<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   -----------

                                    FORM 10-Q

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

                For The Quarterly Period Ended September 30, 2001

                                       OR

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

                          Commission File No. 000-16461

                           COMMUNITY BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                   63-0868361
   ------------------------------          ------------------------------------
      (State of Incorporation)             (I.R.S. Employer Identification No.)

  68149 Main Street, P. O. Box 1000,
          Blountsville, AL                                 35031
----------------------------------------            -----------------
(Address of principal executive offices)                (Zip Code)

   Registrant's telephone number, including area code: (205) 429-1000
                                                       --------------

                                    No Change
                                   -----------
              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

                                 Yes [X] No [ ]

As of October 31, 2001, there were 4,608,691 shares of the Registrant's Common
Stock, $.10 par value per share, outstanding.


<PAGE>

                                      INDEX
                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION                                                                                 PAGE
-----------------------------                                                                                 ----
<S>                                                                                                           <C>
Item 1.  Financial Statements (Unaudited)

         Consolidated Statements of Financial Condition - September 30, 2001 and December 31, 2000........       3

         Consolidated Statements of Income and Consolidated Statements of Comprehensive Income-
           Three months ended September 30, 2001 and 2000.................................................     4-5

         Consolidated Statements of Income and Consolidated Statements of Comprehensive Income-
           Nine months ended September 30, 2001 and 2000..................................................     6-7

         Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2000............       8

         Notes to Consolidated Financial Statements.......................................................      10

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations............      20

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.......................................      30

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings................................................................................      31

Item 6.  Exhibits and Reports on Form 8-K.................................................................      32

SIGNATURES
</TABLE>


<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       SEPTEMBER 30,             December 31,
                                                                                            2001                     2000
                                                                                       --------------           --------------
                                                                                         (UNAUDITED)
<S>                                                                                    <C>                      <C>
ASSETS
  Cash ......................................................................          $    6,267,793           $    7,627,215
  Due from banks ............................................................              22,339,023               18,379,396
  Federal funds sold ........................................................              21,000,000                3,000,000
  Interest-bearing deposits with banks ......................................                 200,000                  700,000
  Securities available-for-sale .............................................             127,149,779              101,569,818
  Loans .....................................................................             511,871,960              528,467,345
  Less: Unearned income .....................................................                  72,051                  151,184
        Allowance for loan losses ...........................................               6,537,851                7,107,430
                                                                                       --------------           --------------
         NET LOANS ..........................................................             505,262,058              521,208,731

  Premises and equipment, net ...............................................              39,785,075               39,325,645
  Accrued interest ..........................................................               7,429,605                8,432,321
  Intangibles, net ..........................................................               5,403,619                5,757,055
  Other real estate .........................................................               3,993,752                1,880,548
  Other assets ..............................................................               4,510,124                5,637,313
                                                                                       --------------           --------------
         TOTAL ASSETS .......................................................          $  743,340,828           $  713,518,042
                                                                                       ==============           ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
  Deposits:
     Noninterest bearing ....................................................          $   70,751,559           $   67,285,705
     Interest bearing .......................................................             548,299,507              533,615,062
                                                                                       --------------           --------------
         TOTAL DEPOSITS .....................................................             619,051,066              600,900,767
  Other short-term borrowings ...............................................               4,277,347                2,265,231
  Accrued interest ..........................................................               4,749,231                5,375,725
  FHLB borrowings ...........................................................              46,000,000               38,000,000
  Capitalized lease obligations .............................................               5,792,550                5,850,225
  Long-term debt ............................................................               4,933,216                5,675,204
  Guaranteed preferred beneficial interest in the Company's junior
     subordinated deferrable interest debentures ............................              10,000,000               10,000,000

  Other liabilities .........................................................               4,061,575                4,261,120
                                                                                       --------------           --------------
         TOTAL LIABILITIES ..................................................             698,864,985              672,328,272
  SHAREHOLDERS' EQUITY
       Preferred stock, par value $.01 per share, 200,000 shares
           authorized, no shares issued .....................................                      --                       --
       Common stock, par value $.10 per share, 20,000,000 shares
           authorized, 4,808,331 shares issued as of September 30, 2001
           and 4,674,995 shares issued as of December 31, 2000 ..............                 480,833                  467,499
      Paid-in-capital .......................................................              30,789,906               29,804,921
      Retained earnings .....................................................              14,364,245               13,490,799
      Treasury stock, 20,803 shares at cost as of September 30,
        2001 and December 31, 2000 ..........................................                (396,768)                (396,768)
      Unearned ESOP shares - 180,941 and 199,877 shares as of
        September 30, 2001 and December 31, 2000, respectively ..............              (2,370,294)              (2,574,002)
      Accumulated other comprehensive income ................................               1,607,921                  397,321
                                                                                       --------------           --------------
         TOTAL SHAREHOLDERS' EQUITY .........................................              44,475,843               41,189,770
                                                                                       --------------           --------------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .........................          $  743,340,828           $  713,518,042
                                                                                       ==============           ==============
</TABLE>

                 See notes to consolidated financial statements


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                Three Months Ended
                                                                                                   September 30,
                                                                                       ------------------------------------
                                                                                           2001                    2000
                                                                                       -------------          -------------
<S>                                                                                    <C>                    <C>
REVENUE FROM EARNING ASSETS
  Interest and fees on loans ................................................          $  12,440,605          $  14,030,527
  Interest on investment securities:
     Taxable securities .....................................................              1,690,510              1,505,545
     Securities exempt from federal income taxes ............................                165,728                252,956
  Interest on federal funds sold ............................................                183,228                 22,161
  Interest on deposits in other banks .......................................                  7,670                 13,353
                                                                                       -------------          -------------
          TOTAL REVENUE FROM EARNING ASSETS .................................             14,487,741             15,824,542
                                                                                       -------------          -------------
INTEREST EXPENSE
  Interest on deposits ......................................................              6,741,849              7,858,934
  Interest on other short-term borrowings ...................................                 30,397                 47,570
  Interest on FHLB borrowings ...............................................                659,790                575,869
  Interest on capital lease obligations .....................................                 93,766                140,604
  Interest on long-term debt ................................................                 81,186                140,676
  Interest on guaranteed preferred beneficial interests in the

     Company's junior subordinated deferrable interest debentures ...........                280,303                277,188

                                                                                       -------------          -------------
          TOTAL INTEREST EXPENSE ............................................              7,887,291              9,040,841

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

NET INTEREST INCOME .........................................................              6,600,450              6,783,701
  Provision for loan losses .................................................              1,486,028              4,618,539
                                                                                       -------------          -------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .........................              5,114,422              2,165,162
NONINTEREST INCOME
  Customer service fees .....................................................                996,401              1,066,406
  Insurance commissions .....................................................                483,932                682,232
  Bank club dues ............................................................                164,153                175,792
  Debt cancellation fees ....................................................                129,803                188,421
  Other operating income ....................................................                230,683                399,702

  Investments securities gains ..............................................                155,113                 45,184
                                                                                       -------------          -------------
          TOTAL NONINTEREST INCOME ..........................................              2,160,085              2,557,737
                                                                                       -------------          -------------
NONINTEREST EXPENSES
  Salaries and employee benefits ............................................              3,897,369              4,577,543
  Occupancy expense .........................................................                748,007                710,323
  Furniture and equipment expense ...........................................                476,655                485,709
  Director and committee fees ...............................................                116,818                139,691
  Other operating expense ...................................................              1,787,136              1,739,113
                                                                                       -------------          -------------
          TOTAL NONINTEREST EXPENSES ........................................              7,025,985              7,652,379
                                                                                       -------------          -------------
Income (loss) before income taxes ...........................................                248,522             (2,929,480)
Provision for income tax expense (benefit) ..................................                 23,802             (1,127,941)
                                                                                       -------------          -------------
          NET INCOME (LOSS) .................................................          $     224,720          $  (1,801,539)
                                                                                       =============          =============
NET INCOME (LOSS) PER COMMON SHARE - BASIC ..................................          $        0.05          $       (0.40)
NET INCOME (LOSS) PER COMMON SHARE - DILUTED ................................                   0.05                  (0.38)
</TABLE>

                 See notes to consolidated financial statements


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               Three Months Ended
                                                                                                  September 30,
                                                                                       -----------------------------------
                                                                                           2001                   2000
                                                                                       ------------           ------------
<S>                                                                                    <C>                    <C>
NET INCOME (LOSS) ...........................................................          $    224,720           $  (1,801,539)
Components of other comprehensive income:
Unrealized gains on securities:
  Unrealized holding gains arising during the period ........................             1,664,411               1,195,107
  Reclassification adjustments for ( gains) included
     in net income ..........................................................              (155,113)                (45,184)
                                                                                       ------------           -------------
Net unrealized gains ........................................................             1,509,298               1,149,923
Income tax expense related to items of other
  comprehensive income ......................................................               603,719                 462,049
                                                                                       ------------           -------------
Total other comprehensive income ............................................               905,579                 687,874

