<PAGE>   1
                             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, 1998         COMMISSION FILE NO. 0-16461

                                       OR

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

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

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

                           MAIN STREET, P. O. BOX 1000
                           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 15, 1999 THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY
                        NON-AFFILIATES WAS $ 62,090,050.

  INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS OF COMMON
                   STOCK, AS OF THE LATEST PRACTICABLE DATE.

           CLASS                                  OUTSTANDING AT MARCH 15, 1999
----------------------------                      -----------------------------
COMMON STOCK, $.10 PAR VALUE                                 4,656,847

  DOCUMENTS INCORPORATED BY REFERENCE        PART OF 10-K IN WHICH INCORPORATED
---------------------------------------      ----------------------------------
PROXY STATEMENT FOR 1999 ANNUAL MEETING                    PART III

       THE TOTAL NUMBER OF PAGES IN THIS REPORT INCLUDING EXHIBITS IS 162.



<PAGE>   2



                                     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
Board (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 northern Alabama and southern Tennessee. At December 31, 1998, the
Company and its subsidiaries had total assets of about $603,244,000, deposits of
about $538,586,000 and shareholders' equity of about $47,233,000.


SUBSIDIARY BANK

Community Bank currently operates through 30 locations in 12 counties in Alabama
and southern Tennessee. It offers a wide range of commercial and retail banking
services, including demand and time deposit accounts, personal and commercial
loans and personal and commercial checking accounts. The majority of loans by
Community Bank are to individuals and small to mid-sized businesses in Alabama
and Tennessee. Community Bank seeks to provide superior service to its customers
and to become a vital component of each of the communities it serves.

Community Bank operates in small non-urban communities, including locations in
Blountsville, Cleveland, Oneonta, Snead and West Blount in Blount County,
Alabama; Fort Payne and Rainsville in DeKalb County, Alabama; Rogersville in
Lauderdale County, Alabama; Elkmont in Limestone County, Alabama; Gurley,
Meridianville and New Hope in Madison County, Alabama; Demopolis in Marengo
County, Alabama; Hamilton in Marion County, Alabama; Arab, Albertville, Boaz and
Gunterville 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.
Four of these offices are located within Wal-Mart stores, including one office
opened in the first quarter of 1998. In June 1998, Community Bank purchased
certain assets and assumed certain liabilities of the Uniontown, Alabama office
of the First National Bank of West Point, Georgia.


OTHER SUBSIDIARIES

1st Community Credit Corporation, another subsidiary of the Company currently
operates 12 finance company offices in nine Alabama communities, including
Albertville, Arab, Athens, Boaz, Cullman, Decatur, Gadsden, Hartselle,
Huntsville, Fort Payne, Jasper and Moulton, Alabama. In March 1998, 1st
Community Credit Corporation acquired certain assets of Valley Finance, Inc.
relating to its offices in Boaz and Gadsden, Alabama. Other subsidiaries of the
Company are of Community Appraisals, Inc., which operates a real estate
appraisal business, and Community Insurance Corp., which serves as an agent in
the sale of title, life, automobile, homeowner's and farmowner's insurance
policies. In April 1998, Community Insurance Corp. acquired 100% ownership of
the outstanding shares of capital stock of Chafin Insurance Agency, Inc. and Jim
Murphree Insurance Agency, Inc., insurance agencies located in Graysville and
Oneonta, Alabama, respectively. Both agencies merged into Community Insurance
Corp. in January 1999. In April 1998, Community Insurance Corp. acquired 100%
ownership of the outstanding shares of capital stock of Southern


                                        1
<PAGE>   3

Select Insurance, Inc., a property and casualty insurance general agency located
in Birmingham, Alabama that serves as the general agent to over 140 insurance
agencies in Alabama. The Company had acquired a controlling interest in Southern
Select Insurance, Inc. in August 1997.

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


COMPETITION

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


EMPLOYEES

At December 31, 1998, the Company and its subsidiaries had approximately 408
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans (ESOP) and other benefit programs for their employees. The
Company maintains continuing educational and training programs for its employees
designed to prepare them for positions of increasing responsibility in
management or operations. Membership and participation in professional and
industry organizations is encouraged and supported by the Company.



                           SUPERVISION AND REGULATION

THE COMPANY

The banking industry is highly regulated. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provision.


FEDERAL RESERVE

The Company is a bank holding company within the meaning of the Bank Holding
Company Act, and is registered with, and subject to supervision by, the Federal
Reserve and the Federal Reserve Bank of Atlanta. The Company is required to file
periodic reports and such additional information as the Federal Reserve may
require pursuant to the Bank Holding Company Act. The Federal Reserve may also
examine the Company and its subsidiaries.


Subject to certain exceptions, the BHC Act requires Federal Reserve approval
before the Company can acquire substantially all the assets of any bank if as a
result of the acquisition the Company would own or

                                       2
<PAGE>   4

control more than 5% of the voting shares of the bank, or for a merger or
consolidation with another bank holding company. The Company may also engage in
or acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be properly incidental thereto.

The Federal Reserve has adopted a risk-based capital adequacy assessment system
for bank holding companies. Assets are weighted by a risk factor and a ratio is
calculated by dividing 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,
1998.

The Company is a legal entity which is separate and distinct from its
subsidiaries. Federal law restricts extensions of credit by Community Bank to
the Company or its affiliates. Dividends to shareholders of the Company may be
paid only from dividends paid to the Company by its subsidiaries.


FEDERAL DEPOSIT INSURANCE CORPORATION

Deposits in Community Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") and therefore they are subject to examination by the FDIC.
Pursuant to provisions of the Federal Deposit Insurance Act, any FDIC-insured
subsidiary of the Company can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with the default
of a commonly controlled FDIC-insured subsidiary or any assistance by the FDIC
to any commonly controlled FDIC-insured subsidiary in danger of default. The
FDIC charges an annual assessment for the insurance of deposits based upon the
risk a particular institution poses to the FDIC's deposit insurance fund.


FEDERAL LEGISLATION

The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
implemented a number of provisions applicable to insured banks and bank holding
companies. Federal bank regulatory agencies are required to establish standards
for safety and soundness of banks and bank holding companies relating to
internal controls and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth and compensation. The FDICIA also
requires bank holding companies to guarantee compliance with any capital
restoration plans entered into by a subsidiary bank and the FDIC. The activities
of insured state banks, including non-subsidiary equity investment, is generally
limited under the FDICIA to those permitted for national banks.

The FDICIA also requires regulations to by federal banking agencies establishing
minimum loan to value ratios for all real estate mortgage and construction
loans. The FDICIA also requires regulations to limit risks posed by an insured
bank's "exposure" to another bank. Exposure includes extension of credit,
purchases of securities issued by the other bank, or acceptance of securities
issued by the other bank as collateral for an extension of credit. Regulations
pursuant to FDICIA limit such exposure.

The Reigle-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

                                       3
<PAGE>   5

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 merger 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 states with out-of-state institutions. Federal
banking regulators may permit an out-of-sate 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 Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") permits, among other things, the acquisition by bank holding
companies of savings associations, irrespective of their financial condition.
FIRREA also provides that commonly controlled federally insured financial
institutions must reimburse the FDIC for losses incurred by the FDIC in
connection with the default of another commonly controlled financial institution
or in connection with the provision of FDIC assistance to such a commonly
controlled financial institution in danger of default. Reimbursement liability
under FIRREA is superior to any obligations to shareholders of such federally
insured institutions, including a bank holding company such as the Company,
arising as a result of their status as a shareholder of a reimbursing financial
institution.

The 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. Regulators are placing increased emphasis on CRA assessments. 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.

The Equal Credit Opportunity Act ("ECOA") requires non-discrimination in banking
services. The federal enforcement agencies have recently cited institutions for
red-lining (refusing to extend credit to residents of a specific geographic area
known to be comprised predominantly of minorities) or reverse red-lining
(extending credit to minority applicants on terms less favorable than those
offered to non-minority applicants). Violations can result in the assessment of
substantial civil penalties.


ALABAMA BANKING DEPARTMENT

Community Bank is subject to regulation and examination by the Alabama
Superintendent of Banks (the "Superintendent"). State regulations in Alabama
relate to such matters as loans, mortgages, consolidations, required reserves,
allowable investments, issuance of securities, payment of dividends,
establishment of branches, filing of periodic reports and other matters
affecting the business of Community Bank.



              [The remainder of this page intentionally left blank]


                                       4
<PAGE>   6

GOVERNMENTAL MONETARY POLICIES

The Federal Reserve regulates the national supply of bank credit. The
instruments on monetary policy used by the Federal Reserve to implement these
objectives are: open market operations in U. S. Government securities, changes
in discount rate, reserve requirements on member bank's deposits and funds
availability regulations. The Company and its subsidiaries are affected by the
credit policies of monetary authorities. These instruments are used in varying
combinations to influence the overall growth of bank loans. The earnings and
growth of the Company and subsidiaries will be subject to the influence of
economic conditions generally and also 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 policies and their impact on the Company
cannot be predicted.



              [The remainder of this page intentionally left blank]









                                       5
<PAGE>   7




ITEM 1 - STATISTICAL DISCLOSURE
<TABLE>
<CAPTION>
                                                                                                              Page(s)
                                                                                                              -------
<S>                                                                                                           <C>

Loan Portfolio...........................................................................................        14


Selected Loan Maturity and Interest Rate Sensitivity.....................................................        15


Investment Portfolio and Investment Portfolio Maturity Schedule..........................................        16


Maturities of Large Time Deposits........................................................................        17


Maturities of Long-term Debt ............................................................................        18


Interest Rate Sensitivity and Market Risk................................................................        20


Capital Adequacy Ratios..................................................................................        22


Return on Equity and Assets..............................................................................        22


Consolidated Average Balances,
  Interest Income/Expense and Yields/Rates...............................................................     25-26


Rate/Volume Variance Analysis............................................................................     27-28


Summary of Loan Loss Experience..........................................................................     29-30


Allocation of Loan Loss Reserve..........................................................................        30


Nonperforming Assets.....................................................................................        31


Noninterest Income.......................................................................................        32


Noninterest Expense......................................................................................        33
</TABLE>




                                        6

<PAGE>   8



ITEM 2 - PROPERTIES

The main offices of the Company are housed in a colonial style two-story
building owned by Community Bank and located on U. S. Highway 231 in
Blountsville, Alabama.

The main office of Community Bank is located at 68149 Main Street, Blountsville,
Alabama, in a one story brick building constructed in 1975 and extensively
remodeled during 1994. The premises are owned by Community Bank . Community
Bank's administrative, operational, legal and accounting functions are housed in
facilities built at the same location as the Company's main office during 1997.
Community Bank owns or leases buildings that are used in the normal course of
business in eleven counties in Alabama, namely Blount, DeKalb, Lauderdale,
Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry and Winston, and in
Giles County, Tennessee. 1st Community Credit Corporation owns or leases
buildings that are used in the normal course of business in nine counties in
Alabama, namely Cullman, Marshall, Morgan, Limestone, Lawrence, Etowah, Madison,
DeKalb and Walker. Community Insurance Corporation and its subsidiary, Southern
Select Insurance, Inc., own or lease buildings that are used in the normal
course of business in Blount, Jefferson and Shelby counties in Alabama.

For information with respect to the amounts at which bank premises, equipment
and other real estate are carried and relating to commitments under leases, see
Consolidated Financial Statements.


ITEM 3 - LEGAL PROCEEDINGS

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 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, paid
themselves excessive director fees and conspired to conceal wrongful acts from
the Company's shareholders. 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 seeks 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. Management of the Company believes that the
plaintiffs' allegations are false and that the action lacks merit. The Company
and its directors have filed a motion with the court seeking to have the action
dismissed. Management of the Company believes that the action will not have a
material adverse effect on the Company's financial condition and results of
operations.

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





                                        7

<PAGE>   9



ITEM 4 - SUBMISSION OF MATTER 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 1998.


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 Held in the Company
and its Subsidiaries                                           Principal Experience During Past Five Years
------------------------------------------                     -------------------------------------------

<S>                                                            <C>
Kennon R. Patterson, Sr. (56)                                  Chairman, President and Chief Executive Officer
Chairman, President and Chief Executive Officer                of the Company (1985-present); Chairman and
of the Company; Chairman and Chief Executive                   Chief Executive Officer of Community Bank
Officer of Community Bank; Director of                         (1993-present)
Community Appraisals, Inc., Community
Insurance Corp, 1st Community Credit
Corporation and Southern Select Insurance, Inc.


Bishop K. Walker, Jr. (67)                                     Vice Chairman, Senior Executive Vice President
Director, Vice Chairman, Secretary, Senior                     and General Counsel of the Company (1987-
Executive Vice President and General Counsel of                present); President and Director of Community
the Company; Director, Senior Executive Vice                   Insurance Corporation (1987-1997)
President and Secretary of Community Bank;
Director of Community Insurance Corp and
Southern Select Insurance, Inc.

Denny G. Kelly (59)                                            President of Community Bank (1993-present)
Director and Executive Vice President of the
Company; Director and President of Community
Bank; Director of 1st Community Credit
Corporation, Community Appraisals, Inc.,
Community Insurance Corp and Southern Select
Insurance, Inc.

Michael A. Bean (51)                                           Executive Vice President and Chief Financial
Acting Chief Accounting Officer of the Company;                Officer of Community Bank (1998-present);
Director, Executive Vice President and Chief                   Chief Accounting Officer of Compass Bancshares,
Financial Officer of Community Bank; Director                  Inc. (1991-1998)
of Community Insurance Corp and Southern
Select Insurance, Inc.
</TABLE>


                                        8

<PAGE>   10



                                     PART II

ITEM 5 - MARKET OF REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS

Shares of the common stock ( the "Common Stock") of the Company were held by
approximately 2,200 shareholders of record as of March 1, 1999. There is no
established trading market for the Common Stock, which has been purchased and
sold infrequently in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock is provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.

<TABLE>
<CAPTION>
                                                                                             Estimated Price Range
                                                                                                   Per Share
                                                                                         --------------------------
                                                                                            High             Low
                                                                                         ----------       ---------
<S>                                                                                      <C>              <C>

1998:
    FIRST QUARTER..................................................................      $    15.00       $   15.00
    SECOND QUARTER.................................................................           19.00           15.00
    THIRD QUARTER..................................................................           19.00           19.00
    FOURTH QUARTER.................................................................           20.00           19.00


1997:
    First Quarter..................................................................      $    12.50       $   11.50
    Second Quarter.................................................................           13.00           12.50
    Third Quarter..................................................................           15.00           13.00
    Fourth Quarter.................................................................           15.00           14.10
</TABLE>


Annual dividends of $.50 per share and $.38 per share were declared by the Board
of Directors on the Company's Common Stock and paid on January 12, 1998 and
January 10, 1997, respectively. Management continues to anticipate retaining
substantially all earnings to finance the Company's growth. 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.
See Consolidated Financial Statements and related notes.

During 1998, the following equity securities were sold by the Company without
registration under the Securities Act of 1993 (the "Securities Act"):

In February 1998, the Company issued an aggregate of 12,642 shares of Common
Stock to certain of Community Bank's city directors in payment of director fees,
in reliance upon an exemption from registration under Section 4(2) of the
Securities Act.

In March 1998, the Company granted options to purchase an aggregate of 203,221
shares of Common Stock to the directors and certain senior officers of the
Company and Community Bank. The exercise price for each of such options is equal
to the market price of the Common Stock on the date of grant. 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.

                                        9

<PAGE>   11



In April 1998, the Company issued 22,306 shares of Common Stock to the holders,
other than the Company, of capital stock of Southern Select Insurance, Inc., as
a portion of the consideration for the purchase of all of the outstanding shares
of capital stock of Southern Select Insurance, Inc. that were not already held
by the Company. In August 1997, the Company issued 11,770 shares of Common Stock
to the holders of capital stock of Southern Select Insurance, Inc. as a portion
of the consideration for the purchase of 51% of the outstanding shares of such
capital stock. The Company issued shares of the Common Stock in each of these
transactions in reliance upon an exemption from registration under Section 4(2)
of the Securities Act.

In April 1998, the Company issued 10,833 shares of Common Stock to the holders
of capital stock of Chafin Insurance Agency, Inc. as a portion of the
consideration for the purchase of all of the outstanding shares of such capital
stock. The Company issued shares of Common Stock in this transaction in reliance
upon an exemption from registration under Section 4(2) of the Securities Act.

In April 1998, the Company issued 6,667 shares of Common Stock to the holder of
capital stock of Jim Murphree Insurance Agency, Inc. as a portion of the
consideration for the purchase of all of the outstanding shares of such capital
stock. The Company issued shares of Common Stock in this transaction in reliance
upon an exemption from registration under Section 4(2) of the Securities Act.

In March 1999, the Company issued an aggregate of 8.923 shares of Common Stock
to certain of Community Bank's city directors in payment of director fees, in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act.



              [The remainder of this page intentionally left blank]



                                       10

<PAGE>   12



                        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>
                                                                        Year Ended December 31,
                                                   -------------------------------------------------------------
                                                     1998         1997          1996          1995        1994
                                                     ----         ----          ----          ----        ----
                                                            (Dollars in Thousands Except Per Share Data)
<S>                                                <C>          <C>           <C>           <C>         <C>

Interest income..................................  $ 44,365     $ 37,791      $ 33,600      $ 26,304    $ 20,751
Interest expense.................................    22,693       19,541        17,426        13,751       9,507
Net interest income..............................    21,672       18,250        16,174        12,553      11,244
Provision for loan losses........................       885          773           834         1,088         638
Non-interest income..............................     8,102        4,891         4,447         3,717       3,189
Non-interest expense.............................    23,784       17,423        14,902        12,046      10,193
Net income.......................................     3,579        3,512         3,459         2,705       2,688

Per Share data:
    Net income - basic...........................       .90          .92           .93           .81         .80
    Net income - diluted.........................       .88          .92           .93           .81         .80
    Cash dividends...............................       .50          .38           .25           .25         -0-
    Shareholders' equity (book value)
        at period end............................     10.16         8.85          8.63          8.13        6.96

Balance Sheet:
    Loans........................................  $433,853     $326,134      $322,762      $237,841    $206,428
    Deposits.....................................   538,586      440,889       400,338       320,149     263,413
    Long-term debt...............................     7,569        7,398         8,281         7,920       8,713
    Average equity...............................    37,318       33,428        30,079        24,839      22,672
    Average assets...............................   538,470      473,381       421,839       328,244     276,063
    Total assets.................................   603,244      491,839       454,710       362,824     299,352
Ratios:
    Return on average assets.....................      0.67%        0.74%         0.82%         0.82%       0.97%
    Return on average equity.....................      9.59%       10.51%        11.50%        10.88%      11.86%
    Dividend payout ratio........................     55.60%       40.50%        26.90%        30.90%       0.00%
    Average equity to average assets.............      6.93%        7.06%         7.13%         7.57%       8.21%
    Total risk-based capital.....................     11.03%       11.86%        11.45%        14.10%      13.58%
    Leverage ratio...............................      7.79%        6.94%         9.20%         8.61%       7.52%
</TABLE>





                                       11

<PAGE>   13



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

The purpose of this discussion is to focus on the significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. This discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements 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 1993, as amended, and Section
21E of the Securities 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(s) 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, dividend payments, deposit base, economies, long-term obligations, loan
losses, interest sensitivity, market risk, impact of inflation and impact of
Year 2000 issues. 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, economic conditions, government fiscal and
monetary policies, prevailing interest rates and effectiveness of the Company's
interest rate strategies, laws and regulations affecting financial institutions,
changes in and effectiveness of the Company's operating or expansion strategies,
geographic concentration of assets and operations, competition from other
financial services companies, Year 2000 compliance issues, and other risks
detailed from time to time in the Company's press releases and filings with the
Securities and Exchange Commission.

SUMMARY

The Company's principal market areas are located in North Central Alabama
(Blount, Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison, Marion,
Marshall, Morgan, and Winston Counties), Western Alabama (Marengo and Perry
Counties) and in South Central Tennessee (Giles County). All of the Company's
banking and finance company facilities are located in relatively rural areas,
placing an emphasis on personal service. None of the banks are located in urban
areas.

