COMMUNITY BANCSHARES INC /DE/, 10-Q, 2000-11-20

COMMUNITY BANCSHARES INC /DE/
10-Q, 2000-11-20
STATE COMMERCIAL BANKS

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<PAGE> 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 SEPTEMBER 30, 2000

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

COMMISSION FILE NO. 000-16461

COMMUNITY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

68149 MAIN STREET, P. O. BOX 1000, BLOUNTSVILLE, AL 35031
--------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (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 NOVEMBER 10, 2000, THERE WERE 4,674,995 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.10 PAR VALUE PER SHARE, OUTSTANDING.

<PAGE> 2

INDEX

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<S> <C>
PART I. FINANCIAL INFORMATION PAGE

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets - September 30, 2000 and December 31, 1999......................... 3

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income -
Three months ended September 30, 2000 and 1999................................................. 4-5

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 2000 and 1999.................................................. 6-7

Consolidated Statements of Cash Flows - Nine months ended September 30, 2000 and 1999.......... 8

Notes to Consolidated Financial Statements - September 30, 2000................................ 10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 16

Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 24

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................................................ 25

Item 6. Exhibits and Reports on Form 8-K................................................................. 27
</TABLE>

<PAGE> 3

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

<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
2000 1999
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................................. $ 6,436,735 $ 11,698,392
Due from banks....................................................... 22,049,966 15,099,119
Interest-bearing deposits with banks................................. 700,000 700,000
Federal funds sold................................................... -0- -0-
Securities available for sale........................................ 106,077,282 96,847,273
Loans................................................................ 533,103,482 499,297,647
Less: Unearned income................................................ 214,128 571,295
Allowance for loan losses...................................... 6,643,510 2,603,128
--------------- ---------------
NET LOANS................................................. 526,245,844 496,123,224

Premises and equipment, net.......................................... 32,989,795 35,683,614
Accrued interest..................................................... 7,335,535 6,537,114
Intangibles, net..................................................... 6,792,590 7,156,449
Other real estate.................................................... 1,579,112 766,005
Other assets......................................................... 6,949,230 4,287,061
--------------- ---------------
TOTAL ASSETS.............................................. $ 717,156,089 $ 674,898,251
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing............................................... $ 69,933,645 $ 64,840,153
Interest-bearing.................................................. 539,794,880 508,420,641
--------------- ---------------
TOTAL DEPOSITS ........................................... 609,728,525 573,260,794
Other short-term borrowings.......................................... 2,166,977 2,493,842
Accrued interest..................................................... 4,974,997 3,743,606
FHLB borrowing....................................................... 38,000,000 40,000,000
Long-term debt....................................................... 5,938,946 6,637,162
Guaranteed preferred beneficial interest in the Company's junior
subordinated deferrable interest debentures....................... 10,000,000 -0-

Other liabilities.................................................... 5,255,538 4,287,471
--------------- ---------------
TOTAL LIABILITIES......................................... 676,064,983 630,422,875
Shareholders' equity
Preferred stock, par value $.01 per share, 200,000 shares
authorized, no shares issued................................ -0- -0-
Common stock, par value $.10 per share, 20,000,000 shares
authorized, 4,674,995 shares issued as of September 30,
AND 4,665,514 shares issued as of December 31, 1999......... 467,499 466,551
Capital surplus................................................... 29,633,369 29,411,513
Retained earnings................................................. 14,704,929 19,038,875
Unearned ESOP shares - 206,079 and 221,321 shares as of
September 30, 2000 and December 31, 1999, respectively...... (2,515,238) (2,788,442)
Accumulated other comprehensive loss (1,199,453) (1,653,121)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY................................ 41,091,106 44,475,376
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $ 717,156,089 $ 674,898,251
=============== ===============
</TABLE>

See notes to consolidated financial statements

<PAGE> 4

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

<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
REVENUE FROM EARNING ASSETS
Interest and fees on loans ....................................... $ 14,030,527 $ 12,127,879
Interest on investment securities: ...............................
Taxable securities ............................................... 1,505,545 1,149,283
Securities exempt from federal income taxes ...................... 252,956 241,683
Interest on federal funds sold ................................... 22,161 31,817
Interest on deposits in other banks .............................. 13,353 15,178
------------- -------------
TOTAL REVENUE FROM EARNING ASSETS ........................ 15,824,542 13,565,840
------------- -------------
INTEREST EXPENSE
Interest on deposits ............................................. 7,858,934 6,054,109
Interest on other short-term borrowings .......................... 38,174 29,482
Interest on FHLB borrowing ....................................... 585,265 405,033
Interest on long-term debt ....................................... 140,676 146,329
Interest on guaranteed preferred beneficial interests in the
Company's junior subordinated deferrable interest debentures ..... 277,188 -0-
------------- -------------
TOTAL INTEREST EXPENSE ................................... 8,900,237 6,634,953
------------- -------------

NET INTEREST INCOME ................................................ 6,924,305 6,930,887
Provision for loan losses .......................................... 4,618,539 545,447
------------- -------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ................ 2,305,766 6,385,440
NONINTEREST INCOME
Service charges on deposits ....................................... 1,066,406 955,031
Insurance commissions ............................................. 682,232 526,973
Bank club dues .................................................... 175,792 179,240
Debt cancellation fees ............................................ 188,421 187,771
Other operating income ............................................ 399,702 426,670
Security gains .................................................... 45,184 6,523
------------- -------------
TOTAL NONINTEREST INCOME ................................. 2,557,737 2,282,208
------------- -------------
NONINTEREST EXPENSES
Salaries and employee benefits ................................... 4,577,543 4,232,886
Occupancy expense ................................................ 807,339 648,490
Furniture and equipment expense .................................. 485,709 466,899
Director and committee fees ...................................... 139,691 127,050
Other operating expense .......................................... 1,739,113 1,576,726
------------- -------------
TOTAL NONINTEREST EXPENSES ............................... 7,749,395 7,052,051
------------- -------------

Income/(Loss) before income taxes .................................. (2,885,892) 1,615,597
PROVISION/(BENEFIT) FOR INCOME TAXES ............................... (1,127,941) 589,028
------------- -------------
NET INCOME/(LOSS) ........................................ $ (1,757,951) $ 1,026,569
============= =============

NET INCOME/(LOSS) PER COMMON SHARE - BASIC ......................... $ (0.39) $ 0.23
NET INCOME/(LOSS) PER COMMON SHARE - DILUTED ....................... $ (0.38) $ 0.22
</TABLE>

See notes to consolidated financial statements

<PAGE> 5

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

<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net income/(loss) .................................................... $ (1,757,951) $ 1,026,569
Components of other comprehensive income before tax:
Unrealized holding gains/(losses) arising during the period ........ 1,195,107 (985,975)
Reclassification adjustments for net gains included
in net income ................................................. (45,184) (6,523)
------------- -------------
Other comprehensive gains/(losses) before income taxes .............. 1,149,923 (992,498)
Income tax expense/(benefit) related to other
comprehensive gains/(losses) .................................. 462,049 (397,000)
------------- -------------
Total other comprehensive income/(loss), net of tax ................. 687,874 (595,498)
------------- -------------

