3,506,489 2,265,231
Accrued interest ............................................................. 5,302,444 5,375,725
FHLB borrowings .............................................................. 46,000,000 38,000,000
Capitalized lease obligations ................................................ 5,815,935 5,850,225
Long-term debt ............................................................... 5,186,959 5,675,204
Guaranteed preferred beneficial interest in the Company's junior
subordinated deferrable interest debentures .............................. 10,000,000 10,000,000
Other liabilities ............................................................ 3,490,048 4,261,120
------------- -------------
TOTAL LIABILITIES ................................................. 692,905,375 672,328,272
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, 4,808,331 shares issued as of June 30, 2001
and 4,674,995 shares issued as of December 31, 2000 ................. 480,833 467,499
Paid-in-capital ........................................................... 30,789,906 29,804,921
Retained earnings ......................................................... 14,139,525 13,490,799
Treasury stock, 20,803 shares at cost as of June 30, 2001
and December 31, 2000 ............................................... (396,768) (396,768)
Unearned ESOP shares - 189,156 and 199,877 shares as of
June 30, 2001 and December 31, 2000, respectively ................... (2,466,791) (2,574,002)
Accumulated other comprehensive income .................................... 702,342 397,321
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ........................................ 43,249,047 41,189,770
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $ 736,154,422 $ 713,518,042
============= =============

See notes to consolidated financial statements

Three Months Ended
June 30,
------------ -----------
2001 2000
------------ -----------

REVENUE FROM EARNING ASSETS
Interest and fees on loans ................................................... $ 13,110,590 $13,408,810
Interest on investment securities:
Taxable securities ........................................................ 1,515,813 1,458,372
Securities exempt from federal income taxes ............................... 161,369 207,287
Interest on federal funds sold ............................................... 143,313 132,616
Interest on deposits in other banks .......................................... 11,389 16,093
------------ -----------
TOTAL REVENUE FROM EARNING ASSETS .................................... 14,942,474 15,223,178
------------ -----------
INTEREST EXPENSE
Interest on deposits ......................................................... 7,165,353 7,418,441
Interest on other short-term borrowings ...................................... 27,524 23,376
Interest on FHLB borrowings .................................................. 597,472 569,609
Interest on capital lease obligations ........................................ 109,581 45,917
Interest on Long-Term Debt ................................................... 76,225 180,436
Interest on guaranteed preferred beneficial interests in the
Company's junior subordinated deferrable interest debentures .............. 288,731 248,109
------------ -----------
TOTAL INTEREST EXPENSE ............................................... 8,264,886 8,485,888
------------ -----------

NET INTEREST INCOME ............................................................ 6,677,588 6,737,290
Provision for loan losses .................................................... 1,381,161 1,329,249
------------ -----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ............................ 5,296,427 5,408,041
NONINTEREST INCOME
Customer service fees ........................................................ 1,041,782 1,049,224
Insurance commissions ........................................................ 415,223 680,486
Bank club dues ............................................................... 168,530 178,479
Debt cancellation fees ....................................................... 113,342 202,807
Investment securities gains .................................................. 25,006 -0-
Other operating income ....................................................... 389,060 527,157
------------ -----------
TOTAL NONINTEREST INCOME ............................................. 2,152,943 2,638,153
------------ -----------
NONINTEREST EXPENSES
Salaries and employee benefits ............................................... 3,956,588 4,867,997
Occupancy expense ............................................................ 728,153 644,674
Furniture and equipment expense .............................................. 474,597 468,152
Director and committee fees .................................................. 134,000 140,774
Other operating expense ...................................................... 2,514,866 1,539,484
------------ -----------
TOTAL NONINTEREST EXPENSES ........................................... 7,808,204 7,661,081
------------ -----------
Income (loss) before income taxes .............................................. (358,834) 385,113
Provision for income tax expense (benefit) ........ (202,471) 95,477
------------ -----------
NET INCOME (LOSS) .................................................... $ (156,363) $ 289,636
============ ===========
NET INCOME (LOSS) PER COMMON SHARE - BASIC ..................................... $ (0.03) $ 0.07
NET INCOME (LOSS) PER COMMON SHARE - DILUTED ................................... (0.03) 0.07

See notes to consolidated financial statements

5
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

Three Months Ended
June 30,
----------------------------
2001 2000
--------- ---------

Net income (loss) .................................................... $(156,363) $ 289,636
Components of other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ........ 21,858 265,799
Reclassification adjustments for gains included
in net income ................................................. (25,006) -0-
--------- ---------
Net unrealized gains (losses) ....................................... (3,148) 265,799
Income tax (expense) benefit related to items of other
comprehensive income .......................................... 1,260 (104,240)
--------- ---------
Total other comprehensive income (loss) ............................. (1,888) 161,559
--------- ---------

Comprehensive income (loss) .......................................... $(158,251) $ 451,195
========= =========

See notes to consolidated financial statements

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6

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

Six Months Ended
June 30,
--------------------------------
2001 2000
------------ ------------

REVENUE FROM EARNING ASSETS
Interest and fees on loans ......................................... $26,527,580 $ 26,214,059
Interest on investment securities:
Taxable securities .............................................. 2,859,898 2,797,820
Securities exempt from federal income taxes ..................... 361,178 333,135
Interest on federal funds sold ..................................... 270,334 163,415
Interest on deposits in other banks ................................ 28,704 29,826
----------- ------------
TOTAL REVENUE FROM EARNING ASSETS .......................... 30,047,694 29,538,255
----------- ------------
INTEREST EXPENSE
Interest on deposits ............................................... 14,863,023 14,160,141
Interest on other short-term borrowings ............................ 64,215 52,932
Interest on FHLB borrowings ........................................ 1,167,081 1,096,318
Interest on capitalized lease obligations .......................... 232,080 45,917
Interest on long-term debt ......................................... 192,433 286,970
Interest on guaranteed preferred beneficial interests in the
Company's junior subordinated deferrable interest debentures .... 560,606 308,334
----------- ------------
TOTAL INTEREST EXPENSE ..................................... 17,079,438 15,950,612
----------- ------------

