COMMUNITY BANKSHARES INC /SC/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2001 File Number 000-22054

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

South Carolina 57-0966962
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)

791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)

Registrant's Telephone Number, Including Area Code: (803) 535-1060

Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value - American Stock Exchange
(Title of Class) - (Name of each exchange on which registered)

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all the
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No _.

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __

The aggregate market value voting and non-voting common equity held by
non-affiliates on March 7, 2002 was approximately $32,236,000. As of March 7,
2002 there were 3,299,674 shares of the Registrant's Common Stock, no par value,
outstanding. For purposes of the foregoing calculation only, all directors and
executive officers of the Registrant have been deemed affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders - Part III

10-K TABLE OF CONTENTS

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PART I

Item 1. Description of Business

Form of organization

Community Bankshares, Inc. (CBI) is a South Carolina corporation and a
bank holding company. CBI commenced operations on July 1, 1993, upon
effectiveness of the acquisition of the Orangeburg National Bank as a wholly
owned subsidiary. In June 1996 CBI acquired all the stock of Sumter National
Bank, which is also a wholly owned subsidiary. In July 1998 CBI acquired all the
stock of Florence National Bank, which is also a wholly owned subsidiary.

Orangeburg National Bank (the Orangeburg bank) is a national bank,
chartered in 1987, operating from two offices located in Orangeburg, South
Carolina.

Sumter National Bank (the Sumter bank) is a national bank, chartered in
1996, operating from two offices located in Sumter, South Carolina.

Florence National Bank (the Florence bank) is a national bank,
chartered in 1998, operating from one office located in Florence, South
Carolina.

In November 2001 CBI acquired all the common stock of Resource Mortgage
Inc., a Columbia, South Carolina based mortgage company. The mortgage company
operates as a wholly owned subsidiary of the holding company and is now named
Community Resource Mortgage Inc.

Business of banking

The Orangeburg, Sumter and Florence banks (hereafter referred to as the
Banks) offer a full array of commercial bank services. Deposit services include
business and personal checking accounts, NOW accounts, savings accounts, money
market accounts, various term certificates of deposit, IRA accounts, and other
deposit services. The Federal Deposit Insurance Corporation insures deposits up
to applicable limits. Most of the Banks' deposits are attracted from individuals
and small businesses.

The Banks offer secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include: car loans, home equity improvement loans
secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short-term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The Banks do not and will not discriminate against any applicant for
credit on the basis of race, color, creed, sex, age, marital status, familial
status, handicap, or derivation of income from public assistance programs.

Other services offered by the Banks include safe deposit boxes, night
depository service, VISA and Master Card charge cards (through a correspondent),
tax deposits, sale of U.S. Treasury bonds, notes and bills and other U. S.
government securities (through a correspondent), and twenty-four hour automated
teller service. Each of the Banks has ATMs and they are all part of the Star and
Cirrus networks.

The mortgage company provides a wide variety of one to four family
residential mortgage products in the Columbia, Sumter and Anderson, South
Carolina markets. Management expects that these products will augment those
currently available through the Banks.

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Competition

The market for financial institutions in Orangeburg, Sumter, and
Florence is highly competitive. Banks generally compete with other financial
institutions through the banking services and products offered, the pricing of
services, the level of service provided, the convenience and availability of
services, and the degree of expertise and personal concern with which services
are offered. The Banks encounter strong competition from most of the financial
institutions in their market areas.

The market area for the Orangeburg bank generally encompasses an area
extending nine miles around the city of Orangeburg. The market area for the
Sumter bank generally encompasses the county of Sumter. The market area for the
Florence bank generally encompasses the city of Florence. In the conduct of
certain banking business, the Banks also compete with credit unions, consumer
finance companies, insurance companies, money market mutual funds, and other
financial institutions, some of which are not subject to the same degree of
regulation and restrictions imposed upon the Banks. Many of these competitors
have substantially greater resources and lending limits than the Banks and offer
certain services, such as international banking and trust services, that the
Banks do not provide. The Banks believe, however, that their relatively small
size permits them to offer more personalized services than many of their
competitors. The Banks attempt to compensate for their lower lending limits by
participating larger loans with other institutions, often with each other.

Most of the other financial institutions in the Orangeburg, Sumter, and
Florence areas are branch offices of large, regional banks. At June 30, 2001,
there were eight financial institutions competing with the Corporation in the
city of Orangeburg, seven financial institutions competing with the Corporation
in Sumter County, and 18 financial institutions competing with the Corporation
in the city of Florence. At June 30, 2001, the Orangeburg bank had the second
largest deposit base in the city of Orangeburg. At June 30, 2001, the Sumter
bank had the fifth largest deposit base in Sumter County. At June 30, 2001, the
Florence bank had the eighth largest deposit base in the city of Florence. Each
of the Corporation's subsidiary banks increased its market share in 2001.

Dependence on Major Customers

The Banks do not consider themselves dependent on any single customer
or small group of customers, either in the deposit or lending areas.