Management believes that the economies of the areas in which we serve are
healthy and expanding, but not at a pace that threatens stability. With the
exception of Blount County, Alabama and Marengo and Perry Counties, Alabama, the
markets in which the Company operates share one common characteristic: they are
separate and distinct economies, but each is close enough to Huntsville, Alabama
to share in the economic and employment benefits of that city. Similarly, Blount
County is close enough to Birmingham, Alabama to share in the economic and
employment benefits of that city.

Despite the apparent dependency upon the military and aerospace industries, the
Huntsville Metropolitan Statistical Area (the "MSA") possesses a diverse
economic base. Significant employers include manufacturers of durable goods,
machinery, and transportation equipment, as well as in retailers and service
industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco,
dairy and poultry farming, also

                                       12

<PAGE>   14



makes up a significant portion of the economy. In 1997, the Huntsville MSA and
Madison County had an average unemployment rate of 2.7%, and the counties served
by the Company and its subsidiaries had unemployment averaging 5.6%, both lower
than the average of 6.5% experienced in the entire State of Alabama. In 1995,
the average per capita income in the Company's markets surpassed the rate for
the average per capita income in the State of Alabama by approximately 5.5%.
Based on 1998 projections, the average population for the counties served by the
Company and its subsidiaries exceeds 70,000 persons per county. The current
economic prospects in our markets are good, and the Company attempts to assist
those prospects by returning the deposits of our customers to the communities
from which they come in the form of loans.

The Company's net income of $3,579,493 for 1998 was 1.9 percent more than 1997's
amount of $3,512,278, which was 1.5 percent more than the $3,458,986 earned
during 1996. When stated as changes in the basic earnings per share, 1998
represented a 2.2 percent decrease from 1997 compared to a 1.1 percent decrease
in 1997 over 1996. The decrease in earnings per share resulted primarily from
increases in non-interest expenses associated with expansion of the bank office
network, new finance company facilities and additional insurance offices.

Management continues to emphasize quality loans and investments with good yields
while keeping expenses in line. The losses sustained by Community Bank in its
new branches were fully anticipated and projected prior to the openings of these
facilities. The growth of these new locations is expected by management to
become a significant factor to the Company's future earnings.

The Company raised approximately $15,000,000 in two public offerings of Common
Stock that closed in 1994 and 1996 after being fully subscribed. In the fourth
quarter of 1998, the Company offered to the public 500,000 newly issued shares
of Common Stock, at a price of $19.00 per share, in accordance with the
Company's Prospectus dated August 14, 1998. The offering was closed on December
1, 1998 upon full subscription of all shares offered, raising approximately
$9,469,000 of capital net of offering costs. This additional capital and
internally generated retained earnings have allowed the Company to remain in a
strong capital position to support current, as well as anticipated future,
growth and expansion.

EARNING ASSETS

Average earning assets in 1998 increased 13.3 percent over 1997 primarily as a
result of increases in the loan portfolio and accounted for approximately 89.0
percent of the Company's average total assets. This is compared to an increase,
during 1997, of 11.3 percent in average earning assets, which represented 89.3
percent of average total assets.

During 1998, the Company's mix of average earning assets continued to shift to
the loan portfolio as loans averaged 78.9 percent of the total average earning
assets for 1998, up from 76.8 percent during 1997 and 72.9 percent during 1996.
Investment securities averaged 18.5 percent, 19.4 percent and 23.4 percent
during 1998, 1997 and 1996, respectively. The other earning assets category
accounted for less than 4.0 percent of the total mix for all three periods. The
increased volume in earning assets contributed to the higher net interest income
reported by the Company.

Average loans increased 16.5 percent in 1998, with no concentration of the
increase in any one specific loan

                                       13

<PAGE>   15



type. Total loans, net of unearned income, outstanding at year-end 1998 were up
33.0 percent over the previous year-end level. Commercial, financial and
agricultural loans increased 46.7 percent in 1998 over year-end 1997, while
consumer loans increased 48.8 percent from year-end 1997 to year-end 1998. Real
estate-mortgage loans, which made up 47.2 percent of the total loans, increased
19.1 percent at year-end 1998 when compared to the previous year. Real
estate-construction loans increased 75.8 percent at year-end 1998 when compared
to the previous year, but had little effect due to representing only 1.4 percent
of total loans outstanding in 1998.

Total loans, net of unearned income, at year-end 1998 grew 33.0 percent over
year-end 1997 and average loans, net of unearned income, grew 16.5 percent over
the same period.

The Company's current strategy is to avoid the growing national market in loans
to finance leveraged buy-outs, participating in no nationally syndicated
leveraged buy-out loans. The Company's strategy also includes avoiding exposure
to lesser developed country ("LDC") debt, having no LDC loans in its portfolio.

The following table shows the classification of loans by major category at
December 31, 1998 and for each of the preceding four years. The second table
provides maturities of certain loan classifications and an analysis of these
loans maturing in over one year.

                                 LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                                                    December 31,
                      -------------------------------------------------------------------------------------------------------
                              1998              1997                1996                  1995                  1994
                      -----------------  -----------------   -------------------    -------------------   -------------------
                               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....   $ 94,057    21.7%  $ 64,136    19.6%    $ 65,634    20.2%     $ 44,686     18.6%     $ 46,892      22.1%
Real estate -
  construction....      6,153     1.4      3,499     1.1        5,262     1.6         5,624      2.4         3,972       1.9
Real estate -
  mortgage........    205,457    47.2    172,504    52.7      162,994    50.2       116,289     48.4       103,194      48.6

Consumer..........    129,334    29.7     86,945    26.6       90,682    28.0        73,479     30.6        58,051      27.4
                     --------   -----   --------   -----     --------   -----      --------    -----      --------     -----
                      435,001   100.0%   327,084   100.0%     324,572   100.0%      240,078    100.0%      212,109     100.0%
                                =====              =====                =====                  =====                   =====

Less: Unearned
  income..........      1,148                950                1,810                 2,237                  5,681
Allowance for
  loan losses.....      2,971              2,131                2,425                 2,209                  1,548
                     --------           --------             --------              --------               --------


Net loans.........   $430,882           $324,003             $320,337              $235,632               $204,880
                     ========           ========             ========              ========               ========
</TABLE>



                                       14

<PAGE>   16



              SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

<TABLE>
<CAPTION>
                                                                                  Rate Structure For Loans
                                                 Maturity                          Maturing Over One Year
                           ------------------------------------------------   ------------------------------
                                        Over One
                                         Year
                                        Through        Over                   Predetermined      Floating or
                            Year or      Five          Five                     Interest         Adjustable
                             Less        Years        Years        Total          Rate              Rate
                           --------     --------      -----        -----      -------------      -----------
                                                         (in Thousands)
<S>                        <C>          <C>          <C>           <C>        <C>                <C>
Commercial, financial
   and agricultural .      $42,445      $18,368      $ 33,244      $ 94,057      $37,491         $14,121
Real estate -
   construction .....        5,240          110           803         6,153          582             331
                           -------      -------      --------      --------      -------         -------

                           $47,685      $18,478      $ 34,047      $100,210      $38,073         $14,452
                           =======      =======      ========      ========      =======         =======
</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 primary objectives of the Company's investment
strategy are to maintain an appropriate level of liquidity and provide a tool to
assist in controlling the Company's interest rate position while at the same
time producing adequate levels of interest income. The Company's entire
portfolio is classified as available for sale to appropriately reflect the
nature of the Company's holdings that are available for sale should liquidity
needs dictate. Management of the maturity of the portfolio is necessary to
provide liquidity and to control interest rate risk. During 1998, gross
investment securities sales were $24,045,000 and maturities were $21,786,000,
representing 27.2 percent and 24.6 percent, respectively, of the average
portfolio for the year. Net gains associated with the sales totaled $465,982,
accounting for 5.8 percent of noninterest income during 1998. Gross unrealized
gains in the portfolio amounted to $1,085,098 at year-end 1998 and unrealized
losses amounted to $346,866. Average investment securities for 1998 increased
8.0 percent from 1997.

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, 1998 and 1997 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
1998 was only $343,164. The recoverability of the Company's investment in
mortgage-backed securities is reviewed periodically by management, and if
necessary, appropriate adjustments would be made to income for impaired values.





                                       15

<PAGE>   17



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,
                                                 ---------------------------------
                                                   1998        1997          1996
                                                   ----        ----          ----
                                                          (in Thousands)

<S>                                              <C>          <C>          <C>
U. S. Treasury and U.S. Government agencies      $49,145      $51,153      $45,135
Mortgage-backed securities ................       31,324       21,241       26,298
State and municipal securities ............       15,187       12,698       15,478
Equity securities .........................        1,736          -0-          -0-
                                                 -------      -------      -------
   Total investment securities ............      $97,392      $85,092      $86,911
                                                 =======      =======      =======
</TABLE>

Average investment securities increased 8.0 percent during 1998 compared to a
decline of 8.0 percent during 1997. Average taxable securities accounted for
84.7 percent of the investment portfolio in 1998 and 84.8 percent in 1997 while
tax-exempt securities were 15.3 percent in 1998 and 15.2 percent in 1997. During
1998, the Company experienced growth in both taxable and non-taxable investment
securities. Period-end securities for 1998 increased 14.5 percent from the
previous year.

The maturities and weighted average yields of the investments in the 1998
portfolio of investment securities are presented below. Taxable equivalent
adjustments (using a 34 percent tax rate) have been made in calculating yields
on tax-exempt obligations. The average maturity of the investment portfolio at
December 31, 1998 was 10.92 years with an average yield of 6.03 percent.
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, 1998
                                            ---------------------------------------------------------------------------------------
                                                                                    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)

Securities- All Available for Sale:
-----------------------------------
<S>                                         <C>         <C>      <C>         <C>         <C>         <C>       <C>           <C>
U. S. Treasury.........                     $ 6,224      6.25%    $ 9,624     5.84%      $26,408     6.11%      $20,321       6.66%
U. S. Government
  agencies.............                       3,519      5.38      14,374     5.58           -0-     0.00           -0-       0.00
State and municipal
  securities...........                       1,343      3.69       1,148     5.33         4,010     6.05         8,685       5.58
Equity securities......                         -0-      0.00         -0-     0.00           -0-     0.00         1,736       7.50
                                            -------               -------                 -------               -------       
Total..................                     $11,086      5.66     $25,146     5.67        $30,418    6.10       $30,742       6.40
                                            =======               =======                 =======               =======         
</TABLE>


There were no securities held by the Company, whose aggregate value on December
31, 1998 exceeded 10.0 percent of the Company's consolidated shareholders'
equity at that date.

                                       16

<PAGE>   18



Average Federal Funds sold decreased 15.7 percent during 1998 , reflecting the
increased cash available from deposit growth in excess of loan growth. During
1997, average Federal Funds sold increased 21.1 percent from 1996 levels. As a
percentage of average earning assets, these funds represented 2.4 percent for
1998 compared to 3.2 percent for 1997.

Interest-bearing deposits with other banks has accounted for less than 1.0
percent of the Company's average earning assets during 1998 . The average
balance of interest-bearing deposits with other banks have reflected declines of
59.5 percent and 1.6 percent during 1998 and 1997, respectively.

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 AND BORROWED FUNDS

The Company's primary source of funds is derived from its deposits. Continued
enhancement of existing products and emphasis upon better customer service fuels
the growth in the deposit base. Emphasis has been placed upon attracting
consumer deposits. It is the Company's intent to expand its consumer base in
order to continue to fund asset growth.

The portion of the Company's average liabilities represented by interest-bearing
deposits increased in both 1998 and 1997 by 14.6 percent and 13.6 percent,
respectively. Average interest-bearing demand deposits and average time deposits
increased 28.3 percent and 15.5 percent, respectively, during 1998, while
average saving deposits decreased 8.0 percent during this same period. Average
noninterest-bearing demand deposits increased 8.4 percent and 8.8 percent during
1998 and 1997, respectively. Customer confidence and satisfaction is evidenced
by the increase in total average deposits of 13.8 percent in 1998 and 12.9
percent in 1997. The two categories of lowest cost deposits comprised the
following percentages of total deposits during 1998 and 1997, respectively:
average noninterest-bearing demand deposits - 12.4 percent and 13.0 percent; and
average interest-bearing demand deposits - 17.6 percent and 15.6 percent. During
1998, interest-bearing demand accounts increased $18,365,000, or 25.7 percent,
while certificates of deposit of less than $100,000 increased $39,501,000, or
22.1 percent. Certificates of deposit of $100,000 or more increased $22,023,000,
or 32.2 percent, during this same period. Of total time deposits at December 31,
1998, approximately 33.3 percent were large denomination certificates of
deposit, up slightly from 32.7 percent at December 31, 1997. The maturities of
the time certificates of deposit and other time deposits of $100,000 or more
issued by the Company at December 31, 1998 are summarized in the table below.

                        MATURITIES OF LARGE TIME DEPOSITS

<TABLE>
<CAPTION>
                                                    December 31, 1998
                                          -----------------------------------
                                              Time       Other
                                          Certificates    Time
                                           of Deposit   Deposits        Total
                                          ------------  --------        -----
                                                      (in Thousands)

<S>                                       <C>           <C>           <C>
Three months or less .............          $17,537      $18,535      $ 36,072
Over three through six months.....           10,578          -0-        10,578
Over six through twelve months....           23,990          -0-        23,990
Over twelve months ...............           38,345          -0-        38,345
                                            -------      -------      --------

   Total .........................          $90,450      $18,535      $108,985
                                            =======      =======      ========
</TABLE>

                                       17

<PAGE>   19



Borrowed funds consist primarily of short-term borrowings and long-term debt.
Short-term borrowings at year-end 1998 and 1997 consisted of the U. S. Treasury
Tax and Loan Note Option account, Federal Funds purchased, overnight funds
purchased from the Federal Home Loan Bank (1998 only), and securities sold under
agreements to repurchase. Community Bank had $10,000,000 in available lines to
purchase Federal Funds, on an unsecured basis, from commercial banks. At
December 31, 1998, Community Bank had no funds advanced against these lines. In
addition, in the fourth quarter of 1998, Community Bank became a member of the
Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and was approved to
borrow up to $70,000,000 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. While Community Bank drew up to a maximum of $11,000,000
under the FHLB-Atlanta's "Overnight Borrowings" program during the fourth
quarter 1998, no funds were advanced against its line as of December 31, 1998.
Long-term debt consisted of various commitments with scheduled maturities from
one to twenty 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, 1998.

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

                                1999       2000        2001        2002        2003
                                ----       ----        ----        ----        ----
                                                 (in Thousands)

<S>                           <C>         <C>         <C>         <C>         <C>
Interest on indebtedness...   $  540      $  467      $  394      $  319      $256
Repayment of principal ....      933         949         968         988       298
                              ------      ------      ------      ------      ----

                              $1,473      $1,416      $1,362      $1,307      $554
                              ======      ======      ======      ======      ====
</TABLE>



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 assets and liabilities 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 requirements of its shareholders. Daily monitoring of the sources and
uses of funds is necessary to maintain an acceptable cash position that meets
both requirements. In a banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.

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 Superintendent of Banks is required to pay
dividends in excess of Community Bank's earnings retained in the current year
plus retained net profits for the preceding two years less any required
transfers to surplus. At December 31, 1998, Community Bank could have declared
dividends of approximately $7,640,960 without approval of regulatory
authorities.



                                       18

<PAGE>   20



The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales of investment and trading account securities. Real
estate-construction and commercial, financial and agricultural loans that mature
in one year or less equaled approximately $ 47,685,000, or 11.0 percent of the
total loan portfolio, at December 31, 1998 and investment securities maturing in
one year or less equaled $11,086,000, or 11.2 percent of the investment
portfolio, at December 31, 1998. Other sources of liquidity include 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 available line through the FHLB-Atlanta. Liquidity
management involves the daily monitoring of the sources and uses of funds to
maintain an acceptable Company cash position.


INTEREST RATE SENSITIVITY AND MARKET RISK

The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities. Management monitors
its interest rate risk exposure through the use of a Static Gap analysis and an
Interest Rate Shock analysis. The static gap analysis measures the amount of
repricing risk embedded in the balance sheet at a specific point in time, by
comparing the difference in the volume of interest-earning assets and
interest-bearing liabilities that are subject to repricing within specific time
periods. Community Bank was liability sensitive at year-end 1998, indicating
that it had more liabilities than assets repricing during 1999. The cumulative
static gap position of rate sensitive assets to rate sensitive liabilities at
December 31, 1998 was: i) .38% at 30 days; ii) .36% at 90 days; iii) .42% at 180
days; and iv) .43% at 365 days.

The interest rate shock analysis measures the impact on Community Bank's net
interest income as a result of immediate and sustained shift in interest rates.
The movement in market rates are based on statistical regression analyses while
management makes assumptions concerning balance sheet growth and the magnitude
of interest rate movements for certain interest earning asset and
interest-bearing liabilities. Using actual maturity and repricing opportunities
of Community Bank's portfolio, in conjunction with management's assumptions, a
rate shock analysis is performed using a +200 basis points shift and a -200
basis points shift in interest rates.






              [The remainder of this page intentionally left blank]


                                       19

<PAGE>   21



The following tables estimate the impact of shifts in interest rates on
Community Bank's net interest income for the twelve months ending December 31,
1999:

                               RATE SHOCK ANALYSIS

<TABLE>
<CAPTION>
                                                                        -200                               +200
                                                                       Basis                              Basis
                                                                       Points           Level             Points
                                                                  -------------------------------------------------
                                                                                (Dollars in thousands)

<S>                                                               <C>              <C>               <C>
Prime Rate....................................................              5.75%            7.75%             9.75%

Interest Income...............................................    $       50,182   $       51,750    $       55,988
Interest Expense..............................................            20,996           23,693            28,562
                                                                  --------------   --------------    --------------

   Net Interest Income........................................    $       29,186   $       28,057    $       27,426
                                                                  ==============   ==============    ==============

Dollar change from Level......................................    $        1,129                     $        (631)
Percentage change from Level..................................              4.03%                            (2.25%)
</TABLE>


                              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 200           Up 200
                                              December 31, 1998                         Basis Points      Basis Points
                                             -------------------                       -------------      ------------
                                          (Dollars in Thousands)

<S>                                      <C>                                            <C>               <C>
Assets which reprice in:
   One year or less..............        $               154,840                            (4.31)%            9.61%
   Over one year.................                        375,631                            (2.62)             7.73
                                         -----------------------

                                         $               530,471                            (3.03)             8.19
                                         =======================

Liabilities which reprice in:
   One year or less..............        $               360,085                           (11.78)            21.31
   Over one year.................                        125,699                           (10.78)            19.39
                                         -----------------------

                                         $               485,784                           (11.38)            20.55
                                         =======================

Total net interest income sensitivity........................................                4.03             (2.25)
</TABLE>


While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to be relatively stable to slightly lower
during 1999 and believes that Community Bank's current interest rate sensitivity
analysis fairly reflects its interest rate risk exposure during the twelve
months ending December 31. 1999. Management continually evaluates the condition
of the economy, the pattern of market interest rates and other economic data to
determine the types of investments that should be made and at what maturities.

                                       20

<PAGE>   22



CAPITAL RESOURCES

A strong capital position is vital to the continued profitability of the Company
because it promotes depositor and investor confidence and provides a solid
foundation for future growth of the organization.

In 1993 and again in 1995, the Company raised capital through the sale of shares
of its $.10 par value Common Stock. Both offerings were closed upon being fully
subscribed. The Company offered to the public, beginning in the third quarter of
1998, a maximum of 500,000 newly issued shares of its $.10 par value Common
Stock at a price of $19.00 per share. The offering was closed on December 1,
1998 upon full subscription of all shares offered for sale, raising
approximately $9,467,000 of capital after reduction for offering costs.

The proceeds from all offerings has been available for debt reduction, capital
enhancement, growth and expansion of the Company and general corporate purposes.

Bank regulatory authorities have issued risk-based capital guidelines that take
into consideration risk factors associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk-adjusted assets to
determine the risk-based capital ratios. The Company's Tier I capital, which
consists of common equity, amounted to $41,521,000 at December 31, 1998. 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 and
was $46,083,000 at year-end 1998. The percentage ratios, as calculated under the
guidelines, were 9.94 percent and 11.03 percent for Tier I and Total Risk-based
Capital, respectively, at year-end 1998. Both levels currently exceed the
minimum ratios of four percent and eight percent, respectively and the well
capitalized ratios of six percent and ten percent, respectively.

