Edgar Filing: COMMUNITY BANCSHARES INC /DE/

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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, 2003
OR

[ ] 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

68149 MAIN STREET
BLOUNTSVILLE, ALABAMA 35031
(Address of principal executive offices)

(205) 429-1000
(Registrant's telephone number)

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:

[X] YES [ ] NO

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN EXCHANGE ACT RULE 12B-2):

[ ] YES [X] NO

AS OF JULY 31, 2003, THERE WERE 4,667,196 SHARES OF THE REGISTRANT'S
COMMON STOCK, $.10 PAR VALUE, OUTSTANDING.

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FORM 10-Q
COMMUNITY BANCSHARES, INC.
JUNE 30, 2003

TABLE OF CONTENTS PAGE NO.

Part 1 - Financial Information

Item 1 - Financial Statements (Unaudited)

Consolidated Statements of Condition as of
June 30, 2003 and December 31, 2002........................................ 3

Consolidated Statements of Income for the Three Months Ended
June 30, 2003 and 2002..................................................... 4-5

Consolidated Statements of Income for the Six Months Ended
June 30, 2003 and 2002..................................................... 6-7

Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002..................................................... 8-9

Notes to Consolidated Financial Statements..................................... 10-16

Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 17-22

Item 3 - Quantitative and Qualitative Disclosures About Market Risk..................... 23

Item 4 - Controls and Procedures........................................................ 23-24

Part 2 - Other Information

Item 1 - Legal Proceedings.............................................................. 24

Item 4 - Submission of Matters to a Vote of Security Holders............................ 25

Item 6 - Exhibits and Reports on Form 8-K............................................... 26

Signatures ...................................................................................... 27

PART 1
ITEM 1 - FINANCIAL STATEMENTS

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

JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------

ASSETS
Cash and due from banks ............................................. $ 34,592,699 $ 15,976,613
Interest-bearing deposits in banks and federal funds sold ........... 25,475,000 24,230,000
Securities available for sale ....................................... 123,755,469 123,901,469
Loans (net of unearned income) ...................................... 326,405,014 359,183,888
Allowance for possible loan losses ............................... (11,232,217) (9,784,269)
------------- -------------
Net loans ........................................................ 315,172,797 349,399,619
Capitalized lease receivable ........................................ 3,006,969 3,053,542
Premises and equipment, net ......................................... 24,642,901 25,435,491
Accrued interest receivable ......................................... 3,347,539 4,369,748
Goodwill and other intangible assets, net ........................... 2,673,681 2,713,389
Other real estate owned ............................................. 11,803,355 7,676,442
Other assets ........................................................ 9,398,199 10,840,086
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TOTAL ASSETS ..................................................... $ 553,868,609 $ 567,596,399
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing .............................................. $ 59,343,955 $ 52,920,683
Interest-bearing ................................................. 392,583,264 406,543,121
------------- -------------
Total deposits ................................................ 451,927,219 459,463,804
Other short-term borrowings ......................................... -- 1,725,133
Accrued interest payable ............................................ 3,898,351 3,622,765
FHLB long-term debt ................................................. 38,000,000 38,000,000
Capitalized lease obligations ....................................... 4,017,864 4,058,169
Other long-term debt ................................................ 3,376,528 3,577,687
Trust preferred securities .......................................... 10,000,000 10,000,000
Other liabilities ................................................... 5,778,265 6,837,884
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Total liabilities ................................................ 516,998,227 527,285,442
Shareholders' equity
Preferred stock (par value $.01 per share, 200,000 shares
authorized, no shares issued) .................................... -- --
Common stock (par value $.10 per share, 20,000,000
shares authorized, 4,827,119 and 4,810,089 shares issued as of
June 30, 2003 and December 31, 2002, respectively) ............... 482,712 481,009
Additional paid in capital .......................................... 30,885,819 30,806,862
Retained earnings ................................................... 7,933,646 11,023,962
Treasury stock (23,803 shares as of June 30, 2003 and
December 31, 2002) ............................................. (441,768) (441,768)
Unearned ESOP shares (136,120 and 148,972 shares as of
June 30, 2003 and December 31, 2002, respectively) ............... (1,871,338) (1,999,858)
Accumulated other comprehensive income (loss), net of taxes ......... (118,689) 440,750
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Total shareholders' equity ....................................... 36,870,382 40,310,957
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................... $ 553,868,609 $ 567,596,399
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See accompanying notes to consolidated financial statements

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

FOR THE THREE MONTHS ENDED JUNE 30,
-------------------------------------
2003 2002
------------ ------------

INTEREST INCOME
Interest and fees on loans ............................. $ 7,019,307 $ 8,471,515
Interest on investment securities:
Taxable securities ..................................... 1,241,836 1,594,748
Non taxable securities ................................. 85,930 124,408
Interest on federal funds sold ......................... 75,024 83,107
Other interest ......................................... 7,144 7,430
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Total interest income ............................... 8,429,241 10,281,208
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INTEREST EXPENSE
Interest on deposits ................................... 2,661,340 3,291,031
Interest on short-term borrowings ...................... 563 27,925
FHLB long-term debt .................................... 569,609 569,609
Interest on capitalized lease obligations .............. 42,709 80,978
Interest on trust preferred securities ................. 333,802 280,303
Interest on other long-term debt ....................... 47,499 51,237
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Total interest expense .............................. 3,655,522 4,301,083
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Net interest income ....................................... 4,773,719 5,980,125
Provision for loan losses .............................. 2,321,041 3,110,241
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Net interest income after provision for loan losses ....... 2,452,678 2,869,884
NONINTEREST INCOME
Service charges on deposits ............................ 710,264 774,529
Insurance commissions .................................. 572,793 553,055
Bank club dues ......................................... 104,804 111,316
Debt cancellation fees ................................. 18,452 78,750
Other operating income ................................. 305,943 410,384
Securities gains, net .................................. 80,955 107,295
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Total noninterest income ............................ 1,793,211 2,035,329
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NONINTEREST EXPENSE
Salaries and employee benefits ......................... 3,310,160 3,736,533
Occupancy expense ...................................... 582,715 561,163
Furniture and equipment expense ........................ 387,607 419,716
Insurance expense ...................................... 287,808 90,786
Director and committee fees ............................ 97,417 104,900
Professional services .................................. 1,233,278 874,630
Net loss on sale or write-down of other
real estate owned ................................... 280,176 203,604
Net loss on disposal or write-down of assets ........... 36,882 (80,150)
Other operating expenses ............................... 1,026,474 1,168,831
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Total noninterest expense ........................... 7,242,517 7,080,013
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INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................... (2,996,628) (2,174,800)
Applicable income taxes ................................... 455,422 293,005
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INCOME (LOSS) FROM CONTINUING OPERATIONS ............ (2,541,206) (1,881,795)
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See accompanying notes to consolidated financial statements