SUPERVISION AND REGULATION

Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of CBI and the Banks.

As discussed below under the caption "Recent Legislation", Congress has
recently adopted extensive changes in the laws governing the financial services
industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience. Neither CBI nor the
Banks has yet made a decision as to how to adapt the new legislation to its use.
Accordingly, the following discussion relates to the supervisory and regulatory
provisions that apply to CBI and the Banks as they currently operate.

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Regulation of Bank Holding Companies

General

As a bank holding company registered under the Bank Holding Company Act
("BHCA"), CBI is subject to the regulations of the Federal Reserve. Under the
BHCA, CBI's activities and those of its subsidiaries are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The BHCA prohibits CBI from acquiring direct
or indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or from merging or consolidating
with another bank holding company without prior approval of the Federal Reserve.
The BHCA also prohibits CBI from acquiring control of any bank operating outside
the State of South Carolina unless such action is specifically authorized by the
statutes of the state where the bank to be acquired is located.

Additionally, the BHCA prohibits CBI from engaging in or from acquiring
ownership or control of more than 5% of the outstanding voting stock of any
company engaged in a non-banking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA generally does not place territorial restrictions on
the activities of such non-banking-related activities.

As discussed below under "Recent Legislation", a bank holding company
that meets certain requirements may now qualify as a financial holding company
and thereby significantly increase the variety of services it may provide and
the investments it may make.

CBI is also subject to limited regulation and supervision by the South
Carolina State Board of Financial Institutions. A South Carolina bank holding
company may be required to provide the State Board with information with respect
to the financial condition, operations, management and inter-company
relationships of the holding company and its subsidiaries. The State Board also
may require such other information as is necessary to keep itself informed about
whether the provisions of South Carolina law and the regulations and orders
issued thereunder by the State Board have been complied with, and the State
Board may examine any bank holding company and its subsidiaries. Furthermore,
pursuant to applicable law and regulations, the Company must receive approval
of, or give notice to (as applicable) the State Board prior to engaging in the
acquisition of banking or non-banking institutions or assets.

Obligations of Holding Company to its Subsidiary Banks

A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policies that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.

The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the bank.

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Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and to the
extent necessary, if any such assessment is not paid by any shareholder after
three months notice, to sell the stock of such shareholder to make good the
deficiency.

Capital Adequacy Guidelines for Bank Holding Companies and National Banks

The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based and leverage capital adequacy guidelines
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off balance sheet exposures, as adjusted for credit risks. The
capital guidelines and CBI's capital position are summarized in Note 20 to the
Financial Statements, contained elsewhere in this report. All three of the Banks
are considered well capitalized.

Failure to meet capital guidelines could subject the banks to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.

The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.

Payment of Dividends

CBI is a legal entity separate and distinct from the Banks. Most of the
revenues of CBI result from dividends paid to CBI by the Banks. There are
statutory and regulatory requirements applicable to the payment of dividends by
subsidiary banks as well as by CBI to its shareholders.

Each national banking association is required by federal law to obtain
the prior approval of the OCC for the payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus. In addition, national banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation).

The payment of dividends by CBI and the Banks may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the Banks, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The OCC has indicated that paying dividends that deplete a national
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. The Federal Reserve, the OCC and the FDIC have issued policy
statements, which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.

6

Certain Transactions by CBI with its Affiliates

Federal law regulates transactions among CBI and its affiliates,
including the amount of the Banks' loans to or investments in nonbank affiliates
and the amount of advances to third parties collateralized by securities of an
affiliate. Further, a bank holding company and its affiliates are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.

FDIC Insurance Assessments

Because Orangeburg National Bank's, Sumter National Bank's, and
Florence National Bank's deposits are insured by the Bank Insurance Fund of the
FDIC ("BIF"), the Banks are subject to semiannual insurance assessments imposed
by the FDIC. Since January 1, 1997, the assessments imposed on all FDIC deposits
for deposit insurance have an effective rate ranging from 0 to 27 basis points
per $100 of insured deposits, depending on the institution's capital position
and other supervisory factors. However, because legislation enacted in 1996
requires that both Savings Association Insurance Fund ("SAIF") insured and BIF
insured deposits pay a pro rata portion of the interest due on the obligations
issued by the Financing Corporation ("FICO"), the FDIC is currently assessing
BIF-insured deposits an additional 1.26 basis points per $100 of deposits, and
SAIF-insured deposits an additional 6.30 basis points per $100 of deposits, to
cover those obligations. The FICO assessment will continue to be adjusted
quarterly to reflect changes in the assessment bases of the respective funds
based on quarterly Call Report and Thrift Financial Report submissions.

