<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

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

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

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

                                68149 MAIN STREET
                           BLOUNTSVILLE, ALABAMA 35031
                     ---------------------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

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

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

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

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

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

                      YES   X       NO
                          -----

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

AS OF MARCH 13, 2002, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING
STOCK HELD BY NON-AFFILIATES WAS $41,031,270 BASED UPON A SALE PRICE OF $15.00
PER SHARE ON MARCH 13, 2002.

AS OF MARCH 13, 2002, THERE WERE 4,635,697 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.10 PAR VALUE SHARES, OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K: PROXY
STATEMENT FOR THE 2002 ANNUAL MEETING OF SHAREHOLDERS.


<PAGE>


                                     PART 1

ITEM 1 - BUSINESS

GENERAL

Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank
holding company registered with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") under the Bank Holding Act of 1956, as amended
(the "Bank Holding Company Act"). The Company was organized in 1983 and
commenced business in 1985. The Company has one bank subsidiary, Community Bank,
an Alabama banking corporation which conducts a general commercial banking
business in north and west-central Alabama and south-central Tennessee. At
December 31, 2001, the Company and its subsidiaries had total assets of
approximately $729,481,000, deposits of approximately $617,706,000 and
shareholders' equity of approximately $40,665,000. The Company maintains its
principal executive offices at 68149 Main Street, Blountsville, Alabama 35031,
and its telephone number is (205) 429-1000.

SUBSIDIARY BANK

At December 31, 2001, Community Bank conducted business through 30 locations in
nine counties in north Alabama, two counties in west-central Alabama and one
county in south-central Tennessee. It offers a wide range of commercial and
retail banking services, including savings and time deposit accounts, personal
and commercial loans and personal and commercial checking accounts. The majority
of loans by Community Bank are to individuals and small to mid-sized businesses
in Alabama and Tennessee. Community Bank seeks to provide superior service to
its customers and to become a vital component of each of the communities it
serves.

Community Bank operates in small non-urban communities. At December 31, 2001 the
Bank had locations in Blountsville, Cleveland, Oneonta, Snead and West Blount in
Blount County, Alabama; Fort Payne and Rainsville in DeKalb County, Alabama;
Rogersville in Lauderdale County, Alabama; Elkmont in Limestone County, Alabama;
Gurley, Meridianville and New Hope in Madison County, Alabama; Demopolis in
Marengo County, Alabama; Hamilton in Marion County, Alabama; Arab, Albertville,
Boaz and Guntersville in Marshall County, Alabama; Falkville and Hartselle in
Morgan County, Alabama; Uniontown in Perry County, Alabama; Double Springs and
Haleyville in Winston County, Alabama; and Pulaski in Giles County, Tennessee.
At December 31, 2001, Community Bank operated 26 full service offices as well as
four paying and receiving offices located within Wal-Mart stores, which
primarily open deposit accounts, cash checks and receive deposits and loan
payments.

In late 2001 and early 2002, Community Bank entered into agreements to sell its
two Pulaski, Tennessee offices, its Rainsville and Ft. Payne, Alabama offices
and its Marshall County, Alabama locations. The Marshall County locations
include one banking office in Boaz, Alabama, one in Albertville, Alabama, two in
Arab, Alabama, and two in Guntersville, Alabama. Two of the total ten offices
under agreements to sell are paying and receiving offices located in Wal-Mart
stores, one in Ft. Payne, Alabama and one in Guntersville, Alabama. On March 31,
2002, the Bank closed on the sale of its Pulaski, Tennessee offices and
anticipates the sale of the others during the second quarter of 2002.

SUBSIDIARIES OF COMMUNITY BANK

1st Community Credit Corporation currently operates 12 finance company offices
in 12 Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman,
Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Oneonta,
Alabama. 1st Community Credit Corporation provides loans to a market segment
traditionally not pursued by Community Bank. These loans have typically
generated higher yields and involved greater risk than standard commercial bank
loans. At December 31, 2001, 1st Community Credit


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Corporation's loan portfolio totaled approximately $24,765,000.

Community Insurance Corp. serves as an agent in the sale of title, property,
casualty and life insurance products to individuals and businesses through an
office in Huntsville, Alabama. Community Insurance Corp. owns 100% of the
outstanding shares of capital stock of Southern Select Insurance, Inc., a
managing general agency which brokers agricultural, commercial and personal
insurance products. Both Community Insurance Corp. and Southern Select
Insurance, Inc. are located in Huntsville, Alabama.

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

MARKET AREAS

At December 31, 2001, the Company's principal market areas were located in north
Alabama (Blount, Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison,
Marshall and Morgan Counties), northwest Alabama (Marion and Winston Counties),
west-central Alabama (Marengo and Perry Counties) and in south-central Tennessee
(Giles County). All of the Company's banking and finance company offices are
located in relatively rural areas and place an emphasis on personal service.

With the exception of Blount, Marengo, Marion, Perry and Winston Counties in
Alabama, the markets in which the Company operates share one common
characteristic: each is close enough to Huntsville, Alabama, to share in the
economic and employment benefits of that city. Huntsville is located in Madison
County. Unemployment for Madison County was 3.7% for December 2001 as compared
to 6.00% for Alabama during that period, as reported by the Alabama Department
of Industrial Relations. The Huntsville Metropolitan Statistical Area ("MSA")
possesses a diverse economic base with employers that include the military and
aerospace industries, manufacturers of durable goods, machinery, transportation,
as well as retailers and service industries. Agriculture, in the form of
soybeans, hay, corn, cotton, tobacco, dairy and poultry farming, also makes up a
significant portion of the Huntsville MSA's economy.

Similarly, Blount County is close enough to Birmingham, Alabama, to share in the
economic and employment benefits of that city. Jefferson County, in which
Birmingham is located, had a 4.3% unemployment rate for December 2001, according
to the Alabama Department of Industrial Relations. The Birmingham area still
retains some of the steel and related manufacturers that built the city, but the
economy is now more diverse with the University of Alabama in Birmingham and the
healthcare industry providing many jobs.

Marion and Winston Counties lie in northwest Alabama, near the Mississippi
border. In both counties the manufacturing sector provides more jobs, and higher
sales or receipts, than the wholesale, retail and service sectors. Manufactured
housing and furniture production are two prominent industries in these counties,
and both industries have experienced recent economic slowdowns. Marion County
was reported to have an unemployment rate of 9.4% for December 2001, according
to the Alabama Department of Industrial Relations. Winston County was reported
to have an unemployment rate of 10.1% for December 2001 according to the Alabama
Department of Industrial Relations.

Marengo and Perry Counties are located in west-central Alabama. Manufacturing
provides more jobs in these counties than the wholesale, retail, and service
sectors. In addition, catfish farming and the timber industry are important
components in the economy of these counties. Marengo County's unemployment rate
reported by the Alabama Department of Industrial Relations for December 2001 was
6.8%. Perry County was reported to have an unemployment rate of 13.4% for
December 2001 as reported by the Alabama Department of Industrial Relations.


                                       2
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As previously discussed, at December 31, 2001, Community Bank was under
agreements to sell ten of its bank locations. The locations are located in
DeKalb County, Alabama, Marshall County, Alabama and Giles County, Tennessee.
The sale of these bank locations will not affect the presence of 1st Community
Credit Corporation, a subsidiary of Community Bank, in its DeKalb and Marshall
County market areas. The sale of the Tennessee operations was consummated
on March 31, 2002, and the Company no longer has a presence in Tennessee.

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

LENDING ACTIVITIES

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

COMPETITION

The banking business in Alabama is highly competitive with respect to loans,
deposits and other financial services and is dominated by a number of major
banks and bank holding companies which have numerous offices and affiliates
operating over wide geographic areas. Community Bank competes for deposits,
loans and other business with these banks as well as with savings and loan
associations, credit unions, mortgage companies, insurance companies and other
local financial institutions. Many of the major commercial banks operating in
Community Bank's service areas offer services such as international banking and
investment and trust services, which are not offered by Community Bank.
Additionally, the competitive environment for both the Company and Community
Bank may be materially affected by the enactment of the Gramm-Leach-Bliley
Financial Services Modernization Act (the "GLBA"). This law modified or
eliminated many barriers between investment banking, commercial banking and
insurance underwriting and sales. See "Supervision and Regulation". These
changes in the law have created and may continue to create greater competition
for the Company and Community Bank by increasing the number and types of
competitors and by encouraging increased consolidation within the financial
services industry.

EMPLOYEES

At December 31, 2001, the Company and its subsidiaries had approximately 383
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans and other benefit programs for their employees. The Company
maintains continuing education and training programs for its employees, designed
to prepare the employees for positions of increasing responsibility in
management or operations. Membership and participation by employees in
professional and industry organizations is encouraged and supported by the
Company.

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SUPERVISION AND REGULATION

The following is a brief summary of the regulatory environment in which the
Company and its subsidiaries operate and is not designed to be a complete
discussion of all statutes and regulations affecting such operations, including
those federal and state statutes and regulations specifically mentioned herein.
Changes in the laws and regulations applicable to the Company and its
subsidiaries can affect the operating environment of the Company and its
subsidiaries in substantial and unpredictable ways. The Company cannot
accurately predict whether legislation will ultimately be enacted, and, if
enacted, the ultimate effect that it or implementing regulations would have on
its or its subsidiaries financial condition or results of operations.

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

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

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

Deposits in Community Bank are insured, up to applicable limits, by the Federal
Deposit Insurance Corporation (the "FDIC") and, therefore, Community Bank is
subject to provisions of the Federal Deposit Insurance Act ("FDIA"). Community
Bank's primary federal regulator is the FDIC, and as a result, Community Bank is
subject to examination and regulation by the FDIC. The FDIC is authorized to
terminate the deposit insurance of any depository institution, such as Community
Bank, whose deposits are insured by the FDIC if the FDIC determines, after a
hearing, that the institution or its directors have engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations as an insured institution, or has violated any applicable law,
regulation, order, condition imposed in writing by the FDIC in connection with
the granting of any application or other request by the depository institution
or any written agreement entered into with the FDIC.

Each federal banking regulatory agency is authorized to issue a cease and desist
order to any financial institution or institution-affiliated party for which the
agency is the primary federal banking regulator (which in the case of Community
Bank, is the FDIC and, in the case of the Company, is the Federal Reserve) if
the agency determines, after a hearing, that the institution or
institution-affiliated party has engaged, is engaging or is reasonably believed
to be about to engage, in unsafe or unsound practices, or has violated, is
violating or is reasonably believed to be about to violate a law, rule or
regulation, or any condition imposed in writing by the agency in connection with
the granting of any application or other request by the institution or any


                                      4

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written agreement entered into with the agency. The cease and desist order may
require the institution or institution-affiliated party to cease and desist from
the violation or practice, including requiring the institution or
institution-affiliated party to make restitution or reimbursement against loss,
restrict the institution's growth, dispose of loans or assets, rescind
agreements or contracts, employ qualified officers or employees and take other
actions determined to be appropriate by the agency. The order may also limit the
activities of the institution.

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

FDICIA also provides for a risk-based deposit insurance premium structure. The
FDIC is an independent federal agency established originally to insure the
deposits, up to prescribed statutory limits, of federally insured banks and to
preserve the safety and soundness of the banking industry. The FDIC maintains
two separate insurance funds: the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"). Community Bank's deposit accounts are
insured by the FDIC under the BIF to the maximum extent permitted by law.
Community Bank pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all BIF-member institutions.

Under FDIC regulations, institutions are assigned to one of three capital groups
for insurance premium purposes (well capitalized, adequately capitalized and
undercapitalized). These three groups are then divided into subgroups which are
based on supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Assessment rates vary depending
upon the assessment classification. In addition, regardless of the potential
risk to the insurance fund, federal law requires the FDIC to establish
assessment rates that will maintain each insurance fund's ratio of reserves to
insured deposits at 1.25%. During 2001 and for the first semiannual assessment
period of 2002, assessment rates for BIF-insured institutions ranged from 0% of
insured deposits for well-capitalized institutions with minor supervisory
concerns to .27% of insured deposits for undercapitalized institutions with
substantial supervisory concerns. The assessment rate schedule is subject to
change by the FDIC and, accordingly, the assessment rate could increase or
decrease in the future.

In addition to deposit insurance assessments, the FDIC is authorized to collect
assessments against insured deposits to be paid to the Finance Corporation
("FICO") to service FICO debt incurred in the 1980s. The FICO assessment rate is
adjusted quarterly. The average annual assessment rate in 2001 was 1.90 cents
per $100 of assessable deposits. For the first quarter of 2002, the FICO
assessment rate for such deposits will be 1.82 cents per $100.

Community Bank's assessment expense for the year ended December 31, 2001 equaled
approximately $207,000.

The federal banking regulatory agencies have adopted a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an



                                       5

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executive officer, employee, director or principal stockholder. In addition, the
agencies adopted regulations that authorize an agency to order an institution
that has been given notice by an agency that it is not satisfying any of such
safety and soundness standards to submit a compliance plan. If the institution
fails to submit an acceptable compliance plan or fails to implement an accepted
plan, the agency must issue an order directing action to correct the deficiency
and may issue an order directing other actions be taken, including restricting
asset growth, restricting interest rates paid on deposits, and requiring an
increase in the bank's ratio of tangible equity to assets. If an institution
fails to comply with such an order, the agency may seek to enforce such order in
judicial proceedings and to impose civil money penalties.

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

FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's total assets at the time it becomes
undercapitalized or the amount necessary to bring the institution into
compliance with all applicable capital standards. If a depository institution
fails to submit an acceptable plan, it is treated as if it is significantly
undercapitalized. Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator. At December 31, 2001, Community Bank was
well capitalized for prompt corrective action purposes.

The Company is required to comply with the risk-based capital guidelines
established by the Federal Reserve, and other tests relating to capital adequacy
which the Federal Reserve adopts from time to time. Under the risk-based capital
assessment system, assets are weighted by a risk factor and a ratio is
calculated by dividing the qualifying capital by the risk-weighted assets. Tier
I capital generally includes common stock and retained earnings. Total capital
is comprised of Tier I capital and Tier II capital, which includes certain
allowances for loan losses and certain subordinated debt. The Company's Tier I
and total capital ratios exceeded the required minimum levels as of December 31,
2001.

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

The primary source of funds for dividends paid to the Company's shareholders is
dividends paid to the Company by Community Bank. Various federal and state


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laws limit the amount of dividends that Community Bank may pay to the Company
without regulatory approval. Under Alabama law, an Alabama state bank, such as
Community Bank, may not pay a dividend in excess of 90% of its net earnings
until the bank's surplus is equal to at least 20% of its capital. Community Bank
is also required by Alabama law to obtain the prior approval of the
Superintendent of the Alabama State Banking Department in order to pay a
dividend if the total of all the dividends declared by Community Bank in any
calendar year will exceed the total of Community Bank's net earnings (as defined
by statute) for that year and its retained net earnings for the preceding two
years, less any required transfers to surplus. At December 31, 2001, Community
Bank could not have declared or paid any dividend without such approval. In
addition, no dividends may be paid from Community Bank's surplus without the
prior written approval of the Superintendent of the Alabama State Banking
Department. Under FDICIA, Community Bank may not pay any dividends, if after
paying the dividend it would be undercapitalized under applicable capital
requirements. The FDIC also has the authority to prohibit Community Bank from
engaging in business practices which the FDIC considers to be unsafe or unsound,
which, depending on the financial condition of Community Bank, could include the
payment of dividends.

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

The federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") permits adequately capitalized and managed bank holding companies to
acquire control of banks in states other than their home states, subject to
federal regulatory approval, without regard to whether such a transaction is
prohibited by the laws of any state. IBBEA permits states to continue to require
that an acquired bank have been in existence for a certain minimum time period,
which may not exceed five years. A bank holding company may not, following an
interstate acquisition, control more than 10% of the nation's total amount of
bank deposits or 30% of bank deposits in the relevant state (unless the state
enacts legislation to raise the 30% limit). States retain the ability to adopt
legislation to effectively lower the 30% limit. Federal banking regulators may
approve merger transactions involving banks located in different states, without
regard to laws of any state prohibiting such transactions; except that, mergers
may not be approved with respect to banks located in states that, prior to June
1, 1997, enacted legislation prohibiting mergers by banks located in such state
with out-of-state institutions. Also, states may continue to require that an
acquired bank have been in existence for a certain minimum period of time, which
may not exceed five years. Federal banking regulators may permit an out-of-state
bank to open new branches in another state if such state has enacted legislation
permitting interstate branching. Affiliated institutions are authorized to
accept deposits for existing accounts, renew time deposits and close and service
loans for affiliated institutions without being deemed an impermissible branch
of the affiliate.

The federal Community Reinvestment Act of 1977 ("CRA") and its implementing
regulations are intended to encourage regulated financial institutions to meet
the credit needs of their local community or communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
such financial institutions. The regulations provide that the appropriate
regulatory authority will assess CRA reports in connection with applications for
establishment of domestic branches, acquisitions of banks or mergers involving
bank holding companies. An unsatisfactory CRA rating may serve as a basis to
deny an application to acquire or establish a new bank, to establish a new
branch or to expand banking services. At December 31, 2001, the Company had a
"satisfactory" CRA rating.


                                       7
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The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") eliminated prohibitions
in the Glass-Steagall Act against a bank associating with a company engaged
principally in securities activities. The GLBA also permits a bank holding
company to elect to become a "financial holding company," which would expand the
powers of the bank holding company. The repeal of the Glass-Steagall Act
provisions and the availability of financial holding company powers became
effective on March 11, 2000. Financial holding company powers relate to
financial activities that are determined by the Federal Reserve to be financial
in nature, incidental to an activity that is financial in nature, or
complementary to a financial activity (provided that the complementary activity
does not pose a safety and soundness risk). The GLBA itself defines certain
activities as financial in nature, including lending activities, underwriting
and selling insurance, providing financial or investment advice, underwriting,
dealing and making markets in securities and merchant banking. In order to
qualify as a financial holding company, a bank holding company's depository
subsidiaries must be both well capitalized and well managed, and must have at
least a satisfactory rating under the CRA. The bank holding company must also
declare its intention to become a financial holding company to the Federal
Reserve and certify that its depository subsidiaries meet the capitalization and
management requirements. The GLBA establishes the Federal Reserve as the
umbrella regulator of financial holding companies, with subsidiaries of the
financial holding company being more specifically regulated by other regulatory
authorities, such as the Securities and Exchange Commission, the Commodity
Futures Trading Commission and state securities and insurance regulators, based
upon the subsidiaries' particular activities. The GLBA also provides for minimum
federal standards of privacy to protect the confidentiality of personal
financial information of customers and to regulate use of such information by
financial institutions. A bank holding company that does not elect to become a
financial holding company remains subject to the Bank Holding Company Act. The
Company has not determined whether it will elect to become a financial holding
company.

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

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

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

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

                                       8
<PAGE>

the Reserve Bank with a contingency plan for conserving or raising cash and
information about loans extended by Community Bank to facilitate purchases of
the Company's common stock, and to periodically provide the Reserve Bank with
certain financial and other information and a report of actions taken by the
Company to ensure compliance with the Memorandum. On March 8, 2002, the Reserve
Bank requested that the Company agree to an amendment of the Memorandum that
would disallow the Company from making any distributions of interest, principal
or other sums on subordinated debentures or trust preferred securities without
the prior written approval of the Reserve Bank. The Company expects to agree to
the amendment on or before May 3, 2002. In the interim, the Company elected to
defer the March 2002 interest payment on its junior subordinated deferrable
interest debentures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations, Borrowed Funds - Maturities of Long-term
Debt". Management of the Company cannot currently estimate the period during
which the Company will remain subject to the terms of the Memorandum, or the
effect of the Memorandum on the Company's financial condition, liquidity and
results of operations.

On April 18, 2001, the Board of Directors of Community Bank, the Company's
subsidiary bank, also entered into a Memorandum of Understanding (the "Bank
Memorandum") with the Regional Director of the FDIC's Atlanta Regional Office
and the Alabama Superintendent of Banks ("State"). Major provisions of the Bank
Memorandum include requirements to reduce classified assets, restrict expansion,
adopt revised policies in the areas of lending, liquidity, interest rate risk,
loan documentation, asset/liability management and ethics, review duties and
responsibilities of key officers, review compliance with investment, liquidity
and funds management policies, reconstitute membership of its Board of
Directors, develop internal loan review and internal audit functions, maintain
capital ratio requirements, restrict dividend payments, provide to the
regulators updates on the status of litigation, other financial and managerial
information and quarterly progress reports detailing efforts to comply with the
requirements of the Bank Memorandum.

Based on an examination as of June 30, 2001, the FDIC and the State requested
the Community Bank Board of Directors to adopt a Safety and Soundness Compliance
Plan ("Plan"). The Board adopted the Plan on March 5, 2002. If accepted by the
FDIC/State, the Plan (initiated by the FDIC) would replace the Bank Memorandum
(initiated by the State).

Pursuant to the terms of the Plan, the Board will review the bank's
organizational structure and staffing requirements and hire and train any
additional personnel needed to comply with the Plan. Also the Board will review
and revise the bank's loan policy and underwriting standards, loan collection
plan, allowance for loan losses methodology, interest rate risk policy and asset
liability management policy. The Plan also provides that the Board will adopt an
internal audit program, an internal controls program, a plan to reduce
classified assets and internal and external loan documentation review
procedures. Also, pursuant to the Plan, the Board will engage an outside firm to
perform the loan review function and will adopt an internal loan review program.
The Plan also places restrictions on extending credit to borrowers who have
classified loans with the bank. Under the Plan, prior to submission of Reports
of Condition and Income, the Board must review the adequacy of the allowance for
loan losses and provide for an adequate balance. Under the Plan, the Board
committed to maintaining a Tier I capital ratio of at least 7% and to obtain the
prior approval of the regulators before paying dividends. In addition, the Plan
requires the submission of a budget and profit plan and the engagement of an
outside accounting firm to perform the bank's internal audit function and the
formation of a bank administration department to strengthen internal controls.
Finally, the Plan requires management to make monthly reports to the Board of
Directors regarding the status in meeting the requirements of the Plan, and to
submit quarterly progress reports to the regulators.


                                       9

<PAGE>


STATISTICAL DISCLOSURE

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



<TABLE>
<CAPTION>


                                                                                                            Page(s)
                                                                                                            --------
<S>                                                                                                            <C>
Loan Portfolio and Selected Loan Maturity................................................................        22

Investment Portfolio.....................................................................................        23

Investment Portfolio Maturity Schedule...................................................................        24

Average Deposit Balances and Rates Paid..................................................................        25

Maturities of Large Time Deposits........................................................................        26

Short-term Borrowings....................................................................................        27

Maturities of Long-term Debt ............................................................................        28

Rate Shock Analysis......................................................................................        30

Interest Sensitivity.....................................................................................        31

Capital Adequacy Ratios and Return on Equity and Assets..................................................        32

Yields, Rates, Interest Rate Spread and Net Interest Margin..............................................        35

Consolidated Average Balances,
  Interest Income/Expense and Yields/Rates...............................................................        36

Rate/Volume Variance Analysis............................................................................        37

Summary of Loan Loss Experience..........................................................................        40

Allocation of the Allowance for Loan Losses..............................................................        41

Nonperforming Assets.....................................................................................        42

Noninterest Income.......................................................................................        43

Noninterest Expense......................................................................................        45

</TABLE>

                                       10

<PAGE>


ITEM 2 - PROPERTIES

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

The main banking office of Community Bank is located at 69156 Main Street,
Blountsville, Alabama. The premises are owned by Community Bank.

At December 31, 2001, Community Bank owned or leased buildings that were used in
the normal course of business in 11 counties in Alabama, including Blount,
DeKalb, Lauderdale, Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry
and Winston Counties, and in Giles County, Tennessee. 1st Community Credit
Corporation owned or leased buildings that were used in the normal course of
business in ten counties in Alabama, including Blount, Cullman, Marshall,
Morgan, Limestone, Lawrence, Etowah, Madison, DeKalb and Walker Counties.
Community Insurance Corp. and its subsidiary, Southern Select Insurance, Inc.,
owned a building that is used in the normal course of business in Madison
County, Alabama.

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

ITEM 3 - LEGAL PROCEEDINGS

Background

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

Benson Litigation

On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community Bank. The complaint alleges that the
directors, officers and employee named as defendants in the complaint breached
their fiduciary duties, failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of


                                       11

<PAGE>

corporate assets by allegedly permitting the subcontractor defendants to
overcharge Community Bank in connection with the construction of two new
Community Bank offices, and to perform the construction work without written
contracts, budgets, performance guarantees and assurances of indemnification. In
addition, the complaint alleges that Kennon R. Patterson, Sr., the Chairman,
President and Chief Executive Officer of the Company, breached his fiduciary
duties by allegedly permitting the two named subcontractors to overcharge for
work performed on the two construction projects in exchange for allegedly
discounted charges for work these subcontractors performed in connection with
the construction of Mr. Patterson's residence. The complaint further alleges
that the director defendants knew or should have known of this alleged
arrangement between Mr. Patterson and the subcontractors. The complaint also
alleges that Mr. Patterson, the Community Bank employee and the two
subcontractor defendants made false representations and suppressed information
about the alleged overcharges and arrangement between Mr. Patterson and the
subcontractors.

On August 15, 2000, the plaintiffs filed an amended complaint adding Andy C.
Mann, a shareholder of the Company, as a plaintiff and adding a former director
of the Company and Community Bank as a defendant. The amended complaint
generally reiterates the allegations of the original complaint. In addition, the
amended complaint alleges that Community Bank was overcharged on all
construction projects from January 1997 to the present. The amended complaint
also alleges that the defendants breached their fiduciary duties and are guilty
of gross financial mismanagement, including allegations concerning the making or
approval of certain loans and taking allegedly improper actions to conceal the
fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs
filed a second amended complaint. The second amended complaint generally
reiterates the allegations of the original and first amended complaints. In
addition, the second amended complaint alleges that the plaintiffs were
improperly denied their rights to inspect and copy certain records of the
Company and Community Bank. The second amended complaint also alleges that the
directors of the Company abdicated their roles as directors either by express
agreement or as a result of wantonness and gross negligence. The second amended
complaint asserts that the counts involving inspection of corporate records and
director abdication are individual, nonderivative claims. The second amended
complaint seeks, on behalf of the Company, an unspecified amount of compensatory
damages in excess of $1 million, punitive damages, disgorgement of allegedly
improperly paid profits and appropriate equitable relief. Upon motion of the
defendants, the case was transferred to the state Circuit Court in Blount
County, Alabama by order dated September 21, 2000, as amended on October 12,
2000.

On August 24, 2000, the Board of Directors of the Company designated the
directors of the Company who serve on the joint investigative committee as a
special litigation committee to investigate and evaluate the allegations and
issues raised in this lawsuit and to arrive at such decisions and take such
action as the special litigation committee deems appropriate. On June 8, 2001,
the special litigation committee filed its report under seal with the court. On
June 18, 2001, the court entered an order affirming the confidentiality of the
special committee's report. On June 28, 2001, the Company, Community Bank and
various other defendants filed a motion with the court to adopt the report of
the special committee, for partial summary judgment and to realign the Company
and Community Bank as plaintiffs in the lawsuit. Following a hearing on August
29, 2001, the court denied these motions on November 8, 2001. The court also
ruled that the plaintiffs were entitled to conduct discovery except as it
related to one of the subcontractor defendants and granted the plaintiffs'
motion to unseal the report of the special litigation committee. On November 14,
2001, the directors of the Company filed a motion for the court to alter, amend
or vacate its November 8, 2001 rulings. On February 7, 2002, the Company and
Community Bank filed a motion to disqualify Maynard, Cooper & Gale, P.C., the
law firm representing the plaintiffs, due to conflicts of interest. The court
held a hearing on these motions on February 22, 2002 and the parties are
awaiting a ruling. On February 25, 2002, the Company and Community Bank filed a
motion for limited discovery relating to its motion to disqualify the
plaintiffs' law firm. 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.

                                       12

<PAGE>

Towns Derivative Litigation

On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. The complaint alleged that the directors of the Company
breached their fiduciary duty to the Company and its shareholders, engaged in
fraud, fraudulent concealment, suppression of material fact and suppression of
the plaintiff shareholders, failed to supervise management, and conspired to
conceal wrongful acts from the Company's shareholders and paid themselves
excessive director fees. The complaint also alleged that the Board of Directors
acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the
Chairman of the Board, Chief Executive Officer and President of the Company,
including alleged self dealing, payment of excessive compensation,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint sought an unspecified amount of compensatory and punitive damages,
removal of the current directors, appointment of a new Board of Directors, and
attorneys fees and costs.

