<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 [FEE REQUIRED]

For the Fiscal Year Ended December 31, 1996          Commission File No. 0-16461

                                       OR

   [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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

       As of January 31, 1997 the aggregate market value of voting stock held
by non-affiliates was $ 26,108,910.

   Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.

          Class                             Outstanding at January 31, 1997
-------------------------------             --------------------------------
 Common Stock, $.10 Par Value                           1,888,697

  Documents Incorporated by Reference      Part of 10-K in which incorporated
---------------------------------------    ----------------------------------
Proxy Statement for 1997 annual meeting                  Part III



     The total number of pages in this report including exhibits is 233.
<PAGE>   2

                                     PART 1

ITEM 1 - BUSINESS

Community Bancshares, Inc. (the "Company") is registered as a bank holding
company with the Federal Reserve Board under the Bank Holding Act.  The Company
was organized in 1983 and commenced business in February, 1985, with the
acquisition of the Bank of Blountsville.  As of December 31, 1996, the Company
had two operating bank subsidiaries, Community Bank, an Alabama banking
corporation ("Community Bank (Alabama)"), and Community Bank, a Tennessee
banking corporation ("Community Bank (Tennessee)").  The majority of the banks'
loans are to individuals and small to mid-size businesses in Alabama and
Tennessee.

Community Bank (Alabama) operated through fourteen locations in Blount, Dekalb,
Lauderdale, Limestone, Madison, Marshall and Morgan Counties in Alabama during
all of 1996. Seven additional Alabama  locations were opened during 1996: two
locations in Haleyville (Winston County) on January 17; Double Springs,
(Winston County) on April 1; Cleveland (Blount County) on June 1; Hamilton
(Marion County) on July 1; Oneonta Walmart location (Blount County) on July 10;
and Uniontown (Perry County) on July 16. This brings the Alabama subsidiary to
a total of 21 locations in 10 Alabama counties.

Community Bank (Alabama) also operates three subsidiaries, Community
Appraisals, Inc., Community Insurance Corp., and 1st Community Credit
Corporation.  Community Appraisals, Inc. is engaged  in the business of
appraising real estate.  Community Insurance Corp. currently acts as an agent
for selling title insurance and life insurance. 1st Community Credit
Corporation operates finance companies in 6 Alabama communities.

Community Bank (Tennessee) commenced operations on November 15, 1993, in
Pulaski, Tennessee.  The Tennessee bank is situated in an economic and
geographical area with the same characteristics as the Alabama bank subsidiary
markets.

The Company maintains its principal executive offices at Main Street, P.O. Box
1000, Blountsville, Alabama  35031.

SUBSIDIARY BANKS

Community Bank (Alabama) conducts a general commercial banking business at
fifteen locations in eight  counties in Alabama.  The present locations are
Blountsville, Oneonta, Snead, West Blount, Cleveland and Oneonta (Walmart
location) in Blount County ; Rainsville in DeKalb County; Rogersville in
Lauderdale County; Elkmont in Limestone County; Gurley, Meridianville and New
Hope in Madison County; Hamilton in Marion County; Arab (Downtown) and Arab
(Parkway) in Marshall County;  Falkville and Hartselle in Morgan County ;
Uniontown in Perry County; and  Haleyville , Haleyville-Village East and Double
Springs  in Winston County.

Community Bank (Tennessee) is similarly engaged in a general commercial banking
business in Pulaski, Tennessee, in two permanent facilities which were occupied
on December 19, 1994. Community Bank (Tennessee) was established by the Company
through the acquisition of the Charter of City and County Bank of McMinn
County, a Tennessee state bank which formerly operated in McMinn County.  After
all state and federal regulatory approvals were received, the Company
consummated the purchase of the charter in November of 1993 and established
Community Bank (Tennessee) as a new state chartered bank.

The subsidiary banks perform banking services customary for full service banks
of similar size and character for their customers in Alabama and Tennessee.
Such services include the receipt of demand and time deposit





                                       1
<PAGE>   3

accounts, the extension of personal and commercial loans and the furnishing of
personal and commercial checking accounts.  Title insurance, life insurance,
and appraisal services are available through the wholly-owned subsidiaries of
Community Bank (Alabama).

ACQUISITIONS

During 1993, the Company received all necessary approvals from the State of
Tennessee Department of Financial Institutions, FDIC, and Federal Reserve Bank
of Atlanta to acquire the charter of City and County Bank of McMinn County, a
Tennessee state chartered bank, which had ceased operations at the close of
1991.  The Company paid $149,000 for the charter pursuant to an agreement with
Sweetwater Valley Corporation entered into on February 28, 1992.

Community Bank (Tennessee) received approval from the State of Tennessee
Department of Financial Institutions to commence operations and the Federal
Deposit Insurance Corporation granted deposit insurance on November 12, 1993.
The bank was initially capitalized with $3.5 million which was obtained from
the proceeds of a loan extended to the Company by Colonial Bank.

On September 25, 1995, Community Bank (Alabama) executed a definitive agreement
to acquire certain assets and liabilities of the Haleyville, Alabama location
of Compass Bank. On January 12, 1996, the agreement was consummated, with
Community Bank (Alabama) assuming liabilities of $31.3 million in exchange for
assets of $12.4 million, a premium of $2.2 million, and cash of $16.7 million.
On November 3, 1995, Community Bank (Alabama) executed a definitive agreement
with Compass Bank for a similar acquisition, the Uniontown, Alabama location,
consummated on July 16, 1996 with the  acquisition of assets of $29.7 million
and payment of a  premium of $260,000, the assumption of  liabilities totaling
$12.3 million, and a cash payment of $17.7 million.

On December 9, 1996, 1st Community Credit Corporation consummated an agreement
with the Charter Financial Group to acquire assets, primarily finance
receivables, totaling $1.9 million, for a cash payment, including a purchase
premium of  $333 thousand, of $2.2 million.

COMPETITION

The banking business in northern 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.  The bank
subsidiaries compete 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 the subsidiaries' service areas offer services
such as international banking, and investment and trust services, which are not
offered by the subsidiaries.

EMPLOYEES

At December 31, 1996, the Company and its subsidiaries had approximately 312
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.





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<PAGE>   4

                           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.
The following factors affect the Company's operations.

The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and is registered with, and
subject to supervision by, the Board of Governors of the Federal Reserve System
and the Federal Reserve Bank of Atlanta (collectively, the "Federal Reserve").
The Company is required to file periodic reports and such additional
information as the Federal Reserve may require pursuant to the BHC act.  The
Federal Reserve may also examine the Company and its subsidiaries.

The BHC Act requires Federal Reserve approval before the Company may acquire
substantially all the assets of any bank if by the acquisition the Company
would own or control more than five percent of the voting shares of the bank,
or for a merger or consolidation with another bank holding company.  The
Company may however, 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 incident 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, certain subordinated debt and perpetual preferred
stock.  The Company's Tier I and Total Capital ratios exceeded the required
minimum levels as of December 31, 1996.

The Company is a legal entity which is separate and distinct from its
subsidiaries.  Federal law restricts extensions of credit by its subsidiary
banks 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.


THE SUBSIDIARIES

Deposits in the bank subsidiaries are insured by the Federal Deposit Insurance
Corporation ("FDIC") and therefore they are subject to examination by the FDIC.
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 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.





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<PAGE>   5

The FDICIA also requires regulations to be adopted by federal banking agencies
establishing minimum loan to value ratios for all real estate mortgage and
construction loans.  The FDICIA 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 Community Reinvestment Act of 1977 ("CRA") and its implementing regulations
are intended to encourage regulated financial instiyutions 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 esatblish 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.

Community Bank (Alabama) is subject to regulation and examination by the
Alabama Superintendent of Banks (the "Superintendent").  Community Bank
(Tennessee) is subject to supervision, regulation and examination by the
Commissioner of the Tennessee Department of Financial Institutions (the
"Commissioner").  State regulations in Alabama and Tennessee 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 the respective banks.

The Supervisory Policy Statement on Securities Activities developed under the
auspices of the Federal Financial Institutions Examination Council ("FFIEC")
was adopted by the Federal Reserve Bank and became effective on February 10,
1992.  This policy addresses the selection of securities dealers and requires
depository institutions to establish prudent policies and strategies for
securities transactions.  The policy statement also addresses unsuitable
investment practices and establishes a framework for identifying when mortgage
derivative products are high-risk mortgage securities which must be reported as
securities held for sale or trading.

On September 28, 1994, the President signed into law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("IBBEA").  Beginning September
29, 1995, IBBEA permits adequately capitalized and managed bank holding
companies to acquire control of banks in states other than their home states,
subject to federal regulatory approval, without regard to whether such a
transaction is prohibited by the laws of any state. IBBEA permits states to
continue to require that an acquired bank have been in existence for a certain
minimum time period, which may not exceed five years. A bank holding company
may not, following an interstate transaction, control more than 10% of the
nation's total 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.

Beginning June 1, 1997, federal banking regulators may approve merger
transactions involving banks located in different states, without regard to
laws of any state prohibiting such transactions; except that, mergers may not
be approved with respect to banks located in states that, prior to June 1,
1997, enacted legislation prohibiting mergers by banks located in such state
with out-of-state institutions. Federal banking regulators may





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<PAGE>   6

permit an out-of-state bank to open new branches in another state if such state
has enacted legislation permitting interstate branching. Affiliated
institutions are authorized to accept deposits for existing accounts, renew
time deposits, and close and service loans for affiliated institutions without
being deemed an impermissible branch of the affiliate.


GOVERNMENTAL MONETARY POLICIES

The Federal Reserve System 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.



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                                       5
<PAGE>   7

ITEM 1 - STATISTICAL DISCLOSURE

<TABLE>
<CAPTION>
                                                                                                        Page(s)
                                                                                                        -------
<S>                                                                                                      <C>
Consolidated Average Balances,
  Interest Income/Expense and Yields/Rates  . . . . . . . . . . . . . . . . . . . . . . . . . . . .      23-24


Rate/Volume Variance Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      25-26


Investment Portfolio and Investment Portfolio Maturity Schedule . . . . . . . . . . . . . . . . . .      14-15


Loan Portfolio  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         13


Selected Loan Maturity and Interest Rate Sensitivity  . . . . . . . . . . . . . . . . . . . . . . .         13


Nonperforming Assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         29


Summary of Loan Loss Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      27-28


Allocation of Loan Loss Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         28


Maturities of Large Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         16


Maturities of Long-term Debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         16


Return on Equity and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         20


Interest Rate Sensitivity Analysis  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         18


Capital Adequacy Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         20


Noninterest Income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         30


Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      30-31
</TABLE>





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<PAGE>   8





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<PAGE>   9

ITEM 2 - PROPERTIES

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

The main office of Community Bank (Alabama) is located at 68149 Main Street,
Blountsville, Alabama, in a one story brick building constructed in 1975 and
which was extensively remodeled during 1994.  The premises are owned by
Community Bank (Alabama).  The Alabama bank subsidiary owns or leases buildings
that are used in the normal course of business in ten counties in North
Alabama, namely Blount, DeKalb, Lauderdale, Limestone, Madison, Marion,
Marshall, Morgan, Perry and Winston.

The main office of Community Bank (Tennessee) is located in the historic Martin
House at 302 South Second Street, Pulaski, Tennessee.  The premises are owned
by Community Bank (Tennessee).  A second banking location operates at 1700 West
College Street in Pulaski.

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

While the Company and its subsidiaries are from time to time parties to various
legal proceedings arising from the ordinary course of business, management
believes, after consultation with legal counsel, that there are no proceedings
threatened or pending against the Company or its subsidiaries that will,
individually or in the aggregate, have a material adverse effect on the
business or consolidated financial condition of the Company.


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 1996.


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<PAGE>   10

                                    PART II

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


Company Common Stock ("Shares") was held by approximately 1,294 shareholders of
record at December 31, 1996.  There is no established trading market for
Company Shares, which have been traded inactively in private transactions.
Therefore, no reliable information is available as to trades of Company Shares,
or as to the prices at which such Shares have traded.  Management has reviewed
the limited information available as to the ranges at which Shares have sold.
The following data regarding Shares is provided for information purposes only,
and should not be viewed as indicative of the actual or market value of Shares.


<TABLE>
<CAPTION>
                                                                                       Estimated Price Range
                                                                                             Per Share          
                                                                                      ------------------------
                                                                                        High             Low  
                                                                                      ---------       --------
<S>                                                                                   <C>             <C>
1996:
   FIRST QUARTER  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $   20.00       $  20.00
   SECOND QUARTER   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           20.00          20.00
   THIRD QUARTER  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           20.00          20.00
   FOURTH QUARTER   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           23.00          22.00

1995:
   First Quarter  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $   20.00       $  15.00
   Second Quarter   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           20.00          18.00
   Third Quarter  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           20.00          15.00
   Fourth Quarter   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           20.00          17.00
</TABLE>


A cash dividend of $.75 per share was declared by the Company's Board of
Directors on January 8, 1997 and was paid on January 10, 1997. Management
continues to anticipate retaining substantially all earnings to finance the
Company's growth.  The payment of dividends on Shares is subject to the prior
payment of principal and interest on the Company's long-term debt, sufficient
earnings and capital in the subsidiaries and to regulatory restrictions.  See
"Financial and Statistical Information" and Consolidated Financial Statements
and related notes.





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<PAGE>   11


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>
                                                   1996        1995          1994         1993        1992  
                                                 --------    --------      --------     --------    --------
                                                           (in Thousands Except Per Share Data)
<S>                                              <C>         <C>           <C>          <C>         <C>
Interest income . . . . . . . . . . . . . . .    $ 33,600    $ 26,304      $ 20,751     $ 17,774    $ 17,798
Interest expense  . . . . . . . . . . . . . .      17,426      13,751         9,507        8,008       8,949
Net interest income . . . . . . . . . . . . .      16,174      12,553        11,244        9,766       8,949
Provision for loan losses . . . . . . . . . .         834       1,088           638          418         539
Non-interest income . . . . . . . . . . . . .       4,447       3,717         3,189        2,914       2,618
Non-interest expense  . . . . . . . . . . . .      14,902      12,046        10,193        8,824       7,297

Net income  . . . . . . . . . . . . . . . . .       3,459       2,705         2,688        2,572       2,699
Per Share data:
   Net income   . . . . . . . . . . . . . . .        1.79        1.62          1.60         1.94        2.19
   Cash dividends   . . . . . . . . . . . . .         .50         .50           -0-          -0-         -0-
   Shareholders' equity (book value)
       at period end  . . . . . . . . . . . .       17.25       16.26         13.91        13.49       10.80
Balance Sheet:
   Loans  . . . . . . . . . . . . . . . . . .     322,762     237,841       206,428      151,651     135,782
   Deposits   . . . . . . . . . . . . . . . .     400,338     320,149       263,413      227,770     198,312
   Long-term debt   . . . . . . . . . . . . .       8,281       7,920         8,713        6,392       3,745
   Average equity   . . . . . . . . . . . . .      30,079      24,839        22,672       15,723      12,493
   Average assets   . . . . . . . . . . . . .     421,839     328,244       276,063      232,340     209,169
   Total assets   . . . . . . . . . . . . . .     454,710     362,824       299,352      262,192     219,812
Ratios:
   Return on average assets   . . . . . . . .        0.82%       0.82%         0.97%        1.11%       1.29%
   Return on average equity   . . . . . . . .       11.50%      10.89%        11.86%       16.36%      21.60%
   Dividend payout ratio  . . . . . . . . . .        0.28%       0.31%         0.00%        0.00%       0.00%
   Average equity to average assets   . . . .        7.13%       7.57%         8.21%        6.77%       5.97%
   Total risk-based capital   . . . . . . . .       11.45%      14.10%        13.58%       16.53%      11.20%
   Leverage ratio   . . . . . . . . . . . . .        9.20%       8.61%         7.52%        8.95%       6.60%
</TABLE>





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<PAGE>   12



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.


SUMMARY

The Company's principal market areas are located in North Central Alabama (in
the counties of Blount, Dekalb, Lauderdale, Limestone, Madison, Marion,
Marshall, Morgan and Winston), Western Alabama (Perry County)  and in South
Central Tennessee (in Giles County). All of the Company's banking 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 the Blount County, Alabama and Perry County, Alabama markets, each
of the markets shares one common characteristic: they are separate and distinct
economies, but are close enough to Huntsville, Alabama to share in the economic
and employment benefits of that city. Blount County is close enough to
Birmingham, Alabama for the same circumstances to apply.

Despite the apparent dependency upon the military and aerospace industries, the
Huntsville MSA possesses a significant diversity. Jobs are created in
significant proportion in the manufacture of durable goods, machinery, and
transportation equipment, as well as in retail and services. Agriculture, in
the form of soybeans, hay, corn, cotton, tobacco, dairy and poultry farming
makes up a significant portion of the economy as well. The Huntsville MSA had
an average unemployment rate of 5.2% in 1994, and the counties served by the
Company had unemployment averaging 5.6%, both lower than the average of 6.0%
experienced in the entire state of Alabama. In the Company's markets, the
increase in the per capita income over the last ten years has surpassed the
rate for the state, as has population growth over the last year.  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 $3,458,986 for 1996 was 28 percent more than 1995's
amount of $2,704,798, which was 1 percent more than the $2,687,954 earned
during 1994.  When stated as changes in net income per share, 1996 represented
a 10 percent increase from 1995 compared to a 1 percent decrease in 1995 over
1994. The initial costs of opening the new Tennessee bank subsidiary, resulting
in net losses of $17,657 and $153,193 in 1996 and 1995, respectively, have had
a significant impact on the growth of the Company's net earnings, as did
operating losses of over $600,000 in 1996 and $400,000 during 1995 in
Community Bank (Alabama) startups.

The continued growth in Company earnings is a response to management's emphasis
on quality loans and investments with good yields while keeping expenses in
line.  The loss sustained by Community Bank (Tennessee) and the new locations
of Community Bank (Alabama) was fully anticipated and projected prior to
opening.  The expected growth of the Tennessee bank and the new Alabama
locations should become a significant factor to the Company's future earnings.





                                      11
<PAGE>   13

A stock offering of $9 million commenced in October, 1993 and closed fully sold
in February, 1994. Another offering of approximately $6 million was completed
during the first half of 1996.  This additional capital and the retained
earnings generated have placed the Company in the strongest capital position
since its inception for future growth and expansion.