Regulation of the Banks

Orangeburg National Bank, Sumter National Bank, and Florence National
Bank are also subject to examination by the OCC bank examiners. In addition, the
Banks are subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
laws relating to branch banking. The Banks' loan operations are subject to
certain federal consumer credit laws and regulations promulgated thereunder,
including, but not limited to: the federal Truth-In-Lending Act, governing
disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure
Act, requiring financial institutions to provide certain information concerning
their mortgage lending; the Equal Credit Opportunity Act and the Fair Housing
Act, prohibiting discrimination on the basis of certain prohibited factors in
extending credit; the Fair Credit Reporting Act, governing the use and provision
of information to credit reporting agencies; the Bank Secrecy Act, dealing with,
among other things, the reporting of certain currency transactions; and the Fair
Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies. The deposit operations of the Banks are
subject to the Truth in Savings Act, requiring certain disclosures about rates
paid on savings accounts; the Expedited Funds Availability Act, which deals with
disclosure of the availability of funds deposited in accounts and the collection
and return of checks by banks; the Right to Financial Privacy Act, which imposes
a duty to maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.

The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.

Other Safety and Soundness Regulations

Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."

7

A bank that is "undercapitalized" becomes subject to provisions of the
Federal Deposit Insurance Act ("FDIA") restricting payment of capital
distributions and management fees; requiring the OCC to monitor the condition of
the bank; requiring submission by the bank of a capital restoration plan;
restricting the growth of the bank's assets and requiring prior approval of
certain expansion proposals. A bank that is "significantly undercapitalized" is
also subject to restrictions on compensation paid to senior management of the
bank, and a bank that is "critically undercapitalized" is further subject to
restrictions on the activities of the bank and restrictions on payments of
subordinated debt of the bank. The purpose of these provisions is to require
banks with less than adequate capital to act quickly to restore their capital
and to have the OCC move promptly to take over banks that are unwilling or
unable to take such steps.

Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.

Interstate Banking

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("Riegel-Neal"), CBI and any other adequately capitalized bank holding
company located in South Carolina can acquire a bank located in any other state,
and a bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Rieglel-Neal also provides that, in any state that has not
previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multistate bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable state branching laws. South
Carolina law was amended, effective July 1, 1996, to permit such interstate
branching but not de novo branching by an out-of-state bank.

The Riegel-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Banks do not generally
attempt to compete for the banking relationships of large corporations, but
concentrate their efforts on small to medium-sized businesses and on
individuals. CBI believes its Banks have competed effectively in this market
segment by offering quality, personal service.

Legislative Proposals

Other proposed legislation which could significantly affect the
business of banking has been introduced or may be introduced in Congress from
time to time. CBI cannot predict the future course of such legislative proposals
or their impact on CBI should they be adopted.

Recent Legislation

On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions, and a significant number of regulations have already been adopted.

Under provisions of the new legislation, which were effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a

8

"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature; or (3) complementary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.

The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.

The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.

Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.

The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.

CBI anticipates that the Act and the regulations adopted pursuant to
the Act will be likely to create new opportunities for it to offer expanded
services to customers in the future, though CBI has not yet determined what the
nature of the expanded services might be or when CBI might find it feasible to
offer them. CBI further expects that the Act will increase competition from
larger financial institutions that are currently more capable than CBI of taking
advantage of the opportunity to provide a broader range of services. However,
CBI continues to believe that its commitment to providing high quality,
personalized service to customers will permit it to remain competitive in its
market area.

Fiscal and Monetary Policy

Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of CBI are subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on CBI cannot be predicted.

9

Employees

At December 31, 2001 the Corporation employed 126 full time equivalent
employees. Management believes that its employee relations are excellent.

Item 2. Description of Property

The Corporation's Orangeburg bank owns land located at 1820 Columbia
Road NE, in Orangeburg, South Carolina, where the Orangeburg bank maintains its
main office. The Bank operates from a one-story building of approximately 7,000
square feet.

The Orangeburg bank also owns a building, which was previously a branch
of the bank, at the corner of Broughton and Glover Streets in Orangeburg. The
Orangeburg bank currently rents this facility to the Corporation for office
space. In June 1999 the Bank moved into a new branch facility located adjacent
to the old building. This new branch office is approximately 6,500 square feet.

The foregoing properties are owned in fee simple by the Orangeburg
bank.

The Corporation's Sumter bank has fee simple title to land and a
one-story 6,500 square foot building located at 683 Bultman Drive, in Sumter,
South Carolina, where the Sumter bank maintains its main office.

The Corporation's Sumter bank opened a branch bank on West Liberty
Street in Sumter in February 2002. The branch is a one-story building of
approximately 3,600 square feet. The approximate cost of the building is
$705,000. The land, approximately one acre, is being leased under a
noncancellable operating lease for an initial term of twenty years. The details
of the lease are discussed in Note 6 to the financial statements contained
elsewhere in this report.

The Florence bank is leasing approximately 1.7 acres of land located at
2009 Hoffmeyer Road in Florence, South Carolina. This land is the site of the
main office for Florence National Bank. The details of the lease are discussed
in Note 6 to the financial statements contained elsewhere in this report. The
Corporation has constructed a one-story building for the Florence bank of
approximately 7,500 share feet on the leased site.

See Note 6 to the Corporation's audited financial statements included
in this report for further information about the lease terms.