On December 21, 1998, the Company and its directors filed a motion with the
court seeking to have the complaint dismissed. On March 1, 1999, the Company's
Board of Directors appointed a special Board committee, comprised of
non-employee directors of the Company, to review the plaintiffs' allegations in
accordance with Delaware law. On April 6, 1999, each of the parties to the
action requested that the court stay the litigation and related discovery,
motions and hearings, pending completion of the special committee's review. On
April 30, 1999, the court entered an order staying the litigation and related
discovery, motions and hearing in accordance with the parties' request. On
October 15, 1999, the special committee filed its final report with the court.
On October 21, 1999, the parties forwarded to the court an agreed-upon order
governing the confidentiality of the special committee's report, which the court
entered on January 2, 2000. On August 3, 2000, the Company, Community Bank and
the Company's directors filed a motion to stay the proceedings until the
Company's and Community Bank's joint investigative committee had completed its
investigation of the alleged construction overcharges discussed above. At the
request of the Company and the other defendants in the action, the court
continued a hearing on the motion to dismiss. On February 23, 2001, the court
indicated that there was no reason to continue the stay of this action. The
parties are awaiting a hearing on the defendants' motion to dismiss the case.

Management of the Company believes that the plaintiffs' allegations are false
and that the action lacks merit. The Company and its directors intend to defend
the action vigorously, and management of the Company believes that the action
will not have a material adverse effect on the Company's financial condition or
results of operations. Regardless of the outcome, however, this lawsuit could be
costly, time consuming and a diversion of management's attention.

Corr Family Litigation

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


                                       13
<PAGE>

Auto Loan Litigation

On June 28, 2000, Community Bank filed an action in the United States District
Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc.,
an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug
Broaddus, the owners of the dealership, several employees and former employees
of the dealership and Gerald Scot Parrish, a former employee of Community Bank,
with respect to certain loans originated during 1998 in Community Bank's
Wal-Mart office in Ft. Payne, Alabama. In the complaint Community Bank alleged
that the defendants willingly and knowingly conducted, participated in, were
employed by or associated with, or aided and abetted an enterprise within the
meaning of the Racketeer Influenced and Corrupt Organizations Act ("RICO") for
the purpose of defrauding Community Bank. The complaint also asserted that the
defendants committed fraud, misrepresentation and deceit by submitting to
Community Bank and/or approving applications for automobile loans which
contained false and/or fraudulent information for the purpose of deceiving,
influencing and persuading Community Bank to provide loans to customers of the
automobile dealership who were otherwise not qualified to receive such loans,
and suppressed material facts regarding the veracity of information contained in
loan applications and the ability of persons seeking the loans to repay them.
Community Bank also alleged in the complaint that the automobile dealership is
responsible for the acts of its officers, agents and employees, and that the
dealership and its management failed to adequately train and/or supervise its
employees. The complaint stated that the defendants participated in a conspiracy
to violate RICO and Alabama statutes dealing with fraud, misrepresentation and
suppression of material facts, and asserted civil liability under Alabama law
for violation of federal statutes dealing with financial institution fraud, mail
and wire fraud and making false statements for the purpose of influencing the
actions of a financial institution upon an application or loan.

On June 29, 2000 and August 31, 2000 the court granted Community Bank's motions
to dismiss without prejudice two of the employees of the automobile dealership
as defendants in the action. On September 13, 2000, the court granted Mr.
Parrish's motion to dismiss the complaint, but granted Community Bank 15 days to
amend the complaint. On September 27, 2000, Community Bank filed an amended
complaint which generally reiterated the allegations of the original complaint
and added specific information concerning the allegedly fraudulent activity and
the use of the United States mail, telephone and other wire transmissions in the
conduct of such activity. On December 1, 2000, the court dismissed Community
Bank's claims based upon mail and wire fraud in the amended complaint but
otherwise denied Mr. Parrish's motion to dismiss the complaint. On October 10,
2001, the court granted a joint motion to bifurcate the trial into separate
stages of liability and damages. On October 23 and November 19, 2001, the court
granted Community Bank's motion to dismiss without prejudice three of the
employees of the automobile dealership as defendants in the action.

The defendants have filed answers to the amended complaint which generally deny
the material allegations in the complaint and allege that any injury suffered by
Community Bank was the result of the contributory negligence of Community Bank,
its officers, employees and agents. In the lawsuit, Community Bank seeks damages
of an unspecified amount to recover losses incurred in connection with the loans
made at Community Bank's Wal-Mart office in Ft. Payne, Alabama, along with all
costs associated with the lawsuit. Any amounts received by Community Bank as a
result of this litigation will be treated as a recovery on loan losses. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Provision for Loan Losses, Net Charge-Offs and Allowance
for Loan Losses."

Employee Litigation

On November 15, 2000, Michael W. Alred and Michael A. Bean, two former directors
and executive officers of Community Bank, filed suit against Community Bank in
the United States District Court for the Northern District of Alabama alleging
that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees. According to the complaint, the information which these two
individuals provided to authorities concerned certain bank construction
projects, specific loans, charge-offs, expenses and past due accounts. The


                                      14

<PAGE>


complaint seeks reinstatement of the plaintiffs to their former positions as
officers and directors of Community Bank as well as compensatory and punitive
damages. Community Bank and its directors believe this lawsuit is without merit
and intend to defend the action vigorously. Management of the Company believes
that this action will not have a material adverse effect on the Company's
financial condition or results of operations.

Conspiracy Litigation

On November 6, 2001 the Company and Community Bank filed a lawsuit in the United
States District Court for the Northern District of Alabama against Bryan A.
Corr, Doris J. Corr, individually and as executrix of the Estate of R.C. Corr,
Jr., Tina M. Corr, Corr, Inc., George M. Barnett, Michael A. Bean, Michael W.
Alred, R. Wayne Washam, M. Lewis Benson, Doris E. Benson, John M. Packard and
Andy Mann seeking damages in excess of $50 million. The complaint also alleges
that, by knowingly making false statements and unsupported allegations to
regulatory and law enforcement authorities and in certain lawsuits discussed
above, the defendants abused the civil legal process to further their plan to
discredit and dislodge the directors and management of the Company and Community
Bank and gain control of those companies. The complaint further alleges that
certain of the defendants who are former directors and/or executive officers of
Community Bank breached their fiduciary duties to Community Bank by
participating in, and taking action in the furtherance of, the conspiracy.
Finally, the complaint alleges that the defendants failed to make filings which
are required by the Federal securities laws to disclose that the group is acting
in concert to acquire control of the Company. The complaint seeks compensatory
and punitive damages as well as an order barring the defendants from voting
their shares of Company stock, purchasing additional Company stock, soliciting
proxies and submitting shareholder proposals for at least three years.

On December 5, 2001, the Company, Community Bank and R. Wayne Washam entered
into a stipulation pursuant to which Mr. Washam would be dismissed as a
defendant. The court granted the stipulation on December 6, 2001. During the
time between December 3 and December 7, 2001 the other defendants filed various
motions to dismiss, abate or stay the lawsuit. On January 4, 2002, the Company
and Community Bank filed a motion to disqualify Maynard, Cooper & Gale, P.C.
from representing M. Lewis Benson, Doris E. Benson, John M. Packard and Andy
Mann due to a conflict of interest. On January 22, 2002 Maynard, Cooper & Gale,
P.C. filed a motion to withdraw from the suit, which motion was granted by the
court on January 24, 2002. On January 29, 2002 the Company and Community Bank
filed an amended complaint to reflect the dismissal of Wayne Washam as a
defendant and to add a claim for defamation against two of the defendants. 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.

Indemnification and Routine Proceedings

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.

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


                                       15
<PAGE>

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

No matter was submitted to a vote of security holders by solicitation of proxies
or otherwise during the fourth quarter of 2001.

              [The remainder of this page intentionally left blank]


                                       16

<PAGE>


EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>


Name, Age and Position Currently Held with the
       Company and its Subsidiaries                                             Principal Experience During Past Five Years
-----------------------------------------------                           --------------------------------------------------------
<S>                                                                       <C>
Kennon R. Patterson, Sr. (59)                                             Chairman, President and Chief Executive Officer of the
Chairman, President and Chief Executive Officer of the                    Company (1985-present); Chairman and Chief Executive
Company; Chairman and Chief Executive Officer of                          Officer of Community Bank (1993-present)
Community Bank; Chairman of 1st Community Credit Corporation;
Vice Chairman of Community  Appraisals, Inc.;
Director of Community Insurance Corp., and Southern
Select Insurance, Inc.

Bishop K. Walker, Jr. (70)*                                               Vice Chairman, Senior Executive Vice President and
Director, Vice Chairman, Secretary, Senior Executive Vice                 General Counsel of the Company (1987-2002); President
President and General Counsel of the Company; Director,                   and Director of Community Insurance Corp. (1987-1997)
Senior Executive Vice President and Secretary of Community Bank;
Chairman of Community Insurance Corp. and Southern Select
Insurance, Inc.

Denny G. Kelly (62)*                                                      President of Community Bank (1993-2001)
Director and Executive Vice President of the Company; Vice Chairman
and President of Community Bank; Vice Chairman and President of
1st Community Credit Corporation; Director of Community Appraisals, Inc.,
Community Insurance Corp. and Southern Select Insurance, Inc.

Loy McGruder (61)                                                         President of Community Bank (2002-Present);
Director of the Company; Director and President of Community Bank         Executive Vice President of Community Bank (1994-2002);
                                                                          City President of Community Bank-Blountsville (1994-1997);
                                                                          Senior Vice President of Community Bank (1993-1994)

Kerri Newton (32)                                                         Chief Financial Officer of the Company and Community
Chief Financial Officer of the Company and Community Bank                 Bank (2001-Present); Senior Risk Consultant for Compass
                                                                          Bank, Birmingham, Alabama (2001); Chief Accounting
                                                                          Officer of Frontier National Corporation, Sylacauga,
                                                                          Alabama (1998-2000); Chief Financial Officer of Frontier
                                                                          National Bank, Lanett, Alabama (1997-2000); Vice President
                                                                          and Controller of The County Bank, Greenwood, South
                                                                          Carolina (1993-1997)

</TABLE>

*Mr. Walker and Mr. Kelly were executive officers of the Company on December 31,
2001, but retired in January, 2002.

The Company's bylaws provide that the term of office of an executive officer of
the Company is as provided in the officer's employment agreement with the
Company or, if the officer is not a party to an employment agreement or if the
officer's employment agreement does not specify a term of office, as determined
by the Company's Board of Directors and until the officer's successor is elected
and qualified or until the officer's earlier resignation or removal. In May
2001, Mr. Patterson, Mr. Walker and Mr. Kelly were elected by the Company's
Board of Directors to serve a term of one year and until his successor has been
elected and qualified.

                                       17

<PAGE>


                                     PART II

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

Shares of the common stock (the "Common Stock") of the Company were held by
approximately 2,334 shareholders of record as of March 13, 2002. There is no
established trading market for the Common Stock, which has been purchased and
sold infrequently in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock are provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.

<TABLE>
<CAPTION>

                                                                                           Estimated Price Range
                                                                                                 Per Share
                                                                                         --------------------------
                                                                                             High            Low
                                                                                         ----------      ----------
<S>                                                                                      <C>             <C>
2001:

    FIRST QUARTER..................................................................       $ 22.00         $ 15.00
    SECOND QUARTER.................................................................         22.00           15.00
    THIRD QUARTER..................................................................         15.00           15.00
    FOURTH QUARTER.................................................................         18.00           12.00

2000:

    First Quarter..................................................................       $ 25.00         $ 24.00
    Second Quarter.................................................................         25.00           19.00
    Third Quarter..................................................................         25.00           20.00
    Fourth Quarter.................................................................         26.00           20.00

1999:

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


</TABLE>

Annual dividends were neither declared nor paid in 2001. Annual dividends of
$.75 per share were declared by the Board of Directors on the Company's Common
Stock and paid on January 5, 2000. Generally, the payment of dividends on the
Common Stock is subject to the prior payment of principal and interest on the
Company's long-term debt, the retention of sufficient earnings and capital in
the Company's operating subsidiaries and regulatory restrictions. The Board of
Directors determined that it was in the Company's best interests not to declare
or pay a dividend in the first quarter of 2002, due to regulatory constraints
and the Company's results of operations and financial condition for 2001.
Currently, the Company is under a memorandum of understanding with the Federal
Reserve that, among other restrictions, disallows the declaration or payment of
any dividends without the prior written approval of the Federal Reserve. The
Board of Directors does not currently anticipate declaring or paying a dividend
in 2002. There can be no assurance that the Company will pay any dividends in
the foreseeable future. See "Item 1 - Business - Supervision and Regulation,"
"Item 7 - Management's Discussion of Financial Condition and Results of
Operations - Liquidity Management" and Note 16 to the Company's Consolidated
Financial Statements included elsewhere in this Report.


                                       18
<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>


                                                                            Years ended December 31,
                                                               2001        2000        1999       1998         1997
                                                            ----------- -----------  ---------  ---------    ---------
                                                                   (Dollars in thousands except per share data)

<S>                                                          <C>         <C>         <C>        <C>          <C>
Interest income..........................................    $ 58,486    $ 61,075    $ 52,194   $  44,365    $ 37,791
Interest expense.........................................      31,588      33,856      25,522      22,693      19,541
Net interest income......................................      26,898      27,219      26,672      21,672      18,250
Provision for loan losses................................       6,314       9,289       4,459         885         773
Non-interest income......................................       9,538       9,906       9,155       8,102       4,891
Non-interest expense.....................................      31,972      31,755      29,208      23,784      17,423
Net income (loss)........................................      (1,100)     (2,215)      1,658       3,579       3,512

Per Share Data:
   Earnings/(loss) per share - basic.....................    $  (0.24)   $  (0.50)   $   0.37   $    0.90    $   0.92
   Earnings/(loss) per share - diluted...................       (0.24)      (0.47)       0.36        0.88        0.92
   Cash dividends........................................           -        0.75        0.60        0.50        0.38

Balance Sheet:
   Loans, net of unearned income.........................    $501,520    $528,316    $498,726   $ 433,853    $326,134
   Deposits..............................................     617,706     600,901     573,261     538,586     440,889
   FHLB borrowings.......................................      38,000      38,000      40,000           -           -
   Capitalized lease obligations.........................       5,766       5,850           -           -           -
   Long-term debt........................................       4,667       5,675       6,637       7,569       7,398
   Guaranteed preferred beneficial interest
     in the Company's junior subordinated
     deferrable interest debentures......................      10,000      10,000           -           -           -
   Average equity........................................      42,938      41,776      44,203      37,318      33,428
   Average assets........................................     725,461     710,915     632,713     538,470     473,381
   Period end assets.....................................     729,482     713,518     674,898     603,244     491,839

Ratios:
   Return on average assets..............................       (0.15)%     (0.31)%      0.26%      0.67%       0.74%
   Return on average equity..............................       (2.56)%     (5.30)%      3.75%      9.59%      10.51%
   Dividend payout ratio.................................           -     (150.00)%    162.16%     55.56%      40.50%
   Average equity to average assets......................        5.92%       5.88%       6.99%      6.93%       7.06%

   Total risk-based capital..............................       11.59%      10.54%       9.37%     11.03%      11.86%
   Leverage ratio........................................        6.70%       6.44%       6.39%      7.79%       6.94%


</TABLE>

                                       19

<PAGE>



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

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The purpose of this discussion is to focus on the significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during 1999, 2000 and 2001. This discussion and analysis is
intended to supplement and highlight information contained in the Company's
consolidated financial statements and related notes and the selected financial
data presented elsewhere in this Report.

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

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

SUMMARY

The Company's net loss of approximately $1,100,000 for 2001 represented a
$1,115,000 decrease from its net loss of approximately $2,215,000 for 2000 which
represented a $3,873,000 decline from 1999's net income of approximately
$1,658,000. When stated as changes in basic earnings per share, the 2001 basic
loss per share of $0.24 represented a $0.26 decrease from the 2000 basic loss
per share of $0.50 which represented a $0.87 decrease from the 1999 basic
earnings per share of $0.37. The decrease in loss per share for 2001 primarily
resulted from a reduction in the provision for loan losses. The decline in 2000
primarily resulted from additional provisions to the Company's allowance for
loan losses in connection with an increase in loans charged-off and certain
loans originated in Community Bank's Double Springs, Alabama branch. In 2001,
2000 and 1999, the Company has experienced higher than normal legal and
accounting fees associated with legal proceedings.


                                       20


<PAGE>
In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. The
debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines. See "Borrowed
Funds--Maturities of Long-term Debt and Note 9 to the Company's Consolidated
Financial Statements" included elsewhere in this Report.

EARNING ASSETS

The Company's average earning assets in 2001 increased 3.1% over that for 2000,
primarily as a result of increases in the investment portfolio and federal funds
sold. Earning assets accounted for approximately 89.5% of the Company's average
total assets for 2001. This growth of average earning assets in 2001 compared to
a 12.2% increase during 2000 over that for 1999, primarily as a result of
increases in the loan portfolio. During 1999, average earning assets increased
17.2%. Earning assets represented 88.6% and 88.7% of the Company's average total
assets for 2000 and 1999 respectively.

Average loans, net of unearned income, represented 79.6%, 82.9% and 82.5% of
average earning assets during 2001, 2000 and 1999, respectively. Average
investment securities represented 17.6% of average earning assets in 2001,
compared to 16.4% in 2000 and 16.9% in 1999. The change in the mix of loans and
securities during 2001 compared to 2000 was primarily attributable to a decrease
in loans during 2001. The other earning asset categories accounted for less than
3.0% of average earning assets for all three periods. The increased volume in
earning assets during 2001 helped offset the decrease in interest income due to
the fall in interest rates.

Total loans, net of unearned income, decreased approximately $26,796,000, or
5.1%, to approximately $501,520,000 at December 31, 2001, from $528,316,000 at
December 31, 2000, which represented an increase of $29,590,000, or 5.9%, from
$498,726,000 at December 31, 1999. These decreases were spread across the loan
type categories. Commercial, financial and agricultural loans decreased by
approximately $5,437,000, or 3.9%, to approximately $146,210,000 at December 31,
2001, from approximately $140,773,000 at December 31, 2000, which represented an
increase of approximately $16,528,000, or 13.3%, from approximately $124,245,000
at December 31, 1999. Commercial, financial and agricultural loans represented
29.1% of total loans at December 31, 2001, compared to 26.6% at December 31,
2000 and 24.9% at December 31, 1999. Real estate - mortgage loans decreased by
approximately $3,376,000, or 1.4%, to approximately $233,216,000 at December 31,
2001, from $236,592,000 at December 31, 2000, which represented an increase of
approximately $12,463,000, or 5.6%, from approximately $224,129,000 at December
31, 1999. As a percentage of total loans, real estate - mortgage loans increased
to 46.5% at December 31, 2001, from 44.8% at December 31, 2000 and 44.9% at
December 31, 1999. Consumer loans decreased by approximately $26,642,000, or
18.3%, to approximately $119,031,000 at December 31, 2001, from approximately
$145,673,000 at December 31, 2000, which represented an increase of
approximately $1,220,000, or 0.9%, from approximately $144,453,000 at December
31, 1999. As a percentage of total loans, consumer loans decreased to 23.8% at
December 31, 2001, from 27.6% at December 31, 2000 and 28.9% at December 31,
1999. Real estate - construction loans decreased by approximately $2,303,000, or
42.4%, to approximately $3,126,000 at December 31, 2001, from approximately
$5,429,000 at December 31, 2000, which represented a decrease of approximately
$1,041,000, or 16.1%, from approximately $6,470,000 at December 31, 1999. As a
percentage of total loans, real estate - construction loans decreased to 0.6% at
December 31, 2001, from 1.0% at December 31, 2000 and 1.3% at December 31, 1999.
The Company has

                                       21

<PAGE>

experienced these decreases in loans because of economic downturns, the
tightening of the Company's credit standards, and increased charge-offs of loans
made in previous years.

The following table shows the classification of loans by major category at
December 31, 2001, and at the end of each of the preceding four years.

                                 LOAN PORTFOLIO

<TABLE>
<CAPTION>


                                                                    December 31,
                     ---------------------------------------------------------------------------------------------------------
                            2001                2000               1999                  1998                    1997
                     ------------------  -----------------  --------------------  -------------------   ----------------------
                                 Percent           Percent              Percent              Percent                 Percent
                      Amount    of Total  Amount  of Total   Amount     of Total   Amount    of Total     Amount     of Total
                     --------   -------- -------- --------  ---------   --------  --------   ---------   --------   ----------
                                                         (Dollars in Thousands)
<S>                  <C>          <C>    <C>        <C>     <C>           <C>     <C>          <C>       <C>          <C>
Commercial,
  financial and
  agricultural.....  $146,210     29.1%  $140,773   26.6%   $124,245      24.9%  $ 94,057      21.6%     $ 64,136     19.6%
Real estate -
  construction.....     3,126      0.6      5,429    1.0       6,470       1.3      6,153       1.4         3,499      1.1
Real estate -
  mortgage.........   233,216     46.5    236,592   44.8     224,129      44.9    205,457      47.3       172,504     52.7
Consumer...........   119,031     23.8    145,673   27.6     144,453      28.9    129,334      29.7        86,945     26.6
                     --------    -----   --------  -----    --------     -----    -------     -----      --------    -----
                      501,583    100.0%   528,467  100.0%    499,297     100.0%   435,001     100.0%      327,084    100.0%

Less: Unearned
  income...........        64                 151                571                1,148                     950
Allowance for
  loan losses......     7,292               7,107              2,603                2,971                   2,131
                     --------            --------           --------             --------                --------
Net loans..........  $494,227            $521,209           $496,123             $430,882                $324,003
                     ========            ========           ========             ========                ========

</TABLE>


The following table provides maturities of certain loan classifications and an
analysis of these loans maturing in over one year as of December 31, 2001.

              SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

<TABLE>
<CAPTION>

                                                                                                  Rate Structure for Loans
                                                             Maturity                              Maturing Over One Year
                                      ---------------------------------------------------    --------------------------------
                                                    Over One
                                        One           Year            Over                    Predetermined      Floating or
                                      Year or        Through          Five                      Interest         Adjustable
                                        Less        Five Years       Years        Total           Rate              Rate
                                      --------    -------------    -----------   --------    ---------------    --------------
                                                                      (In thousands)
<S>                                   <C>           <C>             <C>          <C>            <C>                <C>
Commercial, financial
  and agricultural...............     $58,454       $ 41,815        $ 45,941     $ 146,210      $ 74,088           $ 72,122
Real estate - construction.......       2,802            269              55         3,126         1,950              1,176
                                      -------       --------        --------     ---------      --------           --------
  Total..........................     $61,256       $ 42,084        $ 45,996     $ 149,336      $ 76,038           $ 73,298
                                      =======       ========        ========     =========      ========           ========


</TABLE>

INVESTMENT PORTFOLIO

The composition of the Company's investment securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The Company's entire portfolio is classified as
available for sale. The primary objectives of the Company's investment strategy
are to maintain an appropriate level of liquidity and provide a tool to assist
in controlling the Company's interest rate position


                                       22
<PAGE>

while at the same time producing adequate levels of interest income. Management
of the maturity of the portfolio is necessary to provide liquidity and to
control interest rate risk. During 2001, gross investment securities sales were
approximately $85,134,000 and maturities were approximately $2,500,000
representing 74.6% and 2.2%, respectively, of the average portfolio for the
year, compared to gross investment securities sales of $16,230,000 in 2000 and
approximately $11,628,000 in 1999 and maturities of approximately $25,210,000 in
2000 and approximately $10,778,000 in 1999. Net gains realized on the sales
totaled approximately $1,284,000 during 2001, compared to approximately $5,000
in 2000 and approximately $179,000 in 1999. At December 31, 2001, gross
unrealized gains in the portfolio were approximately $486,000, compared to
approximately $1,419,000 at December 31, 2000 and approximately $72,000 at
December 31, 1999, while gross unrealized losses amounted to approximately
$893,000 at December 31, 2001, compared to approximately $756,000 at December
31, 2000 and approximately $2,827,000 at December 31, 1999. These fluctuations
in the gross unrealized gains and losses in the Company's investment portfolio
resulted primarily from changing bond prices.

Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risk.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Company's mortgage-backed securities
portfolio as of December 31, 2001 and 2000 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
2001, was $928,710, compared to $190,096 at December 31, 2000. The
recoverability of the Company's investment in mortgage-backed securities is
reviewed periodically by management, and if necessary, appropriate adjustments
for impaired value are made to income.

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

                              INVESTMENT PORTFOLIO

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                  -------------------------------------------
                                                                       2001           2000            1999
                                                                  --------------  ------------    -----------
                                                                                   (In thousands)

<S>                                                                <C>             <C>              <C>
U. S. Treasury and U.S. Government agencies.................       $   16,948      $  46,830        $ 55,870
Mortgage-backed securities..................................           90,647         31,341          30,521
State and municipal securities..............................           11,684         19,499           8,356
Equity securities...........................................            2,400          3,900           2,100
                                                                   ----------      ---------        --------
 Total investment securities...............................        $  121,679      $ 101,570        $ 96,847
                                                                   ==========      =========        ========

</TABLE>


Total investment securities increased approximately $20,109,000, or 19.8%, to
approximately $121,679,000 at December 31, 2001, compared to approximately
$101,570,000 at December 31, 2000 and approximately $96,847,000 at December 31,
1999. During 2001, non-taxable investment securities decreased $7,815,000, or
40.1%, to approximately $11,684,000 from $19,499,000 at December 31, 2000, which
represented an increase of $11,143,000 or 133.4%, from $8,356,000 at December
31, 1999. Taxable investment securities increased approximately $27,924,000, or
34.0% during 2001 to $109,995,000 from approximately $82,071,000 at December 31,
2000, which represented a decline of $6,420,000, or 7.3%, from approximately
$88,491,000 at December 31, 1999. The composition of the investment securities
portfolio changed during 2001 primarily as excess funds were invested in
mortgage-backed securities. At December 31, 2001, U.S. government and


                                       23
<PAGE>

agency securities represented 13.9% of the total investment securities portfolio
compared to 46.1% at year-end 2000, while state and municipal securities
represented 9.6% and 19.2% of the investment securities portfolio at year-end
2001 and 2000, respectively. In 2001, as investable funds increased due to
diminished loan demand and bonds redeemed prior to maturity, Community Bank
invested more heavily in mortgage-backed securities to enhance cash flow and
reduce call risk.

The maturities and weighted average yields of the investments in the year-end
2001 portfolio of investment securities are presented below. Taxable equivalent
adjustments (using a 34% tax rate) have been made in calculating yields on
tax-exempt obligations. The average maturity of the investment portfolio was
5.20 years at year-end 2001 compared to 6.71 years at year-end 2000 with an
average yield of 6.22% and 6.71% at December 31, 2001 and 2000, respectively.
Mortgage-backed securities have been included in the maturity table based upon
the guaranteed payoff date of each security.

                     INVESTMENT PORTFOLIO MATURITY SCHEDULE

<TABLE>
<CAPTION>

                                                                             December 31, 2001
                                             ------------------------------------------------------------------------------------
                                                                                 Maturing
                                             ------------------------------------------------------------------------------------
                                                   Within            After One But         After Five But            After
                                                  One Year         Within Five Years      Within Ten Years         Ten Years
                                             ------------------   ------------------     -------------------   ------------------
                                              Amount     Yield      Amount    Yield        Amount     Yield     Amount     Yield
                                             --------   -------   ---------  -------     ---------   -------   --------   -------
                                                                             (Dollars in thousands)

<S>                                         <C>         <C>       <C>         <C>        <C>          <C>      <C>          <C>
SECURITIES - ALL AVAILABLE-FOR-SALE:
    U. S. Government agencies..........     $ 2,001     6.62%     $ 57,003    5.93%      $ 21,093     6.05%    $ 26,406     6.37%
    State and municipal securities.....         180     7.17         3,557    6.06            670     7.27        8,368     7.89
    Equity securities..................           -        -             -       -              -        -        2,400     6.74
                                            -------               --------               --------              --------
                                            $ 2,181     6.67%     $ 60,560    5.94%      $ 21,763     6.09%    $ 37,174     6.73%
                                            =======               ========               ========              ========
</TABLE>


With the exception of some securities issued by U.S. Government agencies, the
Company held one municipal bond issued by Hartselle Utilities, whose amortized
cost of $4,854,027 exceeded 10% of the Company's consolidated shareholders'
equity on December 31, 2001.

Federal Funds Sold increased 900.0% during 2001, from $3,000,000 at December 31,
2000 to $30,000,000 at December 31, 2001. This increase resulted from a decrease
in loan demand coupled with an increase in deposit balances.

The average balance of interest-bearing deposits with other banks reflected a
decrease of 62.4% during 2001, compared to a decrease of 31.9% during 2000 and
an increase of 33.5% during 1999.