EARNING ASSETS

Average earning assets in 1996 increased 28 percent over 1995 primarily as a
result of increases in the loan portfolio.  The mix of average earning assets
shifted slightly from the loan portfolio during 1996 as loans averaged 73
percent of the total for 1996, down from 75 percent during 1995.  As a
percentage of total average earning assets, investments securities averaged 23
percent and other earning asset categories averaged 4 percent for 1996.  In the
previous year, the comparable mix was 22 percent in investment securities and 3
percent in the other earning asset categories.  The increased volume in earning
assets contributed to the higher net interest income reported by the Company.
Average earning assets for 1995 increased 18 percent over 1994.

Average loans increased 24 percent in 1996 with much of the increase
concentrated in the real estate financing areas.  Total loans outstanding at
year-end were up 36 percent over the previous year-end level.  Real
estate-mortgage loans increased 40 percent and consumer loans increased 23
percent from year-end 1995 to year-end 1996.  Commercial, financial and
agricultural loans, which made up 20 percent of the total loans, increased 47
percent when compared to the previous year.  Real estate-construction loans
decreased 7 percent but had little effect due to representing only 2 percent of
total loans.

Total loans at year-end 1995 grew 15 percent over 1994 and average loans grew
25 percent over the same period.

The Company has intentionally avoided the growing national market in loans to
finance leveraged buy-outs, participating in no nationally syndicated leveraged
buy-out loans.  Concurrently, it has avoided exposure to lesser developed
country ("LDC") debt, having no LDC loans in its portfolio.



            [ The remainder of this page intentionally left blank ]





                                       12
<PAGE>   14



The following table shows the classification of loans by major category at
December 31, 1996 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,                   
                     ------------------------------------------------------------------------------------------
                           1996               1995              1994               1993              1992          
                     ----------------   ---------------   ----------------   ---------------    ---------------
                              PERCENT           Percent            Percent           Percent            Percent
                     AMOUNT  OF TOTAL   Amount of Total   Amount  of Total   Amount of Total    Amount of Total
                     ------  --------   ------ --------   ------  --------   ------ --------    ------ --------
                                                           (in Thousands)
<S>                 <C>        <C>     <C>       <C>     <C>        <C>     <C>       <C>     <C>        <C>
Commercial,
 financial and
 agricultural        $65,634    20.2%  $ 44,686   18.6%  $ 46,892    22.1%  $ 34,200   22.0%  $  32,261   23.1%
Real estate -
 construction          5,262     1.6      5,624    2.4      3,972     1.9      2,186    1.4       2,294    1.7
Real estate -
 mortgage   . .      162,994    50.2    116,289   48.4    103,194    48.6     75,835   48.7      64,846   46.5
Consumer  . . .       90,682    28.0     73,479   30.6     58,051    27.4     43,470   27.9      39,988   28.7 
                     -------    ----   --------   ----   --------    ----   --------   ----     -------   ---- 
                     324,572   100.0%   240,078  100.0%   212,109   100.0%   155,691  100.0%    139,389  100.0%
                               =====             =====              =====             =====              ===== 

Less: Unearned
 income   . . .        1,810              2,237             5,681              4,040              3,607
 Allowance for
 loan losses  .        2,425              2,209             1,548              1,255              1,062
                     -------           --------          --------           --------            -------        
Net loans . . .     $320,337          $ 235,632          $204,880          $ 150,693          $ 134,720
                     =======           ========          ========           ========            =======
</TABLE>




              SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

<TABLE>
<CAPTION>
                                                                                     Rate Structure For Loans
                                                     Maturity                         Maturing Over One Year
                                 ------------------------------------------------   ---------------------------
                                                 Over One
                                                   Year
                                     One          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  . . . . .    $   29,895     $  11,053    $  24,646   $ 65,634   $     24,082   $    11,657
Real estate -
  construction  . . . . . . .         4,547           213          502      5,262            498           217
                                 ----------     ---------    ---------   --------   ------------   -----------

                                 $   34,442     $  11,266    $  25,148   $ 70,896   $     24,580   $    11,874
                                 ==========     =========    =========   ========   ============   ===========
</TABLE>





                                       13
<PAGE>   15



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.  For
securities classified as investment securities, it is the intention to hold
such securities for the foreseeable future. On January 1, 1994, the Company
transferred selected securities to an available for sale category to
appropriately reflect the nature of the Company's holdings that are available
for sale should liquidity needs dictate, and on December 1, 1995, the entire
portfolio was classified as available for sale.  Management of the maturity of
the portfolio is necessary to provide liquidity and to control interest rate
risk.  During 1996 gross investment securities sales were $20.0 million and
maturities were $15.6 million, representing 22.5 percent and 17.5 percent,
respectively, of the average portfolio for the year. Gains associated with the
sales totaled $7,509, accounting for 0.2 percent of noninterest income.  Gross
unrealized gains in the portfolio amounted to $771 thousand at year end 1996
and unrealized losses amounted to $1.0 million.  Average investment securities
increased 36.8 percent from 1995.

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 security
portfolio as of December 31, 1996 or 1995 contains no interest-only strips and
the amount of unamortized premium on mortgage-backed securities is only
$351,132. The recoverability of the Company's investment in mortgage-backed
securities is reviewed periodically, and if necessary, appropriate adjustments
would be made to income for impaired values.

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,           
                                                                  ---------------------------------------------
                                                                      1996              1995            1994   
                                                                  -----------      ------------     -----------
                                                                                  (in Thousands)
<S>                                                               <C>              <C>              <C>
Securities Held to Maturity:
----------------------------
   U. S. Treasury and U.S. Government agencies  . . . . . . .     $      -0-       $        -0-     $   12,345
   Mortgage-backed securities . . . . . . . . . . . . . . . .            -0-                -0-         12,680
   State and municipal securities . . . . . . . . . . . . . .            -0-                -0-         16,508
                                                                  ----------       ------------     ----------
        Total securities held to maturity . . . . . . . . .       $      -0-       $        -0-     $   41,533
                                                                  ==========       ============     ==========

Securities Available for Sale:
------------------------------
   U. S. Treasury and U.S. Government agencies  . . . . . . .     $   45,135       $     30,431     $   15,719
   Mortgage-backed securities . . . . . . . . . . . . . . . .         26,298             22,848          2,331
   State and municipal securities . . . . . . . . . . . . . .         15,478             16,711          2,804
                                                                  ----------       ------------     ----------
        Total securities available for sale . . . . . . . .       $   86,911       $     69,990     $   20,854
                                                                  ==========       ============     ==========

Total Investment Securities:
----------------------------
   U. S. Treasury and U.S. Government agencies  . . . . . . .     $   45,135       $     30,431     $   28,064
   Mortgage-backed securities . . . . . . . . . . . . . . . .         26,298             22,848         15,011
   State and municipal securities . . . . . . . . . . . . . .         15,478             16,711         19,312
                                                                  ----------       ------------     ----------
      Total investment securities . . . . . . . . . . . . .       $   86,911       $     69,990     $   62,387
                                                                  ==========       ============     ==========
</TABLE>





                                       14
<PAGE>   16

Average taxable securities were 82.0 percent of the portfolio in 1996 and 70.9
percent in 1995 while tax-exempt securities were 18.0 percent in 1996 and 29.1
percent in 1995.  Average taxable securities increased 64.7 percent while
average tax-exempt securities decreased 15.4 percent in 1995.  Average
investment securities for 1996 increased 58.2 percent from 1995 average levels.
Period-end securities for 1996 increased 24.2 percent from the previous year
due to deposit growth in excess of loan demand growth.

The maturities and weighted average yields of the investments in the 1996
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 is
11.33 years with an average yield of 6.66 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>
                                                                           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 
                         ------     -------  ----------   -------   --------    -------   ---------    -------
                                                           (in Thousands)
<S>                   <C>            <C>     <C>            <C>     <C>           <C>     <C>             <C>
Securities- All Available for Sale:
-----------------------------------
  U. S. Treasury      $    1,162     6.88%   $   21,388     5.56 %  $  7,952      5.59 %  $     -0-       0.00 %
  U. S. Government
  agencies  . . . .        2,437     6.91         1,982     6.23      16,185      6.52       21,154       7.21
  State and municipal
  securities  . . .           15     6.60           633     6.78       4,401      8.72        9,602       8.07
                      ----------             ----------             --------              ---------           
    Subtotal  . . .
                      $    3,614     6.90    $   24,003     5.65    $ 28,538      6.60    $  30,756       7.48
                      ==========             ==========             ========              =========           
</TABLE>



There were no securities held by the Company, whose aggregate value on December
31, 1996 exceeded ten percent of the Company's consolidated shareholders'
equity at that date. (1)
___________________
(1) Securities which are payable from and secured by the same source of revenue
or taxing authority are considered to be securities of a single issuer.
Securities of the U. S. Government and U. S. Government agencies and
corporations are not included.

Average Federal funds sold increased 48.8 percent, reflecting the increased
cash available from deposit growth.  During 1995, average Federal Funds
increased 282.8 percent from 1994 levels.  As a percentage of average earning
assets, these funds represented 3.0 percent for 1996 compared to 2.6 percent
for 1995.

The average balance of interest-bearing deposits with other banks increased
18.3 percent from 1995 to 1996. The average balance from 1994 to 1995 decreased
17.4 percent.  Total average earning assets as compared to total average assets
for 1996 and 1995 were 90.0 and 90.8 percent, 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.





                                       15
<PAGE>   17

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 1996 and 1995 by 27.5 percent and
21.1 percent, respectively.  During the same periods, average
noninterest-bearing deposits increased 50.1 percent and 8.3 percent,
respectively.  Customer confidence and satisfaction is evidenced by the
increase in total average deposits of 30.2 percent in 1996 and 19.4 percent in
1995.  The largest dollar increase was in the time deposits category.

Average interest-bearing demand deposits rose 21.5 percent while average
savings deposits increased 27.9 percent, and average time deposits increased
29.1 percent. The two categories of lowest cost deposits comprised the
following percentages of total deposits during 1996 and 1995, respectively:
average noninterest-bearing demand deposits - 13.5 percent and 11.7 percent;
and average interest-bearing demand deposits - 14.9 percent and 15.9 percent.
Of total time deposits, approximately 34.2 percent were large denomination
certificates of deposit.  The maturities of the time certificates of deposit
and other time deposits of $100,000 or more issued by the Company at December
31, 1996 are summarized in the table below.

                       MATURITIES OF LARGE TIME DEPOSITS

<TABLE>
<CAPTION>
                                                                     Time            Other
                                                                 Certificates        Time
                                                                  of Deposit       Deposits         Total     
                                                                -------------    ------------     ------------
                                                                                (in Thousands)
<S>                                                             <C>              <C>              <C>
Three months or less  . . . . . . . . . . . . . . . . . .       $     14,168     $     18,764     $     32,932
Over three through six months . . . . . . . . . . . . . .              9,051              -0-            9,051
Over six through twelve months  . . . . . . . . . . . . .             18,507              -0-           18,507
Over twelve months  . . . . . . . . . . . . . . . . . . .             19,860              -0-           19,860
                                                                ------------     ------------     ------------

  Total   . . . . . . . . . . . . . . . . . . . . . . . .       $     61,586     $     18,764     $     80,350
                                                                ============     ============     ============
</TABLE>

Borrowed funds consist primarily of short-term borrowings and long-term debt.
Short-term borrowings at year-end 1996 and 1995 consisted of the U. S. Treasury
Tax and Loan Note Option account, federal funds purchased,  and securities sold
under agreements to repurchase.  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, 1996.

<TABLE>
<CAPTION>
                                                                MATURITIES OF LONG-TERM DEBT
                                                   1997        1998         1999        2000         2001   
                                                ----------  ----------  -----------  ----------  -----------
                                                                       (in Thousands)
<S>                                             <C>         <C>         <C>          <C>         <C>
Interest on indebtedness  . . . . . . . . .     $      627  $      555  $       481  $      408  $       331
Repayment of principal  . . . . . . . . . .            876  $      890          906         921          940
                                                ----------------------  -----------  ----------  -----------

                                                $    1,503  $    1,445  $     1,387  $    1,329  $     1,271
                                                ==========  ==========  ===========  ==========  ===========
</TABLE>





                                       16
<PAGE>   18

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 the subsidiary Banks' 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 (Alabama) 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.  At
December 31, 1996, Community Bank (Alabama) could have declared dividends of
$7,697,144 without approval of regulatory authorities.

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 $34.4
million or 10.6 percent of the total loan portfolio at December 31, 1996 and
investment securities maturing in one year or less equaled $3.6 million or 4.2
percent of the portfolio.  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 from available lines of up to $7,000,000.  Liquidity management involves
the daily monitoring of the sources and uses of funds to maintain an acceptable
company cash position.

INTEREST RATE SENSITIVITY MANAGEMENT

Interest rate sensitivity is a function of the repricing characteristics of the
Company's portfolio of assets and liabilities.  These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities
are subject to change in interest rates either at replacement or maturity
during the life of the instruments.  Sensitivity is measured as the difference
between the volume of assets and liabilities in the Company's current portfolio
that are subject to repricing in future time periods.  The differences are
known as interest sensitivity gaps and are usually calculated separately for
segments of time ranging from zero to thirty days, thirty-one to ninety days,
ninety-one days to one year, one to five years, over five years and on a
cumulative basis.  The following tables show interest sensitivity gaps for
these different intervals as of December 31, 1996.





                                       17
<PAGE>   19





                       INTEREST RATE SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
                                       0-30        31-90       91-365       1-5        Over 5
                                       Days         Days        Days       Years        Years       Total   
                                   ----------   ----------  ----------  -----------  ----------  -----------
At December 31, 1996
--------------------
                                                                 (in Thousands)
<S>                                <C>          <C>         <C>         <C>          <C>         <C>
Interest-earning assets(1) 
  Loans . . . . . . . . . . . .    $   35,011   $   41,642  $   63,641  $   124,562  $   57,906  $   322,762
  Investment Securities:
   Taxable  . . . . . . . . . .         1,345          -0-       2,254       23,370      44,465       71,434
   Tax-exempt   . . . . . . . .           -0-          -0-          15          633      14,829       15,477
  Time deposits in other banks            -0-        1,324         250          200         -0-        1,774
  Federal funds sold  . . . . .           -0-          -0-         -0-          -0-         -0-          -0-
                                   ----------   ----------  ----------  -----------  ----------  -----------
                                       36,356       42,966      66,160      148,765     117,200      411,447
                                   ----------   ----------  ----------  -----------  ----------  -----------
Interest-bearing liabilities(2) 
  Demand deposits(3)  . . . . .        20,459       20,458      20,458          -0-         -0-       61,375
  Savings deposits(3)   . . . .        17,831       17,831      17,830          -0-         -0-       53,492
  Time deposits . . . . . . . .        18,459       41,564     104,228       70,849         125      235,225
  Other short-term borrowings .         8,376          -0-         -0-          -0-         -0-        8,376
  Long term debt  . . . . . . .            73          147         664        3,686       3,711        8,281
                                   ----------   ----------  ----------  -----------  ----------  -----------
                                       65,198       80,000     143,180       74,535       3,836      366,749
                                   ----------   ----------  ----------  -----------  ----------  -----------

Interest sensitivity gap  . . .    $  (28,842)  $  (37,034)  $ (77,020)  $   74,230  $  113,364  $    44,698
                                   ==========   ==========   =========   ==========  ==========  ===========

Cumulative interest
  sensitivity gap . . . . . . .    $  (28,842)  $  (65,876)  $(142,896)  $  (68,666) $   44,698
                                   ==========   ==========   =========   ==========  ==========
Ratio of interest-earning assets
  to interest-bearing liabilities        0.56         0.54        0.46         2.00       30.55
                                   ==========   ==========   =========   ==========  ==========
Cumulative ratio  . . . . . . .          0.56         0.55        0.50         0.81        1.12
                                   ==========   ==========   =========   ==========  ==========
Ratio of cumulative gap to
  total interest-bearing assets         (0.79)       (0.83)      (0.98)       (0.23)       0.11
                                   ==========   ==========   =========   ==========  ==========
</TABLE>
_________________
(1)  Excludes nonaccrual loans and securities.
(2)  Excludes matured certificates which have not been redeemed by the customer
     and on which no interest is accruing.
(3)  Demand and savings deposits are assumed to be subject to movement into
     other deposit instruments in equal  amounts during the 0-30 day period,
     the 31-90 day period, and the 91-365 day period.

The above table indicates that in a rising interest rate environment, the
Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets.

As seen in the preceding  table, for the first 30 days of repricing opportunity
there is an excess of interest-bearing liabilities over earning assets of $28.8
million.  For the first 365 days, interest-bearing liabilities exceed earning
assets by $142.9 million.  During this one year time frame, 78.6 percent of all
interest bearing liabilities will reprice compared to 35.4 percent of all
interest-earning assets.  Changes in the mix of earning assets or supporting
liabilities can either increase or decrease the net interest margin without
affecting interest rate sensitivity.  In addition, the interest rate spread
between an asset and its supporting liability can vary significantly while the
timing of repricing for both the asset and the liability remain the same, thus
impacting net interest income.  It should be noted, therefore, that a matched
interest-sensitive position by itself will not ensure maximum net interest
income.  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.  Using this
analysis, management from time to time assumes calculated interest sensitivity
gap positions to maximize net interest income based upon anticipated movements
in the general level of interest rates.





                                       18
<PAGE>   20

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.  The Company has
provided the majority of its capital requirements through the retention of
earnings.

During the last quarter of 1993 and the first quarter of 1994, the Company
offered a maximum of 600,000 shares of its $.10 par value common stock at $15
per share with the anticipation of raising up to $9,000,000 of capital. On
February 11, 1994 the offering was closed upon full subscription of all 600,000
shares offered for sale, raising $8,916,742 of capital after reduction for
offering costs.  During 1995, the Company began a stock offering of up to
312,161 shares of its $.10 par value stock at $20 per share with the
anticipation of raising up to $6.2 million of capital. On June 13, 1996 the
offering was closed upon full subscription of all shares offered for sale,
raising $6,175,898 of capital after reduction for offering costs.

The proceeds of both offerings are available for debt reduction, capital
enhancement and future growth and expansion of the Company.

Bank regulatory authorities are placing increased emphasis on the maintenance
of adequate capital. In 1990, new risk- based capital requirements became
effective. The guidelines take into consideration risk factors, as defined by
regulators, associated with various categories of assets, both on and off the
balance sheet.  Under the guidelines, capital strength is measured in two tiers
which are used in conjunction with risk-adjusted assets to determine the risk-
based capital ratios.  The Company's  Tier 1 capital, which consists of common
equity, amounted to $29.9 million at December 31, 1996.  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 is referred to as Total Risk-based capital and was $34.1
million at year-end 1996.  The percentage ratios, as calculated under the
guidelines were 10.06 percent and 11.45 percent for Tier I and Total Risk-based
capital, respectively, at year-end 1996.  Both levels currently exceed the
minimum ratios of four percent and eight percent, respectively.