Applying the current guidelines to 1997 and 1996 also resulted in capital ratios
exceeding both the regulatory minimum requirements and requirements to be
considered a well capitalized bank.

Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The leverage ratio is defined as the ratio the Company's
shareholders' equity, minus goodwill, bears to total average assets minus
goodwill. The Company's leverage ratios as of December 31, 1998, 1997 and 1996
exceeded the regulatory minimum requirement of 4 percent.


              [The remainder of this page intentionally left blank]

                                       21

<PAGE>   23



The following table illustrates the company's regulatory capital ratios at
December 31, 1998, 1997 and 1996:

                             CAPITAL ADEQUACY RATIOS

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                        1998             1997              1996
                                                                  --------------    -------------    --------------
                                                                                (Dollars in thousands)

     <S>                                                          <C>               <C>              <C>
     Tier I Capital.............................................. $       41,521    $      32,638    $       29,941
     Tier II Capital.............................................          4,562            3,773             4,135
                                                                  --------------    -------------    --------------

            TOTAL QUALIFYING CAPITAL............................. $       46,083    $      36,411    $       34,076
                                                                  ==============    =============    ==============

     Risk Adjusted Total Assets (including
       off-balance-sheet exposures).............................. $      417,945    $     306,947    $      297,650
                                                                  ==============    =============    ==============

     Tier I Risk-Based Capital Ratio.............................           9.94%           10.63%            10.06%
                                                                  ==============    =============    ==============

     Total Risk-Based Capital Ratio..............................          11.03%           11.86%            11.45%
                                                                  ==============    =============    ==============

     Leverage Ratio..............................................           7.79%            6.94%             9.20%
                                                                  ==============    =============    ==============
</TABLE>

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

                           RETURN ON EQUITY AND ASSETS

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                            ---------------------------------------
                                                                             1998            1997              1996
                                                                            -----            ----              ----
<S>                                                                         <C>             <C>               <C>
Return on average assets..........................................           0.67%           0.74%             0.82%
Return on average equity..........................................           9.59           10.51             11.50
Dividend payout ratio.............................................          55.60           40.50             26.90
Average equity to average assets ratio............................           7.79            7.06              7.13
</TABLE>



              [The remainder of this page intentionally left blank]

                                       22
<PAGE>   24



RESULTS OF OPERATIONS

NET INTEREST INCOME

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

Net interest income for 1998 increased 18.0 percent from 1997 and 11.9 percent
in 1997 over 1996. An increase in average earning asset and average
interest-bearing liabilities in 1998 and 1997 accounted for the majority of the
increase. The "Rate/Volume Variance Analysis" table provides the detail changes
in interest income, interest expense and net interest income due to changes in
average balances and rates.

Interest income increased 17.1 percent in 1998 and 12.0 percent in 1997. The
1998 increase is due both to the 13.3 percent increase in average earning assets
and the 30 basis point rise in the average yield on earning assets. The increase
in interest income in 1997 was attributable to the 11.3% increase in average
earning assets. Interest income on loans increased 20.7 percent primarily due to
a 16.5 percent increase in the average balances outstanding coupled with a 36
basis point increase in the average yield. Interest income on investment
securities increased 2.5 percent from 1997 to 1998 primarily as a result of the
8.0 percent increase in the average balances outstanding.

Total interest expense increased 16.1 percent primarily due to the effect of a
14.2 percent increase in average interest-bearing liabilities, coupled with the
effect of a 9 basis point increase in the rate paid. The rise of interest on
deposits and short-term borrowings was due to an increase in average balances
which exceeded declines in deposit rates.

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 fully
taxable equivalent 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 net
interest margin for 1998 was 4.64 percent as compared to 4.46 percent for 1997.

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 net interest spread for 1998 increased 21 basis points to 4.15 percent from
the 1997 spread of 3.94 percent, as the yields on earning assets increased as
the cost of interest-bearing liabilities decreased. See the accompanying tables
entitled "Consolidated Average Balances, Interest Income/Expenses and
Yields/Rates" and "Rate/Volume Variance Analysis" for more information.




              [The remainder of this page intentionally left blank]





                                       23

<PAGE>   25



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

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                         ----------------------------------------------------------
                                                          1998         1997         1996         1995          1994
                                                          ----         ----         ----         ----          ----

<S>                                                      <C>           <C>          <C>          <C>           <C>
Rate earned on earning assets.....................       9.15%         8.94%        8.85%        8.82%         8.20%

Rate paid on borrowed funds.......................       5.23          5.14         5.18         5.17          4.33

Interest rate spread..............................       3.92          3.80         3.67         3.65          3.87

Net yield on earning assets.......................       4.41          4.32         4.26         4.21          4.44
</TABLE>


During 1998, the banking industry experienced a declining interest rate
environment as evidenced by two drops, of 25 basis points each, in the prime
rate during October 1998 and an additional drop of 25 basis points in the prime
rate again in November 1998. Despite the declining interest rate environment,
the Company's net interest income increased by 18.8 percent due to the 13.3
percent increase in average earning assets. This is in contrast to a relatively
flat interest rate environment during 1997.

Absolute changes in net interest income from 1997 to 1998 and from 1996 to 1997
were $3,422,000 and $2,076,000, respectively, as reported in the Consolidated
Statements of Income. The net interest margin increased to 4.52 percent in 1998
from 4.32 percent in 1997 and the interest rate spread increased to 4.04 percent
for 1998 from 3.80 percent for 1997.





              [The remainder of this page intentionally left blank]



                                       24

<PAGE>   26



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

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                     --------------------------------------
                                                                        1998
                                                     --------------------------------------
                                                     AVERAGE        INCOME/          YIELD/
                                                     BALANCE        EXPENSE           RATE
                                                     -------        -------           ----
<S>                                                 <C>             <C>              <C>
ASSETS
  Earning assets:
   Loans, net of unearned income (1) .........      $ 378,189       $38,616          10.21%
   Investment securities:
    Taxable ..................................         74,952         4,488           5.99
    Tax-exempt ...............................         13,488         1,139           8.44
                                                    ---------       -------
     Total investment securities .............         88,440         5,627           6.36
    Time deposits in other banks .............          1,006            91           9.05
    Federal funds sold .......................         11,558           611           5.29
                                                     --------        ------           
  Total interest-earning assets (2) ..........        479,193        44,945           9.38

  Noninterest-earning assets:
   Cash and due from banks ...................         21,609
   Premises and equipment ....................         26,986
   Accrued interest and other assets .........         13,642
   Allowance for loan losses .................         (2,960)
                                                    ---------

    Total assets .............................      $ 538,470
                                                    =========

LIABILITIES AND SHAREHOLDERS' EQUITY
  Interest-bearing liabilities:
   Demand deposits ...........................      $  85,044         3,286           3.86
   Savings deposits ..........................         46,374         1,651           3.56
   Time deposits .............................        292,357        17,026           5.82
                                                    ---------       -------       
                                                      423,775        21,963           5.18
   Other short-term borrowings ...............          3,258           164           5.03
   Long-term debt ............................          6,878           566           8.23
                                                    ---------       -------           
    Total interest-bearing liabilities .......        433,911        22,693           5.23
                                                                    -------           ----
  Noninterest-bearing liabilities:
   Demand deposits ...........................         60,147
   Accrued interest and other liabilities ....          7,094
   Shareholders' equity ......................         37,318
                                                    ---------

    Total liabilities and shareholders' equity      $ 538,470
                                                    =========

Net interest income/net interest spread ......                       22,252           4.15%
                                                                                      ====

Net yield on earning assets ..................                                        4.64%
                                                                                      ====
Taxable equivalent adjustment:
  Loans ......................................                          374
  Investment securities ......................                          752
                                                                    -------
   Total taxable equivalent adjustment .......                        1,126
                                                                    -------

Net interest income ..........................                      $21,126
                                                                    =======
</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
    percent, and do not give effect to the disallowance for federal income tax
    purpose of interest expense related to certain tax-exempt earning assets.



                                       25

<PAGE>   27

<TABLE>
<CAPTION>
                                        Years Ended December 31,
-----------------------------------------------------------------------------------------------------
                        1997                                                 1996
-------------------------------------------------    ------------------------------------------------
    Average           Income/           Yield/          Average            Income/          Yield/
    Balance           Expense            Rate           Balance            Expense           Rate
    -------           -------            ----           -------            -------           ----
   <S>               <C>                <C>            <C>                 <C>              <C>
   $324,745           $31,999            9.85%         $276,878            $27,468           9.92%
                       
     69,432             4,410            6.35            73,011              4,702           6.44
     12,475             1,080            8.66            16,049              1,380           8.60
   --------           -------                          --------            -------
     81,907             5,490            6.70            89,060              6,082           6.83
      2,483               113            4.55             2,522                122           4.84
     13,704               796            5.81            11,319                604           5.34
   --------           -------                          --------            -------
    422,839            38,398            9.08           379,779             34,276           9.03
   
   
     19,732                                              20,276
     20,126                                              15,187
     13,156                                               8,931
     (2,472)                                             (2,334)
   --------                                            --------
   
   $473,381                                            $421,839
   ========                                            ========
   


   $ 66,265             2,722            4.11          $ 55,990              2,106           3.76
     50,393             1,784            3.54            50,844              1,924           3.78
    253,095            14,258            5.63           218,720             12,565           5.74
   --------           -------                          --------            -------
    369,753            18,764            5.07           325,554             16,595           5.10
      2,524               146            5.78             2,824                155           5.49
      7,833               631            8.06             8,053                676           8.39
   --------           -------                          --------            -------
    380,110            19,541            5.14           336,431             17,426           5.18
                      -------         -------                              -------          -----

     55,466                                              51,003
      4,377                                               4,326
     33,428                                              30,079
   --------                                            --------
   
   $473,381                                            $421,839
   ========                                            ========

                       18,857            3.94%                              16,850           3.85%
                                      =======                                               =====

                                         4.46%                                               4.44%
                                      =======                                               =====

                          240                                                  206
                          367                                                  470
                      -------                                              -------
                          607                                                  676

                      $18,250                                              $16,174
                      =======                                              =======
</TABLE>


                                       26

<PAGE>   28



RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS

<TABLE>
<CAPTION>
                                                             Average Volume                  Change in Volume
                                                 ---------------------------------       -------------------------
                                                   1998         1997          1996       1998-1997       1997-1996
                                                   ----         ----          ----       ---------       ---------
                                                                           (Dollars in Thousands)
<S>                                             <C>           <C>           <C>          <C>             <C>
EARNING ASSETS:
Loans, net of unearned income ............      $378,189      $324,745      $276,878      $ 53,444       $ 47,867

Investment securities:
   Taxable ...............................        74,952        69,432        73,011         5,520         (3,579)
   Tax exempt ............................        13,488        12,475        16,049         1,013         (3,574)
                                                --------      --------      --------      --------       --------

     Total investment securities .........        88,440        81,907        89,060         6,533         (7,153)
Interest-bearing deposits with other banks         1,006         2,483         2,522        (1,477)           (39)
Federal funds sold .......................        11,558        13,704        11,319        (2,146)         2,385
                                                --------      --------      --------      --------       --------

      Total earning assets ...............      $479,193      $422,839      $379,779      $ 56,354       $ 43,060
                                                ========      ========      ========      ========       ========

INTEREST-BEARING LIABILITIES:
Deposits:
   Demand ................................      $ 85,044      $ 66,265      $ 55,990      $ 18,779       $ 10,275
   Savings ...............................        46,374        50,393        50,844        (4,019)          (451)
   Time ..................................       292,357       253,095       218,720        39,262         34,375
                                                --------      --------      --------      --------       --------
      Total interest-bearing deposits ....       423,775       369,753       325,554        54,022         44,199

Other short-term borrowings ..............         3,258         2,524         2,824           734           (300)
Long-term borrowings .....................         6,878         7,833         8,053          (955)          (220)
                                                --------      --------      --------      --------       --------

      Total interest-bearing liabilities .      $433,911      $380,110      $336,431      $ 53,801       $ 43,679
                                                ========      ========      ========      ========       ========

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

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

Net cost of funds..................................................................................................
</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.

                                       27

<PAGE>   29



<TABLE>
<CAPTION>
                                                                                     Variance Attributed to (1)
                                                                                  ----------------------------------
        Average Rate            Interest Income/Expense          Variance               1998              1997
  -----------------------     -------------------------  ----------------------   ---------------    ---------------
  1998       1997    1996       1998     1997      1996  1998-1997    1997-1996   VOLUME     RATE    Volume     Rate
  ----       ----    ----       ----     ----      ----  ---------    ---------   ------     ----    ------     ----
                                                       (Dollars in Thousands)

 <S>        <C>      <C>      <C>      <C>       <C>     <C>          <C>         <C>       <C>       <C>       <C>
 10.21%     9.85%    9.92%    $38,616  $31,999   $27,468  $6,617       $4,531     $5,415    $1,202    $4,726    $(195)

  5.99      6.35     6.44       4,488    4,410     4,702      78         (292)       337      (259)     (227)     (65)
  8.44      8.66     8.60       1,139    1,080     1,380      59         (300)        87       (28)     (310)      10
                              -------  -------   -------   ------      ------     ------      ----    ------    -----

  6.36      6.70     6.83       5,627    5,490     6,082     137         (592)       424      (287)     (537)     (55)
  9.05      4.55     4.84          91      113       122     (22)          (9)       (92)       70      (  2)      (7)
  5.29      5.81     5.34         611      796       604    (185)         192       (118)      (67)      135       57
                              -------  -------   -------   ------      ------     ------      ----    ------    -----

  9.38      9.08     9.03      44,945   38,398    34,276    6,547       4,122      5,629       918     4,322     (200)


  3.86      4.11     3.76       3,286    2,722     2,106      564         616        737      (173)      409      207
  3.56      3.54     3.78       1,651    1,784     1,924     (133)       (140)      (143)       10       (17)    (123)
  5.82      5.63     5.74      17,026   14,258    12,565    2,768       1,693      2,273       495     1,938     (245)
                              -------  -------   -------   ------      ------     ------      ----    ------    -----
  5.18      5.07     5.10      21,963   18,764    16,595    3,199       2,169      2,867       332     2,330     (161)

  5.03      5.78     5.49         164      146       155       18          (9)        39       (21)      (17)       8
  8.23      8.06     8.39         566      631       676      (65)        (45)       (78)       13       (18)     (27)
                              -------  -------   -------   ------      ------     ------      ----    ------    -----

  5.23      5.14     5.18      22,693   19,541    17,426    3,152       2,115      2,828       324     2,295     (180)
  ----      ----     ----     -------  -------   -------   ------      ------     ------      ----    ------    -----

  4.15%     3.94%    3.85%    $22,252  $18,857   $16,850   $3,395      $2,007     $2,801      $594    $2,027    $ (20)
  ====      ====     ====     =======  =======   =======   ======      ======     ======      ====    ======    =====
  4.64%     4.46%    4.44%
  ====      ====     ====
  4.74%     4.62%    4.59%
  ====      ====     ====
</TABLE>



                                       28

<PAGE>   30



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

The provision for loan losses, which is charged to operations, 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 $885,000, $773,000
and $834,000 in 1998, 1997 and 1996, respectively. This represents an increase
of $112,000, or 14.4 percent, in 1998, compared to declines of $61,000, or 7.4
percent, in 1997, and $254,000, or 23.3 percent, in 1996. There was a 39.4
percent increase in the allowance for loan losses at December 31, 1998 as
compared to December 31, 1997, in contrast to a decrease of 12.1 percent at
December 31, 1997 as compared to December 31, 1996. The increase in the
allowance for loan losses during 1998 was due primarily to reserves purchased
through acquisitions. Net loan charge-offs increased 23.1 percent in 1998 after
decreasing 6.1 percent in 1997. Net charge-offs on consumer loans amounted to
82.7 percent of total net charge-offs for 1998 compared to 63.7 percent in 1997
and 53.0 percent in 1996. Management believes that the $2,971,000 in the
allowance for loan losses at December 31, 1998 (.68% of total net outstanding
loans at that date) was adequate to absorb known risks in the 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.

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, 1998.

                         SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                              1998       1997         1996        1995         1994
                                                           ---------    --------    ---------   ---------   ----------
                                                                            (Dollars  in Thousands)

<S>                                                        <C>          <C>         <C>         <C>         <C>
Allowance for loan losses at beginning of year............ $   2,131    $  2,425    $   2,209   $   1,548   $    1,255
Loans charged off:
  Commercial, financial and agricultural..................       190          80          392         110           91
  Real Estate - mortgage..................................        50         325          158         -0-          -0-
  Consumer................................................     1,223         783          680         399          319
                                                           ---------    --------    ---------   ---------   ----------
    Total loans charged off...............................     1,463       1,188        1,230         509          410
                                                           ---------    --------    ---------   ---------   ----------

Recoveries on loans previously charged off:
  Commercial, financial and agricultural..................        11           5           10          22           52
  Real Estate - mortgage..................................       -0-           9            1           1            2
  Consumer................................................       126          97           72          59           11
                                                           ---------    --------    ---------   ---------   ----------
    Total recoveries......................................       137         111           83          82           65
                                                           ---------    --------    ---------   ---------   ----------

Net loans charged off.....................................     1,326       1,077        1,147         427          345

Reserves acquired through purchase........................     1,281          10          529         -0-          -0-

Provision for loan losses.................................       885         773          834       1,088          638
                                                           ---------    --------    ---------   ---------   ----------

Allowance for loan losses at end of period................ $   2,971    $  2,131    $   2,425   $   2,209   $    1,548
                                                           =========    ========    =========   =========   ==========

Loans, net of unearned income, at end of period........... $ 433,853    $326,134    $ 322,762   $ 237,841   $  206,428
                                                           =========    ========    =========   =========   ==========

Average loans, net of unearned income,
  outstanding for the period.............................. $ 378,189    $324,745    $ 276,878   $ 223,222   $  178,123
                                                           =========    ========    =========   =========   ==========
</TABLE>





                                       29

<PAGE>   31




<TABLE>
<CAPTION>
                                                               1998         1997         1996       1995          1994
                                                               ----         ----         ----       ----          ----

<S>                                                            <C>          <C>          <C>         <C>          <C>
Ratios:
   Allowance at end of period to loans, net of
    unearned income.......................................       .68%        .65%         .75%        .93%         .75%
  Allowance at end of period to average loans,
    net of unearned income................................       .79         .66          .88         .99          .87
  Net charge-offs to average loans, net of
    unearned income.......................................       .35         .33          .41         .19          .19
  Net charge-offs to allowance at end of period...........     44.63       50.54        47.30       19.33        22.29
  Recoveries to prior year charge-offs....................     11.53        9.02        16.31       20.00        21.96
</TABLE>


In assessing adequacy, management relies predominantly on its ongoing review of
the loan portfolio, which is undertaken both to ascertain whether there are
probable losses which must be charged off and to assess the risk characteristics
of the portfolio in the aggregate. This review takes into consideration the
judgments of the responsible lending officers and senior management, and also
those of bank regulatory agencies that review the loan portfolio as part of the
regular bank examination process.

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 the previous five years net
losses for each loan type.

Management allocated the allowance for loan losses to specific loan classes as
follows:


                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                                      December 31,
                      --------------------------------------------------------------------------------------------------------------
                                1998                  1997                  1996                    1995                 1994
                      ----------------------    -------------------    ------------------     -----------------    -----------------
                                     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>
Domestic loans
  Commercial,
   financial and
   and agricultural      $  526        17.7%   $  149          7%      $  800       33%      $    442     20%      $  170     11%
  Real estate -
   mortgage .......         357          12       618         29          340       14             --     --           --     --
  Consumer ........       2,088        70.3     1,364         64        1,285       53          1,767     80        1,378     89
                         ------      ------    ------      -----       ------      ---       --------   ----       ------     --
                         $2,971         100%   $2,131        100%      $2,425      100%      $  2,209    100%      $1,548    100%
                         ======      ======    ======      =====       ======      ===       ========   ====       ======    ===
</TABLE>








                                       30

<PAGE>   32



NONPERFORMING ASSETS

Nonperforming assets as of December 31, 1998 increased 71.9 percent from
year-end 1997. Nonperforming loans include loans classified as nonaccrual or
renegotiated and those past due 90 days or more for which interest is still
being accrued. There were no commitments to lend any additional funds on
nonaccrual or renegotiated loans at December 31, 1998. The following table
summarizes the Company's nonperforming assets for each of the last five years.