NET INTEREST INCOME .................................................. 12,968,256 13,587,643
Provision for loan losses .......................................... 2,332,279 2,337,351
----------- ------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .................. 10,635,977 11,250,292
NONINTEREST INCOME
Customer service fees .............................................. 2,067,884 2,030,840
Insurance commissions .............................................. 956,065 1,259,438
Bank club dues ..................................................... 337,961 354,033
Debt cancellation fees ............................................. 265,409 398,850
Other operating income ............................................. 809,391 1,116,386
Investment securities gains (losses) ............................... 378,021 (26,886)
----------- ------------
TOTAL NONINTEREST INCOME ................................... 4,814,731 5,132,661
----------- ------------
NONINTEREST EXPENSES
Salaries and employee benefits ..................................... 8,038,030 9,703,882
Occupancy expense .................................................. 1,440,241 1,289,840
Furniture and equipment expense .................................... 924,403 931,200
Director and committee fees ........................................ 251,498 289,278
Other operating expense ............................................ 4,018,621 3,115,775
----------- ------------
TOTAL NONINTEREST EXPENSES ................................. 14,672,793 15,329,975
----------- ------------

Income before income taxes ........................................... 777,915 1,052,978
Provision for income taxes ........................................... 129,188 309,405
----------- ------------
NET INCOME ................................................. $ 648,727 $ 743,573
=========== ============

Net Income Per Common Share - Basic .................................. $ 0.14 $ 0.17
Net Income Per Common Share - Diluted ................................ 0.14 0.16
DIVIDENDS PER COMMON SHARE ........................................... -0- 0.75

See notes to consolidated financial statements

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COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

Six Months Ended
June 30,
-----------------------------
2001 2000
--------- ---------

NET INCOME ........................................................... $ 648,727 $ 743,573
Components of other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ........ 886,389 (420,695)
Reclassification adjustments for (gains) losses included
in net income ................................................. (378,021) 26,886
--------- ---------
Net unrealized gains (losses) ....................................... 508,368 (393,809)
Income tax benefit (expense) related to items of other
comprehensive income .......................................... (203,347) 159,603
--------- ---------
Total other comprehensive income (loss) ............................. 305,021 (234,206)
--------- ---------

COMPREHENSIVE INCOME ................................................. $ 953,748 $ 509,367
========= =========

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See notes to consolidated financial statements

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COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Six Months Ended
June 30,
------------------------------------
2001 2000
------------ -------------

OPERATING ACTIVITIES
Net income ................................................................... $ 648,727 $ 743,573
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ............................................ 2,332,279 2,337,351
Provision for depreciation and amortization .......................... 1,275,233 1,217,589
Amortization of investment security premiums and
accretion of discounts ........................................... 36,209 87,979
Deferred tax benefit ................................................. (81,570) (298,938)

Loss on sale of premises and equipment ............................... 14,046 12,042
Realized investment security (gains) losses .......................... (378,021) 26,886
(Increase) decrease in accrued interest receivable ................... 1,011,589 (998,655)
Increase (decrease) in accrued interest payable ...................... (73,281) 779,290
Other ................................................................ (1,865,065) (1,257,366)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 2,920,146 2,649,751
------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale ......................... 10,567,117 4,684,487
Proceeds from maturity of securities available-for-sale ...................... 25,782,082 22,357,956
Purchase of securities available-for-sale .................................... (52,087,440) (42,054,824)
Decrease in interest-bearing deposit with other banks ........................ 500,000 -0-
Net (increase) decrease in loans to customers ................................ 9,653,210 (33,840,712)
Proceeds from sale of premises and equipment ................................. 87,478 5,889,242
Net proceeds from sale of other real estate .................................. 478,307 582,088
Capital expenditures ......................................................... (1,690,336) (9,434,581)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ...................... (6,709,582) (51,816,344)
------------ ------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
and savings accounts ..................................................... 1,443,965 5,237,668
Net increase in certificates of deposit ...................................... 11,258,768 39,201,958
Net increase (decrease) in short-term borrowings ............................. 1,241,258 (224,736)
Net increase (decrease) in FHLB borrowings ................................... 8,000,000 (2,000,000)
Repayments of long-term debt, net ............................................ (488,245) (389,275)
Increase (decrease) in capitalized lease obligations ......................... (34,290) 5,880,626
Issuance of guaranteed preferred beneficial interest in
junior subordinated deferrable interest debentures ..................... -0- 10,000,000
Proceeds from issuance of common stock ....................................... 209,865 222,804
Cash dividends ............................................................... -0- (3,499,136)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 21,631,321 54,429,909
------------ ------------

Net increase in cash and cash equivalents ...................................... 17,841,885 5,263,316

Cash and cash equivalents at beginning of period ............................... 29,006,611 26,797,511
------------ ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 46,848,496 $ 32,060,827
============ ============

See notes to consolidated financial statements

9
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Six Months Ended
June 30,
-----------------------------------
2001 2000
------------ ------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................ $ 17,152,719 $16,683,985
Income taxes paid (refunded) ........................ (1,080,464) 108,503

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COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001

NOTE A - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Community
Bancshares, Inc. and its wholly-owned subsidiaries, collectively, hereinafter
referred to as the Company. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Certain amounts in 2000 have been
reclassified to conform with the 2001 presentation. Operating results for the
three and six month periods ending June 30, 2001 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.

NOTE B - INVESTMENT SECURITIES

At June 30, 2001 and December 31, 2000, 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 in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. 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 June 30, 2001, the Company's available-for-sale investment securities
reflected net unrealized gains of $1,170,571, which resulted in an increase in
shareholders' equity of $702,342, net of the deferred tax asset. The net
increase in shareholders' equity as a result of an adjustment in accordance with
SFAS No. 115 from December 31, 2000 to June 30, 2001 was $305,021.