Item 3. Legal Proceedings

The Company, the Banks and the mortgage company are from time to time
subject to legal proceedings in the ordinary course of their business. No
proceedings were pending at December 31, 2001, that management believes would
have a material adverse effect on the Company or its subsidiaries.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted for a vote of the security holders during the
fourth quarter of 2001.

10

PART II

Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters

The Corporation's shares of Common Stock are traded on the American
Stock Exchange (the AMEX) under the ticker symbol SCB.

The following table summarizes the range of high and low prices for the
Corporation's Common Stock as reported on the American Stock Exchange for each
quarterly period over the last two years.

Sales price of the Corporation's Common Stock
Quarter ended High Low
Mar. 31, 2000 $12.88 $10.88
June 30, 2000 $12.50 $10.75
Sept. 30, 2000 $12.56 $11.13
Dec. 31, 2000 $11.87 $10.56
Mar. 31, 2001 $11.25 $10.20
June 30, 2001 $11.49 $10.65
Sept. 30, 2001 $12.60 $10.30
Dec. 31, 2001 $13.20 $11.00

The above amounts have been restated for a five-percent stock dividend paid on
January 31, 2000.

During 2001 the Corporation had a stock sales volume of 133,900 shares compared
to 181,500 shares in 2000.

There were 1,925 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 2001 compared to 1,891 the prior year.

During 2001, The Corporation authorized and paid quarterly cash
dividends totaling 28 cents per share. The total cost of these dividends was
$904,000 or 23% of after tax profits. During 2000 The Corporation authorized and
paid quarterly cash dividends totaling 22 cents per share. The total cost of
these dividends was $645,000 or 20% of after tax profits. The dividend policy of
the Corporation is subject to the discretion of the Board of Directors and
depends upon a number of factors, including earnings, financial condition, cash
needs and general business conditions, as well as applicable regulatory
considerations. Subject to ongoing review of these circumstances, the Board
expects to maintain a reasonable, safe, and sound dividend payment policy.

The current source of dividends to be paid by the Corporation is the
dividends received from its banking subsidiaries. Accordingly, the laws and
regulations that govern the payment of dividends by national banking
associations may restrict the Corporation's ability to pay dividends. National
banks may pay dividends only out of present and past earnings with numerous
limitations designed to ensure that the Banks have adequate capital to operate
safely and soundly (See Item 1. Description of Business - Supervision and
Regulation - Payment of Dividends). At December 31, 2001 the Banks could pay up
to $5,936,000 in dividends without special approval of the Comptroller of the
Currency.

In connection with the acquisition of Resource Mortgage, Inc. in the
fourth quarter of 2001, the Company issued an aggregate of 95,454 shares of its
common stock to shareholders of Resource Mortgage, Inc. At December 31, 2001,
63,640 of such shares were held in escrow by Orangeburg National Bank pending
satisfaction of conditions to release set forth in the acquisition agreement.
Issuance of such shares was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933 because no public offering was involved.

11

Item 6. Selected Financial Data

The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1997
through December 31, 2001.

*Per share information is adjusted for a 5% stock dividend paid on Jan. 31, 2000

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation

INTRODUCTION

The discussion and data presented below analyze major factors and
trends regarding the financial condition and results of operations of Community
Bankshares Inc. and its subsidiaries for the three year period ended December
31, 2001.

Forward Looking Statements

Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as `forward looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The words "estimate," "project," "intend,",
"expect," "believe," "anticipate," "plan," and similar expressions identify
forward-looking statements. The Corporation cautions readers that forward

12

looking statements, including without limitation, those relating to the
Corporation's future business prospects, ability to successfully integrate
recent and proposed acquisitions, revenues, working capital, liquidity, capital
needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Corporation's reports filed with the Securities and Exchange
Commission.

Business of the Corporation

Community Bankshares Inc. is a bank holding company. CBI now owns three
banking subsidiaries: Orangeburg National Bank, Sumter National Bank, and
Florence National Bank; and a mortgage company subsidiary, Community Resource
Mortgage, Inc. ("CRM"), which was acquired in November 2001. CBI provides item
and data processing and other technical services for its banking subsidiaries.
The consolidated financial report for 2001 represents the operations of the
holding company and its three banks and its newly acquired mortgage company.
Parent-only financial statements are presented in the footnotes to the
consolidated financial statements.

Orangeburg National Bank is a national banking association and
commenced operations in November 1987. It operates two offices in Orangeburg,
South Carolina. Sumter National Bank is a national banking association and
commenced operations in June 1996. It operates two offices in Sumter, South
Carolina. Florence National Bank is a national banking association and commenced
operations in July 1998. It operates one office in Florence, South Carolina. The
banks provide commercial banking services in their respective communities. Their
primary customer markets are consumers and small to medium size businesses.

Community Resource Mortgage is a South Carolina corporation which
commenced business in 1996, and was acquired by the Corporation in 2001. It is a
mortgage company that provides a variety of one to four family residential
mortgage products from offices in Columbia, Sumter and Anderson, South Carolina.