                              NONPERFORMING ASSETS

<TABLE>
<CAPTION>
                                                                              December 31,
                                                     --------------------------------------------------------------
                                                        1998         1997         1996         1995          1994
                                                     ---------    ---------     --------     --------     ---------
                                                                         (Dollars in Thousands)
<S>                                                  <C>          <C>           <C>          <C>          <C>
Nonaccruing loans.................................   $   1,600    $   1,093     $    565     $    491     $     422
Loans past due 90 days or more....................       2,384          975          470          317           343
Restructured loans................................         -0-          -0-          -0-          -0-           -0-
                                                     ---------    ---------     --------     --------     ---------
Total nonperforming loans.........................       3,984        2,068        1,035          808           765
Other real estate.................................         699          656          791          417           290
                                                     ---------    ---------     --------     --------     ---------

  Total nonperforming assets......................   $   4,683    $   2,724     $  1,826     $  1,225     $   1,055
                                                     =========    =========     ========     ========     =========

Ratios:
 Loan loss allowance to
  total nonperforming assets......................        0.63         0.78         1.33         1.80          1.47
                                                     =========    =========     ========     ========     =========
 Total nonperforming loans to total
  loans (net of unearned interest)................       0.009        0.006        0.003        0.003         0.004
                                                     =========    =========     ========     ========     =========
 Total nonperforming assets
  to total assets.................................       0.008        0.006        0.004        0.003         0.004
                                                     =========    =========     ========     ========     =========
</TABLE>

The ratio of loan loss allowance to total nonperforming assets decreased by 19.2
percent to 0.63 during 1998, compared to a decrease of 41.4 percent, to 0.78
percent, during 1997. The ratio of total nonperforming loans to total loans
increased 50.0 percent, to 0.009, during 1998, and total nonperforming assets to
total assets increased by 0.2% from 1997 to 1998, placing it at a slightly
higher level than in the previous three years. Each of these ratios compare
favorably with industry averages, and management is aware of no factors which
should suggest that they are prone to increases in future periods.

For the years ended December 31, 1998, 1997 and 1996, the difference between the
gross interest income that would have been recorded in such period if
nonaccruing loans had been current in accordance with their original terms and
the amount of interest income on those loans that was included in such period's
net income was immaterial.

There were no concentrations of loans exceeding 10 percent of total loans which
are not otherwise disclosed as a category of loans.



                                       31

<PAGE>   33



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

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. 114,
Accounting by Creditors for Impairment of a Loan, or Statement of Accounting
Standards No. 118, Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures.

NONINTEREST INCOME

Noninterest income for 1998 totaled $8,102,398, as compared to $4,890,980 in
1997 and $4,447,235 in 1996. These amounts are primarily from service charges on
deposit accounts, insurance commissions, Bank club dues ( a deposit account
packaged with other financial services) and debt cancellation fees. Service
charge increases are primarily a reflection of the deposit growth of the Company
as it has expanded into new markets. The insurance commissions increased in 1998
as a result of the activities of the Company's Community Insurance unit in the
areas of title insurance and life insurance. Service charges and Bank club dues
were up a combined 19.8%, primarily due to the continued geographic expansion of
the Company's bank subsidiary, leading to increases in the types of transaction
accounts which create these kinds of fees. The Company also recognized a gain on
the sale of investment securities in connection with a restructuring of its
investment portfolio in October 1998.

                               NONINTEREST INCOME

<TABLE>
<CAPTION>
                                                       Years Ended December 31,                Percent Change
                                               --------------------------------------      ------------------------
                                                   1998         1997          1996         1998/1997      1997/1996
                                               ----------    ----------   -----------      ---------      ---------
                                                         (Dollars in Thousands)
  <S>                                          <C>           <C>          <C>              <C>             <C>
  Service charges on deposits...............   $    3,055    $    2,512   $     2,229          26.6%         12.7%
  Insurance commissions.....................        2,269           796           656         185.1          21.3
  Investment securities gains (losses)......          466            (3)            8       15633.3        (137.5)
  Bank club dues............................          631           562           498          12.3          12.9
  Debt cancellation fees....................          688           275           388         150.2         (29.1)
  Other.....................................          993           749           668          32.6          12.1
                                               ----------    ----------   -----------

                                               $    8,102    $    4,891   $     4,447          65.7          10.0
                                               ==========    ==========   ===========
</TABLE>


NONINTEREST EXPENSES

Noninterest expenses totaled $23,783,885 in 1998, which represents a 36.5
percent increase over 1997 noninterest expenses, which were 16.9 percent higher
than in 1996. Salaries and benefits increased $3,786,442, or 36.4 percent to
$14,189,168 in 1998, reflecting the increased personnel costs of completing the
staffing of the new Alabama bank locations and finance offices. Director and
committee fees, which were $638,120 in 1997 and $465,775 in 1996, increased
11.4% in 1998 to $711,358. Occupancy expense increased 44.3% to $2,113,400 in

                                       32

<PAGE>   34
1998 primarily as a result of the building and renovation of several bank
locations. Furniture and equipment expense increased 27.2% in 1998 from the 1997
amount, to $1,543,634, compared to a 20.8% increase in 1997. Other operating
expenses increased 41.6% to $5,226,325 during 1998. From 1996 to 1997, other
operating expenses increased 13.0%.

                              NONINTEREST EXPENSES

<TABLE>
<CAPTION>
                                                        Years Ended December 31,                 Percent Change
                                               --------------------------------------       ------------------------
                                                   1998          1997           1996        1998/1997      1997/1996
                                               ----------    ----------   -----------       ---------      ---------
                                                         (Dollars in Thousands)
  <S>                                          <C>           <C>          <C>               <C>            <C>
  Salaries and employee benefits............   $   14,189    $   10,403   $     9,135          36.4%         13.9%
  Occupancy expense.........................        2,113         1,478         1,031          43.0          43.4
  Furniture and equipment expense...........        1,544         1,214         1,005          27.2          20.8
  Director and committee fees...............          711           638           466          11.4          36.9
  Amortization of intangibles...............          440           328           275          34.2          19.3
  Advertising...............................           93           238           229         (60.9)          3.9
  Insurance.................................          130           283           224         (54.1)         26.3
  Professional fees.........................          360           273           250          31.9           1.0
  Supplies..................................          471           537           547         (12.3)         (1.8)
  Postage...................................          364           280           257          30.0           9.0
  Telephone.................................          554           357           298          55.2          19.8
  Training and Education....................          256            98            45         161.2         117.8
  Other.....................................        2,559         1,296         1,140          97.5          13.6
                                               ----------    ----------   -----------

                                               $   23,784    $   17,423   $    14,902          36.5          16.9
                                               ==========    ==========   ===========
</TABLE>

INCOME TAXES

The Company attempts to maximize its net income through active tax planning.
This planning resulted in a provision for income taxes of $1,526,204 (29.9%) for
1998, on pre-tax income of $5,105,697. The tax for 1997 was $1,451,419 (29.3%)
on income of $4,945,355 and for 1996 was $1,426,344 (29.2%) on income of
$4,885,330. These tax amounts and rates are lower than the statutory Federal tax
rate of 34 percent primarily due to investments in loans and securities earning
interest income that is exempt from Federal taxation. As proportionately fewer
available funds are invested in tax-exempt assets, the effective tax rate will
more closely approximate the statutory Federal tax rate. In 1998 the effective
tax rate was 87.9 percent of the statutory Federal tax rate, compared to 86.2
percent in 1997. A more detailed explanation of income tax expense is included
in the accompanying notes to the Consolidated Financial Statements.

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 Annual Report will assist in the
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.

                                       33

<PAGE>   35



YEAR 2000 ISSUES

The Year 2000 issue is the result of potential problems with computer systems or
other equipment with computer chips using dates that have been sorted as two
digits rather than four (e.g. "98" for 1998). On January 1, 2000, any clock or
date recording mechanism, including date sensitive software, which uses only two
digits to represent the year may recognize a date using "00" as the year 1900.
This could result in system failures or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices or perform similar tasks.

The Company initiated a program in 1997 to identify and review all of the
information technology ("IT") and non-IT systems used by the Company and its
subsidiaries in order to determine whether the systems were Year 2000 compliant.
This study involved identifying any required modifications or replacements of
certain hardware and software maintained by the Company. In addition, the
Company has taken steps to obtain assurance from third party vendors that
appropriate actions have been taken or are being taken to remedy any Year 2000
issues for computer systems that the vendors are responsible for maintaining and
that are relied upon by the Company.

As a financial institution, the Company's compliance has been closely monitored
by federal regulatory agencies, which have completed a phase one and phase two
examination of the Company and its Year 2000 readiness in the past nine months.
As of December 31, 1998, no regulatory restriction had been imposed on the
Company by federal regulatory authorities in connection with the Company's
current Year 2000 plan and implementation.

Prior to year-end 1998, the Company had identified its mission critical and
non-mission critical systems and had completed the assessment phase of each
system's Year 2000 readiness. Mission critical systems are those systems that
are vital to the core business activity of the Company and include mainframe
computer applications such as deposit, loan and general ledger systems as well
as the system operating software. In July 1998, the Company purchased and
installed new Year 2000 compliant hardware and software systems to support all
core application processing which were deemed to be mission critical.
Non-mission critical systems typically include embedded technology, such as a
micro-controller in elevators. As of December 31, 1998, all mission critical
systems have been validated and it is anticipated that all remaining
non-critical systems will be validated by March 31, 1999.

The Company has also evaluated all significant credit customer relationships to
determine any risk represented to the Company by the impact of Year 2000 on
customers' operations. Based on this evaluation, the Company is not aware of
more than normal credit risk associated with these relationships and management
does not believe that any special additions to the allowance for loan losses are
necessary. The Company's assessment of these parties will be ongoing throughout
1999 in order to identify any changes in the readiness of its credit customers
that could negatively impact the Company.

During 1998, the Company spent approximately $415,000 related to the purchase of
new hardware and software to correct Year 2000 problems. These costs have been
capitalized and will be amortized over the life of the related assets. The
Company spent an additional $5,000 for testing of the core system and estimates
it will spend approximately $15,000 during 1999 for third party reviews of test
results. Since this is an ongoing process involving continual evaluation, the
Company could incur additional unanticipated cost associated with its Year 2000
readiness. However, management believes that these cost would be material to the
Company's financial condition or results of operations.

Throughout 1998, the Company worked to assess Year 2000 readiness of vendors,
business partners, and other counter parties, focusing on those considered
critical to the Company's operations. The Company began assessing the Year 2000
readiness of depositors and other funds providers during the third quarter of

                                       34

<PAGE>   36



1998. The Company will continue to monitor and evaluate the Year 2000 readiness
of third parties and take appropriate measures, including development of
contingency plans, to mitigate the risk to the Company where Year 2000
noncompliance by third parties could have a material adverse impact on the
Company's financial condition or results of operations. However, the impact of
Year 2000 noncompliance by all third parties with which the Company transacts
business cannot be assessed at this time.

Management expects its remediation efforts to occur in a timely manner and does
not anticipate significant disruptions in its operations. Failure to complete
such remediations in a timely fashion could have an adverse impact on the
Company's financial condition and results of operations. Management is currently
developing a contingency plan to address any potential failures.





              [The remainder of this page intentionally left blank]






                                       35

<PAGE>   37



ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities. Management monitors
its interest rate risk exposure through the use of a Static Gap analysis and an
Interest Rate Shock analysis. The static gap analysis measures the amount of
repricing risk embedded in the balance sheet at a specific point in time, by
comparing the difference in the volume of interest-earning assets and
interest-bearing liabilities that are subject to repricing within specific time
periods. Community Bank was liability sensitive at year-end 1998, indicating
that it had more liabilities than assets repricing during 1999. The cumulative
static gap position of rate sensitive assets to rate sensitive liabilities at
December 31, 1998 was: i) .38% at 30 days; ii) .36% at 90 days; iii) .42% at 180
days; and iv) .43% at 365 days.

The interest rate shock analysis measures the impact on Community Bank's net
interest income as a result of immediate and sustained shift in interest rates.
The movement in market rates are based on statistical regression analyses while
management makes assumptions concerning balance sheet growth and the magnitude
of interest rate movements for certain interest earning asset and
interest-bearing liabilities. Using actual maturity and repricing opportunities
of Community Bank's portfolio, in conjunction with management's assumptions, a
rate shock analysis is performed using a +200 basis points shift and a -200
basis points shift in interest rates.

The following tables estimate the impact of shifts in interest rates on
Community Bank's net interest income for the twelve months ending December 31,
1999:

                               RATE SHOCK ANALYSIS

<TABLE>
<CAPTION>
                                                                        -200                               +200
                                                                       Basis                              Basis
                                                                       Points           Level             Points
                                                                  -------------------------------------------------
                                                                                (Dollars in thousands)

<S>                                                               <C>              <C>               <C>
Prime Rate....................................................              5.75%            7.75%             9.75%

Interest Income...............................................    $       50,182   $       51,750    $       55,988
Interest Expense..............................................            20,996           23,693            28,562
                                                                  --------------   --------------    --------------

   Net Interest Income........................................    $       29,186   $       28,057    $       27,426
                                                                  ==============   ==============    ==============

Dollar change from Level......................................    $        1,129                     $         (631)
Percentage change from Level..................................              4.03%                             (2.25%)
</TABLE>




                                       36

<PAGE>   38



                              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 200              Up 200
                                             December 31, 1998                           Basis Points         Basis Points
                                           ---------------------                         ------------         ------------
                                           (Dollars in Thousands)

<S>                                      <C>                                             <C>                  <C>
Assets which reprice in:
   One year or less..............        $               154,840                            (4.31)%            9.61%
   Over one year.................                        375,631                            (2.62)             7.73
                                         -----------------------

                                         $               530,471                            (3.03)             8.19
                                         =======================

Liabilities which reprice in:
   One year or less..............        $               360,085                           (11.78)            21.31
   Over one year.................                        125,699                           (10.78)            19.39
                                         -----------------------

                                         $               485,784                           (11.38)            20.55
                                         =======================

Total net interest income sensitivity........................................                4.03             (2.25)
</TABLE>


While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to be relatively stable to slightly lower
during 1999 and believes that Community Bank's current interest rate sensitivity
analysis fairly reflects its interest rate risk exposure during the twelve
months ending December 31. 1999. Management continually evaluates the condition
of the economy, the pattern of market interest rates and other economic data to
determine the types of investments that should be made and at what maturities.






              [The remainder of this page intentionally left blank]

                                       37

<PAGE>   39


                    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 generally accepted
accounting principles and include amounts based on management's best estimates
and judgement 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.







                                       38

<PAGE>   40



ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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



COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Financial Statements
<TABLE>
<CAPTION>
                                                                                                               Page(s)
                                                                                                               -------
<S>                                                                                                            <C>
Independent Auditor's Report................................................................................      40

Consolidated Statements of Financial Condition as of December 31, 1998 and 1997.............................      41

Consolidated Statements of Income for the years ended
  December 31, 1998, 1997 and 1996..........................................................................      42

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 1998, 1997 and 1996..........................................................................      43

Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1997 and 1996..........................................................................   44-45

Notes to Consolidated Financial Statements -
  December 31, 1998, 1997 and 1996..........................................................................   46-83

Quarterly Results (Unaudited)...............................................................................      84
</TABLE>



                                       39

<PAGE>   41
                          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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.


Birmingham, Alabama
March 2, 1999

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


                                       40

<PAGE>   42



                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                          --------------------------------
                                                                               1998               1997
                                                                          -------------      -------------
<S>                                                                       <C>                <C>
ASSETS
  Cash .................................................................. $   6,204,531      $   6,359,331
  Due from banks ........................................................    19,348,639         13,292,647
  Interest-bearing deposits with banks ..................................       950,000          2,514,558
  Federal funds sold ....................................................           -0-         26,600,000
  Securities available for sale .........................................    97,391,609         85,092,069
  Loans .................................................................   435,000,601        327,084,688
  Less: Unearned income .................................................     1,147,965            950,205
        Allowance for loan losses .......................................     2,970,597          2,131,354
                                                                          -------------      -------------
                  NET LOANS .............................................   430,882,039        324,003,129
  Premises and equipment, net ...........................................    29,545,798         22,362,432
  Accrued interest ......................................................     5,991,588          5,089,765
  Intangibles, net ......................................................     6,355,833          4,117,825
  Other real estate .....................................................       699,014            656,271
  Other assets ..........................................................     5,874,546          1,750,819
                                                                          -------------      -------------
                  TOTAL ASSETS .......................................... $ 603,243,597      $ 491,838,846
                                                                          =============      =============

LIABILITIES AND SHAREHOLDERS' EQUITY
  Deposits:
     Noninterest-bearing ................................................ $  62,562,296      $  52,356,858
     Interest-bearing ...................................................   476,023,225        388,531,773
                                                                          -------------      -------------
                  TOTAL DEPOSITS ........................................   538,585,521        440,888,631
  Other short-term borrowings ...........................................     2,191,841          2,630,387
  Accrued interest ......................................................     3,580,934          2,912,286
  Long-term debt ........................................................     7,568,716          7,397,612
  Other liabilities .....................................................     4,083,184          2,012,500
                                                                          -------------      -------------
                  TOTAL LIABILITIES .....................................   556,010,196        455,841,416

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY ............................           -0-             18,382
  Shareholders' equity
     Preferred stock, par value $.01 per share, 200,000 shares
         authorized, no shares issued ...................................           -0-                -0-
     Common stock, par value $.10 per share, 20,000,000 and 5,000,000
         shares authorized, 4,647,924 and 2,031,606 shares
         issued, as of December 31, 1998 and 1997, respectively .........       464,792            203,161
     Capital surplus ....................................................    29,100,383         18,524,301
     Retained earnings ..................................................    20,169,519         18,824,795
     Unearned ESOP shares - 241,350 and 102,376 shares
         as of December 31, 1998 and 1997, respectively .................    (2,944,232)        (2,002,902)
     Accumulated other comprehensive income .............................       442,939            429,693
                                                                          -------------      -------------

                  TOTAL SHAREHOLDERS' EQUITY ............................    47,233,401         35,979,048
                                                                          -------------      -------------

                  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 603,243,597      $ 491,838,846
                                                                          =============      =============
</TABLE>

                 See notes to consolidated financial statements

                                       41

<PAGE>   43



                        CONSOLIDATED STATEMENTS OF INCOME

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                  -------------------------------------------------
                                                                       1998             1997              1996
                                                                  --------------    -------------    --------------
<S>                                                               <C>               <C>              <C>
INTEREST INCOME
  Interest and fees on loans..................................... $   38,422,899    $  31,759,123    $   27,261,734
  Interest on investment securities:
    Taxable securities...........................................      4,488,336        4,410,193         4,701,656
    Securities exempt from federal income taxes..................        752,013          712,565           910,822
  Interest on federal funds sold.................................        611,030          795,620           604,111
  Interest on deposits in other banks............................         90,641          113,523           121,568
                                                                  --------------    -------------    --------------
                  TOTAL INTEREST INCOME..........................     44,364,919       37,791,024        33,599,891
                                                                  --------------    -------------    --------------
INTEREST EXPENSE
  Interest on deposits...........................................     21,963,493       18,764,865        16,595,417
  Interest on other short-term borrowings........................        163,673          145,991           154,982
  Interest on long-term debt.....................................        565,887          630,553           675,706
                                                                  --------------    -------------    --------------
                  TOTAL INTEREST EXPENSE.........................     22,693,053       19,541,409        17,426,105
                                                                  --------------    -------------    --------------

NET INTEREST INCOME..............................................     21,671,866       18,249,615        16,173,786
Provision for loan losses........................................        884,682          772,579           834,140
                                                                  --------------    -------------    --------------

                  NET INTEREST INCOME
                    AFTER PROVISION FOR LOAN LOSSES..............     20,787,184       17,477,036        15,339,646