NOTE C - CAPITAL SECURITIES

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 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.

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.

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NOTE C - CAPITAL SECURITIES (CONTINUED)

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.

NOTE D - SHAREHOLDERS' EQUITY

The Company did not declare or pay a dividend on its common stock during the
first six months of 2001. An annual dividend of $.75 per share was declared by
the Company's Board of Directors on the Company's common stock and paid in
January 2000. The payment of dividends on the Company's 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 Company's subsidiaries and
regulatory restrictions. In April 2001, the Company entered into a memorandum of
understanding with the Federal Reserve Bank of Atlanta (the "Reserve Bank") in
which the Company agreed not to declare or pay a dividend to its shareholders
without the prior written approval of the Reserve Bank.

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 were exercisable through March 27, 2001. In March 1997,
the Company issued options to purchase a total of 103,000 shares of the
Company's common stock 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 March 26, 2002. In March 1998, options to purchase a total
of 203,331 shares of the Company's common stock 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, options to purchase a total of 204,000 shares of the Company's
common stock 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 the Company's
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 1993.

In March 2001, options to purchase 329,561 shares of the Company's common stock
were exercised with a total exercise price of $3,741,915. These options were
exercised in transactions whereby 207,886 shares of the Company's common stock
owned by the grantees of the options and valued at $18.00 per share (as
determined by the Board of Directors) were delivered to the Company in payment
of the exercise price under the options. The cash portion of these transactions
was immaterial and related almost entirely to the settlement of fractional
shares. These transactions resulted in a net increase of 121,675 shares in the
total outstanding shares of the Company's common stock. In addition, options to
purchase 35,000 shares of the Company's common stock expired during the first
quarter of 2001 without being exercised, and options to purchase 4,833 shares of
the Company's stock expired during the second quarter of 2001 without being
exercised.

12
NOTE D - SHAREHOLDERS' EQUITY (CONTINUED)

Options that have an exercise price below the current fair value of the
Company's common stock are assumed to be exercised in the calculation of diluted
average shares of common stock outstanding. There were no additional incremental
shares outstanding for the three and six-month periods ended June 30, 2001 to
cause a dilutive effect. Average shares outstanding when assuming dilution were
greater than average shares outstanding for basic earnings per share by 206,287
shares for the six months ended June 30, 2000.

NOTE E - 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 shares of the Company's 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 by the Company 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. The Company's 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 2001) on the amount of
compensation which may be considered under the ESOP.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase shares of the Company's common stock in the
Company's initial public offering. 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
1, 1998, this note was refinanced and an additional 56,682 shares of the
Company's common stock were obtained by the ESOP. This refinanced note, in the
original principal of $2,963,842, was secured by 261,433 shares of the Company's
common stock and bears interest at a floating rate, with principal and interest
payments due monthly through November 16, 2010, with the remaining principal, if
any, due on that date. The initial monthly 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 principal and interest
payments. At June 30, 2001, 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 consolidated
balance sheet, 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 pro rata basis by the lender as
monthly payments of principal and interest are made. As of June 30, 2001, there
were 189,156 unreleased shares with a fair value, based on an independent
valuation of $10 per share, of approximately $1,891,560. These shares are
subtracted from outstanding shares of the Company's common stock for earnings
per share calculations.

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 statements and reduce its shareholders' 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 ($106,568 and $122,498 during the first six months of 2001 and 2000,
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.

13
NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

At June 30, 2001 and December 31, 2000, the Company's financial statements
reflect long-term debt and a corresponding contra-equity account, as a result of
the ESOP debt, of $2,466,791 and $2,574,002, respectively.

Company contributions to the ESOP amounted to $241,166 and $199,241 for the six
months ended June 30, 2001 and 2000, respectively.

NOTE F - SEGMENT REPORTING

All of the Company's offices 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 detail related to segment reporting.

NOTE G - RELATED PARTY TRANSACTIONS

In June 2000, Community Bank made a $1,696,576 loan to Debter Properties, LLC,
an Alabama limited liability company of which a director of the Company is a
member, to purchase from the Bank the real property located in the City of Boaz,
Marshall County, Alabama, the site of the Bank's Boaz office. 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.

Management believes this loan was made in the ordinary course of business on
substantially the same credit terms, including interest rates and collateral,
and does not represent more than a normal risk of collection or present other
unfavorable features.

NOTE H - LEASES

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NOTE H - LEASES (CONTINUED)

In June 2000, Community Bank entered into a lease agreement with Debter
Properties, LLC, an Alabama limited liability company of which a director of the
Company is a member, as lessor on the real property located in the City of Boaz,
Marshall County, Alabama, the site of the Bank's Boaz office. 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 June 30, 2001, the amount of the
monthly rental payment was $13,228. In addition, the Bank agrees 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, the 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
the Bank on a quarterly basis the amount of the insurance premium which is
included in payments made by the Bank under the lease.

NOTE I - CONTINGENCIES

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 Board 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

15
NOTE I - CONTINGENCIES (CONTINUED)

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 overcharge 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 directors
abdication are individual, non derivative 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.

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16
of the special committee, for partial summary judgment and to realign the
Company and Community Bank. The court has scheduled a hearing on this motion for
August 29, 2001. 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 directors 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'
allegation 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 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. Although management of the Company currently 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, the lawsuit could be costly, time consuming and a diversion of
management's attention.

On September 14, 2000, an 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.

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

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17

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'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.

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 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.

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18

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.

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

This discussion is intended to assist in an understanding of the financial
condition and results of operations of Community Bancshares, Inc. (the
"Company"). Unless the context otherwise indicates, references to the Company
shall include the Company and its subsidiaries. This analysis should be read in
conjunction with the financial statements and related notes appearing in Item 1
of this Report and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.