Comprehensive income/(loss), net of tax .............................. $ (1,070,077) $ 431,071
============= =============
</TABLE>

[The remainder of this page intentionally left blank]

See notes to consolidated financial statements

<PAGE> 6

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

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
REVENUE FROM EARNING ASSETS
Interest and fees on loans ......................................... $ 40,244,586 $ 33,928,332
Interest on investment securities:
Taxable securities ................................................. 4,303,365 3,575,390
Securities exempt from federal income taxes ........................ 586,091 670,606
Interest on federal funds sold ..................................... 185,576 70,439
Interest on deposits in other banks ................................ 43,179 55,098
------------- -------------
TOTAL REVENUE FROM EARNING ASSETS .......................... 45,362,797 38,299,865
------------- -------------
INTEREST EXPENSE
Interest on deposits ............................................... 22,019,075 17,589,123
Interest on other short-term borrowings ............................ 91,106 297,113
Interest on FHLB borrowing ......................................... 1,681,583 520,533
Interest on long-term debt ......................................... 427,646 429,490
Interest on guaranteed preferred beneficial interests in the
Company's junior subordinated deferrable interest debentures ....... 585,522 -0-
------------- -------------
TOTAL INTEREST EXPENSE ..................................... 24,804,932 18,836,259
------------- -------------

NET INTEREST INCOME .................................................. 20,557,865 19,463,606
Provision for loan losses ............................................ 6,955,890 1,388,900
------------- -------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .................. 13,601,975 18,074,706
NONINTEREST INCOME
Service charges on deposits ......................................... 3,097,246 2,656,345
Insurance commissions ............................................... 1,941,670 1,477,772
Bank club dues ...................................................... 529,825 529,484
Debt cancellation fees .............................................. 587,271 436,537
Other operating income .............................................. 1,516,088 1,155,964
Investment securities gains ......................................... 18,298 6,523
------------- -------------
TOTAL NONINTEREST INCOME ................................... 7,690,398 6,262,625
------------- -------------
NONINTEREST EXPENSES
Salaries and employee benefits ..................................... 14,281,425 12,375,327
Occupancy expense .................................................. 2,129,519 1,926,561
Furniture and equipment expense .................................... 1,416,909 1,321,637
Director and committee fees ........................................ 428,969 455,837
Other operating expense ............................................ 4,854,888 5,067,624
------------- -------------
TOTAL NONINTEREST EXPENSES ................................. 23,111,710 21,146,986
------------- -------------

Income/(Loss) before income taxes .................................... (1,819,337) 3,190,345
PROVISION/(BENEFIT) FOR INCOME TAXES ................................. (818,536) 991,417
------------- -------------
NET INCOME/(LOSS) .......................................... $ (1,000,801) $ 2,198,928
============= =============

NET INCOME/(LOSS) PER COMMON SHARE - BASIC ........................... $ (0.22) $ 0.50
NET INCOME/(LOSS) PER COMMON SHARE - DILUTED ......................... $ (0.21) $ 0.48
DIVIDENDS PER COMMON SHARE ........................................... $ 0.75 $ 0.60
</TABLE>

See notes to consolidated financial statements

<PAGE> 7

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

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net income/(loss) .................................................... $ (1,000,801) $ 2,198,928
Components of other comprehensive income, before tax:
Unrealized holding gains/(losses) arising during the period ........ 774,412 (3,193,371)
Reclassification adjustments for net gains included
in net income ................................................. (18,298) (6,523)
------------- -------------
Other comprehensive gains/(losses) before income taxes .............. 756,114 (3,199,894)
Income tax expense/(benefit) related to other
comprehensive gains/(losses) .................................. 302,446 (1,279,958)
------------- -------------
Total other comprehensive gain/(loss), net of tax ................... 453,668 (1,919,936)
------------- -------------

Comprehensive income/(loss), net of tax .............................. $ (547,133) $ 278,992
============= =============
</TABLE>

[The remainder of this page intentionally left blank]

See notes to consolidated financial statements

<PAGE> 8

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

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss)/income .................................................. $ (1,000,801) $ 2,198,928
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses .................................. 6,955,890 1,388,900
Provision for depreciation and amortization ................ 1,830,227 1,699,310
Amortization of investment security premiums and
accretion of discounts ................................. 117,891 149,790
Deferred tax (benefit)/expense ............................. (1,679,978) 127,289

Gain on sale of premises and equipment ..................... (12,488) (1,783)
Realized investment security gains ......................... (18,298) (6,523)
Increase in accrued interest receivable .................... (798,421) (123,517)
Increase in accrued interest payable ....................... 1,231,391 47,119
Other ...................................................... (1,614,708) (27,482)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 5,010,705 5,452,031
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities - AFS ................. 10,303,129 4,505,826
Proceeds from maturity of investment securities - AFS .............. 23,633,022 6,386,276
Purchase of investment securities - AFS ............................ (42,498,500) (12,249,178)
Cash disbursed in acquisition of finance offices ................... -0- (2,312,592)
Cash disbursed in acquisition of insurance operations .............. -0- (750,000)
Net increase in loans to customers ................................. (37,078,510) (51,197,811)
Proceeds from sale of premises and equipment ....................... 5,951,660 286,963
Net proceeds from sale of other real estate ........................ 716,612 280,888
Capital expenditures ............................................... (4,681,237) (5,462,997)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES ............ (43,653,824) (60,512,625)
------------ ------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and
savings accounts ............................................... 21,044,787 7,982,514
Net increase in certificates of deposit ............................ 15,422,944 1,202,964
Net (decrease)/increase in short-term borrowings ................... (326,865) 3,159,583
(Decrease)/increase in FHLB borrowings ............................. (2,000,000) 40,000,000
Decrease in long-term debt ......................................... (698,216) (571,812)
Issuance of guaranteed preferred beneficial interest in Company's
junior subordinated deferrable interest debentures ........... 10,000,000 -0-
Proceeds from issuance of common stock ............................. 222,804 294,541
Cash dividends ..................................................... (3,333,145) (2,788,753)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 40,332,309 49,279,037
------------ ------------

Net increase/(decrease) in cash and cash equivalents ................. $ 1,689,190 $ (5,781,557)

Cash and cash equivalents at beginning of period ..................... 26,797,511 25,553,170
------------ ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 28,486,701 $ 19,771,613
============ ============
</TABLE>

See notes to consolidated financial statements

<PAGE> 9

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

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................... $ 26,036,323 $ 18,883,378
Income taxes .................................................. 491,173 865,249
</TABLE>

Supplemental schedule of non-cash investing and financing activities:

The company acquired $134,790 and $166,000 of real property characterized as
other real estate as a result of purchasing homes of employees under the
company's relocation program during the nine-month periods ended september 30,
2000 and 1999, respectively.