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

DEPOSITS

Community Bank's primary source of funds is its deposits. Dividends from
Community Bank are the Company's primary source of funds. Historically,
continued enhancement of existing products, emphasis upon better customer
service and expansion into new market areas have fueled the growth in Community
Bank's deposit base. The Company does not presently anticipate further
geographic expansion. Rather emphasis has been placed upon attracting consumer
deposits and the Company's intent is to expand its consumer base in its market
areas in order to continue to fund future asset growth.


                                       24
<PAGE>

During 2001, the Company's average total deposits increased approximately
$6,247,000, or 1.0%, to approximately $608,390,000 from approximately
$602,143,000 in 2000, which represented an increase of approximately
$56,921,000, or 10.4%, from approximately $545,222,000 in 1999. At December 31,
2001, the Company's total deposits were approximately $617,706,000, an increase
of approximately $16,805,000, or 2.8%, from approximately $600,901,000 at
December 31, 2000.

The following table presents the average deposit balances and the average rates
paid for each of the major classifications of deposits for the 12 month periods
ending December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>

                                                           Average Deposit Balances and Rates Paid
                                      --------------------------------------------------------------------------------
                                                2001                       2000                     1999
                                      -----------------------    ----------------------     --------------------------
                                                     Average                   Average                      Average
                                        Average       Rate         Average      Rate          Average         Rate
                                        Balance       Paid         Balance      Paid          Balance         Paid
                                     ------------  ---------      ---------    --------     ------------   -----------
                                                                 (Dollars in thousands)

<S>                                  <C>                <C>      <C>              <C>       <C>              <C>
Noninterest-bearing demand........     $   70,002       0.00%    $   68,785       0.00%     $   69,248       0.00%
Interest-bearing demand...........         92,360       3.50        102,254       4.92          94,763       4.36
Savings...........................         58,875       3.31         55,983       4.39          53,730       3.51
Time..............................        387,153       5.70        375,121       5.92         327,481       5.37
                                       ----------                ----------                 ----------
   Total (1)......................     $  608,390       5.06%    $  602,143       5.57%     $  545,222       4.96%
                                       ==========                ==========                 ==========
</TABLE>

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

The Company's average interest-bearing deposits increased by 0.9%, 12.1% and
12.3% in 2001, 2000 and 1999, respectively. Average interest-bearing demand
deposits decreased 9.7% compared to an increase of 7.9% during 2000 and 11.4%
during 1999. Average savings and average time deposits increased 5.2% and 3.2%,
respectively, during 2001 compared to increases of 4.2% and 14.5%, respectively,
during 2000 and an increase of 15.9% and 12.0%, respectively, during 1999.
Average noninterest-bearing demand deposits increased 1.8% during 2001 compared
to a decrease of 0.7% during 2000 and an increase of 15.1% during 1999. Customer
confidence and satisfaction are evidenced by the increase in total average
deposits of 1.0% in 2001, the increase in total average deposits of 10.4% in
2000 and 12.7% in 1999. The two categories of lowest cost deposits,
noninterest-bearing demand deposits and interest-bearing demand deposits,
comprised the following percentages of total average deposits during 2001, 2000
and 1999, respectively: (i) Average noninterest-bearing demand deposits - 11.5%,
11.4%, and 12.7%; and (ii) average interest-bearing demand deposits - 15.2%,
17.0% and 17.4%. Community Bank experienced a shift in its deposit mix during
2001 as interest-bearing demand deposits increased $14,619,000, or 17.1%, while
savings and certificates of deposits increased $1,776,000, or .4%. This is as
compared to increases in interest-bearing demand deposits by $7,491,000, or
7.9%, in 2000 and by $8,589,000, or 9.6%, in 1999, increases in savings accounts
by $2,253,000, or 4.2%, in 2000 and by $6,123,000, or 10.4%, in 1999, and
increases in certificate of deposits by $47,640,000, or 14.5%, in 2000 and by
$8,503,000, or 3.9%, in 1999. Of total time deposits at December 31, 2001,
approximately 31.5 % were large denomination certificates of deposit and other
time deposits of $100,000 or more, up from 20.7% at December 31, 2000.

                                       25
<PAGE>

The maturities of the time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 2001 are summarized in
the table below.

                 MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE

<TABLE>
<CAPTION>

                                                                                   December 31, 2001
                                                                  ---------------------------------------------
                                                                       Time             Other
                                                                   Certificates         Time
                                                                    of Deposit        Deposits          Total
                                                                  --------------   --------------    ----------
                                                                                   (In thousands)

<S>                                                                 <C>              <C>             <C>
Maturing in three months or less..............................      $   5,864        $ 19,148        $  25,012
Maturing in over three through six months.....................         45,218               -           45,218
Maturing in over six through twelve months....................         28,671               -           28,671
Maturing in over twelve months................................         20,635               -           20,635
                                                                    ---------        --------        ---------
   Total......................................................      $ 100,388        $ 19,148        $ 119,536
                                                                    =========        ========        =========
</TABLE>


BORROWED FUNDS

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

Borrowed funds consist primarily of short-term borrowings, borrowings from the
Federal Home Loan Bank of Atlanta, Georgia ("FHLB-Atlanta") and long-term debt.
Short-term borrowings at year-end 2000 and 1999 consisted of the U. S. Treasury
Tax and Loan Note Option account and securities sold under agreements to
repurchase. Community Bank had $5,000,000 at year end 2001 in available lines to
purchase Federal Funds on a secured basis from a commercial bank and $6,000,000
at year-end 2000 in available lines to purchase Federal Funds, on an unsecured
basis, from a commercial bank. At December 31, 2001 and 2000, Community Bank had
no funds advanced against these lines. In May 2001, Community Bank borrowed
funds of $8,000,000 under the FHLB "fixed rate credit" plan. The advance was for
six months bearing interest at 4.15% and matured in November 2001.



              [The remainder of this page intentionally left blank]



                                       26

<PAGE>

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

                              SHORT-TERM BORROWINGS

<TABLE>
<CAPTION>

                                                    At December 31,
                                              --------------------------
                                                               Weighted                                      Maximum
                                                               Average         Average      Average       Outstanding At
                                                Balance         Rate           Balance       Rate          Any Month End
                                              ----------    ------------     -----------   ----------     ---------------
                                                                       (Dollars in thousands)
<S>                                             <C>              <C>          <C>             <C>            <C>
 2001:
   FEDERAL FUNDS PURCHASED..................    $      -         0.00%        $    74         6.11%          $  3,000
   SHORT-TERM FHLB BORROWINGS...............           -         0.00%          3,967         4.30%             8,000
   SECURITIES SOLD UNDER AGREEMENT TO
     REPURCHASE.............................       2,538         2.13%          2,274         3.59%               391
   U.S. TREASURY TAX AND LOAN, NOTE
     OPTION.................................       1,822         1.51%          1,021         3.21%               814
                                                --------                      -------                        --------
       TOTAL................................    $  4,360         1.87%        $ 7,336         3.95%          $ 12,205
                                                ========                      =======                        ========
 2000:
   Federal funds purchased..................    $      -         0.00%        $   402         6.47%          $  3,000
   Short-term FHLB borrowings...............           -         0.00%            325         6.86%                 -
   Securities sold under agreement to
     repurchase.............................         862         6.17%            818         6.17%             1,072
   U.S. Treasury Tax and Loan, note
     option.................................       1,403         5.72%          1,044         6.14%             2,456
                                                --------                     --------                        --------
       Total................................    $  2,265         5.89%        $ 2,589         6.30%          $  6,528
                                                ========                      =======                        ========

</TABLE>

In the fourth quarter of 1998, Community Bank became a member of the
FHLB-Atlanta and was approved to borrow under various short-term and long-term
programs offered by the FHLB-Atlanta. These borrowings are secured under a
blanket lien agreement on certain qualifying mortgage instruments in Community
Bank's loan and investment portfolios. Community Bank's maximum credit
availability with FHLB-Atlanta is fixed at $72,210,000. At December 31, 2000,
Community Bank's maximum credit availability with FHLB-Atlanta was 10% of
Community Bank's total assets, based upon the most recent quarterly financial
information submitted to the FDIC. Based on Community Bank's Consolidated Report
of Condition and Income as of the close of business on September 30, 2000,
Community Bank's maximum credit availability at December 31, 2000 was
approximately $74,000,000.

Since June 1999, Community Bank has borrowed funds under the FHLB-Atlanta's
"Convertible Advance Program." Community Bank had $38,000,000 outstanding at
both December 31, 2001 and 2000 under the FHLB-Atlanta's "Convertible Advance
Program". This obligation has a final maturity of March 1, 2010 (120 months), a
call feature every quarterly payment date during the life of the obligation, and
a fixed interest rate of 5.93% per annum. The first call date for this advance
was March 1, 2001; the advance was not called on that date nor has been since.

Advances obtained by Community Bank under the "Convertible Advance Program" are
subject to the terms of an agreement for Advances and Security Agreement with
Blanket Floating Lien. Among other things, this agreement provides that upon an
event of default, the FHLB may declare all or any part of the indebtedness


                                       27
<PAGE>

and accrued interest thereon, including any prepayment fees, to be immediately
due and payable. Included in the list of "events of default" is where the FHLB
reasonably and in good faith determines that a material adverse change has
occurred in the financial condition of Community Bank from that disclosed at the
time of the making of any advance or from the condition of Community Bank as
most recently disclosed to the FHLB.

Long-term debt consisted of various commitments with scheduled maturities from
one to 20 years. The following table sets forth expected debt service for the
next five years based on interest rates and repayment provisions as of December
31, 2001. A more detailed explanation of long-term debt is included in Note 8 to
the Company's Consolidated Financial Statements included elsewhere in this
Report.

                          MATURITIES OF LONG-TERM DEBT
<TABLE>
<CAPTION>


                                                              2002        2003        2004       2005       2006
                                                           ---------   ---------   ---------  ---------   --------
                                                                                (in Thousands)

<S>                                                        <C>          <C>          <C>        <C>         <C>
   Interest on indebtedness.............................   $    233     $ 194        $ 173      $ 150       $ 126
   Repayment of principal...............................      1,089       398          420        442         466
                                                           --------     -----        -----      -----       -----
                                                           $  1,322     $ 592        $ 593      $ 592       $ 592
                                                           ========     =====        =====      =====       =====
</TABLE>

In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. Under
the terms of the indenture, the Company may elect to defer payments of interest
for up to ten semiannual payment periods. The Company elected to defer its March
2002 interest payment and may elect to do so again based on the liquidity needs
of the Company when future payments become due. For the duration of such
deferral period, the Company is restricted from paying dividends to shareholders
or paying debt that is junior to the debenture. The debentures represent the
sole asset of the Trust. The debentures and related income statement effects are
eliminated in the Company's consolidated financial statements. The Company is
entitled to treat the aggregate liquidation amount of the debentures as Tier I
capital under Federal Reserve guidelines.

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

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


                                       28

<PAGE>

LIQUIDITY MANAGEMENT

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

The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can also meet the
investment objectives of its shareholders. Daily monitoring of the sources and
uses of funds is necessary to maintain an acceptable cash position that meets
both its customers' needs and its shareholders' objectives. In a banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are, therefore, monitored on a daily basis.

The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales, maturities, calls and pay downs of investment
securities. Real estate-construction and commercial, financial and agricultural
loans that mature in one year or less totaled approximately $61,256,000, or
12.2% of loans, net of unearned income, at December 31, 2001, and investment
securities maturing in one year or less totaled approximately $2,181,000, or
1.8% of the investment portfolio, at December 31, 2001. Other sources of
liquidity include cash on deposit with other banks and short-term investments
such as Federal Funds sold and maturing interest-bearing deposits with other
banks.

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

As disclosed elsewhere in this report, Community Bank has entered into
agreements to sell ten of its banking offices in the first half of 2002. Under
each agreement the purchaser will receive the assets of each banking office
mostly consisting of loans and fixed assets and will assume the liabilities,
most of which are deposits. The cash transaction will be based upon the assets,
liabilities and premium due to Community Bank at the time of each closing. Since
these offices, as a whole, carry more deposits than loans and other assets, Bank
management expects to disburse funds as a result of the transactions. Although
the disbursement amount will not be known until the closing of each sale,
management expects to disburse as much as $25 to $30 million as a result of the
transactions. As of December 31, 2001, the federal funds sold balance was
$30,000,000. Management expects the federal funds sold balance to remain at
levels high enough to provide the funding of any cash disbursements upon the
closing of any branch sales; however, these transactions will decrease the
availability of liquid funds.

Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its shareholders and
other needs. Certain restrictions exist regarding the ability of Community Bank
to transfer funds to the Company in the form of cash dividends, loans or
advances. The approval of the Alabama Banking Department is required to pay
dividends in excess of Community Bank's net earnings in the current year plus
retained net earnings for the preceding two years less any required transfers to
surplus. At December 31, 2001, Community Bank could not have declared any
dividends without approval of regulatory authorities. See Note 16 to the
Company's Consolidated Financial Statements elsewhere in this Report and "Item 1
- Business - Supervision and Regulation."


                                       29
<PAGE>
The Company relies on dividends from Community Bank in order to pay expenses,
service debt and pay dividends to shareholders. Although dividends from
Community Bank are the primary source of funding, the Company also receives cash
from Community Bank in the form of management fee income and generally retains
cash for its portion of tax benefit on intercompany income tax settlements.
Without dividends or management fee income from Community Bank, the Company
would not be able to pay expenses or service debt. Management fees for 2001 were
$300,000 and no dividends were paid for 2001. Community Bank is unable to pay a
dividend to the Company without prior approval of the regulatory authorities nor
is the Company able to increase the management fee charged to Community Bank
without the prior written approval of the Federal Reserve. See "Item 1 -
Business - Supervision and Regulation." Upon the sale of the branch offices and
recognition of projected income for Community Bank in 2002, Community Bank
expects to request approval for dividends to be paid to the Company; however,
the amount or approval of such is not yet determinable.

INTEREST RATE SENSITIVITY

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

The estimated impact on Community Banks net interest income sensitivity over a
one year time horizon at December 31, 2001 is shown below. Such analysis assumes
an immediate and sustained parallel shift in interest rates and the Bank's
estimates of how interest bearing transaction accounts will reprice.

                               RATE SHOCK ANALYSIS

<TABLE>
<CAPTION>

                                                                        -100                          +100
                                                                        Basis                         Basis
                                                                       Points         Level          Points
                                                                    -----------    -----------    ----------
                                                                               (Dollars in thousands)

<S>                                                                 <C>             <C>            <C>
Prime Rate......................................................          3.75%          4.75%          5.75%

Interest Income.................................................    $   47,508      $  50,612      $  53,156
Interest Expense................................................        18,102         20,094         21,679
                                                                    ----------      ---------      ---------
   Net Interest Income..........................................    $   29,406      $  30,519      $  31,477
                                                                    ==========      =========      =========
Dollar change from Level........................................    $   (1,113)     $              $     958

Percentage change from Level....................................         -3.65%                         3.14%

</TABLE>


              [The remainder of this page intentionally left blank]



                                       30
<PAGE>


                              INTEREST SENSITIVITY

<TABLE>
<CAPTION>

                                                                             Percentage Increase (Decrease)
                                                                               in Interest Income/ Expense
                                                 Principal Amount of        Given Immediate and Sustained
                                                   Earning Assets,               Interest Rate Shifts
                                                  Interest-bearing       -----------------------------------
                                                   Liabilities at           Down 100             Up 100
                                                  December 31, 2001       Basis Points        Basis Points
                                                ----------------------   --------------      ---------------
                                                (Dollars in Thousands)

<S>                                                      <C>                     <C>                  <C>
Assets which reprice in:
   One year or less...........................           $280,681                4.35%               -0.76%
   Over one year..............................            373,522              -14.12%                9.44%
                                                         --------

                                                         $654,203               -6.13%                5.03%
                                                         ========
Liabilities which reprice in:
   One year or less...........................           $474,514               -9.92%                7.87%
   Over one year..............................            123,409               -9.90%                7.96%
                                                         --------

                                                         $597,923                -9.91%                7.89%
                                                         ========

Total net interest income sensitivity.........                                  -3.65%                3.14%


</TABLE>

As shown above, in a 100 basis point rising rate environment, the net interest
margin should increase 3.14% and in a 100 basis point falling rate environment,
the net interest margin should decrease 3.65%. These percent changes from a
level rate scenario fall comfortably within Community Bank's ALCO policy limit
of +/-7.00%.

CAPITAL RESOURCES

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

In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%.

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

Bank regulatory authorities have issued risk-based capital guidelines that take
into consideration risk factors associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital

                                       31

<PAGE>

strength is measured in two tiers, which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. The Company's
Tier I capital, which includes common stock, retained earnings and guaranteed
preferred beneficial interest in the Company's junior subordinate deferrable
interest debentures, amounted to approximately $49,118,000 at December 31, 2001,
compared to approximately $45,956,000 at December 31, 2000, and $39,976,000 at
December 31, 1999. Tier II capital components include supplemental capital
components, such as qualifying allowance for loan losses and qualifying
subordinated debt. Tier I capital plus the Tier II capital components are
referred to as Total Risk-based capital, which was approximately $56,833,000,
$53,746,000 and $44,067,000 at year-end 2001, 2000, and 1999, respectively. The
percentage ratios, as calculated under the guidelines, for Tier I and Total
Risk-based capital were 10.02% and 11.59%, respectively, at December 31, 2001,
compared to 9.01% and 10.54%, respectively, at year-end 2000 and 8.50% and
9.37%, respectively, at December 31,1999. At December 31, 2001, as both Tier I
and Total Risk-based capital of the Company exceeded the regulatory minimum
ratios of 4% and 8%, respectively. Applying the current guidelines to 2000 and
1999, the Company exceeded these minimum capital ratios for these periods as
well.

Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The Tier I Leverage ratio is defined as the ratio that the
Company's Tier I capital bears to total average assets minus goodwill. The
Company's Tier I Leverage ratios were 6.70%, 6.44% and 6.39% at December 31,
2001, 2000 and 1999, respectively, exceeding the regulatory minimum requirement
of 4%.

The following table illustrates the Company's regulatory capital ratios at
December 31, 2001, 2000 and 1999:

                             CAPITAL ADEQUACY RATIOS

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                  ------------------------------------------------
                                                                       2001            2000              1999
                                                                  -------------    -------------    --------------
                                                                               (Dollars in thousands)

<S>                                                               <C>              <C>              <C>
Tier I Capital................................................    $      49,118    $      45,956    $      39,976
Tier II Capital...............................................            7,715            7,790            4,091
                                                                  -------------    -------------    -------------
   Total Qualifying Capital...................................    $      56,833    $      53,746    $      44,067
                                                                  =============    =============   ==============
Risk-weighted Total Assets (including
   off-balance-sheet exposures)...............................    $     490,224    $     510,161    $     470,305
                                                                  =============    =============    =============
Tier I Risk-based Capital Ratio...............................            10.02%            9.01%            8.50%
Total Risk-based Capital Ratio................................            11.59%           10.54%            9.37%
Leverage Ratio................................................             6.70%            6.44%            6.39%


</TABLE>




              [The remainder of this page intentionally left blank]



                                       32

<PAGE>

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

                        CAPITAL GROWTH (REDUCTION) RATIOS

<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                                 -----------------------------------------------
                                                                      2001             2000              1999
                                                                 -------------     ------------       ----------

<S>                                                                     <C>           <C>                <C>
Dividend payout ratio.......................................                -%        (150.00)%          162.16%
Average equity to average assets ratio......................             5.92%            5.88%            6.99%


</TABLE>


The Company's return on average assets ratio, which is computed by dividing net
income (loss) by average assets, increased in 2001 to (0.15)% and decreased
significantly in 2000 to (0.31)% from 0.26% in 1999. The increase in 2001 was
due to the net loss of approximately $1,100,000 in 2001, compared to net loss of
approximately $2,215,000 in 2000 and net income of approximately $1,658,100 in
1999, coupled with only a 2.05% increase in average assets during 2001 to
approximately $725,461,000, compared to average assets of approximately
$710,915,000 during 2000 and $632,713,000 during 1999.

The Company's return on average equity ratio, which is computed by dividing net
income (loss) by average shareholders' equity, increased in 2001 to (2.56)%,
from (5.30)% in 2000. The increase in 2001 was due to net loss of approximately
$1,100,000 made by the Company in 2001, compared to the net loss of
approximately $2,215,000 in 2000 and net income of approximately $1,658,000 in
1999, which was coupled with only a slight increase in average shareholders'
equity to approximately $42,938,000 during 2001, compared to approximately
$41,776,000 during 2000 and approximately $44,203,000 during 1999.

The Company's dividend payout ratio is determined by dividing the dividends per
share by the basic net earnings or loss per share for the relevant period. The
Company did not pay dividends in 2001. During 2000, the Company's dividend
payout ratio was (150.00)% due to an increase in the amount of cash dividends
paid per share coupled with a basic net loss per share reported for the period.
This compares to a dividend payout ratio of 162.16% for 1999. During 2000, the
amount of cash dividends paid per share increased $0.15, or 25%, to $0.75 from
$0.60 in 1999. In addition, during 2000, the Company reported a basic net loss
per share of $0.50 compared to basic net earnings per share of $0.37 for 1999.

The Company's average equity to average assets ratio, which is computed by
dividing average shareholders' equity by average assets, was 5.92% in 2001,
5.88% in 2000, and 6.99% in 1999. The increase in 2001 was due to a 2.8%
increase in average shareholders' equity during 2001 to approximately
$42,938,000, compared to average shareholders' equity of approximately
$41,776,000 during 2000 and $44,203,000 during 1999, and a 2.1% increase in
average assets to approximately $725,461,000 during 2001, compared to
approximately $710,915,000 during 2000 and approximately $632,713,000 during
1999.

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income is usually the principal source of a financial institution's
earnings stream and represents the difference or spread between interest income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning

                                       33

<PAGE>

assets and interest-bearing liabilities impact net interest income. All
discussions in this section assume a taxable equivalent basis unless otherwise
noted.

Net interest income for 2001, on a fully taxable equivalent ("FTE") basis,
decreased approximately $373,000, or 1.3%, to approximately $27,478,000 from
approximately $27,851,000 in 2000, compared to an increase of approximately
$575,000, or 2.1%, in 2000 from approximately $27,276,000 in 1999. The Company
experienced growth in both average earning assets and average interest-bearing
liabilities during 2001. However, the falling interest rate environment during
2001, coupled with interest-bearing liabilities repricing slower than
interest-earning assets, resulted in the decrease in net interest income for
2001. The "Rate/Volume Variance Analysis" table in the section below provides
information about changes in interest income, interest expense and net interest
income due to changes in average balances and rates.

The Company's FTE interest income decreased approximately $2,641,000, or 4.3%,
to $59,066,000 in 2001 from $61,707,000 in 2000, compared to an increase of
approximately $8,909,000, or 16.9%, in 2000 from approximately $52,798,000 in
1999. The decrease in 2001 was due to a 70 basis points decrease in the FTE
yield on average earning assets during 2001 despite an increase in the volume of
average earning assets. The 2000 increase was due to the 12.2% increase in
average earning assets in 2000 coupled with a 40 basis points increase in the
FTE yield on average earning assets. The FTE interest income on loans decreased
6.1% during 2001, due to both a decrease of 1.0% in the average loan balances
outstanding and a decrease in the FTE yield on loans of 53 basis points. During
2000, the FTE interest income on loans increased 17.1%, primarily due to the
12.7% increase in the average loan balances outstanding in 2000, coupled with an
increase in the FTE yield on loans of 38 basis points. The FTE interest income
on investment securities increased 5.0% during 2001, compared to 2000, and 13.6%
during 2000, compared to 1999, due mostly to changes in the average investment
security balances outstanding.

During 2001, the Company's interest expense decreased approximately $2,268,000,
or 6.7%, to approximately $31,588,000 from approximately $33,856,00 in 2000, as
average interest-bearing liabilities outstanding during 2001 increased 2.1% but
the average rate paid on interest-bearing liabilities during 2001 decreased 50
basis points. In 2000, interest expenses increased approximately $8,334,000, or
32.7%, to approximately $33,856,000 from approximately $25,522,000 in 1999, due
to the effect of a 16.0% increase in average interest-bearing liabilities in
2000, coupled with the effect of a 72 basis point increase in the average rate
paid in 2000. Interest-bearing deposits are the major component of interest
bearing liabilities, representing 89.0% in 2001, 90.1% in 2000 and 93.2% in 1999
of average total interest-bearing liabilities outstanding. While average
interest-bearing deposits outstanding increased .9% and 12.1% during 2001 and
2000, respectively, the rate paid on these average balances reflected a decrease
of 51 basis points during 2001 compared to an increase of 61 basis points during
2000. The decrease in interest expense on short-term borrowings during 2001
primarily resulted from a decline of 277 basis points in the average rate paid.
The decrease in interest expense on long-term debt during 2001 occurred despite
an increase in average balances outstanding during 2001 because of an 81 basis
point decrease in the average rate paid during 2001. The increase in interest
expense on FHLB borrowings during 2001 was due to a 10.4% increase in the
average balance of borrowings outstanding during 2001 even though the average
interest rate paid on these borrowings decreased 4 basis points during 2001. A
new component of interest expense resulted in 2000 when Community Bank entered
into capitalized lease arrangements on two of its bank locations. The average
capitalized lease obligations outstanding during 2001 were approximately
$5,415,000, which represented 9.0% of the Company's average total
interest-bearing liabilities.

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

                                       34

<PAGE>

2001 was 4.23%, compared to 4.42% and 4.86% for 2000 and 1999, respectively.

The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest-bearing sources of funds.
The interest rate spread eliminates the impact of noninterest-bearing funds and
gives a more direct perspective to the effect of market interest rate movements.
The FTE net interest spread for 2001 decreased 20 basic points to 3.88% from the
Company's 2000 spread of 4.08% as the cost of interest-bearing sources of funds
decreased 50 basis points, but the FTE yield on earning assets decreased 70
basis points. The FTE net interest spread for 1999 was 4.40%. See the tables in
this section below entitled "Consolidated Average Balances, Interest
Income/Expenses and Yields/Rates" and "Rate/Volume Variance Analysis" for more
information.

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

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                              ------------------------------------------------------
                                                               2001        2000        1999       1998        1997
                                                              ------      ------      ------     ------      -------

<S>                                                            <C>         <C>         <C>       <C>          <C>
Rate earned on earning assets............................      9.10%       9.80%       9.40%     9.26%        8.94%
Rate paid on borrowed funds..............................      5.22        5.72        5.00      5.23         5.14
Interest rate spread.....................................      3.88        4.08        4.40      4.03         3.80
Net interest margin......................................      4.23        4.42        4.86      4.52         4.32

</TABLE>


During 2001, the banking industry saw the prime interest rate move from 9.50% to
5.00%. This decrease resulted as the prime interest rate fell by 100 basis
points in February 2001, 50 basis points in each of April, May, June, October,
November and December and 25 basis points in each of July and September. This is
in contrast to the 100 basis point increase during 2000. The Company's net
interest income (not on a FTE basis), before the provision for loan losses,
decreased 1.2% during 2001, and increased 2.0% and 23.1% in 2000 and 1999,
respectively. Net interest income, before provision for loan losses, was
$26,898,000, $27,219,000, and $26,673,000 for the twelve months ended December
31, 2001, 2000 and 1999, respectively. This represented changes of ($321,000)
from 2000 to 2001 and $546,000 from 1999 to 2000 as reported in the Company's
Consolidated Statements of Income included elsewhere in this Report.