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

FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
2003 2002
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DISCONTINUED OPERATIONS:
Income from operations of divested branches
(includes gain on disposal of $6,520,542) ............................... -- 6,755,835
Applicable income taxes .................................................... -- (2,047,018)
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NET INCOME (LOSS) .......................................................... $(2,541,206) $ 2,827,022
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OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) arising during period,
net of income taxes of $116,016 and $940,453, respectively ........... $ 174,024 $ 1,410,680
Reclassification adjustment related to net realized gains, net of
income taxes of $32,382 and $42,918, respectively .................... (48,573) (64,377)
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OTHER COMPREHENSIVE INCOME .............................................. 125,451 1,346,303
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COMPREHENSIVE INCOME (LOSS) ................................................... $(2,415,755) $ 4,173,325
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Earnings (loss) per common share - income (loss) from continuing operations:
Basic ................................................................... $ (0.55) $ (0.41)
Diluted ................................................................. $ (0.55) $ (0.41)

Earnings (loss) per common share - net income (loss):
Basic ................................................................... $ (0.55) $ 0.61
Diluted ................................................................. $ (0.55) $ 0.61

Weighted average number of shares outstanding:
Basic ................................................................... 4,656,788 4,642,330
Diluted ................................................................. 4,656,788 4,642,330

Dividends per share ........................................................... $ -- $ --

See accompanying notes to consolidated financial statements

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

FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------
2003 2002
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INTEREST INCOME
Interest and fees on loans ............................. $ 14,380,212 $ 17,291,997
Interest on investment securities:
Taxable securities ..................................... 2,616,483 3,145,293
Non taxable securities ................................. 175,255 269,496
Interest on federal funds sold ......................... 157,282 226,190
Other interest ......................................... 14,254 14,424
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Total interest income ............................... 17,343,486 20,947,400
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INTEREST EXPENSE
Interest on deposits ................................... 5,546,548 6,941,654
Interest on short-term borrowings ...................... 1,713 32,213
FHLB long-term debt .................................... 1,132,959 1,132,959
Interest on capitalized lease obligations .............. 85,161 130,185
Interest on trust preferred securities ................. 647,966 560,606
Interest on other long-term debt ....................... 77,970 105,135
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Total interest expense .............................. 7,492,317 8,902,752
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Net interest income ....................................... 9,851,169 12,044,648
Provision for loan losses .............................. 3,610,480 4,053,852
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Net interest income after provision for loan losses ....... 6,240,689 7,990,796
NONINTEREST INCOME
Service charges on deposits ............................ 1,320,822 1,536,151
Insurance commissions .................................. 1,136,586 1,092,660
Bank club dues ......................................... 211,363 216,770
Debt cancellation fees ................................. 48,567 138,854
Other operating income ................................. 531,480 636,801
Securities gains, net .................................. 728,596 123,941
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Total noninterest income ............................ 3,977,414 3,745,177
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NONINTEREST EXPENSE
Salaries and employee benefits ......................... 6,638,957 7,210,194
Occupancy expense ...................................... 1,171,720 1,151,926
Furniture and equipment expense ........................ 754,998 825,759
Insurance expense ...................................... 581,199 182,703
Director and committee fees ............................ 219,617 202,000
Professional services .................................. 2,268,429 1,605,730
Net loss on sale or write-down of other
real estate owned ................................... 532,904 203,604
Net loss on disposal of assets ......................... 36,882 315,425
Other operating expenses ............................... 2,046,614 2,115,026
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Total noninterest expense ........................... 14,251,320 13,812,367
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LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................... (4,033,217) (2,076,394)
Applicable income taxes ................................... 942,902 208,598
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LOSS FROM CONTINUING OPERATIONS ..................... (3,090,315) (1,867,796)
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See accompanying notes to consolidated financial statements

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

FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
2003 2002
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DISCONTINUED OPERATIONS:
Income from operations of divested branches
(includes gain on disposal of $8,071,985) ............................... -- 8,504,062
Applicable income taxes .................................................... -- (2,576,731)
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NET INCOME (LOSS) .......................................................... $(3,090,315) $ 4,059,535
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OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) arising during period,
net of income taxes of $81,521 and $696,705, respectively ............ $ (122,281) $ 1,045,058
Reclassification adjustment related to net realized gains, net of
income taxes of $ 291,438 and $49,576, respectively .................. (437,158) (74,365)
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OTHER COMPREHENSIVE INCOME (LOSS) ....................................... (559,439) 970,693
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COMPREHENSIVE INCOME (LOSS) ................................................... $(3,649,754) $ 5,030,228
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Earnings (loss) per common share - income (loss) from continuing operations:
Basic ................................................................... $ (0.66) $ (0.40)
Diluted ................................................................. $ (0.66) $ (0.40)

Earnings (loss) per common share - net income (loss):
Basic ................................................................... $ (0.66) $ 0.88
Diluted ................................................................. $ (0.66) $ 0.88

Weighted average number of shares outstanding:
Basic ................................................................... 4,647,621 4,632,811
Diluted ................................................................. 4,647,621 4,632,811

Dividends per share ........................................................... $ -- $ --

See accompanying notes to consolidated financial statements

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

FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................... $ (3,090,315) $ 4,059,535
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses ........................................... 3,610,480 4,128,978
Provision for depreciation and amortization ......................... 874,550 1,068,169
Amortization of investment security premiums
and accretion of discounts ....................................... 388,111 149,811
Deferred tax expense ................................................ 71,455 622,232
Realized investment security gains .................................. (728,596) (123,941)
Gain on sale of branches ............................................ -- (8,071,985)
Loss on sale of premises and equipment .............................. 10,240 315,425
Net loss or write-down on other real estate owned ................... 532,904 203,604
Decrease in accrued interest receivable ............................. 1,022,209 1,673,633
Increase (decrease) in accrued interest payable ..................... 275,586 (679,167)
Other ............................................................... 916,016 (1,398,707)
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Net cash provided by operating activities ........................ 3,882,640 1,947,587
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls and pay downs of securities
available for sale ............................................... 74,912,228 35,674,381
Proceeds from maturity of securities
available for sale ............................................... 18,200,000 15,000,000
Purchase of securities available for sale ........................... (93,558,140) (47,361,146)
Cash disbursed in settlement of branch divestitures ................. -- (32,054,765)
Net decrease in loans to customers .................................. 25,136,450 17,809,200
Proceeds from sale of premises and equipment ........................ 19,035 60,350
Capital expenditures ................................................ (211,528) (252,404)
Net proceeds from sale of other real estate ......................... 983,583 398,403
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Net cash provided by (used in) investing activities .............. 25,481,628 (10,725,981)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
NOW accounts and savings accounts ................................ 14,417,713 310,669
Net decrease in certificates of deposit and other time deposits ..... (21,954,298) (14,941,161)
Net decrease increase in short-term borrowings ...................... (1,725,133) (2,424,313)
Net decrease in capitalized lease obligations ....................... (40,305) (58,055)
Repayment of long-term debt ......................................... (201,159) (415,207)
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Net cash provided by (used in) financing activities .............. (9,503,182) (17,528,067)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 19,861,086 (26,306,461)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................... 40,206,613 53,037,008
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CASH AND CASH EQUIVALENTS, END OF PERIOD ............................... $ 60,067,699 $ 26,730,547
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COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
2003 2002
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest ..................................... $ 7,216,731 $12,012,698
Income taxes ................................. -- 1,611,346

SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Foreclosure of other real estate owned ....... 5,826,391 2,148,108
Loan charge-offs, net of recoveries .......... 2,162,533 2,429,477

See accompanying notes to consolidated financial statements

[The remainder of this page intentionally left blank]

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

NOTE 1 - GENERAL

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 accounting principles
generally accepted in the United States 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 accounting principles generally accepted in the United States 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. Operating results for the three or six month periods ended June
30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. 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, 2002.

Certain reclassifications of prior years' amounts have been made to conform to
current year presentation. These reclassifications had no effect on net income,
total assets, total liabilities, or shareholders' equity.

The Company has not changed its accounting and reporting policies from those
stated in the annual report on Form 10-K for the year ended December 31, 2002.
The unaudited interim financial statements included in this report should be
read in conjunction with the audited financial statements and footnotes
included in such annual report on Form 10-K. These policies, along with the
disclosures presented in the other footnotes, provide information on how
significant assets and liabilities are valued in the financial statements and
how those values are determined. Those accounting policies involving
significant estimates and assumptions by management, which have, or could have,
a material impact on the carrying value of certain assets and impact
comprehensive income, are considered critical accounting policies. The Company
recognizes the following as critical accounting policies: Accounting for
Allowance for Loan Losses and Accounting for Income Taxes.

Accounting for Allowance for Loan Losses. Management's ongoing evaluation of
the adequacy and allocation of the allowance considers both impaired and
unimpaired loans and takes into consideration the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrowers' ability to repay, estimated value of any underlying
collateral, the reviews of regulators, and an analysis of current economic
conditions. While management believes that it has exercised prudent judgment
and applied reasonable assumptions which have resulted in an allowance
presented in accordance with generally accepted accounting principles, there
can be no assurance that in the future, adverse economic conditions, increased
nonperforming loans, regulatory concerns, or other factors will not require
further increases in, or reallocation of the allowance.

Accounting for Income Taxes. The Company uses the asset and liability method of
accounting for income taxes. Determination of the deferred and current
provision requires analysis by management of certain transactions and the
related tax laws and regulations. Management exercises significant judgment in
evaluating the amount and timing of recognition of the resulting tax
liabilities and assets. Those judgments and estimates are re-evaluated on a
continual basis as regulatory and business factors change.

NOTE 2 - STOCK BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. However, SFAS No. 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock issued to
Employees. Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting defined in SFAS No. 123 had been applied.
Under the fair value based method, compensation cost is measured at the grant

date based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company has elected to continue to measure
compensation cost for its stock option plans under the provisions in APB
Opinion 25 and has calculated the fair value of outstanding options for
purposes of pro forma disclosure utilizing the Black-Scholes method.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models do not necessarily provide a reliable single measure of the fair value
of its employee stock options.

The Company's options granted during the first six months of 2003 vest
immediately; therefore, for purposes of pro forma disclosure, the compensation
expense related to these options was recognized when granted. No options were
granted during the first six months of 2002.

The Company's pro forma information follows:

FOR THE THREE FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------

Net income (loss):
As reported ......................................... $(2,541,206) $ 2,827,022 $(3,090,315) $ 4,059,535
Deducts:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax .................................. (30,739) -- (170,329) --
----------- ----------- ----------- -----------

Pro forma net income (loss) .............................. $(2,571,945) $ 2,827,022 $(3,260,644) $ 4,059,535
=========== =========== =========== ===========

Basic earnings (loss) per share:
As reported ......................................... $ (0.55) $ 0.61 $ (0.66) $ 0.88
Pro forma ........................................... $ (0.55) $ 0.61 $ (0.70) $ 0.88
Diluted earnings (loss) per share:
As reported ......................................... $ (0.55) $ 0.61 $ (0.66) $ 0.88
Pro forma ........................................... $ (0.55) $ 0.61 $ (0.70) $ 0.88

The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the options granted in 2003: dividend yield 0%; expected
volatility of .283; risk-free interest rates of 3.10% for options issued in the
first quarter of 2003 and 2.50% for options issued in the second quarter of
2003; and expected lives of 5 years.

NOTE 3 - CONTINGENCIES

BACKGROUND

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 in Guntersville, Alabama. 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 alleged that Community Bank had been
overcharged by subcontractors on that construction project and another current
construction project. On July 18, 2000, the Boards of Directors of the Company
and Community Bank appointed a joint committee comprised of independent
directors of the Company and of Community Bank to investigate the alleged
overcharges. The joint committee retained independent legal counsel and an
independent accounting firm to assist the committee in its investigation and
has made its report to the Boards of Directors. The directors of Community Bank
who alleged the construction overcharges have made similar charges to bank
regulatory agencies and law enforcement authorities. These agencies and
authorities are currently conducting investigations regarding this matter. As
indicated in Footnote 22 in the Annual Report on Form 10-K, the Company
recognized an aggregate asset impairment of $1,972,000.

BENSON LITIGATION

On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the
Boards of Directors of the Company and Community Bank. The complaint alleges
that the directors, officers and employee named as defendants in the complaint
breached their fiduciary duties, failed to properly supervise officers and
agents of the Company and Community Bank, and permitted waste of corporate
assets by allegedly permitting the subcontractor defendants to overcharge
Community Bank in connection with the construction of two new Community Bank
offices, and to perform the construction work without written contracts,
budgets, performance guarantees and assurances of indemnification. In addition,
the complaint alleges that Kennon R. Patterson, Sr., the Chairman, President
and Chief Executive Officer of the Company, breached his fiduciary duties by
allegedly permitting the two named subcontractors to overcharge for work
performed on the two construction projects in exchange for allegedly discounted
charges for work these subcontractors performed in connection with the
construction of Mr. Patterson's residence. The complaint further alleges that
the director defendants knew or should have known of this alleged arrangement
between Mr. Patterson and the subcontractors. The complaint also alleges that
Mr. Patterson, the Community Bank employee and the two subcontractor defendants
made false representations and suppressed information about the alleged
overcharges and arrangement between Mr. Patterson and the subcontractors.