Applying the current guidelines to the preceding two years also resulted in
capital ratios exceeding the minimum requirements.

Other important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible 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,
1996, 1995, and 1994 exceeded the regulatory minimum requirement of 4% .

The table following illustrates the company's regulatory capital ratios at
December 31, 1996, 1995 and 1994 under the year end 1996 requirements.





                                       19
<PAGE>   21





                            CAPITAL ADEQUACY RATIOS

<TABLE>
<CAPTION>
                                                                     1996             1995             1994    
                                                                -------------    -------------    -------------
                                                                                (in thousands)
    <S>                                                         <C>              <C>              <C>
    Tier 1 Capital  . . . . . . . . . . . . . . . . . . . . .   $     29,941     $     28,273     $     23,182
    Tier 2 Capital  . . . . . . . . . . . . . . . . . . . . .          4,135            3,983            3,381
                                                                ------------     ------------     ------------

          TOTAL QUALIFYING CAPITAL  . . . . . . . . . . . . .   $     34,076     $     32,256     $     26,563
                                                                ============     ============     ============

    Risk Adjusted Total Assets (including
     off-balance-sheet exposures)   . . . . . . . . . . . . .   $    297,650     $    228,714     $    195,646
                                                                ============     ============     ============ 

    Tier 1 Risk-Based Capital Ratio   . . . . . . . . . . . .          10.06%           12.36%           11.85%
                                                                ============     ============     ============  
                                                                                                              
    Total Risk-Based Capital Ratio  . . . . . . . . . . . . .          11.45%           14.10%           13.58%
                                                                ============     ============     ============  
                                                                                                              
    Leverage Ratio  . . . . . . . . . . . . . . . . . . . . .           9.20%            8.61%             7.5%
                                                                ============     ============     ============  
</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,         
                                                                    -------------------------------------------
                                                                       1996             1995             1994  
                                                                    ---------        ---------        ---------
<S>                                                                     <C>              <C>              <C>
Return on average assets  . . . . . . . . . . . . . . . . . .            0.82%            0.82%            0.97%
Return on average equity  . . . . . . . . . . . . . . . . . .           11.50            10.89            11.86
Dividend payout ratio . . . . . . . . . . . . . . . . . . . .            0.28             0.31             ----
Average equity to average assets ratio  . . . . . . . . . . .            7.13             7.57             8.21
</TABLE>





                                       20
<PAGE>   22

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 materially
impact net interest income.  All discussions in this section assume a taxable
equivalent basis unless otherwise noted.

Net interest income for 1996 increased 28.8 percent from 1995 and 11.6 percent
in 1995 over 1994. Increased volume in 1996 and 1995 accounted for the majority
of the increase. The schedule on pages 24 and 25 provides the detail changes in
interest income, interest expense and net interest income due to changes in
volume and rate.

Interest income increased 27.7 percent in 1996 and 26.8 percent in 1995.  The
1996 increase is due both to the 27.4 percent increase in average earning
assets and the 4 basis point decline in the average yield on earning assets.
The increase in interest income in 1995 was attributable to the 17.7% increase
in average earning assets. Interest income on loans increased 25.8 percent
primarily due to increased volume.  Interest income on investment securities
increased 37.5 percent from 1995 to 1996 as a result of increased average
balances outstanding.

Total interest expense increased 26.7 percent due to the effect of a 26.4
percent increase in volume of average interest-bearing liabilities added to the
effect of an 8 basis point increase in the rate paid. The rise of interest on
deposits and short-term borrowings was due to an increase in volume with
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 1996 was 4.44 percent as compared to 4.46 percent for
1995.

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 1996 decreased 5 basis points to 3.85
percent from the 1995 spread of 3.90 percent as the yields on earning assets
increased at a slower pace than the cost of interest-bearing liabilities.
See the accompanying schedules entitled "Rate/Volume Variance Analysis" and
"Consolidated Average Balances, Interest Income/Expenses and Yields/Rates" for
more information.

Federal income tax laws applicable to banks during 1996 and 1995 were
substantially different from those applicable in prior years.  Imposition of
the alternative minimum tax, changes in tax rates and the effective elimination
of the tax- exempt status of certain previously tax-exempt income, resulted in
the distortion of the comparability of yields, interest rate spreads and
margins presented on an assumed tax equivalency basis.





                                       21
<PAGE>   23




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

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,                 
                                                       --------------------------------------------------------
                                                        1996        1995         1994         1993         1992
                                                        ----        ----         ----         ----         ----
<S>                                                     <C>         <C>          <C>          <C>          <C>
Rate earned on earning assets . . . . . . . .           8.85 %      8.82 %       8.20 %       8.32 %       9.22 %
Rate paid on borrowed funds . . . . . . . . .           5.18        5.17         4.33         4.25         5.21
                                                            
Interest rate spread  . . . . . . . . . . . .           3.67        3.65         3.87         4.07         4.01
Net yield on earning assets . . . . . . . . .           4.26        4.21         4.44         4.58         4.58
</TABLE>

1996 was characterized by relatively stable interest rates.Despite the flat
rate environment,net interest income increased by 27.4 percent due to the 28.8
percent increase in average earning asset volume.

Absolute changes in net interest income from 1995 to 1996 and from 1994 to 1995
were $3.6 million and $1.3 million, respectively, as reported in the
Consolidated Statements of Income.  The net interest margin increased to 4.26
percent in 1996 from 4.21 percent in 1995 and the interest rate spread
increased to 3.67 percent for 1996 from 1995's 3.65 percent.


             [The remainder of this page intentionally left blank]





                                      22
<PAGE>   24

CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (in Thousands)
<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,         
                                                                -----------------------------------------------
                                                                                     1996                
                                                                -----------------------------------------------
                                                                  AVERAGE            INCOME/         YIELD/
                                                                  BALANCE            EXPENSE          RATE     
                                                                ------------     -------------    -------------
<S>                                                             <C>              <C>              <C>
ASSETS
 Earning assets:
  Loans, net of unearned income (1)   . . . . . . . . . .       $    276,878     $     27,468              9.92%
  Investment securities:
    Taxable . . . . . . . . . . . . . . . . . . . . . . .             73,011            4,702              6.44
    Tax-exempt  . . . . . . . . . . . . . . . . . . . . .             16,049            1,380              8.60
                                                                ------------     ------------                  
     Total investment securities  . . . . . . . . . . . .             89,060            6,082              6.83
    Time deposits in other banks  . . . . . . . . . . . .              2,522              122              4.84
    Federal funds sold  . . . . . . . . . . . . . . . . .             11,319              604              5.34
                                                                ------------     ------------                  
     Total interest-earning assets (2)  . . . . . . . . .            379,779           34,276              9.03

 Non interest-earning assets:
  Cash and due from banks   . . . . . . . . . . . . . . .             20,276
  Premises and equipment  . . . . . . . . . . . . . . . .             15,187
  Accrued interest and other assets   . . . . . . . . . .              8,931
  Allowance for loan losses   . . . . . . . . . . . . . .             (2,334)
                                                                ------------  

    Total assets  . . . . . . . . . . . . . . . . . . . .       $    421,839
                                                                ============ 

LIABILITIES AND SHAREHOLDERS' EQUITY
 Interest-bearing liabilities:
  Demand deposits   . . . . . . . . . . . . . . . . . . .       $     55,990            2,106              3.76
  Savings deposits  . . . . . . . . . . . . . . . . . . .             50,844            1,924              3.78
  Time deposits   . . . . . . . . . . . . . . . . . . . .            218,720           12,565              5.74
                                                                ------------     ------------                  
                                                                     325,554           16,595              5.10
  Other short-term borrowings   . . . . . . . . . . . . .              2,824              155              5.49
  Long-term debt  . . . . . . . . . . . . . . . . . . . .              8,053              676              8.39
                                                                ------------     ------------                  
    Total interest-bearing liabilities  . . . . . . . . .            336,431           17,426              5.18
                                                                                 ------------     -------------
 Noninterest-bearing liabilities:
  Demand deposits   . . . . . . . . . . . . . . . . . . .             51,003
  Accrued interest and other liabilities  . . . . . . . .              4,326
  Shareholders' equity  . . . . . . . . . . . . . . . . .             30,079
                                                                ------------

    Total liabilities and shareholders' equity  . . . . .       $    421,839
                                                                ============

Net interest income/net interest spread . . . . . . . . .                              16,850              3.85%
                                                                                                  ============= 
                                                                                                               
Net yield on earning assets . . . . . . . . . . . . . . .                                                  4.44%
                                                                                                  ============= 
Taxable equivalent adjustment:
 Loans  . . . . . . . . . . . . . . . . . . . . . . . . .                                 206
 Investment securities  . . . . . . . . . . . . . . . . .                                 470
                                                                                 ------------
  Total taxable equivalent adjustment   . . . . . . . . .                                 676
                                                                                 ------------

Net interest income . . . . . . . . . . . . . . . . . . .                        $     16,174
                                                                                 ============
</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.





                                      23
<PAGE>   25





<TABLE>
<CAPTION>
                                      Years Ended December 31,                                
--------------------------------------------------------------------------------------------------
                      1995                                                1994                     
-----------------------------------------------    -----------------------------------------------
   Average           Income/          Yield/          Average           Income/          Yield/
   Balance           Expense           Rate           Balance           Expense           Rate    
-------------    -------------    -------------    -------------    -------------    -------------
<S>              <C>                       <C>                      <C>              <C>
$     223,222    $      21,837             9.78 %  $     178,123    $      16,614             9.33 %

       46,155            2,952             6.40           51,846            3,105             5.99
       18,962            1,710             9.02           18,667            1,719             9.21
-------------    -------------                     -------------    -------------                 
       65,117            4,662             7.16           70,513            4,824             6.84
        2,132              107             5.02            2,581              108             4.18
        7,607              441             5.80            1,987               81             4.08
-------------    -------------                     -------------    -------------                 
      298,078           27,047             9.07          253,204           21,627             8.54


       14,460                                             11,780
       11,518                                              8,251
        5,817                                              4,251
       (1,629)                                            (1,423)
-------------                                      ------------- 

$     328,244                                      $     276,063
=============                                      =============



$      46,092            1,738             3.77    $      45,249            1,509             3.33
       39,762            1,524             3.83           42,425            1,400             3.30
      169,413            9,551             5.64          123,124            5,940             4.82
-------------            -----                     -------------    -------------                 
      255,267           12,813             5.02          210,798            8,849             4.20
        2,818              166             5.89            1,554              112             7.21
        8,123              772             9.50            7,403              546             7.38
-------------           ------                     -------------    -------------                 
      266,208           13,751             5.17          219,755            9,507             4.33  
                        ------             ----                     -------------    -------------  
       33,974                                             31,369
        3,223                                              2,241
       24,839                                             22,698
-------------                                      -------------

$     328,244                                      $     276,063
=============                                      =============
                        13,296             3.90%                           12,120             4.21%
                                           ====                                      ============= 
                                           4.46%                                              4.92%
                                           ====                                      ============= 
                           162                                                291
                           581                                                585
                 -------------                                      -------------
                           743                                                876
                 -------------                                      -------------
                                                                    
                 $      12,553                                      $      11,244
                 =============                                      =============
</TABLE>





                                      24
<PAGE>   26

RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis

<TABLE>
<CAPTION>
                                                              Average Volume                 Change in Volume                  
                                                  -------------------------------------     -------------------
                                                    1996            1995         1994       1996-1995 1995-1994
                                                  --------        --------     --------     --------- ---------
                                                                      (in Thousands)
<S>                                                 <C>          <C>         <C>         <C>          <C>
EARNING ASSETS:
Loans, net of unearned income . . . . . . . . .     $276,878     $223,222    $178,123    $  53,656    $ 45,099
Investment securities:
  Taxable   . . . . . . . . . . . . . . . . . .       73,011       46,155      57,846       26,856      (5,691)
  Tax exempt  . . . . . . . . . . . . . . . . .       16,049       18,962      18,667       (2,913)        295
                                                    --------     --------    --------    ---------    --------
                                                                                                              
                                                                                                              

    Total investment securities   . . . . . . .       89,060       65,117      70,513       23,943      (5,396)
Interest-bearing deposits with other banks  . .        2,522        2,132       2,581          390        (449)
Federal funds sold  . . . . . . . . . . . . . .       11,319        7,607       1,987        3,712       5,620
                                                    --------     --------    --------    ---------    --------

     Total earning assets   . . . . . . . . . .     $379,779     $298,078    $253,204    $  81,701    $ 44,874
                                                    ========     ========    ========    =========    ========

INTEREST-BEARING LIABILITIES:
Deposits:
     Demand   . . . . . . . . . . . . . . . . .     $ 55,990     $ 46,092    $ 45,249    $   9,898    $    843
     Savings  . . . . . . . . . . . . . . . . .       50,844       39,762      42,425       11,082      (2,663)
Time  . . . . . . . . . . . . . . . . . . . . . .    218,720      169,413     123,124       49,307      46,289
                                                    --------     --------    --------    ---------    --------
     Total interest-bearing deposits  . . . . .      325,554      255,267     210,798       70,287      44,469

Other short-term borrowings . . . . . . . . . .        2,824        2,818       1,554            6       1,264
Long-term debt  . . . . . . . . . . . . . . . .        8,053        8,123       7,403          (70)        720
                                                    --------     --------    --------    ---------    --------

   Total interest-bearing liabilities   . . . .     $336,431     $266,208    $219,755    $  70,223    $ 46,453
                                                    ========     ========    ========    =========    ========

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

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

Net cost of funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>





                                      25
<PAGE>   27



<TABLE>
<CAPTION>
                                                                              Variance Attributed to (1)  
                                                                           --------------------------------
      AVERAGE RATE           Interest Income/Expense         Variance            1996            1995
------------------------  -------------------------- ------------------- ----------------- ---------------
 1996     1995     1994    1996     1995      1994   1996-1995 1995-1994  VOLUME   RATE     Volume    Rate  
------   ------   ------  ------   ------    ------- --------- --------- -------  ------   --------   ----
                                               (in Thousands)
 <S>     <C>      <C>     <C>      <C>       <C>       <C>     <C>        <C>      <C>     <C>       <C>
  9.78%  9.78%    9.33%   $27,468  $21,837   $16,614   $5,631  $5,223     $5,315    316    $4,387       836
                                                                                                     
                                                                                                     
  6.44   6.40     5.99      4,702    2,952     3,105    1,750    (153)     1,731     19      (356)      203
  8.60   9.02     9.21      1,380    1,710     1,719     (330)     (9)      (253)   (77)       27       (36)
                          -------  -------   -------   ------  ------     ------   ----     -----    ------    
                                                                                                     
  6.83   7.16     6.84      6,082    4,662     4,824    1,420    (162)     1,478    (58)     (329)      167
  4.84   5.02     4.18        122      108       108       15      (1)        19     (4)      (21)       20
  5.34   5.80     4.08        604      441        81      163     360        200    (37)      313        47
                          -------  -------   -------   ------  ------     ------   ----     -----    ------    
                                                                                                     
  9.03   9.07     8.54     34,276   27,048    21,627    7,229   5,420      7,012    217     4,350     1,070
                                                                                                     
                                                                                                     
  3.76   3.77     3.33      2,106    1,738     1,509      368     229        373     (5)       28       201
  3.78   3.83     3.30      1,924    1,524     1,400      400     124        420    (20)      (92)      216
  5.74   5.64     4.82     12,565    9,551     5,940    3,014   3,611      2,841    173     2,486     1,125
                          -------  -------   -------   ------  ------     ------   ----     -----    ------    
  5.10   5.02     4.20     16,595   12,813     8,849    3,782   3,964      3,634    148     2,422     1,542
                                                                                                     
  5.49   5.89     7.21        155      166       112      (11)     54          0    (11)       78       (24)
  8.39   9.50     7.38        676      772       546      (96)    226         (7)   (89)       57       169
                          -------  -------   -------   ------  ------     ------   ----     -----    ------    
  5.18   5.17     4.33     17,426   13,751     9,507    3,675   4,244      3,627     48     2,557     1,687
  ----   ----     ----    -------  -------   -------   ------  ------     ------   ----    ------    ------    
  3.85%  3.90%    4.21%   $16,850  $13,296   $12,120   $3,554  $1,176     $3,385   $169    $1,793    $ (617)
  ====   ====     ====    =======  =======   =======   ======  ======     ======   ====    ======    ======     
  4.44%  4.46%    4.92%
  ====   ====     ====      
  4.59%  4.61%    3.75%
  ====   ====     ====      
</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.





                                       26
<PAGE>   28

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 decreased 23.3
percent in 1996 compared to an increase of 70.5 percent in 1995; reserves
obtained through the acquisition of assets still provided for an increase of
9.8 percent in the allowance for loan losses. Net loan charge-offs increased
168.6 percent in 1996 after increasing 23.8 percent in 1995.  Net charge-offs
on consumer loans amounted to 53.0 percent of total net charge-offs for 1996
compared to 20.6 percent in 1995 and 89.3 percent in 1994.  Management believes
that the $2,424,847 in the allowance for loan losses at December 31, 1996 (.75%
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, 1996.