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

              [The remainder of this page intentionally left blank]

                                       35


<PAGE>


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

<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                              -----------------------------------------------------------------------------------------------------
                                          2001                               2000                                 1999
                              -----------------------------     ------------------------------      -------------------------------
                               AVERAGE   INCOME/     YIELD/      Average     Income/   Yield/         Average     Income/    Yield/
                               BALANCE   EXPENSE      RATE       Balance     Expense    Rate          Balance     Expense     Rate
                              --------  ---------   --------    ---------   --------   -------      ----------   ---------  -------
                                                                     (Dollars in thousands)

<S>                           <C>         <C>         <C>        <C>         <C>        <C>          <C>          <C>        <C>
Assets
  Earning assets:
  Loans, net of unearned
   income (1)(3)............  $516,954    $ 51,158    9.90%      $522,301    $54,492    10.43%       $463,298     $46,549    10.05%
  Investment securities:
    Taxable.................   100,599       6,209    6.17         87,745      5,644     6.43          79,733       4,782     6.00
    Tax exempt..............    13,468       1,052    7.81         15,366      1,271     8.27          15,412       1,305     8.47
                              --------    --------               --------    -------                 --------     -------
   Total investment
     securities.............   114,067       7,261    6.37        103,111      6,915     6.71          95,145       6,087     6.40
  Interest bearing deposits
   in other banks...........       344          44   12.79            915         66     7.21           1,343          74     5.51
  Federal funds sold........    17,816         603    3.38          3,635        234     6.44           1,740          88     5.06
                              --------    --------               --------    -------                 --------     -------
   Total earning assets(2)..   649,181      59,066    9.10        629,962     61,707     9.80         561,526      52,798     9.40

  Noninterest-earning
   assets:
  Cash and due from banks...    23,306                             26,260                              22,332
  Premises and equipment....    42,971                             38,232                              32,527
  Accrued interest and
   other assets.............    16,657                             19,781                              19,087
  Allowance for loan losses.    (6,654)                            (3,320)                             (2,759)
                              ---------                          --------                            --------
   Total assets.............  $725,461                           $710,915                            $632,713
                              ========                           ========                            ========
Liabilities and
Shareholders' Equity
 Interest-bearing
   liabilities:
   Demand deposits..........  $ 92,360       3,237    3.50       $102,254      5,036     4.92        $ 94,763       4,131     4.36
   Savings deposits.........    58,875       1,950    3.31         55,983      2,457     4.39          53,730       1,886     3.51
   Time deposits............   387,153      22,057    5.70        375,121     22,218     5.92         327,481      17,577     5.37
                              --------    --------               --------    -------                 --------     -------
                               538,388      27,244    5.06        533,358     29,711     5.57         475,974      23,594     4.96
   Other short-term

     borrowings.............     3,367         119    3.53          2,589        163     6.30           6,714         333     4.96
   FHLB borrowings..........    41,967       2,468    5.88         38,000      2,248     5.92          20,932       1,037     4.95
   Capitalized lease

     Obligations ...........     5,415         403    7.44          3,579        327     9.14               -           -     0.00
   Long-term debt...........    15,478       1,354    8.75         14,716      1,407     9.56           7,100         558     7.86
                              --------    --------               --------    -------                 --------     -------
   Total interest-bearing
     liabilities............   604,615      31,588    5.22        592,242     33,856     5.72         510,720      25,522     5.00
                                          --------                           -------                              -------
  Noninterest-bearing
  liabilities:
  Demand deposits...........    70,002                             68,785                              69,248
  Accrued interest and
   other liabilities........     7,906                              8,112                               8,542
  Shareholders' equity......    42,938                             41,776                              44,203
                              --------                           --------                            --------
   Total liabilities and
     shareholders' equity...  $725,461                           $710,915                            $632,713
                              ========                           ========                            ========
Net interest income/net
  interest spread...........                27,478    3.88%                   27,851     4.08%                     27,276     4.40%
                                          --------    ====                   -------     ====                     -------     ====
Net interest margin.........                          4.23%                              4.42%                                4.86%
                                                      ====                               ====                                 ====
Taxable equivalent adjustment:
  Loans.....................                   222                               201                                  159
  Investment securities.....                   358                               431                                  444
                                          --------                           -------                              -------
   Total taxable equivalent
     adjustment.............                   580                               632                                  603
                                          --------                           -------                              -------
Net interest income.........              $ 26,898                           $27,219                              $26,673
                                          ========                           =======                              =======


</TABLE>

-----------------
(1) Average loans include nonaccrual loans. All loans and deposits are domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34%,
    and do not give effect to the disallowance for federal income tax purpose of
    interest expense related to certain tax-exempt earning assets.
(3) Income on Loans, net of unearned income, includes loan fees of $2,980,000.


                                       36

<PAGE>


RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS

<TABLE>
<CAPTION>

                                                 Average Volume             Change in Volume               Average Rate
                                       -------------------------------    ---------------------  -------------------------------
                                          2001      2000       1999        2001-2000  2000-1999    2001       2000        1999
                                       ---------  --------  ----------    ----------  ---------  --------   ---------   --------
                                                                         (Dollars in thousands)

<S>                                    <C>        <C>        <C>           <C>       <C>            <C>      <C>        <C>
EARNING ASSETS:
Loans, net of unearned income.......   $516,954   $522,301   $463,298      $ (5,347) $ 59,003       9.90%    10.43%     10.05%
Investment securities:
   Taxable..........................    100,599     87,745     79,733        12,854     8,012       6.17      6.43       6.00
   Tax exempt.......................     13,468     15,366     15,412        (1,898)      (46)      7.81      8.27       8.47
                                       --------   --------   --------      --------  --------
     Total investment securities....    114,067    103,111     95,145        10,956     7,966       6.37      6.71       6.40
Interest-bearing deposits with other
   banks............................        344        915      1,343          (571)     (428)     12.79      7.21       5.51
Federal funds sold..................     17,816      3,635      1,740        14,181     1,895       3.38      6.44       5.06
                                       --------   --------   --------      --------  --------
     Total earning assets...........   $649,181   $629,962   $561,526      $ 19,219  $ 68,436       9.10      9.80       9.40
                                       ========   ========   ========      ========  ========
INTEREST-BEARING LIABILITIES:
Deposits:
   Demand...........................   $ 92,360   $102,254   $ 94,763      $ (9,894) $  7,491       3.50      4.92       4.36
   Savings..........................     58,875     55,983     53,730         2,892     2,253       3.31      4.39       3.51
   Time.............................    387,153    375,121    327,481        12,032    47,640       5.70      5.92       5.37
                                       --------    -------   --------      --------  --------
     Total interest-bearing deposits    538,388    533,358    475,974         5,030    57,384       5.06      5.57       4.96
Other short-term borrowings.........      3,367      2,589      6,714           778    (4,125)      3.53      6.30       4.96
FHLB borrowings.....................     41,967     38,000     20,932         3,967    17,068       5.88      5.92       4.95
Capitalized lease obligations.......      5,415      3,579          -         1,836     3,579       7.44      9.14       0.00
Long-term borrowings................     15,478     14,716      7,100           762     7,616       8.75      9.56       7.86
                                       --------     ------   --------      --------  --------
     Total interest-bearing
      liabilities...................   $604,615   $592,242   $510,720      $ 12,373  $ 81,522       5.22      5.72       5.00
                                       ========   ========   ========      ========  ========   --------    ------     ------
Net interest income/net interest
   spread...........................                                                                3.88%     4.08%      4.40%
                                                                                                ========    ======     ======
Net yield on earning assets.........                                                                4.23%     4.42%      4.86%
                                                                                                ========    ======     ======

</TABLE>


<TABLE>
<CAPTION>


                                                                                                     Variance Attributed to(1)
                                                                                            ---------------------------------------
                                         Interest Income/Expense             Variance             2001                 2000
                                       ---------------------------   ---------------------  ------------------  -------------------
                                        2001      2000      1999     2001-2000  2000-1999    Volume     Rate     Volume      Rate
                                       -------  --------- --------   ---------  ----------  --------- --------  --------  ---------
                                                                        (Dollars in thousands)

<S>                                    <C>       <C>      <C>        <C>         <C>          <C>     <C>        <C>       <C>
EARNING ASSETS:
Loans, net of unearned income......... $51,158   $54,492  $46,549    $ (3,334)   $ 7,943      $(559)  $(2,775)   $6,125    $ 1,818
Investment securities:
 Tax able.............................   6,209     5,644    4,782         565        862        800      (235)      503        359
 Tax exempt...........................   1,052     1,271    1,305        (219)       (34)      (151)      (68)       (4)       (30)
                                       -------   -------  -------    --------    -------      -----   -------    ------    -------
   Total investment securities........   7,261     6,915    6,087         346        828        649      (303)      499        329
Interest-bearing deposits with other
   banks..............................      44        66       74         (22)        (8)       (55)       33       (27)        19
Federal funds sold....................     603       234       88         369        146        527      (158)      117         29
                                       -------    ------  -------    --------    -------      -----   -------    ------    -------

   Total earning assets............... $59,066   $61,707  $52,798    $ (2,641)   $ 8,909      $ 562   $(3,203)   $6,714    $ 2,195
                                       =======   =======  =======    ========    =======      =====   =======    ======    =======
INTEREST-BEARING LIABILITIES:
Deposits:
  Demand.............................. $ 3,237   $ 5,036  $ 4,131    $ (1,799)   $   905      $(452)  $(1,347)   $  345    $   560
  Savings.............................   1,950     2,457    1,886        (507)       571        122      (629)       82        489
  Time................................  22,057    22,218   17,577        (161)     4,641        690      (851)    2,724      1,917
                                       -------   -------  -------    --------    -------      -----   -------    ------    -------
   Total interest-bearing
    deposits..........................  27,244    29,711   23,594      (2,467)     6,117        360    (2,827)    3,151      2,966
Other short-term borrowings...........     119       163      333         (44)      (170)        40       (84)     (243)        73
FHLB borrowings.......................   2,468     2,248    1,037         220      1,211        235       (15)      976        235
Capitalized lease obligations.........     403       327        -          76        327         42        34       327          -
Long-term borrowings..................   1,354     1,407      558         (53)       849         70      (123)      707        142
                                       -------   -------  -------    --------    -------      -----   -------    ------    -------
   Total interest-bearing liabilities.  31,588    33,856   25,522      (2,268)     8,334        747    (3,015)    4,918      3,416
                                       -------   -------  -------    --------    -------      -----   -------    ------    -------
   Net interest income.................$27,478   $27,851  $27,276    $   (373)   $   575      $(185)  $  (188)   $1,796    $(1,221)
                                       =======   =======  =======    ========    =======      =====   =======    ======    =======

</TABLE>


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



                                       37

<PAGE>



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

The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance is based upon management's estimated range of
those losses. Actual losses for these loans may vary significantly from this
estimate.

At December 31, 2001, the allowance for loan losses was $7,292,000 which
represented an increase of $185,000, or 2.6%, over the December 31, 2000 amount
of $7,107,000. There was a $4,504,000, or 173.0%, increase in the allowance for
loan losses at December 31, 2000 as compared to December 31, 1999. This increase
in the overall level of the allowance for loan losses was primarily due to
additional provisions for loan losses of $3,478,000 and $501,000 made by the
Company in September 2000 and December 2000, respectively. As a percentage of
total loans, net of unearned income, the allowance for loan losses increased to
1.45% at December 31, 2001, compared to 1.35% at December 31, 2000. Management
believes that the allowance for loan losses at December 31, 2001 is adequate to
absorb known risks in the Company's loan portfolio based upon the Company's
historical experience. No assurance can be given, however, that increased loan
volume, adverse economic conditions or other circumstances will not result in
increased losses in the Company's loan portfolio or additional provisions to the
allowance for loan losses.

A provision for loan losses is charged against current earnings. Actual loan
losses, net of recoveries, are charged directly to the allowance for loan
losses. The amount of the provision for loan losses is based on the growth of
the loan portfolio, the amount of net loan losses incurred and management's
estimation of potential future losses based on an evaluation of the risk in the
loan portfolio. The provision for loan losses was $6,314,000, $9,289,000 and
$4,459,000 in 2001, 2000 and 1999, respectively. This represented a decrease of
$2,975,000, or 32.0%, in 2001 and an increase of $4,830,000 or 108.3% in 2000.
The provision for loan loss in 2001 remained high compared to historical levels
due to increased loan charge-offs during the year. The increase in 2000 resulted
from management's decision to make provisions for current losses and actual
growth in the loan portfolio and to increase the overall level of the allowance
for loan losses due to aggressive lending in new expansion markets. The
additional provision in December 2000 was made with respect to the estimated
loss on certain loans made through Community Bank's Double Springs, Alabama
location, which are discussed in the following paragraph.

In March 2001, management of Community Bank became aware that an employee in
Community Bank's Double Springs, Alabama location had improperly originated
approximately $1,200,000 in loans primarily during 2000 and the first quarter of
2001 in violation of Community Bank's lending policies, and had manipulated loan
payments to make it falsely appear that payments under the loans were current.
The bank employee has admitted wrongdoing in connection with the loans and his
employment with Community Bank has been terminated. Management notified federal
and state banking regulatory authorities, law enforcement authorities and the
Company's fidelity bond carrier, and is cooperating with law enforcement
authorities in their investigation of the matter. As a result of its
investigation of these loans, the Company has charged off loans deemed to be a
loss and has reserved for its future estimated losses with a provision
increasing its allowance for loan losses as of December 31, 2001.

In September 1998, Community Bank determined that $9,360,000 in motor vehicle
loans that were originated in Community Bank's Ft. Payne, Alabama Wal-Mart
location primarily during a four-month period beginning in May 1998 were not in
compliance with Community Bank's lending policy. By December 31, 1999, borrowers
had defaulted on approximately $5,594,000 of these loans. Community Bank took
into possession and resold 362 vehicles that served as collateral for these
loans, which resulted in proceeds of approximately $2,963,000, which was applied
to the outstanding balances of the defaulted loans. In the fourth quarter of
1999, management determined that these unpaid balances were impaired and,
therefore, made a charge of approximately $2,631,000 to the Company's allowance
for loan losses in December 1999. Concurrently, a provision for loan losses, in
the same amount, was made in order to return the allowance for loan losses to
its

                                       38

<PAGE>

balance prior to the charge for the impaired loans. During 2000, Community Bank,
including its subsidiary 1st Community Credit Corporation, charged an additional
$567,000 to its allowance for loan losses with respect to these defaulted Ft.
Payne loans. On June 20, 2000, Community Bank filed an action in the United
States District Court for the Northern District of Alabama against an automobile
dealership, several employees and former employees of the dealership and a
former employee of Community Bank. The lawsuit seeks damages of an unspecified
amount to recover losses incurred by Community Bank in connection with the Ft.
Payne loans, along with all costs associated with the legal action. Any amounts
received by Community Bank as a result of this litigation will be treated as a
recovery on loan losses. See "Item 3 - Legal Proceedings - Auto Loan
Litigation."

Loan charge-offs exceeded recoveries by $6,129,000 during 2001, which
represented an increase of $1,344,000, or 28.1%, from $4,785,000 during 2000,
which represented a decrease of $41,000, or 0.9%, from $4,826,000 during 1999.
Net loan charge-offs increased in 2001 from 2000 in large part due to Double
Springs charge-offs mentioned above as well as other loans classified as loss
during 2001. Net loan charge-offs remained at the same level in 2000 as compared
to 1999.



              [The remainder of this page intentionally left blank]



                                     39

<PAGE>


The following table sets forth certain information with respect to the Company's
loans, net of unearned income, and the allowance for loan losses for the five
years ended December 31, 2001.

                         SUMMARY OF LOAN LOSS EXPERIENCE


<TABLE>
<CAPTION>

                                                               2001       2000        1999       1998       1997
                                                           ----------- ----------- ---------  ---------  -------
                                                                             (Dollars in Thousands)

<S>                                                        <C>         <C>         <C>        <C>        <C>
Allowance for loan losses at beginning of period........   $     7,107 $     2,603 $   2,971  $   2,131  $    2,425
Loans charged off:
   Commercial, financial and agricultural...............         1,056         620       282        190          80
   Real estate - mortgage...............................           726         319        92         50         325
   Consumer.............................................         4,785       4,114     4,814      1,223         783
                                                           ----------- ----------- ---------  ---------  ----------
     Total loans charged off............................         6,567       5,053     5,188      1,463       1,188
                                                           ----------- ----------- ---------  ---------  ----------
Recoveries on loans previously charged off:
Commercial, financial and agricultural..................             7          10       220         11           5
   Real estate - mortgage...............................            40           2         4         -            9
   Consumer.............................................           391         256       138        126          97
                                                           ----------- ----------- ---------  ---------  ----------
     Total recoveries...................................           438         268       362        137         111
Net loans charged off...................................         6,129       4,785     4,826      1,326       1,077
Reserves acquired through acquisitions..................            -           -         -       1,281          10
Provision for loan losses...............................         6,314       9,289     4,458        885         773
                                                           ----------- ----------- ---------  ---------  ----------
Allowance for loan losses at end of period..............   $     7,292 $     7,107 $   2,603  $   2,971  $    2,131
                                                           =========== =========== =========  =========  ==========
Loans, net of unearned income, at end of period.........   $   501,520 $   528,316 $ 498,726  $ 433,853  $  326,134
                                                           =========== =========== =========  =========  ==========
Average loans, net of unearned income,
   outstanding for the period...........................   $   516,954 $   522,301 $ 463,298  $ 378,189  $  324,745
                                                           =========== =========== =========  =========  ==========


</TABLE>

<TABLE>
<CAPTION>


                                                              2001        2000       1999       1998       1997
                                                           ---------   ---------  ---------  ---------  ---------

<S>                                                           <C>       <C>       <C>         <C>         <C>
Ratios:
   Allowance for loan losses to loans, net of
     unearned income, at end of period..................       1.45%     1.35%      0.52%      0.68%       0.65%
   Allowance for loan losses at end of period to
     average loans, net of unearned income..............       1.41%     1.36%      0.56%      0.79%       0.66%
   Net charge-offs to average loans, net of
     unearned income....................................       1.19%     0.92%      1.04%      0.35%       0.33%
   Net charge-offs to allowance for loan losses,
     at end of period ..................................      84.05%    67.33%    185.40%     44.63%      50.54%
   Recoveries to prior year charge-offs.................       8.67%     5.17%     24.74%     11.53%       9.02%

</TABLE>



              [The remainder of this page intentionally left blank]


                                       40


<PAGE>

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

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

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

                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES


<TABLE>
<CAPTION>

                                                                           December 31,
                                   ------------------------------------------------------------------------------------------------
                                         2001                2000               1999                1998               1997
                                   -----------------  -----------------    ------------------  ---------------   ------------------
                                             Percent            Percent              Percent           Percent             Percent
                                               of                 of                   of                 of                 of
                                    Amount    Total   Amount     Total     Amount     Total    Amount   Total    Amount     Total
                                   -------- -------- --------  --------   --------  ---------  ------  -------  --------  ---------

<S>                                 <C>      <C>     <C>         <C>      <C>          <C>     <C>       <C>     <C>          <C>
Domestic loans
   Commercial, financial and
   agricultural.................    $  802      11%  $   711      10%     $  234         9%    $  526     18%    $  149         7%
Real estate - mortgage.............    583       8       497       7         182         7        357     12        618        29
Consumer..........................   5,907      81     5,899      83       2,187        84      2,088     70      1,364        64
                                    ------   -----   -------    ----      ------       ---     ------    ----    ------       ---
                                    $7,292   100.0%  $ 7,107     100%     $2,603       100%    $2,971    100%    $2,131       100%
                                    ======   =====   =======    ====      ======       ===     ======    ===     ======       ===
</TABLE>






              [The remainder of this page intentionally left blank]



                                       41

<PAGE>


NONPERFORMING ASSETS

Nonperforming assets as of December 31, 2001 increased approximately $6,163,000,
or 97.4%, to approximately $12,492,000 from approximately $6,329,000 at year-end
2000, which represented an increase of approximately $1,522,000 or 31.7%, from
approximately $4,807,000 at December 31, 1999. Nonperforming loans include loans
classified as nonaccrual or renegotiated and those past due 90 days or more for
which interest was still being accrued. During 2001, nonaccruing loans increased
212.2% to $5,859,000 at December 31, 2001, while loans past due 90 days or more
decreased 8.8% to $2,346,000 at December 31, 2001. The Company has recognized
its asset quality problems and has in turn, increased its credit standards. The
Company has also implemented steps needed to recognize problem credits more
timely. Loan review processes were implemented during 2001 which have led to
better identification and recognition of problem credits. During 2000,
nonaccruing loans decreased 30.7% to $1,877,000 at December 31, 2000, while
loans past due 90 days or more increased 93.0% to $2,571,000 at December 31,
2000. Other real estate was $4,287,000 and $1,881,000 at December 31, 2001 and
2000, respectively, which represented increases of 127.9% and 145.6%,
respectively, from the prior year-end. There were no commitments to lend any
additional funds on nonaccrual or renegotiated loans at December 31, 2001. The
following table summarizes the Company's nonperforming assets at December 31
during each of the last five years.

                              NONPERFORMING ASSETS

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                           ----------------------------------------------------------
                                                              2001        2000        1999       1998        1997
                                                           ----------- ----------- ---------  ---------  ------------
                                                                             (Dollars in Thousands)

<S>                                                        <C>         <C>         <C>        <C>        <C>
Nonaccruing loans.......................................   $     5,859 $     1,877 $   2,709  $   1,600  $    1,093
Loans past due 90 days or more..........................         2,346       2,571     1,332      2,384         975
Restructured loans......................................             -           -         -          -           -
                                                           ----------- ----------- ---------  ---------  ----------
Total nonperforming loans...............................         8,205       4,448     4,041      3,984       2,068
Other real estate.......................................         4,287       1,881       766        699         656
                                                           ----------- ----------- ---------  ---------  ----------
Total nonperforming assets..............................   $    12,492 $     6,329 $   4,807  $   4,683  $    2,724
                                                           =========== =========== =========  =========  ==========
Ratios:
Allowance for loan losses to
   total nonperforming assets...........................      58.37%      112.29%     54.15%     63.44%     78.23%
Total nonperforming loans to total
   loans (net of unearned income).......................       1.64%        0.84%      0.81%      0.92%      0.63%
Total nonperforming assets
   to total assets......................................       1.71%        0.89%      0.71%      0.78%      0.55%

</TABLE>


The ratio of allowance for loan losses to total nonperforming assets declined
48.0% during 2001, to 58.37% at December 31, 2001, compared to an increase of
107.4% during 2000, to 112.29% at December 31, 2000 and a decline of 14.6%
during 1999 to 54.15% at December 31, 1999. The significant decline in this
ratio for 2001 resulted from the substantial increase in the Company's
nonperforming assets during 2001. The ratio of total nonperforming loans to
total loans, net of unearned income, increased 95.2% during 2001, to 1.64% at
December 31, 2001, compared to 0.84% and 0.81% at year-end 2000 and 1999,
respectively. The ratio of total nonperforming assets to total assets increased
92.1% during 2001 to 1.71% at year-end 2001, compared to 0.89% at year-end 2000
and 0.71% at year-end 1999. The ratios have worsened in 2001 as nonperforming
loans have increased.



                                       42

<PAGE>

There were no concentrations of loans exceeding 10% of total loans, which are
not otherwise disclosed as a category of loans at December 31, 2001, 2000 and
1999.

It is the general policy of Community Bank to stop accruing interest income and
place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Normally, accrual of interest income
on consumer installment loans is suspended when any payment of principal or
interest, or both, is more than 90 days delinquent. When a loan is placed on
nonaccrual status, any uncollected interest accrued in a prior year is charged
against the allowance for loan losses and any uncollected interest accrued in
the current year is reversed against current income unless the collateral for
the loan is sufficient to cover the accrued interest or a guarantor assures
payment of interest.

NONINTEREST INCOME

Noninterest income for 2001 decreased approximately $368,000, or 3.7%, to
approximately $9,538,000 from approximately $9,906,000 in 2000, which
represented an increase of approximately $751,000, or 8.2%, from approximately
$9,155,000 in 1999. Noninterest income is derived primarily from service charges
on deposit accounts, insurance commissions, bank club dues (a deposit account
packaged with other financial services) and debt cancellation fees. The 2001
decrease in service charges on deposit accounts for 2001 is primarily due to a
reduction in insufficient funds charges and deposit account attrition. Insurance
commissions decreased 20.3% to approximately $1,918,000 in 2001 after increasing
during 2000. The level of insurance commissions during the past three years is
primarily a result of the activities of Community Insurance Corp., a subsidiary
of Community Bank, in the areas of property, casualty and life insurance. Bank
club dues decreased 6.0% during 2001, to approximately $661,000, compared to a
decline of 0.4% during 2000. Debt cancellation fees decreased 33.7% to
approximately $503,000, during 2001 compared to a 22.0% increase in 2000. The
decline in 2001 was primarily due to decreased volume in debt cancellation
coverage associated with a decline in Community Bank's loan portfolio. Other
operating income decreased 41.3%, to approximately $1,109,000 during 2001
compared to increases of 6.3% and 79.1% in 2000 and 1999, respectively.
Components of other operating income reflecting decreases during 2001 were fee
income associated with wire transfers, safe deposit box rentals, and other
miscellaneous service fees. The Company also recognized gains on the sale of
investment securities during 2001, 2000 and 1999 as shown below.

                               NONINTEREST INCOME

<TABLE>
<CAPTION>
                                                        Years Ended December 31,                   Percent Change
                                                   ----------------------------------       --------------------------
                                                     2001          2000        1999          2001/2000      2000/1999
                                                   ---------    ---------    --------       ------------   -----------
                                                                        (Dollars in Thousands)

<S>                                                 <C>          <C>         <C>              <C>              <C>
Service charges on deposits...................      $ 4,063      $ 4,144     $ 3,627              (2.0)%        14.3%
Insurance commissions.........................        1,918        2,406       2,243             (20.3)          7.3
Investment securities gains (losses)..........        1,284            4         179          32,000.0         (97.8)
Bank club dues................................          661          703         706              (6.0)         (0.4)
Debt cancellation fees........................          503          759         622             (33.7)         22.0
Other.........................................        1,109        1,890       1,778             (41.3)          6.3
                                                    -------      -------     -------
                                                    $ 9,538      $ 9,906     $ 9,155              (3.7)          8.2
                                                    =======      =======     =======
</TABLE>




                                       43

<PAGE>

NONINTEREST EXPENSES

Noninterest expenses totaled approximately $31,972,000 in 2001, $31,755,000 in
2000 and $29,208,000 in 1999. These levels represent changes of 0.7% and 8.7%
for 2001 and 2000, respectively. The primary component of noninterest expenses
is salaries and employee benefits, which decreased $3,148,000, or 16.3%, during
2001 to $16,146,000, compared to $19,294,000 and $17,010,000 for 2000 and 1999,
respectively. The decrease in salaries and employee benefits during 2001
resulted primarily from officer's salary reductions and overall corporate
downsizing. Director and committee fees were $479,000 in 2001, $675,000 in 2000
and $601,000 in 1999. The decrease in 2001 resulted primarily from not paying a
retainer fee to non-employee directors as was done in 2000. This represents a
29.0% decrease in 2001 compared to an increase of 12.3% in 2000. Since 1999,
employee directors have not received board or committee fees. Occupancy expense
increased 5.3% in 2001 to $2,866,000, compared to $2,722,000 in 2000 and
$2,655,000 in 1999, while furniture and equipment expenses decreased 0.8% in
2001 to approximately $1,893,000, as compared to $1,908,000 in 2000 and
$1,767,000 in 1999. Other operating expenses increased 47.9% in 2001 to
approximately $10,588,000, compared to $7,156,000 in 2000 which represented a
0.3% decrease from $7,175,000 in 1999. Professional and legal fees incurred as a
result of continued litigation against the Company continues to keep other
operating expense high.

The substantial decrease in certain types of noninterest expenses were offset by
a write-down of approximately $2,653,000 of unamortized goodwill related to 1st
Community Credit Corporation and Community Insurance Corp., both subsidiaries of
Community Bank. Management deemed the write-down necessary based on its
assessment of each Company's historical operating income. Management believes
that the decision to recognize this expense was prudent under current
conditions. Moreover, the large size of the write-down is based on conservative
estimates of each subsidiaries future cash flows and may obviate the need for
further adjustments, thus leaving the subsidiaries better positioned for future
performance.

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



              [The remainder of this page intentionally left blank]




                                       44

<PAGE>

                              NONINTEREST EXPENSES

<TABLE>
<CAPTION>


                                                        Years Ended December 31,                   Percent Change
                                                   ----------------------------------       --------------------------
                                                     2001          2000        1999          2001/2000      2000/1999
                                                   ---------    ---------    --------       ------------   -----------
                                                         (Dollars in Thousands)

<S>                                                 <C>          <C>         <C>                <C>            <C>
Salaries and employee benefits................     $16,146       $19,294     $17,010            (16.3)%        13.4%
Occupancy expense.............................       2,866         2,722       2,655              5.3           2.5
Furniture and equipment expense...............       1,893         1,908       1,767             (0.8)          8.0
Director and committee fees...................         479           675         601            (29.0)         12.3
Amortization of intangibles...................         562           554         493              1.4          12.4
Loss on write-down of goodwill...............        2,653             -           -            100.0             -
Advertising...................................          52           109         320            (52.3)        (65.9)
Insurance.....................................         319           298         171              7.0          74.3
Legal Fees....................................       1,873           785         894            138.6         (12.2)
Professional fees.............................       1,202           220         166            446.4          32.5
Supplies......................................         652           515         623             26.6         (17.3)
Postage.......................................         390           443         380            (12.0)         16.6
Telephone.....................................         769           920         769            (16.4)         19.6
Training and Education........................          44            53         255            (17.0)        (79.2)
Other.........................................       2,072         3,259       3,104            (36.4)          5.0
                                                   -------       -------     -------
                                                   $31,972       $31,755     $29,208             (7.7)%         8.7%
                                                   =======       =======     =======
</TABLE>


INCOME TAXES

The Company experienced a tax benefit of $749,000, or a 40.5% effective tax
rate, on a pre-tax loss of $1,849,000 for 2001, compared to an income tax
benefit of $1,704,000, or 43.5% effective tax benefit rate, on pre-tax loss of
$3,919,000 for 2000 and an income tax expense of $502,000, or 23.3% effective
tax rate on pre-tax income of $2,161,000 for 1999. The tax amounts and rates are
different than the statutory Federal tax rate of 34% primarily due to
investments in loans and securities earning interest income that is exempt from
Federal taxation. As proportionately fewer available funds are invested in
tax-exempt assets, the effective tax rate will more closely approximate the
statutory Federal tax rate. The Company attempts to maximize any tax benefits
and minimize any tax liabilities through active tax planning. A more detailed
explanation of income tax expense is included in Note 10 to the Company's
Consolidated Financial Statements included elsewhere in this Report.