On August 15, 2000, the plaintiffs filed an amended complaint adding Andy C.
Mann, a shareholder of the Company, as a plaintiff and adding a former director
of the Company and Community Bank as a defendant. The amended complaint
generally reiterates the allegations of the original complaint. In addition,
the amended complaint alleges that Community Bank was overcharged on all
construction projects from January 1997 to the present. The amended complaint
also alleges that the defendants breached their fiduciary duties and are guilty
of gross financial mismanagement, including allegations concerning the making
or approval of certain loans and taking allegedly improper actions to conceal
the fact that certain loans were uncollectible. On September 18, 2000 the
plaintiffs filed a second amended complaint. The second amended complaint
generally reiterates the allegations of the original and first amended
complaints. In addition, the second amended complaint alleges that the
plaintiffs were improperly denied their rights to inspect and copy certain
records of the Company and Community Bank. The second amended complaint also
alleges that the directors of the Company abdicated their roles as directors
either by express agreement or as a result of wantonness and gross negligence.
The second amended complaint asserts that the counts involving inspection of
corporate records and director abdication are individual, 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. 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 affirming 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 judgment and to realign the Company
and Community Bank as plaintiffs in the lawsuit.

Following a hearing on August 29, 2001, the court denied these motions on
November 8, 2001. The court also ruled that the plaintiffs were entitled to
conduct discovery except as it related to one of the subcontractor defendants
and granted the plaintiffs' motion to unseal the report of the special
litigation committee. On November 14, 2001, the directors of the Company filed
a motion for the court to alter, amend, or vacate its November 8, 2001 rulings.
On February 7, 2002, the Company and Community Bank filed a motion to
disqualify Maynard, Cooper & Gale, P.C., the law firm representing the
plaintiffs, due to conflicts of interest. The court held a hearing on these
motions on February 22, 2002 and the parties are awaiting a ruling. A tentative
settlement of the lawsuit was announced in November, 2002, but was not
finalized. On or about April 21, 2003 the plaintiffs filed a motion to enforce
the tentative settlement. The court scheduled a hearing on September 5, 2003 to
consider the fairness of this tentative settlement. On or about July 25, 2003
the Alabama Banking Department filed a motion to intervene in the case for the
purpose of opposing this settlement.

On July 30, 2003 the Company, Community Bank and certain individual defendants
agreed to a new settlement of this case and the Packard case (see "Packard
Derivative Litigation" below) which supersedes the settlement announced in
November, 2002. On August 11, 2003 the court entered an order substituting this
new settlement for the prior one for purposes of the fairness hearing on
September 5, 2003. The terms of the new settlement are set forth in Exhibit
99(c) to a Form 8-K filed by the Company with the Securities and Exchange
Commission on August 12, 2003. Shareholders of the Company may file objections
to the new settlement with the Clerk of the Circuit Court of Blount County,
Alabama, no later than three business days prior to the fairness hearing. The
new settlement is subject to the approval of the Alabama Superintendent of
Banks and the court.

Because of the inherent uncertainties of the litigation process, the Company is
unable at this time to predict the outcome of this lawsuit and its effect on
the Company's financial condition and results of operations.

PACKARD DERIVATIVE LITIGATION

On April 4, 2003, a group composed of the same plaintiffs as in the Benson case
filed another derivative action against Sheffield Electrical Contractors, Inc.,
Steve Sheffield, Jay Bolden, Dudley, Hopton-Jones, Sims & Freeman, PLLP, Glynn
Debter, Kennon R. Patterson, Jr., Robert O. Summerford, Jimmie Trotter, John
Lewis, Jr., Merritt Robbins, Stacy Mann, B. K. Walker, Jr., Denny Kelly, Roy B.
Jackson, Loy McGruder, and Hodge Patterson. The complaint in this new
derivative lawsuit, besides adding defendants known during but not named in the
Benson lawsuit, is based upon the same allegations as in the Benson case but
bases its claims against the director-defendants not "for what they did (and
did not do) before learning of the over billing [sic.] allegations against
Patterson [Kennon R. Patterson, Sr., the Company's former Chairman and CEO] in
July 2000" but, instead "only for what they have done (and failed to do) after
the filing of the Benson lawsuit -- that is, after they learned of the
allegations against Patterson in July 2000." [Emphasis in the original.] On
June 18, 2003 the court granted the motion filed by the Company, Community Bank
and most of the individual defendants to transfer the suit to the Circuit Court
of Blount County, Alabama. On July 30, 2003 the Company, Community Bank and
certain individual defendants agreed to a tentative settlement of this case as
part of

the settlement of the Benson case (see "Benson Litigation" above). Because of
the inherent uncertainties of the litigation process, the Company is unable at
this time to predict the outcome of this lawsuit and its effect on the
Company's financial condition and results of operations.

CORR FAMILY LITIGATION

On September 14, 2000, Bryan A. Corr and six other shareholders of the Company
related to Mr. Corr filed an action in the Circuit Court of Blount County,
Alabama, against the Company, Community Bank, and certain directors and
officers of the Company and Community Bank. The plaintiffs have alleged that
the directors of the Company 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. On May 15, 2003, the court granted the defendants'
motion for summary judgment. The plaintiffs have appealed the court's ruling.
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.

LENDING ACTS LITIGATION

On October 11, 2002, William Alston, Murphy Howard, and Jason Tittle filed an
action against Community Bank, Community Bancshares, Inc., Holsombeck Motors,
Inc., Lee Brown d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Chris
Holmes d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Regina
Holsombeck, Kennon "Ken" Patterson, Sr., Hodge Patterson, James Timothy "Tim"
Hodge, Ernie Stephens, and the State of Alabama Department of Revenue. The
plaintiffs in this class action allege that Community Bank and others conspired
or used extortionate methods to effect a lending scheme of "churning phantom
loans", and that profits from the scheme were used to secure an interest in
and/or to invest in an enterprise that affects interstate commerce. The
allegations state that Community Bank used various methods to get uneducated
customers with fair to poor credit to sign numerous "phantom loans" when the
customers only intended to sign for one loan. Claims include racketeering
activity within the meaning of the Racketeer Influenced and Corrupt
Organizations Act of 1970, conspiracy, spoliation, conversion, negligence,
wantonness, outrage, and civil conspiracy.

The Company and Community Bank intend to defend the action vigorously and
currently are conducting discovery to ascertain what substance, if any, there
is to the claims. 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.