                        Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                           1996       1995        1994        1993         1992   
                                                         --------    --------    --------    --------    ---------
                                                                       (in Thousands)
<S>                                                      <C>         <C>         <C>         <C>         <C>
Allowance for loan losses at beginning of year  . . .    $  2,209    $  1,548    $  1,255    $  1,062    $     940
Loan charged off
  Commercial, financial and agricultural  . . . . . .         392         110          91         129          112
  Real Estate - mortgage  . . . . . . . . . . . . . .         158         -0-         -0-          33          143
  Consumer  . . . . . . . . . . . . . . . . . . . . .         680         399         319         134          226
                                                         --------    --------    --------    --------    ---------
   Total loans charged off  . . . . . . . . . . . . .       1,230         509         410         296          481
                                                         --------    --------    --------    --------    ---------
Recoveries on loans previously charged off
  Commercial, financial and agricultural  . . . . . .          10          22          52           8            2
  Real Estate - mortgage  . . . . . . . . . . . . . .           1           1           2         -0-            9
  Consumer  . . . . . . . . . . . . . . . . . . . . .          72          59          11          63           53
                                                         --------    --------    --------    --------    ---------
   Total recoveries   . . . . . . . . . . . . . . . .          83          82          65          71           64
                                                         --------    --------    --------    --------    ---------

Net loans charged off . . . . . . . . . . . . . . . .       1,147         427         345         225          417

Reserves acquired through purchase  . . . . . . . . .         529         -0-         -0-         -0-          -0-

Provision for loan losses . . . . . . . . . . . . . .         834       1,088         638         418          539
                                                         --------    --------    --------    --------    ---------

Allowance for loan losses at end of period  . . . . .    $  2,425    $  2,209    $  1,548    $  1,255    $   1,062
                                                         ========    ========    ========    ========    =========

Loans, net of unearned income, at end of period . . .    $322,762    $237,841    $206,428    $151,651    $ 135,782
                                                         ========    ========    ========    ========    =========

Average loans, net of unearned income,
  outstanding for the period  . . . . . . . . . . . .    $276,878    $223,222    $178,123    $140,294    $ 128,167
                                                         ========    ========    ========    ========    =========
</TABLE>





                                      27
<PAGE>   29





<TABLE>
<CAPTION>
                                                           1996        1995       1994        1993         1992   
                                                         --------    --------    --------    --------    ---------
<S>                                                         <C>         <C>         <C>         <C>          <C>
Ratios:
   Allowance at end of period to loans, net of
   unearned income  . . . . . . . . . . . . . . . . .         .75  %      .93  %      .75 %       .83 %        .78 %
  Allowance at end of period to average loans,
   net of unearned income   . . . . . . . . . . . . .         .88         .99         .87         .89          .83
  Net charge-offs to average loans, net of
   unearned income  . . . . . . . . . . . . . . . . .         .41         .19         .19         .16          .33
  Net charge-offs to allowance at end of period . . .       47.30       19.33       22.29       17.93        39.27
  Recoveries to prior year charge-offs  . . . . . . .       16.31       20.00       21.96       14.76        17.98
</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 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.

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

                        ALLOCATION OF LOAN LOSS RESERVE


<TABLE>
<CAPTION>
                                                          December 31,
                   ------------------------------------------------------------------------------------------
                         1996               1995             1994               1993                1992
                   -----------------  ---------------   ----------------  -----------------  ----------------
                            PERCENT           Percent           Percent             Percent          Percent
                   AMOUNT   OF TOTAL  Amount of Total   Amount  of Total  Amount   of Total  Amount  of Total
                   ------   --------  ------ --------   ------  --------  ------   --------  ------  --------
                                                       (in Thousands)
<S>                  <C>        <C>     <C>        <C>    <C>        <C>    <C>         <C>    <C>        <C>
Domestic loans
 Commercial,
   financial and
   and agricultural  $   800     33%    $   442     20%   $   170     11%   $    678     54%   $   276     26%
 Real estate -                                                            
   mortgage . .          340     14        --       --        --     --          188     15        340     32
 Consumer   . .        1,285     53       1,767     80      1,378     89         389     31        446     42
                     -------    ---     -------   ----    -------    ---    --------   ----    -------    ---
                                                                          
                     $ 2,425    100%    $ 2,209    100%   $ 1,548    100%   $  1,255    100%   $ 1,062    100%
                     =======    ===     =======   ====    =======    ===    ========   ====    =======    === 
</TABLE>



(1)  The Company had no foreign loans.





                                       28
<PAGE>   30


NONPERFORMING ASSETS

Nonperforming assets as of  December 31, 1996 increased 45.5 percent from
year-end 1995. 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, 1996.  The following table
summarizes the Company's nonperforming assets for each of the last five years.


                             NONPERFORMING ASSETS

<TABLE>
<CAPTION>
                                                   
                                                                            December 31,
                                                      1996        1995         1994         1993         1992  
                                                   ---------    --------     --------    ---------    ---------
                                                                          (in Thousands)
<S>                                                <C>          <C>          <C>         <C>          <C>
Nonaccruing loans . . . . . . . . . . . . . .      $    565     $    491     $    422    $     265    $    276
Loans past due 90 days or more  . . . . . . .           470          317          343          154         604
Restructured loans  . . . . . . . . . . . . .           -0-          -0-          -0-          -0-         -0-
                                                   --------     --------     --------    ---------    --------
Total nonperforming loans . . . . . . . . . .         1,035          808          765          419         880
Nonaccruing securities  . . . . . . . . . . .           -0-          -0-          -0-          -0-         260
Other real estate . . . . . . . . . . . . . .           791          417          290          284          60
                                                   --------     --------     --------    ---------    --------

  Total nonperforming assets  . . . . . . . .      $  1,826     $  1,255     $  1,055    $     703    $  1,200
                                                   ========     ========     ========    =========    ========

Ratios:
 Loan loss allowance to
  total nonperforming assets  . . . . . . . .          1.33         1.80         1.47         1.79        0.89
                                                   =========    ========     ========    =========    ========  
 Total nonperforming loans to total
  loans (net of unearned interest)  . . . . .         0.003        0.003        0.004        0.003       0.006
                                                   ========     ========     ========    =========    ========
 Total nonperforming assets
  to total assets . . . . . . . . . . . . . .         0.004        0.003        0.004        0.003       0.005
                                                   ========     ========     ========    =========    ========
</TABLE>

The ratio of loan loss allowance to total nonperforming assets decreased by
24.4% from 1995 to 1996, to 1.33.  The ratio of total nonperforming loans to
total loans was unchanged from 1995 to 1996, and total nonperforming assets to
total assets increased by 0.1% from 1995 to 1996,  remaining at approximately
the same level as 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, 1996, 1995 and 1994, 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 negligible.

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

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





                                       29
<PAGE>   31

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 1996 totaled $4,447,235 as compared to $3,716,891 in
1995 and $3,188,760 in 1994.  These amounts are primarily from service charges
on deposit accounts, debt cancellation fees and fees on services to customers.
Service charge increases are primarily a reflection of the deposit growth of
the Company as it has expanded into new markets, and the result that that
deposit growth has on deposit account service charges and NSF income. The
insurance commissions  increased significantly in 1994 as a result of the
activities of the Company's Community Insurance unit in the areas of title
insurance and life insurance, as well as increased credit life insurance
commissions as a result of a significant rise in loan activity. That decreased
in 1995 partly due to the shift from credit life insurance to debt cancellation
contracts on a portion of the Company's loan portfolio, but increased again in
1996 due to a rise in real estate lending activity in the banks. The shift to
debt cancellation is reflected in the 247% increase in that program's revenue
for 1996.

                               NONINTEREST INCOME

<TABLE>
<CAPTION>
                                                     Years Ended December 31,                Percent Change    
                                             -------------------------------------   --------------------------
                                                1996         1995          1994        1996/1995    1995/1994  
                                             ----------   ----------   -----------   ------------   ---------- 
                                                        (in Thousands)
<S>                                          <C>          <C>           <C>                 <C>       <C>
  Service charges on deposits . . . . . .    $    2,229   $    1,751    $    1,521           27.3%       15.1%
  Insurance commissions . . . . . . . . .           656          637           828
                                                                                              3.0       (23.1)
Investment securities gains (losses)  . .             8          266            21          (97.0)    1,116.7
  Bank club dues  . . . . . . . . . . . .           498          427           306           16.6        39.5
  Debt cancellation fees  . . . . . . . .           388          112           -0-          246.4          --      
  Other . . . . . . . . . . . . . . . . .           668          524           513           27.5         2.1
                                             ----------   ----------    ----------              
                                             $    4,447   $    3,717    $    3,189           19.6        16.6
                                             ==========   ==========    ==========              
                                                                                                         
</TABLE>
NONINTEREST EXPENSES

Noninterest expenses totaled $14,901,551 in 1996 which represents a 23.7
percent increase over 1995 noninterest expenses, which were 18.2 percent higher
than in 1994.  Salaries and benefits increased $1,926,081 (32.8%) to $9,135,335
in 1996 reflecting the increased personnel costs of completing the staffing of
the new Alabama locations.  Director and committee fees, which were $286,550 in
1995 and $286,650 in 1994 , increased 62.5% in 1996 to $465,775 . Occupancy
expense increased 19.0% to $1,030,522 in 1996 primarily as a result of the
building and renovation of several bank locations. Furniture and equipment
expense increased 20.6% in 1996 from the 1995 amount, to $1,004,804, compared
to a 36.3% increase in 1995.  Other operating expenses increased 14.5% to
$3,265,115 during 1996.  From 1994 to 1995, other operating expenses increased
7.1%.





                                       30
<PAGE>   32

                              NONINTEREST EXPENSES

<TABLE>
<CAPTION>
                                                     Years Ended December 31,                Percent Change    
                                             -------------------------------------   --------------------------
                                                1996         1995          1994        1996/1995    1995/1994 
                                             ----------   ----------    ----------   ------------   ----------
                                                        (in Thousands)
<S>                                          <C>          <C>           <C>               <C>           <C> 
  Salaries and employee benefits  . . . .    $    9,135   $    7,209    $    5,877         26.7%         22.7%
  Occupancy expense . . . . . . . . . . .         1,031          866           756         19.1          14.6
  Furniture and equipment expense . . . .         1,005          833           612         20.6          36.1
  Director and committee fees . . . . . .           466          287           287         62.4          -0-
  Amortization of intangibles . . . . . .           275          123           127        123.6          (3.1)
  Advertising . . . . . . . . . . . . . .           229          197           250         16.2         (21.2)
  Insurance . . . . . . . . . . . . . . .           224          495           725        (54.7)        (31.7)
  Professional fees . . . . . . . . . . .           250          247           218          1.2          13.3
  Supplies  . . . . . . . . . . . . . . .           547          380           213         43.9          78.4
  Other . . . . . . . . . . . . . . . . .         1,740        1,409         1,128         23.5          24.9
                                             ----------   ----------    ----------                               

                                             $   14,902   $   12,046    $   10,193         23.7          18.2
                                             ==========   ==========    ==========                           
</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 $1,426,344 (29.2%)
for 1996, on income of $4,885,330.  The tax for 1995 was $430,997 (13.7%) on
income of $3,135,795 and for 1994 was $913,802 (25.4%) on income of $3,601,756.
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.  The effective tax rate for 1995
also decreased due to an adjustment in the deferred tax valuation allowance and
the recognition of a deferred tax benefit from the donation of a capital asset
which exceeded its tax basis by approximately $290,000. 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 1996 the
effective tax rate was 85.9 percent of the statutory Federal tax rate compared
to 40 percent in 1995 and 75 percent in 1994.  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.





                                      31
<PAGE>   33

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.



            [The remainder of this page intentionally left blank]





                                      32
<PAGE>   34


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


                    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.





                                       33
<PAGE>   35



ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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



COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Financial Statements                                                                                     Page(s)
                                                                                                         -------
<S>                                                                                                      <C>
Independent Auditor's Report  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       35

Consolidated Statements of Financial Condition as of December 31, 1996 and 1995 . . . . . . . . . . .       36

Consolidated Statements of Income for the years ended
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       37

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       38

Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    39-40

Notes to Consolidated Financial Statements -
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    41-69

Quarterly Results (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       70
</TABLE>





                                       34
<PAGE>   36
                                    DUDLEY
                                 HOPTON-JONES
                                     SIMS
                                & FREEMAN PLLP
                                 [LETTERHEAD]



                          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, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996.  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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.


Birmingham, Alabama
February 14, 1997
                                       DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP





                                       35
<PAGE>   37

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                 COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                        December 31,      
                                                                               --------------------------------
                                                                                   1996             1995      
                                                                               --------------   --------------
<S>                                                                            <C>              <C>
ASSETS
  Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $     5,096,892  $     2,576,214
  Due from banks  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         12,515,285       13,512,033
  Interest-bearing deposits with banks  . . . . . . . . . . . . . . . . . .          1,773,778        1,912,288
  Federal funds sold  . . . . . . . . . . . . . . . . . . . . . . . . . . .                -0-       20,350,000
  Securities available for sale . . . . . . . . . . . . . . . . . . . . . .         86,911,305       69,989,862
  Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        324,571,991      240,078,385
  Less: Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . .          1,809,698        2,237,612
        Allowance for loan losses . . . . . . . . . . . . . . . . . . . . .          2,424,847        2,208,798
                                                                               ---------------   --------------
                 NET LOANS  . . . . . . . . . . . . . . . . . . . . . . . .        320,337,446      235,631,975
  Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . .         17,076,220       12,524,545
  Accrued interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          4,847,308        3,476,130
  Intangibles, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          4,101,306        1,453,756
  Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .            791,435          416,836
  Other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,258,720          980,837
                                                                               ---------------   --------------

                 TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . .    $   454,709,695   $  362,824,476
                                                                               ===============   ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
  Deposits:
     Noninterest-bearing  . . . . . . . . . . . . . . . . . . . . . . . . .    $    50,245,130   $   41,187,667
     Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . .        350,092,545      278,961,678
                                                                               ---------------   --------------
                 TOTAL DEPOSITS . . . . . . . . . . . . . . . . . . . . . .        400,337,675      320,149,345
  Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . .          8,376,472        2,008,684
  Accrued interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2,542,825        2,073,534
  Long-term debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          8,281,449        7,919,873
  Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2,612,488        1,653,803
                                                                               ---------------   --------------
                 TOTAL LIABILITIES  . . . . . . . . . . . . . . . . . . . .        422,150,909      333,805,239
  Shareholders' equity
     Common stock, par value $.10 per share, 5,000,000
         shares authorized, 2,000,000 and 1,849,273 shares
         issued as of December 31, 1996 and 1995  . . . . . . . . . . . . .            200,000          184,927
     Capital surplus  . . . . . . . . . . . . . . . . . . . . . . . . . . .         17,819,722       14,821,302
     Retained earnings  . . . . . . . . . . . . . . . . . . . . . . . . . .         16,812,517       14,262,319
     Unearned ESOP shares - 112,121 and 64,607 shares
         as of December 31, 1996 and 1995 . . . . . . . . . . . . . . . . .         (2,119,891)        (995,198)
     Unrealized (losses) gains on investment securities
         available for sale, net of deferred tax or tax benefit . . . . . .           (153,562)         745,887
                                                                               ---------------   --------------

                 TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . .         32,558,786       29,019,237
                                                                               ---------------   --------------

                 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . .    $   454,709,695   $  362,824,476
                                                                               ===============   ==============
</TABLE>




                See notes to consolidated financial statements





                                      36
<PAGE>   38

                       CONSOLIDATED STATEMENTS OF INCOME

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,                 
                                                                -----------------------------------------------
                                                                    1996             1995             1994     
                                                                -------------    -------------    -------------
<S>                                                              <C>              <C>              <C>
INTEREST INCOME
  Interest and fees on loans  . . . . . . . . . . . . . . . .    $ 27,261,734     $ 21,675,669     $ 16,324,063
  Interest on investment securities:
   Taxable securities   . . . . . . . . . . . . . . . . . . .       4,701,656        2,951,706        3,105,299
   Securities exempt from federal income taxes  . . . . . . .         910,822        1,128,707        1,133,722
  Interest on federal funds sold  . . . . . . . . . . . . . .         604,111          440,961           80,821
  Interest on deposits in other banks . . . . . . . . . . . .         121,568          106,976          107,539
                                                                 ------------     ------------     ------------
                 TOTAL INTEREST INCOME  . . . . . . . . . . .      33,599,891       26,304,019       20,751,444
                                                                 ------------     ------------     ------------

INTEREST EXPENSE
  Interest on deposits  . . . . . . . . . . . . . . . . . . .      16,595,417       12,813,243        8,849,159
  Interest on other short-term borrowings . . . . . . . . . .         154,982          166,066          112,289
  Interest on long-term debt  . . . . . . . . . . . . . . . .         675,706          771,635          545,879
                                                                 ------------     ------------     ------------
                 TOTAL INTEREST EXPENSE . . . . . . . . . . .      17,426,105       13,750,944        9,507,327
                                                                 ------------     ------------     ------------

NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . .      16,173,786       12,553,075       11,244,117
Provision for loan losses . . . . . . . . . . . . . . . . . .         834,140        1,087,749          638,228
                                                                 ------------     ------------     ------------

                 NET INTEREST INCOME
                   AFTER PROVISION FOR LOAN LOSSES  . . . . .      15,339,646       11,465,326       10,605,889

NONINTEREST INCOME
  Service charges on deposits . . . . . . . . . . . . . . . .       2,228,762        1,750,970        1,521,380
  Insurance commissions . . . . . . . . . . . . . . . . . . .         656,134          637,164          827,938
  Bank club dues  . . . . . . . . . . . . . . . . . . . . . .         498,282          427,291          306,160
  Debt cancellation fees  . . . . . . . . . . . . . . . . . .         387,876          111,926              -0-
  Other operating income  . . . . . . . . . . . . . . . . . .         668,672          523,601          512,588
  Investment securities gains . . . . . . . . . . . . . . . .           7,509          265,939           20,694
                                                                 ------------     ------------     ------------
                 TOTAL NONINTEREST INCOME . . . . . . . . . .       4,447,235        3,716,891        3,188,760
                                                                 ------------     ------------     ------------

NONINTEREST EXPENSES
  Salaries and employee benefits  . . . . . . . . . . . . . .       9,135,335        7,209,254        5,876,916
  Occupancy expense . . . . . . . . . . . . . . . . . . . . .       1,030,522          865,876          756,021
  Furniture and equipment expense . . . . . . . . . . . . . .       1,004,804          833,220          611,510
  Director and committee fees . . . . . . . . . . . . . . . .         465,775          286,550          286,650
  Other operating expenses  . . . . . . . . . . . . . . . . .       3,265,115        2,851,522        2,661,796
                                                                 ------------     ------------     ------------
                 TOTAL NONINTEREST EXPENSES . . . . . . . . .      14,901,551       12,046,422       10,192,893
                                                                 ------------     ------------     ------------

Income before income taxes  . . . . . . . . . . . . . . . . .       4,885,330        3,135,795        3,601,756
Provision for income taxes  . . . . . . . . . . . . . . . . .       1,426,344          430,997          913,802
                                                                 ------------     ------------     ------------

                 NET INCOME . . . . . . . . . . . . . . . . .    $  3,458,986     $  2,704,798     $  2,687,954
                                                                 ============     ============     ============

EARNINGS PER COMMON SHARE - PRIMARY
  AND FULLY DILUTED
  Net income per common share . . . . . . . . . . . . . . . .    $       1.79     $       1.62     $       1.60
  Weighted average common shares outstanding  . . . . . . . .       1,929,280        1,667,945        1,681,892
</TABLE>

                 See notes to consolidated financial statements





                                       37
<PAGE>   39

               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                      
                 COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                         Unrealized
                                                                             Unearned        Common     Gain/(Losses)
                                  Common        Capital       Retained         ESOP         Stock in         On
                                  Stock         Surplus       Earnings        Shares        Treasury     Securities       Total     
                                ----------   ------------   -------------   -----------    ----------   -------------  ------------
<S>                             <C>         <C>            <C>             <C>              <C>          <C>            <C>
Balance at January 1, 1994  . . $173,982    $13,031,807    $10,259,089     $       -0-      $     -0-    $      -0-     $13,810,331
                                