IMPACT OF INFLATION AND CHANGING PRICES

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

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


                                       45
<PAGE>


                    MANAGEMENT'S STATEMENT OF RESPONSIBILITY
                            FOR FINANCIAL INFORMATION

                           COMMUNITY BANCSHARES, INC.

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

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

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

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

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


                                       46

<PAGE>


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>


Financial Statements                                                                                        Page(s)
                                                                                                            -------
<S>                                                                                                          <C>
Independent Auditors' Report................................................................................     48

Consolidated Statements of Financial Condition as of December 31, 2001 and 2000.............................     49

Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999......................     50

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999........     51

Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999..................  52-53

Notes to Consolidated Financial Statements - December 31, 2001, 2000 and 1999..............................   54-97



</TABLE>


                                       47

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT

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

We have audited the consolidated statements of financial condition of Community
Bancshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community
Bancshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

Birmingham, Alabama

April 5, 2002

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



                                       48

<PAGE>

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                           DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>

                                                                                        2001              2000
                                                                                  ---------------   ---------------

<S>                                                                               <C>                <C>
ASSETS
   Cash........................................................................  $      8,312,263    $    7,627,215
   Due from banks...............................................................       14,724,745        18,379,396
   Interest-bearing deposits with banks.........................................          200,000           700,000
   Federal funds sold...........................................................       30,000,000         3,000,000
   Securities available for sale................................................      121,679,303       101,569,818
   Loans........................................................................      501,583,650       528,467,345
   Less: Unearned income........................................................           63,991           151,184
        Allowance for loan losses...............................................        7,292,370         7,107,430
                                                                                  ---------------    --------------
         NET LOANS..............................................................      494,227,289       521,208,731
   Premises and equipment, net..................................................       39,626,868        39,325,645
   Accrued interest.............................................................        7,061,043         8,432,321
   Intangibles, net.............................................................        2,629,682         5,757,055
   Other real estate............................................................        4,287,273         1,880,548
   Other assets.................................................................        6,733,102         5,637,313
                                                                                  ---------------    --------------
         TOTAL ASSETS...........................................................  $   729,481,568    $  713,518,042
                                                                                  ===============    ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
   Deposits:
     Noninterest-bearing........................................................  $    67,695,615    $   67,285,705
     Interest-bearing...........................................................      550,010,415       533,615,062
                                                                                  ---------------    --------------
         Total Deposits.........................................................      617,706,030       600,900,767
   Other short-term borrowings..................................................        4,359,927         2,265,231
   Accrued interest.............................................................        4,400,000         5,375,725
   FHLB borrowing...............................................................       38,000,000        38,000,000
   Capitalized lease obligations................................................        5,766,076         5,850,225
   Long-term debt...............................................................        4,666,599         5,675,204
   Guaranteed preferred beneficial interest in the Company's junior
     subordinated deferrable interest debentures................................       10,000,000        10,000,000
   Other liabilities............................................................        3,917,567         4,261,120
                                                                                  ---------------    --------------
         TOTAL LIABILITIES......................................................      688,816,199       672,328,272

SHAREHOLDERS' EQUITY
   Preferred stock, par value $.01 per share, 200,000 shares
     authorized, no shares issued...............................................               -                 -
   Common stock, par value $.10 per share, 20,000,000
     shares authorized, 4,808,331and 4,674,995 shares
     issued, as of December 31, 2001 and 2000, respectively.....................          480,833           467,499
   Capital surplus..............................................................       30,753,008        29,804,921
   Retained earnings............................................................       12,390,300        13,490,799
   Treasury Stock, 20,803 shares................................................         (396,768)         (396,768)
   Unearned ESOP shares - 174,267 and 199,877 shares
     as of December 31, 2001 and 2000, respectively.............................       (2,317,902)       (2,574,002)
   Accumulated other comprehensive (loss) income................................         (244,102)          397,321
                                                                                  ----------------   --------------
       TOTAL SHAREHOLDERS' EQUITY...............................................       40,665,369        41,189,770
                                                                                  ---------------    --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................  $   729,481,568    $  713,518,042
                                                                                  ===============    ==============

</TABLE>



                 See notes to consolidated financial statements

                                       49


<PAGE>


                        CONSOLIDATED STATEMENTS OF INCOME

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>

                                                                       2001             2000              1999
                                                                  --------------    -------------    --------------

<S>                                                               <C>               <C>              <C>
INTEREST INCOME
   Interest and fees on loans.................................... $   50,937,197    $  54,291,413    $   46,390,060
   Interest on investment securities:
   Taxable securities............................................      6,209,240        5,644,293         4,781,553
   Securities exempt from federal income taxes...................        693,065          839,587           860,689
   Interest on federal funds sold................................        603,072          234,432            87,702
   Interest on deposits in other banks...........................         43,851           65,576            74,250
                                                                  --------------    -------------    --------------
     Total Interest Income.......................................     58,486,425       61,075,301        52,194,254
                                                                  --------------    -------------    --------------
INTEREST EXPENSE
   Interest on deposits..........................................     27,244,411       29,711,253        23,593,922
   Interest on other short-term borrowings.......................        118,857          162,801           332,551
   Interest on capitalized lease obligations.....................        402,452          326,812                 -
   FHLB borrowings...............................................      2,467,829        2,248,055         1,036,704
   Interest on long-term debt....................................        233,315          567,579           558,484
   Interest on guaranteed preferred beneficial interest in the
     Company's junior subordinated deferrable interest debentures      1,121,213          839,791                 -
                                                                  --------------    -------------    --------------
       TOTAL INTEREST EXPENSE....................................     31,588,077       33,856,291        25,521,661
                                                                  --------------    -------------    --------------
NET INTEREST INCOME..............................................     26,898,348       27,219,010        26,672,593
   Provision for loan losses.....................................      6,313,940        9,289,362         4,458,636
                                                                  --------------    -------------    --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..............     20,584,408       17,929,648        22,213,957
NONINTEREST INCOME
   Service charges on deposits...................................      4,062,631        4,143,775         3,626,448
   Insurance commissions.........................................      1,918,733        2,406,183         2,243,358
   Bank club dues................................................        660,734          702,534           706,080
   Debt cancellation fees........................................        503,329          758,825           622,048
   Other operating income........................................      1,108,582        1,890,220         1,777,641
   Investment securities gains...................................      1,283,945            4,587           179,303
                                                                  --------------    -------------    --------------
       TOTAL NONINTEREST INCOME..................................      9,537,954        9,906,124         9,154,878
                                                                  --------------    -------------    --------------

NONINTEREST EXPENSES
   Salaries and employee benefits................................     16,146,189       19,293,662        17,010,366
   Occupancy expense.............................................      2,865,964        2,722,441         2,654,567
   Furniture and equipment expense...............................      1,892,667        1,908,086         1,767,388
   Director and committee fees...................................        479,366          674,739           601,312
   Other operating expenses......................................     10,587,527        7,156,251         7,174,614
                                                                  --------------    -------------    --------------
       TOTAL NONINTEREST EXPENSES................................     31,971,713       31,755,179        29,208,247
                                                                  --------------    -------------    --------------
Income (loss) before income taxes................................    (1,849,351)      (3,919,407)         2,160,588
Income tax expense (benefit) ....................................      (748,852)      (1,704,476)           502,478
                                                                  --------------    ------------     --------------
       NET INCOME (LOSS)......................................... $  (1,100,499)    $ (2,214,931)    $    1,658,110
                                                                  ==============    ============     ==============
Earnings (Loss) Per Common Share - basic......................... $       (0.24)    $      (0.50)    $         0.37
Earnings (Loss) Per Common Share - diluted....................... $       (0.24)    $      (0.47)    $         0.36



</TABLE>


                 See notes to consolidated financial statements

                                       50


<PAGE>

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>

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

<S>                             <C>         <C>          <C>          <C>           <C>             <C>             <C>
Balance at
 December 31, 1998............  $ 464,792   $29,100,383  $20,169,519  $(2,944,232)   $    442,939    $        -      $ 47,233,401
Net Income - 1999.............          -             -    1,658,110            -               -             -         1,658,110
Other comprehensive
 income,net of tax and
 reclassification adjustments:
  Net Change in Unrealized
   Gains (Losses)
   on Securities..............         -              -           -             -      (2,096,060)            -        (2,096,060)
                                                                                                                     ------------
Comprehensive Income..........         -              -           -             -               -             -          (437,950)
                                                                                                                     ------------
Cash dividends: Common........         -              -   (2,788,754)           -               -             -        (2,788,754)
Stock Options Exercised.......       867        124,138            -            -               -             -           125,005
Tax Benefit on Stock options..         -         18,348            -            -               -             -            18,348
Stock Issued in lieu of cash
  paid for directors' fees
  at $19......................       892        168,644            -            -               -             -           169,536
Release of ESOP shares........         -              -            -      155,790               -             -           155,790
                                --------    -----------  -----------  -----------    ------------   -----------      ------------
Balance at
 December 31, 1999............   466,551     29,411,513   19,038,875   (2,788,442)     (1,653,121)            -        44,475,376
Net Loss - 2000...............         -              -   (2,214,931)           -               -             -        (2,214,931)
Other comprehensive
 income,net of tax and
 reclassification adjustments:
  Net Change in Unrealized
   Gains (Losses)
   on Securities..............         -              -            -            -       2,050,442             -         2,050,442
                                                                                                                     ------------
Comprehensive Loss............         -              -            -            -               -             -          (164,489)
                                                                                                                     ------------
Cash dividends: Common........         -              -   (3,333,145)           -               -             -        (3,333,145)
Stock Issued in lieu of cash
  paid for directors' fees
  at $23.50...................       948        221,856            -            -               -             -           222,804
Release of ESOP shares........         -        171,552            -      214,440               -             -           385,992
Purchase of Treasury Stock....         -              -            -            -               -      (396,768)         (396,768)
                                --------    -----------  -----------  -----------    ------------   -----------      ------------
Balance at
 December 31, 2000............   467,499     29,804,921   13,490,799   (2,574,002)        397,321      (396,768)       41,189,770
NET INCOME - 2001.............         -              -   (1,100,499)           -               -             -        (1,100,499)
OTHER COMPREHENSIVE
 INCOME,NET OF TAX AND
 RECLASSIFICATION
 ADJUSTMENTS:
  NET CHANGE IN
   UNREALIZED GAINS
   (LOSSES) ON
   SECURITIES.................         -              -            -            -        (641,423)            -          (641,423)
                                                                                                                     ------------
COMPREHENSIVE INCOME..........         -              -            -            -               -             -        (1,741,922)
                                                                                                                     ------------
STOCK OPTIONS EXERCISED.......    32,956      3,708,944            -            -               -             -         3,741,900
STOCK USED BY OPTIONEES TO
 PURCHASE OPTIONS WHEN FAIR
 VALUE WAS $18 PER SHARE......   (20,788)    (3,721,112)           -            -               -             -        (3,741,900)
TAX BENEFIT ON STOCK OPTIONS..         -        751,556            -            -               -             -           751,556
STOCK ISSUED IN LIEU OF CASH
 PAID FOR DIRECTORS' FEES
 AT $18.....................,.     1,166        208,699            -            -               -             -           209,865
RELEASE OF ESOP SHARES........         -              -            -      256,100               -             -           256,100
                                --------    -----------  -----------  -----------    ------------   -----------      ------------
BALANCE AT
 DECEMBER 31, 2001............ $ 480,833    $30,753,008  $12,390,300  $(2,317,902)   $   (244,102)  $  (396,768)     $ 40,665,369
                               =========    ===========  ===========  ===========    ============   ===========      ============

</TABLE>

                 See notes to consolidated financial statements

                                       51


<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


<TABLE>
<CAPTION>
                                                                       2001               2000               1999
                                                                 -----------------   --------------    --------------

<S>                                                              <C>               <C>              <C>
OPERATING ACTIVITIES:
   Net income (loss)...........................................  $    (1,100,499)  $   (2,214,931)  $     1,658,110
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
   Provision for loan losses...................................        6,313,940        9,289,362         4,458,636
   Provision for depreciation and amortization.................        2,611,405        3,467,187         2,296,843
   Amortization of investment security premiums and accretion
     of discounts..............................................          159,957          149,261           162,032
   Deferred tax (benefit) expense..............................         (914,941)      (2,198,860)          225,413
   Loss on write-down of goodwill..............................        2,652,620                -                 -
   Realized investment security gains..........................       (1,283,945)          (4,587)          (179,303)
   Loss on sale of premises and equipment......................           66,482          144,398             4,396
   Increase in accrued interest receivable.....................        1,371,278       (1,895,207)         (545,526)
   Increase in accrued interest payable........................         (975,725)       1,632,119           162,672
   Other.......................................................          864,637       (2,157,701)        1,460,171
                                                                 ---------------   --------------   ---------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES.................        9,765,209        6,211,041         9,703,444
                                                                 ---------------   --------------   ---------------
INVESTING ACTIVITIES:
   Proceeds from sales of securities available for sale........       86,418,413       16,229,953        11,627,522
   Proceeds from maturity of securities available for sale.....        2,500,000       25,210,217        10,778,482
   Purchase of securities available for sale...................     (108,972,949)     (42,889,985)     (25,337,831)
   Net decrease in interest-bearing deposits with other banks..          500,000               -            250,000
   Cash used in acquisition of insurance operations............               -                -           (750,000)
   Loans purchased.............................................               -                -         (2,312,592)
   Net decrease (increase) in loans to customers...............       16,968,554      (34,374,869)      (67,674,628)
   Proceeds from sale of premises and equipment................          108,075          162,914            72,680
   Capital expenditures........................................       (2,612,433)      (5,986,652)       (7,254,322)
   Net proceeds from sale of other real estate.................        1,292,223          853,961           415,941
                                                                 ---------------   --------------   ---------------
     NET CASH USED IN INVESTING ACTIVITIES.....................       (3,798,117)     (40,794,461)      (80,184,748)
                                                                 ---------------   --------------   ---------------
FINANCING ACTIVITIES:
   Net increase (decrease) in demand deposits, NOW accounts,
     savings and time open deposit accounts....................       21,905,506       (9,214,288)       16,952,243
   Net (decrease) increase in certificates of deposit..........       (5,100,244)      36,854,261        17,723,030
   Net increase (decrease) in short-term borrowings............        2,094,696         (228,611)          302,001
   (Decrease) increase in borrowings from FHLB.................               -        (2,000,000)       40,000,000
   Net (decrease) increase in capitalized lease obligations....          (84,149)       5,850,225                -
   Repayment of long-term debt.................................         (752,504)        (961,958)         (775,764)
   Issuance of guaranteed preferred beneficial interest in
     Company's junior subordinated deferrable interest
     debentures................................................               -        10,000,000                -
   Issuance of common stock....................................               -           222,804           312,889
   Purchase of treasury stock..................................               -          (396,768)               -
   Cash dividends..............................................               -        (3,333,145)       (2,788,754)
                                                                 ---------------   --------------   ---------------
     NET CASH PROVIDED BY FINANCING ACTIVITIES.................       18,063,305       36,792,520        71,725,645
                                                                 ---------------   --------------   ---------------
Net Increase In Cash and Cash Equivalents......................       24,030,397        2,209,100         1,244,341
Cash and Cash Equivalents At Beginning of Year.................       29,006,611       26,797,511        25,553,170
                                                                 ---------------   --------------   ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................  $    53,037,008   $   29,006,611   $    26,797,511
                                                                 ===============   ==============   ===============

</TABLE>


                                       52
<PAGE>

<TABLE>
<CAPTION>


                                                                     2001             2000             1999
                                                                 -------------   --------------   --------------


<S>                                                              <C>             <C>              <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
   Interest....................................................  $  32,563,802   $   35,488,410   $   25,684,333
   Income taxes................................................     (1,082,900)         859,978        1,121,889


</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
   AND FINANCING ACTIVITIES:

Other real estate of $4,411,029, $1,824,857 and $840,902 was acquired in 2001,
2000 and 1999, respectively, through foreclosure. Other assets acquired by
foreclosure amounted to $3,777,599 in 2001, $2,975,936 in 2000 and $3,969,795 in
1999.



              [The remainder of this page intentionally left blank]




                 See notes to consolidated financial statements


                                       53
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business: Community Bancshares, Inc. (the "Company") is a
Delaware corporation and a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Act of 1956, as amended (the "Bank Holding Company Act"). The Company
was organized in 1983 and commenced business in 1985. The Company has one bank
subsidiary, Community Bank, an Alabama banking corporation which conducts a
general commercial banking business in north and west-central Alabama and
south-central Tennessee.

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

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

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

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

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

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

The Company and its subsidiaries have no trading securities. At December 31,
2001 and 2000, all of the Company's investments in securities were classified as
securities available for sale.

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

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


                                       54
<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Loans and Interest Income: Loans are reported at principal amounts outstanding
less unearned income, net deferred fees, and the allowance for loan losses.

Interest income on consumer loans, made on a discount basis, is recognized in a
manner which approximates the level yield method. Interest income on
substantially all other loans is recognized on a level yield basis.

Loan fees, net of certain direct origination costs, are deferred and amortized
over the terms of the loans using a method which approximates a level yield.
Annual fees charged on equity lines are recognized as income when charged to the
account holder.

Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is discontinued when reasonable
doubt exist as to the full collection of interest or principal, or when they
become contractually in default for 90 days or more as to either interest or
principal, unless they are both well secured and in the process of collection.
When a loan is placed on nonaccrual status, current year accrued and uncollected
interest is charged to interest income on loans and previous year accrued
interest is charged to the allowance for loan loss reserve, unless management
believes accrued interest is recoverable through the liquidation of collateral.
Interest payments received on nonaccrual loans are applied as a reduction of
principal. Loans are returned to accruing status when they are brought fully
current with respect to interest and principal and when, in the judgement of
management, the loans are estimated to be fully collectible as to both principal
and interest. Interest on accruing impaired loans is recognized as long as such
loans do not meet the criteria for nonaccrual classification.

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

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


                                       55

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

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

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

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

<TABLE>
<CAPTION>

                                                                       2001             2000              1999
                                                                  --------------    -------------     -------------

<S>                                                                    <C>              <C>               <C>
Weighted average of common shares outstanding....................      4,572,301        4,460,295         4,429,303
Effect of dilutive options.......................................             -           211,135           165,769
                                                                  --------------   --------------    --------------

Weighted average of common shares outstanding effected
   for dilution..................................................      4,572,301        4,671,430         4,595,072
                                                                  ==============    =============    ==============
</TABLE>


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

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


                                       56

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Pension and Employee Stock Ownership Plans: The Company and its subsidiaries
have various employee benefit plans which cover substantially all employees.
Pension expense is determined based on an actuarial valuation. The Company
contributes amounts to the pension fund sufficient to satisfy funding
requirements of the Employee Retirement Income Security Act. Contributions to
the Employee Stock Ownership Plan ("ESOP") are determined by the Board of
Directors but may not be less than the amount required to cover the debt service
on the ESOP loan.

Intangibles: Excess of purchase price over net assets of businesses acquired is
recognized as goodwill and other intangibles and amortized on a straight-line
basis over periods of 15 to 25 years. The Company assesses the value of its
intangible assets to determine that recorded amounts are reasonable and not
impaired. An impairment loss is recognized against operating income when events
or circumstances indicate carrying amounts may not be recoverable.

At December 31, 2001 and 2000, intangibles, net of amortization, totaled
$2,629,682 and $5,757,055, respectively. Amortization expense for the years
ending December 31, 2001, 2000, and 1999, totaled $471,390, $1,429,879 and
$495,513, respectively. See Recently Issued Accounting Standards included in
this Note 1 regarding SFAS 142, Goodwill and Other Intangible Assets for future
accounting and reporting requirements.

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

Debt Cancellation Contracts: The Company began issuing debt cancellation
contracts on certain loans to customers as of October 1, 1995. The contract
represents an agreement by the Company to cancel the debt of the borrower upon
said borrower's death. Contracts may not be written on loans in excess of
$25,000 per borrower. The Company charges fees equivalent to that authorized by
the state banking authorities and establishes a reserve account, from fees
collected, to cover potential claims. The reserve for debt cancellation
contracts totaled $142,825 and $168,001 at December 31, 2001 and 2000,
respectively.

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

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

Reclassification: Certain amounts in 2000 and 1999 have been reclassified to
conform with the 2001 presentation.

                                       57

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Comprehensive Income: Comprehensive income is defined as the change in equity of
a business enterprise during the period from transactions and other events and
circumstances arising from nonowner sources. Items that are to be recognized
under accounting standards as components of comprehensive income are displayed
in the Consolidated Statements of Shareholders' Equity. (See Note 18).

Segment Information: All of the Company's subsidiaries offer similar products
and services, are located in the same geographic region, and serve the same
customer segments of the market. As a result, management considers all units as
one operating segment and therefore feels that the basic financial statements
and related footnotes provide details related to segment reporting.

Recently Issued Accounting Standards

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

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

In June 2001, the FASB issued SFAS No. 141, Business Combinations. This
statement address financial accounting and reporting for business combinations
and supersedes ABP Opinion No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of SFAS No. 141 are to be accounted for using
one method, the purchase method. Prior to the issuance of this statement,
subject to certain criteria, business combinations were accounted for using one
of two methods, the pooling-of-interests method or the purchase method. The two
methods produce different financial statement results. The single-method
approach used in SFAS No.

                                       58
<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

141 reflects the conclusion that virtually all business combinations are
acquisitions and therefore should be accounted for in the same manner as other
asset acquisitions based on the values exchanged. This statement provides
expanded and revised guidance related to the allocation of the purchase price to
goodwill and other intangibles arising from the business combination. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material
effect on the Company's consolidated financial statements.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. SFAS No. 142 provides new standards for accounting relating to
intangible assets after initial recognition in the financial statements. This
statement proscribes the accounting practice of amortizing or expensing
intangibles ratably over a prescribed period of time and imposes new guidance
requiring that goodwill and certain other intangibles be tested for impairment
at least annually by comparing fair values of those assets with their recorded
amounts. Additional disclosure requirements also are provided. The provisions of
SFAS No. 142 are required to be applied in fiscal years beginning after December
15, 2001. Management has not yet determined the amount of goodwill impairment to
be recognized upon adoption of SFAS 142.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's consolidated
financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The major changes
resulting from this statement relate to the establishment of a single method for
the recognition of impairment losses on long-lived assets to be held and used
whether from discontinuance of a business segment or otherwise. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. Management has not yet determined whether or not the
application of this statement will have a material effect on the financial
statements.

                                       59
<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Bank is required to maintain average reserve balances either in vault cash
or on deposit with the Federal Reserve. The amount of those reserves required at
December 31, 2001 was approximately $421,000.

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

NOTE 3 - INVESTMENT SECURITIES

At December 31, 2001 and 2000, the Company's investment securities are
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Unrealized holding gains and losses,
net of applicable deferred taxes, are included as a component of shareholders'
equity, (Accumulated Other Comprehensive Income) until realized.

The carrying amounts of investment securities as shown in the consolidated
statements of financial condition of the Company and their approximate fair
values at December 31, 2001 and 2000 are presented below.

<TABLE>
<CAPTION>

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

<S>                                                 <C>              <C>            <C>            <C>

AS OF DECEMBER 31, 2001:

SECURITIES AVAILABLE FOR SALE:
  U. S. GOVERNMENT AND AGENCY SECURITIES.........   $   16,854,383   $      99,368  $       5,234  $     16,948,517
  STATE AND MUNICIPAL SECURITIES.................       11,512,284         220,731         49,372        11,683,643
  MORTGAGE-BACKED SECURITIES.....................       91,319,473         166,360        838,690        90,647,143
  EQUITY SECURITIES..............................        2,400,000              -              -          2,400,000
                                                    --------------   -------------  -------------  ----------------
                                                    $  122,086,140   $     486,459  $     893,296  $    121,679,303
                                                    ==============   =============  =============  ================
As of December 31, 2000:

Securities available for sale:
  U. S. government and agency securities.........  $    46,826,740   $     350,714  $     347,680  $     46,829,774
  State and municipal securities.................       18,591,183         914,593          6,445        19,499,331
  Mortgage-backed securities.....................       31,580,186         153,284        392,757        31,340,713
  Equity securities..............................        3,909,507              -           9,507         3,900,000
                                                   ---------------   -------------  -------------  ----------------
                                                   $   100,907,616   $   1,418,591  $     756,389  $    101,569,818
                                                   ===============   =============  =============  ================
</TABLE>


                                       60

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The contractual maturities of securities available for sale at December 31, 2001
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.


<TABLE>
<CAPTION>

                                                                                          Weighted
                                                   Estimated                                Tax
                                                   Amortized             Fair           Equivalent
                                                     Cost               Value              Yield
                                                  ------------      -------------     ----------------

<S>                                               <C>                <C>                      <C>
As of December 31, 2001:
Due in one year or less ....................      $  2,180,704       $  2,181,498             6.67%
Due after one year through five years.......        60,955,273         60,560,338             5.94%
Due after five years through ten years......        21,811,733         21,763,025             6.09%
Due after ten years.........................        34,738,430         34,774,442             6.73%
Equity securities...........................         2,400,000          2,400,000             6.74%
                                                  ------------       ------------
                                                  $122,086,140       $121,679,303
                                                  ============       ============
</TABLE>


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

Proceeds from the sale of available-for-sale securities were $85,134,468,
$16,229,953 and $11,627,522 in 2001, 2000 and 1999, respectively.

Gross realized gains and losses on investments in debt securities available for
sale for each of the years ended December 31, 2001, 2000 and 1999 were as
follows:

<TABLE>
<CAPTION>
                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                  <C>             <C>             <C>
Gross realized gains.............................................    $   1,283,945   $      45,362   $      186,853
Gross realized losses............................................               -           40,775            7,550

</TABLE>

The carrying value of investment securities pledged to secure public funds on
deposit, securities sold under agreements to repurchase, and for other purposes
as required by law amounted to approximately $87,514,000 and $80,503,000 at
December 31, 2001 and 2000, respectively.

An investment security issued by Hartselle Utilities is carried at a value of
$4,854,027, which exceeds 10% of total stockholder's equity.


                                       61

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 4 - LOANS

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

The major classifications of loans as of December 31, 2001 and 2000 were as
follows:

<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
Commercial, financial and agricultural..........................................  $   146,209,839  $    140,773,063
Real estate - construction......................................................        3,126,592         5,429,141
Real estate - mortgage..........................................................      233,216,469       236,591,919
Consumer........................................................................      119,030,750       145,673,222
                                                                                  ---------------  ----------------
                                                                                      501,583,650       528,467,345
Less: Unearned income...........................................................           63,991           151,184
Less: Allowance for loan losses.................................................        7,292,370         7,107,430
                                                                                  ---------------  ----------------

Net loans.......................................................................  $   494,227,289  $    521,208,731
                                                                                  ===============  ================
</TABLE>

At December 31, 2001, the recorded investment in loans that were considered to
be impaired was $6,186,216 (of which $3,828,056 were on a nonaccrual basis).
Included in this amount is $5,070,769 of impaired loans for which the related
loan loss allowance is $726,895. The balance of $1,115,447 of impaired loans
for which the related loan loss allowance is included in the Company's overall
allowance for loan losses.

At December 31, 2000, the recorded investment in loans that were considered to
be impaired was $924,000 for which the related loan loss allowance was $520,000,
in accordance with SFAS No. 114. There were no impaired loans for which no
related allowance was determined. Of the above mentioned of impaired loans,
$128,000 were on a nonaccrual basis.

For the year ended December 31, 2001, the amount of interest that would have
been recorded under the original terms on nonaccrual loans was $301,584 and the
amount that was actually recorded was $116,094. The difference between gross
interest income that would have been recorded under original terms and the
interest actually recorded was $113,038 and $115,098 for the years ended
December 31, 2000 and 1999 respectively.