PATTERSON LITIGATION

On April 9, 2003 Kennon R. Patterson, Sr., former Chairman, President and Chief
Executive Officer of the Company, filed an adversary proceeding in the United
States Bankruptcy Court for the Northern District of Alabama in connection with
his petition for protection under Chapter 11 of the United States Bankruptcy
Code. Defendants of the adversary proceeding are the Company, Community Bank,
five directors of the Company and Community Bank and the law firm of Powell,
Goldstein, Frazer and Murphy, LLP which represents Community Bank's Audit
Committee. The complaint alleges that the Company breached its employment
agreement with Mr. Patterson by terminating his employment on January 27, 2003
and failed to pay him for compensation and benefits which had allegedly accrued
prior to his termination. The complaint also alleges that Community Bank,
members of Community Bank's Audit Committee, the Audit Committee's independent
counsel and the Company's current Chairman, President and Chief Executive
Officer conspired to interfere with Mr. Patterson's contract and business
relationship with the Company. The suit seeks damages in excess of $150 million
for, among other things, lost

compensation and benefits, mental anguish, and damage to Mr. Patterson's
reputation. The Company believes that this lawsuit is without merit and intends
to defend the action vigorously. On May 9, 2003 the defendants filed a motion
to dismiss the suit. On June 17, 2003 the court denied the motion to dismiss
the suit as to the Company, Community Bank and the individual defendants. On
July 7, 2003, those defendants filed a counterclaim against Mr. Patterson
asserting that Mr. Patterson breached his employment agreement with the
Company, engaged in fraudulent conduct, and converted property belong to
Community Bank to his own use. 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.

EMPLOYEE LITIGATION

On May 5, 2003 two former executive officers of the Company and Community Bank
filed separate suits in the Circuit Court of Blount County, Alabama, against
the Company, Community Bank, Kennon R. Patterson, Sr., former Chairman and
Chief Executive Officer of the Company and Community Bank, and a number of
fictitious defendants. Bishop K. Walker, Jr., former Senior Executive Vice
President and General Counsel of the Company, and Denny G. Kelly, former
President of Community Bank, allege that they were induced to retire based on
misrepresentations made by Kennon R. Patterson, Sr. who was allegedly acting
within the scope of his duties as an agent of the Company and Community Bank.
Plaintiffs claim that these actions constituted fraud, promissory fraud,
fraudulent suppression, fraud in the inducement, deceit, fraudulent deceit,
negligence, recklessness, wantonness and breach of contract. The complaints ask
for an unspecified amount of compensatory and punitive damages. 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.

GENERAL

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

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.

NOTE 4 - DISCONTINUED OPERATIONS

During 2002, Community Bank consummated the sale of the following branches: two
Pulaski, Tennessee locations on March 31, 2002, two DeKalb County, Alabama
locations on May 3, 2002, and six Marshall County, Alabama locations on May 31,
2002. Income and expenses related to these locations are included in
discontinued operations for the three and six months ended June 30, 2002 for
comparative purposes.

NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to
certain entities (called variable interest entities) in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. In addition, public
companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003.
Management is currently assessing the impact of FIN 46, and does not expect
this Interpretation to have a material impact to the Consolidated Financial
Statements.

On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of SFAS No. 149 are effective for fiscal
quarters beginning after June 15, 2003. Management does not believe the
provisions of this standard will have a material impact on results of future
operations.

In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity", and
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The changes in this Statement require that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments were previously
classified as equity. In particular, the changes in this Statement (1) is
expected to result in a more complete depiction of an entity's liabilities and
equity and should, thereby, assist investors and creditors in assessing the
amount, timing, and likelihood of potential future cash outflows and equity
share issuances, (2) is expected to enhance the relevance of accounting
information by providing more information about an entity's obligations to
transfer assets or issue shares, thus, improving its predictive value to users.
Reliability of accounting information should be improved by providing a
portrayal of an entity's capital structure that is unbiased, verifiable, and
more representationally faithful than information reported prior to issuance of
this Statement. Those changes may result in more consistent reporting of these
financial instruments. Management does not believe the provisions of this
standard will have a material impact on the Company.

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) and its subsidiaries. Unless the context otherwise indicates, 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, 2002.

FORWARD LOOKING INFORMATION

Certain statements in this Report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are not based on historical facts and may be identified by their
reference to a future period or by the use of forward-looking terminology, such
as "anticipate," "estimate," "expect," "may" and "should." These
forward-looking statements include, without limitation, those relating to the
Company's future growth and profitability, economic prospects of market areas,
dividends, pending litigation, branch office divestitures, non-compliant or
impaired loans, capital requirements, operating strategy, deposits, consumer
base, allowance for loan losses, non-performing assets, interest rate
sensitivity, market risk and impact of inflation. We caution you not to place
undue reliance on these forward-looking statements. Actual results could differ
materially from those indicated in such forward-looking statements due to a
variety of factors. These factors include, but are not limited to, changes in
economic conditions and government fiscal and monetary policies, changes in
prevailing interest rates and effectiveness of the Company's interest rate
strategies, laws, regulations and regulatory authorities affecting financial
institutions, changes in and effectiveness of the Company's operating or
expansion strategies, geographic concentration of the Company's assets and
operations, competition from other financial services companies, unexpected
financial results or outcomes of legal proceedings, 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, 2003 COMPARED TO DECEMBER 31, 2002

SUMMARY

Total assets at June 30, 2003 were $553,869,000, down from $567,596,000 at
December 31, 2002. The Company continued to experience declines in loans. The
Company also experienced a decline in deposits during the quarter due mostly to
management's decision not to rebid on higher priced out of state funds, since
funding is not currently needed for liquidity at the Company's subsidiary,
Community Bank.

EARNING ASSETS

The earning assets of the Company are mainly composed of investment securities,
federal funds sold and loans. Investment securities decreased $146,000 at June
30, 2003 from $123,901,000 at December 31, 2002. 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
$260,000 at June 30, 2003 compared to $200,000 at December 31, 2002. The
Company had $25,215,000 in federal funds sold at June 30, 2003, compared to
$24,030,000 at December 31, 2002, representing an increase of $1,185,000, or
4.9%.

Cash and due from banks increased $18,616,000 during the first six months of
2003. Earnings credit rates are applied to balances held in the Company's
correspondent bank accounts held with other banks. The Company is given a
credit based on its balance and the credit is used to offset service charges to
the Company. These earnings

credit rates are currently higher than the federal funds sold rates. The
Company increased its balances in its main correspondent account during 2003 to
take advantage of the better rate; therefore, earning a larger credit against
service charges it would have paid than the interest income it otherwise would
have received had the funds been in federal funds sold.

Loans comprise the largest single category of the Company's earning assets.
Loans, net of unearned income, were $326,405,000 at June 30, 2003 down
$32,779,000, or 9.1%, from $359,184,000 at December 31, 2002. The Company
continues to experience a decline in total loans because of economic downturns,
the tightening of the Company's credit standards, increased charge-offs of
loans made in previous years, and lack of loan demand in the markets it
currently serves.