Certain statements in this Report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1993, 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, net interest income, allowance for loan losses,
professional fees, pending litigation and investigations, non-compliant and
impaired loans originated in Community Bank's Double Springs, Alabama office,
capital requirements, operating strategy, interest rate sensitivity and market
risk. 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, government fiscal and
monetary policies and prevailing interest rates, effectiveness of the Company's
interest rate strategies, changes in laws, regulations and regulatory policies
affecting financial institutions, changes in and effectiveness of the Company's
operating or expansion strategies, geographic concentration of the Company's
assets and operations, changes in the Company's loan portfolio; competition from
other financial services companies, 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, and Double Springs, Alabama office, adverse outcome of pending
litigation 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.

FINANCIAL CONDITION

JUNE 30, 2001 COMPARED TO DECEMBER 31, 2000

LOANS

Loans comprised the largest single category of the Company's earning assets at
June 30, 2001. Loans, net of unearned income and allowance for loan losses, were
69.2% of total assets at June 30, 2001 and 73.1% of total assets at December 31,
2000. Total net loans were $509,223,242 at June 30, 2001, representing an
$11,985,489, or 2.30% $ decrease from the December 31, 2000 total net loans
of $521,208,731. This decrease was attributable to a reduction in loans at the
Bank's finance company subsidiary and more stringent underwriting policies and
procedures at all lending locations.

Commercial, financial and agricultural loans increased by approximately $9,293,
or 6.6%, to approximately $150,066 at June 30, 2001 from approximately
$140,773,000 at December 31, 2000, and represented 29.1% of total loans at June
30, 2001, compared to 26.6% at December 31, 2000. Real estate-mortgage loans
decreased by approximately $9,443, or 4.0%, to approximately $227,149 at June
30, 2001 from approximately $236,592,000 at December 31, 2000, and represented
44.0% of total loans at June 30, 2001, compared to 44.8% at December 31, 2000.
Consumer loans decreased by approximately $10,835, or 7.4%, to approximately
$134,838 at June 30, 2001 from $145,673,000 at December 31, 2000, and
represented 26.1% of total loans at June 30, 2000, compared to 27.6% a December
31, 2000. Real estate-construction loans decreased by approximately $1,498, or
27.6%, to approximately $3,931 at June 30, 2001 from approximately $5,429,000
at December 31, 2000, and represented .80% of total loans at June 30, 2001,
compared to 1.0% at December 31, 2000.

INVESTMENT SECURITIES AND OTHER EARNING ASSETS

Investment securities increased $16,588,421, or 16.3%, to $118,158,239 at June
30, 2001 compared to $101,569,818 at December 31, 2000. The investment
securities portfolio is used to make various term investments, to provide a
source of liquidity and to serve as collateral to secure certain government
deposits. Short-term investments in the form of interest-bearing deposits with
banks were $200,000 at June 30, 2001 compared to $700,000 at December 31, 2000.

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20

The Company had $19,000,000 in federal funds sold at June 30, 2001 compared to
$3,000,000 at December 31, 2000. Increases in investment securities and federal
funds sold is due primarily to growth in deposits and liquidity provided from
the loan portfolio.

ASSET QUALITY

Between December 31, 2000 and June 30, 2001, the ratio of the allowance for loan
losses to total nonperforming assets (defined as nonaccruing loans, loans past
due 90 days or greater, restructured loans, nonaccruing securities and other
real estate) declined from 112.3% at year-end 2000 to 80.5% at June 30, 2001.
The ratio of total nonperforming assets to total assets increased to 1.1% at
June 30, 2001 from 0.9% at year-end 2000, while the ratio of nonperforming loans
to total loans, net of unearned income, increased to 1.0% at June 30, 2001 from
0.8% at December 31, 2000. These changes were primarily due to a decrease in the
total of loans, net of unearned income of approximately 12,417,000, or 2.4%,
also contributing was an increase in nonaccruing loans of approximately
$969,000, or 51.6%, to approximately $2,846,000 at June 30, 2001 from
$1,877,000 at December 31, 2000 and an increase in other real estate of
$1,414,000 or 75.2%, to approximately $3,295,000 at June 30, 2001 from
approximately $1,881,000 at December 31, 2000. These increases were partially
offset by a decline in loans past due 90 days or more of $420,000 or 16.3%, to
approximately $2,151,000 at June 30, 2001 from approximately $2,574,000 at
December 31, 2000. Total nonperforming assets increased $1,963,000, or 12.5%,
to approximately $8,292,000 at June 30, 2001 from approximately $6,329,000 at
December 31, 2000.

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 the investigation of this matter. While the Company
has not completed its investigation of these loans, management's estimate of the
impairment of such loans at the time of discovery was approximately $839,000. As
of December 31, 2000, the Company had made a provision and increased its
allowance for loan losses by approximately $501,000 to reflect the estimated
impairment of these loans at year-end 2000. During 2001, the Company made a
additional provision and increased its allowance for loan losses by
approximately $338,000 to reflect the increase in 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. See "Results of Operations -
Provisions for Loan Losses".

DEPOSITS

Total deposits of $613,603,500 at June 30, 2001 reflected an increase of
$12,702,733 or 2.1% from $600,900,767 at year-end 2000. Deposits are Community
Bank's primary source of funds. Noninterest- bearing deposits increased
$1,957,566 or 2.9%, to $69,243,271 at June 30, 2001, from $67,285,705 at
December 31,2000, while interest-bearing deposits increased $10,745,167 or 2.0%
to $544,360,229 at June 30, 2001, from $533,615,062 at December 31, 2000.
Certificates of deposits of $100,000 or more increased approximately
$21,873,000, or 21.7%, to approximately $122,885,000 at June 30, 2001, from
approximately $101,012,000 at December 31, 2000.

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21

BORROWINGS

Community Bank 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 cost 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.