A substantial portion of the loans is secured by real estate in markets in which
branch offices are located in northern Alabama. Accordingly, the ultimate
collectibility of a substantial portion of the loan portfolio, and the recovery
of a substantial portion of the carrying amount of real estate owned, are
susceptible to changes in market conditions in these areas.


                                       62

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 5 - ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for each of the years ended December
31, 2001, 2000 and 1999, were as follows:

<TABLE>
<CAPTION>

                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                  <C>             <C>             <C>
Balance at beginning of year.....................................    $   7,107,430   $   2,603,128   $    2,970,597
Charge-offs......................................................       (6,567,136)     (5,053,052)      (5,188,037)
Recoveries.......................................................          438,136         267,992          361,932
                                                                     -------------   -------------   --------------
Net charge-offs..................................................       (6,129,000)     (4,785,060)      (4,826,105)
Provision for loan losses........................................        6,313,940       9,289,362        4,458,636
                                                                     -------------   -------------   --------------
Balance at end of year...........................................    $   7,292,370   $   7,107,430   $    2,603,128
                                                                     =============   =============   ==============

</TABLE>


NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2001 and 2000 was as follows:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
Land..........................................................................    $     4,331,352  $      3,402,209
Buildings and land improvements...............................................         23,287,467        25,161,118
Capitalized leases............................................................          5,880,626         5,880,626
Property Held for Sale........................................................          2,689,023                 -
Furniture and equipment.......................................................         11,846,267        12,719,546
Automobiles...................................................................          1,674,691         1,690,867
Leasehold improvements........................................................            853,690           853,690
                                                                                  ---------------  ----------------
                                                                                       50,563,116        49,708,056
Less allowance for depreciation...............................................         10,936,248        10,382,411
                                                                                  ---------------  ----------------

                                                                                  $    39,626,868  $     39,325,645
                                                                                  ===============  ================
</TABLE>

The provisions for depreciation charged to occupancy expense and furniture and
equipment expense for the years ended December 31, 2001, 2000 and 1999 were
$2,136,653, $2,037,309 and $1,798,679, respectively. The Bank capitalized
$242,020 and $244,971 in interest costs related to building construction in 2001
and 2000, respectively.

                                       63

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 7 - INTANGIBLES

Goodwill and core deposit intangibles at December 31, 2001 and 2000 are
summarized as follows:

<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
Goodwill, gross...............................................................    $     7,567,312  $      9,069,201
Goodwill write-off............................................................         (2,652,620)                -
Loss on disposals.............................................................                  -          (845,873)
Accumulated amortization......................................................         (2,285,010)       (2,466,273)
                                                                                  ---------------  ----------------
Balance at the end of the period..............................................    $     2,629,682  $      5,757,005
                                                                                  ===============  ================

</TABLE>

In December 2001, the Company recorded a goodwill write-down of $2,652,620
($1,908,157 after taxes) which represented the unamortized goodwill related to
the Company's wholly owned subsidiaries, 1st Community Credit Corporation and
Community Insurance Corp. The goodwill of each subsidiary was determined to have
been impaired because of current condition of the companies and their inability
to generate future operating income without substantial revenue increases that
are uncertain. Moreover, recoverability of the goodwill through future cash
flows was not reasonably assured.



              [The remainder of this page intentionally left blank]


                                       64

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999



NOTE 8 - DEPOSITS

The major classifications of deposits as of December 31, 2001 and 2000, were as
follows:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
Noninterest-bearing demand....................................................    $    67,695,615  $     67,285,705
Interest-bearing demand.......................................................        100,094,906        85,475,801
Savings.......................................................................         70,479,875        63,603,383
Time..........................................................................        259,899,596       260,170,173
Certificates of deposit of $100,000 or more...................................        100,387,582       101,011,881
Other time deposits...........................................................         19,148,456        23,353,824
                                                                                  ---------------  ----------------

                                                                                  $   617,706,030  $    600,900,767
                                                                                  ===============  ================
</TABLE>


The maturities of time deposits following December 31, 2001, were as follows:

<TABLE>
<CAPTION>

     Years Ending December 31,
    ---------------------------

<S>                                                                                                <C>
                2002.............................................................................  $    313,781,527
                2003.............................................................................        47,750,783
                2004.............................................................................         7,587,498
                2005.............................................................................         6,305,554
                2006.............................................................................         3,759,960
                Thereafter.......................................................................           250,312
                                                                                                   ----------------
                                                                                                   $    379,435,634
</TABLE>

NOTE 9 - FHLB BORROWINGS AND LONG TERM DEBT

At December 31, 2001 and 2000, the Company had notes payable totaling
$52,666,599 and $53,675,204, respectively.

On December 17, 1992, the Company entered into a loan agreement with a regional
bank for amounts up to $6,500,000. At December 31, 2001 and 2000, the amounts
outstanding were $711,304 and $1,423,003, respectively, due December 17, 2002,
bearing interest at a floating prime rate, collateralized by 100% of the common
stock of Community Bank. The note agreement contains provisions, which limit the
Company's right to transfer or issue shares of Community Bank's stock. Principal
payments of $59,292 are due monthly; however, the Company has the option of
postponing up to twenty-four monthly principal payments, provided that no more
than six consecutively scheduled installments are deferred.

On November 3, 1993, the Trustees of the Company's ESOP executed a promissory
note of $1,200,000 in order to purchase common stock in the Company's public
offering of new common stock. The note was


                                       65
<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 9 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED

originally secured by 80,000 shares of purchased stock. The promissory note had
been refinanced in years subsequent to 1993 as additional shares were purchased
by the ESOP. On December 1, 1998, this note was refinanced and an additional
56,682 shares of the Company's common stock were obtained by the ESOP. This
debt, in the original amount of $2,963,842, was secured by 261,433 shares of the
Company's common stock. The note bears interest at a floating rate, with
principal and interest payments due monthly through November 16, 2010, with all
remaining principal, if any, due upon that date. The initial principal and
interest payment on this debt was $31,677. As changes occur in the interest rate
on the loan, appropriate adjustments are made to the monthly principal and
interest payments. At December 31, 2001, the monthly payment was $33,852. The
Company has guaranteed this debt and in accordance with the applicable
accounting and reporting guidelines the debt has been recognized on the
Company's statement of condition, with an offsetting charge against equity. As
principal payments are made by the ESOP, the debt and offsetting charge against
equity are reduced. The shares securing the note are released on a prorata basis
by the lender as monthly payments of principal and interest are made. The
outstanding balance of this note was $2,382,490 at December 31, 2001, secured by
174,267 of unreleased shares of Company stock. (See Note 15)

On October 4, 1994, the Company entered into a twenty-year, subordinated
installment capital note due October 1, 2014 for the purchase of treasury stock.
Monthly principal and interest payments of $15,506 are made on the note, which
bears interest at the fixed annual rate of 7%. The Company maintains the right
to prepay the note at its sole discretion. The balance of the note was
$1,572,805 and $1,645,977 at December 31, 2001 and 2000, respectively.

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


                                       66

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 9 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED

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

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.

Maturities and stated calls of long-term debt and FHLB borrowings following
December 31, 2001, are as follows:

<TABLE>
<CAPTION>
                                                                                                         Trust
                                                          Note       Subordinated       FHLB          Preferred
                                                         Payable         Debt        Borrowings       Securities
                                                    --------------   ------------  -------------    --------------

<S>                                                 <C>              <C>           <C>               <C>
2002.............................................   $    1,010,839   $    78,461   $         -       $          -
2003.............................................          314,078        84,133             -                  -
2004.............................................          329,325        90,214             -                  -
2005.............................................          345,314        96,737             -                  -
2006.............................................          362,078       103,729             -                  -
Thereafter.......................................          732,160     1,119,531    38,000,000         10,000,000
                                                    --------------   -----------   -----------       ------------
                                                    $    3,093,794   $ 1,572,805   $38,000,000       $ 10,000,000
                                                    ==============   ===========   ===========       ============

</TABLE>


                                       67

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 10 - OTHER OPERATING EXPENSES

Other operating expenses consist of the following:

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                     ----------------------------------------------
                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                  <C>             <C>             <C>
Amortization of intangibles......................................    $     561,798   $     553,521   $      493,602
Loss on write-down of goodwill...................................        2,652,620              --               --
Insurance........................................................          319,305         298,052          171,165
Legal fees.......................................................        1,872,801         785,192          893,874
Professional fees................................................        1,201,646         219,990          166,021
Supplies.........................................................          652,020         514,633          622,980
Postage..........................................................          389,593         442,930          380,060
Telephone........................................................          768,863         920,029          768,944
Other............................................................        2,168,881       3,421,904        3,677,968
                                                                     -------------   -------------   --------------
                                                                     $  10,587,527   $   7,156,251   $    7,174,614
                                                                     =============   =============   ==============
</TABLE>

NOTE 11 - INCOME TAXES

The components of income tax expense benefit for each of the years ended
December 31, 2001, 2000 and 1999 were:

<TABLE>
<CAPTION>

                                     2001                           2000                          1999
                         ----------------------------  -----------------------------  -----------------------------
                            CURRENT        DEFERRED        Current       Deferred         Current       Deferred
                         -------------  -------------  --------------  -------------  -------------  --------------

<S>                      <C>            <C>            <C>             <C>            <C>            <C>
Federal...............   $     149,717  $    (812,875) $      501,709  $  (1,985,384) $     277,441  $      213,177
State.................          16,372       (102,066)         (7,325)      (213,476)          (376)         12,236
                         -------------  -------------- --------------  -------------  -------------  --------------

                         $     166,089  $    (914,941) $      494,384  $  (2,198,860) $     277,065  $      225,413
                         =============  ============== ==============  =============  =============  ==============


</TABLE>


              [The remainder of this page intentionally left blank]




                                       68



<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 11 - INCOME TAXES - CONTINUED

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

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
Net unrealized losses (gains) on securities available for sale................    $       162,735  $       (264,881)
Depreciation..................................................................         (1,260,335)       (1,190,043)
Pension expense and benefits..................................................            540,660           398,798
Provision for loan losses.....................................................          1,968,906         1,900,848
Intangibles...................................................................            744,463                 -
Provision for debt cancellation...............................................             52,378            61,606
Alternative minimum tax credit carryforward...................................            351,505           351,505
Loss carryforward.............................................................            191,353           191,353
Other.........................................................................             42,315             2,237
                                                                                  ---------------  ----------------
                                                                                  $     2,793,980  $      1,451,423
                                                                                  ===============  ================
</TABLE>


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

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                     ----------------------------------------------
                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                           <C>              <C>             <C>
Statutory federal income tax rates...............................             34.0%            34.0%           34.0%
Effect on rate of:
   Tax-exempt income.............................................            (47.5)            10.7           (18.4)
   State income tax, net of federal tax benefit..................              (.3)             3.7             0.5
   Interest expense disallowance.................................             10.9             (1.2)            1.9
   Intangibles...................................................             41.0                -               -
Other items......................................................              2.4             (3.7)            5.3
                                                                     -------------   --------------  --------------
Effective income tax rate........................................             40.5%            43.5%           23.3%
                                                                     =============   ==============  ==============
</TABLE>

At December 31, 2001, for income tax purposes, the Company had federal
alternative minimum tax (AMT) credit carry forwards of $351,505. The AMT credit
carryforwards have no expiration date.

Tax effects of securities transactions resulted in an increase in income taxes
for 2001, 2000 and 1999 of $470,823, $1,682 and $65,750, respectively.


                                       69


<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 12 - SHAREHOLDERS' EQUITY

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

In March 1996, the Company issued options to purchase a total of 270,000 shares
of the Company's common stock. The options were issued to the directors based
upon their years of service and their positions with the Company. Each of the
options has an exercise price of $10.00 per share, the market value (as
determined by the Board of Directors) of the Company's common stock at the time
of issuance. The options were exercisable through March 27, 2001. In March 1997,
an additional 103,000 options were issued to the Company's directors with an
exercise price of $12.50 per share, the market value (as determined by the Board
of Directors) of the Company's common stock at the time of issuance. These
options are exercisable through March 26, 2002. In March 1998, 203,331 options
were issued to directors and certain senior officers with an exercise price of
$15.00 per share, the market value (as determined by the Board of Directors) of
the Company's common stock at the time of issuance. These options are
exercisable through March 25, 2003. In December 1999, an additional 204,000
options were issued to directors and certain senior officers with an exercise
price of $20.00 per share, the market value (as determined by the Board of
Directors) of the Company's common stock at the time of issuance. These options
are exercisable through December 3, 2004. In August 2000, the Company granted
options to purchase an aggregate of 15,000 shares of common stock to certain
senior officers of Community Bank. Each of these options has an exercise price
of $18.00 per share, the market value (as determined by the Board of Directors)
of the Company's common stock at the time of issuance. These options are
exercisable through August 24, 2005. In December 2001, the Company granted
options to purchase an aggregate of 252,000 shares of common stock to certain
senior officers of Community Bank. Each of these options has an exercise price
of $10.00 per share, the market value (as determined by the Board of Directors)
of the Company's common stock at the time of issuance. The options are
exercisable through December 17, 2006. The Company did not receive any payment
in exchange for granting any of such options, which were granted in reliance
upon an exemption from registration under Section 4(2) of the Securities Act of
1933.


                                       70

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

The following sets forth certain information regarding stock options for the
years ended December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                      Number         Wgt. Average
                                                                                    Of  Shares      Exercise Price
                                                                                  ---------------- -----------------
<S>                                                                                       <C>      <C>
Balance, December 31, 1998....................................................            514,331  $         12.36
Granted, Year Ended December 31, 1999.........................................            204,000            20.00
Exercised, Year Ended December 31, 1999.......................................             (8,667)          (14.42)
Expired, Year Ended December 31, 1999.........................................            (18,333)          (15.00)
                                                                                  ---------------  ---------------
Balance, December 31, 1999....................................................            691,331            14.52
Granted, Year Ended December 31, 2000.........................................             15,000            18.00
Expired, Year Ended December 31, 2000.........................................             (2,500)          (20.00)
                                                                                  ---------------  ---------------
Balance, December 31, 2000....................................................            703,831            14.57
GRANTED, YEAR ENDED DECEMBER 31, 2001.........................................            252,000            10.00
EXERCISED, YEAR ENDED DECEMBER 31, 2001.......................................           (329,560)           11.35
EXPIRED, YEAR ENDED DECEMBER 31, 2001.........................................            (49,666)           15.10
                                                                                  ---------------  ---------------
BALANCE, DECEMBER 31, 2001....................................................            576,605  $         14.37
                                                                                  ===============  ===============
</TABLE>

<TABLE>
<CAPTION>

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

<S>                                                                        <C>          <C>                 <C>
Options with Exercise Price of $10.00............................          252,000      12-17-2006          252,000
Options with Exercise Price of $12.50............................           20,400      03-26-2002           20,400
Options with Exercise Price of $15.00............................          110,705      03-25-2003          110,705
Options with Exercise Price of $20.00............................          183,500      12-03-2004          183,500
Options with Exercise Price of $18.00............................           10,000      08-24-2005           10,000
                                                                     -------------                   --------------
Total outstanding, December 31, 2001.............................          576,605                          576,605
                                                                     =============                   ==============

</TABLE>


The Company permits option holders to tender previously owned shares in lieu of
cash to pay the exercise price for shares acquired through option exercise. This
technique results in an increase in the number of shares outstanding with little
or no increase in capital account balances. During 2001, option holders tendered
207,883 shares in connection with the exercise of options for 329,560 shares
resulting in a net increase of 121,667 shares outstanding. The excess of the
fair market value of the 329,560 shares over the aggregate option price
resulted in an income tax benefit of $751,566, which was credited to capital
surplus.


                                       71

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 2001, 2000 and 1999, was estimated at
the date of grant using a Black-Scholes option pricing model. The Black-Scholes
option pricing model was originally developed for use in estimating the fair
value of traded options which have different characteristics from the Company's
employee stock options. The model is also sensitive to changes in the subjective
assumptions which can materially affect the fair value estimate. As a result,
management believes that the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.

The Company's options outstanding have a weighted average contractual life of
3.43 years. The weighted average fair value of options granted was $2.30 in
2001, $4.12 in 2000, and $3.10 in 1999. The fair value of each option granted is
estimated using the following weighted-average assumptions in the option pricing
model: expected dividend yield of 2.50% for 2001, 2.78% for 2000, and 4.25% for
1999; an expected option life of five years; expected volatility of .257 for
2001, 0.250 for 2000 and 0.164 for 1999; and a risk free interest rate of 4.40%,
5.08% and 6.60% for 2001, 2000 and 1999, respectively.

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

<TABLE>
<CAPTION>
                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                         <C>                                      <C>             <C>             <C>
Pro forma net income (loss) ($000's).............................    $     (1,483)   $     (2,254)   $       1,258
Pro forma earnings (loss) per Common Share - basic...............           (0.32)          (0.51)            0.28
Pro forma earnings (loss) per Common Share - diluted.............           (0.32)          (0.48)            0.27

</TABLE>

No options were assumed to be exercised in the calculation of diluted average
shares outstanding for 2001, since all options outstanding were at an exercise
price greater than the fair market value of the stock. Therefore, average shares
outstanding for 2001 was 4,572,301 for both basis and diluted earnings per
share. Average shares outstanding when assuming dilution were greater than
average shares outstanding for basic earnings per share by 211,135 for 2000 and
165,769 for 1999. As opposed to no dilutive effect for 2001, the dilutive effect
on earnings (loss) per share was $(.03) for the year ended December 31, 2000,
and $.01 for the year ended December 31, 1999.

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

Common stock issued in lieu of cash for directors' fees is summarized as
follows:

<TABLE>
<CAPTION>

                                                                       2001              2000              1999
                                                                   -------------    -------------    --------------

<S>                                                                <C>              <C>              <C>
    Shares issued...............................................          11,661            9,481             8,923
                                                                   =============    =============    ==============
    Fair market value on issue date.............................   $     209,865    $     222,804    $      169,536
                                                                   =============    =============    ==============

</TABLE>

The aggregate fair market value of the shares issued was charged to expense in
each respective period.


                                       72

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 13 - COMMITMENTS AND CONTINGENCIES

No dividends were declared or paid in 2001. Annual dividends of $.75 per share
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 to regulatory restrictions. (See Notes 8 and
15).

In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement and interest rate protection. Accounting
principles generally accepted in the United States of America recognize these
transactions as contingent liabilities and, accordingly, they are not reflected
in the accompanying financial statements. Commitments to extend credit, credit
card arrangements, commercial letters of credit and standby letters of credit
all include exposure to some credit loss in the event of nonperformance of the
customer. The Company's credit policies and procedures for credit commitments
and financial guarantees are the same as those for extensions of credit that are
recorded on the consolidated statements of financial condition. Because these
instruments have fixed maturity dates, and because many of them expire without
being drawn upon, they do not generally present any significant liquidity risk
to the Company. The Company has not been required to perform on any financial
guarantees nor has it incurred any losses on its commitments in either 2001 or
2000. Following is a discussion of these commitments:

Standby Letters of Credit: These agreements are used by the Company's customers
as a means of improving their credit standings in their dealings with others.
Under these agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do so. As of December
31, 2001 and 2000, the Company has issued standby letters of credit of
approximately $1,299,000 and $978,000, respectively.

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

Loan Commitments: As of December 31, 2001 and 2000, the Company had commitments
outstanding to extend credit totaling approximately $19,788,000 and $19,868,000,
respectively. These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.

All of the Company's loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Company. Investments in state and municipal
securities also involve governmental entities within the Company's market area.
The concentrations of credit by type of loan are set forth in Note 4. The
commitments to extend credit relate primarily to consumer cash lines which
represented approximately $2,464,000 and $2,277,256 of the unused commitment
balances at December 31, 2001 and 2000. All remaining commitments consist
primarily of unused real estate commitment lines.


                                       73


<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

Litigation Background

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

Benson Litigation

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

On August 15, 2000, the plaintiffs filed an amended complaint adding Andy C.
Mann, a shareholder of the Company, as a plaintiff and adding a former director
of the Company and Community Bank as a defendant. The amended complaint
generally reiterates the allegations of the original complaint. In addition, the


                                       74

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

amended complaint alleges that Community Bank was overcharged on all
construction projects from January 1997 to the present. The amended complaint
also alleges that the defendants breached their fiduciary duties and are guilty
of gross financial mismanagement, including allegations concerning the making or
approval of certain loans and taking allegedly improper actions to conceal the
fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs
filed a second amended complaint. The second amended complaint generally
reiterates the allegations of the original and first amended complaints. In
addition, the second amended complaint alleges that the plaintiffs were
improperly denied their rights to inspect and copy certain records of the
Company and Community Bank. The second amended complaint also alleges that the
directors of the Company abdicated their roles as directors either by express
agreement or as a result of wantonness and gross negligence. The second amended
complaint asserts that the counts involving inspection of corporate records and
director abdication are individual, nonderivative claims. The second amended
complaint seeks, on behalf of the Company, an unspecified amount of compensatory
damages in excess of $1 million, punitive damages, disgorgement of allegedly
improperly paid profits and appropriate equitable relief. Upon motion of the
defendants, the case was transferred to the state Circuit Court in Blount
County, Alabama by order dated September 21, 2000, as amended on October 12,
2000.

On August 24, 2000, the Board of Directors of the Company designated the
directors of the Company who serve on the joint investigative committee as a
special litigation committee to investigate and evaluate the allegations and
issues raised in this lawsuit and to arrive at such decisions and take such
action as the special litigation committee deems appropriate. At a hearing on
February 23, 2001 the court stayed discovery with respect to the Company,
Community Bank and the directors, officers and employees of each until May 24,
2001, at which time the court expects to receive a report from the special
litigation committee. Because the special litigation committee has not yet
completed its investigation, and as a result of the inherent uncertainties of
the litigation process, the Company is unable at this time to predict the
outcome of this lawsuit and its effect on the Company's financial condition and
results of operations. Regardless of the outcome, however, this lawsuit could be
costly, time-consuming and a diversion of management's attention.

Towns Derivative Litigation

On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. The complaint alleged that the directors of the Company
breached their fiduciary duty to the Company and its shareholders, engaged in
fraud, fraudulent concealment, suppression of material fact and suppression of
the plaintiff shareholders, failed to supervise management, and conspired to
conceal wrongful acts from the Company's shareholders and paid themselves
excessive director fees. The complaint also alleged that the Board of Directors
acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the
Chairman of the Board, Chief Executive Officer and President of the Company,
including alleged self dealing, payment of excessive compensation,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint sought an unspecified amount of compensatory and punitive damages,
removal of the current directors, appointment of a new Board of Directors, and
attorneys fees and cost.


                                       75

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

On December 21, 1998, the Company and its directors filed a motion with the
court seeking to have the complaint dismissed. On March 1, 1999, the Company's
Board of Directors appointed a special Board committee comprised of non-employee
directors of the Company, to review the plaintiffs' allegations in accordance
with Delaware law. On April 6, 1999, each of the parties to the action requested
that the court stay the litigation and related discovery, motions and hearings,
pending completion of the special committee's review. On April 30, 1999, the
court entered an order staying the litigation and related discovery, motions and
hearing in accordance with the parties' request. On October 15, 1999, the
special committee filed its final report with the court. On October 21, 1999,
the parties forwarded to the court an agreed-upon order governing the
confidentiality of the special committee's report, which the court entered on
January 2, 2000. On August 3, 2000, the Company, Community Bank and the
Company's directors filed a motion to stay the proceedings until the Company's
and Community Bank's joint investigative committee had completed its
investigation of the alleged construction overcharges discussed above. At the
request of the Company and the other defendants in the action, the court
continued a hearing on the motion to dismiss. On February 23, 2001, the court
indicated that there was no reason to continue the stay of this action. The
parties are awaiting a hearing on the defendants' motion to dismiss the case.
Management of the Company believes that the plaintiffs' allegations are false
and that the action lacks merit. The Company and its directors intend to defend
the action vigorously, and management of the Company believes that the action
will not have a material adverse effect on the Company's financial condition or
results of operations. Regardless of the outcome, however, this lawsuit could be
costly, time consuming and a diversion of management's attention.

Corr Family Litigation

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

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

Auto Loan Litigation

On June 28, 2000, Community Bank filed an action in the United States District
Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc.,
an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug
Broaddus, the owners of the dealership, several employees and former employees
of the dealership and Gerald Scot Parrish, a former employee of Community Bank,
with respect to certain loans originated during 1998 in Community Bank's
Wal-Mart office in Ft. Payne, Alabama. In the


                                       76

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

complaint Community Bank alleged that the defendants willingly and knowingly
conducted, participated in, were employed by or associated with, or aided and
abetted an enterprise within the meaning of the Racketeer Influenced and Corrupt
Organizations Act (RICO) for the purpose of defrauding Community Bank. The
complaint also asserted that the defendants committed fraud, misrepresentation
and deceit by submitting to Community Bank and/or approving applications for
automobile loans which contained false and/or fraudulent information for the
purpose of deceiving, influencing and persuading Community Bank to provide loans
to customers of the automobile dealership who were otherwise not qualified to
receive such loans, and suppressed material facts regarding the veracity of
information contained in loan applications and the ability of persons seeking
the loans to repay them. Community Bank also alleged in the complaint that the
automobile dealership is responsible for the acts of its officers, agents and
employees, and that the dealership and its management failed to adequately train
and/or supervise its employees. The complaint stated that the defendants
participated in a conspiracy to violate RICO and Alabama statutes dealing with
fraud, misrepresentation and suppression of material facts, and asserted civil
liability under Alabama law for violation of federal statutes dealing with
financial institution fraud, mail and wire fraud and making false statements for
the purpose of influencing the actions of a financial institution upon an
application or loan.

On June 29, 2000 and August 31, 2000, the court granted Community Bank's motions
to dismiss without prejudice two of the employees of the automobile dealership
as defendants in the action. On September 13, 2000, the court granted Mr.
Parrish's action to dismiss the complaint, but granted Community Bank 15 days to
amend the complaint. On September 27, 2000, Community Bank filed an amended
complaint which generally reiterated the allegations of the original complaint
and added specific information concerning the allegedly fraudulent activity and
the use of the United States mail, telephone and other wire transmissions in the
conduct of such activity. On December 1, 2000, the court dismissed Community
Bank's claims based upon mail and wire fraud in the amended complaint but
otherwise denied Mr. Parrish's motion to dismiss the complaint.

The defendants have filed answers to the amended complaint which generally deny
the material allegations in the complaint and allege that any injury suffered by
Community Bank was the result of the contributory negligence of Community Bank,
its officers, employees and agents. In the lawsuit, Community Bank seeks damages
of an unspecified amount to recover losses incurred in connection with the loans
made at Community Bank's Wal-Mart office in Ft. Payne, Alabama, along with all
costs associated with the lawsuit. Any amounts received by Community Bank as a
result of this litigation will be treated as a recovery on loan losses.

Employee Litigation

On November 15, 2000, Michael W. Alred and Michael A. Bean, two former directors
and executive officers of Community Bank, filed suit against Community Bank in
the United States District Court for the Northern District of Alabama alleging
that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees. According to the complaint, the information which these two
individuals provided to authorities concerned certain bank construction
projects, specific loans, charge-offs, expenses and past due accounts. The
complaint seeks reinstatement of the plaintiffs to their former positions as
officers and directors of Community Bank as well as compensatory and punitive
damages. Community Bank and its directors believe this lawsuit is without

                                       77
<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

merit and intend to defend the action vigorously. Management of the Company
believes that this action will not have a material adverse effect on the
Company's financial condition or results of operations.