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

COMPREHENSIVE INCOME (LOSS) .................................................          $  1,130,299           $  (1,113,665)
                                                                                       ============           =============
</TABLE>

              [The remainder of this page intentionally left blank]

                 See notes to consolidated financial statements


                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                Nine Months Ended
                                                                                                  September 30,
                                                                                       ------------------------------------
                                                                                           2001                    2000
                                                                                       -------------          -------------
<S>                                                                                    <C>                    <C>
REVENUE FROM EARNING ASSETS
  Interest and fees on loans ................................................          $  38,968,185          $  40,244,586
  Interest on investment securities:
     Taxable securities .....................................................              4,550,408              4,303,365
     Securities exempt from federal income taxes ............................                526,906                586,091
  Interest on federal funds sold ............................................                453,562                185,576
  Interest on deposits in other banks .......................................                 36,374                 43,179
                                                                                       -------------          -------------
          TOTAL REVENUE FROM EARNING ASSETS .................................             44,535,435             45,362,797
                                                                                       -------------          -------------
INTEREST EXPENSE
  Interest on deposits ......................................................             21,604,872             22,019,075
  Interest on other short-term borrowings ...................................                 94,612                100,502
  Interest on FHLB borrowings ...............................................              1,826,871              1,672,187
  Interest on capitalized lease obligations .................................                325,846                186,521
  Interest on long-term debt ................................................                273,619                427,646
  Interest on guaranteed preferred beneficial interests in the
     Company's junior subordinated deferrable interest debentures ...........                840,909                585,522
                                                                                       -------------          -------------
          TOTAL INTEREST EXPENSE ............................................             24,966,729             24,991,453
                                                                                       -------------          -------------

NET INTEREST INCOME .........................................................             19,568,706             20,371,344
  Provision for loan losses .................................................              3,818,307              6,955,890
                                                                                       -------------          -------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .........................             15,750,399             13,415,454
NONINTEREST INCOME
  Customer service fees .....................................................              3,064,285              3,097,246
  Insurance commissions .....................................................              1,439,997              1,941,670
  Bank club dues ............................................................                502,114                529,825
  Debt cancellation fees ....................................................                395,212                587,271
  Other operating income ....................................................              1,040,074              1,516,088
  Investment securities gains ...............................................                533,134                 18,298
                                                                                       -------------          -------------
          TOTAL NONINTEREST INCOME ..........................................              6,974,816              7,690,398
                                                                                       -------------          -------------
NONINTEREST EXPENSES
  Salaries and employee benefits ............................................             11,935,399             14,281,425
  Occupancy expense .........................................................              2,188,248              2,000,163
  Furniture and equipment expense ...........................................              1,401,058              1,416,909
  Director and committee fees ...............................................                368,316                428,969
  Other operating expense ...................................................              5,805,757              4,854,888
                                                                                       -------------          -------------
          TOTAL NONINTEREST EXPENSES ........................................             21,698,778             22,982,354
                                                                                       -------------          -------------

Income (loss)  before income taxes ..........................................              1,026,437             (1,876,502)
Provision for income tax expense (benefit) ..................................                152,990               (818,536)
                                                                                       -------------          -------------
          NET INCOME (LOSS) .................................................          $     873,447          $  (1,057,966)
                                                                                       =============          =============

NET INCOME  (LOSS) PER COMMON SHARE - BASIC .................................          $        0.19          $       (0.24)
NET INCOME  (LOSS) PER COMMON SHARE - DILUTED ...............................                   0.19                  (0.23)
DIVIDENDS PER COMMON SHARE ..................................................                   0.00                   0.75
</TABLE>

                 See notes to consolidated financial statements


                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                Nine Months Ended
                                                                                                  September 30,
                                                                                       ------------------------------------
                                                                                           2001                   2000
                                                                                       ------------           -------------
<S>                                                                                    <C>                    <C>
NET INCOME (LOSS) ...........................................................          $    873,447           $  (1,057,966)
Components of other comprehensive income:
Unrealized gains on securities:
  Unrealized holding gains arising during the period ........................             2,550,800                 774,412
  Reclassification adjustments for (gains) losses included
       in net income ........................................................              (533,134)                (18,298)
                                                                                       ------------           -------------
 Net unrealized gains .......................................................             2,017,666                 756,114
 Income tax expense related to items of other
       comprehensive income .................................................               807,066                 302,446
                                                                                       ------------           -------------
 Total other comprehensive income ...........................................             1,210,600                 453,668
                                                                                       ------------           -------------

COMPREHENSIVE INCOME (LOSS) .................................................          $  2,084,047           $    (604,298)
                                                                                       ============           =============
</TABLE>

              [The remainder of this page intentionally left blank]

                 See notes to consolidated financial statements


                                       7
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                 Nine Months Ended
                                                                                                   September 30,
                                                                                       ---------------------------------------
                                                                                            2001                     2000
                                                                                       --------------           --------------
<S>                                                                                    <C>                      <C>
OPERATING ACTIVITIES
  Net income (loss) .........................................................          $      873,447           $   (1,057,966)
  Adjustments to reconcile net income to net cash provided by
     operating activities:
          Provision for loan losses .........................................               3,818,307                6,955,890
          Provision for depreciation and amortization .......................               1,939,704                1,830,227
          Amortization of investment security premiums and
              accretion of discounts ........................................                  76,189                  117,891
          Deferred tax benefit ..............................................                 949,850               (1,679,978)
          Loss (gain) on sale of premises and equipment .....................                  47,527                  (12,488)
          Realized investment security gains ................................                (533,134)                 (18,298)
          Decrease (increase) in accrued interest receivable ................               1,002,716                 (798,421)
          (Decrease) increase in accrued interest payable ...................                (626,493)               1,231,391
          Other .............................................................                 733,967               (1,614,708)
                                                                                       --------------           --------------
                    NET CASH PROVIDED BY OPERATING ACTIVITIES ...............               8,282,080                4,953,540
                                                                                       --------------           --------------
INVESTING ACTIVITIES
  Proceeds from sales of securities available-for-sale ......................              49,474,247               10,303,129
  Proceeds from maturity of securities available-for-sale ...................               2,500,000               23,633,022
  Purchase of securities available-for-sale .................................             (75,612,731)             (42,498,500)
  Decrease in interest-bearing deposit with other banks .....................                 500,000                       --
  Net decrease (increase) in loans to customers .............................               9,727,005              (37,078,510)
  Proceeds from sale of premises and equipment ..............................                 108,074                  158,600
  Net proceeds from sale of other real estate ...............................                 250,213                  716,612
  Capital expenditures ......................................................              (2,201,300)              (4,681,237)
                                                                                       --------------           --------------
                    NET CASH USED IN INVESTING ACTIVITIES ...................             (15,254,492)             (49,446,884)
                                                                                       --------------           --------------
FINANCING ACTIVITIES
  Net increase in demand deposits, NOW accounts,
      and savings accounts ..................................................              13,943,584               21,044,787
  Net increase in certificates of deposit ...................................               4,206,715               15,422,944
  Net increase (decrease) in short-term borrowings ..........................               2,012,116                 (326,865)
  Net increase (decrease) in FHLB borrowings ................................               8,000,000               (2,000,000)
  Repayments of long-term debt, net .........................................                (741,988)                (698,216)
  (Decrease) increase in capitalized lease obligations ......................                 (57,675)               5,850,225
  Issuance of guaranteed preferred beneficial interest in
        junior subordinated deferrable interest debentures ..................                      --               10,000,000
  Proceeds from issuance of common stock ....................................                 209,865                  222,804
  Cash dividends ............................................................                      --               (3,333,145)
                                                                                       --------------           --------------
                  NET CASH PROVIDED BY FINANCING ACTIVITIES .................              27,572,617               46,182,534
                                                                                       --------------           --------------

Net increase in cash and cash equivalents ...................................              20,600,205                1,689,190

Cash and cash equivalents at beginning of period ............................              29,006,611               26,797,511
                                                                                       --------------           --------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................          $   49,606,816           $   28,486,701
                                                                                       ==============           ==============
</TABLE>

                 See notes to consolidated financial statements


                                       8
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                Nine Months Ended
                                                                                                  September 30,
                                                                                       -------------------------------------
                                                                                            2001                    2000
                                                                                       -------------           -------------
<S>                                                                                    <C>                     <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period
  for:
       Interest .............................................................          $  25,593,222           $  18,883,378
       Income taxes (refunded) paid .........................................             (1,082,900)                865,249

</TABLE>

              [The remainder of this page intentionally left blank]

                 See notes to consolidated financial statements


                                       9
<PAGE>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2001

NOTE A - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Community
Bancshares, Inc. and its wholly-owned subsidiaries, collectively, hereinafter
referred to as the "Company". The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Certain amounts in 2000 have been
reclassified to conform with the 2001 presentation. Operating results for the
three and nine month periods ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.