Other short-term borrowings totaled $3,506,489 at June 30, 2001, a $1,241,258,
or 54.8% increase from $2,265,231 at December 31, 2000. At June 30, 2001,
short-term borrowings consisted primarily of the U.S. Treasury Tax and Loan Note
Option account and securities sold under agreement to repurchase. Balances under
U.S. Treasury Tax and Loan Note Option are subject to call at any time by the
U.S. Treasury. The increase during the first six months of 2001 was due to a
increase of approximately $285,000 in balances outstanding under the U.S.
Treasury Tax and Loan Note Option, and by an increase of approximately $956,000
in securities sold under agreement to repurchase.

At June 30, 2001 and December 31, 2000, the Company had notes payable totaling
approximately $5,187,000 and $5,675,000, respectively, described briefly in the
following paragraphs.

In December 1992, the Company entered into a loan agreement with a regional bank
for amounts up to $6,500,000. At June 30, 2001, and December 31, 2000, the
amounts outstanding under this loan agreement were approximately $1,067,000 and
$1,423,000, respectively, due December 2002, bearing interest at a floating
prime rate, and collateralized by 100% of the common stock of Community Bank,
the Company's subsidiary 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 24 monthly principal payments, provided that no more
than six consecutively scheduled installments are deferred. The Company did not
postpone any principal payments under this loan agreement during the first six
months of 2001.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock in the Company's initial public
offering. 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 1, 1998, this note was
refinanced and an additional 56,682 shares of the Company's common stock were
obtained by the ESOP. This note, in the original principal 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 on that date. The
initial monthly 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 principal and interest payments. At June 30,
2001, 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 balance sheet, 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 $2,510,000 at June
30, 2001 and approximately $2,606,000 at December 31, 2000, secured by 189,156
and 199,877 of unreleased shares of Company common stock, respectively.

On October 4, 1994, the Company entered into a 20-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 rate of 7%. The Company maintains the right to prepay the
note at its sole discretion. The balance of the note was approximately
$1,610,000 at June 30, 2001 and approximately $1,646,000 at December 31, 2000.

Since June 1999, Community Bank, has borrowed funds under the Federal Home Loan
Bank of Atlanta's "Convertible Advance Program." These advances have had
original maturities of 10 years, with stated call

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22

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 a stated call date,
with interest payable each quarter. At December 31, 2000, Community Bank had an
outstanding advance of $38,000,000. This obligation has a 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 with interest payable
each quarter. At June 30, 2001, outstanding funds advanced to Community Bank
under the FHLB "Convertible Loan Program" totaled $38,000,000.

In May 2001, Community Bank made an application for and received an advance of
$8,000,000 under the FHLB "fixed rate credit" plan. The advance was for 6 months
bearing interest at 4.15% and will be due in November 2001. The balance of this
obligation at June 30, 2001 was $8,000,000.

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"). The proceeds from the issuance
of the Capital Securities 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
principal balance outstanding is due at maturity. However, as specified in the
indenture pursuant to which the debentures were issued, the debentures can be
redeemed prior to maturity at a redemption price equal to a percentage of the
principal amount, ranging from 105.438% in the year 2010 to 100.00% in and after
the year 2020, plus accrued but unpaid interest. As of June 30, 2001, the
Company's consolidated financial statements reflected $10,000,000 in junior
subordinated deferrable interest debentures, after the effects of elimination.
See Note C to the Consolidated Financial Statements.

Maturities/calls of long-term debt and FHLB borrowings for the years ending
December 31, are as follows:

Junior
Notes Subordinated FHLB Subordinated
Payable Debt Borrowings Debentures
---------- ------------ ----------- ------------

2001............. $ 425,048 $ 37,223 $ 8,000,000 $ -0-

2002............. 893,705 78,461 38,000,000 -0-

2003............. 200,287 84,133 -0- -0-

2004............. 220,165 90,215 -0- -0-

2005............. 242,015 96,737 -0- -0-

Thereafter....... 1,595,710 1,223,260 -0- 10,000,000
---------- ---------- ----------- -----------

$3,576,930 $1,610,029 $46,000,000 $10,000,000
========== ========== =========== ===========

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23

CAPITAL RESOURCES

Bank regulatory authorities have placed increased emphasis on the maintenance of
adequate capital, and subsequently developed risk-based capital guidelines. The
guidelines take into consideration risk factors, as defined by regulators,
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 consists of common equity and junior
subordinated deferrable interest debentures, less goodwill and unrealized gains
on debt securities, amounted to $47,904,000 at June 30, 2001. Tier II capital
components totaling approximately $7,693,000 at June 30, 2001, include
supplemental capital components such as qualifying allowance for loan losses and
qualifying subordinated debt. Tier I capital plus Tier II capital components are
referred to as Total Risk-Based capital and was $55,597,000 at June 30, 2001.

As of June 30, 2001, the Company and Community Bank, its banking subsidiary, was
classified as well capitalized under the financial institutions regulatory
framework. Management has reviewed and will continue to monitor the Company's
asset mix, product pricing and loan loss allowance, which are the areas
determined to be most affected by these requirements.

On April 9, 2001, the Company's Board of Directors entered into a memorandum of
understanding with the Federal Reserve Bank of Atlanta. As part of this
agreement, the Company agreed to maintain a quarterly Tier I leverage capital
ratio (the ratio of Tier I Capital to average assets, less goodwill) of at least
6.5%. At June 30, 2001, the Company's Tier I leverage capital ratio was 6.7%. On
April 18, 2001, the Board of Directors of Community Bank, the Company's
subsidiary bank, also made a commitment to the Regional Director of the Federal
Deposit Insurance Corporation's Atlanta Regional Office and the Alabama
Superintendent of Bank's with regard to certain financial goals related to
Community Bank's capital ratios.