Effect of Adopting SFAS 115 . .                                                               783,670       783,670
                                
Net Income - 1994 . . . . . . .                              2,687,954                                                    2,687,954
                                
Issuance of Common Stock  . . .    6,400        951,203                                                                     957,603
                                
Recognition of Unreleased ESOP  
  shares at January 1, 1994   .                                             (1,200,000)                                  (1,200,000)
                                
Release of ESOP shares during   
  year ended December 31, 1994                                                 171,360                                      171,360
                                
Net Change in Unrealized Gains  
   (Losses) on Securities . . .                                                                          (1,442,761)     (1,442,761)

Acquisition of Treasury Stock                                                              (2,899,460)                   (2,899,460)
                                --------     ----------     ----------      ----------     -----------   -----------     ---------- 

Balance at December 31, 1994  .  180,382     13,983,010     12,947,043      (1,028,640)    (2,899,460)     (659,091)     22,523,244
                                
Net Income - 1995 . . . . . . .                              2,704,798                                                    2,704,798
                                
Cash dividends:Common . . . . .                               (809,630)                                                    (809,630)
                                
Issuance of Common Stock  . . .    4,545        838,292                                                                     842,837
                                
Release of ESOP shares during   
 year ended December 31, 1995                                                  171,360                                      171,360
                                
Pledging of additional ESOP     
  shares during year ended      
  December 31, 1995   . . . . .                                               (137,918)                                    (137,918)
                                
Net Change in Unrealized Gains  
  (Losses) on Securities  . . .                                                                           1,404,978       1,404,978
                                
Resale of Treasury Stock  . . .                               (579,892)                     2,899,460                     2,319,568
                                --------     ----------     ----------      ----------     -----------   -----------     ---------- 
BALANCE AT DECEMBER 31, 1995  .  182,927     14,821,302     14,262,319        (995,198)           -0-       745,887      29,019,237
                                
NET INCOME - 1996 . . . . . . .                              3,458,986                                                    3,458,986
                                
CASH DIVIDENDS:COMMON                                         (908,788)                                                    (908,788)
                                
ISSUANCE OF COMMON STOCK  . . .   15,073      2,998,420                                                                   3,013,493
                                
RELEASE OF ESOP SHARES DURING   
  YEAR ENDED DECEMBER 31, 1996                                                 135,314                                      135,314
                                
PLEDGING OF ADDITIONAL ESOP     
  SHARES DURING YEAR ENDED      
  DECEMBER 31, 1996   . . . . .                                             (1,260,007)                                  (1,260,007)
                                
NET CHANGE IN UNREALIZED GAINS  
  (LOSSES) ON SECURITIES  . . .                                                                            (899,449)       (899,449)
                                --------     ----------     ----------     -----------     -----------   -----------    -----------
BALANCE AT DECEMBER 31,         
  1996  . . . . . . . . . . . . $200,000    $17,819,722    $16,812,517     $(2,119,891)    $      -0-    $ (153,562)    $32,558,786
                                ========    ===========    ===========     ===========     ==========    ==========     ===========
</TABLE>

                 See notes to consolidated financial statements



                                       38
<PAGE>   40


                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES



<TABLE>
<CAPTION>
                                                                            Years Ended December 31,       
                                                                -----------------------------------------------
                                                                    1996             1995             1994     
                                                                -------------    -------------    -------------
  <S>                                                           <C>               <C>              <C>
OPERATING ACTIVITIES:
  Net income  . . . . . . . . . . . . . . . . . . . . . . . .   $   3,458,986    $   2,704,798    $  2,687,954
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Provision for loan losses  . . . . . . . . . . . . . . .         834,140        1,087,749         638,228
     Provision for depreciation and amortization  . . . . . .       1,251,145          934,772         747,268
     Amortization of investment security
      premiums and accretion of discounts   . . . . . . . . .         (44,943)        (121,753)       (194,964)
     Deferred tax expense (benefit) . . . . . . . . . . . . .          61,324         (441,035)         38,024
     Realized investment security gains . . . . . . . . . . .          (7,509)        (265,939)        (20,694)
     Loss (gain) on sale of premises and equipment  . . . . .          39,866           (5,269)         28,579
     Increase in accrued interest receivable  . . . . . . . .      (1,009,584)        (795,751)       (585,697)
     Increase in accrued interest payable . . . . . . . . . .         233,690          678,198         336,560
     Other  . . . . . . . . . . . . . . . . . . . . . . . . .       1,217,000          (54,317)       (955,304)
                                                                -------------    -------------     -----------
         NET CASH PROVIDED BY OPERATING ACTIVITIES
                                                                    6,034,115        3,721,453       2,719,954
                                                                -------------    -------------     -----------
   INVESTING ACTIVITIES:
  Proceeds from sales of securities available for sale  . . .      20,014,380        8,246,865      19,809,531
  Proceeds from maturity of securities available for sale . .      15,569,562        2,081,237       3,975,895
  Proceeds from maturity of securities held to maturity . . .            -0-        14,381,805      29,080,007
  Purchase of securities available for sale . . . . . . . . .     (53,952,015)     (15,386,069)     (6,007,844)
  Purchase of securities held to maturity . . . . . . . . . .            -0-       (14,197,937)    (27,893,363)
  Net decrease (increase) in interest-bearing
   deposits with other banks  . . . . . . . . . . . . . . . .         138,510          201,535        (173,773)
  Cash used in acquisition of bank branches and finance offices . .  (929,639)             -0-             -0-
  Net increase in loans to customers  . . . . . . . . . . . .     (43,823,086)     (31,205,039)    (55,207,261)
  Proceeds from sale of premises and equipment  . . . . . . .         115,319           79,223         296,741
  Capital expenditures  . . . . . . . . . . . . . . . . . . .      (5,352,381)      (3,047,780)     (4,476,926)
  Net proceeds from sale of other real estate . . . . . . . .         380,508           47,292          86,537
                                                                -------------    -------------     -----------
         NET CASH USED IN INVESTING ACTIVITIES  . . . . . . .     (67,838,842)     (38,798,868)    (40,510,456)
                                                                -------------    -------------     -----------
   FINANCING ACTIVITIES:
  Net increase in demand deposits, NOW accounts,
   and savings accounts   . . . . . . . . . . . . . . . . . .      19,052,113        2,466,443      13,167,552
  Net increase in certificates of deposit . . . . . . . . . .      15,686,984       54,270,341      22,474,665
  Net increase (decrease) in short-term borrowings  . . . . .       6,897,972         (462,860)        194,292
  Repayment of long-term debt . . . . . . . . . . . . . . . .        (763,117)        (759,638)       (707,354)
  Issuance of common stock  . . . . . . . . . . . . . . . . .       3,013,493          842,837         957,603
  Sale (purchase) of treasury stock . . . . . . . . . . . . .            -0-         2,319,568        (899,460)
  Cash dividends  . . . . . . . . . . . . . . . . . . . . . .        (908,788)        (809,630)            -0-
                                                                -------------    -------------     -----------
         NET CASH PROVIDED BY FINANCING ACTIVITIES  . . . . .      42,978,657       57,867,061      35,187,298
                                                                -------------    -------------     -----------
   Net (decrease) increase in cash and cash equivalents   . .     (18,826,070)      22,789,646      (2,603,204)

   Cash and cash equivalents at beginning of year   . . . . .      36,438,247       13,648,601      16,251,805
                                                                -------------    -------------     -----------

   CASH AND CASH EQUIVALENTS AT END OF YEAR   . . . . . . . .   $  17,612,177    $  36,438,247     $13,648,601
                                                                =============    =============     ===========
</TABLE>                                                                     



                 See notes to consolidated financial statements





                                      39
<PAGE>   41

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>
                                                                               Years Ended December 31,        
                                                                -----------------------------------------------
                                                                    1996             1995             1994     
                                                                -------------    -------------    -------------
  <S>                                                           <C>              <C>              <C>
  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

  Cash paid during the year for:
   Interest   . . . . . . . . . . . . . . . . . . . . . . . .   $ 16,956,814     $ 13,072,746     $   9,170,767
   Income taxes   . . . . . . . . . . . . . . . . . . . . . .        601,000          956,723         1,235,165
</TABLE>


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
   AND FINANCING ACTIVITIES:

   Other real estate of $1,328,284, $387,958 and $350,553 was acquired in 1996,
   1995 and 1994, respectively, through foreclosure.

   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 additional shares to obtain additional ESOP debt of
   $1,260,007 on May 17, 1996 and $137,918 on October 2, 1995, long-term debt
   was increased and equity was decreased again. The debt was reduced and
   shares were released by $135,314 and $171,360, respectively,  during each of
   the years ended December 31, 1996 and 1995 as a result of payments made by
   the Company's ESOP on the outstanding ESOP debt.

   Investment securities of $40,504,243 and $39,742,884 were transferred during
   1995 and 1994, respectively, to securities available for sale in accordance
   with the provisions of SFAS 115.

   During 1994, treasury stock in the amount of $2,899,460 was acquired for
   cash and the assumption of a $2,000,000 subordinated capital installment
   note. All of the treasury stock was re-issued during 1995.





                 See notes to consolidated financial statements





                                       40
<PAGE>   42





                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 1996, 1995 AND 1994



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 (Alabama), Community Bank (Tennessee), Community
Appraisals, Inc., Community Insurance Corp. and 1st Community Credit
Corporation collectively, the "Bank".  All significant intercompany balances
and transactions have been eliminated.  Investments in subsidiaries are carried
at the parent company's equity in the underlying net assets.

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   Effective January 1, 1994, the Company and its
subsidiary banks adopted Statement of Financial Accounting Standards No, 115,
Accounting  for Certain Investments in Debt and Equity Securities ("SFAS 115").
This statement, among other things, requires debt and equity securities to be
divided into one of three categories: held to maturity, available for sale, and
trading.

The Company's investments in securities are classified in two categories 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 until realized.

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





                                       41
<PAGE>   43

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.  An
allowance for losses on other real estate is maintained for subsequent
valuation adjustments on a specific property basis.





                                       42
<PAGE>   44

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Earnings Per Common Share    Earnings per common share are calculated on the
basis of the weighted average number of common shares outstanding and shares
under option treated as common stock equivalents.

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.

Intangibles  Intangibles consist primarily of legal organizational costs and
core deposits intangible.  Organizational costs are generally amortized over 5
years using the straight-line method.  The core deposits intangible represents
premiums paid on the purchase of 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 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
$7,000,000.





                                       43
<PAGE>   45

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Debt Cancellation Contracts  The Company began issuing debt cancellation
contracts on certain of its loan 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 , after the establishment of an original
reserve account of $150,000, sets aside 30% of all realized fees as a reserve
for potential claims. The reserve for debt cancellation contracts totaled
$282,081 and $183,984 at December 31, 1996 and 1995.

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.


Effect of New Financial Accounting Standards  The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
114 ,Accounting by Creditors for Impairment of a Loan. SFAS No. 114, as amended
by SFAS No. 118, became effective January 1, 1995 and requires that impaired
loans that are within the scope of this Statement be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or, as a practical expedient, at the loans observable market
price or the fair value of the collateral if the loan is collateral dependent.

The adoption of SFAS No. 114 did not have a material effect on financial
position and results of operations.


NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The subsidiary banks are required to maintain average reserve balances either
in vault cash or on deposit with the Federal Reserve Bank. The amount of those
reserves required at December 31, 1996 was approximately $6,231,000.

NOTE 3 - INVESTMENT SECURITIES

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Financial Accounting Standards No. 115 ("SFAS
115"), Accounting for Certain Investments in Debt and Equity Securities. This
pronouncement requires that all investments in debt securities be classified as
either HELD TO MATURITY SECURITIES, which are reported at amortized cost;
TRADING SECURITIES, which are reported at fair value, with unrealized gains and
losses included in earnings; or AVAILABLE FOR SALE SECURITIES, which are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of shareholders' equity (net of deferred
tax effect).





                                       44
<PAGE>   46

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The Company has no trading securities. During 1995, the Financial Accounting
Standards Board issued a report clarifying several provisions of SFAS 115. The
report authorized entities to "reassess the appropriateness of the
classifications of all securities" that were held when the current rule took
effect, without risking the classification of other securities, for a limited
period of time from November 15, 1995 to December 31, 1995.  Effective December
1, 1995, the Company transferred all securities from its held to maturity
category to its available for sale category, a change affecting securities with
a total amortized cost of $40,504,243 and a fair value at the time of the
transfer of $40,470,589.

At December 31, 1996, the Company's available-for-sale securities reflected net
unrealized losses of $255,937, which resulted in an decrease in stockholders'
equity of $ 153,562, net of deferred tax expense, as opposed to net unrealized
gains of $1,243,146 and a resultant increase in stockholders' equity of
$745,887,net of deferred tax benefit, at December 31, 1995.  At December 31,
1994, the investment securities reflected $1,098,484 of net unrealized losses
in available for sale securities, with a decrease to stockholders' equity, net
of deferred tax liability, of $659,091.

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, 1996 and 1995 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, 1996:
----------------------- 

SECURITIES AVAILABLE FOR SALE:

U. S. GOVERNMENT AND AGENCY SECURITIES  . . . .    $  45,886,402   $     44,259   $     795,676   $ 45,134,985

STATE AND MUNICIPAL SECURITIES  . . . . . . . .       14,885,151        592,609             -0-     15,477,760

MORTGAGE-BACKED SECURITIES  . . . . . . . . . .       26,395,689        134,301         231,430     26,298,560
                                                   -------------   ------------   -------------   ------------

                                                   $  87,167,242   $    771,169   $   1,027,106   $ 86,911,305
                                                   =============   ============   =============   ============
</TABLE>





                                       45
<PAGE>   47

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 3 - INVESTMENT SECURITIES - CONTINUED

<TABLE>
<CAPTION>
                                                                      Gross           Gross        Estimated
                                                     Amortized      Unrealized      Unrealized        Fair
                                                       Cost           Gains           Losses          Value     
                                                   -------------   ------------   -------------   ------------
As of December 31, 1995:
----------------------- 
<S>                                                <C>             <C>            <C>             <C>
Securities Available for sale:

U. S. government and agency securities  . . . .    $  30,330,431   $    249,053   $     148,640   $ 30,430,844

State and municipal securities  . . . . . . . .       15,932,988        778,266              53     16,711,201

Mortgage-backed securities  . . . . . . . . . .       22,483,297        385,876          21,356     22,847,817
                                                   -------------   ------------   -------------   ------------

                                                   $  68,746,716   $  1,413,195   $     170,049   $ 69,989,862
                                                   =============   ============   =============   ============
</TABLE>


The contractual maturities of securities held to maturity and securities
available for sale at December 31, 1996 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    
                                                                                  -------------   -------------
AS OF DECEMBER 31, 1996:
----------------------- 
<S>                                                                               <C>             <C>
SECURITIES AVAILABLE FOR SALE:
DUE IN ONE YEAR OR LESS . . . . . . . . . . . . . . . . . . . . . . . .           $   3,574,921   $  3,614,492
DUE AFTER ONE YEAR THROUGH FIVE YEARS . . . . . . . . . . . . . . . . .              25,312,891     25,012,228
DUE AFTER FIVE YEARS THROUGH TEN YEARS  . . . . . . . . . . . . . . . .              27,771,123     27,528,445
DUE AFTER TEN YEARS . . . . . . . . . . . . . . . . . . . . . . . . . .              30,508,307     30,756,140
                                                                                  -------------   ------------

                                                                                  $  87,167,242   $ 86,911,305
                                                                                  =============   ============
</TABLE>


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





                                       46
<PAGE>   48

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 3 - INVESTMENT SECURITIES - CONTINUED



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, 1996 were as
follows:

<TABLE>
<CAPTION>
                                                                      1996            1995             1994    
                                                                 -------------    ------------    -------------
  <S>                                                            <C>              <C>             <C>
  Gross realized gains  . . . . . . . . . . . . . . . . .        $     136,304    $    299,263    $     207,639
  Gross realized losses . . . . . . . . . . . . . . . . .              128,795          33,324          186,945
</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 $67,875,000 and $57,195,000 at
December 31, 1996 and 1995, respectively.



             [The remainder of this page intentionally left blank]





                                       47
<PAGE>   49

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 4 - LOANS

The subsidiary banks grant loans to customers primarily in North Central
Alabama and South Central Tennessee.

The major classifications of loans as of December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
                                                                                     1996           1995      
                                                                                 --------------  -------------
<S>                                                                              <C>             <C>
Commercial, financial and agricultural  . . . . . . . . . . . . . . . . . .      $   65,633,586  $  44,686,373
Real estate - construction  . . . . . . . . . . . . . . . . . . . . . . . .           5,262,429      5,624,260
Real estate - mortgage  . . . . . . . . . . . . . . . . . . . . . . . . . .         162,993,707    116,289,049
Consumer  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          90,682,269     73,478,703
                                                                                 --------------  -------------
                                                                                    324,571,991    240,078,385
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,809,698      2,237,612
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . .           2,424,847      2,208,798
                                                                                 --------------  -------------

Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $  320,337,446  $ 235,631,975
                                                                                 ==============  =============
</TABLE>

As of December 31, 1996, there were no loans which the Bank had specifically
classified as impaired. Other nonaccrual loans at December 31, 1996 and 1995
amounted to approximately $565,000 and $491,000, respectively. For the year
ended December 31, 1996 and 1995 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
negligible.

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


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, 1996 were as follows:
<TABLE>
<CAPTION>
                                                                      1996            1995          1994      
                                                                 -------------    ------------    ------------
<S>                                                              <C>              <C>              <C>
Balance at beginning of year  . . . . . . . . . . . . . . . .    $   2,208,798    $  1,547,834     $ 1,254,843

Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . .       (1,229,976)       (508,669)       (410,226)
Recoveries  . . . . . . . . . . . . . . . . . . . . . . . . .           82,081          81,884          64,989
                                                                 -------------    ------------     -----------
  Net charge-offs . . . . . . . . . . . . . . . . . . . . . .       (1,147,895)       (426,785)       (345,237)

Provision for loan losses . . . . . . . . . . . . . . . . . .          834,140       1,087,749         638,228

Reserves acquired through acquisitions  . . . . . . . . . . .          529,804             -0-             -0- 
                                                                 -------------    ------------    ------------

Balance at end of year  . . . . . . . . . . . . . . . . . . .    $   2,424,847    $  2,208,798    $  1,547,834
                                                                 =============    ============    ============
                                                                                                             
                                                                                                             
</TABLE>





                                       48
<PAGE>   50

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
                                                                                     1996             1995     
                                                                                 -------------     ------------
<S>                                                                              <C>               <C>
Land  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $   1,862,290     $  1,596,007
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         12,068,293        8,350,603
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .          6,200,020        5,154,110
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,143,319          832,130
Leasehold improvements  . . . . . . . . . . . . . . . . . . . . . . . . . .            535,055          434,445
                                                                                 -------------     ------------
                                                                                    21,808,977       16,367,295
Less allowance for depreciation . . . . . . . . . . . . . . . . . . . . . .          4,732,757        3,842,750
                                                                                 -------------     ------------

                                                                                 $  17,076,220     $ 12,524,545
                                                                                 =============     ============
</TABLE>

The provisions for depreciation charged to occupancy and furniture and
equipment expense for the years ended December 31, 1996, 1995 and 1994 were
$976,519, $811,339 and $620,505, respectively.