NOTE B - INVESTMENT SECURITIES

At September 30, 2001 and December 31, 2000, the Company's investment securities
are categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Unrealized holding gains and losses,
net of applicable deferred taxes, are included as a component of shareholders'
equity (Accumulated Other Comprehensive Income) until realized.

At September 30, 2001, the Company's available-for-sale investment securities
reflected net unrealized gains of $2,679,868, which resulted in an increase in
shareholders' equity of $1,607,921, net of the deferred tax asset. The net
increase in shareholders' equity as a result of an adjustment in accordance with
SFAS No. 115 from December 31, 2000 to September 30, 2001 was $1,210,600.

NOTE C - CAPITAL SECURITIES

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


                                    Page 10
<PAGE>

NOTE C - CAPITAL SECURITIES (CONTINUED)

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

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

NOTE D - SHAREHOLDERS' EQUITY

The Company did not declare or pay a dividend on its common stock during the
first nine months of 2001. An annual dividend of $.75 per share of the Company's
common stock was declared by the Company's Board of Directors and paid in
January 2000. The payment of dividends on the Company's 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 Company's subsidiaries and
regulatory restrictions. In April 2001, the Company entered into a memorandum of
understanding with the Federal Reserve Bank of Atlanta (the "Reserve Bank") in
which the Company agreed not to declare or pay a dividend to its shareholders
without the prior written approval of the Reserve Bank.

In March 1997, the Company issued options to purchase a total of 103,000 shares
of the Company's common stock to the Company's directors with an exercise price
of $12.50 per share, the market value (as determined by the Board of Directors)
of the Company's common stock at the time of issuance. These options are
exercisable through March 26, 2002. In March 1998, options to purchase a total
of 203,331 shares of the Company's common stock were issued to directors and
certain senior officers with an exercise price of $15.00 per share, the market
value (as determined by the Board of Directors) of the Company's common stock at
the time of issuance. These options are exercisable through March 25, 2003. In
December 1999, options to purchase a total of 204,000 shares of the Company's
common stock were issued to directors and certain senior officers with an
exercise price of $20.00 per share, the market value (as determined by the Board
of Directors) of the Company's common stock at the time of issuance. These
options are exercisable through December 3, 2004. In August 2000, the Company
granted options to purchase an aggregate of 15,000 shares of the Company's
common stock to certain senior officers of Community Bank. Each of these options
has an exercise price of $18.00 per share, the market value (as determined by
the Board of Directors) of the Company's common stock at the time of issuance.
These options are exercisable through August 24, 2005. The Company did not
receive any payment in exchange for granting any of such options, which were
granted in reliance upon an exemption from registration under Section 4(2) of
the Securities Act of 1993.


                                    Page 11
<PAGE>

NOTE D - SHAREHOLDERS' EQUITY (CONTINUED)

In March 2001, options to purchase 329,561 shares of the Company's common stock
were exercised with a total exercise price of $3,741,915. These options were
exercised in transactions whereby 207,886 shares of the Company's common stock
owned by the grantees of the options and valued at $18.00 per share (as
determined by the Board of Directors) were delivered to the Company in payment
of the exercise price under the options. The cash portion of these transactions
was immaterial and related almost entirely to the settlement of fractional
shares. These transactions resulted in a net increase of 121,675 shares in the
total outstanding shares of the Company's common stock. In addition, options to
purchase 35,000 shares of the Company's common stock expired during the first
quarter of 2001 without being exercised, and options to purchase 4,833 shares of
the Company's stock expired during the second quarter of 2001 without being
exercised.

Options that have an exercise price below the current fair value of the
Company's common stock are assumed to be exercised in the calculation of diluted
average shares of common stock outstanding. There were no additional incremental
shares outstanding for the three and nine month periods ended September 30, 2001
to cause a dilutive effect.

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

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase shares of the Company's common stock in the
Company's initial public offering. The note was originally secured by 80,000
shares of purchased stock. The promissory note has been refinanced in years
subsequent to 1993 as additional shares were purchased by the ESOP. On December
1, 1998, this note was refinanced and an additional 56,682 shares of the
Company's common stock were obtained by the ESOP. This refinanced note, in the
original principal amount of $2,963,842, was secured by 261,433 shares of the
Company's common stock and bears interest at a floating rate, with principal and
interest payments due monthly through November 16, 2010, with the remaining
principal, if any, due on that date. The initial monthly principal and interest
payment on this debt in December 1998 was $31,677. As changes occur in the
interest rate on the loan, appropriate adjustments are made to the monthly
principal and interest payments. At September 30, 2001, the monthly payment was
$33,852. The Company has guaranteed this debt and, in accordance with the
applicable accounting and reporting guidelines, the debt has been recognized on
the Company's consolidated balance sheet, with an offsetting charge against
equity. As principal payments are made by the ESOP, the debt and offsetting
charge against equity are reduced. The shares securing the note are released on
a pro rata basis by the lender as monthly payments of principal and interest are
made. As of September 30, 2001, there were 180,941 unreleased shares with a fair
value, based on an independent valuation of $10 per share, of approximately


                                    Page 12
<PAGE>

NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

$1,809,410. These shares are subtracted from outstanding shares of the Company's
common stock for earnings per share calculations.

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP 93-6,
the employer must recognize the indebtedness of its sponsored ESOP on its
financial statements and reduce its shareholders' equity for shares of stock
which have not been released by a lender to the ESOP for allocation to its
participating employees. The portion of payments made by the Company to the ESOP
on behalf of its participating employees which are used to pay interest on the
ESOP debt ($146,128 and $186,937 during the first nine months of 2001 and 2000,
respectively) is classified as interest expense on the Company's income
statement.

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

At September 30, 2001 and December 31, 2000, the Company's financial statements
reflect long-term debt and a corresponding contra-equity account, as a result of
the ESOP debt, of $2,370,294 and $2,574,002, respectively.

Company contributions to the ESOP amounted to $225,501 and $199,241 for the nine
months ended September 30, 2001 and 2000, respectively.

NOTE F - SEGMENT REPORTING

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

NOTE G - RELATED PARTY TRANSACTIONS

In June 2000, Community Bank made a $1,696,576 loan to Debter Properties, LLC,
an Alabama limited liability company of which a director of the Company is a
member, to purchase from Community Bank the real property located in the City of
Boaz, Marshall County, Alabama, the site of the Bank's Boaz office. The loan
amortizes over a 20-year period and is collateralized by a first mortgage on the
real property. The loan carries a prime rate of interest that adjusts each time
there is a change in the prime rate. As adjustments occur in the interest rate
on the loan, appropriate increases or decreases are made to the monthly loan
payment. Concurrently with this loan and the purchase of the real property,
Community Bank entered into a lease agreement with Debter Properties, LLC to
lease back this real property from Debter Properties, LLC for a term of 20
years, with monthly rental payments equal to the monthly amount of principal and
interest due under the loan to Debter Properties, LLC plus applicable real
estate taxes, assessments, levies and insurance. Management believes this loan
was made in the ordinary course of business on substantially the same credit
terms, including interest rates and collateral, and does not represent more than
a normal risk of collection or present other unfavorable features.


                                    Page 13
<PAGE>

NOTE H - LEASES

In May 2000, Community Bank entered into a lease agreement, as the tenant, with
REM, LLC, an Alabama limited liability company, pursuant to which Community Bank
leased the real property in which Community Bank's Hamilton, Alabama office is
located. The term of the lease is 30 years; however, in no event is the term of
the lease to expire prior to the time when the loan obtained by the lessor to
purchase the leased property is paid in full. The monthly rent on this lease is
an amount equal to the monthly debt amortization of funds which the lessor
borrowed to purchase the leased property. Because the interest rate on the loan
used to purchase the property adjusts with fluctuations in the prime rate, the
monthly lease payments are subject to change. At September 30, 2001, and 2000,
the amount of the monthly lease payment was $25,274 and $35,209 respectively. In
addition, Community Bank agreed to pay the lessor an additional sum to be
adjusted periodically to coincide with the cost to the lessor of the real estate
taxes and other items and insurance. Community Bank is also responsible for
maintaining fire and extended coverage and general liability insurance coverage
for the real property. The Company has the option to purchase the leased
premises from the lessor at any time during the term of the lease for an amount
equal to the lessor's cost in acquiring and/or constructing such leased
premises. In an Addendum to the Lease Agreement and Loan Agreement, dated May
31, 2000, Community Bank agreed to maintain and continue in force fire and
extended coverage insurance and general liability insurance upon the leased
premises. In return, the lessor agreed to reimburse Community Bank on a
quarterly basis the amount of the insurance premium which is included in
payments made by Community Bank under the lease.