NONPERFORMING ASSETS AND PAST DUE LOANS

Between December 31, 2002 and June 30, 2003, 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 43.95% at year-end 2002 to 37.46% at June 30,
2003. The ratio of total nonperforming assets to total assets increased to
5.41% at June 30, 2003 from 3.92% at year-end 2002, while the ratio of
nonperforming loans to total loans, net of unearned income, increased to 5.57%
at June 30, 2003 from 4.06% at December 31, 2002. These changes were primarily
due to an increase in nonaccruing loans of $4,235,000 or 41.9%, to $14,334,000
at June 30, 2003 from $10,099,000 at December 31, 2002 and an increase in other
real estate of $4,127,000, or 53.8%, to $11,803,000 at June 30, 2003 from
$7,676,000 at December 31, 2002. In addition, loans past due 90 days or more
increased $197,000, or 15.9%, to $1,438,000 at June 30, 2003 from $1,241,000 at
December 31, 2002. Total nonperforming assets increased $7,722,000, or 34.7%,
to $29,982,000 at June 30, 2003 from $22,260,000 at December 31, 2002. The
significant increase in nonaccrual loans was mostly due to a $5,150,000 real
estate loan to the Company's former Chairman and Chief Executive Officer who
filed bankruptcy in January, 2003. It is the Company's policy to place loans on
nonaccrual status when a borrower files bankruptcy.

FUNDING

The Company's primary sources of funding are from deposits from the customers
of Community Bank and from other short-term and long-term borrowings. Total
deposits of $451,927,000 at June 30, 2003 reflected a decrease of $7,537,000,
or 1.6%, from $459,464,000 at year-end 2002. Deposits are Community Bank's
primary source of funds. Noninterest-bearing deposits increased $6,423,000, or
12.1%, to $59,344,000 at June 30, 2003 from $52,921,000 at December 31, 2002,
while interest-bearing deposits decreased $13,960,000, or 3.4%, to $392,583,000
at June 30, 2003 from $406,543,000 at December 31, 2002. Certificates of
deposit and other time deposits of $100,000 or more decreased $8,405,000, or
9.8%, to $77,512,000 at June 30, 2003 from $85,917,000 at December 31, 2002.

Total short-term borrowings decreased $1,725,000, or 100%, to a zero balance at
June 30, 2003 from $1,725,000 at December 31, 2002. FHLB long-term debt
remained constant at $38,000,000 for both June 30, 2003 and December 31, 2002
while other long-term debt decreased $201,000, or 5.6%, to $3,377,000 at June
30, 2003 from $3,578,000 at December 31, 2002.

In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000
of guaranteed preferred securities representing undivided beneficial interests
in the assets of the Trust ("Capital Securities"). All of the common securities
of the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. Under
the terms of the indenture, the Company may elect to defer payments of interest
for up to ten semiannual payment periods. The Company has elected to defer its
March 2002, September 2002 and March 2003 interest payments and may elect to do
so again based on the liquidity needs of the Company when future payments
become due. For the duration of such deferral period, the Company is restricted
from paying dividends to

shareholders or paying debt that is junior to the debenture. 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.

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

LIQUIDITY

The Company experienced an approximate $19,861,000 increase in cash and cash
equivalents during the first six months of 2003. Cash provided by operating
activities was $3,883,000. Investing activities provided an increase of
$25,482,000, mostly from loan payments from customers. Financing activities
used $9,503,000 of cash and cash equivalents during the first six months of
2003. Certificates of deposits decreased $21,954,000, but was partially offset
by increases in cash from the growth of demand deposits, NOW deposits, and
other savings deposits totaling $14,418,000.

Dividends paid by Community Bank are the primary source of funds available to
the Company. The Company relies on dividends from Community Bank in order to
pay expenses, service debt and pay dividends to shareholders. Certain
restrictions exist regarding the ability of Community Bank to transfer funds to
the Company in the form of cash dividends, loans or advances. Although
dividends from Community Bank are the primary source of funding, the Company
also receives cash from its subsidiaries for its portion of tax benefit on
intercompany income tax settlements. Community Bank discontinued paying the
Company a management fee in 2003. The Company's primary cash outflow is now
debt service. Community Bank is unable to pay a dividend to the Company without
prior approval of the regulatory authorities.

CAPITAL RESOURCES

Total shareholders' equity at June 30, 2003 was 6.7% of total assets as
compared to 7.1% at December 31, 2002. The decrease experienced during the
first six months of 2003 is primarily a result of net losses of $3,090,000.

Bank regulatory authorities have issued risk-based capital guidelines that take
into consideration risk factors associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital strength is
measured in two tiers, which are used in conjunction with risk-adjusted assets
to determine the risk-based capital ratios. The Company's Tier I capital, which
includes common stock, retained earnings and guaranteed preferred beneficial
interest in the Company's junior subordinate deferrable interest debentures,
amounted to $43,959,000 at June 30, 2003, compared to $46,817,000 at December
31, 2002. Tier II capital components include supplemental capital components,
such as qualifying allowance for loan losses and qualifying subordinated debt.
Tier I capital plus the Tier II capital components are referred to as total
risk-based capital, which was $48,322,000 at June 30, 2003 as compared to
$52,897,000 at year-end 2002. The percentage ratios, as calculated under the
guidelines, for tier I and total risk-based capital were 12.84% and 14.11%,
respectively, at June 30, 2003, compared to 12.95% and 14.63%, respectively, at

year-end 2002. At June 30, 2003, both tier I and total risk-based capital of
the Company exceeded the regulatory minimum ratios of 4% and 8%, respectively.

Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The tier I leverage ratio is defined as the ratio that the
Company's tier I capital bears to total average assets minus goodwill. The
Company's tier I leverage ratios were 7.85% and 8.20% at June 30, 2003 and
December 31, 2002, respectively, exceeding the regulatory minimum requirement
of 4%. The Company is currently under a special regulatory requirement of 6.50%
for tier 1 leverage ratio. The Company's ratio currently exceeds that
requirement.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002

SUMMARY

The Company's net loss from continuing operations for the six months ended June
30, 2003 was $3,090,000, a decrease of $1,222,000 from a net loss from
continuing operations of $1,868,000 for the same period in 2002. Income from
discontinued operations which includes the gain on disposal of $5,927,000
during the first six months of 2002 brought net income to $4,060,000. Both
basic and diluted net loss per share was $0.66 for the six months ended June
30, 2003, as compared to net income per share of $0.88 for the same period in
2002.

The Company's net loss for the three month period ended June 30, 2003 was
$2,541,000 as compared to net income of $2,827,000 for the same period of 2002;
however, continuing operations during the three month period ended June 30,
2002 resulted in a net loss of $1,882,000 in comparison to the $2,541,000.

The following discussion is on results of operations from continuing operations
of the Company. Refer to Note 6 of the Notes to Consolidated Financial
Statements for a description of the presentation for discontinued operations.