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

NOTE 14 - PENSION PLAN

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

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

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

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

              [The remainder of this page intentionally left blank]


                                       78


<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 14 - PENSION PLAN - CONTINUED

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

Pension Plan as of December 31:

<TABLE>
<CAPTION>
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
Change in benefit obligation:
   Benefit obligation at beginning of year....................................    $     7,030,889  $      5,279,613
   Service cost...............................................................            614,252           620,489
   Interest cost..............................................................            495,976           446,220
   Amendments.................................................................                 -                 -
   Actuarial (gain) or loss...................................................            (37,271)          885,026
   Benefits paid..............................................................           (212,680)         (200,459)
                                                                                  ---------------- ----------------
     Benefit obligation at end of year........................................    $     7,891,166  $      7,030,889
                                                                                  ===============  ================
Change in plan assets:
   Fair value of plan assets at beginning of year.............................    $     5,153,926  $      4,983,127
   Actual return on plan assets...............................................           (229,629)          (66,986)
   Employer contribution......................................................            731,235           438,244
   Benefits paid from plan assets.............................................           (212,680)         (200,459)
                                                                                  ---------------- ----------------
     Fair value of plan assets at end of year.................................    $     5,442,852  $      5,153,926
                                                                                  ===============  ================
Funded status of plan:
   Funded status of plan......................................................    $    (2,448,314) $     (1,876,963)
   Unrecognized actuarial (gain) or loss......................................          1,946,596         1,186,539
   Unrecognized prior service cost............................................             77,337            89,036
   Unrecognized transition asset..............................................             (3,794)          (20,673)
                                                                                  ---------------- ----------------
     Accrued benefit cost.....................................................    $      (428,175) $       (622,061)
                                                                                  ================ ================

Weighted average rate assumptions used in determining pension cost and the
   projected benefit obligation were:
     Discount rate used to determine present value
       of projected benefit obligation at end of year.........................               7.25%             7.50%
     Expected long-term rate of return on plan assets for the year............               9.25%            10.00%
     Expected rate of increase in future compensation levels..................               6.00%             6.00%

</TABLE>


                                       79
<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 14 - PENSION PLAN - CONTINUED

Pension plan net periodic benefit cost:

<TABLE>
<CAPTION>

                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                  <C>             <C>             <C>
Service cost.....................................................    $     614,252   $     620,489   $      485,701
Interest cost....................................................          495,976         446,220          366,805
Expected return on plan assets...................................         (567,699)       (529,400)        (470,474)
Amortization of prior service cost...............................           11,699          11,699           11,699
Amortization of transitional asset...............................          (16,879)        (16,879)         (16,879)
Recognized actuarial loss........................................               -               -                -
                                                                     -------------   -------------   --------------
Net periodic benefit cost........................................    $     537,349   $     532,129   $      376,852
                                                                     =============   =============   ==============
</TABLE>

Benefit Restoration Plan as of December 31:

<TABLE>
<CAPTION>
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
Change in benefit obligation:
   Benefit obligation at beginning of year....................................    $     2,678,166  $      2,082,163
   Service cost...............................................................            157,302           141,048
   Interest cost..............................................................            202,471           170,368
   Amendments.................................................................                 -                 -
   Actuarial loss.............................................................            162,993           284,587
   Benefits paid..............................................................                 -                 -
                                                                                  ---------------  ----------------
   Benefit obligation at end of year..........................................    $     3,200,932  $      2,678,166
                                                                                  ===============  ================
Change in plan assets:
   Fair value of plan assets at beginning of year.............................    $            -   $             -
   Actual return on plan assets...............................................                 -                 -
   Employer contribution......................................................                 -                 -
   Benefits paid from plan assets.............................................                 -                 -
                                                                                  ---------------  ----------------
   Fair value of plan assets at end of year...................................    $            -   $             -
                                                                                  ===============  ================
Funded status of plan:
   Funded status of plan......................................................    $    (3,200,932) $     (2,678,166)
   Unrecognized actuarial loss................................................          1,371,808         1,298,222
   Unrecognized prior service cost............................................             98,439           133,346
   Unrecognized transition (asset) or obligation..............................                 -                 -
                                                                                  ---------------  ----------------
   Accrued benefit cost.......................................................    $    (1,730,685) $     (1,246,598)
                                                                                  ================ ================

Weighted average rate assumptions used in determining pension cost and the
   projected benefit obligation were:
     Discount rate used to determine present value
       of projected benefit obligation at end of year.........................               7.25%             7.50%
     Expected long-term rate of return on plan assets for the year............               9.25%            10.00%
     Expected rate of increase in future compensation levels..................               6.00%             6.00%


</TABLE>


                                       80

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 14- PENSION PLAN - CONTINUED

Benefit Restoration plan net periodic benefit cost:

<TABLE>
<CAPTION>

                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                  <C>             <C>             <C>
Service cost.....................................................    $     157,302   $     141,048   $       85,940
Interest cost....................................................          202,471         170,368           96,712
Expected return on plan assets...................................               -               -                -
Amortization of prior service cost...............................           34,907          34,907           34,907
Amortization of transitional (asset) or obligation...............               -               -                -
Recognized actuarial loss........................................           89,407          63,748           38,399
                                                                     -------------   -------------   --------------
Net periodic benefit cost........................................    $     484,087   $     410,071   $      255,958
                                                                     =============   =============   ==============

</TABLE>

NOTE 15 - EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. An employee becomes a participant in
the ESOP on June 30 or December 31 after completing 12 months of employment
during which the employee is credited with 1,000 or more hours of service.
Contributions to the ESOP are made at the discretion of the Company's Board of
Directors, but may not be less than the amount required to cover the debt
service on the ESOP loan. Employer contributions are allocated to eligible
participants in proportion to their compensation, which equals W-2 wages plus
pre-tax reductions for the Company's cafeteria plan. The Internal Revenue Code
imposes a limit ($170,000 in 2001) on the amount of compensation which may be
considered under the plan.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. The promissory note has been refinanced in years subsequent to
1993 as additional shares were purchased by the ESOP. On December 31, 1998, this
note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments due
monthly through November 16, 2010, with the remaining principal, if any, due
upon that date. The initial principal and interest payment on this debt in
December 1998 was $31,677. As changes occur in the interest rate on the loan,
appropriate adjustments are made to the monthly principle and interest payments.
At December 31, 2001, the monthly payment was $33,852. The Company has
guaranteed this debt and in accordance with the applicable accounting and
reporting guidelines the debt has been recognized on the Company's statement of
condition, with an offsetting charge against equity. As principal payments are
made by the ESOP, the debt and offsetting charge against equity are reduced. The
shares securing the note are released on a prorata basis by the lender as
monthly payments of principal and interest are made. As of December 31, 2001,
there were 174,267 unreleased shares with a fair value, based on an independent
valuation of $10.00 per share, of approximately $1,742,670. These shares are
subtracted from outstanding shares for earnings per share calculations.


                                       81

<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 15- EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED

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
($176,465, $251,976 and $237,589 in 2001, 2000 and 1999, respectively) is
classified as interest expense on the Company's income statement.

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

At December 31, 2001 and 2000, the Company's financial statements reflected
long-term debt related to the ESOP of $2,382,490 and $2,606,224, respectively.
The corresponding contra-equity account was $2,317,902 at December 31, 2001 and
$2,574,002 at December 31, 2000.

Company contributions to the ESOP amounted to $406,228, $568,346 and $452,739
for 2001, 2000 and 1999, respectively.

NOTE 16 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its stockholders and
other needs. Certain restrictions exist regarding the ability of the Bank to
transfer funds to the Company in the form of cash dividends, loans or advances.
Under Alabama law, the approval of the Alabama Superintendent of Banks is
required to pay dividends in excess of the Bank's net earnings for the current
year plus retained net earnings for the preceding two years less any required
transfers to surplus.

Effective April 18, 2001, the Board of Directors of Community Bank, the
Company's subsidiary bank, entered into a Memorandum of Understanding
("Memorandum") with the Regional Director of the Federal Deposit Insurance
Corporation's Atlanta Regional Office ("FDIC") and the Alabama Superintendent of
Banks ("State"). One major provision of the Memorandum restricts the Bank from
paying any cash dividends without the prior written consent of the Supervisory
Authorities. The Bank has made no requests to make a dividend payment since the
Memorandum has been in effect.

NOTE 17 - REGULATORY CAPITAL

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



                                       82
<PAGE>

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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 17- REGULATORY CAPITAL - CONTINUED

Quantitative measures established by regulation to ensure capital adequacy
require the Company and Community Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2001 and 2000, that the Bank meets all capital adequacy requirements to which it
is subject.

At December 31, 2001 and 2000, under applicable banking regulations, the Company
and Community Bank, were considered well capitalized compared to both being
classified as adequately capitalized at year-end 1999. The Company is entitled
to treat the aggregate liquidation amount of the junior subordinated deferrable
interest debentures, purchased by Community (AL) Capital Trust I, as Tier I
capital under Federal Reserve guidelines. At December 31, 2001, the aggregate
liquidation amount of the debentures included in Tier I capital was $10,000,000.
(See Note 8)

Community Bank's allowance for loan losses, limited to 1.25% of risk-weighted
assets, is a component of Tier II capital under capital adequacy guidelines. Due
to the significant increase in the allowance for loan losses during 2000, this
Tier II component contributed to the increases in the Company's and Community
Bank's capital ratios. The amount of the allowance for loan losses included in
Tier II capital at December 31, 2001 was approximately $6,142,000 for the
Company and approximately $6,110,000 for Community Bank, compared to $6,386,034
for both the Company and $6,356,770 for Community Bank at December 31, 2000.




              [The remainder of this page intentionally left blank]




                                       83


<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 17 - REGULATORY CAPITAL - CONTINUED

The following table sets forth the actual capital ratios at December 31, 2001
and 2000, for the Company and the Bank, as well as the minimum total risk-based,
Tier 1 risked-based and Tier 1 leverage ratios required to be classified as
adequately capitalized and well capitalized.

<TABLE>
<CAPTION>

                                                                              For Capital                  To Be
                                                        Actual              Adequacy Purposes         Well Capitalized
                                               ------------------------    -------------------      --------------------
                                                 Amount       Ratio         Amount      Ratio        Amount      Ratio
                                               -----------  -----------    ---------   -------      --------   ---------
                                                                       (Dollars In Thousands)
<S>                                            <C>            <C>           <C>          <C>        <C>         <C>
AS OF DECEMBER 31, 2001:
  TOTAL CAPITAL
   (TO RISK WEIGHTED ASSETS):
   CONSOLIDATED............................    $   56,833     11.59%        $ 39,218     8.00%      $ 49,023    10.00%
   COMMUNITY BANK..........................        58,101     11.91           39,011     8.00         48,764    10.00
TIER 1 CAPITAL
  (TO RISK WEIGHTED ASSETS):
   CONSOLIDATED............................        49,118     10.02           19,609     4.00         29,414     6.00
   COMMUNITY BANK..........................        51,991     10.66           19,505     4.00         29,258     6.00
TIER 1 CAPITAL
  (TO AVERAGE ASSETS):
   CONSOLIDATED............................        49,118      6.70           29,315     4.00         36,644     5.00
   COMMUNITY BANK..........................        51,991      7.11           29,244     4.00         36,555     5.00
As of December 31, 2000:
  Total Capital
   (to Risk Weighted Assets):
   Consolidated............................    $   53,746     10.54%        $ 40,813     8.00%      $ 51,016    10.00%
   Community Bank..........................        52,763     10.39           40,623     8.00         50,779    10.00
Tier 1 Capital
  (to Risk Weighted Assets):
   Consolidated............................        45,956      9.01           20,406     4.00         30,610     6.00
   Community Bank..........................        46,406      9.14           20,312     4.00         30,467     6.00
Tier 1 Capital
  (to Average Assets):
   Consolidated............................        45,956      6.44           28,539     4.00         35,674     5.00
   Community Bank..........................        46,406      6.54           28,375     4.00         35,469     5.00

</TABLE>

                                       84

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 18 - COMPREHENSIVE INCOME

In the calculation of comprehensive income, certain reclassification adjustments
are made to avoid double counting items that are displayed as part of net income
for a period that also had been displayed as a part of other comprehensive
income in that period or earlier periods.

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

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                     ----------------------------------------------
                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------


<S>                                                                  <C>             <C>             <C>
Unrealized holding gains (losses) arising during period
   before income tax and reclassification adjustments............    $     214,906   $   3,421,991   $   (3,314,131)
Reclassification adjustments for net (gains) losses
   included in net income........................................       (1,283,945)         (4,587)        (179,303)
                                                                     -------------   -------------   --------------
Other comprehensive income (loss), before income tax.............       (1,069,039)      3,417,404       (3,493,434)
Income tax expense (benefit) related to other
   comprehensive income..........................................         (427,616)      1,366,962       (1,397,374)
                                                                     -------------   -------------   --------------

Other comprehensive income (loss), net of income tax.............    $    (641,423)  $   2,050,442   $   (2,096,060)
                                                                     =============   =============   ==============

</TABLE>

NOTE 19 - RELATED PARTY TRANSACTIONS

Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 2001 and 2000. Except as noted below, all such loans are made in the
ordinary course of business on substantially the same credit terms, including
interest rates and collateral and do not represent more than a normal risk of
collection or present other unfavorable features. Total loans to these persons
at December 31, 2001 and 2000 amounted to approximately $16,179,000 and
$14,034,000, respectively. An analysis of activity during 2001 in loans to
related parties resulted in additions of approximately $377,000, representing
new loans, reductions of approximately $999,000, representing payments, and an
increase of approximately $2,767,000, representing a change in the composition
of related parties.

The Company, through Community Bank, its wholly owned subsidiary, offers all
regular full-time employees, including executive officers, loans at interest
rates which are 1% below the prevailing market rate. As of December 31, 2001,
executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interests, had loans outstanding pursuant to this policy
with total indebtedness of approximately $396,000.

The Company, through Community Bank, also offers first mortgage real estate
loans on the primary residence, at a rate of 5%, to employees who are required
to relocate in the course of their employment. As of December 31, 2001,
executive officers and directors of the Company and executive officers of
Community


                                       85
<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 19 - RELATED PARTY TRANSACTIONS - CONTINUED

Bank and its subsidiaries, including members of their immediate families and
related interests, had relocation loans outstanding with total indebtedness of
approximately $2,155,000.

         Community Bank currently has outstanding two loans to Kennon R.
Patterson, Sr., the Chairman and CEO of the Company:

         (i)      a farm operating line of credit of $100,000. During 2001, the
highest balance outstanding for this loan was $100,000, and its balance at year
end was $49,780. The loan bears interest at 3.75%;

         (ii)     a real-estate loan in the amount of $5,150,000. During 2001,
the highest balance outstanding for this loan was $5,150,000, and its balance
at year end was $5,150,000. The loan bears interest at 4.75% and is secured by
real estate having an appraised value in excess of the loan amount.

         Community Bank currently has outstanding loans to Hodge Patterson,
Executive Vice President of the Bank:

         (i)      a real-estate loan of $549,480. During 2001, the highest
balance outstanding for this loan was $561,253, and its balance at year end was
$552,732. the loan bears interest at 5.00%.

         (ii)     unsecured loans of $124,572. During 2001, the highest balance
outstanding for these loans were $124,572, and its balance at year end was
$124,572. The loans bear interest at 4.75%.

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.

Maintenance Contract: The Bank had no service contracts during 2001 or 2000 with
Heritage Valley Farms, an unincorporated business owned by Kennon R. Patterson,
Sr., a director and officer of the Company. Heritage Valley Farms did perform
upkeep and maintenance of the external grounds for five of the Bank's locations
for the entire year of 1999. External grounds upkeep and maintenance was also
performed for most of 1999 for five additional Bank locations and two 1st
Community Credit Corporation locations. Maintenance expense under this contract
amounted to $62,323 for the year ended December 31, 1999, a monthly average of
$588 per location.

Interior Design: The Company and the Bank had no service contracts during 2001
with Heritage Interiors, a decorating and design firm owned and operated by the
wife of Kennon R. Patterson, Sr., a director and officer of the Company. The
Company and the Bank, including the Bank's subsidiaries used the services of
Heritage Interiors during 1999 and 2000 for the interior design, furniture,
appliances, fixtures, hardware, carpets, wall coverings, paint, drapes and
accessories for new facilities and similar work associated with the renovation
of existing locations. At the request of Mrs. Patterson in January 2000, the
Company's contract with Heritage Interiors was canceled, but at the Board of
Directors' request, Mrs. Patterson agreed to complete projects then pending.
During 2000, Heritage Interiors was paid $145,038 in connection with the
completion of the Boaz and Hamilton, Alabama banks. In addition, Community Bank
paid Heritage Interiors $41,827 in connection with the completion of the
renovation of the first floor of the headquarters building and the furnishings
and decorating of three departments at the headquarters complex in Blountsville,
Alabama. Additional payments totaling $25,064 were made to Heritage Interiors
during 2000 in connection with 21 other banking locations and the parent
company. 1st Community Credit Corporation paid Heritage Interiors $22,003 for
the furnishings and decorating in connection with the relocation of its
Hartselle, Alabama office and $4,845 in connection with the remodeling of its
Albertville, Alabama office. Additional payments totaling $7,317 were made to
Heritage Interiors during 2000 in connection with nine other finance company
locations. Community Insurance Corp. paid Heritage Interiors $156,158 during
2000 for furnishings and decorating in connection with the renovation of its
Huntsville, Alabama office. In addition, payments totaling $4,848 were made to
Heritage Interiors during 2000 for furnishings at the Oneonta, Alabama insurance
office. Total payments to Heritage Interiors in 2000 were $407,100. All pending
projects were completed prior to year-end 2000.


                                       86
<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 19 - RELATED PARTY TRANSACTIONS - CONTINUED

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

Accounting Services: The Company has engaged the accounting firm of Schauer,
Taylor, Cox, Vise and Morgan, P.C. to perform certain accounting services. Doug
Schauer, a member of the firm, is Kennon R. Patterson, Sr.'s son-in-law. Other
than preparing work papers during the first quarter of 2000 for the Company's
independent auditors in connection with the Company's 1999 external audit,
services performed by Schauer, Taylor, Cox, Vise and Morgan, P.C. for the
Company in 2001 and 2000 have been limited to preparation of the Company's
quarterly tax accruals, preparation and filing the Company's federal and state
tax returns and consultation regarding interpretation and application of
accounting standards. During 1999, services performed by Schauer, Taylor, Cox,
Vice and Morgan, P.C., included the review of work papers and reports prepared
by Community Bank's internal audit department, preparation of work papers for
the Company's independent auditors in connection with the Company's external
audits, preparation and filing the Company's federal and state tax returns and
consultation regarding interpretation and application of accounting standards.
The Company and its subsidiaries paid Schauer, Taylor, Cox, Vise and Morgan,
P.C. $121,707, $117,898 and $143,000 for services rendered during 2001, 2000 and
1999, respectively.

Leases: In June 2000, Community Bank entered into a capital lease agreement, as
the tenant, with Debter Properties, LLC, an Alabama limited liability company,
pursuant to which Community Bank leased the real property in which Community
Bank's Boaz, Alabama office is located. Mr. Glynn Debter, a director of the
Company, is a member of Debter Properties, LLC. In connection with the lease
agreement, Community Bank loaned funds to Debter Properties, LLC to finance its
purchase of the real property from Community Bank. The term of the lease is 20
years; provided, however, that in no event shall the term of the lease expire
prior to the time when the loan obtained by the lessor to purchase the leased
property is paid in full. The monthly rent on this lease is an amount equal to
the monthly debt amortization of funds which the lessor borrowed to purchase the
leased property. Because the interest rate on the loan used to purchase the
property adjusts with fluctuation in the prime rate, the monthly lease payments
are subject to change. At December 31, 2001, the amount of the monthly rental
payment was $11,136. Lease payments to Debter Properties, LLC during 2001
totaled approximately $156,651. In addition, Community Bank agreed to pay the
lessor an additional sum


                                       87
<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 19 - RELATED PARTY TRANSACTIONS - CONTINUED

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 that is included in payments
made by Community Bank under the lease.

On March 13, 2001, Community Bank entered into a ground lease with Merritt
Robbins, a director of the Company and Community Bank, pursuant to which
Community Bank leases property in New Hope, Alabama, from Mr. Robbins for a
period of 5 years at a monthly rent of $800. Community Bank has the option to
renew the lease for up to seven successive 5-year terms in which event the rent
increases $200 per month with each renewal term. At any time during the term of
the lease Community Bank has the option to purchase the property at a price
agreed upon by the parties, or, if the parties cannot agree, at a price
determined by averaging appraisals of the property performed by two licensed
appraisers.

On June 14, 2001, Community Bank entered into a lease with Michael Robbins, the
son of a director of the Company and Community Bank pursuant to which Mr.
Robbins leases property in Madison County, Alabama from Community Bank for a
period of 5 years at a monthly rent of $700. Mr. Robbins has the option to renew
the lease for up to seven successive 5-year terms. At any time during the term
of the lease Mr. Robbins has the option to purchase the property at a price
agreed upon by the parties, or, if the parties cannot agree, at a price
determined by averaging appraisals of the property performed by two licensed
appraisers.

NOTE 20 - LEASES

The Company has a number of operating lease agreements, involving land and
buildings. The operating leases are noncancellable and expire on various dates
through the year 2018. The leases provide for renewal options and generally
require the Company to pay maintenance, insurance and property taxes. Options to
purchase are also included in some leases. For the years ended December 31,
2001, 2000, and 1999, rental expense for operating leases was approximately
$559,725, 523,524 and $687,994, respectively.

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

                                       88

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 20 - LEASES - CONTINUED

The following is an analysis of the leased property under capital leases by
major classes:

<TABLE>
<CAPTION>
                                                                                          Asset Balances at
                                                                                            December 31,
                                                                                 ------------------------------
                                                                                      2001            2000
                                                                                 -------------    -------------

<S>                                                                              <C>               <C>
    Buildings....................................................                $   5,880,626     $  5,880,626
    Less allowance for depreciation..............................                      355,137          130,840
                                                                                 -------------     ------------
                                                                                 $   5,525,489     $  5,749,786
                                                                                 =============     ============
</TABLE>


The following is a schedule by year of future minimum lease payments under
capital and operating leases, together with the present value of the net minimum
lease payments as of December 31, 2001. All capitalized leases are with related
parties.

<TABLE>
<CAPTION>

                                                                  Related Party         Total
                                                                    Operating         Operating       Capitalized
                                                                 -------------      -------------   ---------------
<S>                                                               <C>                <C>             <C>
Years Ending December 31,
             2002............................................... $       9,600      $     381,265   $       398,748
             2003...............................................         9,600            280,707           398,748
             2004...............................................         9,600            217,846           398,748
             2005...............................................         9,600            139,305           398,748
             2006...............................................         2,400             94,767           398,748
             Thereafter.........................................             -            264,400         7,967,800
                                                                  -------------      ------------   ---------------
             Total minimum lease payments....................... $      40,800      $   1,378,290         9,961,540
                                                                 =============      =============
             Less amount representing interest..................                                          4,195,464
                                                                                                    ---------------
             Present value of net minimum lease payments........                                    $     5,766,076
                                                                                                    ===============

</TABLE>

NOTE 21 - OTHER SHORT-TERM BORROWINGS

Other short-term borrowings at December 31, 2001 and 2000 consisted of the U.S.
Treasury Tax and Loan Note Option account of $1,822,420 and securities sold
under agreements to repurchase of $2,537,507. The Company had no federal funds
purchased or overnight funds purchased from FHLB-Atlanta at December 31, 2001
and 2000.

US Treasury Tax and Loan Note Option and securities sold under agreements to
repurchase are generally treated as collateralized financing transactions. It is
the Company's policy to deliver underlying securities to custodian accounts for
customers.


                                       89

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 21 - OTHER SHORT-TERM BORROWINGS - CONTINUED

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

                              SHORT-TERM BORROWINGS

<TABLE>
<CAPTION>
                                                   At December 31,
                                              ------------------------
                                                              Weighted                               Maximum
                                                              Average     Average     Average      Outstanding At
                                                 Balance       Rate       Balance      Rate        Any Month End
                                              ------------  ----------  ----------  -----------   ----------------
                                                                      (Dollars in thousands)


<S>                                            <C>              <C>      <C>          <C>             <C>
 2001:
   FEDERAL FUNDS PURCHASED..................   $       -        0.00%    $    74      6.11%           $  3,000
   SHORT-TERM FHLB BORROWINGS...............           -        0.00%      3,967      4.30%              8,000
   SECURITIES SOLD UNDER AGREEMENT TO
     REPURCHASE.............................       2,538        2.13%      2,274      3.59%                391
   U.S. TREASURY TAX AND LOAN, NOTE
     OPTION.................................       1,822        1.51%      1,021      3.21%                814
                                               ---------                 -------                      --------
       TOTAL................................   $   4,360        1.87%    $ 7,336      3.95%           $ 12,205
                                               =========                 =======                      ========
 2000:
   Federal funds purchased..................   $      -         0.00%    $   402      6.47%           $  3,000
   Short-term FHLB borrowings...............          -         0.00%        325      6.86%                  -
   Securities sold under agreement to
     repurchase.............................        862         6.17%        818      6.17%              1,072
   U.S. Treasury Tax and Loan, note
     option.................................      1,403         5.72%      1,044      6.14%              2,456
                                               --------                  -------                      --------
       Total................................   $  2,265         5.89%    $ 2,589      6.30%           $  6,528
                                               ========                  =======                      ========
</TABLE>

NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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



                                       90
<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

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

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

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

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

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                                       91


<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999



NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The estimated fair values of the Company's financial instruments as of December
31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>

                                                                 2001                            2000
                                                    ------------------------------  -------------------------------
                                                        CARRYING         FAIR         Carrying           Fair
                                                         AMOUNT          VALUE         Amount            Value
                                                    --------------   -------------  -------------  ----------------
                                                            (IN THOUSANDS)                  (IN THOUSANDS)

<S>                                                 <C>              <C>             <C>            <C>
FINANCIAL ASSETS
  Cash and short-term investments................   $       23,237          23,237  $      26,707  $         26,707
  Federal funds sold.............................           30,000          30,000          3,000             3,000
  Investment securities..........................          121,679         121,679        101,570           101,570
  Loans..........................................          501,520         517,454        528,316                -
  Less: allowance for loan losses................            7,292           7,292          7,107                -
                                                    --------------   -------------  -------------  ----------------
  Net Loans......................................          494,228         510,162        521,209           519,754
                                                    --------------   -------------  -------------  ----------------
  TOTAL FINANCIAL ASSETS.........................   $      669,144   $     685,078  $     652,486  $        651,031
                                                    ==============   =============  =============  ================
FINANCIAL LIABILITIES
  Deposits.......................................   $      617,706   $     623,334  $     600,901  $        604,172
  Short-term borrowings..........................            4,360           4,360          2,265             2,265
  FHLB borrowings................................           38,000          52,631         38,000            37,067
  Capitalized lease obligations..................            5,766           5,766          5,850             5,850
  Long-term debt.................................            4,667           4,767          5,675             5,586
  Guaranteed preferred beneficial interest
    in the Company's junior subordinated
    deferrable interest debentures...............           10,000          14,902         10,000            10,756
                                                    --------------   -------------  -------------  ----------------
  TOTAL FINANCIAL LIABILITIES....................   $      680,499   $     705,760  $     662,691  $        665,696
                                                    ==============   =============  =============  ================

UNRECOGNIZED FINANCIAL INSTRUMENTS
  Commitments to extend credit...................   $           -    $      18,489  $          -   $         19,868
  Standby letters of credit......................               -            1,299             -                978
                                                    --------------   -------------  -------------  ----------------
  TOTAL UNRECOGNIZED
    FINANCIAL INSTRUMENTS........................   $           -    $      19,788  $          -   $         20,846
                                                    ==============   =============  =============  ================


</TABLE>


                                       92

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 23 - CONDENSED PARENT COMPANY INFORMATION

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                       2001              2000
                                                                                  ---------------  ----------------

<S>                                                                               <C>              <C>
ASSETS
   Cash and due from banks....................................................    $       982,434  $      3,573,341
   Investment in subsidiaries (equity method) -
     eliminated upon consolidation............................................         53,452,423        51,553,558
   Premises and equipment, net................................................             19,384            22,779
   Intangibles, net...........................................................            836,867           920,178
   Deferred tax assets........................................................          1,016,469           825,817
   Refundable Income taxes-current............................................            692,163         1,189,661
   Other assets...............................................................            777,694         1,409,907
                                                                                  ---------------  ----------------
       TOTAL ASSETS...........................................................    $    57,777,434  $     59,495,241
                                                                                  ===============  ================
LIABILITIES AND SHAREHOLDERS' EQUITY
   Long-term debt.............................................................    $     4,666,599  $      5,675,204
   Guaranteed preferred beneficial interest in the Company's
     junior subordinated deferrable interest debentures.......................         10,310,000        10,310,000
   Other liabilities..........................................................          2,135,466         2,320,266
                                                                                  ---------------  ----------------
       TOTAL LIABILITIES......................................................         17,112,065        18,305,470
       TOTAL SHAREHOLDERS' EQUITY.............................................         40,665,369        41,189,771
                                                                                  ---------------  ----------------
       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................    $    57,777,434  $     59,495,241
                                                                                  ===============  ================


</TABLE>






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                                       93


<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 23 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                                 Year Ended December 31,
                                                                     ----------------------------------------------
                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                  <C>             <C>             <C>
INCOME
   From subsidiaries - eliminated upon consolidation:
     Dividends...................................................    $          -    $   4,878,562   $    3,702,566
     Management fees.............................................          300,000         300,000          600,000
     Interest....................................................          111,322         169,455           51,578
     Other Income................................................           15,007          27,759            3,620
                                                                     -------------   -------------   --------------
                                                                           426,329       5,375,776        4,357,764
EXPENSES
   Salaries and employee benefits................................        1,568,160       2,193,107        1,857,053
   Interest......................................................        1,388,241       1,433,404          320,895
   Other expenses................................................          683,737       1,340,281        1,692,028
                                                                     -------------   -------------   --------------
                                                                         3,640,138       4,966,792        3,869,976
                                                                     -------------   -------------   --------------
Income (loss) before income taxes and equity in
   undistributed earnings of subsidiaries........................       (3,213,809)        408,984          487,788
Income tax benefit...............................................       (1,107,020)     (1,506,160)      (1,059,075)
                                                                     --------------  -------------   --------------
Income before equity in undistributed earnings (loss)
   of subsidiaries...............................................       (2,106,789)      1,915,144        1,546,863
Equity in undistributed earnings (loss) of subsidiaries..........        1,006,290      (4,130,075)         111,247
                                                                     -------------   -------------   --------------
NET INCOME (LOSS)................................................    $  (1,100,499)  $  (2,214,931)  $    1,658,110
                                                                     ==============  =============   ==============


</TABLE>






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                                       94

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 23 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                 Year Ended December 31,
                                                                     ----------------------------------------------
                                                                         2001             2000            1999
                                                                     -------------   -------------   --------------

<S>                                                                  <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss).............................................    $  (1,100,499)  $  (2,214,931)  $    1,658,110
   Adjustments to reconcile net income (loss) to net
     cash provided by operating activities:
     Equity in undistributed income of subsidiaries..............       (1,006,290)      4,130,075         (111,247)
     Provision for depreciation, amortization and accretion......           86,707         108,362           94,629
     Increase in other assets....................................        1,690,614      (1,547,353)        (191,731)
     Increase in other liabilities...............................         (184,800)      1,291,716           86,792
                                                                     -------------   -------------   --------------
       NET CASH PROVIDED BY OPERATING ACTIVITIES.................         (514,268)      1,767,869        1,536,553
                                                                     -------------   -------------   --------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturity of securities available for sale ......               -               -                -
   Increase in interest-bearing deposits with banks..............               -               -                -
   Proceeds from sale of assets..................................               -           33,431           15,599
   Capitalization of subsidiaries................................       (1,534,000)     (5,940,879)              -
   Capital expenditures..........................................               -               -           (28,538)
                                                                     -------------   -------------   --------------
       NET CASH (USED IN) PROVIDED BY
         INVESTING ACTIVITIES....................................       (1,534,000)     (5,907,448)         (12,939)
                                                                     -------------   -------------   --------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Repayment of long-term debt...................................         (752,504)       (961,958)        (775,764)
   Issuance of guaranteed preferred beneficial interest
     in Company's junior subordinated deferrable
     interest Debentures.........................................               -       10,310,000               -
   Issuance of common stock......................................          209,865         222,804          312,889
   Cash dividends................................................               -       (3,333,145)      (2,788,754)
                                                                     -------------   -------------   --------------
       NET CASH PROVIDED BY (USED IN)
         FINANCING ACTIVITIES....................................         (542,639)      6,237,701       (3,251,629)
                                                                     -------------   -------------   --------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............       (2,590,907)      2,098,122       (1,728,015)
Cash and Due From Banks at Beginning of Year.....................        3,573,341       1,475,219        3,203,234
                                                                     -------------   -------------   --------------
CASH AND DUE FROM BANKS AT END OF YEAR...........................    $     982,434   $   3,573,341   $    1,475,219
                                                                     =============   =============   ==============


</TABLE>

                                       95

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 24 - SUBSEQUENT EVENTS

In late 2001 and early 2002, Community Bank entered into agreements to sell its
two Pulaski, Tennessee offices, its Rainsville and Ft. Payne, Alabama offices
and its Marshall County, Alabama locations. The Marshall County locations
include one banking office in Boaz, Alabama, one in Albertville, Alabama, two in
Arab, Alabama, and two in Guntersville, Alabama. Two of the total ten offices
under agreements to sell are paying and receiving offices located in Wal-Mart
stores, one in Ft. Payne, Alabama and one in Guntersville, Alabama.