In June 2000, Community Bank entered into a lease agreement with Debter
Properties, LLC, an Alabama limited liability company of which a director of the
Company is a member, as lessor of the real property in which Community Bank's
Boaz, Alabama office is located. In connection with the lease agreement,
Community Bank loaned funds to Debter Properties, LLC to finance its purchase of
the real property from Community Bank. The term of the lease is 20 years;
however, in no event is the term of the lease to expire prior to the time when
the loan obtained by the lessor to purchase the leased property is paid in full.
The monthly rent on this lease is an amount equal to the monthly debt
amortization of funds which the lessor borrowed to purchase the leased property.
Because the interest rate on the loan used to purchase the property adjusts with
fluctuation in the prime rate, the monthly lease payments are subject to change.
At September 30, 2001, the amount of the monthly rental payment was $12,272. In
addition, Community Bank agreed to pay the lessor an additional sum to be
adjusted periodically to coincide with the cost to the lessor of the real estate
taxes and other items and insurance. Community Bank is responsible for
maintenance, repairs and utilities for the real property. Community Bank is also
responsible for maintaining fire and extended coverage and general liability
insurance coverage for the real property. The Company has the option to purchase
the leased premises from the lessor at any time during the term of the lease for
an amount equal to the lessor's cost in acquiring and/or constructing such
leased premises. In an Addendum to the Lease Agreement and Loan Agreement, dated
June 1, 2000, Community Bank agreed to maintain and continue in force fire and
extended coverage insurance and general liability insurance upon the leased
premises. In return, the lessor agreed to reimburse Community Bank on a
quarterly basis the amount of the insurance premium which is included in
payments made by Community Bank under the lease.

NOTE I - CONTINGENCIES

At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money Community Bank
had paid subcontractors in connection with the construction of a new Community
Bank office. Management of the Company commenced an


                                    Page 14
<PAGE>

NOTE I - CONTINGENCIES (CONTINUED)

investigation of the expenditures. At the request of management, the architects
and subcontractors involved in the construction project made presentations to
the Boards of Directors of the Company and Community Bank on July 15 and July
18, 2000, respectively. At the July 18, 2000 meeting of the Board of Directors
of Community Bank, another director made a presentation alleging that Community
Bank had been overcharged by subcontractors on that construction project and
another current construction project. On July 18, 2000, the Board of Directors
of the Company and Community Bank appointed a joint committee comprised of
independent directors of the Company and of Community Bank to investigate the
alleged overcharges. Upon completion of its investigation, the joint committee
was to inform the Boards of Directors of the Company and Community Bank of its
findings and recommendations. The joint committee retained legal counsel and an
independent accounting firm to assist the committee in its investigation.
Management has also been informed that the directors of Community Bank who
alleged the construction overcharge have contacted bank regulatory agencies and
law enforcement authorities. Management believes that these agencies and
authorities either have conducted or are currently conducting investigations
regarding this matter.

On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community Bank. The complaint alleges that the
directors, officers and employee named as defendants in the complaint breached
their fiduciary duties, failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of corporate assets by allegedly
permitting the subcontractor defendants to overcharge Community Bank in
connection with the construction of two new Community Bank offices, and to
perform the construction work without written contracts, budgets, performance
guarantees and assurances of indemnification. In addition, the complaint alleges
that Kennon R. Patterson, Sr., the Chairman, President and Chief Executive
Officer of the Company, breached his fiduciary duties by allegedly permitting
the two named subcontractors to overcharge for work performed on the two
construction projects in exchange for allegedly discounted charges for work
these subcontractors performed in connection with the construction of Mr.
Patterson's residence. The complaint further alleges that the director
defendants knew or should have known of this alleged arrangement between Mr.
Patterson and the subcontractors. The complaint also alleges that Mr. Patterson,
the Community Bank employee and the two subcontractor defendants made false
representations and suppressed information about the alleged overcharges and
arrangement between Mr. Patterson and the subcontractors. On August 15, 2000,
the plaintiffs filed an amended complaint adding Andy C. Mann, a shareholder of
the Company, as a plaintiff and adding a former director of the Company and
Community Bank as a defendant. The amended complaint generally reiterates the
allegations of the original complaint. In addition, the amended complaint
alleges that Community Bank was overcharged on all construction projects from
January 1997 to the present. The amended complaint also alleges that the
defendants breached their fiduciary duties and are guilty of gross financial
mismanagement, including allegations concerning the making or approval of
certain loans and taking allegedly improper actions to conceal the fact that
certain loans were uncollectible. On September 18, 2000 the plaintiffs filed a
second amended complaint. The second amended complaint generally reiterates the
allegations of the original and first amended complaints. In addition, the
second amended complaint alleges that the plaintiffs were improperly denied
their rights to inspect and copy certain records of the Company and Community
Bank. The second


                                    Page 15
<PAGE>

NOTE I - CONTINGENCIES (CONTINUED)

amended complaint also alleges that the directors of the Company abdicated their
roles as directors either by express agreement or as a result of wantonness and
gross negligence. The second amended complaint asserts that the counts involving
inspection of corporate records and director abdication are individual,
non-derivative claims. The second amended complaint seeks, on behalf of the
Company, an unspecified amount of compensatory damages in excess of $1 million,
punitive damages, disgorgement of allegedly improperly paid profits and
appropriate equitable relief. Upon motion of the defendants, the case was
transferred to the state Circuit Court in Blount County, Alabama by order dated
September 21, 2000, as amended on October 12, 2000. On August 24, 2000, the
Board of Directors of the Company designated the directors of the Company who
serve on the joint investigative committee as a special litigation committee to
investigate and evaluate the allegations and issues raised in this lawsuit and
to arrive at such decisions and take such action as the special litigation
committee deemed appropriate. On June 8, 2001, the special litigation committee
filed its report under seal with the court. On June 18, 2001, the court entered
an order governing the confidentiality of the special committee's report. On
June 28, 2001, the Company, Community Bank and various other defendants filed a
motion with the court to adopt the report of the special committee, for partial
summary judgment and to realign the Company and Community Bank as plaintiffs in
the lawsuit. On August 29, 2001 the court held a hearing on these motions. On
November 8, 2001, the court denied the defendants' motions. The court also ruled
that the plaintiffs were entitled to conduct discovery except as it related to
one of the subcontractor defendants and granted the plaintiffs' motion to unseal
the report of the special litigation committee. The Company is unable at this
time to predict the outcome of this lawsuit and its effect on the Company's
financial condition and results of operations. Regardless of the outcome,
however, this lawsuit could be costly, time-consuming and a diversion of
management's attention.

On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. The complaint alleged that the directors of the Company
breached their fiduciary duty to the Company and its shareholders, engaged in
fraud, fraudulent concealment, suppression of material fact and suppression of
the plaintiff shareholders, failed to supervise management, and conspired to
conceal wrongful acts from the Company's shareholders and paid themselves
excessive directors fees. The complaint also alleged that the Board of Directors
acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the
Chairman of the Board, Chief Executive Officer and President of the Company,
including alleged self dealing, payment of excessive compensation,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint sought an unspecified amount of compensatory and punitive damages,
removal of the current directors, appointment of a new Board of Directors and
attorneys fees and cost. On December 21, 1998, the Company and its directors
filed a motion with the court seeking to have the complaint dismissed. On March
1, 1999, the Company's Board of Directors appointed a special Board committee,
comprised of non-employee directors of the Company, to review the plaintiffs'
allegation in accordance with Delaware law. On April 6, 1999, each of the
parties to the action requested that the court stay the litigation and related
discovery, motions and hearings, pending completion of the special committee's
review. On April 30, 1999, the court entered an order staying the litigation and
related discovery, motions and hearing in accordance with the parties' request.
On October 15, 1999, the special committee filed its final report with the
court. On October 21, 1999, the parties forwarded to the court an agreed-upon
order governing the confidentiality of the special


                                    Page 16
<PAGE>

NOTE I -CONTINGENCIES (CONTINUED)

committee's report, which the court entered on January 2, 2000. On August 3,
2000, the Company, Community Bank and Company's directors filed a motion to stay
the proceedings until the Company's and Community Bank's joint investigative
committee had completed its investigation of the alleged construction
overcharges discussed above. At the request of the Company and the other
defendants in the action, the court continued a hearing on the motion to
dismiss. On February 23, 2001, the court indicated that there was no reason to
continue the stay of this action. The parties are awaiting a hearing on the
defendants' motion to dismiss the case. Management of the Company believes that
the plaintiffs' allegations are false and that the action lacks merit. The
Company and its directors intend to defend the action vigorously. Management of
the Company currently believes that the action will not have a material adverse
effect on the Company's financial condition or results of operations, regardless
of the outcome, however, the lawsuit could be costly, time consuming and a
diversion of management's attention.

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

On November 15, 2000, Michael W. Alred and Michael A. Bean, two former directors
and executive officers of Community Bank, filed suit against Community Bank in
the United States District Court for the Northern District of Alabama alleging
that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees. According to the complaint, the information which these two
individuals provided to authorities concerned certain bank construction
projects, specific loans, charge-offs, expenses and past due accounts. The
complaint seeks reinstatement of the plaintiffs to their former positions as
officers and directors of Community Bank as well as compensatory and punitive
damages. Community Bank and its directors believe this lawsuit is without merit
and intend to defend the action vigorously. Management of the Company believes
that this action will not have a material adverse effect on the Company's
financial condition or results of operations.