Also in late November 2001 the Corporation entered into an agreement to
acquire the common stock of Ridgeway Bancshares Inc., the holding company for
the Bank of Ridgeway. The agreement provides for the Corporation to issue
1,000,000 shares of its stock and $4,000,000 cash in exchange for 100% of the
stock of Ridgeway. The transaction must be approved by two-thirds of the
shareholders of both companies, as well as various regulators. Shareholder
meetings for both companies have been scheduled for April 2002. CBI anticipates
completion of the transaction by July 1, 2002.

Stock Dividend

On January 31, 2000 the Corporation effected a five-percent stock
dividend. All references to per share information contained in this discussion
have been adjusted accordingly.

13

DISTRIBUTION OF ASSETS AND LIABILITIES

The following table presents the average balance sheets, the average
yield and the interest earned on earning assets, and the average rate and the
interest paid on interest bearing liabilities for the years ended December 31,
2001, 2000 and 1999.

1. Computed on a fully taxable equivalent basis using a federal tax rate of
34%.
2. Nonaccruing loans are included in the average loan balances and income from
such loans is recognized on a cash basis. Loans fees are immaterial.
3. Total interest earning assets yield less total interest bearing liabilities
rate.
4. Net yield equals net interest income divided by total interest earning
assets.

14

Earnings Performance, 2001 compared to 2000

The Corporation's net income was $3,908,000 or $.1.21 per share in
2001. This compares to $3,147,000 or $.99 per share in 2000, an increase of
$761,000, or 24.2%.

This increase in earnings resulted from improved profit at all three
banks. Earnings at the Sumter bank increased to $1,184,000 in 2001 from $908,000
in 2000, an increase of 30.4% or $276,000. Earnings at the Orangeburg bank
increased to $2,507,000 in 2001 from $2,243,000 in 2000, an increase of 11.8% or
$264,000. Earnings at the Florence bank increased to $154,000 in 2001 from
$78,000 in 2000, an increase of 97.4% or $76,000.

On November 1, 2001 the Corporation acquired Community Resource
Mortgage in a purchase transaction. Resource earned $172,000 for the two month
period ended December 31, 2001.

Interest Income and Interest Expense, 2001 compared to 2000

The Corporation's interest income and interest expense were
substantially influenced by the extraordinary interest rate environment during
2001. When the year began the prime lending rate was at 9.5%, by year end the
rate had fallen to 4.75%, a fifty percent decline in market rates within twelve
months.

The Corporation's interest income increased slightly in 2001 from 2000.
In 2001 the Corporation earned $21,201,000 in total interest income, up from the
prior year's $20,203,000. This represented a $998,000 or a 4.9% increase. This
growth was the result of increased volume of earning assets at the banks, which
more than offset the reduction in rates.

Interest bearing deposits in other banks contributed $161,000 to
interest income in 2001, up from $64,000 the prior year, an increase of $97,000
or 152%. In 2001 the Corporation had an average of $4,044,000 in interest
bearing deposits, up from the prior year's $1,024,000, an increase of $3,020,000
or 295%. The average yield on these deposits during 2001 was 3.98%, down from
the prior year's 6.25%. The decline in market interest rates caused a large
number of investments to be called prior to maturity, generating extra cash
which was placed in interest bearing deposits and federal funds sold.

Taxable investments contributed $2,167,000 to interest income in 2001,
down from $3,025,000 the prior year, a decrease of $858,000 or 28.4%. The
investment portfolio averaged $37,751,000 in 2001, down from the prior year's
$47,377,000, a decrease of $9,626,000 or 20.3%. The Corporation's investment
portfolio consists primarily of short-term U. S. government and agency debt
issues. The average yield on investments during 2001 was 5.74%, down from 6.38%
in 2000.

The Corporation's tax-exempt securities portfolio earned $29,000 during
2001, down from $32,000 the prior year, a decrease of $3,000 or 9.4%. The
portfolio averaged $766,000 in 2001, down from $807,000 in 2000, a decrease of
$41,000 or 5.1%. The average yield was 5.74%, compared to 6.01% the prior year,
on a fully taxable equivalent basis.

Federal funds sold represent temporary surplus funds that one bank
lends to another. These funds are a source of day to day operating liquidity.
Federal funds sold contributed $734,000 to interest income in 2001, up from
$430,000 in the prior year, an increase of $304,000 or 70.7%. The Corporation
had an average of $19,095,000 in federal funds during 2001, up from the prior
year's $6,670,000, an increase of $12,425,000 or 186%. The average yield on
federal funds during 2001 was 3.84%, down from 6.45% in 2000. As noted above,
the decline in market interest rates caused numerous investments to be called

15

prior to maturity, which generated unusually high amounts of cash that the
Company placed in interest bearing deposits and federal funds.

The Corporation's major source of interest income is the loan
portfolio, which contributed $18,110,000 to interest income in 2001, up from
$16,652,000 in the prior year, an increase of $1,458,000 or 8.8%. The average
loan portfolio for 2001 was $211,901,000 compared to the prior year's
$179,654,000, an increase of $32,247,000 or 17.95%. The average yield on loans
during 2001 was 8.55%, down from 9.27% in 2000.