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23
24

RESULTS OF OPERATIONS

SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2001 AND 2000

SUMMARY

Net income of the Company for the six months ended June 30, 2001 was $648,727
compared to $743,573 for the same period in 2000, representing a decline of
$94,846, or 12.8%. Basic net income per share was $0.14 for the six months ended
June 30, 2001, as compared to $0.17 for the same period of 2000. Fully diluted
net income per share was $0.14 and $0.16 for the six months ended June 30, 2001
and 2000, respectively. This decline resulted primarily from increased
professional fees related to the special investigative committee and fees
associated with various litigations and a decrease in net interest income. These
charges to expense are considered to be non-recurring by management.
Notwithstanding these increased expenses non interest expense declined by
$657,182 or 4.3% to $14,672,793 for the six months ended June 30, 2001, as
compared to $15,329,975 for the period ended June 30, 2000. This decline was the
direct result of cost cutting measures effected by management related to
salaries and benefits company wide. Non interest income decreased $317,930 or
6.2% due primarily to decreased insurance commissions resulting from
discontinued insurance product areas. Non interest income for the six months
ended June 30, 2001, was $4,814,731 compared to $5,132,661 for the same period
in 2000.

Net income (loss) for the quarter ended June 30, 2001, was ($156,363) compared
to $289,636 for the same three month period of 2000, representing a decrease of
$445,999, or 154.0%. Basic net income (loss) per share was ($0.03) for the
second quarter of 2001 compared to $0.07 for the same period of 2000. Fully
diluted net income per share was ($0.03) and $0.06 for the three months ended
June 30, 2001 and 2000, respectively. The loss for the quarter was the combined
effect of decreases in noninterest income and the cost of professional fees as
it related to the report of the special investigative committee. The company
experienced a decline in its net interest income of $111,614 for the quarter
ended June 30, 2000 as interest bearing assets repriced faster than interest
earning liabilities in a declining interest rate environment. In the second
quarter of 2001 non interest income fell $485,210 as compared to the second
quarter of 2000 which represents a decline of 18.4%. This decline is due
primarily to decreases in insurance commissions and debt cancellation fees.
Total non interest income for the three months ended June 30, 2001 was
$2,152,943 while the non interest income for the same period ending June 30,
2000, was $2,638,153. Non interest expenses increased $147,123 in the second
quarter 2001 despite a decrease of $911,409 in salary and benefits in the three
months then ended. Increases in occupancy expense and other expenses detailed
above are the primary source for the increase. Total non interest expense for
the quarters ended June 30, 2001, and June 30, 2000, were $7,808,204 and
$7,661,081, respectively.

NET INTEREST INCOME

Variations in the amounts earned on interest bearing-assets and conversely
amounts paid on interest-bearing liabilities can be accounted for by 1) changes
in the average balance of the account (volume), and 2) the changes in the
interest rate earned and paid on assets and liabilities (rate) and a 3)
combination of changes in volume and rate. Average earning assets outstanding
during the first six months of 2001 were approximately $641,510,000 as compared
to $619,483,000 for the same period of 2000, which represents a $22,027,000
increase or 3.6% in the average balance. The revenue earned from these assets
were approximately $30,327,000 and $29,807,000 for the periods ended June 30,
2001, and June 30, 2000, respectively. This represents an increase of only
$520,000 or 1.7% since the rate has decreased from year to year. Total average
interest-bearing liabilities were approximately $599,020,000 for the period
ending June 30, 2001, compared with approximately $580,564,000 for the period
ending June 30, 2000. This represents an increase of $18,456,000 or 3.2%
Interest paid on these liabilities totaled approximately $17,079,000 and
$15,951,000 for the respective periods which is an increase of $1,128,000 in
expense or 7.1%. The relatively even increase in average interest-earning
assets and interest-bearing liabilities with a marked increase in interest paid
over interest earned shows that interest-bearing liabilities were repricing
faster during the six months ended June 30, 2001, than were interest-earning
assets. Over the next twelve months, management expects this trend to change as
interest-bearing liabilities are scheduled to re-price at a rate of two-to-one
over interest-earnings

Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of the Company's
net income. Net interest income, before provision for loan losses, decreased
$620,000, or 4.6%, to approximately $12,968,000 for the six months ended June
30, 2001, from approximately $13,588,000 for the same period of 2000. Revenues
from interest earning assets of the Company increased $520,000, or 1.7%, to
approximately $30,327,000 for the six months ended June 30, 2001 from
approximately $29,807,000 for the same period in 2000. This increase was due to
both higher average outstanding balances of earning assets, which offset a
decrease in the average yield on these balances. Average earning assets
outstanding during the first six months of 2001 were approximately $641,510,000,
which represents an increase of approximately $22,027,000, or 3.6%, from
approximately $619,483,000 for the first six months of 2000. The Company's fully
taxable equivalent yield on its average earning assets decreased 27 basis points
to 9.53% for the first six months of 2001, compared to 9.80% for the same period
of 2000. Interest expense for the six months ended June 30, 2001 increased
approximately $1,128,000, or 7.1%, to $17,079,000 from $15,951,000 for the
corresponding period of 2000. This increase was due to [BOTH] higher average
outstanding balances of interest-bearing liabilities [AND AN INCREASE IN THE
AVERAGE RATE PAID ON THESE BALANCES]. Average interest-bearing liabilities
during the first six months of 2001 were approximately $599,020,000, which
represents an increase of $18,456,000, or 3.2%, from approximately $580,564,000
for the same period of 2000. The rate paid on average interest-bearing
liabilities [IN]creased 3 basis points to 5.75% for the six months ended June
30, 2001, compared to 5.72% for the six months ended June 30, 2000. A portion of
this increase in the rate paid on average interest-bearing liabilities was
attributable to the Company's junior subordinated deferrable interest
debentures, which carry an annual interest rate of 10.875% and were outstanding
for the entire first half of 2001, compared to only nine days during the first
quarter of 2000. In addition, during the first and second quarters of 2000
Community Bank offered several special certificate of deposit products at higher
rates with maturities ranging from 11 to 24 months.