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

On June 28, 2000, Community Bank filed an action in the United States District
Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc.,
an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug
Broaddus, the owners of the dealership, several employees and former employees
of the dealership and Gerald Scot Parrish, a former employee of Community Bank,
with


                                    Page 17
<PAGE>

NOTE I - CONTINGENCIES (CONTINUED)

respect to certain loans originated during 1998 in Community Bank's Wal-Mart
office in Ft. Payne, Alabama. In the complaint, Community Bank alleged that the
defendants willingly and knowingly conducted, participated in, were employed by
or associated with, or aided and abetted an enterprise within the meaning of the
Racketeer Influenced and Corrupt Organizations Act (RICO) for the purpose of
defrauding Community Bank. The complaint also asserted that the defendants
committed fraud, misrepresentation and deceit by submitting to Community Bank
and/or approving applications for automobile loans which contained false and/or
fraudulent information for the purpose of deceiving, influencing and persuading
Community Bank to provide loans to customers of the automobile dealership who
were otherwise not qualified to receive such loans, and suppressed material
facts regarding the veracity of information contained in loan applications and
the ability of persons seeking the loans to repay them. Community Bank also
alleged in the complaint that the automobile dealership is responsible for the
acts of its officers, agents and employees, and that the dealership and its
management failed to adequately train and/or supervise its employees. The
complaint stated that the defendants participated in a conspiracy to violate
RICO and Alabama statutes dealing with fraud, misrepresentation and suppression
of material facts, and asserted civil liability under Alabama law for violation
of federal statutes dealing with financial institution fraud, mail and wire
fraud and making false statements for the purpose of influencing the actions of
a financial institution upon an application or loan. On June 29, 2000 and August
31, 2000 the court granted Community Bank's motions to dismiss without prejudice
two of the employees of the automobile dealership as defendants in the action.
On September 13, 2000, the court granted Mr. Parrish's motion to dismiss the
complaint, but granted Community Bank 15 days to amend the complaint. On
September 27, 2000, Community Bank filed an amended complaint which generally
reiterated the allegations of the original complaint and added specific
information concerning the allegedly fraudulent activity and the use of the
United States mail, telephone and other wire transmissions in the conduct of
such activity. On December 1, 2000. the court dismissed Community Bank's claims
based upon mail and wire fraud in the amended complaint but otherwise denied Mr.
Parrish's motion to dismiss the complaint. On October 18, 2001 the court granted
Community Bank's motion to dismiss without prejudice two of the employees of the
automobile dealership as defendants in the action. The defendants have filed
answers to the amended complaint which generally deny the material allegations
in the complaint and allege that any injury suffered by Community Bank was the
result of the contributory negligence of Community Bank, its officers, employees
and agents. In the lawsuit, Community Bank seeks damages of an unspecified
amount to recover losses incurred in connection with the loans made at Community
Bank's Wal-Mart office in Ft. Payne, Alabama, along with all costs associated
with the lawsuit. Any amounts received by Community Bank as a result of this
litigation will be treated as a recovery on loan losses.

On November 6, 2001 the Company and Community Bank filed a lawsuit in the United
States District Court for the Northern District of Alabama against Bryan A.
Corr, Doris J. Corr, individually and as executrix of the Estate of R.C. Corr,
Jr., Tina M. Corr, Corr, Inc., George M. Barnett, Michael A. Bean, Michael W.
Alred, Wayne Washam, M. Lewis Benson, Doris E. Benson, John M. Packard and Andy
Mann seeking damages in excess of $50 million. The complaint alleges that the
defendants have illegally conspired to acquire control of the Company and
Community Bank. The complaint also alleges that, by knowingly making false
statements and unsupported allegations to regulatory and law enforcement
authorities and in certain lawsuits discussed above, the defendants abused the
civil legal process to further their plan to discredit and dislodge the
directors and management of the Company and Community Bank and gain control of
those companies. The complaint further alleges that certain of the defendants
who are former directors and/or executive officers of Community Bank breached
their fiduciary duties to Community Bank by participating in, and taking actions
in the furtherance of, the conspiracy. Finally, the


                                    Page 18
<PAGE>

NOTE I - CONTINGENCIES (CONTINUED)

complaint alleges that the defendants failed to make filings which are required
by the Federal securities laws to disclose that the group is acting in concert
to acquire control of the Company. The complaint seeks compensatory and punitive
damages as well as an order barring the defendants from voting their shares of
Company stock, purchasing additional Company stock, soliciting proxies and
submitting shareholder proposals for at least three years.

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

              [The remainder of this page intentionally left blank]


                                    Page 19
<PAGE>

                                     ITEM 2.
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

This discussion is intended to assist in an understanding of the financial
condition and results of operations of Community Bancshares, Inc. (the
"Company"). Unless the context otherwise indicates, references to the Company
shall include the Company and its subsidiaries. This analysis should be read in
conjunction with the financial statements and related notes appearing in Item 1
of this Report and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.

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

FINANCIAL CONDITION

SEPTEMBER 30, 2001 COMPARED TO DECEMBER 31, 2000

LOANS

Loans comprised the largest single category of the Company's earning assets at
September 30, 2001. Loans, net of unearned income and allowance for loan losses,
were 68.0% of total assets at September 30, 2001 and 73.0% of total assets at
December 31, 2000. Total net loans were $505,262,058 at September 30, 2001,
representing a $15,946,673, or 3.1%, decrease from the total net loans at
December 31, 2000 of $521,208,731. This decrease was attributable to a reduction
in loans as customers took advantage of decrease in pool mortgage interest and
refinanced their existing mortgages along with more stringent underwriting
policies and procedures at all lending locations.


                                    Page 20
<PAGE>

LOANS (CONTINUED)

Commercial, financial and agricultural loans increased by approximately
$10,558,000, or 7.5%, to approximately $151,331,000 at September 30, 2001 from
approximately $140,773,000 at December 31, 2000, and represented 29.6% of total
loans at September 30, 2001, compared to 26.6% at December 31, 2000. Real estate
mortgage loans decreased by approximately $5,267,000, or 2.2%, to approximately
$231,325,000 at September 30, 2001 from approximately $236,592,000 at December
31, 2000, and represented 45.2% of total loans at September 30, 2001, compared
to 44.8% at December 31, 2000. Consumer loans decreased by approximately
$19,730,000 or 13.5%, to approximately $125,943,000 at September 30, 2001 from
$145,673,000 at December 31, 2000, and represented 24.6% of total loans at
September 30, 2000, compared to 27.6% a December 31, 2000. Real estate
construction loans decreased by approximately $2,228,000, or 41.0%, to
approximately $3,201,000 at September 30, 2001 from approximately $5,429,000 at
December 31, 2000, and represented 0.6% of total loans at September 30, 2001,
compared to 1.0% at December 31, 2000.

INVESTMENT SECURITIES AND OTHER EARNING ASSETS

Investment securities offer flexibility in the Company's management of interest
rate risk, and are an important source of liquidity to compensate for the
changing characteristics of assets and liabilities.

Investment securities increased $25,579,961, or 25.2%, to $127,149,779 at
September 30, 2001 compared to $101,569,818 at December 31, 2000. The investment
securities portfolio is used to make various term investments, to provide a
source of liquidity and to serve as collateral to secure certain government
deposits. Short-term investments in the form of interest-bearing deposits with
banks were $200,000 at September 30, 2001 compared to $700,000 at December 31,
2000.

The Company had $21,000,000 in federal funds sold at September 30, 2001 compared
to $3,000,000 at December 31, 2000. Increases in investment securities and
federal funds sold is due primarily to growth in deposits and liquidity provided
from the loan portfolio.

ASSET QUALITY

From December 31, 2000 and September 30, 2001, the ratio of the allowance for
loan losses to total nonperforming assets (defined as nonaccruing loans, loans
past due 90 days or greater, restructured loans, nonaccruing securities and
other real estate) declined from 112.3% at year-end 2000 to 51.6% at September
30, 2001. The ratio of total nonperforming assets to total assets increased to
1.7% at September 30, 2001 from 0.9% at year-end 2000, while the ratio of
nonperforming loans to total loans, net of unearned income, increased to 1.7% at
September 30, 2001 from 0.8% at December 31, 2000. These changes were primarily
due to a decrease in the total of loans, net of unearned income of approximately
$16,516,000, or 3.1%, and an increase in nonaccruing loans of approximately
$5,437,000, or 289.7%, to approximately $7,314,000 at September 30, 2001 from
approximately $1,877,000 at December 31, 2000 and an increase in other real
estate of approximately $2,113,000 or 112.3%, to approximately $3,994,000 at
September 30, 2001 from approximately $1,881,000 at December 31, 2000. These
increases were partially offset by a decline in loans past due 90 days or more
of approximately $1,210,000 or 47.1%, to approximately $1,361,000 at September
30, 2001 from approximately $2,571,000 at December 31, 2000. Total nonperforming
assets increased approximately $6,340,000, or 100.2%, to approximately
$12,669,000 at September 30, 2001 from approximately $6,329,000 at December 31,
2000.