NONINTEREST INCOME
  Service charges on deposits                                          3,055,298        2,511,501         2,228,762
  Insurance commissions..........................................      2,268,680          795,805           656,134
  Bank club dues.................................................        630,427          562,552           498,282
  Debt cancellation fees.........................................        688,859          274,989           387,876
  Other operating income.........................................        993,152          748,723           668,672
  Investment securities gains (losses)...........................        465,982           (2,590)            7,509
                                                                  ---------------   -------------    --------------
                  TOTAL NONINTEREST INCOME.......................      8,102,398        4,890,980         4,447,235
                                                                  --------------    -------------    --------------

NONINTEREST EXPENSES
  Salaries and employee benefits.................................     14,189,168       10,402,726         9,135,335
  Occupancy expense..............................................      2,113,400        1,477,721         1,030,522
  Furniture and equipment expense................................      1,543,634        1,213,978         1,004,804
  Director and committee fees....................................        711,358          638,120           465,775
  Other operating expenses.......................................      5,226,325        3,690,116         3,265,115
                                                                  --------------    -------------    --------------
                  TOTAL NONINTEREST EXPENSES.....................     23,783,885       17,422,661        14,901,551
                                                                  --------------    -------------    --------------

Income before income taxes.......................................      5,105,697        4,945,355         4,885,330
Provision for income taxes.......................................      1,526,204        1,451,419         1,426,344
                                                                  --------------    -------------    --------------
                  NET INCOME BEFORE MINORITY INTEREST............      3,579,493        3,493,936         3,458,986
Minority interest in consolidated subsidiary.....................            -0-           18,342               -0-
                                                                  --------------    -------------    --------------

                  NET INCOME..................................... $    3,579,493    $   3,512,278    $    3,458,986
                                                                  ==============    =============    ==============

EARNINGS PER COMMON SHARE - basic................................ $          .90    $         .92    $          .93
EARNINGS PER COMMON SHARE - diluted.............................. $          .88    $         .92    $          .93
</TABLE>




                 See notes to consolidated financial statements

                                       42

<PAGE>   44



                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                           Accumulated
                                                                             Unearned         Other
                                 Common       Capital          Retained        ESOP       Comprehensive                Comprehensive
                                  Stock       Surplus          Earnings       Shares          Income        Total          Income
                               ----------   ------------    -------------   -----------    -----------   -----------   -------------
<S>                            <C>          <C>             <C>             <C>           <C>            <C>           <C>
Balance at January 1,1996....  $  184,927   $ 14,821,302    $  14,262,319   $  (995,198)  $    745,887   $29,019,237

Net Income - 1996............                                   3,458,986                                  3,458,986     $3,458,986

Other Comprehensive Income, net:
Net Change in Unrealized Gains
  (Losses) on Securities ....                                                                 (899,449)     (899,449)      (899,449)
                                                                                                                         ----------
Comprehensive Income.........                                                                                            $2,559,537
                                                                                                                         ==========
Cash dividends: Common.......                                    (908,788)                                  (908,788)

Issuance of Common Stock.....      15,073      2,998,420                                                   3,013,493

Release of ESOP shares ......                                                   135,314                      135,314

Pledging of additional ESOP
   shares ...................                                                (1,260,007)                  (1,260,007)
                               ----------   ------------    -------------   -----------    -----------   -----------

Balance at December 31, 1996.     200,000     17,819,722       16,812,517    (2,119,891)      (153,562)   32,558,786

Net Income - 1997............                                   3,512,278                                  3,512,278     $3,512,278

Other comprehensive income, net:
Net Change in Unrealized Gains
  (Losses) on Securities ....                                                                  583,255       583,255        583,255
                                                                                                                         ----------

Comprehensive Income.........                                                                                            $4,095,533
                                                                                                                         ==========

Cash dividends: Common.......                                  (1,500,000)                                (1,500,000)

Issuance of Common Stock.....       3,161        704,579                                                     707,740

Release of ESOP shares.......                                                   116,989                      116,989
                               ----------   ------------    -------------   -----------    -----------   -----------
Balance at December 31, 1997      203,161     18,524,301       18,824,795    (2,002,902)       429,693    35,979,048

NET INCOME - 1998............                                   3,579,493                                  3,579,493     $3,579,493

OTHER COMPREHENSIVE INCOME, NET:
NET CHANGE IN UNREALIZED GAINS
  (LOSSES) ON SECURITIES ....                                                                   13,246        13,246         13,246
                                                                                                                         ----------

COMPREHENSIVE INCOME.........                                                                                            $3,592,739
                                                                                                                         ==========

CASH DIVIDENDS: COMMON.......                                  (2,031,608)                                (2,031,608)

2:1 STOCK SPLIT..............     203,161                        (203,161)                                       -0-

ISSUANCE OF COMMON STOCK.....      58,470     10,576,082                                                  10,634,552

RELEASE OF ESOP SHARES.......                                                   135,628                      135,628

PLEDGING OF ADDITIONAL ESOP
   SHARES....................                                                (1,076,958)                  (1,076,958)
                               ----------   ------------    -------------   -----------    -----------   -----------

BALANCE AT DECEMBER 31, 1998.  $  464,792   $ 29,100,383    $  20,169,519   $(2,944,232)   $   442,939   $47,233,401
                               ==========   ============    =============   ===========    ===========   ===========
</TABLE>



                 See notes to consolidated financial statements

                                       43

<PAGE>   45



                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES



<TABLE>
<CAPTION>
                                                                                       Years Ended December 31,
                                                                        -------------------------------------------------
                                                                             1998              1997              1996
                                                                        -------------      ------------      ------------
<S>                                                                     <C>                <C>               <C>
OPERATING ACTIVITIES:
  Net income ......................................................     $   3,579,493      $  3,512,278      $  3,458,986
  Adjustments to reconcile net income to net
    cash provided by operating activities:
     Provision for loan losses ....................................           884,682           772,579           834,140
     Provision for depreciation and amortization ..................         1,990,250         1,577,243         1,251,145
     Amortization of investment security
       premiums and accretion of discounts ........................           166,455            82,839           (44,943)
     Deferred tax expense .........................................           308,759           386,061            61,324
     Realized investment security (gains) losses ..................          (465,982)            2,590            (7,509)
     Loss (gain) on sale of premises and equipment ................            26,599           (64,787)           39,866
     Increase in accrued interest receivable ......................          (901,823)         (242,457)       (1,009,584)
     Increase in accrued interest payable .........................           668,648           369,461           233,690
     Other ........................................................        (3,520,039)         (439,836)        1,217,000
                                                                        -------------      ------------      ------------
         NET CASH PROVIDED BY OPERATING ACTIVITIES ................         2,737,042         5,955,971         6,034,115
                                                                        -------------      ------------      ------------

INVESTING ACTIVITIES:
  Proceeds from sales of securities available for sale ............        24,045,040         5,007,863        20,014,380
  Proceeds from maturity of securities available for sale .........        21,785,801         6,636,625        15,569,562
  Purchase of securities available for sale .......................       (57,808,777)       (8,938,589)      (53,952,015)
  Net decrease (increase) in interest-bearing
    deposits with other banks .....................................         1,564,558          (740,780)          138,510
  Cash used in acquisition of bank branches and finance offices ...        (5,321,041)              -0-          (929,639)
  Net increase in loans to customers ..............................       (99,903,246)       (5,349,333)      (43,823,086)
  Proceeds from sale of premises and equipment ....................            87,630           250,596           115,319
  Capital expenditures ............................................        (8,452,082)       (6,420,709)       (5,352,381)
  Net proceeds from sale of other real estate .....................         1,119,355           240,000           380,508
                                                                        -------------      ------------      ------------
          NET CASH USED IN INVESTING ACTIVITIES ...................      (122,882,762)       (9,314,327)      (67,838,842)
                                                                        -------------      ------------      ------------

FINANCING ACTIVITIES:
  Net increase in demand deposits, NOW accounts,
    and savings accounts ..........................................        30,636,345         8,114,624        19,052,113
  Net increase in certificates of deposit .........................        61,416,395        31,022,542        15,686,984
  Net (decrease) increase in short-term borrowings ................          (438,546)       (5,275,058)        6,897,972
  Repayment of long-term debt .....................................          (770,226)         (766,848)         (763,117)
  Issuance of common stock ........................................        10,634,552           402,897         3,013,493
  Cash dividends ..................................................        (2,031,608)       (1,500,000)         (908,788)
                                                                        -------------      ------------      ------------
         NET CASH PROVIDED BY FINANCING ACTIVITIES ................        99,446,912        31,998,157        42,978,657
                                                                        -------------      ------------      ------------

Net (decrease) increase in cash and cash equivalents ..............       (20,698,808)       28,639,801       (18,826,070)

Cash and cash equivalents at beginning of year ....................        46,251,978        17,612,177        36,438,247
                                                                        -------------      ------------      ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR ..........................     $  25,553,170      $ 46,251,978      $ 17,612,177
                                                                        =============      ============      ============
</TABLE>


                 See notes to consolidated financial statements

                                       44

<PAGE>   46



                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                  --------------------------------------------------
                                                                        1998             1997              1996
                                                                  --------------    -------------    --------------
<S>                                                               <C>               <C>              <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:
    Interest..................................................... $   22,024,405    $  19,171,945    $   16,956,814
    Income taxes.................................................        843,623        1,933,488           601,000
</TABLE>


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:

Other real estate of $792,518, $808,150 and $1,328,284 was acquired in 1998,
1997 and 1996, respectively, through foreclosure. Other assets acquired by
foreclosure amounted to $277,675 in 1998 and $471,027 in 1997.

Upon the pledging of additional shares to obtain additional ESOP debt of
$1,076,958 on December 1, 1998 and $1,260,007 on May 17, 1996, long-term debt
was increased and equity was decreased. The debt was reduced and shares were
released by $135,628, $116,989, and $135,314, respectively, during each of the
years ended December 31, 1998, 1997, and 1996 as a result of payments made by
the Company's ESOP on the outstanding ESOP debt.

In August 1997, the Company issued 11,770 shares of its common stock to the
owners of Southern Select Insurance, Inc. as a portion of the consideration
given in exchange for 51% of its issued and outstanding common stock. The
Company issued an additional 22,306 shares of its common stock, in April 1998,
to the owners of Southern Select Insurance, Inc. as a portion of the
consideration in exchange for the remaining 49% of its issued and outstanding
common stock. In April 1998 the Company issued 10,833 shares of its common stock
to the owners of Chafin Insurance Agency, Inc. as a portion of the consideration
given in exchange for 100% of the issued and outstanding shares of common stock.
The Company also issued 6,667 shares of its common stock to the owner of the Jim
Murphree Insurance Agency, Inc. as a portion of the consideration given in
exchange for 100% of the issued and outstanding shares of common stock.






              [The remainder of this page intentionally left blank]














                 See notes to consolidated financial statements



                                       45

<PAGE>   47



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowances based on their
judgements 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. Effective December
1, 1995, the Company reclassified all of its investments in securities 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's
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.






                                       46

<PAGE>   48


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

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

Allowance for Loan Losses   The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential loan losses in the
loan portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loan loss experience, current
domestic and international economic conditions, volume, growth and composition
of the loan portfolio, and other relevant factors. 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 FASB Statement No. 91, entitled: 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.

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.





                                       47
<PAGE>   49


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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 SFAS No. 128, Earnings per
Share. The following reconciles the weighted average number of shares
outstanding:

<TABLE>
<CAPTION>
                                                        1998          1997          1996
                                                      ---------     ---------     ---------

<S>                                                   <C>           <C>           <C>
Weighted average of common shares outstanding ...     3,994,798     3,807,232     3,727,506
Effect of dilutive options ......................        57,461        22,999           -0-
                                                      ---------     ---------     ---------

Weighted average of common shares
   Outstanding effected for dilution ............     4,052,259     3,830,231     3,727,506
                                                      =========     =========     =========
</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 SFAS 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.

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 are determined by the Board of Directors but
may not be less than the amount required to cover the debt service on the ESOP
loan. In February 1998, the Financial Accounting Standards Board issued
Financial Accounting Statement SFAS No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits. This Statement standardizes the
disclosure requirement for pensions and other postretirement benefits to the
extent practicable, and requires additional information on changes in the
benefits obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain other disclosures previously
required. The adoption of this statement had no material impact on the financial
condition or results of operations of the Company.



                                       48

<PAGE>   50


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Intangibles   Intangibles consist primarily of legal organizational costs and
goodwill. Organizational costs are generally amortized over 5 years using the
straight-line method. The goodwill intangible represents premiums paid on the
purchase of assets and deposit liabilities. The asset is stated at cost, net of
accumulated amortization, which is provided using the straight-line method over
the estimated useful life of approximately 15 and 20 years.

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

The Company also has available as a source of short-term financing the purchase
of federal funds from other commercial banks from available lines of up to
$10,000,000. In addition, the Company has an available overnight funds line of
up to $70,000,000 from the Federal Home Loan Bank of Atlanta (FHLB-Atlanta).

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
$15,000 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 $137,803 and $135,139 at December 31, 1998 and 1997.

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

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

Repurchase Agreements   In June 1996, the Financial Accounting Standards board
issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, relating to repurchase agreements,
securities lending and other similar transactions, and pledged collateral. This
statement established new criteria for determining whether a transfer of
financial assets in exchange for cash or other consideration should be accounted
for as a sale or as a pledge of collateral. Subsequently, SFAS No. 127, Deferral
of the Effective Date of Certain Provisions of SFAS No. 125 was issued and
deferred




                                       49

<PAGE>   51


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

implementation of certain aspects of the original statement until January 1,
1998. The adoption of these provisions did not have a material impact on the
Company's financial position or results of operations.

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

Reclassification   Certain amounts in 1997 and 1996 have been reclassified to
conform with the 1998 presentation.

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

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

In February 1998, the FASB issued SFAS No 132, Employer's Disclosures about
Pension and Other Postretirement Benefits. This statement standardizes the
disclosure requirement for pensions and other Postretirement benefits to the
extent practicable, and requires additional information on changes in the
benefits obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain other disclosures previously
required. The adoption of this statement had no material impact on the financial
condition or results of operations of the Company.







                                       50

<PAGE>   52


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


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, 1998 was approximately $1,481,000.

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, 1998 and 1997, the Company's investment securities are
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Unrealized holding gains and losses,
net of applicable deferred taxes, are included as a component of shareholders'
equity, (Accumulated Other Comprehensive Income) until realized.

At December 31, 1998, the Company's available-for-sale securities reflected net
unrealized gains of $738,232, which resulted in an increase in shareholders'
equity of $ 442,939, net of deferred tax expense, compared to net unrealized
gains of $716,155 and a resultant increase in stockholders' equity of $429,693,
net of deferred tax liability, at December 31, 1997. At December 31, 1996, the
investment securities reflected $255,937 of net unrealized losses in available
for sale securities, with a decrease in shareholders' equity, net of deferred
tax benefit, of $153,562.






              [The remainder of this page intentionally left blank]




                                       51

<PAGE>   53


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The carrying amounts of investment securities as shown in the consolidated
statements of financial condition of the Company and their approximate fair
values at December 31, 1998 and 1997 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, 1998:
------------------------

SECURITIES AVAILABLE FOR SALE:

U. S. GOVERNMENT AND AGENCY SECURITIES ....     $48,877,741     $  484,437     $   217,017     $49,145,161

STATE AND MUNICIPAL SECURITIES ............      14,640,733        545,949             -0-      15,186,682

MORTGAGE-BACKED SECURITIES ................      31,399,003         54,712         129,849      31,323,866

EQUITY SECURITIES .........................       1,735,900            -0-             -0-       1,735,900
                                                -----------     ----------     -----------     -----------

                                                $96,653,377     $1,085,098     $   346,866     $97,391,609
                                                ===========     ==========     ===========     ===========


As of December 31, 1997:
------------------------

Securities available for sale:

U. S. government and agency securities ....     $51,267,361     $  117,694     $   231,651     $51,153,404

State and municipal securities ............      12,118,830        578,983             -0-      12,697,813

Mortgage-backed securities ................      20,989,723        267,361          16,232      21,240,852
                                                -----------     ----------     -----------     -----------

                                                $84,375,914     $  964,038     $   247,883     $85,092,069
                                                ===========     ==========     ===========     ===========
</TABLE>






                                       52

<PAGE>   54


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The contractual maturities of securities available for sale at December 31, 1998
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>
                                                                    Estimated
                                                   Amortized          Fair
                                                      Cost            Value
                                                  -----------     -----------
<S>                                               <C>             <C>
AS OF DECEMBER 31, 1998:
------------------------

SECURITIES AVAILABLE FOR SALE:

DUE IN ONE YEAR OR LESS .....................     $11,104,481     $11,086,181
DUE AFTER ONE YEAR THROUGH FIVE YEARS .......      24,744,893      25,145,548
DUE AFTER FIVE YEARS THROUGH TEN YEARS ......      30,285,147      30,417,673
DUE AFTER TEN YEARS .........................      28,782,956      29,006,307
EQUITY SECURITIES ...........................       1,735,900       1,735,900
                                                  -----------     -----------

                                                  $96,653,377     $97,391,609
                                                  ===========     ===========
</TABLE>


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

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

<TABLE>
<CAPTION>
                                     1998        1997         1996
                                   --------     -------     --------


<S>                                <C>          <C>         <C>
Gross realized gains .........     $472,904     $48,454     $136,304
Gross realized losses ........        6,922      51,044      128,795
</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 $80,163,283 and $73,920,000 at
December 31, 1998 and 1997, respectively.







                                       53

<PAGE>   55


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 4 - LOANS

The Bank grants loans to customers primarily in North Central Alabama and South
Central Tennessee.

The major classifications of loans as of December 31, 1998 and 1997 were as
follows:

<TABLE>
<CAPTION>
                                                          1998             1997
                                                     ------------     ------------

<S>                                                  <C>              <C>
Commercial, financial and agricultural .........     $ 94,056,615     $ 64,136,607
Real estate - construction .....................        6,152,759        3,498,853
Real estate - mortgage .........................      205,457,289      172,504,056
Consumer .......................................      129,333,938       86,945,172
                                                     ------------     ------------
                                                      435,000,601      327,084,688
Unearned income ................................        1,147,965          950,205
Allowance for loan losses ......................        2,970,597        2,131,354
                                                     ------------     ------------

Net loans ......................................     $430,882,039     $324,003,129
                                                     ============     ============
</TABLE>

As of December 31, 1998, there were no loans which the Bank had specifically
classified as impaired. Other nonaccrual loans at December 31, 1998 and 1997
amounted to approximately $1,599,439 and $1,093,000, respectively. For the years
ended December 31, 1998 and 1997, the difference between gross interest income
that would have been recorded in such period if nonaccruing loans had been
current in accordance with their original terms and the amount of interest
income on those loans that was included in such period's net income was
immaterial.

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






              [The remainder of this page intentionally left blank]

                                       54

<PAGE>   56


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 5 - ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 1998 were as follows:

<TABLE>
<CAPTION>
                                                      1998             1997             1996
                                                  -----------      -----------      -----------

<S>                                               <C>              <C>              <C>
Balance at beginning of year ................     $ 2,131,354      $ 2,424,847      $ 2,208,798

Charge-offs .................................      (1,463,450)      (1,187,263)      (1,229,976)
Recoveries ..................................         137,264          112,417           82,081
                                                  -----------      -----------      -----------
  Net charge-offs ...........................      (1,326,186)      (1,074,846)      (1,147,895)

Provision for loan losses ...................         884,682          772,579          834,140

Reserves acquired through acquisitions ......       1,280,747            8,774          529,804
                                                  -----------      -----------      -----------

Balance at end of year ......................     $ 2,970,597      $ 2,131,354      $ 2,424,847
                                                  ===========      ===========      ===========
</TABLE>


NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment at December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                     1998            1997
                                                                 -----------     -----------

<S>                                                              <C>             <C>
Land .......................................................     $ 3,911,361     $ 2,426,678
Buildings, land improvements and construction in process ...      19,904,561      15,761,915
Furniture and equipment ....................................      10,123,164       7,851,306
Automobiles ................................................       1,925,544       1,498,323
Leasehold improvements .....................................         927,894         684,178
                                                                 -----------     -----------
                                                                  36,792,524      28,222,400
Less allowance for depreciation ............................       7,246,726       5,859,968
                                                                 -----------     -----------

                                                                 $29,545,798     $22,362,432
                                                                 ===========     ===========
</TABLE>

The provisions for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 1998, 1997 and 1996 were $1,549,920,
$1,249,420 and $976,519, respectively. The Bank capitalized $123,099 in interest
cost related to building construction in 1998.