The Corporation had average earning assets in 2001 of $273,557,000,
which earned a yield of 7.75%. The Corporation had average earning assets in
2000 of $235,532,000, which earned a yield of 8.58%. Average earning assets
increased $38,025,000 or 16.1%, while the yield on these assets decreased by 83
basis points or 9.7%.

Savings accounts consist of savings and money market accounts. Total
savings accounts averaged $38,194,000 in 2001, up from $33,445,000 in the prior
year, an increase of $4,749,000 or 14.2%. The cost of these funds decreased to
2.92% in 2001 from 4.06% in the prior year.

Interest bearing transaction accounts are the primary checking accounts
that the Banks offer customers. This overall category averaged $26,917,000 in
2001, up from $21,039,000 in 2000, an increase of $5,878,000 or 27.9%. The
average cost of these funds was .98% in 2001 compared to 1.56% in the prior
year.

Time deposits are the largest category of deposits, averaging
$136,938,000 in 2001, up from $119,949,000 in the prior year, an increase of
$16,989,000 or 14.2%. The cost of time deposits decreased to 5.47% from 5.76%.

Short-term borrowing includes federal funds purchased and securities
sold under agreements to repurchase. The repurchase agreements are entered into
with a number of larger commercial customers. These accounts are not deposits;
they are considered other obligations of the Banks. Balances in these accounts
are subject to wide fluctuation and they constitute a relatively small portion
of the balance sheet. The average balance for 2001 was $7,533,000, up from
$4,501,000 in the prior year, an increase of $3,032,000 or 67.4%. The cost of
these funds decreased to 3.15% from 4.84%.

The Banks are members of and have the ability to borrow from the
Federal Home Loan Bank (FHLB). The Banks had an average $19,899,000 outstanding
borrowing balance during 2001 at an average cost of 5.77%. The Banks had an
average $19,385,000 outstanding during 2000 at an average cost of 6.01%.
Borrowings increased by $514,000 or 2.7%. These borrowings are mostly for longer
terms than other interest bearing liabilities and are part of the Banks'
on-going asset/liability management strategy. These loans are secured by a
blanket lien on the Banks' one-to-four family residential mortgage loan
portfolios or portions of their investment portfolios and the Banks' FHLB stock.

The Corporation had average total interest bearing liabilities in 2001
of $229,481,000 costing an average of 4.47% compared with interest bearing
liabilities in 2000 of $198,319,000 costing an average of 5.03%. Average
interest bearing liabilities increased $31,162,000 or 15.7%, while the cost of
these liabilities decreased by 56 basis points or 11.1%.

16

Earnings Performance, 2000 compared to 1999

The Corporation's net income was $3,147,000 or $.99 per share in 2000.
This compares to $2,182,000 or $.68 per share in 1999, an increase of $965,000,
or 44.2%.

This increase in earnings resulted from improved profit at all three
banks. Earnings at the Sumter bank increased to $908,000 in 2000 from $559,000
in 1999, an increase of 62.4% or $349,000. Earnings at the Orangeburg bank
increased to $2,243,000 in 2000 from $2,054,000 in 1999, an increase of 9.2% or
$189,000. Earnings at the Florence bank increased to $78,000 in 2000 from a loss
of $314,000 for 1999, an improvement of $392,000.

Interest Income and Interest Expense, 2000 compared to 1999

The Corporation's interest income increased substantially in 2000 from
1999. In 2000 the Corporation earned $20,203,000 in total interest income, up
from the prior year's $15,388,000. This represented a $4,815,000 or a 31.3%
increase. This growth was mostly the result of increased volume in the loan and
investment portfolios at the banks.

Interest bearing deposits in other banks contributed $64,000 to
interest income in 2000, down from $101,000 the prior year, a decrease of
$37,000 or 36.6%. In 2000 the Corporation had an average of $1,024,000 in
interest bearing deposits, down from the prior year's $1,937,000, a decrease of
$913,000 or 47.1%. The average yield on these deposits during 2000 was 6.25%, up
from the prior year's 5.21%.

Taxable investments contributed $3,025,000 to interest income in 2000,
up from $2,458,000 the prior year, an increase of $567,000 or 23.1%. The
investment portfolio averaged $47,377,000 in 2000, up from the prior year's
$39,856,000, an increase of $7,521,000 or 18.9%. The Corporation's investment
portfolio consists primarily of short-term U. S. government and agency debt
issues. The average yield on investments during 2000 was 6.38%, up from 6.17% in
1999.

The Corporation's tax-exempt securities portfolio earned $32,000 during
2000, up from $30,000 the prior year, an increase of $2,000 or 6.7%. The
portfolio averaged $807,000 in 2000, up from $783,000 in 1999, an increase of
$24,000 or 3.1%. The average yield was 6.01%, compared to 5.81% the prior year,
on a fully taxable equivalent basis.