Net interest margin is computed by dividing net interest income, on a fully
taxable equivalent basis, by average interest earning assets. This ratio
represents the difference between the average yield returned on average interest
earning assets and the average rate paid on funds used to support those interest
earning assets, including both interest-bearing and noninterest-bearing
sources. The Company's net interest margin, on a fully taxable equivalent basis,
for the six months ended June 30, 2001 decreased 26 basis points to 4.16%, from
4.42% for the six months ended June 30, 2000, due to a decline in net interest
income, on a fully taxable equivalent basis, coupled with an increase in average
interest-earning assets.

Net interest spread measures the difference between the average yield on
interest earning assets and the average rate paid on interest-bearing sources of
funds. The Company's net interest spread, on a fully taxable equivalent basis,
for the six months ended June 30, 2001 decreased 30 basis points to 3.48%, from
3.78% for the six months ended June 30, 2000.

24
25

assets. This trend is expected to have a positive effect on net interest income.
Net interest income for the six months ended June 30, 2001, was approximately
$12,968,000 compared with approximately $13,588,000 for the same period June 30,
2000. This represents a decrease of $620,000 or (4.6)%.

As a result of interest rate decreases from the Federal Reserve, revenue from
earning assets decreased $280,704 or (1.8%) for the quarter to $14,942,474 for
the three months ended June 30, 2001, as compared to $15,223,178 for the quarter
ended June 30, 2000. Total interest expense declined $221,002 during the same
period to $8,264,886 from $8,485,888 for the quarters ended June 30, 2001 and
2000, respectively. Net interest income for the quarter declined to
approximately $6,678,000 from approximately $6,737,000 in the second quarter of
2000, a $59,000 decrease or (0.9)%.

PROVISION FOR LOAN LOSSES

The Company maintains an allowance for loan 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. At June 30, 2001, the allowance for loan losses was approximately
$6,676,000, which represented $431,000, or 6.1%, decrease over the December 31,
2000 amount of $7,107,000. This decrease was due to charge offs that had been
previously provided for being made and a decrease in the balance of loans
outstanding at the end of the period. As a percentage of total loans, net of
unearned income, the allowance for loan losses decreased to 1.30% at June 30,
2001 from 1.35% at December 31, 2000. Management believes that the allowance for
loan losses at June 30, 2001 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.

In assessing the adequacy of the allowance for loan losses, management relies
predominantly on its ongoing review of the loan portfolios 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.

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 are charged directly to the allowance for loan losses while
recoveries on charged-off loans are credited 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 $2,332,279 for the six months ended
June 30, 2001, compared to $2,337,351 for the same period of 2000, representing
an decrease of $5,072, or .2%. The provision for loan losses during the first
six months of 2000 resulted from management's decision to make provisions for
current losses, actual growth in the loan portfolio and to increase the overall
level of the allowance for loan losses due to expansion into new markets, which
expansion resulted in growth in the loan portfolio. There was also an increase
in the amount of charged-off loans during the first six months of 2001 due to
expansion into new markets, which resulted in growth in the loan portfolio. Net
charge-offs for the six months ended June 30, 2001 were approximately $2,763,000
compared to $1,798,000 for the same period of 2000.

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26

The provision for loan losses for the second quarter of 2001 was approximately
$1,381,161 compared to $1,329,249 for the same period of 2000, representing a
decrease of $51,912 or 4.0%. Charge-offs exceeded recoveries by approximately
$1,233,000 and $668,000 for the quarters ended June 30, 2001 and 2000,
respectively. These changes during the second quarter of 2001 resulted as
management continued to out its decision to increase the allowance for loan
losses and its more aggressive assessment of past due credits.

NON INTEREST INCOME

Non interest income for the six months ended June 30, 2001 was $4,814,731,
compared to $5,132,661 for the same period of 2000. This decrease of $317,930,
or 6.2%, during the first six months of 2001, compared to the same period of
2000, resulted primarily from decreases in insurance commissions and fees on
debt cancellation contracts. The Company recorded net gains on the sale of
investment securities of $378,021 during the six months ended June 30, 2001,
while losses on the sale of investment securities for the same period of 2000
were $26,886.

Non interest income reflected a decrease of $485,210, or 18.4%, for the second
quarter of 2001 compared to the same period of 2000. This decrease resulted
primarily from decreases of $89,465, or 44.1%, in debt cancellation fees and
$265,263, or 39.0% in insurance commissions and $138,097 or 26.2% in other
operating income.

NON INTEREST EXPENSE

Non interest expenses for the six months ended June 30, 2001 were $14,672,793,
reflecting a $657,182, or 4.3%, decrease over $15,329,975 for the same period of
2000. The primary components of non interest expenses are salaries and employee
benefits, which decreased $1,665,852 for the six months ended June 30, 2001,
17.2% lower than in the same period of 2000. The decreases in salaries and
employee benefits are due to corporate downsizing and reduced salary and
benefits to officers and executive officers at the bank and the Company.
Salaries and benefits also include compensation expense related to the release
of shares in the Company's leveraged ESOP. Occupancy costs increased $150,401,
or 11.7%, furniture and equipment expenses declined by $6,797, or 0.7%, while
director and committee fees decreased $37,780, or 13.1%. Other operating
expenses increased $902,846,or 29.0%, to $4,018,621 during the first six months
of 2001 compared to $3,115,775 for the same period of 2000. This increase
primarily reflects an increase in the audit fees, legal fees and other costs
related to the special investigation committee.

Non-interest expenses were $7,808,204 for the three months ended June 30, 2001
compared to $7,661,081 for the same period of 2000. This increase of $147,123,
or 1.9%, during the second quarter of 2001 resulted primarily from an decrease
of $911,409, or 18.7%, in personnel cost, which was offset by an increase of
$975,402, or 63.6%, in other operating expenses. Professional fees for the
quarter were $1,188,540 for the three months ended June 30, 2001, compared to
$170,835 for the same period in the year ended June 30, 2000.