Upon the pledging of purchased shares of the company's common stock to obtain
additional ESOP debt of $1,076,958 on december 1, 1998, long-term debt was
increased and equity was decreased. The debt was reduced $113,861 and $117,834
during the nine-month periods ended september 30, 2000 and 1999, respectively,
and shares of the company's common stock were released as a result of payments
made by the company's ESOP on the outstanding ESOP debt.

[The remainder of this page intentionally left blank]

<PAGE> 10

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000

NOTE A - BASIS OF PRESENTATION

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 1999 have been reclassified to conform with
the 2000 presentation. Operating results for the three and nine month periods
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000. 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,
1999.

NOTE B - INVESTMENT SECURITIES

At September 30, 2000 and December 31, 1999, the Company's investment
securities are categorized as available for sale and, as a result, are stated
at fair value based generally on quoted market prices in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115. 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 September 30, 2000, the Company's available-for-sale investment securities
reflected net unrealized losses of $1,999,088, which resulted in a decrease in
shareholders' equity of $1,199,453, net of the deferred tax asset. The net
increase in shareholders' equity as a result of an adjustment in accordance
with SFAS 115 from December 31, 1999 to September 30, 2000 was $453,668.

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.

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.

<PAGE> 11

NOTE D - SHAREHOLDERS' EQUITY

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

The Company has issued options on several occasions to its directors and
certain senior officers, based upon their years of service and their positions
with the Company, to purchase shares of the Company's common stock. The options
are treated as non-qualified options under the provisions of the Internal
Revenue Code. The agreements evidencing these options also contain a provision
whereby the Company will compensate the optionee in cash for any federal or
state tax liability incurred upon the exercise of the options.

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, causing the equivalent
average number of shares outstanding on a diluted basis to be 210,900 greater
than that used to calculate basic earnings per share for the nine months ended
September 30, 2000. Average shares outstanding when assuming dilution were
greater than average shares outstanding for basic earnings per share by 120,055
for the nine months ended September 30, 1999.

NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN

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

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 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
September 30, 2000, the monthly payment was $33,852. The Company has guaranteed
this debt and in accordance with the applicable accounting and reporting
guidelines the debt has been recognized on the Company's balance sheet, with an
offsetting charge against equity. As principal payments are made by the ESOP,
the debt on the Company's books is 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, resulting in a reduction in the contra-equity account equal
to the fair value of the shares released. As of September 30, 2000, there were
206,079 unreleased shares with a fair value, based on an independent valuation
of $18 per share, of approximately $3,709,422. These shares are subtracted from
outstanding shares for earnings per share calculations.

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position (SOP) No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans. 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
($186,937 and $176,216 during the first nine months of 2000 and 1999,
respectively) is classified as interest expense on the Company's income
statement. Total compensation recorded during the first nine months of 2000, as
a result of the release of shares held by the Company's leveraged ESOP, was
$274,356, based on the fair value of such shares.

<PAGE> 12

NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

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

At September 30, 2000 and 1999, the Company's financial statements reflected
long-term debt related to the ESOP of $2,674,581 and $2,826,398, respectively.
The corresponding contra-equity account was $2,515,238 at September 30, 2000
and $2,826,398 at September 30, 1999.

Company contributions to the ESOP amounted to $300,798 and $285,093 for the
nine months ended September 30, 2000 and 1999, respectively.

NOTE F - RELATED PARTY TRANSACTIONS

In May 2000, Community Bank loaned $4,184,051 to REM, LLC, an Alabama limited
liability company of which a director of Community Bank is a member, to fund
the purchase from Community Bank of the real property in which Community Bank's
Hamilton, Alabama office is located. The loan amortizes over a 30-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 REM, LLC to lease back this real
property from REM, LLC for a term of 30 years, with monthly rental payments
equal to the monthly amount of principal and interest due under the loan to
REM, LLC plus applicable real estate taxes, assessments, levies and insurance.

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

Management believes these loans were made in the ordinary course of business on
substantially the same credit terms as would be made available to third parties
unaffiliated with Community Bank including interest rates and collateral, and
do not represent more than a normal risk of collection or present other
unfavorable features.

NOTE G - LEASES

In May 2000, Community Bank entered into a lease agreement, as the tenant, with
REM, LLC, an Alabama limited liability company of which a director of Community
Bank is a member, pursuant to which Community Bank leased the real property
Community Bank's Hamilton, Alabama office is located. In connection with the
lease agreement, Community Bank loaned funds to REM, LLC to finance its
purchase of the real property from Community Bank. The term of the lease is 30
years; provided however that in no event shall the term of the lease expire
prior to the time when the loan obtained by the lessor to purchase the leased
property is paid in full. The monthly rent on this lease is an amount equal to
the monthly debt amortization of funds which the lessor borrowed to purchase
the leased property. Because the interest rate on the loan used to purchase the
property adjusts with fluctuations in the prime rate, the monthly lease
payments are subject to change. At September 30, 2000, the amount of the
monthly rental payment was $35,210. In addition, Community Bank agreed to pay
the lessor an additional sum to be adjusted periodically to coincide with the
cost to the lessor of the real estate taxes and other items and insurance.
Community Bank is responsible for maintenance, repairs and utilities for the
real property. Community Bank is also responsible for maintaining fire and
extended coverage and general liability insurance coverage for the real
property. The Company has the option to purchase the leased premises from the
lessor at any time during the term of the lease for

<PAGE> 13

NOTE G - LEASES (CONTINUED)

an amount equal to the lessor's cost in acquiring and/or constructing such
leased premises. In an Addendum to the Lease Agreement and Loan Agreement,
dated May 31, 2000, Community Bank agreed to maintain and continue in force
fire and extended coverage insurance and general liability insurance upon the
leased premises. In return, the lessor agreed to reimburse Community Bank on a
quarterly basis the amount of the insurance premium which is included in
payments made by Community Bank under the lease.

In June 2000, Community Bank entered into a lease agreement, as the tenant,
with Debter Properties, LLC, an Alabama limited liability company of which a
director of the Company is a member, pursuant to which Community Bank leased
the real property in which Community Bank's Boaz, Alabama office is located. In
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 September 30, 2000,
the amount of the monthly rental payment was $15,821. In addition, Community
Bank agreed to pay the lessor an additional sum to be adjusted periodically to
coincide with the cost to the lessor of the real estate taxes and other items
and insurance. Community Bank is responsible for maintenance, repairs and
utilities for the real property. Community Bank is also responsible for
maintaining fire and extended coverage and general liability insurance coverage
for the real property. The Company has the option to purchase the leased
premises from the lessor at any time during the term of the lease for an amount
equal to the lessor's cost in acquiring and/or constructing such leased
premises. In an Addendum to the Lease Agreement and Loan Agreement, dated June
1, 2000, Community Bank agreed to maintain and continue in force fire and
extended coverage insurance and general liability insurance upon the leased
premises. In return, the lessor agreed to reimburse Community Bank on a
quarterly basis the amount of the insurance premium which is included in
payments made by Community Bank under the lease.