Federal funds sold contributed $430,000 to interest income in 2000,
down from $555,000 in the prior year, a decrease of $125,000 or 22.5%. The
Corporation had an average of $6,670,000 in federal funds during 2000, down from
the prior year's $10,967,000, a decrease of $4,297,000 or 39.2%. The average
yield on federal funds during 2000 was 6.45%, up from 5.06% in 1999. The decline
in federal funds sold was directly related to continued strong loan demand.

The Corporation's major source of interest income is the loan
portfolio, which contributed $16,652,000 to interest income in 2000, up from
$12,244,000 in the prior year, an increase of $4.246,000 or 34.2%. The average
loan portfolio for 2000 was $179,654,000 compared to the prior year's
$139,215,000, an increase of $40,439,000 or 29%. The average yield on loans
during 2000 was 9.27%, up from 8.80% in 1999.

The Corporation had average earning assets in 2000 of $235,532,000,
which earned a yield of 8.58%. The Corporation had average earning assets in
1999 of $192,758,000, which earned a yield of 7.98%. Average earning assets
increased $42,774,000 or 22.2%.

17

The category savings accounts consist of savings and money market
accounts. Total savings accounts averaged $33,445,000 in 2000, up from
$28,321,000 in the prior year, an increase of $5,124,000 or 18.1%. The cost of
these funds increased to 4.06% in 2000 from 3.33% in the prior year.

Interest bearing transaction accounts are the primary checking accounts
that the Banks offer customers. This overall category was $21,039,000 in 2000,
up from $17,417,000 in 1999, an increase of $3,622,000 or 20.8%. The average
cost of these funds was 1.56% in 2000 compared to 1.54% in the prior year.

Time deposits are the largest category of deposits, averaging
$119,949,000 in 2000, up from $96,761,000 in the prior year, an increase of
$23,188,000 or 24%. The cost of time deposits increased to 5.76% from 5.07%.

Short-term borrowings are subject to wide fluctuation, and they
constitute a relatively small portion of the balance sheet. The average balance
for 2000 was $4,501,000, down from $5,210,000 in the prior year, a decrease of
$709,000 or 13.6%. The cost of these funds increased to 4.84% from 3.26%.

The Banks had an average $19,385,000 outstanding borrowing balance with
the FHLB during 2000 at an average cost of 6.01%. The banks had an average
$12,335,000 with the FHLB outstanding during 1999 at an average cost of 5.47%.
Borrowings increased by $7,050,000 or 57.2%. These borrowings are mostly for
longer terms than other interest bearing liabilities and are part of the Banks'
on-going asset/liability management strategy. These loans are secured by a
blanket lien on the Banks' one-to-four family residential mortgage loan
portfolios or portions of their investment portfolios and the Banks' FHLB stock.

The Corporation had total interest bearing liabilities in 2000 of
$198,319,000 costing an average of 5.03% compared with interest bearing
liabilities in 1999 of $160,044,000 costing an average of 4.35%. Average
interest bearing liabilities increased $38,275,000 or 23.9%.

Volume and Rate Variance Analysis

The table "Volume and Rate Variance Analysis" provides a summary of
changes in net interest income resulting from changes in volume and changes in
rate. (The changes in volume are the difference between the current and prior
year's balances times the prior year's rate. The changes in rate are the
difference between the current and prior year's rate times the prior year's
balance.)

As reflected in the table, the increase in 2001 net interest income of
$712,000 is due to changes in volume. Of the $998,000 increase in interest
income, most was attributed to increased volume in the loan portfolio. Of the
$286,000 increase in interest expense, most was attributed to increased volume
of time deposits. The increase in 2000 net interest income of $1,798,000 is also
primarily due to changes in volume. Of the $4,815,000 increase in interest
income, $3,812,000 or 79% was from volume growth in the loan portfolio. Of the
$3,017,000 increase in interest expense, $1,276,000 or 42% was due to volume
increases for time deposits. Also, $728,000 or 24% of the increase was due to
rate changes in time deposits.

The prime interest rate has changed dramatically over the last three
years. The prime rate was 7.75% during the first half of 1999, when rates
started to climb. By May 2000 the rate had climbed to 9.50%. In January 2001 the
Federal Reserve began a series of rate cuts that brought the prime rate down to
4.75% by December. Management expects interest rates to be fairly stable in the

18

near term. Therefore, as in 2001, any improvements in net interest income during
2002 are more likely to be the result of changes in volume and the mix of
earning assets and interest bearing liabilities than changes in rates.

Volume and Rate Variance Analysis

The change in interest due to both and yield/rate has been allocated to change
due to volume and change due to yield/rate in proportion to the absolute value
of the change in each.

PREMISES AND EQUIPMENT

Premises and equipment were $5,177,000 at December 31, 2001 compared to
$4,411,000 the prior year, an increase of $766,000 or 17.4%. Most of the
increase was due to the construction of a new branch office in Sumter, which
opened in February 2002. Premises and equipment are discussed further in Note 6
to the consolidated financial statements.