NET INTEREST INCOME

Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, was $9,851,000 for the six months ended
June 30, 2003. Net interest income, before provision for loan losses, decreased
$2,194,000, or 18.2%, from $12,045,000 for the same period of 2002. Revenues
from interest earning assets of the Company decreased $3,604,000, or 17.2%, to
$17,343,000 for the six months ended June 30, 2003 from $20,947,000 for the
same period in 2002. This decrease was due to lower yields on and volume of
interest earning assets. Average earning assets outstanding during the first
six months of 2003 were $498,164,000, which represents a decrease of
$36,158,000, or 6.8%, from $534,322,000 for the first six months of 2002. The
Company's yield on its average earning assets decreased 89 basis points to
7.02% for the first six months of 2003, compared to 7.91% for the same period
of 2002. This decrease is somewhat reflective of the overall decrease in
interest rates experienced during the time frame. Interest expense for the six
months ended June 30, 2003 decreased $1,411,000, or 15.8%, to $7,492,000 from
$8,903,000 for the corresponding period of 2002. This decrease occurred due to
a decline in rates paid on and volume of interest-bearing liabilities. Average
interest-bearing liabilities during the first six months of 2003 were
$457,379,000, which represents a decrease of $14,666,000, or 3.1%, from
$472,045,000 for the same period of 2002. The rate paid on average
interest-bearing liabilities decreased 50 basis points to 3.30% for the six
month period ended June 30, 2003, compared to 3.80% for the first six months of
2002. This decrease is also attributable to the overall decline in interest
rates during the year 2002.

The Company's net interest margin for the six months ended June 30, 2003
decreased 56 basis points to 3.99%, from 4.55% for the six months ended June
30, 2002, due to the decrease in net interest income. Net interest margin is
computed by dividing net interest income 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 spread for the six months ended June 30, 2003
decreased 39 basis points to 3.72%, from 4.11% for the six months ended June
30, 2002, as the average cost of interest-bearing sources of funds decreased 50
basis points while the average yield on interest earning assets decreased 89
basis points. 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 has also experienced declines in its net interest
margin and net interest spread with the continued increase in nonearning assets
as a result of higher nonaccrual loans and other real estate owned.

PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2003, the allowance for loan losses was $11,232,000 which
represented an increase of $1,448,000, or 14.8%, from the December 31, 2002
amount of $9,784,000. The provision for loan losses was $3,610,000 and
$4,054,000 for the six months ended June 30, 2003 and 2002, respectively.
Management continues to make provisions for current losses in the loan
portfolio as it continues its effort to improve the overall credit quality of
the Company. In this effort, management has increased the allowance for loan
losses account as a percent of loans to reserve for potential losses in the
loan portfolio by recognizing additional provisions for loan loss expense. As a
percentage of total loans, net of unearned income, the allowance for loan
losses increased to 3.44% at June 30, 2003, compared to 2.72% at December 31,
2002. Loan charge-offs exceeded recoveries by $2,163,000 during the first six
months of 2003, which represented a decrease of $266,000, or 11.0%, from
$2,429,000 for the same period during 2002. Management believes that the
allowance for loan losses at June 30, 2003 is adequate; however, no assurance
can be given that additional losses may not occur or that additional provisions
to the allowance for loan losses will not be necessary.

NONINTEREST INCOME

Noninterest income for the six months ended June 30, 2003 increased $232,000,
or 6.2%, to $3,977,000, from $3,745,000 for the same period of 2002. Service
charges on deposit accounts decreased $215,000, or 14.0%, to $1,321,000 for the
first six months of 2003 from $1,536,000 in the first six months of 2002. Debt
cancellation fees decreased during the first six months of 2003, as compared to
the first six months of 2002, $90,000, or 64.7%, due to decreased volume in
debt cancellation coverage associated with the decline in the Company's loan
portfolio. Other operating income decreased $106,000 to $531,000 for the first
six months of 2003 from $637,000 for the same period in 2002. The Company
recorded net gains on the sale of investment securities of $729,000 during the
six months ended June 30, 2003, compared to net gains on the sale of investment
securities of $124,000 for the same period of 2002. The net securities gains
were the primary reason for the increase in noninterest income, although the
Company also experienced a 4.0%, or $44,000, increase in insurance commissions
attributable to increased revenues from the Company's subsidiary, Community
Insurance Corp.

For the three months ended June 30, 2003, noninterest income was $1,793,000, a
decrease of $242,000, or 11.9% from $2,035,000 for the same period in 2002. For
the three month period ended June 30, 2003 from the same period ended June 30,
2002, insurance commissions increased $20,000, debt cancellation fees decreased
$61,000, other operating income decreased $104,000 and net securities gains
decreased $26,000.

NONINTEREST EXPENSES

Noninterest expenses for the six months ended June 30, 2003 were $14,251,000,
representing a $439,000, or 3.2%, increase from $13,812,000 for the same period
of 2002. The primary components of noninterest expenses are salaries and
employee benefits, which decreased $571,000, or 7.9%, to $6,639,000 for the six
months ended June 30, 2003 from $7,210,000 for the same period of 2002.
Occupancy costs increased $20,000, or 1.7%, to $1,172,000 for the first six
months of 2003 from $1,152,000 for the same period of 2002. Furniture and
equipment expenses for the six month period ended June 30, 2003 decreased
$71,000, or 8.6%, to $755,000 from $826,000 for the same period of 2002.
Insurance expense increased $398,000 to $581,000 for the six months ended June
30, 2003 from $183,000 for the same period in 2002. Director and committee fees
increased $18,000, or 8.9%, to $220,000 for the first six months of 2003 from
$202,000 for the first six months of 2002. This increase is the result of
increased Board

meetings due to the many changes the Company has experienced during the first
six months of 2003. Other operating expenses were $2,047,000 and $2,115,000 for
the six month periods ended June 30, 2003 and 2002, respectively. Professional
services expense increased $662,000, or 41.2%, to $2,268,000 due to
professional services required to comply with the agreement with the Alabama
State Banking Department and the investigation into payments made in connection
with construction projects of the Bank.

For the three months ended June 30, 2003, noninterest expenses were $7,243,000,
an increase of $163,000 over the same three month period in 2002 of $7,080,000.
The increase was due to increases in professional services and insurance
expense of $358,000 and $197,000, respectively. This increase was partially
offset by a $427,000 decrease in salaries and employee benefits and a $143,000
decrease in other operating expenses, but was further exacerbated by losses on
other real estate and disposal of assets totaling $317,000.

INCOME TAXES

The Company attempts to maximize its net income through active tax planning.
Tax benefits were $943,000 for the six month period ended June 30, 2003
compared to tax expense of $2,368,000 for the same period in 2002. The Company
has experienced an effective tax rate of 23.4% thus far in 2003.