NOTE H - 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. As of September 30, 2000, Community Bank
had paid a total of approximately $1,825,787 to these subcontractors with
respect to the two construction projects. On July 18, 2000, the Boards of
Directors of the Company and Community Bank appointed a joint committee
comprised of independent directors of the Company and of Community Bank to
investigate the alleged overcharges. Upon completion of its investigation, the
joint committee is to inform the Boards of Directors of the Company and
Community Bank of its findings and recommendations. The joint committee has
retained legal counsel and an independent accounting firm to assist the
committee in its investigation. Management has also been informed that the
directors of Community Bank who alleged the construction overcharges have
contacted bank regulatory agencies and law enforcement authorities. Management
believes that these agencies and authorities either have conducted or are
currently conducting investigations regarding this matter.

<PAGE> 14

NOTE H - CONTINGENCIES (CONTINUED)

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. The 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 investigatory 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. Because the special litigation
committee has not yet completed its investigation, and as a result of the
inherent uncertainties of the litigation process, the Company is unable at this
time to predict the outcome of this lawsuit and its effect on the Company's
financial condition and results of operations. Regardless of the outcome,
however, this lawsuit could be costly, time-consuming and a diversion of
management's attention.

On August 3, 2000, the Company, Community Bank and the Company's directors
filed a motion to stay the proceedings of a shareholder derivative action that
was filed on November 19, 1998 in the state Circuit Court of Blount County,
Alabama against the Company, Community Bank and the Company's directors by
William Towns, Pat Ballew and Mary Ballew, each a stockholder of the Company.
The motion seeks to stay the proceedings until the Company's and Community
Bank's joint investigating committee has completed its investigation of the
alleged construction overcharges discussed above. For additional information
about this lawsuit, please see the section captioned "Legal Proceedings" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and
Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and
June 30, 2000.

Another action was filed against the Company, Community Bank and certain
directors and officers of the Company and Community Bank on September 14, 2000,
by seven shareholders of the Company alleging that the directors actively
participated in or ratified the misappropriation of corporate income. The
Company and its directors believe that this lawsuit, which was not styled as a
shareholder derivative lawsuit, is without merit and intend to defend the
action vigorously.

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.

In December 1999, Community Bank charged approximately $2,631,000 to its
allowance for loan losses associated with impaired balances on automobile and
truck loans originated through Community Bank's Ft. Payne, Alabama Wal-Mart
location which were not in compliance with Community Bank's lending policy.
Community Bank, including its subsidiary 1st Community Credit Corporation,
charged an additional approximately $567,000 to its allowance for loan losses
during the first six months of 2000 related to these Ft. Payne loans. On June
20, 2000, Community Bank filed an action in the United States District Court
for the Northern District of Alabama against a car dealership, several
employees and former employees of the dealership and a former employee of
Community Bank. The lawsuit seeks damages of an unspecified amount to recover
losses incurred by Community Bank in

<PAGE> 15

NOTE H - CONTINGENCIES (CONTINUED)

connection with certain loans made at Community Bank's Wal-Mart office in Fort
Payne, Alabama, along with all costs associated with this legal action. On
September 27, 2000, Community Bank filed an amended complaint in this action.
Any amounts received by Community Bank as a result of this litigation will be
treated as a recovery on loan losses.

NOTE I - OTHER COMPREHENSIVE INCOME

During the first nine months of 2000, the Company had other comprehensive
income, before tax, of $756,114 resulting in a tax expense of $302,446 related
to other comprehensive income. The tax effect for each component of other
comprehensive income during the nine months ended September 30, 2000 was a tax
expense of $309,765 related to unrealized holding gains arising during the
period partially offset by a tax benefit of $7,319 related to reclassification
adjustments for net gains included in net income during the period. In
contrast, during the nine months ended September 30, 1999, the Company had an
other comprehensive loss, before tax, of $3,193,371 resulting in a tax benefit
of $1,279,958 related to this other comprehensive loss. The tax effect for each
component of the other comprehensive loss during the first nine months of 2000
was a tax benefit of $1,277,348 related to unrealized holding losses arising
during the period coupled with a tax benefit of $2,610 related to
reclassification adjustments for net gains included in net income for the
period.

During the third quarter of 2000, the Company had other comprehensive income,
before tax, of $1,149,923 resulting in a tax expense of $462,049 related to
other comprehensive income. The tax effect for each component of other
comprehensive income during the three months ended September 30, 2000 was a tax
expense of $480,194 related to unrealized holding gains arising during the
period partially offset by a tax benefit of $18,145 related to reclassification
adjustments for net gains included in net income during the period. In
contrast, during the three months ended September 30, 1999, the Company had an
other comprehensive loss, before tax, of $992,498 resulting in a tax benefit of
$397,000 related to this other comprehensive loss. The tax effect for each
component of the other comprehensive loss during the first nine months of 2000
was a tax benefit of $394,390 related to unrealized holding losses arising
during the period coupled with a tax benefit of $2,610 related to
reclassification adjustments for net gains included in net income for the
period.

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<PAGE> 16
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, 1999.

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, non-interest expenses, pending litigation and
investigations, 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, the
ability of Community Bank to increase its deposits and loans profitably and
successfully manages its growth, geographic concentration of the Company's
assets and operations, 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, 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

SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999

LOANS

Loans comprised the largest single category of the Company's earning assets at
September 30, 2000. Loans, net of unearned income and allowance for loan losses,
were 73.4% of total assets at September 30, 2000 and 73.5% of total assets at
December 31, 1999. Total net loans were $526,245,844 at September 30, 2000,
representing a $30,122,620, or 6.1%, increase from the December 31, 1999 total
net loans of $496,123,224. Of this growth, $5,861,072, or 19.5%, was
attributable to loans made to affiliates of two directors of the Company in
connection with the sale/lease back of the real property in which two Community
Bank offices are located. The remaining increase in total net loans was
considered ordinary growth occurring in most markets served by the Company. (See
Note F to the Consolidated Financial Statements)

INVESTMENT SECURITIES AND OTHER EARNING ASSETS

Investment securities increased $9,230,009, or 9.5%, to $106,077,282 at
September 30, 2000 compared to $96,847,273 at December 31, 1999. This increase
in investment securities for the nine months ending September 30, 2000, resulted
primarily from growth in deposits which was not used to fund loan growth. During
the third quarter of 2000, management decided to reduce investment securities by
approximately $5,000,000, or 4.5%, to cover the withdrawal of public funds on
deposit. 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-

16
<PAGE> 17

term investments in the form of interest-bearing deposits with banks were
$700,000 at both September 30, 2000 and December 31, 1999. The Company had no
federal funds sold at September 30, 2000 or December 31, 1999.