Each agreement calls for the purchaser to purchase the fixed assets of each
location and the book value of each loan portfolio less any agreed upon
discounts. The agreements also call for the purchaser to assume the deposit
liabilities of each location and pay an agreed upon premium for the deposits
assumed.

On March 31, 2002, Community Bank closed on the sale of its Pulaski bank offices
and recorded a gain of $1,551,443, representing a 7% premium on the 30-day
average of core deposits totaling $1,884,194 less the discount on loans and
fixed assets of $332,751.

The Rainsville and Ft. Payne sale is expected to occur on May 3, 2002 and the
Marshall County sale is expected to occur on May 31, 2002, both assuming
satisfaction of customary conditions prior to closing. Both transactions are
expected to result in gains representing an 8% premium on core deposits less the
agreed upon discount on loans.



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                                       96

<PAGE>


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

                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 25 - QUARTERLY RESULTS (UNAUDITED)

A summary of the unaudited results of operations for each quarter of 2001 and
2000 follows:

<TABLE>
<CAPTION>

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

<S>                                                 <C>              <C>               <C>            <C>
2001:
   TOTAL INTEREST INCOME.........................   $      15,105    $     14,942      $  14,488      $   13,951
   TOTAL INTEREST EXPENSE........................           8,815           8,265          7,887           6,622
   PROVISION FOR LOAN LOSSES.....................             951           1,381          2,449           1,533
   NET INTEREST INCOME AFTER

     PROVISION FOR LOAN LOSSES...................           5,340           5,296          4,152           5,796
   INVESTMENT SECURITIES GAINS (LOSSES)..........             353              25            155             751
   TOTAL NONINTEREST INCOME......................           2,309           2,128          2,005           1,812
   TOTAL NONINTEREST EXPENSE.....................           6,865           7,808          7,321           9,978
   INCOME TAX EXPENSE............................             332            (202)            24            (903)
   NET INCOME (LOSS).............................             805            (156)        (1,033)           (716)
   PER COMMON SHARE:
     BASIC EARNINGS (LOSS).......................   $         .18    $       (.03)     $    (.22)     $     (.16)
     DILUTED EARNINGS (LOSS).....................             .18            (.03)          (.22)           (.16)

2000:
   Total interest income.........................   $      14,315    $     15,223      $  15,825      $   15,712
   Total interest expense........................           7,465           8,440          8,900           9,051
   Provision for loan losses.....................           1,008           1,329          4,619           2,333
   Net interest income after
     provision for loan losses...................           5,842           5,454          2,306           4,829
   Investment securities gains (losses)..........             (27)              -             45             (13)
   Total noninterest income......................           2,522           2,638          2,512           2,229
   Total noninterest expense.....................           7,669           7,694          7,749           8,644
   Income tax expense............................             214              95         (1,128)           (886)
   Net income (loss).............................             454             303         (1,758)         (1,214)
   Per Common Share:
     Basic earnings (loss).......................   $         .10    $        .06      $    (.39)     $     (.27)
     Diluted earnings (loss).....................             .10             .06           (.38)           (.25)

</TABLE>


In April 2002, the Company amended the Form 10Q filed for the period ended
September 30, 2001. Net loans and total assets decreased $1,258,010 resulting
from a restatement of charge-offs for the period. Net income and total
shareholders' equity decreased $1,258,010 resulting from a restatement of the
provision for loan losses of $962,549 and other operating expenses of $295,461.


                                       97


<PAGE>


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

         The Company's discussion of changes in its accountants are disclosed
in:

         (i.)     The Company's Current Report on Form 8-K filed on May 16, 2000
         (ii.)    an amendment thereto on Form 8-K/A filed on May 30, 2000
         (iii.)   a Current Report on Form 8-K filed on September 28, 2000
         (iv.)    an amendment thereto on Form 8-K/A filed on October 10, 2000
         (v.)     a Current Report on Form 8-K filed on February 15, 2001.





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                                       98

<PAGE>



                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item with respect to the directors and nominees for
director of the Company is incorporated by reference from the sections entitled
"Election of Directors" and "Executive Compensation and Other Information" in
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
during 2002. Information regarding the executive officers of the Company is
included in Part I of this Report.

Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference from the section
entitled "Election of Directors - Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for the annual meeting of
shareholders to be held during 2002.

ITEM 11 - EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from the section
entitled "Executive Compensation" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held during 2002.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated by reference from the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
during 2002.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference from the section
entitled "Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held during 2002.



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                                       99

<PAGE>




                                     PART IV

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

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

<TABLE>
<CAPTION>

Community Bancshares, Inc. and Subsidiaries
Financial Statements                                                                                           Page(s)
                                                                                                               -------

<S>                                                                                                             <C>
Auditors' Report..........................................................................................      59
Consolidated Statements of Financial Condition as of
  December 31, 2001 and 2000..............................................................................      60

Consolidated Statements of Income for the years ended
  December 31, 2001, 2000 and 1999........................................................................      61

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 2001, 2000 and 1999........................................................................      62

Consolidated Statements of Cash Flows for the years ended
  December 31, 2001, 2000 and 1999........................................................................   63-64

Notes to Consolidated Financial Statements -
  December 31, 2001, 2000 and 1999........................................................................  65-113

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

</TABLE>

(b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the fourth quarter ended
December 31, 2001:

(c) Exhibits

<TABLE>

<S>        <C>
     3.1  Certificate of Incorporation, as amended and restated May 2000 (1)
     3.2  By-Laws of Registrant, as amended and restated May 2000 (2)
     4.1  Rights Agent Agreement, dated January 13, 1999, between Community
          Bancshares, Inc. and the Bank of New York (3)
     4.2  Indenture, dated March 23, 2000, by and between Community Bancshares, Inc. and The
          Bank of New York (4)
    10.1  Promissory  Note,  Guaranty  and Pledge  Agreement,  dated  December  1, 1998,  by and
          between Community Bancshares, Inc. and Colonial Bank, N.A. (5)
    10.2  Plan document for the Community  Bancshares,  Inc.  Benefit  Restoration  Plan adopted
          April 12, 1994, effective January 1, 1995 (6) (*)
    10.3  Subordinated  Promissory Note, dated October 4, 1994,  between  Community  Bancshares,
          Inc. as borrower and Jeffrey K. Cornelius as holder (7)
    10.4  Employment Agreement,  dated March 28, 1996 by and between Kennon R. Patterson,  Sr. and Community
          Bancshares, Inc. (8) (*)
    10.5  Amendment to Employment  Agreement,  dated October 14, 1999, by and between  Kennon R.  Patterson,
          Sr. and Community Bancshares, Inc. (9) (*)


</TABLE>

                                      100


<PAGE>

<TABLE>

 <S>      <C>
 10.6     Stock Option Agreement between Community  Bancshares,  Inc. and Robert O. Summerford, dated March
          27, 1997 (10) (*)
 10.7     Stock Option Agreement between Community  Bancshares,  Inc. and Denny Kelly,  dated March 26, 1998
          (11) (*)
 10.8     Stock Option Agreement between Community Bancshares,  Inc. and Loy McGruder,  dated March 26, 1998
          (12) (*)
 10.9     Form of Stock Option Agreement between Community  Bancshares,  Inc. and grantees,  dated March 26,
          1998 (13) (*)
 10.10    Form of Change in Control  Agreement  between  Community  Bancshares,  Inc.  and each of Kennon R.
          Patterson, Sr. and Loy McGruder dated December 4, 1999 (14) (*)
 10.11    Form of Stock Option Agreement for Non-Employee  Directors  between  Community Bancshares,  Inc.,
          and each of Glynn Debter,  Roy B.  Jackson,  John J. Lewis,  Jr., Merritt  Robbins and Robert O.
          Summerford, dated December 4, 1999 (15) (*)
 10.12    Form of Stock Option  Agreement for Employees  between  Community  Bancshares,  Inc.,  and each of
          Kennon R. Patterson, Sr., Bishop K. Walker,  Jr., Denny Kelly,  and Loy McGruder, dated December
          4, 1999 (16) (*)
 10.13    Amended and Restated  Declaration  of Trust,  dated March 23, 2000, by and between The Bank of New
          York  (Delaware),  The Bank of New York,  Community  Bancshares,  Inc. and Community  (AL) Capital
          Trust I (17)
 10.14    Guarantee  Agreement,  dated March 23, 2000,  by and between  Community  Bancshares,  Inc. and The
          Bank of New York (18)
 10.15    Placement  Agreement,  dated March 23, 2000,  between  Community  (AL) Capital Trust I, Community
          Bancshares, Inc. and Salomon Smith Barney, Inc. (19)
 10.16    Lease Agreement, dated May 31, 2000, between REM, LLC, as lessor, and Community Bank, as lessee
          (20)
 10.17    Addendum to Lease Agreement and Loan Agreement, dated May 31,2000, between REM, LLC and Community
          Bank (21)
 10.18    Lease Agreement, dated June 1, 2000, between Debter Properties, LLC, as lessor, and Community
          Bank, as lessee (22)
 10.19    Addendum to Lease Agreement and Loan Agreement, dated June 1, 2000, between Debter Properties, LLC
          and Community Bank (23)
 10.20    Form of Amendment to Nonqualified Stock Option Agreement,  between Community Bancshares, Inc. and
          grantee, dated December 12, 2000 (24) (*)
 10.21    Change in Control Agreement, dated September 18, 2001, between Community Bancshares, Inc. and
          Kerri C. Newton (25)(*)
 10.22    Form of Stock Option Agreement  between Community  Bancshares,  Inc. and each Kennon R. Patterson,
          Sr.,  Glynn  Debter, Roy B. Jackson,  Denny Kelly,  John J. Lewis,  Jr., Loy McGruder,  Kennon R.
          Patterson,  Jr., Merritt Robbins,  Robert O. Summerford, Jimmie Trotter and Kerri Newton dated
          December 18, 2001(*)
 10.23    Stock Purchase  Agreement  dated January,  2002 between  Community  Bancshares,  Inc. and Denny G.
          Kelly and Arlene S. Kelly (*)
 10.24    Stock Purchase  Agreement dated January,  2002 between Community  Bancshares,  Inc. and Bishop K.
          Walker and Wanda W. Walker (*)
 10.25    Severance Agreement dated the 9th day of January, 2002 by and between Denny G. Kelly and Community
          Bancshares, Inc. and Community Bank (*)
 10.26    Severance Agreement dated the 9th day of  January,  2002 by and  between  Bishop K.  Walker and
          Community Bancshares, Inc. and Community Bank (*)
 10.27    Acquisition Agreement dated December 21, 2001 by and among First Farmers and Merchants
          Corporation, First Farmers and Merchants National Bank of Columbia, Community Bank and Community
          Bancshares, Inc.
 10.28   Supplemental Agreement dated January 23, 2002 between First Farmers and Merchants Corporation,
          First Farmers and Merchants National Bank of Columbia, Community Bank and Community Bancshares,
          Inc.
</TABLE>

                                      101

<PAGE>

<TABLE>

<S>       <C>

10.29     Acquisition Agreement dated the 25th day of February, 2002 by and
          between First Southern National Bank and Community Bank
10.30     Acquisition Agreement dated the 25th day of February, 2002 by and
          between Peoples Bank of North Alabama and Community Bank
10.31     Amendment to Subordinated  Promissory Note, dated March 26, 2002,  between Community  Bancshares,
          Inc. and Jeffrey K. Cornelius
11        Statement of computation of per share earnings
12        Statement of computation of ratios
21        Subsidiaries of the Registrant

</TABLE>


Notes to Exhibits:

<TABLE>

<S>   <C>

(1)   Filed as Exhibit 3.2 to Form 10-Q for the quarter  ended June 30, 2000,  and  incorporated  herein
      by reference
(2)   Filed as Exhibit 3.1 to Form 10-Q for the quarter  ended June 30, 2000,  and  incorporated  herein
      by reference
(3)   Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and incorporated herein by reference
(4)   Filed as Exhibit 4.4 to Form 10-Q for the quarter ended March 31, 2000,  and  incorporated  herein
      by reference
(5)   Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1998, and  incorporated  herein
      by reference
(6)   Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 1995, and incorporated herein
      by reference
(7)   Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1995, and incorporated herein
      by reference
(8)   Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended September 30, 1998, and incorporated
      herein by reference
(9)   Filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein
      by reference
(10)  Filed as Exhibit 10.47 to Form 10-K for the year ended December 31, 1997, and incorporated herein
      by reference
(11)  Filed as Exhibit 10.38 to Form 10-K for the year ended December 31, 1998, and incorporated herein
      by reference
(12)  Filed as Exhibit 10.40 to Form 10-K for the year ended December 31, 1998, and incorporated herein
      by reference
(13)  Filed as Exhibit 10.41 to Form 10-K for the year ended December 31, 1998, and incorporated herein
      by reference
(14)  Filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 1999, and incorporated herein
      by reference
(15)  Filed as Exhibit 10.33 to Form 10-K for the year ended December 31, 1999, and incorporated herein
      by reference
(16)  Filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 1999, and incorporated herein
      by reference
(17)  Filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2000, and  incorporated  herein
      by reference
(18)  Filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2000, and  incorporated  herein
      by reference
(19)  Filed as Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2000, and  incorporated  herein
      by reference
(20)  Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2000,  and  incorporated  herein
      by reference

</TABLE>

                                      102


<PAGE>


<TABLE>

<S>   <C>

(21)  Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2000,  and  incorporated  herein
      by reference
(22)  Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2000,  and  incorporated  herein
      by reference
(23)  Filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2000,  and  incorporated  herein
      by reference
(24)  Filed as Exhibit 10.45 to Form 10-K for the year ended December 31, 2000, and incorporated herein
      by reference
(25)  Filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2001, and incorporated
      herein by reference

(*)   Management contract or compensation plan or arrangement

</TABLE>


Certain financial statements, schedules and exhibits have been omitted because
they are not applicable.

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized, in the city of
Blountsville, State of Alabama, on April 15, 2002.




                                        COMMUNITY BANCSHARES, INC.




                                        By: /s/ Kennon R. Patterson, Sr.
                                           -------------------------------
                                           KENNON R. PATTERSON, SR.
                                           CHAIRMAN AND CHIEF EXECUTIVE
                                           OFFICER

                                       By: /s/ Kerri C. Newton
                                          -------------------------------
                                          KERRI C. NEWTON
                                          CHIEF FINANCIAL OFFICER

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




       Signature
-----------------------------


/s/ Kennon R. Patterson, Sr.
----------------------------
KENNON R. PATTERSON, SR.                Chairman of the Board, President,
                                        Chief Executive Officer, Director
                                          (principal executive officer)
/s/ Kerri C. Newton
----------------------------
KERRI C. NEWTON                         Chief Financial Officer (principal
                                              accounting officer)

/s/ Glynn Debter
----------------------------
GLYNN DEBTER                                  Director



                                      103


<PAGE>


/s/ Roy B. Jackson
----------------------------
ROY B. JACKSON                                Director





----------------------------
DENNY KELLY                                   Director


/s/ John J. Lewis, Jr.
----------------------------
JOHN J. LEWIS, JR.                            Director


/s/ Loy McGruder
-----------------------------
LOY MCGRUDER                                  Director



/s/ Kennon R. Patterson, Jr.
----------------------------
KENNON R. PATTERSON, JR.                      Director


/s/ Merritt Robbins
----------------------------
MERRITT ROBBINS                               Director



/s/ Robert O. Summerford
----------------------------
ROBERT O. SUMMERFORD                          Director



/s/ Jimmie Trotter
----------------------------
JIMMIE TROTTER                                Director



                                      104
<PAGE>
--------------------------------------------------------------------------------




                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



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



                                   EXHIBITS TO

                           ANNUAL REPORT ON FORM 10-K



                                     FOR THE

                          YEAR ENDED DECEMBER 31, 2001


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



                           COMMUNITY BANCSHARES, INC.

                                68149 MAIN STREET

                           BLOUNTSVILLE, ALABAMA 35031



--------------------------------------------------------------------------------
<PAGE>

(c) Exhibits

<TABLE>
         <S>      <C>
         3.1      Certificate of Incorporation, as amended and restated May 2000
                  (1)
         3.2      By-Laws of Registrant, as amended and restated May 2000 (2)
         4.1      Rights Agent Agreement, dated January 13, 1999, between
                  Community Bancshares, Inc. and the Bank of New York (3)
         4.2      Indenture, dated March 23, 2000, by and between Community
                  Bancshares, Inc. and The Bank of New York (4)
         10.1     Promissory Note, Guaranty and Pledge Agreement, dated December
                  1, 1998, by and between Community Bancshares, Inc. and
                  Colonial Bank, N.A. (5)
         10.2     Plan document for the Community Bancshares, Inc. Benefit
                  Restoration Plan adopted April 12, 1994, effective January 1,
                  1995 (6) (*)
         10.3     Subordinated Promissory Note, dated October 4, 1994, between
                  Community Bancshares, Inc. as borrower and Jeffrey K.
                  Cornelius as holder (7)
         10.4     Employment Agreement, dated March 28, 1996 by and between
                  Kennon R. Patterson, Sr. and Community Bancshares, Inc. (8)
                  (*)
         10.5     Amendment to Employment Agreement, dated October 14, 1999, by
                  and between Kennon R. Patterson, Sr. and Community Bancshares,
                  Inc. (9) (*)
         10.6     Stock Option Agreement between Community Bancshares, Inc. and
                  Robert O. Summerford, dated March 27, 1997 (10) (*)
         10.7     Stock Option Agreement between Community Bancshares, Inc. and
                  Denny Kelly, dated March 26, 1998 (11) (*)
         10.8     Stock Option Agreement between Community Bancshares, Inc. and
                  Loy McGruder, dated March 26, 1998 (12) (*)
         10.9     Form of Stock Option Agreement between Community Bancshares,
                  Inc. and grantees, dated March 26, 1998 (13) (*)
         10.10    Form of Change in Control Agreement between Community
                  Bancshares, Inc. and each of Kennon R. Patterson, Sr. and Loy
                  McGruder dated December 4, 1999 (14) (*)
         10.11    Form of Stock Option Agreement for Non-Employee Directors
                  between Community Bancshares, Inc., and each of Glynn Debter,
                  Roy B. Jackson, John J. Lewis, Jr., Merritt Robbins and Robert
                  O. Summerford, dated December 4, 1999 (15) (*)
         10.12    Form of Stock Option Agreement for Employees between Community
                  Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop
                  K. Walker, Jr., Denny Kelly and Loy McGruder dated December 4,
                  1999 (16) (*)
         10.13    Amended and Restated Declaration of Trust, dated March 23,
                  2000, by and between The Bank of New York (Delaware), The Bank
                  of New York, Community Bancshares, Inc. and Community (AL)
                  Capital Trust I (17)
         10.14    Guarantee Agreement, dated March 23, 2000, by and between
                  Community Bancshares, Inc. and The Bank of New York (18)
         10.15    Placement Agreement, dated March 23, 2000, between Community
                  (AL) Capital Trust I, Community Bancshares, Inc. and Salomon
                  Smith Barney, Inc. (19)
         10.16    Lease Agreement, dated May 31, 2000, between REM, LLC, as
                  lessor, and Community Bank, as lessee (20)
         10.17    Addendum to Lease Agreement and Loan Agreement, dated May
                  31,2000, between REM, LLC and Community Bank (21)
         10.18    Lease Agreement, dated June 1, 2000, between Debter
                  Properties, LLC, as lessor, and Community Bank, as lessee (22)
</TABLE>

<PAGE>

<TABLE>
         <S>      <C>
         10.19    Addendum to Lease Agreement and Loan Agreement, dated June 1,
                  2000, between Debter Properties, LLC and Community Bank (23)
         10.20    Form of Amendment to Nonqualified Stock Option Agreement,
                  between Community Bancshares, Inc. and grantee, dated December
                  12, 2000 (24) (*)
         10.21    Change in Control Agreement, dated September 18, 2001, between
                  Community Bancshares, Inc. and Kerri C. Newton (25)(*)
         10.22    Form of Stock Option Agreement between Community Bancshares,
                  Inc. and each Kennon R. Patterson, Sr., Glynn Debter, Roy B.
                  Jackson, Denny Kelly, John J. Lewis, Jr., Loy McGruder, Kennon
                  R. Patterson, Jr., Merritt Robbins, Robert O. Summerford,
                  Jimmie Trotter and Kerri Newton dated December 18, 2001 (*)
         10.23    Stock Purchase Agreement dated January, 2002 between Community
                  Bancshares, Inc. and Denny G. Kelly and Arlene S. Kelly (*)
         10.24    Stock Purchase Agreement dated January, 2002 between Community
                  Bancshares, Inc. and Bishop K. Walker and Wanda W. Walker (*)
         10.25    Severance Agreement dated the 9th day of January, 2002 by and
                  between Denny G. Kelly and Community Bancshares, Inc. and
                  Community Bank (*)
         10.26    Severance Agreement dated the 9th day of January, 2002 by and
                  between Bishop K. Walker and Community Bancshares, Inc. and
                  Community Bank (*)
         10.27    Acquisition Agreement dated December 21, 2001 by and among
                  First Farmers and Merchants Corporation, First Farmers and
                  Merchants National Bank of Columbia, Community Bank and
                  Community Bancshares, Inc.
         10.28    Supplemental Agreement dated January 23, 2002 between First
                  Farmers and Merchants Corporation, First Farmers and Merchants
                  National Bank of Columbia, Community Bank and Community
                  Bancshares, Inc.
         10.29    Acquisition Agreement dated the 25th day of February, 2002 by
                  and between First Southern National Bank and Community Bank
         10.30    Acquisition Agreement dated the 25th day of February, 2002 by
                  and between Peoples Bank of North Alabama and Community Bank
         10.31    Amendment to Subordinated Promissory Note, dated March 26,
                  2002, between Community Bancshares, Inc. and Jeffrey K.
                  Cornelius
         11       Statement of computation of per share earnings
         12       Statement of computation of ratios
         21       Subsidiaries of the Registrant
</TABLE>

Notes to Exhibits:

         (1)      Filed as Exhibit 3.2 to Form 10-Q for the quarter ended June
                  30, 2000, and incorporated herein by reference
         (2)      Filed as Exhibit 3.1 to Form 10-Q for the quarter ended June
                  30, 2000, and incorporated herein by reference
         (3)      Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and
                  incorporated herein by reference
         (4)      Filed as Exhibit 4.4 to Form 10-Q for the quarter ended March
                  31, 2000, and incorporated herein by reference
         (5)      Filed as Exhibit 10.2 to Form 10-K for the year ended December
                  31, 1998, and incorporated herein by reference
         (6)      Filed as Exhibit 10.13 to Form 10-K for the year ended
                  December 31, 1995, and incorporated herein by reference
         (7)      Filed as Exhibit 10.15 to Form 10-K for the year ended
                  December 31, 1995, and incorporated herein by reference

<PAGE>

         (8)      Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended
                  September 30, 1998, and incorporated herein by reference
         (9)      Filed as Exhibit 10.2 to Form 10-Q for the quarter ended
                  September 30, 1999, and incorporated herein by reference
         (10)     Filed as Exhibit 10.47 to Form 10-K for the year ended
                  December 31, 1997, and incorporated herein by reference
         (11)     Filed as Exhibit 10.38 to Form 10-K for the year ended
                  December 31, 1998, and incorporated herein by reference
         (12)     Filed as Exhibit 10.40 to Form 10-K for the year ended
                  December 31, 1998, and incorporated herein by reference
         (13)     Filed as Exhibit 10.41 to Form 10-K for the year ended
                  December 31, 1998, and incorporated herein by reference
         (14)     Filed as Exhibit 10.32 to Form 10-K for the year ended
                  December 31, 1999, and incorporated herein by reference
         (15)     Filed as Exhibit 10.33 to From 10-K for the year ended
                  December 31, 1999, and incorporated herein by reference
         (16)     Filed as Exhibit 10.34 to Form 10-K for the year ended
                  December 31, 1999, and incorporated herein by reference
         (17)     Filed as Exhibit 10.1 to Form 10-Q for the quarter ended March
                  31, 2000, and incorporated herein by reference
         (18)     Filed as Exhibit 10.2 to Form 10-Q for the quarter ended March
                  31, 2000, and incorporated herein by reference
         (19)     Filed as Exhibit 10.4 to Form 10-Q for the quarter ended March
                  31, 2000, and incorporated herein by reference
         (20)     Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June
                  30, 2000, and incorporated herein by reference
         (21)     Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June
                  30, 2000, and incorporated herein by reference
         (22)     Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June
                  30, 2000, and incorporated herein by reference
         (23)     Filed as Exhibit 10.4 to Form 10-Q for the quarter ended June
                  30, 2000, and incorporated herein by reference
         (24)     Filed as Exhibit 10.45 to Form 10-K for the year ended
                  December 31, 2000, and incorporated herein by reference
         (25)     Filed as Exhibit 10.1 to Form 10-Q for the quarter ended
                  September 30, 2001, and incorporated herein by reference.
         (*)      Management contract or compensation plan or arrangement

Certain financial statements schedules and exhibits have been omitted because
they are not applicable.