                                    Page 21
<PAGE>

ASSET QUALITY (CONTINUED)

In March 2001, management of Community Bank became aware that an employee in
Community Bank's Double Springs, Alabama location had improperly originated
loans, primarily during 2000 and the first quarter of 2001, in violation of
Community Bank's lending policies, and had manipulated loan payments to make it
falsely appear that payments under the loans were current. The bank employee has
admitted wrongdoing in connection with the loans and his employment with
Community Bank has been terminated. Management has notified federal and state
banking regulatory authorities, law enforcement authorities and the Company's
fidelity bond carrier, and is cooperating with law enforcement authorities in
the investigation of this matter. Community Bank has not completed an
investigation of these loans, but has made the appropriate charges to the
allowance for loan losses as the loans have been determined to be a loss. The
amount charged off thus far is approximately $1,100,000. The Company made a
provision and increased its allowance for loan losses by approximately $501,000
to reflect the estimated impairment of these loans at year-end 2000 and has made
additional provisions in 2001 of approximately $599,000. Community Bank will
continue to make provisions to reflect its estimation for impairment of such
loans and will continue to make appropriate charges to its allowance for loan
losses with respect to determined actual losses.

DEPOSITS

Total deposits of $619,051,066 at September 30, 2001 reflected an increase of
$18,150,299 or 3.0% from $600,900,767 at year-end 2000. Deposits are Community
Bank's primary source of funds. Noninterest bearing deposits increased
$3,465,854 or 5.2%, to $70,751,559 at September 30, 2001, from $67,285,705 at
December 31,2000, while interest bearing deposits increased $14,684,445 or 2.8%
to $548,299,507 at September 30, 2001, from $533,615,062 at December 31, 2000.
Certificates of deposits of $100,000 or more increased approximately
$21,631,000, or 21.4%, to approximately $122,643,000 at September 30, 2001, from
approximately $101,012,000 at December 31, 2000.

BORROWINGS

Community Bank uses borrowed funds as a source of funds for asset growth in
excess of deposit growth and for short-term liquidity needs. The mixture of
borrowed funds and deposits as sources of funds depends on the relative
availability and cost of those funds and Community Bank's need for funding.
Borrowed funds consist primarily of short-term borrowings, borrowings from the
Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and long-term debt.

Other short-term borrowings totaled $4,277,347 at September 30, 2001, a
$2,012,116, or 88.8%, increase from $2,265,231 at December 31, 2000. At
September 30, 2001, short-term borrowings consisted primarily of the U.S.
Treasury Tax and Loan Note Option account and securities sold under agreement to
repurchase. Balances under U.S. Treasury Tax and Loan Note Option are subject to
call at any time by the U.S. Treasury. At September 30, 2001, U.S. Treasury Tax
and Loan Note Option totaled $1,950,355 and securities sold under agreements to
repurchase totaled $2,326,992.

At September 30, 2001 and December 31, 2000, the Company had notes payable
totaling $4,933,216 and $5,675,204, respectively, described briefly in the
following paragraphs.

In December 1992, the Company entered into a loan agreement with a regional bank
for amounts up to $6,500,000. At September 30, 2001, and December 31, 2000, the
amounts outstanding under this loan


                                    Page 22
<PAGE>

BORROWINGS (CONTINUED)

agreement were approximately $890,000 and $1,423,000, respectively, due December
2002, bearing interest at a floating prime rate, and collateralized by 100% of
the common stock of Community Bank, the Company's subsidiary bank. The note
agreement contains provisions which limit the Company's right to transfer or
issue shares of Community Bank's stock. Principal payments of $59,127 are due
monthly; however, the Company has the option of postponing up to 24 monthly
principal payments, provided that no more than nine consecutively scheduled
installments are deferred. The Company did not postpone any principal payments
under this loan agreement during the first nine months of 2001.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock in the Company's initial public
offering. The note was originally secured by 80,000 shares of purchased stock.
The promissory note has been refinanced in years subsequent to 1993 as
additional shares were purchased by the ESOP. On December 1, 1998, this note was
refinanced and an additional 56,682 shares of the Company's common stock were
obtained by the ESOP. This note, in the original principal of $2,963,842, was
secured by 261,433 shares of the Company's common stock. The note bears interest
at a floating rate, with principal and interest payments due monthly through
November 16, 2010, with the remaining principal, if any, due on that date. The
initial monthly principal and interest payment on this debt in December 1998 was
$31,677. As changes occur in the interest rate on the loan, appropriate
adjustments are made to the monthly principal and interest payments. At
September 30, 2001, the monthly payment was $40,338. The Company has guaranteed
this debt and, in accordance with the applicable accounting and reporting
guidelines, the debt has been recognized on the Company's balance sheet, with an
offsetting charge against equity. As principal payments are made by the ESOP,
the debt and offsetting charge against equity are reduced. The shares securing
the note are released on a pro rata basis by the lender as monthly payments of
principal and interest are made. The outstanding balance of this note was
$2,452,094 at September 30, 2001 and approximately $2,606,000 at December 31,
2000, secured by 180,941 and 199,877 of unreleased shares of the Company's
common stock, respectively.

On October 4, 1994, the Company entered into a 20-year subordinated installment
capital note due October 1, 2014 for the purchase of treasury stock. Monthly
principal and interest payments of $15,469 are made on the note, which bears
interest at the fixed rate of 7% per year. The Company maintains the right to
prepay the note at its sole discretion. The balance of the note was
approximately $1,592,000 at September 30, 2001 and approximately $1,646,000 at
December 31, 2000.

Since June 1999, Community Bank, has borrowed funds under the Federal Home Loan
Bank of Atlanta's "Convertible Advance Program." These advances have had
original maturities of 10 years, with stated call features during the life of
the obligation, at fixed interest rates for the life of the obligations.
Principal is due at final maturity or on a stated call date, with interest
payable each quarter. At December 31, 2000, Community Bank had an outstanding
advance of $38,000,000. This obligation has a maturity of March 1, 2010 (120
months), a call feature every quarterly payment date during the life of the
obligation, and a fixed interest rate of 5.93% per annum with interest payable
each quarter. At September 30, 2001, outstanding funds advanced to Community
Bank under the FHLB "Convertible Loan Program" totaled $38,000,000.

In May 2001, Community Bank borrowed funds of $8,000,000 under the FHLB "fixed
rate credit" plan. The advance was for 6 months bearing interest at 4.15% and
will be due in November 2001. The balance of this obligation at September 30,
2001 was $8,000,000.


                                    Page 23
<PAGE>

BORROWINGS (CONTINUED)

In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). The proceeds from the issuance
of the Capital Securities and common securities ($310,000) were used by the
Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. The
principal balance outstanding is due at maturity. However, as specified in the
indenture pursuant to which the debentures were issued, the debentures can be
redeemed prior to maturity at a redemption price equal to a percentage of the
principal amount, ranging from 105.438% in the year 2010 to 100.00% in and after
the year 2020, plus accrued but unpaid interest. As of September 30, 2001, the
Company's consolidated financial statements reflected $10,000,000 in junior
subordinated deferrable interest debentures, after the effects of elimination.
See Note C to the Consolidated Financial Statements included in Item 1 of this
Report.

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

<TABLE>
<CAPTION>
                                                                                                            Junior
                                         Notes             Subordinated              FHLB                Subordinated
                                        Payable                Debt               Borrowings              Debentures
                                     ------------          ------------          -------------          -------------
<S>                                  <C>                   <C>                   <C>                    <C>
2001                                 $    189,664          $     18,773          $   8,000,000          $          --
2002                                      893,705                78,461                     --                     --
2003                                      200,287                84,133                     --                     --
2004                                      220,165                90,215                     --                     --
2005                                      242,015                96,737                     --                     --
Thereafter                              1,595,800             1,223,261             38,000,000             10,000,000
                                     ------------          ------------          -------------          -------------

                                     $  3,341,636             1,591,580             46,000,000          $  10,000,000
                                     ============          ============          =============          =============
</TABLE>

CAPITAL RESOURCES

Bank regulatory authorities have placed increased emphasis on the maintenance of
adequate capital, and subsequently developed risk-based capital guidelines. The
guidelines take into consideration risk factors, as defined by regulators,
associated with various categories of assets, both on and off the balance sheet.
Under the guidelines, capital strength is measured in two tiers which are used
in conjunction with risk-adjusted assets to determine the risk-based capital
ratios. The Company's Tier I capital, which consists of common equity and junior
subordinated deferrable interest debentures, less goodwill and unrealized gains
on debt securities, amounted to $48,322,000 at September 30, 2001. Tier II
capital components totaling approximately $7,841,000 at September 30, 2001,
include supplemental capital components such as qualifying allowance for loan
losses and qualifying subordinated debt. Tier I capital plus Tier II capital
components are referred to as Total Risk-Based capital and was $56,163,000 at
September 30, 2001.