ASSET QUALITY

Between December 31, 1999 and September 30, 2000, two of the three key ratios
used as an indicator of the quality of the Company's assets improved while the
third ratio declined. The ratio of the allowance for loan losses to total
nonperforming assets (defined as nonaccrual loans, loans past due 90 days or
greater, restructured loans, nonaccruing securities and other real estate)
improved to 1.22 at September 30, 2000 from 0.54 at year-end 1999. The ratio of
total nonperforming assets to total assets increased slightly to 0.008 at
September 30, 2000 from 0.007 at year-end 1999, while the ratio of nonperforming
loans to total loans, net of unearned interest income, decreased slightly to
0.007 at September 30, 2000 from 0.008 at December 31, 1999. Total nonperforming
assets increased $661,000, or 13.8%, during the first nine months of 2000. This
increase resulted from increases of $845,000, or 63.4%, in loans past due 90
days or more due to aggressive lending in new expansion markets and $813,000, or
106.1%, in other real estate as a result of an increase in foreclosure activity.
Nonaccrual loans decreased $997,000, or 36.8%, during the first nine months of
2000 as a result of loans being charged-off.

There was a significant increase in the amount of charged-off loans during the
first nine months of 2000 due to loan growth in new expansion markets and
aggressive lending. In addition, during the recent examination of Community Bank
by the Alabama Banking Department, the Alabama Banking Department regulators
identified and recommended for charge-off approximately $1,609,000 in loans and
other assets. All of these loans and other assets were recognized by management
and charged against the allowance for loan losses during the second and third
quarters of 2000.

In January 2000, management decided to make provisions for current loan losses
and actual growth in the loan portfolio and to increase the overall level of the
allowance for loan losses due to aggressive lending in new markets. In addition,
as a result of the recent examination of Community Bank by the Alabama Banking
Department, the Alabama Banking Department regulators recommended and management
agreed to increase Community Bank's allowance for loan losses. As of September
30, 2000, Community Bank made a one-time additional provision of $3,478,000 to
its allowance for loan losses. These provisions during the first nine months of
2000, resulted in an increase of $4,040,382, or 155.2%, in Community Bank's
allowance for loan losses to $6,643,510 at September 30, 2000 from $2,603,128 at
year-end 1999. The allowance for loan losses as a percentage of loans, net of
unearned income, increased to 1.25% at September 30, 2000 from 0.52% at year-end
1999. (See - Results of Operations/Provision for Loan Losses)

DEPOSITS

Total deposits were $609,728,525 at September 30, 2000, an increase of
$36,467,731, or 6.4%, over total deposits of $573,260,794 at year-end 1999, due
to expansion in new markets. Deposits are the Company's primary source of funds
with which to support its earning assets. Noninterest-bearing deposits increased
$5,093,492, or 7.9%, from year-end 1999 to September 30, 2000, while
interest-bearing deposits at September 30, 2000 increased $31,374,239, or 6.2%,
from year-end 1999. Certificates of deposit of $100,000 or more increased
$2,695,530, or 2.8%, to $100,013,500 at September 30, 2000 from $97,317,970 at
December 31, 1999. During the third quarter of 2000, certificates of deposit of
$100,000 or more declined approximately $3,500,000 as management made the
decision to reduce its public funds and certain deposits were withdrawn.

OTHER SHORT-TERM BORROWINGS

Other short-term borrowings totaled $2,166,977 at September 30, 2000,
representing a decrease of $326,865, or 13.1%, from the December 31, 1999 level
of $2,493,842. At September 30, 2000, short-term borrowings consisted of the
U.S. Treasury Tax and Loan Note Option account and securities sold under
agreement to repurchase. Balances under the U.S. Treasury Tax and Loan Note
Option are subject to call at any time by the U.S. Treasury. The decrease during
the first nine months of 2000 was due primarily to a decrease in the balances
outstanding under the U.S. Treasury Tax and Loan Note Option.

17
<PAGE> 18

FHLB BORROWINGS AND LONG-TERM DEBT

At September 30, 2000 and December 31, 1999, the Company had notes payable
totaling $5,938,946 and $6,637,162, respectively.

In December 1992, the Company entered into a loan agreement with a regional bank
for the Company to borrow amounts up to $6,500,000. At September 30, 2000 and
December 31, 1999, the amounts outstanding under this loan agreement were
$1,600,879 and $2,134,505, 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 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 6 consecutively scheduled installments are deferred.
The Company did not postpone any principle payments during the first nine months
of 2000.

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
September 30, 2000, the monthly payment was $33,852. The Company has guaranteed
this debt and in accordance with the applicable accounting and reporting
guidelines the debt has been recognized on the Company's balance sheet, with an
offsetting charge against equity. As principal payments are made by the ESOP,
the debt on the Company's books is 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 resulting in a reduction in the contra-equity account equal to
the fair value of the shares released. The outstanding balance of this note was
$2,674,581 at September 30, 2000 and $2,788,442 at December 31, 1999, secured by
206,079 and 221,321 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% per year. The Company maintains the right to
prepay the note at its sole discretion. The balance of the note was $1,663,486
at September 30, 2000 and $1,714,215 at December 31, 1999.

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 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, 1999, Community Bank had an outstanding
advance of $40,000,000. This advance had a final maturity of September 1, 2009
(120 months), with a call feature every 6 months during the life of the
obligation, and carried a fixed rate of 4.99% per annum. Due to a stated call of
this obligation on March 1, 2000, Community Bank made a $2,000,000 reduction in
the amount advanced under the FHLB "Convertible Advance Program" and refinanced
$38,000,000. This new obligation has a final maturity of March 1, 2010 (120
months), a call feature every 12 months during the life of the obligation, and a
fixed interest rate of 5.93% per annum with interest payable each quarter. At
September 30, 2000, outstanding funds advanced to Community Bank under the FHLB
"Convertible Loan Program" totaled $38,000,000.