                                       55

<PAGE>   57


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 7 - DEPOSITS

The major classifications of deposits as of December 31, 1998 and 1997 were as
follows:

<TABLE>
<CAPTION>
                                                                                       1998              1997
                                                                                    -------------    --------------

<S>                                                                                 <C>              <C>
Noninterest-bearing demand......................................................    $  62,562,296    $   52,356,858
Interest-bearing demand.........................................................       89,808,368        71,442,832
Savings.........................................................................       58,722,767        51,050,582
Time............................................................................      218,507,099       179,055,956
Certificates of deposit of $100,000 or more.....................................       90,449,991        68,427,403
Other time deposits.............................................................       18,535,000        18,555,000
                                                                                    -------------    --------------

                                                                                    $ 538,585,521    $  440,888,631
                                                                                    =============    ==============
</TABLE>

The maturities of time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                                        TIME             OTHER
                                                                    CERTIFICATES         TIME
                                                                      OF DEPOSIT        DEPOSITS          TOTAL
                                                                    -------------   -------------    --------------
<S>                                                                 <C>             <C>              <C>
Three months or less.............................................   $  17,537,343   $  18,535,000    $   36,072,343
Over three through six months....................................      10,577,684             -0-        10,577,684
Over six through twelve months...................................      23,990,216             -0-        23,990,216
Over twelve months...............................................      38,344,748             -0-        38,344,748
                                                                    -------------   -------------    --------------

                                                                    $  90,449,991   $  18,535,000    $  108,984,991
                                                                    =============   =============    ==============
</TABLE>


NOTE 8 - LONG TERM DEBT

At December 31, 1998 and 1997, the Company had notes payable totaling $7,568,716
and $7,397,612, 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, 1998 and 1997, the amounts
outstanding were $2,846,631 and $3,557,509, respectively, due December 17, 2002,
bearing interest at a floating prime rate, collateralized by 100% of the common
stock of the subsidiary bank. The note agreement contains provisions which limit
the Company's right to transfer or issue shares of the subsidiary 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.




                                       56

<PAGE>   58


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 8 - LONG TERM DEBT - CONTINUED

On November 3, 1993, the Trustees of the Company's ESOP executed a promissory
note of $1,200,000 in order to purchase common stock from the Company's public
offering of new common stock. The note was originally secured by 80,000 shares
of purchased stock. The promissory note had been refinanced in years subsequent
to 1993 as additional shares were purchased by the ESOP. On December 1, 1998,
this note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments of
$31,677 due monthly through November 16, 2010, with all remaining principal, if
any, due upon that date. 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 $2,944,232 at
December 31, 1998, secured by 241,350 of unreleased shares of Company stock. See
Note 16.

On October 4, 1994, the Company entered into a twenty year, subordinated
installment capital note due October 1, 2014 for the purchase of treasury stock.
Monthly principal and interest payments of $15,506 are made on the note, which
bears interest at the fixed rate of 7%. The Company maintains the right to
prepay the note at its sole discretion. The balance of the note was $ 1,777,853
and $1,837,201 at December 31, 1998 and 1997, respectively.


Maturities of long-term debt following December 31, 1998 are as follows:

<TABLE>
                  <S>                                   <C>
                  1999............................      $   932,661
                  2000............................          949,238
                  2001............................          967,784
                  2002............................          987,779
                  2003............................          297,837
                  Thereafter......................        3,433,417
                                                        -----------

                                                        $ 7,568,716
                                                        ===========
</TABLE>







              [The remainder of this page intentionally left blank]




                                       57

<PAGE>   59


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 9 - OTHER OPERATING EXPENSES

Other operating expenses consist of the following:

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                        ----------------------------------------
                                           1998           1997           1996
                                        ----------     ----------     ----------
<S>                                     <C>            <C>            <C>
Amortization of intangibles .......     $  440,330     $  327,823     $  274,826
Advertising .......................         92,663        237,887        229,087
Insurance .........................        129,572        282,791        223,696
Professional fees .................        359,981        272,999        250,105
Supplies ..........................        471,676        537,374        546,697
Postage ...........................        363,948        280,346        257,071
Telephone .........................        553,693        357,048        298,437
Training and Education ............        255,497         98,337         44,515
Other .............................      2,558,965      1,295,511      1,140,681
                                        ----------     ----------     ----------

                                        $5,226,325     $3,690,116     $3,265,115
                                        ==========     ==========     ==========
</TABLE>


NOTE 10 - INCOME TAXES

Federal and state income taxes receivable and (payable) as of December 31, 1998
and 1997 included in other assets and other liabilities, respectively, were as
follows:

<TABLE>
<CAPTION>
                                                                   1998          1997
                                                                ---------      --------
         <S>                                                    <C>            <C>
         Current
           Federal ........................................     $ (30,282)     $225,520
                                                                =========      ========
           State ..........................................     $(162,232)     $ 33,316
                                                                =========      ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                         1998             1997
                                                                                     ------------    --------------
  <S>                                                                                <C>             <C>
  DEFERRED TAX ASSET:
    Federal.....................................................................     $    652,659    $      667,885
    State.......................................................................          114,763           116,176
                                                                                     ------------    --------------
     Total gross deferred income tax asset......................................          767,422           784,061
                                                                                     ------------    --------------
  Deferred tax liability:
    Federal.....................................................................       (1,194,959)         (898,021)
    State.......................................................................         (159,583          (158,978)
                                                                                     ------------    --------------
     Total gross deferred income tax liability..................................       (1,354,542)       (1,056,999)
                                                                                     ------------    --------------

  Net deferred income tax asset (liability).....................................     $   (587,120)   $     (272,938)
                                                                                     ============    ==============
</TABLE>


                                       58

<PAGE>   60


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 10 - INCOME TAXES - CONTINUED

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

<TABLE>
<CAPTION>
                                                                                         1998              1997
                                                                                     ------------    --------------
  <S>                                                                                <C>             <C>
  Net unrealized losses (gains) on securities
    available for sale..........................................................     $   (295,293)   $     (286,462)
  Depreciation..................................................................         (945,316)         (739,956)
  Pension expense...............................................................          260,079           150,521
  Provision for loan losses.....................................................          335,450           469,998
  Deferred compensation.........................................................           15,152            49,419
  Provision for debt cancellation...............................................           55,121            52,922
  Other.........................................................................          (12,313)           30,620
                                                                                     ------------    --------------

                                                                                     $   (587,120)   $     (272,938)
                                                                                     ============    ==============
</TABLE>


The components of income tax expense for each of the years ended December 31,
1998, 1997 and 1996 were:

<TABLE>
<CAPTION>
                                   1998                             1997                             1996
                   ----------------------------    ------------------------------    ------------------------------
                      CURRENT        DEFERRED          Current         Deferred         Current          Deferred
                   ------------    ------------    -------------    -------------    ------------    --------------
<S>                <C>             <C>             <C>              <C>              <C>             <C>           
Federal........    $  1,070,862    $    264,234    $   1,041,065    $     322,262    $  1,164,205    $       59,451
State..........         146,583          44,525           24,293           63,799         200,815             1,873
                   ------------    ------------    -------------    -------------    ------------    --------------

                   $  1,217,445    $    308,759    $   1,065,358    $     386,061    $  1,365,020    $       61,324
                   ============    ============    =============    =============    ============    ==============
</TABLE>


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


<TABLE>
<CAPTION>
                                                         1998             1997            1996
                                                   -------------    -------------    ------------
    <S>                                            <C>              <C>              <C>
    Depreciation............................       $     205,360    $     140,117    $     88,004
    Provision for loan losses...............             135,538          159,886          36,173
    Pension expense.........................            (109,558)        (61,630)          50,372
    Alternative minimum
      tax credit............................                 -0-              -0-          29,293
    Other...................................              77,419          147,688        (142,518)
                                                   -------------    -------------    ------------

                                                   $     308,759    $     386,061    $     61,324
                                                   =============    =============    ============
</TABLE>



                                       59

<PAGE>   61


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 10 - INCOME TAXES - CONTINUED

Tax effects of securities transactions resulted in an increase (decrease) in
income taxes for 1998, 1997 and 1996 of $167,940, ($1,036) and $3,004,
respectively.

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

<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                                          --------------------------
                                                           1998     1997     1996
                                                           -----    ----     ----
  <S>                                                     <C>      <C>      <C>
  Statutory federal income tax rates..................     34.0%    34.0%    34.0%
  Effect on rate of:
  Tax-exempt securities.............................       (5.0)    (4.9)    (6.3)
  Tax-exempt loan income............................       (2.5)    (3.2)    (2.8)
  State income tax, net of federal tax benefit......         --      ---      2.2
  Interest expense disallowance.....................        0.6      0.7      0.9
  Other items.......................................        2.8      2.7      1.2
                                                          -----    -----    -----
  Effective income tax rate.........................       29.9%    29.3%    29.2%
                                                          =====    =====    =====
</TABLE>


NOTE 11 - PRIOR PERIOD RESTATEMENT

Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, was adopted by the Company during 1997. Earnings per share amounts for
1997 and 1996 have been restated to give effect for the 2:1 stock split
effective March 26, 1998.


NOTE 12 - SHAREHOLDERS' EQUITY

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

On March 28, 1996, the Company issued a total of 135,000 options to its
directors to purchase its common shares. The options were distributed among the
directors based upon their years of service and their positions of leadership
with the Company. Each of the stock option agreements contained an option price
of $10.00 per share, the market value of the shares at the time of issuance. The
options are exercisable between April 1, 1996 and March 31, 2001 (1996 options).
In March 1997, an additional 103,000 options were issued to the Company's
directors with an option price of $12.50 per share. These options were
exercisable between April 1, 1997 and March 31, 2002 (1997 options). In March
1998, 203,331 options were issued to directors and certain senior officers with
an option price of $15.00 per share. These options are exercisable between
April 1, 1998 and March 31, 2003 (1998 options). Options under the plan are
treated as non-qualified options under the provisions of the Internal Revenue
Code. The agreements also contain a provision whereby the Company shall
compensate the optionee in cash for any federal or state tax liability incurred
upon the exercise of the options.

                                       60

<PAGE>   62


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

The following sets forth certain information regarding stock options for the
years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                         Number       Wgt. Average
                                                                                       of Shares     Exercise Price
                                                                                      -----------    ---------------

  <S>                                                                                 <C>            <C>
  Balance, December 31, 1995....................................                              -0-    $           -0-
  Granted, Year Ended December 31, 1996.........................                          270,000              10.00
  Exercised, Year Ended December 31, 1996.......................                              -0-                -0-
                                                                                      -----------    ---------------

  Balance, December 31, 1996....................................                          270,000              10.00

  Granted, Year Ended December 31, 1997.........................                          103,000              12.50
  Exercised, Year Ended December 31, 1997.......................                          (30,000)            (10.16)
                                                                                      -----------    ---------------

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

  GRANTED, YEAR ENDED DECEMBER 31, 1998.........................                          203,331              15.00
  EXERCISED, YEAR ENDED DECEMBER 31, 1998.......................                          (32,000)            (11.72)
                                                                                      -----------     --------------

  BALANCE, DECEMBER 31, 1998....................................                          514,331     $        12.36
                                                                                      ===========     ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                                      Expiration        Options
                                                                       Number           Date          Exercisable
                                                                    -------------    ------------    --------------
<S>                                                                 <C>              <C>             <C>
Options with Exercise Price of $10.00............................         222,000       3-31-2001           222,000
Options with Exercise Price of $12.50............................          99,000       3-31-2002            99,000
Options with Exercise Price of $15.00............................         193,331       3-31-2003           193,331
                                                                    -------------                    --------------
Total outstanding, December 31, 1998.............................         514,331                           514,331
                                                                    =============                    ==============
</TABLE>

The number of shares and weighted average exercise price have been restated to
give effect for the 2:1 stock split effective March 26, 1998.

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


                                       61

<PAGE>   63


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


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 1996, 1997 and 1998 was estimated at
the date of grant using a Black-Scholes option pricing model. The Black-Scholes
option pricing model was originally developed for use in estimating the fair
value of traded options which have different characteristics from the Company's
employee stock options. The model is also sensitive to changes in the subjective
assumptions which can materially affect the fair value estimate. As a result,
management believes that the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.

The Company's options outstanding have a weighted average contractual life of
3.19 years. The weighted average fair value of options granted was $ 3.68 in
1998, $3.32 in 1997 and $2.66 in 1996. The fair value of each option granted is
estimated using the following weighted-average assumptions in the option pricing
model: expected dividend yield of 3.33% for 1998, 3.00% for 1997 and 2.50% for
1996; an expected option life of 5 years; expected volatility of 0.289 for 1998,
1997 and 1996; and a risk free interest rate of 5.49%, 6.12% and 5.19% for 1998,
1997 and 1996, respectively.

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

<TABLE>
<CAPTION>
                                                          1998            1997              1996
                                                     -------------   -------------    --------------

<S>                                                  <C>             <C>              <C>
Pro forma earnings ($000's)                            $   3,101       $   3,361         $  3,120
Pro forma Earnings per Common Share - basic                  .78             .88              .84
Pro forma  Earnings per Common Share - diluted               .77             .88              .84
</TABLE>


These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent average number of shares
outstanding on a diluted basis to be 57,461 greater than that used to calculate
basic earnings per share for 1998. Average shares outstanding when assuming
dilution were greater than average shares outstanding for basic earnings per
share by 22,999 for 1997. Diluted shares and basic shares were the same for
1996. The dilutative effect on earnings per share for the year ended December
31, 1998 was $.02. There was no dilutative effect on the book value of the
Company's common shares at December 31, 1997 or 1996.

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

Annual dividends of $.50 per share, $.38 per share and $.25 per share were
declared by the Company's Board of Directors on its common stock and paid in
January of 1998, 1997 and 1996, respectively. The payment of dividends on common
stock is subject to the prior payment of principal and interest on the Company's
long-term debt, maintenance of sufficient earnings and capital of the
subsidiaries, and to regulatory restrictions. (See Notes 8 and 17).

                                       62

<PAGE>   64


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 13 - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements. Commitments to extend credit, credit card arrangements, commercial
letters of credit and standby letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extension 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 1998 or 1997. 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, 1998 and 1997, the Company has issued standby letters of credit of
approximately $621,000 and $577,000, 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, 1998 and 1997, the Company had commitments
outstanding to extend credit totaling approximately $15,698,000 and $18,049,000,
respectively. These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.

Litigation: 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 seeks an unspecified amount of compensatory and punitive damages,
removal of the current

                                       63

<PAGE>   65


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

directors, appointment of a new Board of Directors, and attorneys fees and
costs. 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 have filed a motion with the court seeking to
have the action dismissed. Management of the Company believes that the action
will not have a material adverse effect on the Company's financial condition and
results of operations.

The Company and its subsidiaries are parties to other litigation and claims
arising in the normal course of business. Management, after consultation with
legal counsel, believes that the liabilities, if any, arising from such
litigation and claims are not material to the consolidated financial statements.

In September 1998, Community Bank discovered that a number of automobile and
truck loans had been made through its Ft. Payne, Alabama Wal-Mart location which
were not in compliance with the Bank's lending policy. The total amount of those
loans was approximately $9,300,000. The appropriate authorities and the Bank's
financial institution bond carrier were notified, and investigations are still
proceeding. As of December 31, 1998, borrowers had defaulted on loans totaling
approximately $3,400,000 and the Bank had taken possession of over 200 vehicles,
which were the collateral for such defaulted loans. Although investigation of
the matter has not yet been completed, management currently believes that the
Bank will be reimbursed either by its bond carrier or by other parties involved
in these transactions and the Bank will not incur any material losses from such
loans.


NOTE 14 - CONCENTRATIONS OF CREDIT

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 $2,399,000 and $2,967,000 of the unused commitment
balances at December 31, 1998 and 1997. All remaining commitments consist
primarily of unused real estate commitment lines.

The Company maintains its cash accounts at various commercial banks in Alabama.
The total cash balances are insured by the FDIC up to $100,000. Total uninsured
balances held at other commercial banks amounted to $18,440,464 and $6,791,718,
at December 31, 1998 and 1997, respectively.




              [The remainder of this page intentionally left blank]



                                       64

<PAGE>   66


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 15 - PENSION PLAN

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

Benefits under the Pension Plan depend upon a participant's years of credited
service with the Company or any of its subsidiaries and his average monthly
earnings for the highest five consecutive years out of the participants final 10
years of employment. Employees who become participants 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. Employees who became
participants before January 1, 1996, are 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 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 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.




              [The remainder of this page intentionally left blank]

                                       65

<PAGE>   67


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 15 - PENSION PLAN - CONTINUED


Pension Plan as of December 31:

<TABLE>
<CAPTION>
                                                                1998              1997
                                                            -----------       -----------
<S>                                                         <C>               <C>
Change in benefit obligation:
  Benefit obligation at beginning of year .............     $ 4,051,109       $ 3,512,362
  Service cost ........................................         410,795           310,756
  Interest cost .......................................         334,729           280,601
  Amendments ..........................................             -0-               -0-
  Actuarial (gain) or loss ............................         630,395            46,932
  Benefits paid .......................................        (106,510)          (99,542)
                                                            -----------       -----------

  Benefit obligation at end of year ...................     $ 5,320,518       $ 4,051,109
                                                            ===========       ===========

Change in plan assets:
  Fair value of plan assets at beginning of year ......     $ 4,001,126       $ 3,131,790
  Actual return on plan assets ........................         534,351           522,773
  Employer contribution ...............................         367,438           446,105
  Benefits paid from plan assets ......................        (106,510)          (99,542)
                                                            -----------       -----------
  Fair value of plan assets at end of year ............     $ 4,796,405       $ 4,001,126
                                                            ===========       ===========

Funded status of plan:
  Funded status of plan ...............................     $  (524,113)      $   (49,983)

  Unrecognized actuarial (gain) or loss ...............         314,786          (176,394)
  Unrecognized prior service cost .....................         112,434           124,133
  Unrecognized transition (asset) or obligation .......         (54,431)          (71,310)
                                                            -----------       -----------
  Accrued benefit cost ................................     $  (151,324)      $  (173,554)
                                                            ===========       ===========

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%             8.00%
  Expected long-term rate of return on plan
    assets for the year ...............................           10.00%             8.00%
  Expected rate of increase in future
    compensation levels ...............................            6.00%             6.00%
</TABLE>





                                       66

<PAGE>   68


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 15 - PENSION PLAN - CONTINUED

Pension plan net periodic benefit cost:


<TABLE>
<CAPTION>
                                                                        1998            1997              1996
                                                                    -------------    ------------    -------------

    <S>                                                             <C>              <C>              <C>
    Service cost..............................................      $     410,795    $   310,756      $     269,391
    Interest cost.............................................            334,729        280,601            241,630
    Expected return on plan assets............................           (395,136)      (245,114)          (223,356)
    Amortization of prior service cost........................             11,699         11,699             11,699
    Amortization of transitional (asset) or obligation........            (16,879)       (16,879)           (16,879)
    Recognized actuarial loss.................................                -0-            -0-                -0-
                                                                    -------------    ------------    --------------
    Net periodic benefit cost.................................      $     345,208    $   341,063     $      282,485
                                                                    =============    ===========     ==============
</TABLE>










              [The remainder of this page intentionally left blank]



















                                       67

<PAGE>   69


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 15 - PENSION PLAN - CONTINUED

Benefit Restoration Plan as of December 31:

<TABLE>
<CAPTION>

                                                                                      1998               1997
                                                                                ---------------    ----------------
  <S>                                                                           <C>                <C>
  Change in benefit obligation:
    Benefit obligation at beginning of year................................     $       802,984    $        619,321
    Service cost...........................................................              68,927              52,515
    Interest cost..........................................................              74,466              55,410
    Amendments.............................................................                 -0-                 -0-
    Actuarial (gain) or loss...............................................             242,018              75,738
    Benefits paid..........................................................                 -0-                 -0-
                                                                                ---------------    ----------------
    Benefit obligation at end of year......................................     $     1,188,395    $        802,984
                                                                                ===============    ================

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

  Funded status of plan:
    Funded status of plan..................................................     $    (1,188,395)   $       (802,984)
    Unrecognized actuarial (gain) or loss..................................             404,666             188,615
    Unrecognized prior service cost........................................             203,160             238,067
    Unrecognized transition (asset) or obligation..........................                 -0-                 -0-
                                                                                ---------------    ----------------
    Accrued benefit cost...................................................     $      (580,569)   $       (376,302)
                                                                                ===============    ================

  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%              8.00%
    Expected long-term rate of return on plan
      assets for the year..................................................               10.00%              8.00%
    Expected rate of increase in future
      compensation levels..................................................                6.00%              6.00%
</TABLE>








                                       68

<PAGE>   70


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 15 - PENSION PLAN - CONTINUED

  Benefit Restoration plan net periodic benefit cost:


<TABLE>
<CAPTION>
                                                                         1998            1997            1996
                                                                    -------------    ------------    ------------

    <S>                                                             <C>               <C>             <C>
    Service cost................................................    $      68,927     $    52,515     $    44,552
    Interest cost...............................................           74,466          55,410          42,521
    Expected return on plan assets..............................              -0-             -0-             -0-
    Amortization of prior service cost..........................           34,907          34,907          34,907
    Amortization of transitional (asset) or obligation..........              -0-             -0-             -0-
    Recognized actuarial loss...................................           25,967          11,243           6,325
                                                                    -------------    ------------       ---------
    Net periodic benefit cost...................................    $     204,267    $    154,075      $  128,305
                                                                    =============    ============      ==========
</TABLE>













              [The remainder of this page intentionally left blank]















                                       69

<PAGE>   71


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. An employee becomes a participant in
the ESOP on June 30 or December 31 after completing 12 months of employment
during which the employee is credited with 1,000 or more hours of service.
Contributions to the ESOP are made at the discretion of the Company's Board of
Directors, but may not be less than the amount required to cover the debt
service on the ESOP loan. Employer contributions are allocated to eligible
participants in proportion to their compensation, which equals W-2 wages plus
pre-tax reductions for the Company's cafeteria plan. The Internal Revenue Code
imposes a limit ($160,000 in 1998) 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 of
$31,677 due monthly through November 16, 2010, with the remaining principal, if
any, due upon that date. 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, 1998, there were 241,350 unreleased shares
with a fair value of approximately $4,827,000. These shares are subtracted from
outstanding shares for earnings per share calculations.