As of September 30, 2001, the Company and Community Bank, its banking
subsidiary, were classified as well capitalized under the financial institutions
regulatory framework. Management has reviewed and will continue to monitor the
Company's asset mix, product pricing and loan loss allowance, which are the
areas determined to be most affected by these requirements.


                                    Page 24
<PAGE>

CAPITAL RESOURCES (CONTINUED)

On April 9, 2001, the Company's Board of Directors entered into a memorandum of
understanding with the Federal Reserve Bank of Atlanta. As part of this
agreement, the Company agreed to maintain a quarterly Tier I leverage capital
ratio (the ratio of Tier I Capital to average assets, less goodwill) of at least
6.5%. At September 30, 2001, the Company's Tier I leverage capital ratio was
6.6%. On April 18, 2001, the Board of Directors of Community Bank, the Company's
subsidiary bank, also made a commitment to the Regional Director of the Federal
Deposit Insurance Corporation's Atlanta Regional Office and the Alabama
Superintendent of Bank's with regard to certain financial goals related to
Community Bank's capital ratios.

RESULTS OF OPERATIONS

NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

SUMMARY

The Company's net income (loss) for the nine months ended September 30, 2001 was
$873,447 compared to $(1,057,966) for the same period in 2000, representing an
increase of $1,931,413, or 182.6%. Basic net income (loss) per share was $0.19
for the nine months ended September 30, 2001, as compared to $(0.24) for the
same period of 2000. Fully diluted net income (loss) per share was $0.19 and
$(0.23) for the nine months ended September 30, 2001 and 2000, respectively.
This increase resulted primarily from an increase in net interest income after
provision for loan losses. Net interest income before the provision for loan
losses decreased $802,638 while the provision expense decreased $3,137,583. Net
income for the nine month period has been negatively affected by a decrease in
noninterest income and positively affected by a decline in non interest expense
and reduced bad debt expenses that were attributable to the Fort Payne
operations in 2000. This decline in noninterest expense occurred as a direct
result of cost cutting measures and despite increased legal and professional
fees associated with continued various litigation.

Net income (loss) for the quarter ended September 30, 2001, was $224,720
compared to $(1,801,539) for the same three month period of 2000, representing
an increase of $2,026,259, or 112.5%. Basic net income (loss) per share was
$0.05 for the third quarter of 2001 compared to $(0.40) for the same period of
2000. Fully diluted net income (loss) per share was $0.05 and $(0.38) for the
three months ended September 30, 2001 and 2000, respectively. The income for the
quarter was the combined effect of an increase net interest income after
provision for loan losses as compared to the same period in 2000. Noninterest
income for the quarter was down approximately $398,000 and noninterest expense
for the quarter was down approximately $626,000 from the same period in 2000.

NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)

Net interest income, the difference between interest earned on assets and the
cost of interest bearing liabilities, is the largest component of the Company's
net income. On a fully taxable equivalent basis, net interest income, before
provision for loan losses, decreased approximately $1,006,000, or 4.8%, to
approximately $20,002,000 for the nine months ended September 30, 2001, from
approximately $21,008,000 for the same period of 2000. Revenues from interest
earning assets of the Company decreased approximately $844,000, or 1.8%, to
approximately $44,969,000 for the nine months ended September 30, 2001 from
approximately $45,813,000 for the same period in 2000. Although average


                                    Page 25
<PAGE>

NET INTEREST INCOME (CONTINUED)

outstanding balances of earning assets were higher in 2000, revenues have
decreased due to lower yields resulting from falling interest rates. Average
earning assets outstanding during the first nine months of 2001, were
approximately $646,260,000, which represents an increase of approximately
$18,312,000, or 2.9%, from approximately $627,948,000 for the first nine months
of 2000.

The Company's yield on its average earning assets decreased 42 basis points to
9.30% for the first nine months of 2001, compared to 9.72% for the same period
of 2000. Interest expense for the first nine months ended September 30, 2001
decreased approximately $24,000, or 0.1%, to approximately $24,967,000 from
approximately $24,991,000 for the corresponding period of 2000. The decrease was
due to a decrease in the average rate paid on interest bearing liabilities.
Average interest bearing liabilities during the first nine months of 2001 were
approximately $603,741,000, which represents an increase of approximately
$16,491,000, or 2.8%, from approximately $587,250,000 for the same period of
2000. The rate paid on average interest bearing liabilities decreased 10 basis
points to 5.53% for the nine months ended September 30, 2001, compared to 5.63%
for the nine months ended September 30, 2000. One reason the rate paid on
average interest bearing liabilities has not decreased as drastically as market
rates have fallen is the Company's junior subordinated deferrable interest
debentures, which carry an annual interest rate of 10.875%, were outstanding for
the entire first three quarters of 2001, compared to only nine days during the
first quarter of 2000. In addition, during the first and second quarters of
2000, Community Bank offered several special certificates of deposit products at
higher rates with maturities ranging from 11 to 24 months.

Net interest margin is computed by dividing net interest income, on a fully
taxable equivalent basis, by average interest earning assets. This ratio
represents the difference between the average yield returned on average interest
earning assets and the average rate paid on funds used to support those interest
earning assets, including both interest bearing and noninterest bearing sources.
The Company's net interest margin, on a fully taxable equivalent basis, for the
nine months ended September 30, 2001 decreased 32 basis points to 4.14%, from
4.46% for the nine months ended September 30, 2000, due to a decline in net
interest income, on a fully taxable equivalent basis, coupled with an increase
in average interest earning assets.

Net interest spread measures the difference between the average yield on
interest earning assets and the average rate paid in interest bearing sources of
funds. The Company's net interest spread, on a fully taxable equivalent basis,
for the nine months ended September 30, 2001 decreased 32 basis points to 3.77%,
from 4.09% for the nine months ended September 30, 2000.

As a result of interest rate decreases from the Federal Reserve, revenue from
earning assets decreased approximately $1,365,000 or 8.5% for the quarter to
approximately $14,642,000 for the three months ended September 30, 2001, as
compared to approximately $16,007,000 for the quarter ended September 30, 2000.
Total interest expense declined approximately $1,153,000 during the same period
to approximately $7,888,000 from approximately $9,041,000 for the quarters ended
September 30, 2001 and 2000, respectively. Net interest income for the quarter
declined to approximately $6,754,000 from approximately $7,107,000 in the third
quarter of 2000, an approximate $353,000 decrease or 5.0%.


                                    Page 26
<PAGE>

PROVISION FOR LOAN LOSSES

The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance is based upon management's estimated range of
those losses. Actual losses for these loans may vary significantly from this
estimate. At September 30, 2001, the allowance for loan losses was approximately
$6,538,000, which represented an approximate $569,000, or 8.0%, decrease over
the December 31, 2000 amount of approximately $7,107,000. This decrease was due
to charge-offs that had been previously provided for being made and a decrease
in the balance of loans outstanding at the end of the period. As a percentage of
total loans, net of unearned income, the allowance for loan losses decreased to
1.28% at September 30, 2001 from 1.35% at December 31, 2000. Management believes
that the allowance for loan losses at September 30, 2001 is adequate to absorb
known risks in the Company's loan portfolio based upon the Company's historical
experience. No assurance can be given, however, that increased loan volume,
adverse economic conditions or other circumstances will not result in increased
losses in the Company's loan portfolio or additional provisions to the allowance
for loan losses.

In assessing the adequacy of the allowance for loan losses, management relies
predominantly on its ongoing review of the loan portfolio, 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.

Loans identified as having increased credit risk are classified in accordance
with the Company's loan policy and appropriate reserves are established for each
loan classification category based on pre-determined reserve percentages.
Reserves are established for the remaining unclassified portion of the loan
portfolio based on actual historical loss factors associated with certain loan
types.

The provision for loan losses is charged to current earnings to bring the
allowance for loan losses to a level deemed appropriate by management. Actual
loan losses are charged directly to the allowance for loan losses while
recoveries on charged-off loans are credited to the allowance for loan losses.
The amount of the provision for loan losses is based on the growth of the loan
portfolio, the amount of net loan losses incurred and management's estimation of
potential future losses based on an evaluation of the risk in the loan
portfolio. The provision for loan losses during the first nine months of 2001
resulted from management's decision to make provisions for current losses and to
maintain the overall level of the allowance by providing to cover net
charge-offs. Net charge-offs for the first nine months of 2001 were
approximately $4,388,000 compared to approximately $2,916,000 for the same
period of 2000.