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 September 30, 2000, 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)

18
<PAGE> 19

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

<TABLE>
<CAPTION>
Notes Subordinated FHLB Junior
Payable Debt Borrowings Subordinated
Debentures
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
2000 ............... $ 229,177 $ 17,509 $ -0- $ -0-
2001 ............... 895,476 73,171 38,000,000 -0-
2002 ............... 912,234 78,461 -0- -0-
2003 ............... 219,019 84,133 -0- -0-
2004 ............... 238,970 90,215 -0- -0-
Thereafter ......... 1,780,584 1,319,997 -0- 10,000,000
------------- ------------- ------------- -------------
$ 4,275,460 $ 1,663,486 $ 38,000,000 $ 10,000,000
============= ============= ============= =============
</TABLE>

SHAREHOLDERS' EQUITY

The Company's shareholders' equity decreased $3,384,270, or 7.6%, from
$44,475,376 at December 31, 1999 to $41,091,106 at September 30, 2000. This
decrease resulted primarily from a net loss of $1,000,801 and payment of a cash
dividend of $3,333,145, which as partially offset by proceeds from the issuance
of additional common stock for $222,804, a reduction of unearned ESOP shares by
$273,204 and a decrease of $453,668 in unrealized losses on securities available
for sale, net of deferred tax liability.

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 (see Note C to the Consolidated
Financial Statements), less goodwill, amounted to $46,438,974 at September 30,
2000. Tier II capital components 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 $54,218,794 at September 30, 2000.

As of September 30, 2000, the Company and Community Bank, were 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 allowance for loan losses, which are the areas determined to
be most affected by these requirements.

[The remainder of this page intentionally left blank]

19
<PAGE> 20

RESULTS OF OPERATIONS

NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

SUMMARY

The Company experienced a net loss of $1,000,801 for the nine months ended
September 30, 2000 as compared to net income of $2,198,928 for the same period
in 1999, representing a decline of $3,199,729, or 145.5%. Basic net loss per
share was $.22 for the nine months ended September 30, 2000 as compared to basic
net income per share of $.50 for the same period of 1999. Fully diluted net loss
per share was $.21 for the nine months ended September 30, 2000 as compared to
fully diluted net income per share of $.48 for the nine months ended September
30, 1999. These declines resulted primarily from an increase in the provision
for loan losses that exceeded the increase in the Company's net interest income
before the provision for loan losses during the first none months of 2000, as
compared to the same period of 1999. The Company continued to experience
pressure on its net interest income before provision during the first nine
months of 2000 due to rising interest rates as Community Bank's interest-bearing
liabilities repriced at a faster rate than its interest earning assets. A
$1,427,773, or 22.8%, increase in non-interest income was offset by a
$1,964,724, or 9.3%, increase in non-interest expense during the first nine
months of 2000 as compared to the same period of 1999, which also contributed to
the Company's net loss for the first nine months of 2000. The increase in
non-interest income resulted primarily from increases in service charges on
deposit accounts, insurance commissions, debt cancellation fees and other
service fees associated with the delivery of financial services, while the
increase in non-interest expense was related to increases in salaries and
benefits associated with the Company's expansion.

The net loss for the quarter ended September 30, 2000 was $1,757,951 as compared
to net income of $1,026,569 for the same three month period of 1999,
representing a decrease of $2,784,520, or 271.2%. Basic net loss per share was
$.39 for the third quarter of 2000 as compared to basic net income per share of
$.23 for the same period of 1999. Fully diluted net loss per share was $.38 for
the three months ended September 30, 2000 as compared to fully diluted net
income per share of $.22 for the three months ended September 30, 1999. This
decline during the third quarter of 2000 resulted primarily from an increase in
the provision for loan losses and a small decrease in net interest income before
the provision as compared to the same period of 1999. Non-interest income
increased $275,529, or 12.1%, while non-interest expense increased $697,344, or
9.9%, during the third quarter of 2000 as compared to the same period of 1999.
The increase in non-interest income was due primarily to increases in revenues
from service charges on deposit accounts and insurance commissions. The increase
in non-interest expense was due primarily to increases in salaries and benefits,
occupancy costs related to the rental expense of two of Community Bank's offices
and postage, telephone, audit and legal fees which are components of other
non-interest expense.

NET INTEREST INCOME

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. Revenues from interest-earning assets of the Company during the nine
months ended September 30, 2000 increased $7,062,932, or 18.4%, to $45,362,797
from $38,299,865 for the same period in 1999. This increase was due to both
higher average outstanding balances of earning assets and an increase in the
yield on these balances. Average earning assets outstanding during the first
nine months of 2000 were $627,948,000, which represents an increase of
$75,389,000, or 13.6%, over the level of $552,559,000 for the first nine months
of 1999. In addition, the Company's fully taxable equivalent yield on its
average earning assets increased 38 basis points to 9.72% during the first nine
months of 2000, compared to 9.34% for the same period of 1999. Interest expense
for the nine months ended September 30, 2000 increased $5,968,673, or 31.7%, to
$24,804,932 from $18,836,259 for the corresponding period of 1999. This increase
was due to both higher average outstanding balances of interest-bearing
liabilities and an increase in the rate paid on these balances. Average
interest-bearing liabilities during the first nine months of 2000 were
$587,250,000, which represents an increase of $86,616,000, or 17.3%, as compared
to $500,634,000 for the same period of 1999. The rate paid on average
interest-bearing liabilities increased 60 basis points to 5.63% for the nine
month period ended September 30, 2000, compared to 5.03% for the first nine
months of 1999. As a result of these factors, net interest income, before
provision for loan losses, increased $1,094,259, or 5.6%, in the nine months
ended September 30, 2000, compared to the same period of 1999. The Company
continued to experience some shrinkage in its net interest income before
provision during the first nine months of 2000 as interest rates increased and
Community Bank's interest-bearing liabilities repriced at a faster rate than
its interest earning assets.

20
<PAGE> 21

Net interest income for the third quarter of 2000 declined $6,582, or 0.1%, to
$6,924,305 during the three months ended September 30, 2000 from $6,930,887 for
the same period of 1999. The Company continued to show increases in the average
balances outstanding in interest-earning assets and interest-bearing liabilities
during the third quarter of 2000 compared to the same period of 1999. However,
there was a decline in the growth of the Company's net interest income for the
third quarter of 2000, due primarily to the impact of rising interest rates as
the rate paid on interest-bearing liabilities grew at a greater rate than the
yield on interest-earning assets. Interest income was $15,824,542 and
$13,565,840 for the three months ended September 30, 2000 and 1999,
respectively. This represents a $2,258,702, or 16.7%, increase. Interest expense
increased $2,265,284, or 34.1%, to $8,900,237 for the three months ended
September 30, 2000 from $6,634,953 for the three months ended September 30,
1999.

PROVISION FOR LOAN LOSSES

The provision for loan losses, which is charged to current earnings, 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. 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.

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

In January 2000, management determined to increase Community Bank's, allowance
for loan losses and decrease its loan-to-deposit ratio. In addition, as a result
of the recent examination of Community Bank by the Alabama Banking Department,
the Alabama Banking Department regulators recommended and management agreed to
increase Community Bank's allowance for loan losses. As of September 30, 2000,
Community Bank made a one-time additional provision of $3,478,000 to increase
its allowance for loan losses.