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP 93-6,
the employer must recognize the indebtedness of its sponsored ESOP on its
financial statement and reduce its stockholders' equity for shares of stock
which have not been released by a lender to the ESOP for allocation to its
participating employees. The portion of payments made by the Company to the ESOP
on behalf of its participating employees which are used to pay interest on the
ESOP debt ($165,808, $165,550 and $152,822 in 1998, 1997 and 1996, 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
are treated as other income of the ESOP.

At December 31, 1998 and 1997, the Company's financial statements reflect long
term debt and a corresponding contra-equity account, as a result of the ESOP
debt, of $2,944,232 and $2,002,902, respectively.

                                       70

<PAGE>   72


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED

Company contributions to the ESOP amounted to $316,008, $289,147 and $288,878,
for 1998, 1997 and 1996, respectively.


NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its stockholders and
other needs. Certain restrictions exist regarding the ability of the Bank to
transfer funds to the Company in the form of cash dividends, loans or advances.
The approval of the Alabama Superintendent of Banks is required to pay dividends
in excess of the Bank's earnings retained in the current year plus retained net
profits for the preceding two years less any required transfers to surplus. At
December 31, 1998, Community Bank could have declared dividends of approximately
$7,640,960 without approval of regulatory authorities.


NOTE 18 - REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998 and 1997, that the Bank meets all capital adequacy requirements to which it
is subject.

As of December 31, 1998 and 1997, the Company and its banking subsidiary are
classified as well capitalized under the financial institution regulatory
framework. To be categorized as well capitalized the Company and the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since year-end 1998
that management believes have changed the institution's category.




                                       71

<PAGE>   73


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 18 - REGULATORY CAPITAL - CONTINUED

<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, 1998:
 TOTAL CAPITAL
   (TO RISK WEIGHTED ASSETS):
   CONSOLIDATED                                  $  46,083   11.03%    $  33,436      8.00%    $  41,795      10.00%
   COMMUNITY BANK                                   47,333   11.40        33,218      8.00        41,523      10.00

 TIER 1 CAPITAL
   (TO RISK WEIGHTED ASSETS):
   CONSOLIDATED                                  $  41,521    9.94%    $  16,718      4.00%    $  25,777       6.00%
   COMMUNITY BANK                                   44,362   10.68        16,609      4.00        24,914       6.00

 TIER 1 CAPITAL
   (TO AVERAGE ASSETS):
   CONSOLIDATED                                  $  41,521    7.79%    $  21,328      4.00%    $  26,660       5.00%
   COMMUNITY BANK                                   44,362    8.34        21,268      4.00        26,585       5.00
</TABLE>



<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, 1997:
 Total Capital
   (to Risk Weighted Assets):
   Consolidated                                  $  36,411   11.86%    $  24,556      8.00%    $  30,695      10.00%
   Community Bank                                   39,351   12.80        24,586      8.00        30,733      10.00

 Tier 1 Capital
   (to Risk Weighted Assets):
   Consolidated                                  $  32,638   10.63%    $  12,278      4.00%    $  18,417       6.00%
   Community Bank                                   37,219   12.11        12,294      4.00        18,441       6.00

 Tier 1 Capital
   (to Average Assets):
   Consolidated                                  $  32,638    6.94%    $  18,813      4.00%    $  23,524       5.00%
   Community Bank                                   37,219    7.95        18,718      4.00        23,398       5.00
</TABLE>



                                       72

<PAGE>   74


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 19 - COMPREHENSIVE INCOME

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

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

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                 ---------------------------------------
                                                                    1998          1997           1996
                                                                 ---------      --------     -----------
<S>                                                              <C>            <C>          <C>
Unrealized holding gains (losses) arising during period ....     $ 488,059      $969,502     $(1,491,574)

Reclassification adjustments for net (gains) losses
  included in net income ...................................      (465,982)        2,590          (7,509)
                                                                 ---------      --------     -----------

Other comprehensive income, before income taxes ............        22,077       972,092      (1,499,083)

Income tax expense (benefit) related to other
  Comprehensive Income .....................................         8,831       388,837        (599,634)
                                                                 ---------      --------     -----------

Other Comprehensive Income .................................     $  13,246      $583,255     $  (899,449)
                                                                 =========      ========     ===========
</TABLE>


NOTE 20 - RELATED PARTY TRANSACTIONS

Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 1998 and 1997. 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, 1998 and 1997, amounted to $10,780,000 and $6,971,000,
respectively. An analysis of activity during 1998 in loans to related parties
resulted in additions of $8,108,000, representing new loans, reductions of
$4,484,000, representing payments, and an increase of $185,000, representing a
change in the composition of related parties.


                                       73

<PAGE>   75


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED

The Company, through Community Bank, its wholly owned subsidiary, offers all
regular full-time employees, including executive officers, loans at interest
rates which are one percent below the prevailing market rate. As of December 31,
1998, 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 $1,719,000. The Company, through its
wholly owned bank subsidiary, 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, 1998, executive
officers and directors of the Company and executive officers of Community Bank
and its subsidiaries, including members of their immediate families and related
interest, had relocation loans outstanding with total indebtedness of
approximately $2,985,000.

Maintenance Contract: The Bank has a service contract with Heritage Farms, an
unincorporated business owned by Kennon R. Patterson, Sr., a director and
officer of the Company, for the upkeep and maintenance of the external grounds
of six of the Bank's locations and one location for 1st Community Credit
Corporation for most of 1998. External grounds upkeep and maintenance was also
performed for twelve other Bank locations only during the first quarter of 1998.
Maintenance expense under this contract amounted to $51,465, $96,300 and $64,875
for the years ended December 31, 1998, 1997 and 1996, respectively, a monthly
average of $468, $422 and $318 per location.

Interior Design : The Company and the Bank, including the Bank's subsidiaries,
paid Heritage Interiors, a decorating and design firm owned and operated by the
wife of Kennon R. Patterson, Sr., a director and officer of the Company, for the
interior design, furniture, appliances, fixtures, hardware, carpets, wall
coverings, paint, drapes and accessories for new facilities and similar work
associated with the renovation of existing locations. During 1998, Heritage
Interiors was paid $265,066 in connection with the completion of three new
buildings with a total of approximately 60,000 square feet and $31,876 for the
renovation of an existing building at the Company's headquarters in
Blountsville, $150,723 in connection with the opening of a permanent location in
Double Springs, $38,647 in connection with the opening of bank offices in
Albertville, Boaz and Guntersville, $44,610 in connection with the opening of
six offices of 1st Community Credit Corporation, and additional amounts relating
to 23 other offices of the Company, Community Bank or its subsidiaries. Total
payments to Heritage Interiors in 1998 were $666,492. During 1997, Heritage
Interiors was paid $803,510 in connection with the building of the three new
buildings at the Company's headquarters in Blountsville, $136,133 for goods and
services for the Oneonta office, $139,484 for goods and services for the
Cleveland office and additional amounts for goods and services for 20 other
offices of the Company, Community Bank and its subsidiaries. Total payments to
Heritage Interiors in 1997 were $1,186,287. During 1996, Heritage Interiors was
paid $122,346 in connection with the opening of an office in Rainsville,
$129,033 in connection with the opening of an office in Rogersville and
additional amounts for goods and services for 17 other offices of the Company,
Community Bank and its subsidiaries. Total payments to Heritage Interiors in
1996 were $377,897.

These purchases were at a cost more favorable to the Company and its
subsidiaries than could be obtained from unrelated parties.

                                       74

<PAGE>   76


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 21 - LEASES

The Company has a number of operating lease agreements, involving land and
buildings. These leases are noncancellable and expire on various dates through
the year 2013. 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, 1998, 1997
and 1996, rental expense for operating leases was approximately $539,655,
$232,759, and $176,942, respectively.

Future minimum lease payments for all leases at December 31, 1998 are as
follows:

<TABLE>
<CAPTION>
                                                           OPERATING
                                                         -------------
                  <S>                                    <C>
                  Years Ending December 31,
                  1999..............................     $     382,624
                  2000..............................           365,461
                  2001..............................           336,757
                  2002..............................           272,726
                  2003..............................           237,492
                  Thereafter........................         1,255,710
                                                         -------------

                  Total minimum lease payments......     $   2,850,770
                                                         =============
</TABLE>


NOTE 22 - BUSINESS COMBINATIONS

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

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



                                       75

<PAGE>   77


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 22 - BUSINESS COMBINATIONS - CONTINUED

On April 1, 1998, Community Insurance established an office in Oneonta, Alabama
through the acquisition of 100% of the common stock of the Murphree Insurance
Agency. Community Insurance exchanged a combination of cash and shares of the
Company's common stock, totaling $375,000, acquiring $7,884 in fixed assets and
paying a premium of $367,116. Also effective April 1, 1998, Community Insurance
established an office in Graysville, Alabama as a result of the acquisition of
the Chafin Insurance Agency. Community Insurance exchanged a combination of cash
and shares of the Company's common stock, totaling $700,000, acquiring $62,488
in assets and paying a premium of $637,512. Neither of these transactions were
material to the financial statements of the Company for periods prior to the
acquisition date.

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

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


NOTE 23 - OTHER SHORT-TERM BORROWINGS

Other short-term borrowings at December 31, 1998 and 1997 consisted of the U.S.
Treasury Tax and Loan Note Option account, federal funds purchased, overnight
funds purchased from FHLB-Atlanta and securities sold under agreements to
repurchase.

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

<TABLE>
<CAPTION>
                                                                                        1998               1997
                                                                                     ------------      ------------

<S>                                                                                  <C>               <C>
Average balance during the year.................................................     $    880,551      $  1,271,798
Average interest rate during the year...........................................             6.02%             6.29%
Maximum month-end balance during the year.......................................     $  1,930,582      $  1,033,137

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

Carrying Value..................................................................     $  1,901,763      $  2,842,188
Estimated Fair Value............................................................        1,852,228         2,842,188
Accrued Interest Receivable.....................................................           25,801            51,938
</TABLE>



                                       76

<PAGE>   78


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 23 - OTHER SHORT-TERM BORROWINGS - CONTINUED

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.


NOTE 24 - SUBSEQUENT EVENTS

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 of 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 that 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.




              [The remainder of this page intentionally left blank]










                                       77

<PAGE>   79


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

Long-term Debt: Rates currently available to the Bank for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.

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.



              [The remainder of this page intentionally left blank]
















                                       78

<PAGE>   80


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The estimated fair values of the Company's financial instruments as of December
31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                1998                              1997
                                                  ------------------------------------------------------------------
                                                     Carrying           Fair           Carrying            Fair
                                                      Amount           Value            Amount             Value
                                                  -------------   -------------     -------------    --------------
                                                         (in Thousands)                      (in Thousands)
  <S>                                             <C>             <C>               <C>              <C>
  FINANCIAL ASSETS:
    Cash and short-term investments.........      $      26,503   $      26,503     $      48,766    $       48,766
    Investment securities...................             97,392          97,392            85,092            85,092
    Loans...................................            433,853                           326,134
    Less: allowance for losses..............              2,971                             2,131
                                                  -------------                     -------------
    Net Loans...............................            430,882         436,914           324,003           320,133
                                                  -------------   -------------     -------------    --------------

    TOTAL FINANCIAL ASSETS..................      $     554,777   $     560,809     $     457,861    $      453,991
                                                  =============   =============     =============    ==============

  FINANCIAL LIABILITIES:
    Deposits................................      $     538,586   $     543,221     $     440,889    $      440,964
    Short-term borrowings...................              2,192           2,192             2,630             2,630
    Long-term debt..........................              7,569           7,606             7,398             7,246
                                                  -------------   -------------     -------------    --------------

    TOTAL FINANCIAL LIABILITIES.............      $     548,347   $     553,019     $     450,917    $      450,840
                                                  =============   =============     =============    ==============

  UNRECOGNIZED FINANCIAL INSTRUMENTS:
    Commitments to extend credit............      $         -0-   $      15,698     $         -0-    $       18,049
    Standby letters of credit...............                -0-             621               -0-               577
                                                  -------------   -------------     -------------    --------------

    TOTAL UNRECOGNIZED
      FINANCIAL INSTRUMENTS.................      $         -0-   $      16,319     $         -0-    $       18,626
                                                  =============   =============     =============    ==============
</TABLE>



                                       79

<PAGE>   81


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 26 - CONDENSED PARENT COMPANY INFORMATION


STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                          December 31,
                                                               --------------------------------
                                                                     1998              1997
                                                               --------------    --------------
  <S>                                                          <C>               <C>
  ASSETS
    Cash and due from banks.................................   $    3,203,234    $      491,956
    Interest-bearing deposits with other banks..............              -0-           822,713
    Investment in subsidiaries (equity method) -
     eliminated upon consolidation..........................       50,073,892        40,559,940
    Premises and equipment, net.............................           80,684            54,084
    Intangibles, net........................................        1,086,800         1,197,428
    Other assets............................................        1,299,265           920,810
                                                               --------------    --------------

          TOTAL ASSETS......................................   $   55,743,875    $   44,046,931
                                                               ==============    ==============



LIABILITIES AND SHAREHOLDERS' EQUITY
    Long-term debt..........................................   $    7,568,716    $    7,397,612
    Other liabilities.......................................          941,758           670,271
                                                               --------------    --------------
          TOTAL LIABILITIES.................................        8,510,474         8,067,883

          TOTAL SHAREHOLDERS' EQUITY........................       47,233,401        35,979,048
                                                               --------------    --------------

          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........   $   55,743,875    $   44,046,931
                                                               ==============    ==============
</TABLE>



                                       80

<PAGE>   82


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED



STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                  -------------------------------------------------
                                                                        1998             1997              1996
                                                                  --------------    -------------    --------------
<S>                                                               <C>               <C>              <C>
INCOME
    From subsidiaries - eliminated upon consolidation
     Dividends................................................    $    3,017,970    $   2,548,201    $    1,103,482
     Management fees..........................................           600,000          600,000           575,000
     Interest.................................................            22,222           30,513           143,649
     Other Income.............................................             3,740            2,400             3,904
                                                                  --------------    -------------    --------------
                                                                       3,643,932        3,181,114         1,826,035
                                                                  --------------    -------------    --------------
EXPENSES
    Salaries and employee benefits............................         1,751,593        1,385,633         1,472,670
    Interest..................................................           400,079          465,003           522,884
    Other expenses............................................           666,862          683,802           445,751
                                                                  --------------    -------------    --------------
                                                                       2,818,534        2,534,438         2,441,305
                                                                  --------------    -------------    --------------
Income (loss) before income taxes and equity in
    undistributed earnings of subsidiaries....................           825,398          646,676          (615,270)
Income tax benefit............................................          (753,387)        (719,485)         (597,778)
                                                                  --------------    -------------    --------------

Income (loss) before equity in undistributed earnings
    of subsidiaries...........................................         1,578,785        1,366,161           (17,492)
Equity in undistributed earnings of subsidiaries..............         2,000,708        2,146,117         3,476,478
                                                                  --------------    -------------    --------------

             NET INCOME.......................................    $    3,579,493    $   3,512,278    $    3,458,986
                                                                  ==============    =============    ==============
</TABLE>



                                       81

<PAGE>   83


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                      -----------------------------------------------
                                                                           1998             1997              1996
                                                                      ------------      -----------      ------------
<S>                                                                   <C>               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income ....................................................     $  3,579,493      $ 3,512,278      $  3,458,986
  Adjustments to reconcile net income to net
    cash provided by operating activities:
     Equity in undistributed income of subsidiaries .............       (2,000,708)      (2,146,117)       (3,476,478)
     Provision for depreciation, amortization and accretion .....          118,571          111,642            23,426
     (Increase) decrease in other assets ........................         (378,456)          (1,277)           43,489
      Increase (decrease) in other liabilities ..................          271,490           19,194            (8,623)
                                                                      ------------      -----------      ------------
          NET CASH PROVIDED BY
                OPERATING ACTIVITIES ............................        1,590,390        1,495,720            40,800
                                                                      ------------      -----------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of securities available for sale .....................              -0-              -0-        (9,010,957)
  Proceeds from maturity of securities available for sale .......          822,713        1,050,000        10,073,749
  (Increase) decrease in interest-bearing deposits with banks ...              -0-         (742,932)          113,250
  Proceeds from sale of assets ..................................              -0-           39,584            23,315
  Capitalization of bank subsidiary .............................       (7,500,000)             -0-        (5,600,000)
  Capital expenditures ..........................................          (34,543)         (17,041)          (58,085)
                                                                      ------------      -----------      ------------
          NET CASH (USED IN) PROVIDED BY
                INVESTING ACTIVITIES ............................       (6,711,830)         329,611        (4,458,728)
                                                                      ------------      -----------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of long-term debt ...................................         (770,226)        (766,848)         (763,117)
  Issuance of common stock ......................................       10,634,552          707,740         3,013,493
  Cash dividends ................................................       (2,031,608)      (1,500,000)         (908,788)
                                                                      ------------      -----------      ------------
          NET CASH PROVIDED BY (USED IN)
                FINANCING ACTIVITIES ............................        7,832,718       (1,559,108)        1,341,588
                                                                      ------------      -----------      ------------

Net increase(decrease) in cash and cash equivalents .............        2,711,278          266,223        (3,076,340)

Cash and due from banks at beginning of year ....................          491,956          225,733         3,302,073
                                                                      ------------      -----------      ------------

CASH AND DUE FROM BANKS AT END OF YEAR ..........................     $  3,203,234      $   491,956      $    225,733
                                                                      ============      ===========      ============
</TABLE>








                                       82

<PAGE>   84


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1998, 1997 AND 1996


NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED


<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                          --------------- ------------------------
                                                              1998           1997           1996
                                                           ---------      ---------      ---------
<S>                                                        <C>            <C>            <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid (received) during the year for:
    Interest .........................................     $ 402,209      $ 467,424      $ 526,437
    Income taxes .....................................      (780,000)      (735,803)      (393,793)
</TABLE>


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

  Long-term debt was increased and equity was decreased $1,200,000 on January 1,
  1994 to reflect the existence of leveraged, unreleased ESOP shares. Upon the
  pledging of purchased shares to obtain additional ESOP debt of $1,076,958 on
  December 1, 1998 and $1,260,007 on May 17, 1996 long-term debt was increased
  and equity was decreased. The debt was reduced and shares were released by
  $135,628, $116,989 and $135,314, respectively, during each of the years ended
  December 31, 1998, 1997 and 1996 as a result of payments made by the Company's
  ESOP on the outstanding ESOP debt.