NOTE 7 - DEPOSITS

The major classifications of deposits as of December 31, 1996 and 1995 were as
follows:

<TABLE>
<CAPTION>
                                                                                      1996            1995      
                                                                                 -------------   -------------
<S>                                                                              <C>             <C>
Noninterest-bearing demand  . . . . . . . . . . . . . . . . . . . . . . . .      $  50,245,130   $   41,187,667
Interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . .         61,374,918       48,635,856
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         53,492,359       43,426,018
Time  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        154,874,881      126,426,783
Certificates of deposit of $100,000 or more . . . . . . . . . . . . . . . .         61,585,936       45,194,938
Time deposits open  . . . . . . . . . . . . . . . . . . . . . . . . . . . .         18,764,451       15,278,083
                                                                                 -------------   --------------

                                                                                 $ 400,337,675   $  320,149,345
                                                                                 =============   ==============
</TABLE>

The maturities of time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                                                                     TIME             OTHER
                                                                 CERTIFICATES         TIME
                                                                   OF DEPOSIT        DEPOSITS         TOTAL    
                                                                 -------------    ------------    -------------
<S>                                                              <C>             <C>              <C>
Three months or less  . . . . . . . . . . . . . . . . . . . .    $  14,168,323   $  18,764,451    $ 32,932,774
Over three through six months . . . . . . . . . . . . . . . .        9,051,136             -0-       9,051,136
Over six through twelve months  . . . . . . . . . . . . . . .       18,506,413             -0-      18,506,413
Over twelve months  . . . . . . . . . . . . . . . . . . . . .       19,860,064             -0-      19,860,064
                                                                 -------------   -------------    ------------

                                                                 $  61,585,936   $  18,764,451    $ 80,350,387
                                                                 =============   =============    ============
</TABLE>





                                      49
<PAGE>   51

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 8 - LONG TERM DEBT

At December 31, 1996 and 1995, the Company had notes payable totaling
$8,281,449, and $7,919,873, 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, 1995 and 1994, the amounts
outstanding were $4,269,010 and  $4,980,512, respectively, due December 17,
2002, bearing interest at a floating prime, collateralized by 100% of the
common stock of the subsidiary banks.  The note agreement contains provisions
which limit the Company's right to transfer or issue shares of subsidiary
banks' stock. Principal payments of $59,292 are due monthly; however, the
Company has the option of postponing up to twenty- four monthly principal
payments, provided that no more than six consecutively scheduled installments
are deferred.

On November 3, 1993, the Trustees of the Company's ESOP (Note 16) 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. On October 2, 1995, the ESOP acquired
7,455 additional shares with the proceeds of a second promissory note,
collateralized by the acquired shares. On May 17, 1996, these two notes were
refinanced and an additional 58,000 shares of stock were obtained by the ESOP
with a promissory note with a beginning balance of $2,183,805. The Company has
guaranteed this debt; accounting and reporting guidelines mandate that the debt
be 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. This note was originally secured
by 117,847 shares of the Company's common stock. The note bears interest at a
floating rate, with principal and interest payments of $23,948 due monthly
through June 17, 2018, with all remaining principal, if any, due upon that
date. The shares securing the note are released proratably by the lender as
monthly payments of principal and interest are made. The outstanding balance of
this note was $2,119,891 at December 31, 1996, secured by 112,121 of unreleased
shares of Company stock .

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 
$1,892,548 and $1,944,163 at December 31, 1996 and 1995.

Maturities of long-term debt following December 31, 1996 are as follows:

<TABLE>
                 <S>                           <C>
                 1997 . . . . . . . . . .      $     883,743
                 1998 . . . . . . . . . .            897,278
                 1999 . . . . . . . . . .            912,885
                 2000 . . . . . . . . . .            929,288
                 2001 . . . . . . . . . .            947,036
                 Thereafter . . . . . . .          3,711,219
                                               -------------
                                               $   8,281,449
                                               =============
</TABLE>





                                       50
<PAGE>   52

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 9 - OTHER OPERATING EXPENSES

Other operating expenses consist of the following:
<TABLE>
<CAPTION>
                                                                             Years Ended December 31,          
                                                                -----------------------------------------------
                                                                     1996             1995             1994    
                                                                -------------    -------------    -------------
  <S>                                                           <C>              <C>              <C>
  Amortization of intangibles . . . . . . . . . . . . . . .          $274,826    $     123,432    $     126,764
  Advertising . . . . . . . . . . . . . . . . . . . . . . .           229,087          197,208          249,514
  Insurance . . . . . . . . . . . . . . . . . . . . . . . .           223,696          494,703          725,383
  Professional fees . . . . . . . . . . . . . . . . . . . .           250,105          247,034          218,426
  Supplies  . . . . . . . . . . . . . . . . . . . . . . . .           546,697          379,607          213,208
  Other . . . . . . . . . . . . . . . . . . . . . . . . . .         1,740,704        1,409,538        1,128,501
                                                                -------------    -------------    -------------

                                                                $   3,265,115    $   2,851,522    $   2,661,796
                                                                =============    =============    =============
</TABLE>


NOTE 10 - INCOME TAXES

Federal and state income taxes receivable and (payable) as of December 31, 1996
and 1995 included in other assets and other liabilities, respectively, were as
follows:

<TABLE>
<CAPTION>
                                                                                      1996            1995     
                                                                                  ------------    -------------
               <S>                                                                <C>             <C>
               Current
                 Federal  . . . . . . . . . . . . . . . . . . . . . . . . .       $    423,512    $     249,480
                                                                                  ============    =============

                 State  . . . . . . . . . . . . . . . . . . . . . . . . . .       $    172,845    $     (81,817)
                                                                                  ============    ============= 
</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>
                                                                                      1996            1995     
                                                                                  ------------    -------------
  <S>                                                                             <C>             <C>
  Deferred tax asset:
   Federal  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $    980,544    $     866,592
   State  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            162,413          138,127
                                                                                  ------------    -------------
     Total gross deferred income tax asset  . . . . . . . . . . . . . . . .          1,142,957        1,004,719
                                                                                  ------------    -------------
  Deferred tax liability:
   Federal  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (552,729)        (889,014)
   State  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (83,323)        (147,108)
                                                                                  ------------    ------------- 
     Total gross deferred income tax liability  . . . . . . . . . . . . . .           (636,052)      (1,036,122)
                                                                                  ------------    -------------  

  Net deferred income tax asset (liability) . . . . . . . . . . . . . . . .       $    506,905    $     (31,403)
                                                                                  ============    ============= 
</TABLE>





                                      51
<PAGE>   53


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





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>
                                                                                      1996             1995    
                                                                                  ------------    -------------
  <S>                                                                             <C>             <C>
  Alternative minimum tax credit carryover  . . . . . . . . . . . . . . . .       $        -0-    $     29,293
  Net unrealized gains (losses) on securities
   available for sale   . . . . . . . . . . . . . . . . . . . . . . . . . .            102,375        (497,258)
  Depreciation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (599,839)       (511,835)
  Pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             88,891         139,263
  Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . .            629,884         666,057
  Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . .            128,539          49,068
  Provision for debt cancellation . . . . . . . . . . . . . . . . . . . . .            109,193          70,296
  Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             47,863          23,713
                                                                                  ------------    ------------
                                                                                  $    506,906    $    (31,403)
                                                                                  ============    ============ 
</TABLE>


The components of income tax expense for each of the years ended December 31,
1996, 1995 and 1994 were:

<TABLE>
<CAPTION>
                             1996                            1995                             1994                  
                  ---------------------------    -----------------------------    ----------------------------
                     CURRENT       DEFERRED         Current         Deferred         Current        Deferred  
                  ------------   ------------    ------------    -------------    ------------    ------------
<S>               <C>            <C>             <C>             <C>              <C>             <C>
Federal . . .     $  1,164,205   $     59,451    $    739,420    $   (366,403)    $    769,490    $     29,000
State . . . .          200,815          1,873         132,612         (74,632)         106,288           9,024
                  ------------   ------------    ------------    ------------     ------------    ------------
                  $  1,365,020   $     61,324    $    872,032    $   (441,035)    $    875,778    $     38,024
                  ============   ============    ============    ============     ============    ============
</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>
                                                      1996             1995            1994   
                                                 ------------    -------------    ------------
   <S>                                           <C>             <C>              <C>
   Depreciation   . . . . . . . . . . . .        $    88,004     $     72,485     $     80,025
   Provision for loan losses  . . . . . .             36,173         (221,584)         (89,979)
   Pension expense  . . . . . . . . . . .                                      
                                                      50,372          (38,066)            (144)
   Alternative minimum                                                         
     tax credit   . . . . . . . . . . . .             29,293           48,685          (77,978)
   Change in valuation                                                         
     allowance  . . . . . . . . . . . . .                -0-         (172,045)          89,979
   Other  . . . . . . . . . . . . . . . .           (142,518)        (130,510)          36,121
                                                 -----------     ------------     ------------
                                                                               
                                                 $    61,324     $   (441,035)    $     38,024
                                                 ===========     ============     ============
</TABLE>





                                      52
<PAGE>   54

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 10 - INCOME TAXES - CONTINUED

Tax effects of securities transactions resulted in an increase in income taxes
for 1996, 1995 and 1994 of $3,004, $106,376 and $8,278, 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,        
                                                                     ----------------------------------------------
                                                                          1996            1995             1994    
                                                                     -------------    ------------    -------------
  <S>                                                                     <C>            <C>              <C>
  Statutory federal income tax rates  . . . . . . . . . . .               34.0%           34.0%            34.0%
  Effect on rate of:
   Tax-exempt securities  . . . . . . . . . . . . . . . . .               (6.3)          (12.3)           (10.7)
   Tax-exempt loan income   . . . . . . . . . . . . . . . .               (2.8)           (3.4)            (5.3)
   State income tax, net of federal tax benefit   . . . . .                2.2             2.5              1.9
   Bad debt expense limitation  . . . . . . . . . . . . . .                - -             - -              2.1
   Reduction of valuation reserve   . . . . . . . . . . . .                - -            (4.6)             - -
   Interest expense disallowance  . . . . . . . . . . . . .                0.9             1.6              1.2
   Donation of appreciated fixed asset  . . . . . . . . . .                - -            (3.2)             - -
   Other items  . . . . . . . . . . . . . . . . . . . . . .                1.2            (0.9)             2.2
                                                                       -------         -------          -------
                                                                                                        
  Effective income tax rate . . . . . . . . . . . . . . . .               29.2%           13.7%            25.4%
                                                                       =======         =======          ======= 
</TABLE>


NOTE 11 - PRIOR PERIOD ADJUSTMENT

A prior period adjustment was recorded during 1995 to correct an error made in
the calculation of income taxes for the year ended December 31, 1994. Community
Bank (Tennessee) was denied eligibility for an historic rehabilitation tax
credit which resulted in an increase of income tax expense for the year ended
December 31, 1994 of $129,092, and a decrease in net earnings of the same
amount. Earnings per share were reduced from $1.67, as originally reported, to
$1.60.


NOTE 12 - SHAREHOLDERS' EQUITY


Effective October 1, 1993, the Company offered a maximum of 600,000 shares of
its $.10 par value common stock at $15 per share with the anticipation of
raising up to $9,000,000 of capital.  As of December 31, 1993,  535,999 shares
had been issued, raising $7,959,139 of capital after reduction of offering
costs.  On February 11, 1994  the offering was closed upon full subscription of
all shares offered for sale, raising an additional $957,603 of capital after
offering costs.





                                      53
<PAGE>   55

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

On October 4, 1994, the Company purchased 115,978 shares of Common Stock,
including 7,144.384 shares vested under the ESOP, from Jeffrey K. Cornelius, a
former director and officer of the Company, at a price per share of
approximately $25. The Company paid Mr. Cornelius $899,460 in cash and issued
to him a subordinated promissory note in the original amount of $2,000,000.
Such note bears interest on the outstanding principal amount at a rate of 7.0%
per annum, is payable in 240 equal monthly installments of principal and
interest, and may be repaid in whole or in part at any time without penalty. In
addition, the Company conveyed to Mr. Cornelius a 1994 automobile valued at
approximately $25,200, free of any liens or encumbrances, and a life insurance
policy, which had no cash surrender value, in the amount of $100,000, the
premiums for which were thereafter assumed by Mr. Cornelius. The price per
share paid to Mr. Cornelius by the Company exceeded $18.50 per share, the
valuation provided to the Company at December 31, 1994 from an independent
appraisal for the purposes of shares held by the ESOP, and $18.00 per share,
the next highest trading price per share reported to the Company during 1994.
The $18.50 per share valuation was expressly limited by the independent
appraiser for purposes of valuing the Common Stock to be utilized for the ESOP.
The shares purchased from Mr. Cornelius are being offered hereby at a price per
share of $20.00, which is $5 per share less than the amount paid by the Company
to Mr.  Cornelius for such shares.

Management believes that the price per share paid by the Company for Mr.
Cornelius' shares represented the fair value of such shares at the date of the
purchase. The 115,978.384 shares of Common Stock acquired by the Company from
Mr.  Cornelius comprised approximately 6.68% of the outstanding shares of
Common Stock, which represented the third largest block of Common Stock
outstanding. Management determined that the acquisition of such block of shares
by a person with a view toward exerting control or substantial influence with
respect to the management, policies and operations of the Company could have
proved detrimental to the efficiency and profitability of the Company and,
therefore, was not in the best interests of the shareholders of the Company. In
addition, management determined that Mr. Cornelius would likely have attempted
to sell his shares of Common Stock to persons in the Company's market area, and
that such an attempt by Mr. Cornelius, who had a long and prominent association
with the Company, may have negatively impacted the Company's financial
condition and results of operations. There is no active trading market for the
Common Stock, and, accordingly, there is a limited amount of information
available regarding the market value of the Common Stock. No other trades of
Common Stock were reported to the Company during the fourth quarter of 1994.
Management did not obtain any independent advice, appraisal or other evidence
to evaluate whether the price per share paid to Mr. Cornelius was economically
justified. Such purchase price was determined based upon management's
subjective determination of the fair value of such shares. Management was not
aware of other bona fide offers to purchase Mr. Cornelius' shares of Common
Stock.

In January of 1997, the Board of Directors of the Company declared a dividend
of $.75 per share to shareholders of record as of January 8, 1997;a dividend of
$.50 per share was declared and paid in January of both 1996 and 1995. 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).





                                       54
<PAGE>   56

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

Also on January 9, 1995, the Board of Directors passed a resolution authorizing
the preparation of a Registration Statement for the proposed sale of 312,161
shares of the Company's $.10 par value common stock, consisting of the
Company's 115,978 shares of treasury stock and 196,183 newly issued shares. On
June 13, 1996, the offering was closed upon full subscription of all shares
offered for sale, raising $6,175,898 of capital after reduction for offering
costs.

On March 28, 1996, the Company issued a total of 87,500 options to purchase its
common shares to its directors. 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 $20.00 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, and 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.

A deferred compensation expense of $175,000 was recorded by the Company for the
year ended December 31, 1996 to reflect the estimated rise in market value of
the options between their issuance date and December 31, 1996.

These options have been treated as common stock equivalents and have been
included in the calculation of average common shares outstanding , causing the
equivalent average number of shares outstanding for  1996 to rise by 65,527
shares. The dilutative effect on earnings per share for the year ended December
31, 1996 was $.07. There was no dilutative effect on the book value of the
Company's common shares at September 30, 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 1996 or
1995.  Following is a discussion of these commitments:





                                       55
<PAGE>   57

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

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, 1996 and 1995, the Company has issued standby letters of credit of
approximately $522,000 and $599,000, 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, 1996 and 1995, the Company had
commitments outstanding to extend credit totaling approximately $6,471,000 and
$5,118,000, 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:  The Company and its subsidiaries are parties to 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.


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 $3,887,000 and $2,827,000 of the unused commitment
balances at December 31, 1996 and 1995.  All remaining commitments consist
primarily of unused real estate draw 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 $2,449,619 and
$3,337,127, at December 31, 1996 and 1995, respectively.





                                       56
<PAGE>   58

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




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.  Employees who are expected to work
1,000 hours in any calendar year become participants in the Pension Plan on
January 1 of each year.  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 the later of age 65 or five years after the date of
employment.  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 five year period prior to the retirement or termination of
employment.  A participant is 20% vested in his accrued benefits after
completion of two years of service.  Vesting increases 20% per year for the
next four years with the participant becoming fully vested upon completion of
six years of service.  An employee who completes ten years of service and
attains age fifty-five 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
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 1987. The costs of this
plan are included with those of the regular pension plan in the schedules
below.