The Company's strategy is to make each office of its subsidiary bank a vital
part of the community it serves. Each office has management and personnel
similar to a full service, stand-alone bank. Although more expensive, the
Company believes this strategy has been successful for Community Bank, and best
serves its communities, customers and the Company's shareholders.

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27

INCOME TAXES

The provision for income taxes of $129,188 for the six months ended June 30,
2001 decreased $180,217, or 58.2%, compared to the same period of 2000, due
primarily to the decrease in income before taxes. The effective tax rate of
16.6% for the first six months of 2001 is less than the effective tax rate of
29.3% for the same period of 2000 reflects. The Company's effective tax rate of
23.9% for the second quarter of 2001 represents a decline from the effective tax
rate of 26.8% for the second quarter of 2000. These shifts are in part due to
the effect of tax-free interest income. The Company attempts to maximize its net
income through active tax planning.

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27
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 the first six months
of 2001, Community Bank saw its interest earning assets repricing within one
year increase while its interest bearing liabilities repricing during this same
period decreased. These changes reflect an improvement in the Company's static
gap position, as compared to year-end 2000. The Company remained liability
sensitive at June 30, 2001, indicating that it had more interest bearing
liabilities than interest earning assets repricing during the twelve months
ending June 30, 2002. The cumulative static gap position of rate sensitive
assets to rate sensitive liabilities at June 30, 2001 was: i) 69.0% AT 30 DAYS;
II) 61.3% AT 90 DAYS; III) 57.9% AT 180 DAYS; AND IV) 51.8% AT 365 DAYS.

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 June 30, 2001,
Asset/Liability Analysis, the improvement in net interest income, over the next
twelve months, resulting from a 200 basis points decrease in the interest rate
environment would be $1,272,000 or 4.6%. Conversely, a 200 basis points increase
in interest rates would result in a $2,974,000 or 10.7%, increase in net
interest income for the same period.

While movement of interest rates cannot be predicted with any certainty,
management believes that Community Bank's current interest rate sensitivity
analysis fairly reflects its interest rate risk exposure during the twelve
months ending June 30, 2002. 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.

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Except as noted in the foregoing, on June 8, 2001, the special litigation
committee of the Company's Board of Directors formed to investigate the
allegations contained in the lawsuit filed by M. Lewis Benson, Doris E. Benson,
John M. Pachard, Jr. and Andy C. Mann against the Company, Community Bank,
certain directors and officers of the Company and Community Bank and two
construction subcontractors filed its report under seal with the Circuit Court
of Blount County, Alabama. On June 18, 2001, the court entered a confidentially
order concerning the report. On June 28, 2001, the Company, Community Bank and
various other defendants filed a motion with the court to adopt the report of
the special committee, for partial summary judgement and to realign the parties
plaintiff. The court has scheduled a hearing on this motion for August 29, 2001.

There have been no material developments in the legal proceedings disclosed in
the section captioned "Item 3 - Legal Proceedings" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.

On June 8, 2001, the special litigation committee filed its report under seal
with the court. On June 18, 2001, the court entered an order governing the
confidentiality of the special committee's report. On June 28, 2001, the
Company, Community Bank and various other defendants filed a motion with the
court to adopt the report of the special committee, for partial summary
judgement and to realign the parties plaintiff. The court has scheduled a
hearing on this motion for August 29, 2001. 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.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

In February 200 1, the Company issued an aggregate of 11,661 shares of its
common stock to certain of Community Bank's city directors in payment of
director fees, in reliance upon an exemption from registration under Section
4(2) of the Securities Act of 1933.

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

The annual meeting of shareholders of the Company was held on Thursday,
June 7, 2001. Glynn Debter, John J. Lewis, Jr., Loy McGruder and Bishop K.
Walker, Jr. were elected to serve as Class II directors of the Company until the
annual meeting of stockholders of the Company is 2004 or until their successors
are elected and qualified. The vote with respect to such election was as
follows:

Votes Cast Abstentions
Votes Cast Against or or Broker
Name In Favor Withheld Non-Votes
---- ---------- ---------- -----------

Glynn Debter 3,216,917 517,895 4,706
John J. Lewis, Jr. 3,204,763 529,649 4,706
Loy McGruder 3,203,797 530,615 4,706
Bishop K. Walker, Jr. 3,191,527 542,885 4,706

The following directors continued in office following the shareholders
meeting:

Name Term Expires
---- ------------

Denny Kelly 2002
Kennon R. Patterson, Sr. 2002
Merritt M. Robbins 2002
R. Wayne Washam 2002
Roy B. Jackson 2003
Hodge Patterson 2003
Kennon R. Patterson, Jr. 2003
Robert O. Summerford 2003
Jimmie Trotter 2003

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30

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit Number Description of Exhibit
-------------- ----------------------

3.1 Certificate of incorporation, as amended and restated May
2000 (Filed as Exhibit 3.2 to Form 10-Q for the quarter
June 30, 2000, and incorporated herein by reference)

3.2 By-laws of Registrant, as amended and restated May 2000
(Filed as Exhibit 3.1 to Form 10-Q for the quarter June
30, 2000, and incorporated herein by reference)

4.1 Rights Agent Agreement, dated January 13, 1999, between
Community Bancshares, Inc. and the Bank of New York (Filed
as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and
incorporated herein by reference)

4.2 Indenture, dated March 23, 2000, by and between Community
Bancshares, Inc. and the Bank of New York (Filed as
Exhibit 4.4 to Form 10-Q for the quarter ended March 31,
2000, and incorporated herein by reference)

11 Computation of Earnings Per Share

b) Reports on Form 8-K

During the quarter ended June 30, 2001, no reports were filed for the
Company on Form 8-K.

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32

SIGNATURES

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

COMMUNITY BANCSHARES, INC.

August 16, 2001 /s/ Kennon R. Patterson, Sr.
------------------------ ----------------------------------------------
Date Kennon R. Patterson, Sr., as its
President and Chief Executive Officer