              [The remainder of this page intentionally left blank]





                                       83

<PAGE>   85



                          QUARTERLY RESULTS (UNAUDITED)

A summary of the unaudited results of operations for each quarter of 1998 and
1997 follows:


<TABLE>
<CAPTION>
                                                                    First        Second       Third         Fourth
                                                                    Quarter      Quarter      Quarter       Quarter
                                                                    -------      -------      -------       -------
                                                                        (In Thousands Except Per Share Data)
<S>                                                               <C>           <C>          <C>          <C>
1998:
TOTAL INTEREST INCOME...........................................  $   9,794     $ 10,715     $ 11,677     $  12,179
TOTAL INTEREST EXPENSE..........................................      5,307        5,452        5,751         6,183
PROVISION FOR LOAN LOSSES.......................................        188          208          226           263
NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES.....................................      4,299        5,055        5,700         5,733
INVESTMENT SECURITIES GAINS (LOSSES) ...........................          9            3            7           447
TOTAL NONINTEREST INCOME........................................      1,573        2,058        2,037         1,968
TOTAL NONINTEREST EXPENSE.......................................      5,115        5,667        6,419         6,583
INCOME TAX EXPENSE..............................................        211          411          401           503
NET INCOME......................................................        555        1,038          924         1,062

PER COMMON SHARE:
 BASIC EARNINGS.................................................        .14          .27          .24           .25
 DILUTED EARNINGS...............................................        .14          .26          .23           .25

1997:
Total interest income...........................................  $   9,120     $  9,313     $  9,626     $   9,732
Total interest expense..........................................      4,643        4,883        5,053         4,963
Provision for loan losses.......................................        198          296          302          (24)
Net interest income after
  provision for loan losses.....................................      4,279        4,134        4,271         4,793
Investment securities gains (losses) ...........................        (3)          -0-          -0-           -0-
Total noninterest income........................................      1,178        1,145        1,204         1,385
Total noninterest expense.......................................      4,301        3,896        4,513         4,713
Income tax expense..............................................        332          381          256           483
Net income......................................................        821        1,002          706           982

Per Common Share:
 Basic earnings.................................................        .22          .27          .19           .24
 Diluted earnings...............................................        .22          .27          .19           .24
</TABLE>



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


None



                                       84

<PAGE>   86






                                    PART III


ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item on the directors and director nominees 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 1999.
Information on the executive officers of the Company is included in Part I of
this Report.


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 1999.


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 1999.


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 1999.





              [The remainder of this page intentionally left blank]


                                       85

<PAGE>   87



                                     PART IV

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

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

Community Bancshares, Inc and Subsidiaries
<TABLE>
<CAPTION>
Financial Statements                                                          Page(s)
                                                                              ------
<S>                                                                         <C>
Auditor's Report...........................................................     40

Consolidated Statements of Financial Condition as of
  December 31, 1998 and 1997...............................................     41

Consolidated Statements of Income for the years ended
  December 31, 1998, 1997 and 1996.........................................     42

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 1998, 1997 and 1996.........................................     43

Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1997 and 1996.........................................  44-45

Notes to Consolidated Financial Statements -
  December 31, 1998, 1997 and 1996.........................................  46-83

Quarterly Results (Unaudited)..............................................     84
</TABLE>


(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter ended December 31,
1998.

<TABLE>
<CAPTION>
(C) Exhibits
-------------
<S>           <C>
       3.1    Certificate of Incorporation, as amended (1)
       3.2    Certificate of Amendment to the Certificate of Incorporation,
              changing the name of the registrant to Community Bancshares, Inc.
              (2)
       3.3    By-Laws of Registrant, as amended and restated January 1999
       3.4    Certificate of Amendment to the Certificate of Incorporation,
              providing for directors' indemnification (3)
       3.5    Certificate of Amendment to the Certificate of Incorporation,
              increasing the number of authorized shares (4)
       3.6    Amended Certificate of Amendment of the Certificate of
              Incorporation, increasing the number of authorized shares (5)
       4.1    Certificate of Registrant establishing the Series 1984-1 Preferred
              Stock, dated August 17, 1984 ("Certificate of Stock Designation")
              (6)
       4.2    Certificate of Amendment to the Certificate of Stock Designation
              (7)
      10.1    Subordinated Promissory Note between the Registrant as borrower
              and Jack Cornelius as holder (8)
</TABLE>


                                       86

<PAGE>   88


<TABLE>
<CAPTION>
                                                                               Page(s)
                                                                               -------

       <S>    <C>                                                              <C>
       10.2   Promissory Note, Guaranty and Pledge Agreement by and between
              Community Bancshares, Inc. and Colonial Bank, N.A.
       10.3   Plan document for the Community Bancshares, Inc. Benefit
              Restoration Plan adopted April 12, 1994, effective January 1, 1995
              (9)
       10.4   Subordinated Promissory Note between the Registrant as borrower
              and Jeffrey K. Cornelius as holder (10)
       10.5   Employment Agreement dated March 28, 1996 by and between Kennon R.
              Patterson, Sr. and Community Bancshares, Inc. (11)
       10.6   Employment Agreement dated March 28, 1996 by and between Bishop K.
              Walker, Jr. and Community Bancshares, Inc. (12)
       10.7   Stock Option Agreement between Community Bancshares, Inc. and
              Kennon R. Patterson, Sr. dated March 28, 1996 (13)
       10.8   Stock Option Agreement between Community Bancshares, Inc. and
              Bishop K. Walker dated March 28, 1996 (14)
       10.9   Stock Option Agreement between Community Bancshares, Inc. and
              Denny Kelly dated March 28, 1996 (15)
       10.10  Stock Option Agreement between Community Bancshares, Inc. and
              Hodge Patterson, III dated March 28, 1996 (16)
       10.11  Stock Option Agreement between Community Bancshares, Inc. and Loy
              McGruder dated March 28, 1996 (17)
       10.12  Stock Option Agreement between Community Bancshares, Inc. and
              Merritt Robbins dated March 28, 1996 (18)
       10.13  Stock Option Agreement between Community Bancshares, Inc. and
              Wayne Washam dated March 28, 1996 (19)
       10:14  Stock Option Agreement between Community Bancshares, Inc. and
              Glynn Debter dated March 28, 1996 (20)
       10.15  Stock Option Agreement between Community Bancshares, Inc. and
              Robert Summerford dated March 28, 1996 (21)
       10.16  Change in Control Agreement dated March 28, 1996 by and between
              Kennon R. Patterson, Sr. and Community Bancshares, Inc. (22)
       10.17  Change in Control Agreement dated March 28, 1996 by and between
              Bishop K. Walker, Jr. and Community Bancshares, Inc. (23)
       10.18  Change in Control Agreement dated March 28, 1996 by and between
              Hodge Patterson and Community Bancshares, Inc. (24)
       10.19  Change in Control Agreement dated March 28, 1996 by and between
              Denny Kelly and Community Bancshares, Inc. (25)
       10.20  Change in Control Agreement dated March 28, 1996 by and between
              Loy McGruder and Community Bancshares, Inc. (26)
       10.21  Change in Control Agreement dated December 28, 1998 by and between
              Michael A. Bean and Community Bancshares, Inc.
       10.22  Stock Option Agreement between Community Bancshares, Inc. and Jon
              Owings dated March 28, 1996 (27)
       10.23  Stock Option Agreement between Community Bancshares, Inc. and
              Kennon R. Patterson, Sr. dated March 27, 1997 (28)
       10.24  Stock Option Agreement between Community Bancshares, Inc. and
              Bishop K. Walker, Jr. dated March 27, 1997 (29)
       10.25  Stock Option Agreement between Community Bancshares, Inc. and
              Denny Kelly dated March 27, 1997 (30)
</TABLE>




                                       87

<PAGE>   89


<TABLE>
<CAPTION>
                                                                               Page(s)
                                                                               -------

       <S>    <C>                                                              <C>
       10.26  Stock Option Agreement between Community Bancshares, Inc. and
              Hodge Patterson, III. dated March 27, 1997 (31)
       10.27  Stock Option Agreement between Community Bancshares, Inc. and Loy
              McGruder dated March 27, 1997 (32)
       10.28  Stock Option Agreement between Community Bancshares, Inc. and
              Merritt Robbins dated March 27, 1997 (33)
       10.29  Stock Option Agreement between Community Bancshares, Inc. and
              Wayne Washam dated March 27, 1997 (34)
       10.30  Stock Option Agreement between Community Bancshares, Inc. and
              Glynn Debter dated March 27, 1997 (35)
       10.31  Stock Option Agreement between Community Bancshares, Inc. and
              Robert Summerford dated March 27, 1997 (36)
       10.32  Stock Option Agreement between Community Bancshares, Inc. and
              Kennon R. Patterson, Jr. dated March 27, 1997 (37)
       10.33  Stock Option Agreement between Community Bancshares, Inc. and John
              J. Lewis, Jr. dated March 27, 1997 (38)
       10.34  Stock Option Agreement between Community Bancshares, Inc. and
              Stacey W. Mann dated March 27, 1997 (39)
       10.35  Stock Option Agreement between Community Bancshares, Inc. and
              Edward Ferguson dated March 27, 1997 (40)
       10.36  Stock Option Agreement between Community Bancshares, Inc. and
              Kennon R. Patterson, Sr. dated March 26, 1998
       10.37  Stock Option Agreement between Community Bancshares, Inc. and
              Bishop K. Walker, Jr. dated March 26, 1998
       10.38  Stock Option Agreement between Community Bancshares, Inc. and
              Denny Kelly dated March 26, 1998
       10.39  Stock Option Agreement between Community Bancshares, Inc. and
              Hodge Patterson, III dated March 26, 1998
       10.40  Stock Option Agreement between Community Bancshares, Inc. and Loy
              McGruder dated March 26, 1998
       10.41  Form of Stock Option Agreement between Community Bancshares, Inc.
              and Grantees dated March 26, 1998

       11    Statement of computation of earnings per common share.........  92
       12    Statement of Computation of Ratios............................  93
       21    Subsidiaries of the Registrant................................  93
       27    Financial Data Table (for SEC use only).......................
</TABLE>


Notes to Exhibits:

       (1)    Filed as appendix II to the Proxy Statement included in part I of
              the Registration Statement on Form S-14, Registration No 2-92974,
              and incorporated herein by reference.
       (2)    Filed as Exhibit 4 to Form 10-K for the year ended December 31,
              1985, and incorporated herein by reference.
       (3)    Filed as Exhibit 3.4 to Form 10-K for the year ended December 31,
              1987, and incorporated herein by reference.
       (4)    Filed as Exhibit 3.5 to Form 10-K for the year ended December 31,
              1993, and incorporated herein by reference.
       (5)    Filed as Exhibit 3 to Form 10-Q/A-1 for the period ended September
              30, 1998, and incorporated herein by reference.

                                       88

<PAGE>   90



       (6)   Filed as Appendix I to the Proxy Statement included in Part I of
             the Registration Statement on Form S-14, Registration No. 2-92974,
             and incorporated herein by reference.
       (7)   Filed as Exhibit 4.1 to the Registration Statement on Form S-1,
             Registration No. 33-7032, and incorporated herein by reference.
       (8)   Filed as Exhibit 10.17 to Form 10-K for the year ended December 31,
             1988, and incorporated herein by reference.
       (9)   Filed as Exhibit 10.13 to Form 10-K for the year ended December 31,
             1995, and incorporated herein by reference
      (10)   Filed as Exhibit 10.15 to Form 10-K for the year ended December 31,
             1995, and incorporated herein by reference
      (11)   Filed as Exhibit 10.1 to Form 10-Q/A-2 for the period ended
             September 30, 1998, and incorporated herein by reference
      (12)   Filed as Exhibit 10.2 to Form 10-Q/A-2 for the period ended
             September 30, 1998, and incorporated herein by reference
      (13)   Filed as Exhibit 10.20 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (14)   Filed as Exhibit 10.21 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (15)   Filed as Exhibit 10.22 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (16)   Filed as Exhibit 10.23 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (17)   Filed as Exhibit 10.24 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (18)   Filed as Exhibit 10.27 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (19)   Filed as Exhibit 10.28 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (20)   Filed as Exhibit 10.29 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (21)   Filed as Exhibit 10.30 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (22)   Filed as Exhibit 10.31 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (23)   Filed as Exhibit 10.32 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (24)   Filed as Exhibit 10.33 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (25)   Filed as Exhibit 10.34 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (26)   Filed as Exhibit 10.35 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (27)   Filed as Exhibit 10.36 to Form 10-K for the year ended December 31,
             1996, and incorporated herein by reference
      (28)   Filed as Exhibit 10.37 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (29)   Filed as Exhibit 10.38 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (30)   Filed as Exhibit 10.39 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (31)   Filed as Exhibit 10.40 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (32)   Filed as Exhibit 10.41 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (33)   Filed as Exhibit 10.44 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference

                                       89
<PAGE>   91

      (34)   Filed as Exhibit 10.45 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (35)   Filed as Exhibit 10.46 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (36)   Filed as Exhibit 10.47 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (37)   Filed as Exhibit 10.49 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (38)   Filed as Exhibit 10.50 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (39)   Filed as Exhibit 10.51 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference
      (40)   Filed as Exhibit 10.52 to Form 10-K for the year ended December 31,
             1997, and incorporated herein by reference


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






              [The remainder of this page intentionally left blank]










                                       90

<PAGE>   92



EXHIBIT 11 - STATEMENTS RE:  COMPUTATION OF PER SHARE EARNINGS


                           COMMUNITY BANCSHARES, INC.
                   COMPUTATION OF NET INCOME PER COMMON SHARE

The following tabulation presents the calculation of primary and fully diluted
earnings per common share for the years ended December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                               1998          1997          1996
                                                                          -------------  ------------ -------------

<S>                                                                       <C>            <C>          <C>
Reported net income....................................................   $   3,579,493  $  3,512,278 $   3,458,986
                                                                          =============  ============ =============

Earnings on common shares..............................................   $   3,579,493  $  3,512,278 $   3,458,986
                                                                          =============  ============ =============

Weighted average common shares outstanding - basic.....................       3,994,798     3,807,232     3,727,506
                                                                          =============  ============ =============

Earnings per common share- basic
  Income from continuing operations....................................   $         .90  $        .92 $         .93
                                                                          =============  ============ =============

  Net income............................................................  $         .90  $        .92 $         .93
                                                                          =============  ============ =============

Weighted average common shares outstanding - diluted....................      4,052,259     3,830,231     3,727,506
                                                                          =============  ============ =============

Earnings per common share- diluted
  Income from continuing operations.....................................  $         .88  $        .92 $         .93
                                                                          =============  ============ =============

  Net income............................................................  $         .88  $        .92 $         .93
                                                                          =============  ============ =============
</TABLE>






              {The remainder of this page intentionally left blank]










                                       91

<PAGE>   93

EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS


                           COMMUNITY BANCSHARES, INC.
                COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES


<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                           ------------------------------------------
                                                                                1998         1997             1996
                                                                           ------------  ------------   -------------
                                                                                    (Dollars in thousands)


<S>                                                                        <C>           <C>            <C>
Pretax income..........................................................    $      5,106  $      4,945   $       4,885
Add fixed charges:
    Interest on deposits...............................................          21,963        18,765          16,595
    Interest on borrowings.............................................             730           777             831
    Portion of rental expense representing interest expense............             180            78              59
                                                                           ------------  ------------   -------------
        Total fixed charges............................................          22,873        19,620          17,485
                                                                           ------------  ------------   -------------

Income before fixed charges............................................    $     27,979  $     24,565   $      22,370
                                                                           ============  ============   =============

Pretax income..........................................................    $      5,106  $      4,945   $       4,885
Add fixed charges:
    Interest on borrowings.............................................             730           777             831
    Portion of rental expense representing interest expense............             180            78              59
                                                                           ------------  ------------   -------------
        Total fixed charges............................................             910           855             890
                                                                           ------------  ------------   -------------

Income before fixed charges (excluding interest on deposits)...........    $      6,016  $      5,800   $       5,775
                                                                           ============  ============   =============

RATIO OF EARNINGS TO FIXED CHARGES:
    Including interest on deposits.....................................            1.22X         1.25x           1.28x
    Excluding interest on deposits.....................................            6.61X         6.78x           6.49x
</TABLE>



EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
Subsidiaries - Direct/wholly-owned                                                      State of Incorporation
----------------------------------                                                      ----------------------

<S>                                                                                     <C>
Community Bank                                                                                   Alabama

Subsidiaries - Indirect/wholly-owned by Community Bank
------------------------------------------------------

Community Appraisals, Inc.                                                                       Alabama
1st Community Credit Corporation                                                                 Alabama
Community Insurance Corp                                                                         Alabama

Subsidiaries - Indirect/wholly-owned by Community Insurance Corp
-----------------------------------------------------------------

Southern Select Insurance, Inc.                                                                  Alabama
</TABLE>

                                       92

<PAGE>   94



                                   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.


                                 COMMUNITY BANCSHARES, INC.


Date:    March 25, 1999          By   /s/ Kennon R. Patterson, Sr.
       -------------------          --------------------------------------
                                    KENNON R. PATTERSON, SR.
                                    CHAIRMAN AND CHIEF EXECUTIVE OFFICER


Date:    March 25, 1999          By   /s/ Michael A. Bean
       -------------------          ----------------------------------------
                                    MICHAEL A. BEAN
                                    EXECUTIVE VICE PRESIDENT AND
                                    CHIEF ACCOUNTING OFFICER

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kennon R. Patterson, Sr. and Bishop K. Walker, Jr., and
each of them, his true and lawful attorney-in-fact, as agent with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacity, to sign any or all amendments to this Form 10-K and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents in full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as they might or could be in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

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.

    Directors                                         Date
    ---------                                         ----

  /s/ Glynn Debter                                March 25, 1999
----------------------                            --------------
GLYNN DEBTER

  /s/ Roy B. Jackson                              March 25, 1999
----------------------                            --------------
ROY B. JACKSON

  /s/ Denny Kelly                                 March 25, 1999
----------------------                            --------------
DENNY KELLY



                                       93


<PAGE>   95



                              SIGNATURES, Continued

          Directors                                      Date
          ---------                                      ----

  /s/ John J. Lewis, Jr.                            March 25, 1999
---------------------------------                ----------------------
JOHN J. LEWIS, JR.

  /s/ Loy McGruder                                  March 25, 1999
---------------------------------                ----------------------
LOY MCGRUDER

  /s/ Hodge Patterson, III                          March 25, 1999
---------------------------------                ----------------------
HODGE PATTERSON, III

  /s/ Kennon R. Patterson, Sr.                      March 25, 1999
---------------------------------                ----------------------
KENNON R. PATTERSON, SR.

  /s/ Merritt Robbins                               March 25, 1999
---------------------------------                ----------------------
MERRITT ROBBINS

  /s/ Robert O. Summerford                          March 25, 1999
---------------------------------                ----------------------
ROBERT O. SUMMERFORD

  /s/ Bishop K. Walker, Jr.                         March 25, 1999
---------------------------------                ----------------------
BISHOP K. WALKER, JR.


  /s/ Wayne Washam                                  March 25, 1999
---------------------------------                ----------------------
WAYNE WASHAM





                                       94


<PAGE>   96



================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549





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





                                   EXHIBITS TO


                           ANNUAL REPORT AND FORM 10-K

                          YEAR ENDED DECEMBER 31, 1998





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





                           COMMUNITY BANCSHARES, INC.

                                 P.O. BOX 1000

                                   MAIN STREET

                           BLOUNTSVILLE, ALABAMA 35031






================================================================================




                                       95