RECENTLY ISSUED ACCOUNTING STANDARDS

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

Community Bank's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates.
Community Bank manages its exposure to fluctuations in interest rates through
policies established by its Asset/Liability Committee ("ALCO"). The ALCO meets
periodically to monitor its interest rate risk exposure and implement
strategies that might improve its balance sheet positioning and/or earnings.
Management utilizes an Interest Rate Simulation model to estimate the
sensitivity of the Bank's net interest income and net income to changes in
interest rates. Such estimates are based upon a number of assumptions for each
scenario, including balance sheet growth, deposit repricing characteristics and
prepayment rates.

The estimated impact on Community Bank's net interest income sensitivity over a
one year time horizon at June 30, 2003 is shown below. Such analysis assumes an
immediate and nonparallel shift in interest rates and the Bank's estimates of
how interest-bearing transaction accounts will reprice.

RATE SHOCK ANALYSIS

-100 +100
BASIS BASIS
POINTS LEVEL POINTS
------- ------- -------
(DOLLARS IN THOUSANDS)

Prime Rate ....................... 3.00% 4.00% 5.00%

Interest Income .................. $30,879 $32,272 $33,603
Interest Expense ................. 10,791 11,803 13,136
------- ------- -------
Net Interest Income ......... $20,088 $20,469 $20,467
======= ======= =======

Dollar change from Level ......... $ -381 $ -2

Percentage change from Level ..... -1.86% -0.00%

As shown above, in a 100 basis point rising rate environment, the net interest
margin is projected to remain unchanged and in a 100 basis point falling rate
environment, the net interest margin is projected to decrease 1.86%. These
percent changes from a level rate scenario fall comfortably within Community
Bank's ALCO policy limit of +/-7.00%.

ITEM 4 - CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company's management,
with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period
covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.

(b) Management, in consultation with the Company's independent
accountants, identified deficiencies related to the
impairment of premises and the equipment and valuation of
repossessions, which constitute "material weaknesses" under
standards established by the American Institute of Certified
Public Accountants. Management has established a plan to
strengthen the procedures and controls surrounding these
processes. Implementation has begun and completion of these
plans is expected in the third quarter of 2003.

PART II OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On or about April 21, 2003 the plaintiffs in the lawsuit styled Benson et al v.
Community Bancshares, Inc. et al. filed a motion to enforce the tentative
settlement announced in November, 2002. The court scheduled a hearing on
September 5, 2003 to consider the fairness of this tentative settlement. On or
about July 25, 2003 the Alabama Banking Department filed a motion to intervene
in the case for the purpose of opposing this settlement. On July 30, 2003 the
Company, Community Bank and certain individual defendants agreed to a new
settlement of this case which supersedes the settlement announced in November,
2002. On August 11, 2003 the court entered an order substituting this new
settlement for the prior one for purposes of the fairness hearing on September
5, 2003. The terms of the new settlement are set forth in Exhibit 99(c) to a
Form 8-K filed by the Company with the Securities and Exchange Commission on
August 12, 2003. Shareholders of the Company may file objections to the new
settlement with the Clerk of the Circuit Court of Blount County, Alabama, no
later than three business days prior to the fairness hearing. The new
settlement is subject to the approval of the Alabama Superintendent of Banks
and the court.

On May 15, 2003 the court granted the defendants' motion for summary judgment
in the lawsuit styled Corr v. Patterson. The plaintiffs have appealed the
court's ruling.

On June 18, 2003, the court granted the motion filed by the Company, Community
Bank and most of the individual defendants to transfer the lawsuit styled
Packard et al. v. Sheffield Electrical Contractors, Inc. et al. from the
Circuit Court of Jefferson County, Alabama, to the Circuit Court of Blount
County, Alabama,. On July 30, 2003 the Company, Community Bank and certain
individual defendants agreed to a tentative settlement of this case as part of
the settlement of the Benson case.

On May 9, 2003 the defendants in the lawsuit styled Patterson v. Community
Bancshares, Inc. et al. filed a motion to dismiss the suit. On June 17, 2003
the court denied the motion to dismiss the suit as to the Company, Community
Bank and the individual defendants. On July 7, 2003, those defendants filed a
counterclaim against Mr. Patterson asserting that Mr. Patterson breached his
employment agreement with the Company, engaged in fraudulent conduct, and
converted property belonging to Community Bank to his own use.

Except as noted above, no reportable events or material developments have
occurred since the filing of the Company's Annual Report on Form 10-K (the
"Form 10-K"), for the year ended December 31, 2002 and filed on April 15, 2003.

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

The annual meeting of stockholders of the Company was held on Thursday, July
24, 2003, at which the following matters were voted upon by the stockholders of
the Company:

I. Election of Class I Directors

Roy B. Jackson, Stacey W. Mann and Jimmie Trotter were elected to serve as
Class III directors of the Company until the annual meeting of stockholders in
2006 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

Roy B. Jackson 3,261,646 840,988
Stacey W. Mann 2,899,494 1,203,140
Jimmie Trotter 3,269,091 833,543

The following directors continued in office following the stockholders meeting:

Name Term Expires

Glynn Debter 2004
John J. Lewis, Jr. 2004
Loy McGruder 2004
Kenneth K. Campbell 2005
Patrick M. Frawley 2005
Kennon R. Patterson, Sr. 2005
Merritt M. Robbins 2005

II. Removal of a Class III Director

The recommendation made by the Board of Directors that Kennon R. Patterson, Sr.
be removed as a Class III director of the Company was not adopted. Pursuant to
the Company's Certificate of Incorporation, the holders of at least 80% of the
shares of Company common stock represented at the meeting, in person or by
proxy, must affirmatively vote for removal in order for a director to be
removed from office. With respect to removal of Mr. Patterson, the holders of
2,715,279 shares, or approximately 66.18 % of the shares represented at the
meeting, voted in favor of removal, holders of 661,593 voted against removal,
and holders of 725, 762 shares abstained.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

11 Statement of computation of per share earnings
31.1 Rule 13a-14(a)/15d-14(a) Certifications of the Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certifications of the Chief
Financial Officer
32.1 Rule 13a-14(b) Certifications of the Chief Executive Officer
32.2 Rule 13a-14(b) Certifications of the Chief Financial Officer

(b) Reports on Form 8-K

During the quarter ended June 30, 2003, no reports were filed on Form
8-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized, in the city of
Blountsville, State of Alabama, on August 14 , 2003.

COMMUNITY BANCSHARES, INC.

By:/s/ Patrick M. Frawley
--------------------------------------------
Patrick M. Frawley
Chairman, Chief Executive Officer,
and President

By:/s/ Kerri C. Kinney
--------------------------------------------
Kerri C. Kinney
Chief Financial Officer