Net pension cost for 1996, 1995 and 1994 is composed of the following:

<TABLE>
<CAPTION>
                                                                      1996            1995             1994    
                                                                 -------------    ------------    -------------
  <S>                                                            <C>              <C>             <C>
  Service . . . . . . . . . . . . . . . . . . . . . . . . .      $     313,943    $    275,078    $     222,624
  Interest cost on projected benefit obligations  . . . . .            284,151         240,496          187,062
  Actual return on assets . . . . . . . . . . . . . . . . .           (170,590)       (276,487)          (9,652)
  Net amortization and deferral . . . . . . . . . . . . . .            (16,714)        129,395         (160,235)
                                                                 -------------    ------------    -------------  

   Net periodic pension cost  . . . . . . . . . . . . . . .      $     410,790    $    368,482    $     239,799
                                                                 =============    ============    =============
</TABLE>





                                       57
<PAGE>   59

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 15 - PENSION PLAN - CONTINUED

The following table sets forth the funding status of the plan and the amount
recognized in the Company's consolidated statements of financial condition at
December 31:
<TABLE>
<CAPTION>
                                                                                     1996             1995     
                                                                                  ------------    -------------
  <S>                                                                             <C>             <C>
  Actuarial present value of benefit obligations:
   Vested   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $  2,667,863    $   2,194,125
   Nonvested  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           64,302          136,714
                                                                                  ------------    -------------

  Accumulated benefit obligation  . . . . . . . . . . . . . . . . . . . . . .     $  2,732,165    $   2,330,839
                                                                                  ============    =============

  Actuarial present value of projected benefit obligation . . . . . . . . . .     $  4,131,683    $   3,487,863
  Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . .        3,131,790        2,650,676
                                                                                  ------------    -------------
   Projected benefit obligation in excess of plan assets  . . . . . . . . . .         (999,893)        (837,187)
  Unamortized net assets at transition  . . . . . . . . . . . . . . . . . . .          (88,189)        (105,068)
  Unrecognized net loss (gain)  . . . . . . . . . . . . . . . . . . . . . . .          178,453           (1,122)
  Prior service cost not yet recognized in net periodic pension cost  . . . .          408,806          455,412
                                                                                  ------------    -------------

  Non-current pension liability . . . . . . . . . . . . . . . . . . . . . . .     $   (500,823)   $    (487,965)
                                                                                  ============    ============= 
</TABLE>


The weighted average discount rate and rate of increase in future compensation
levels used in determining actuarial present value of the projected benefit
obligations were eight  percent and six percent, respectively, for 1996 and
1995.  The assumed long-term rate of return on plan assets in 1996 and 1995 was
eight percent.


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.  Employees who work 1,000 hours in
any consecutive twelve month period become participants in the ESOP on December
31 of that year, and remain eligible in every subsequent year in which 1,000
hours of work are completed.  Employer contributions, which are made at the
discretion of the Company's Board of Directors, are allocated to eligible
participants in proportion to their eligible pay, which equals W-2 wages plus
pre-tax reductions for the Company's cafeteria plan.  The Internal Revenue
Service imposes a limit ($150,000 in 1996) on the maximum amount of eligible
pay under the plan.





                                       58
<PAGE>   60

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED

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.  On October 2, 1995, the ESOP acquired 7,455 additional shares
with the proceeds of a second promissory note, collateralized by the acquired
shares. On May 17, 1996, these two notes were refinanced and an additional
58,000 shares of stock were obtained by the ESOP. These shares were funded with
the same promissory note which provided funds to refinance the previously
executed notes. This new note was originally secured by 117,847 shares of the
Company's common stock. The shares securing the note are released proratably by
the lender as monthly payments of principal and interest are made. The note is
guaranteed by the Company. As of December 31, 1996, there were 112,121
unreleased shares with a fair value of approximately $2,467,000.  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 indebtness of its sponsored ESOP on its
financial statement and reduce its stockholder's 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 ($152,822 and $83,947 in 1996 and 1995, 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, 1996, the Company's financial statements reflect long term debt
and a corresponding contra-equity account, as a result of the ESOP debt, of
$2,119,891.

Company contributions to the ESOP amounted to $288,878, $254,687 and $276,991,
for 1996, 1995 and 1994, respectively.


NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Dividends paid by Community Bank (Alabama) 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 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.  At December 31, 1996,
Community Bank (Alabama) could have declared dividends of $7,697,144 without
approval of regulatory authorities.





                                       59
<PAGE>   61

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 18 - REGULATORY CAPITAL

The Company and its subsidiary banks are subject to various regulatory capital
requirements abministered 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 banks 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 banks 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, 1996, that the Bank meets all capital adequacy requirements to
which it is subject.

As of December 31, 1996, the Company and both of its banking subsidiaries are
classified as well capitalized under the financial institution regulatory
framework. To be categorized as well capitalized the Company and each 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 that management believes have changed the institution's category.

<TABLE>
<CAPTION>
                                                                        For Capital               To Be
                                                   Actual             Adequacy Purposes       Well Capitalized 
                                             -------------------   --------------------    --------------------
                                                 Amount    Ratio     Amount       Ratio       Amount     Ratio
                                             ----------   ------   ---------      -----    ---------     ------
                                                                      (In Thousands)
<S>                                            <C>        <C>       <C>            <C>     <C>           <C>
As of December 31, 1996:
 Total Capital
   (to Risk Weighted Assets):
  Consolidated                                 $ 34,076    11.45%   $ 23,835       8.00%   $  29,794     10.00% 
  Community Bank - AL                            31,999    11.56      22,143       8.00       27,679     10.00   
  Community Bank - TN                             5,610    28.63       1,568       8.00        1,960     10.00   
 Tier 1 Capital                                                                                                  
   (to Risk Weighted Assets):                                                                                    
  Consolidated                                 $ 29,941    10.06%   $ 11,906       4.00%   $  17,859      6.00% 
  Community Bank - AL                            29,845    10.78      11,071       4.00       16,607      6.00  
  Community Bank - TN                             5,368    27.39         784       4.00        1,176      6.00  
 Tier 1 Capital                                                                                                 
   (to Average Assets):                                                                                         
  Consolidated                                 $ 29,941     9.20%   $ 13,119       4.00%   $  16,274      5.00% 
  Community Bank - AL                            29,845    10.13      11,780       4.00       14,725      5.00
  Community Bank - TN                             5,368    21.71         989       4.00        1,236      5.00
</TABLE>





                                      60
<PAGE>   62

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 18 - REGULATORY CAPITAL - CONTINUED

<TABLE>
<CAPTION>
                                                                      For Capital                To Be
                                                   Actual           Adequacy Purposes       Well Capitalized 
                                             -------------------   --------------------    --------------------
                                               Amount     Ratio     Amount       Ratio       Amount      Ratio
                                             ----------   ------   ---------     ------    ---------     -----
                                                                      (In Thousands)
<S>                                            <C>        <C>       <C>            <C>     <C>            <C>
As of December 31, 1995:
 Total Capital
   (to Risk Weighted Assets):
  Consolidated                                 $ 32,256   14.10%    $ 18,297       8.00%   $  22,871      10.00%
  Community Bank - AL                            31,999   12.54       16,384       8.00       20,479      10.00
  Community Bank - TN                             5,610   27.71        1,343       8.00        1,679      10.00
 Tier 1 Capital                                                                                                
   (to Risk Weighted Assets):                                                                                  
  Consolidated                                 $ 28,273   12.36%    $  9,149       4.00%   $  13,723       6.00%
  Community Bank - AL                            24,240   11.84        8,192       4.00       10,240       6.00
  Community Bank - TN                             4,418   26.31          672       4.00          840       6.00
 Tier 1 Capital                                                                                                
   (to Average Assets):                                                                                        
  Consolidated                                 $ 28,273    8.61%    $ 13,130       4.00%   $  16,412       5.00%
  Community Bank - AL                            24,240    8.51       11,891       4.00       14,864       5.00
  Community Bank - TN                             4,418   17.87          989       4.00        1,236       5.00
</TABLE>


NOTE 19 - RELATED PARTY TRANSACTIONS

Loans:  Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
subsidiary bank during 1996 and 1995.  Such loans are made in the ordinary
course of business at normal credit terms, including interest rates and
collateral and do not represent more than a normal risk of collection.  Total
loans to these persons at December 31, 1996 and 1995, amounted to $8,587,341
and $9,625,231, respectively.  An analysis of activity during 1996 in loans to
related parties resulted in additions of $5,134,157 representing new loans,
reductions of $7,033,207, representing payments, and an increase of $861,160
representing a change in the composition of related parties.

Leases:  Community Bank (Alabama) had lease agreements which expired in August
1995 with Com-Pac, a partnership composed of Kennon R. Patterson, Sr.and Bishop
K. Walker, Jr., both of whom are directors and officers of the Company, for the
lease of land and banking facilities.  Lease expense on these properties
amounted to $85,968, $143,352 and $142,552 for the years ended December 31,
1995, 1994 and 1993, respectively. Upon termination of the  lease agreements,
Community Bank (Alabama) purchased the properties at the expiration of the
leases for a total of $1,093,106.





                                      61
<PAGE>   63

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 19 - RELATED PARTY TRANSACTIONS - CONTINUED

Maintenance Contract:  Community Bank (Alabama) 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 seventeen of the Bank's locations.  Maintenance expense
under this contract amounted to $64,875 for the year ended December 31, 1996, a
monthly average of $318 per location. Royal Acres, a partnership composed of
Kennon R. Patterson, Sr. and Bishop K. Walker, Jr., both of whom are directors
and officers of the Company, held this contract for 1995 and 1994. Maintenance
expense under this contract amounted to $80,347 and  $60,000 for the each of
the years ended December 31, 1995 and 1994.

Interior Design :  Community Bank (Alabama) and Community Bank (Tennesse) 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, carpets, wallcoverings,
drapes, and accessories for Community Bank (Alabama) new bank facilities at
Rainsville and Rogersville; for furnishing temporary facilities in Cleveland
and Haleyville; for remodeling and refurnishing the acquired facility in
Uniontown; for facilities under construction at the headquarters in
Blountsville; and various facelifts and furnishings at other offices of
Community Bank (Alabama), Community Bank (Tennessee), and 1st Community Credit
Corporation,  totaling $377,897 in 1996.  Payments for similar services totaled
$203,649 in 1995.

The purchases were made at a cost more favorable than could be obtained from
unrelated parties.

NOTE 20 - 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 2006.  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,
1996, 1995 and 1994, rental expense for operating leases was approximately
$176,942, $160,588, and $232,122, respectively.

Future minimum lease payments for all leases at December 31, 1996 are as
follows:

<TABLE>
<CAPTION>
                                                  OPERATING  
                                                -------------
 <S>                                            <C>
 Years Ending December 31,
 1997 . . . . . . . . . . . . . . . . . .       $     179,067
 1998 . . . . . . . . . . . . . . . . . .             136,807
 1999 . . . . . . . . . . . . . . . . . .             119,612
 2000 . . . . . . . . . . . . . . . . . .             102,422
 2001 . . . . . . . . . . . . . . . . . .             101,406
 Thereafter . . . . . . . . . . . . . . .             511,165
                                                -------------

 Total minimum lease payments . . . . . .       $   1,150,479
                                                =============
</TABLE>





                                       62
<PAGE>   64

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 21 - BUSINESS COMBINATIONS


On January 12, 1996, Community Bank (Alabama) opened a branch bank in
Haleyville, Alabama as a result of the acquisition of certain assets and the
assumption of certain liabilities from Compass Bank. The Bank assumed
liabilities of $31.3 million in exchange for assets of $12.4 million, a premium
of $2.2 million, and cash of $16.7 million.On July 12, 1996, the Company
acquired the assets and assumed the liabilities of the Uniontown, Alabama
branch of a Compass Bank. The liabilities assumed in the transaction totaled
$12.3 million, and  non-cash assets acquired totaled $29.7 million.
Accordingly, the resultant cash disbursement by the Company, including of the
premium of $261,000 paid for the branch's deposits, was $17.7 million.

In late 1995, the Company incorporated 1st Community Credit Corporation as a
subsidiary of Community Bank (Alabama).  This subsidiary was created for the
purpose of establishing  finance offices in selected north Alabama and south
central Tennessee communities. It was operating 6 offices in north Alabama as
of December 31, 1996.


NOTE 22 - OTHER SHORT-TERM BORROWINGS

Other short-term borrowings at December 31, 1996 and 1995 consisted of the U.S.
Treasury Tax and Loan Note Option account, federal funds purchased and
securities sold under agreements to repurchase.

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

<TABLE>
<CAPTION>
                                                                                     1996             1995     
                                                                                  ------------    -------------
<S>                                                                               <C>             <C>
Average balance during the year . . . . . . . . . . . . . . . . . . . . . .       $  1,416,555    $   1,573,931
Average interest rate during the year . . . . . . . . . . . . . . . . . . .               6.31%            6.24%
Maximum month-end balance during the year . . . . . . . . . . . . . . . . .          1,337,698        1,611,900

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

Carrying Value  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $  2,794,499    $   2,875,812
Estimated Fair Value  . . . . . . . . . . . . . . . . . . . . . . . . . . .          2,794,499        2,875,812
</TABLE>





                                     63
<PAGE>   65

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 23 - 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 acked 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.





                                     64
<PAGE>   66

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The estimated fair values of the Company's financial instruments as of December
31, 1996 and 1995 are as follows:

<TABLE>                                    
<CAPTION>
                                                           1996                               1995
                                                ----------------------------     -----------------------------
                                                 Carrying           Fair           Carrying           Fair
                                                  Amount           Value            Amount           Value    
                                                ------------    ------------     ------------     ------------
                                                       (in Thousands)                   (in Thousands)
  <S>                                           <C>             <C>              <C>              <C>
  FINANCIAL ASSETS:
   Cash and short-term investments  . . .       $     19,386    $     19,386     $     38,350     $     38,350
   Investment securities  . . . . . . . .             86,911          86,911           69,990           69,990
   Loans  . . . . . . . . . . . . . . . .            322,763                          237,841
   Less: allowance for losses   . . . . .              2,425                            2,209
                                                ------------                     ------------
   Net Loans  . . . . . . . . . . . . . .            320,338         322,414          235,632          237,816
                                                ------------    ------------     -------------    ------------
   TOTAL FINANCIAL ASSETS   . . . . . . .       $    426,635    $    428,711     $    343,972     $    346,156
                                                ============    ============     ============     ============
                                                                                        
  FINANCIAL LIABILITIES:
   Deposits   . . . . . . . . . . . . . .       $    400,337    $    400,419     $    320,150     $    321,422
   Short-term borrowings  . . . . . . . .              8,377           8,377            2,009            2,009
   Long-term debt   . . . . . . . . . . .              8,281           7,692            7,920            9,521
                                                ------------    ------------     ------------     ------------

   TOTAL FINANCIAL LIABILITIES  . . . . .       $    416,995    $    416,488     $    331,079     $    332,952
                                                ============    ============     ============     ============

  UNRECOGNIZED FINANCIAL INSTRUMENTS:
   Commitments to extend credit   . . . .       $      6,471    $      6,471     $      5,118     $      5,118
   Standby letters of credit  . . . . . .                522             522              599              599
                                                ------------    ------------     ------------     ------------
   TOTAL UNRECOGNIZED
     FINANCIAL INSTRUMENTS  . . . . . . .       $      6,993    $      6,993     $      5,717     $      5,717
                                                ============    ============     ============     ============
</TABLE>





                                     65
<PAGE>   67

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 24 - CONDENSED PARENT COMPANY INFORMATION



STATEMENTS OF FINANCIAL CONDITION

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

                                                                                      1996             1995    
                                                                                --------------   --------------
<S>                                                                             <C>              <C>
  ASSETS
   Cash and due from banks  . . . . . . . . . . . . . . . . . . . . . . . .     $     225,733    $   3,302,073
   Investment securities  . . . . . . . . . . . . . . . . . . . . . . . . .         1,038,018        1,996,517
   Interest-bearing deposits with other banks   . . . . . . . . . . . . . .            79,781          193,031
   Investment in subsidiaries (equity method) -
     eliminated upon consolidation  . . . . . . . . . . . . . . . . . . . .        37,830,568       29,655,444
   Premises and equipment, net  . . . . . . . . . . . . . . . . . . . . . .            87,139           63,802
   Intangibles, net   . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,310,540        1,423,652
   Other assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           942,425          783,149
                                                                                -------------    -------------

         TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . .     $  41,514,204    $  37,417,668
                                                                                =============    =============



LIABILITIES AND SHAREHOLDERS' EQUITY
   Long-term debt   . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $   8,281,449    $   7,919,873  
   Other liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . .           673,969          478,558  
                                                                                -------------    -------------  
         TOTAL LIABILITIES  . . . . . . . . . . . . . . . . . . . . . . . .         8,955,418        8,398,431  
                                                                                                                
         TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . .        32,558,786       29,019,237  
                                                                                -------------    -------------  
                                                                                                                
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . .     $  41,514,204    $  37,417,668  
                                                                                =============    =============  
</TABLE>





                                     66
<PAGE>   68

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 24 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED



STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,          
                                                                -----------------------------------------------

                                                                     1996             1995             1994    
                                                                -------------    -------------    -------------
<S>                                                             <C>              <C>              <C>
  INCOME
   From subsidiaries - eliminated upon consolidation
     Dividends  . . . . . . . . . . . . . . . . . . . . .       $   1,103,482    $   2,017,056    $   1,150,058
     Management fees  . . . . . . . . . . . . . . . . . .             575,000          300,000          145,000
     Interest . . . . . . . . . . . . . . . . . . . . . .             143,649           47,710           24,408
     Other Income . . . . . . . . . . . . . . . . . . . .               3,904          178,998          272,109
                                                                -------------    -------------    -------------
                                                                    1,826,035        2,543,764        1,591,575
                                                                -------------    -------------    -------------
  EXPENSES
   Salaries and employee benefits   . . . . . . . . . . .           1,472,670        1,155,789          411,098
   Interest   . . . . . . . . . . . . . . . . . . . . . .             522,884          713,616          599,025
   Other expenses   . . . . . . . . . . . . . . . . . . .             445,751          381,922          357,021
                                                                -------------    -------------    -------------
                                                                    2,441,305        2,251,327        1,367,144
                                                                -------------    -------------    -------------
(Loss) income before income taxes and equity in
   undistributed earnings of subsidiaries   . . . . . . .            (615,270)         292,437          224,431
 Income tax benefit . . . . . . . . . . . . . . . . . . .            (597,778)        (611,918)        (309,620)
                                                                -------------    -------------    ------------- 

(Loss) income before equity in undistributed earnings
   of subsidiaries  . . . . . . . . . . . . . . . . . . .             (17,492)         904,355          534,051
 Equity in undistributed earnings of subsidiaries . . . .           3,476,478        1,800,443        2,153,903
                                                                -------------    -------------    -------------

            NET INCOME  . . . . . . . . . . . . . . . . .       $   3,458,986    $   2,704,798    $   2,687,954
                                                                =============    =============    =============
</TABLE>