The provision for loan losses for the third quarter of 2001 was approximately
$1,486,000, compared to approximately $4,619,000 for the same period of 2000,
representing an approximate decrease of $3,133,000 or 67.8%. Charge-offs
exceeded recoveries by approximately $1,625,000 and $1,118,000 for the three
months ended September 30, 2001 and 2000, respectively.

NONINTEREST INCOME

Noninterest income for the nine months ended September 30, 2001 and 2000 was
$6,974,816 and $7,690,398, respectively. This decrease of $715,582, or 9.3%,
resulted primarily from decreases in insurance commissions and fees on debt
cancellation contracts. The Company recorded net gains on the


                                    Page 27
<PAGE>

NONINTEREST INCOME (CONTINUED)

sale of investment securities of $533,134 during the nine months ended September
30, 2001, while net gains on the sale of investment securities for the same
period of 2000 were $18,298.

Noninterest income reflected a decrease of $397,652, or 15.5%, for the third
quarter of 2001 compared to the same period of 2000. This decrease resulted
primarily from decreases of $58,618, or 31.1%, in debt cancellation fees and
$198,300, or 29.1% in insurance commissions and $169,019 or 42.3% in other
operating income.

NONINTEREST EXPENSES

Noninterest expenses for the nine months ended September 30, 2001 were
$21,698,778, reflecting a $1,283,576, or 5.6%, decrease from $22,982,354 for the
same period of 2000. The primary components of noninterest expenses are salaries
and employee benefits, which decreased $2,346,026 for the nine months ended
September 30, 2001, 16.4% from the same period of 2000. The decreases in
salaries and employee benefits are due to corporate downsizing and reduced
salary and benefits to officers at the bank and the Company. Salaries and
benefits also include compensation expense related to the release of shares in
the Company's leveraged ESOP. Occupancy costs increased $188,085, or 9.4%,
furniture and equipment expenses declined by $15,851, or 1.1%, while director
and committee fees decreased $60,653, or 14.1%. Other operating expenses
increased $950,869,or 19.6%, $5,805,757 to during the first nine months of 2001
compared to $4,854,888 for the same period of 2000. This increase primarily
reflects an increase in the audit fees, legal fees and other costs related to
the special litigation committee and continuing litigation.

Noninterest expenses were $7,025,985 for the three months ended September 30,
2001 compared to $7,652,379 for the same period of 2000. This decrease of
$626,394, or 8.2%, during the third quarter of 2001 was attributable to a
decrease of $680,174, or 14.9%, in personnel cost.

INCOME TAXES

The provision for income taxes of $152,990 for the nine months ended September
30, 2001 increased $971,526, or 118.7%, compared to the same period of 2000, due
primarily to the increase in income before income taxes. The effective tax rate
of 14.9% for the first nine months of 2001 is less than the effective tax rate
of 43.6% for the same period of 2000. The Company's effective tax rate of 9.6%
for the third quarter of 2001 represents a decline from the effective tax rate
of 38.5% for the third quarter of 2000. These shifts are in part due to the
effect of tax-free interest income. The Company attempts to maximize its net
income through active tax planning.

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2001, the Auditing Standards Board issued Statement on Auditing Standards
("SAS") No. 94, The Effect of Information Technology on the Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55, Consideration of Internal Control in a Financial Statement
Audit, by providing additional guidance related to the understanding by the
auditor of an entity's use of information technology relevant to the audit. This
auditing standard is effective for audits of financial statements for periods
beginning on or after June 1, 2001. The impact on the audit of the Bank's
financial statements resulting from the issuance of this auditing standard is
not expected to be


                                    Page 28
<PAGE>

RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

material.

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

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

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                                    Page 29
<PAGE>

                                     ITEM 3.
           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest earning assets and interest bearing liabilities. Management monitors
its interest rate risk exposure through the use of a Static Gap analysis and an
Interest Rate Shock analysis.

The Company remained liability sensitive at September 30, 2001, indicating that
it had more interest bearing liabilities than interest earning assets repricing
during the twelve months ending September 30, 2002. The cumulative static gap
position of rate sensitive assets to rate sensitive liabilities at September 30,
2001 was: i) 67.0% at 30 days; ii) 68.8% at 90 days; iii) 67.0% at 180 days; and
iv) 58.0% at 365 days.

The interest rate shock analysis measures the impact on Community Bank's net
interest income as a result of immediate and sustained shift in interest rates.
The movement in market rates are based on statistical regression analyses while
management makes assumptions concerning balance sheet growth and the magnitude
of interest rate movements for certain interest earning assets and interest
bearing liabilities. Using actual maturity and repricing opportunities of
Community Bank's portfolio, in conjunction with management's assumptions, a rate
shock analysis is performed using a plus 200 basis points shift and a minus 200
basis points shift in interest rates. Based on the Company's September 30, 2001
Asset/Liability Analysis, the decline in net interest income, over the next
twelve months, resulting from a 200 basis points decrease in the interest rate
environment would be $2,296,000, or 7.9%. Conversely, a 200 basis points
increase in interest rates would result in a $1,288,000 or 4.4%, increase in net
interest income for the same period.

While movement of interest rates cannot be predicted with any certainty,
management believes that Community Bank's current interest rate sensitivity
analysis fairly reflects its interest rate risk exposure during the twelve
months ending September 30, 2002. 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.

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                                    Page 30
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On June 8, 2001, the special litigation committee of the Company's Board of
Directors formed to investigate the allegations contained in the lawsuit filed
by M. Lewis Benson, Doris E. Benson, John M. Packard, Jr. and Andy C. Mann
against the Company, Community Bank, certain directors and officers of the
Company and Community Bank and two construction subcontractors filed its report
under seal with the Circuit Court of Blount County, Alabama. On September 18,
2001, the court entered a confidentiality order concerning the report. On
September 28, 2001, the Company, Community Bank and various other defendants
filed a motion with the court to adopt the report of the special committee, for
partial summary judgment and to realign the Company and Community Bank as
parties plaintiff. The court held a hearing on this motion on August 29, 2001.
On November 8, 2001 the court denied defendants' motions. The court also ruled
that the plaintiffs were entitled to conduct discovery except as it related to
one of the subcontractor defendants and granted the plaintiffs' motion to unseal
the report of the special litigation committee. Additional information regarding
this lawsuit may be found in Note I to the Company's consolidated financial
statements included in Item 1 of this Report, as well as the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 and Quarterly Reports
on Form 10-Q for the three months ended March 31, 2001 and June 30, 2001.

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

Except as noted above and in the Company's Quarterly Reports on Form 10-Q for
the three months ended March 31, 2001 and June 30, 2001, there have been no
material developments in the legal proceedings disclosed in the section
captioned "Item 3 - Legal Proceedings" in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.

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


                                    Page 31
<PAGE>

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

<TABLE>
<CAPTION>
Exhibit Number                                  Description of Exhibit
--------------                                  ----------------------
<S>               <C>
  3.1             Certificate of incorporation, as amended and restated May 2000 (Filed as Exhibit 3.2 to Form 10-Q for the
                  quarter June 30, 2000, and incorporated herein by reference)

  3.2             By-laws of Registrant, as amended and restated May 2000 (Filed as Exhibit 3.1 to Form 10-Q for the quarter
                  June 30, 2000, and incorporated herein by reference)

  4.1             Rights Agent Agreement, dated January 13, 1999, between Community Bancshares, Inc. and the Bank of New York
                  (Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and incorporated herein by reference)

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

 10.1             Change in Control Agreement, dated September 18, 2001, between Community Bancshares, Inc. and Kerri C. Newton

 11               Computation of Earnings Per Share
</TABLE>

b) Reports on Form 8-K

During the quarter ended September 30, 2001, no current reports on Form 8-K were
filed for the Company.


                                    Page 32
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                       COMMUNITY BANCSHARES, INC.



November 14, 2001                      /s/ Kennon R. Patterson, Sr.
-----------------                      ----------------------------------------
Date                                   Kennon R. Patterson, Sr., as its
                                       President and Chief Executive Officer



November 14,2001                       /s/ Kerri C. Newton
----------------                       ----------------------------------------
Date                                   Kerri C. Newton, as its
                                       Chief Financial Officer


<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit Number                               Description of Exhibit
--------------                               ----------------------
<S>               <C>
     3.1          Certificate of incorporation, as amended and restated May 2000 (Filed as Exhibit 3.2 to Form 10-Q for the
                  quarter June 30, 2000, and incorporated herein by reference)

     3.2          By-laws of Registrant, as amended and restated May 2000 (Filed as Exhibit 3.1 to Form 10-Q for the quarter
                  June 30, 2000, and incorporated herein by reference)

     4.1          Rights Agent Agreement, dated January 13, 1999, between Community Bancshares, Inc. and the Bank of New York
                  (Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and incorporated herein by reference)

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

    10.1          Change in Control Agreement, dated September 18, 2001, between Community Bancshares, Inc. and Kerri C. Newton

    11            Computation of Earnings Per Share
</TABLE>