The provision for loan losses was $6,955,890 for the nine months ended September
30, 2000, compared to $1,388,900 for the same period of 1999, representing an
increase of $5,566,990, or 400.8%. This increase in the provision for loan
losses during the first nine 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 aggressive
lending in new expansion markets and management's agreement with the
recommendation of the Alabama Banking Department to increase the provision.
During the first nine months of 2000, there was also an increase in the amount
of charged-off loans due to aggressive lending in new expansion markets and
assets classified as loss during the recent examination of Community Bank by the
Alabama Banking Department. Charge-offs exceeded recoveries by $2,916,000 for
the nine months ended September 30, 2000, compared to $1,736,000 for the same
period of 1999. The allowance for loan losses as a percentage of outstanding
loans, net of unearned income, was 1.25% at September 30, 2000 compared to 0.52%
at year-end 1999.

The provision for loan losses for the third quarter of 2000 was $4,618,539
compared to $545,447 for the same period of 1999, representing an increase of
$4,073,092, or 746.7%. As of September 30, 2000, $3,478,000, or 75.3%, of the
third quarter 2000 provision was due to management's agreement with the
recommendation of the Alabama Banking Department to increase the allowance for
loan losses. In addition to this one-time provision, further increases resulted
in the provision during the third quarter of 2000 as management continued to
carry out its decision to increase the allowance for loan losses and its more
aggressive assessment of past due credits. Charge-offs exceeded recoveries by
$1,118,000 and $552,000 for the quarters ended September 30, 2000 and 1999,
respectively.

NON-INTEREST INCOME

Non-interest income for the nine months ended September 30, 2000 was $7,690,398,
compared to $6,262,625 for the same period of 1999. This increase of $1,427,773,
or 22.8%, during the first nine months of 2000, compared to the same period of
1999, resulted primarily from increases of $440,901, or 16.6%, in service
charges on deposit accounts, $463,898, or 31.4%, in insurance commissions,
$150,734, or 34.5%, in fees on debt cancellation contracts and $360,124, or
31.2%, in other operating income. Components of other operating income
reflecting increases

21
<PAGE> 22

were title insurance revenues and other fee income associated with wire
transfers, non-customer check cashing and ATM access. The Company recorded net
gains on the sale of investment securities of $18,298 and $6,523 during the nine
months ended September 30, 2000 and 1999, respectively.

Non-interest income reflected an increase of $275,529, or 12.1%, for the third
quarter of 2000 compared to the same period of 1999. This increase resulted
primarily from increases of $111,375, or 11.7%, in service charges on deposit
accounts and $155,259, or 29.5%, in insurance commissions. Other non-interest
income reflected a decrease of $26,968, or 6.3%, during the third quarter of
2000 compared to the same period of 1999, with no significant change
attributable to any one component.

NON-INTEREST EXPENSES

Non-interest expenses for the nine months ended September 30, 2000 were
$23,111,710, reflecting a $1,964,724, or 9.3%, increase over $21,146,986 for the
same period of 1999. The primary components of non-interest expenses are
salaries and employee benefits, which increased $1,906,098 for the nine months
ended September 30, 2000, 15.4% higher than in the same period of 1999. The
increases in salaries and employee benefits are due to staffing for new banking
locations and expansion, as well as merit increases and incentive payments for
existing personnel. Salaries and benefits also include compensation expense
related to the release of shares in the Company's leveraged ESOP. Occupancy
costs increased $202,958, or 10.5%, during the nine months ended September 30,
2000 primarily due to the rental expense associated with the sale-lease back
arrangements of the real property in which Community Bank's Hamilton and Boaz,
Alabama offices are located, coupled with increased utilities, insurance and
other ancillary costs associated with the Company's new banking locations. (See
Note G to the Consolidated Financial Statements) Furniture and equipment
expenses rose $95,272, or 7.2%, during the first nine moths of 2000 due
primarily to an increase in depreciation cost associated with the Company's new
banking locations. Director and committee fees decreased $26,868, or 5.9%. Other
operating expenses declined $212,736,or 4.2%, to $4,854,888 during the first
nine months of 2000 compared to $5,067,624 for the same period of 1999. This
decline reflects decreases in dues and entertainment, supplies and training and
educational expenses. In addition, the Company experienced a reduction in the
publication and advertising costs associated with the Company's 2000 annual
shareholders' meeting, as compared to these expenses attributable to the
Company's 1999 annual shareholders' meeting and a related proxy contest. As a
result of the Company's recent growth, management anticipates that non- interest
expenses will remain at least at their current level for the foreseeable future.

Non-interest expenses were $7,749,395 for the three months ended September 30,
2000 compared to $7,052,051 for the same period of 1999. This increase of
$697,344, or 9.9%, during the third quarter of 2000 resulted primarily from
increases of $344,657, or 8.1%, in personnel cost associated with the Company's
expansion activities and $158,849, or 24.5%, in occupancy expense due primarily
to the rental expense associated with the sale-lease back arrangements of the
real property in which Community Bank's Hamilton and Boaz, Alabama offices are
located, coupled with increased utilities, insurance and other ancillary cost
associated with the Company's new banking locations. Other non-interest expense
increased $162,387, or 10.3%, during the third quarter of 2000 compared to the
third quarter of 1999. Components of other non-interest expense reflecting
increases during the three months ended September 30, 2000 were postage,
telephone, legal and audit and exam fees, while promotion and advertising,
supplies and training and educational expenses reflected declines.

The Company's strategy is to make each office of Community 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 better serves its
communities and customers and the Company's shareholders.

INCOME TAXES

The Company experienced a benefit for income taxes of $818,536 for the nine
months ended September 30, 2000, a decrease of $1,809,953, or 182.6%, compared
to the same period of 1999, due primarily to a net loss before taxes for the
first nine months of 2000 compared to net income before taxes for the same
period of 1999. The effective tax rate of approximately 45.0% for the first nine
months of 2000 is above than the statutory rate and reflects an increase over
the effective tax rate of 31.1% for the same period of 1999. The Company's
effective tax rate of 39.1% for the third quarter of 2000 represents a increase
from the effective tax rate of 36.5% for the third quarter of 1999. These
changes are in part due to the shift to a tax benefit position for the first
nine months of 2000 from

22
<PAGE> 23

a tax liability position for the same period of 1999 and reflects the additional
benefit of tax-free interest income. The Company attempts to maximize any tax
benefits and minimize any tax liabilities through active tax planning.