                                     67
<PAGE>   69

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES




NOTE 24 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,          
                                                                -----------------------------------------------
                                                                    1996             1995             1994     
                                                                -------------    -------------    -------------
<S>                                                             <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income  . . . . . . . . . . . . . . . . . . . . . . .     $  3,458,986     $   2,704,798    $  2,687,954
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Equity in undistributed income of subsidiaries . . . .       (3,476,478)       (1,800,443)     (2,153,903)
     Provision for depreciation, amortization and accretion           23,426           (28,981)        (88,446)
     Realized investment security losses (gains)  . . . . .              -0-               (45)            172
     Increase (decrease) in other assets  . . . . . . . . .           43,489           (48,984)       (624,276)
     Decrease (increase) in other liabilities . . . . . . .           (8,623)          200,985        (671,511)
                                                                ------------     -------------    ------------          
                 NET CASH PROVIDED BY (USED IN)
                   OPERATING ACTIVITIES . . . . . . . . . .           40,800         1,027,330        (850,010)
                                                                ------------     -------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of securities available for sale . . . . . . . .       (9,010,957)      (10,846,042)    (18,797,778)
  Proceeds from maturity of securities available for sale         10,073,749        11,991,539      21,996,058
  Decrease (increase) in interest-bearing deposits with banks        113,250           329,092        (522,123)
  Proceeds from sale of assets  . . . . . . . . . . . . . .           23,315             5,500          29,899
  Capitalization of bank subsidiaries . . . . . . . . . . .       (5,600,000)       (4,000,000)            -0-
  Capital expenditures  . . . . . . . . . . . . . . . . . .          (58,085)           (1,415)        (64,562)
                                                                ------------     -------------    ------------ 
         NET CASH PROVIDED BY (USED IN)
          INVESTING ACTIVITIES  . . . . . . . . . . . . . .       (4,458,728)       (2,521,326)      2,641,494
                                                                ------------     -------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of long-term debt . . . . . . . . . . . . . . .         (763,117)         (759,638)       (707,354)
  Issuance of common stock  . . . . . . . . . . . . . . . .        3,013,493           842,837         957,603
  Sale (purchase) of treasury stock . . . . . . . . . . . .              -0-         2,319,568        (899,460)
  Cash dividends  . . . . . . . . . . . . . . . . . . . . .         (908,788)         (809,630)            -0-
                                                                ------------     -------------    ------------
         NET CASH PROVIDED BY (USED IN)
          FINANCING ACTIVITIES  . . . . . . . . . . . . . .        1,341,588         1,593,137        (649,211)
                                                                ------------     -------------    ------------  

Net (decrease) increase in cash and cash equivalents  . . .       (3,076,340)           99,141       1,142,273

Cash and due from banks at beginning of year  . . . . . . .        3,302,073         3,202,932       2,060,659
                                                                ------------     -------------   -------------

CASH AND DUE FROM BANKS AT END OF YEAR  . . . . . . . . . .     $    225,733     $   3,302,073    $  3,202,932
                                                                ============     =============    ============
</TABLE>





                                     68
<PAGE>   70

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES





NOTE 24 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED


<TABLE>
<CAPTION>
                                                                            Years Ended December 31,           
                                                             --------------------------------------------------
                                                                    1996             1995             1994     
                                                             ----------------    -------------    -------------
<S>                                                             <C>              <C>              <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid (received) during the year for:
   Interest   . . . . . . . . . . . . . . . . . . . . . . .     $     526,437    $     715,506    $     585,358
   Income taxes   . . . . . . . . . . . . . . . . . . . . .          (393,793)        (598,012)         474,057
</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 $1,260,007
  on May 17, 1996 and of $137,918 on October 2, 1995, long-term debt was
  increased and equity was decreased . The debt was reduced and shares were
  released by $135,314 and $171,360, respectively, during each of the years
  ended December 31, 1996 and 1995 as a result of payments made by the
  Company's ESOP on the outstanding ESOP debt.

  During 1994, treasury stock in the amount of $2,899,460 was acquired for cash
  and the assumption of a $2,000,000 subordinated capital installment note. All
  of the treasury stock was re-issued during 1995.





                                     69
<PAGE>   71

                        QUARTERLY RESULTS (UNAUDITED)

A summary of the unaudited results of operations for each quarter of 1996 and
1995 follows:


<TABLE>
<CAPTION>
                                                                 First        Second       Third        Fourth
                                                                 Quarter      Quarter      Quarter      Quarter
                                                                --------     --------    ---------    ---------
                                                                      (In Thousands Except Per Share Data)
<S>                                                             <C>          <C>         <C>          <C>
1996:
TOTAL INTEREST INCOME . . . . . . . . . . . . . . . . . . .     $  7,593     $  8,039    $   8,848    $  9,120
TOTAL INTEREST EXPENSE  . . . . . . . . . . . . . . . . . .        4,179        4,278        4,460       4,509
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . .          128          149          206         351
NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . .        3,286        3,612        4,182       4,260
INVESTMENT SECURITIES GAINS (LOSSES)  . . . . . . . . . . .          -0-           (7)          26         (12)
TOTAL NONINTEREST INCOME  . . . . . . . . . . . . . . . . .          930        1,055        1,214       1,241
TOTAL NONINTEREST EXPENSE . . . . . . . . . . . . . . . . .        3,308        3,583        3,771       4,240
INCOME TAX EXPENSE  . . . . . . . . . . . . . . . . . . . .          237          305          517         367
NET INCOME  . . . . . . . . . . . . . . . . . . . . . . . .          671          772        1,134         882

PER COMMON SHARE:
 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . .          .37          .40          .58         .44


1995:
Total interest income . . . . . . . . . . . . . . . . . . .     $  5,998     $  6,400    $   6,791    $  7,115
Total interest expense  . . . . . . . . . . . . . . . . . .        3,048        3,322        3,572       3,809
Provision for loan losses . . . . . . . . . . . . . . . . .          122          105          154         707
Net interest income after
  provision for loan losses . . . . . . . . . . . . . . . .        2,828        2,973        3,065       2,599
Investment securities gains (losses)  . . . . . . . . . . .          (22)           2
                                                                                               -0-         286
Total noninterest income  . . . . . . . . . . . . . . . . .          765          865          895         926
Total noninterest expense . . . . . . . . . . . . . . . . .        2,971        2,971        2,952       3,152
Income tax expense  . . . . . . . . . . . . . . . . . . . .          145          199          268        (181)
Net income  . . . . . . . . . . . . . . . . . . . . . . . .          455          670          740         840

Per Common Share:
 Net income . . . . . . . . . . . . . . . . . . . . . . . .          .28          .41          .44         .49
</TABLE>




ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None





                                     70
<PAGE>   72

                                    PART III


ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Executive Compensation and Other
Information" in the Proxy Statement for the Annual Meeting of Shareholders to
be held March 27, 1997 which is to be filed with the Securities and Exchange
Commission.


ITEM 11 - EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from the section
entitled "Executive Compensation and Other Information" in the Proxy Statement
for the Annual Meeting of Shareholders to be held March 27, 1997 which is to be
filed with the Securities and Exchange Commission.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT

Information required by this item is incorporated by reference from the
sections entitled "Holdings of Voting Securities" and "Election of Directors"
in the Proxy Statement for the Annual Meeting of Shareholders to be held March
27, 1997 which is to be filed with the Securities and Exchange Commission.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference from the section
entitled "Executive Compensation and Other Information" in the Proxy Statement
for the Annual Meeting of Shareholders to be held March 27, 1997 which is to be
filed with the Securities and Exchange Commission.





                                     71
<PAGE>   73

                                    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  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         35

Consolidated Statements of Financial Condition as of
  December 31, 1996 and 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         36

Consolidated Statements of Income for the years ended
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         37

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         38

Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      39-40

Notes to Consolidated Financial Statements -
  December 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      41-69

Quarterly Results (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         70
</TABLE>


(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter ended December 31,
1996.

(c) Exhibits

     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. 
     3.3     By-Laws of Registrant (3)
     3.4     Certificate of Amendment to the Certificate of Incorporation,
             providing for directors' indemnification (4)
     3.5     Certificate of Amendment to 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)
     5.0     Opinion of Waller Lansden Dortch & Davis regarding legality (8)
    10.1     Subordinated Promissory Note between the Registrant as borrower
             and Jack Cornelius as holder (9)
    10.2     Commercial Lease Agreements and Addendums dated January 23, 1990
             by and between Com-Pac as lessor and Community Bank as lessee (10)





                                     72
<PAGE>   74

<TABLE>
<CAPTION>

                                                                                  Page(s)
    <S>      <C>                                                                   <C>
    10.3     Employment Agreement dated March 28, 1991 by  and  between Kennon
             R. Patterson,  Sr.and Community Bancshares, Inc. (11)
    10.4     Employment Agreement dated March 1, 1990 by and between Jeffrey K.
             Cornelius and Community Bank (12)
    10.5     Employment Agreement dated March 1, 1990 by and between Bishop K.
             Walker, Jr. and Community Bank (13)
    10.6     Employment Agreement dated March 1, 1990 by and between Denny
             Kelly and Community Bank (14)
    10.7     Employment Agreement dated March 1, 1990 by and between Birl
             Bryson and Community Bank (15)
    10.8     Employment Agreement dated March 1, 1990 by and between Hodge
             Patterson III and Community Bank (16)
    10.9     Loan Agreement, Term Note and Pledge Agreement by and between
             Community Bancshares, Inc. and Colonial Bank, N.A. (17)
    10.10    Note Modification Agreement and First Amendment to Pledge
             Agreement by and between Community Bancshares, Inc. and Colonial
             Bank, N.A. (18)
    10.11    Escrow Agreement by and between Community Bancshares, Inc. and
             Waller Lansden Dortch & Davis (19)
    10.12    Service Contract dated December 23, 1992 by and between Royal
             Acres and Community Bank (20)
    10.13    Plan document for the Community Bancshares, Inc. Benefit
             Restoration Plan adopted April 12, 1994, effective January 1, 1995
             (21)
    10.14    Amendment No. 3 to the Community Bancshares, Inc. Employee Stock
             Ownership Plan, dated October 3, 1994 (22)
    10.15    Subordinated Promissory Note between the Registrant as borrower
             and Jeffrey K. Cornelius as holder (23)
    10.16    Employment Agreement dated January 5, 1994 by and between Kennon
             R. Patterson, Sr. and Community Bancshares, Inc. (24)
    10.17    Employment Agreement dated January 5, 1994 by and between Bishop
             K. Walker, Jr. and Community Bank (25)
    10.18    Employment Agreement dated December 9, 1995 by and between Kennon
             R. Patterson, Sr. and Community Bancshares, Inc. (26)
    10.19    Employment Agreement dated December 9, 1995 by and between Bishop
             K. Walker, Jr.and Community Bancshares, Inc. (27)
    10.20    Stock Option Agreement between Community Bancshares, Inc. and
             Kennon R. Patterson, Sr. dated March 28, 1996
    10.21    Stock Option Agreement between Community Bancshares, Inc. and
             Bishop K. Walker dated March 28, 1996
    10.22    Stock Option Agreement between Community Bancshares, Inc. and
             Denny Kelly dated March 28, 1996
    10.23    Stock Option Agreement between Community Bancshares, Inc. and
             Hodge Patterson, III dated March 28, 1996
    10.24    Stock Option Agreement between Community Bancshares, Inc. and Loy
             McGruder dated March 28, 1996
    10.25    Stock Option Agreement between Community Bancshares, Inc. and R.C.
             Corr, Jr. dated March 28, 1996
    10.26    Stock Option Agreement between Community Bancshares, Inc. and C.
             Kenneth Copeland dated March 28, 1996,
    10.27    Stock Option Agreement between Community Bancshares, Inc. and
             Merritt Robbins dated March 28, 1996
    10.28    Stock Option Agreement between Community Bancshares, Inc. and
             Wayne Washam dated March 28, 1996
    10.29    Stock Option Agreement between Community Bancshares, Inc. and
             Glynn Debter dated March 28, 1996
</TABLE>


                                     73
<PAGE>   75
<TABLE>
<CAPTION>
                                                                                  Page(s)
    <S>      <C>                                                                   <C>   
    10.30    Stock Option Agreement between Community Bancshares, Inc. and
             Robert Summerford dated March 28, 1996
    10.31    Change in Control Agreement dated March 28, 1996 by and between
             Kennon R. Patterson, Sr. and  Community Bancshares, Inc.
    10.32    Change in Control Agreement dated March 28, 1996 by and between
             Bishop K. Walker, Jr. and  Community Bancshares, Inc.
    10.33    Change in Control Agreement dated March 28, 1996 by and between
             Hodge Patterson and Community Bancshares, Inc.
    10.34    Change in Control Agreement dated March 28, 1996 by and between
             Denny Kelly and Community Bancshares, Inc.
    10.35    Change in Control Agreement dated March 28, 1996 by and between
             Loy McGruder and Community Bancshares, Inc.

    10.36    Stock Option Agreement between Community Bancshares, Inc. and Jon
             Owings dated March 28, 1996
    11       Statement of computation of earnings per common share  . . . . .      76
    21       Subsidiaries of the Registrant . . . . . . . . . . . . . . . . .      76
    27       Financial Data Schedule (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)   Files as Exhibit 3.1 to the Registration Statement on Form S-14,
             Registration No. 2-92974, and incorporated herein by reference.
       (4)   Filed as Exhibit 3.4 to Form 10-K for the year ended December 31,
             1987, and incorporated herein by reference.
       (5)   Filed as Exhibit 3.5 to Form 10-K for the year ended December 31,
             1993, and incorporated herein by reference.
       (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 5 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
       (9)   Filed as Exhibit 10.17 to Form 10-K for the year ended December
             31, 1988, and incorporated herein by reference.
      (10)   Filed as Exhibit 10.3 to Form 10-K for the year ended December 31,
             1990, and incorporated herein by reference.
      (11)   Filed as Exhibit 10.4 to Form 10-K for the year ended December 31,
             1991 and incorporated herein by reference.
      (12)   Filed as Exhibit 10.4 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
      (13)   Filed as Exhibit 10.5 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
      (14)   Filed as Exhibit 10.6 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
      (15)   Filed as Exhibit 10.7 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
      (16)   Filed as Exhibit 10.8 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
      (17)   Filed as Exhibit 10.4 to Form 10-K for the year ended December 31,
             1992, and incorporated herein by reference.
      (18)   Filed as Exhibit 10.10 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.





                                     74
<PAGE>   76

     (19)    Filed as Exhibit 10.11 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
     (20)    Filed as Exhibit 10.12 to the Registration Statement on Form S-2,
             Registration No. 33-69004, and incorporated herein by reference.
     (21)    Filed as Exhibit 10.13 to Form 10-K for the year ended December
             31, 1995, and incorporated herein by reference
     (22)    Filed as Exhibit 10.14 to Form 10-K for the year ended December
             31, 1995, and incorporated herein by reference
     (23)    Filed as Exhibit 10.15 to Form 10-K for the year ended December
             31, 1995, and incorporated herein by reference
     (24)    Filed as Exhibit 10.16 to Form 10-K for the year ended December
             31, 1995, and incorporated herein by reference
     (25)    Filed as Exhibit 10.17 to Form 10-K for the year ended December
             31, 1995, and incorporated herein by reference
     (26)    Filed as Exhibit 10.18 to Form 10-K for the year ended December
             31, 1995, and incorporated herein by reference
     (27)    Filed as Exhibit 10.19 to Form 10-K for the year ended December
             31, 1995, and incorporated herein by reference


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





                                     75

<PAGE>   77

                                   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, thereunto duly authorized.


<TABLE>
<S>               <C>                                               <C>
                                                                    COMMUNITY BANCSHARES, INC.


Date:             February 28, 1997                                 By   /s/ Kennon R. Patterson, Sr.        
       ---------------------------------                               --------------------------------------
                                                                                     KENNON R. PATTERSON, SR.
                                                                         CHAIRMAN AND CHIEF EXECUTIVE OFFICER
                                                                    

Date:             February 28, 1997                                 By   /s/  Paul W. Williams, CPA     
       ---------------------------------                               --------------------------------------
                                                                                        PAUL W. WILLIAMS, CPA   
                                                                                     CHIEF ACCOUNTING OFFICER
                                                                    
                                                                                   
</TABLE>

                               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.

<TABLE>
<CAPTION>
               Directors                                                                        Date
               ---------                                                                        ----
<S>                                                                                       <C>
  /s/ C.K. Copeland                                                                         February 28, 1997          
-----------------------                                                                   -----------------------      
C.K. COPELAND                                                                                                          
                                                                                      
  /s/ Bryan A. Corr                                                                         February 28, 1997          
----------------------                                                                    -----------------------      
BRYAN A. CORR                                                                                                          
                                                                                                                       
  /s/ R.C. Corr, Jr.                                                                        February 28, 1997          
--------------------                                                                      -----------------------      
R.C. CORR, JR.                                                                                                         
                                                                                                                       
  /s/ Glynn Debter                                                                          February 28, 1997          
--------------------------                                                                -----------------------      
GLYNN DEBTER                                                                                                           
                                                                                                                       
  /s/ Edward E. Ferguson                                                                    February 28, 1997          
----------------------------------                                                        -----------------------      
EDWARD E. FERGUSON                                                                                                     
</TABLE>           

                   
                                     77
<PAGE>   78
                                      
                                      
                            SIGNATURES, Continued

<TABLE>
<CAPTION>
          Directors                                                                          Date
          ---------                                                                          ----
<S>                                                                                       <C>
  /s/ Denny Kelly                                                                            February 28, 1997    
--------------------------------                                                          ----------------------- 
DENNY KELLY

  /s/ John J. Lewis, Jr.                                                                     February 28, 1997    
--------------------------------                                                          ----------------------- 
JOHN J. LEWIS, JR.

  /s/ Stacey W. Mann                                                                         February 28, 1997    
----------------------------------                                                        ----------------------- 
STACEY W. MANN

  /s/ Loy McGruder                                                                           February 28, 1997    
-------------------------------                                                           ----------------------- 
LOY MCGRUDER

  /s/ Jon M. Owings                                                                          February 28, 1997    
--------------------------------                                                          ----------------------- 
JON M. OWINGS

  /s/ Hodge Patterson, III                                                                   February 28, 1997    
--------------------------------                                                          ----------------------- 
HODGE PATTERSON, III

  /s/ Kennon R. Patterson, Jr.                                                               February 28, 1997    
-------------------------------                                                           ----------------------- 
KENNON R. PATTERSON, JR.

  /s/ Kennon R. Patterson, Sr.                                                               February 28, 1997   
---------------------------------                                                         -----------------------
KENNON R. PATTERSON, SR.                                                                                         

  /s/ Merritt Robbins                                                                        February 28, 1997   
------------------------------------                                                      -----------------------
MERRITT ROBBINS                                                                                                  
                                                                                                              
  /s/ Robert O, Summerford                                                                   February 28, 1997   
----------------------------------                                                        -----------------------
ROBERT O. SUMMERFORD                                                                                             
                                                                                                              
  /s/ Bishop K. Walker, Jr.                                                                  February 28, 1997   
----------------------------------                                                        -----------------------
BISHOP K. WALKER, JR.                                                                                            
                                                                                                              
                                                                                                              
  /s/ Wayne Washam                                                                           February 28, 1997   
---------------------------------                                                         -----------------------
WAYNE WASHAM                                                                                                     
</TABLE>





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