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23
<PAGE> 24

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 nine months
of 2000, Community Bank saw its interest earning assets repricing within one
year increase while its interest bearing liabilities repricing during this same
period decreased. While these changes reflect a slight improvement in the
Company's static gap position, as compared to year-end 1999, the Company
remained liability sensitive at September 30, 2000, indicating that it had more
interest bearing liabilities than interest earning assets repricing during the
twelve months ending September 30, 2001. The cumulative static gap position of
rate sensitive assets to rate sensitive liabilities at September 30, 2000 was:
i) -13.4% at 30 days; ii) -14.4% at 90 days; iii) -18.6% at 180 days; and iv)
-31.5% 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 September 30,
2000 Asset/Liability Analysis, Community Bank's net interest income would
decline $126,000, or 0.4%, over the next twelve months as a result of a 200
basis points decrease in the interest rate environment. A 200 basis points
increase in interest rates would result in a $676,000 or 2.1%, decrease 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 September 30, 2001. Management continually evaluates the condition
of the economy, the pattern of market interest rates and other economic data to
determine the types of investments that should be made and at what maturities.

[The remainder of this page intentionally left blank]

24
<PAGE> 25

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money Community Bank
had paid subcontractors in connection with the construction of a new Community
Bank office. Management of the Company commenced an investigation of the
expenditures. At the request of management, the architects and subcontractors
involved in the construction project made presentations to the Boards of
Directors of the Company and Community Bank on July 15 and July 18, 2000,
respectively. At the July 18, 2000 meeting of the Board of Directors of
Community Bank, another director made a presentation alleging that Community
Bank had been overcharged by subcontractors on that construction project and
another current construction project. As of September 30, 2000, Community Bank
had paid a total of approximately $1,825,787 to these subcontractors with
respect to the two construction projects. On July 18, 2000, the Boards of
Directors of the Company and Community Bank appointed a joint committee
comprised of independent directors of the Company and of Community Bank to
investigate the alleged overcharges. Upon completion of its investigation, the
joint committee is to inform the Boards of Directors of the Company and
Community Bank of its findings and recommendations. The joint committee has
retained legal counsel and an independent accounting firm to assist the
committee in its investigation. Management has also been informed that the
directors of Community Bank who alleged the construction overcharges have
contacted bank regulatory agencies and law enforcement authorities. Management
believes that these agencies and authorities either have conducted or are
currently conducting investigations regarding this matter.

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. The 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 investigatory 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. Because the special litigation committee has not
yet completed its investigation, and as a result of the inherent uncertainties
of the litigation process, the Company is unable at this time to predict the
outcome of this lawsuit and its effect on the Company's financial condition and
results of operations. Regardless of the outcome, however, this lawsuit could be
costly, time-consuming and a diversion of management's attention.

25
<PAGE> 26

On August 3, 2000, the Company, Community Bank and the Company's directors filed
a motion to stay the proceedings of a shareholder derivative action that was
filed on November 19, 1998 in the state Circuit Court of Blount County, Alabama
against the Company, Community Bank and the Company's directors by William
Towns, Pat Ballew and Mary Ballew, each a stockholder of the Company. The motion
sought to stay the proceedings until the Company's and Community Bank's joint
investigating committee has 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. For
additional information about this lawsuit, please see the section captioned
"Legal Proceedings" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, and Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31 and June 30, 2000.

Another action was filed against the Company, Community Bank and certain
directors and officers of the Company and Community Bank on September 14, 2000
by seven shareholders of the Company alleging that the directors actively
participated in or ratified the misappropriation of corporate income. The
Company and its directors believe that this lawsuit, which was not styled as a
shareholder derivative lawsuit, is without merit and intend to defend the action
vigorously.

On June 20, 2000 Community Bank filed an action in the United States District
Court for the Northern District of Alabama against a car dealership, several
employees and former employees of the dealership and a former employee of
Community Bank. The lawsuit seeks damages of an unspecified amount to recover
losses incurred by Community Bank in connection with certain loans made at
Community Bank's Wal-Mart office in Fort Payne, Alabama, along with all costs
associated with this legal action. On September 27, 2000 Community Bank filed an
amended complaint in this action. Any amounts received by Community Bank as a
result of this litigation will be treated as a recovery on loan losses.

[The remainder of this page intentionally left blank]

26
<PAGE> 27

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
3.1 By-laws of Registrant, as amended and restated May 2000 (filed as Exhibit 3.1 to the
Registrants's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference)

3.2 Certificate of Incorporation, as amended and restated May 2000 (Filed as Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended 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 the Registrant's Registration Statement on Form
8-A, filed January 21, 1999, and incorporated herein by reference)

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

10.1 Stock Option Agreement, dated August 24, 2000, between Community Bancshares, Inc. and
William H. Caughran, Jr.

10.2 Stock Option Agreement, dated August 24, 2000, between Community Bancshares, Inc. and
William E. Blackmon

10.3 Change in Control Agreement, dated August 24, 2000, between Community Bancshares, Inc.
and William E. Blackmon

11 Computation of Earnings Per Share

27 Financial Data Schedule (for SEC use only)
</TABLE>

(b) Reports on Form 8-K

The Company filed the following reports on Form 8-K during the quarter
ended September 30, 2000.

1. Current Report on Form 8-K filed July 26, 2000, and reporting
the appointment by the Boards of Directors of the Registrant
and the Registrant's subsidiary, Community Bank, of a joint
special committee to investigate allegations surrounding
construction projects of Community Bank under Item 5

2. Current Report on Form 8-K filed August 4, 2000, and reporting
a press release regarding an investigation of allegations
surrounding construction projects of the Registrant's
subsidiary, Community Bank under Item 5

3. Current Report on Form 8-K filed September 28, 2000, and
reporting changes in certifying accountant under Item 4

27
<PAGE> 28

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

November 17, 2000 /s/ Kennon R. Patterson, Sr.
------------------------------- ----------------------------------
Date Kennon R. Patterson, Sr.
Chairman, President and
Chief Executive Officer

November 17, 2000 /s/ William E. Blackmon
------------------------------- ----------------------------------
Date William E. Blackmon
Acting Chief Accounting Officer

<PAGE> 29

-------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------------------

EXHIBITS TO

FORM 10-Q

FOR THE

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

---------------------------

COMMUNITY BANCSHARES, INC.

P. O. BOX 1000

MAIN STREET

BLOUNTSVILLE, ALABAMA 35031

--------------------------------------------------------------------------------

<PAGE> 30

<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
------------------------
<S> <C>
3.1 By-laws of Registrant, as amended and restated May 2000 (filed as Exhibit 3.1 to the
Registrants's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference)

3.2 Certificate of Incorporation, as amended and restated May 2000 (Filed as Exhibit 3.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended 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 the Registrant's Registration Statement on
Form 8-A, filed January 21, 1999, and incorporated herein by reference)

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

10.1 Stock Option Agreement, dated August 24, 2000, between Community Bancshares, Inc. and
William H. Caughran, Jr.

10.2 Stock Option Agreement, dated August 24, 2000, between Community Bancshares, Inc. and
William E. Blackmon

10.3 Change in Control Agreement, dated August 24, 2000, between Community Bancshares, Inc.
and William E. Blackmon

11 Computation of Earnings Per Share

27 Financial Data Schedule (for SEC use only)
</TABLE>