INVESTMENT PORTFOLIO

The Corporation's investment portfolio consists primarily of short-term
U. S. government and agency debt issues. Investment securities averaged $38.5
million in 2001, $48.2 million in 2000 and $40.6 million in 1999. Note 4 to the
consolidated financial statements provides further information on the investment
portfolio.

19

The table below gives the amortized cost and fair value of the
Corporation's investment portfolio for the past three years.

Information on the maturity distribution of the investment portfolio is
presented in Note 4 to the financial statements.

At December 31, 2001 the Corporation's available for sale portfolio
showed a net of tax other comprehensive loss in the equity section of the
balance sheet of $7,000 compared to a loss of $131,000 the prior year. The
change in the valuation of the investment portfolio was directly related to the
changes in market interest rates during the year.

LOAN PORTFOLIO

The average size of the loan portfolio in 2001 was $211.9 million
compared to $179.7 million in 2000 and $139.2 million in 1999.

At December 31, 2001 the net loan portfolio was $227 million, compared
to $192.7 million the prior year, an increase of $34.3 million or 17.8%.

Management believes the loan portfolio is adequately diversified. There
are no foreign loans and few agricultural loans.

The table, "Loan Portfolio Composition," in the following section,
indicates the amounts of loans outstanding according to the type of loan at the
dates indicated.

20

Loan Portfolio Composition

The following table shows the composition of the loan portfolio for the
years ended December 31, 1997 through 2001.

Commercial, financial, and agricultural loans, primarily representing
loans made to small and medium size businesses, increased by $4.2 million or
8.1% during 2001. These loans may be made on either a secured or an unsecured
basis. When taken, security usually consists of liens on inventories,
receivables, equipment, and furniture and fixtures. Unsecured business loans are
generally short-term with emphasis on repayment strengths and low debt-to-worth
ratios.

Real estate loans consist of construction loans and loans secured by
mortgages. Construction loans are also generally secured with mortgages. Because
the Corporation's subsidiaries are community banks, real estate loans comprise
the bulk of the loan portfolio. Construction loans increased $4.2 million or
27.1% in 2000. Mortgage loans increased $28.8 million or 29.4% in 2001.

The Corporation's Banks generally do not compete with 15 and 30 year
fixed rate secondary market mortgage interest rates, so they have elected to
pursue the origination of mortgage loans that could be easily sold into the
secondary mortgage market. Community Resource Mortgage also originates loans for
sale in the secondary market. These loans are generally pre-qualified with the
underwriters to avoid problems in the sale of the loans. In 2001, 2000 and 1999
the Corporation sold $34.9 million, $5.9 million, and $9.9 million,
respectively, in such loans. These loans are usually sold at par so no gain or
loss is recognized at the time of sale. However, the origination and sale of
these loans generates fee income. The Corporation also makes mortgage loans for
its own account. Such loans are usually for a shorter term than loans originated
to sell and usually have a variable rather than a fixed interest rate.

Loans to individuals held by the Corporation decreased $2.4 million or
8.3% in 2001.

Interest income from the loan portfolio was $18.1 million in 2001
compared to $16.7 million in 2000, an increase of $1.4 million or 8.4%. The
average yield on the portfolio was 8.55% in 2001 compared to 9.32% in 2000.

21

Maturity Distribution of Loans

The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 2001 as well as the type of
interest on loans due after one year.

Lending Risks

Because extending credit involves a certain degree of risk, management
has established loan and credit policies designed to control both the types and
amounts of risks assumed and to minimize losses. Such policies include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices and collection procedures, and nonaccrual and charge-off guidelines.
The Corporation also conducts internal loan reviews to monitor on an ongoing
basis the quality of its portfolio.

The Corporation has a geographic concentration of loans within its home
communities of Orangeburg, Sumter, and Florence, South Carolina, because its
primary business is community banking.

Concentrations of credit also occur where a number of customers are
engaged in similar business activities. A concentration is defined as a
concentration of loans exceeding 10% of total loans. The banks regularly review
their business lending in an effort to detect, monitor and control such loan
concentrations. At December 31, 2001 the Corporation had no such loan
concentrations.

Nonaccrual and Past Due Loans

The nonaccrual, past due, and impaired loans and other real estate
owned are summarized in Note 5 to the consolidated financial statements. The
Corporation had no restructured loans in 2001 or 2000.

22

Gross income that would have been recorded for the years ended December
31, 2001 and 2000, if nonaccrual loans had been performing in accordance with
their original terms was approximately $7,000 and $33,000 respectively. No
interest income was recognized in the current period on the non-accrual loans.

The Corporation's policies on nonaccrual and impaired loans are
discussed in Note 2 to the consolidated financial statements.

Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 2001. Management is aware of no trends, events or
uncertainties that would cause nonaccrual loans to change materially in 2002.

Potential Problem Loans

At December 31, 2001 the Corporation's internal loan review program had
identified $1,684,000 (0.73% of the portfolio) in various loans where
information about credit problems of borrowers had caused management to have
concerns about the ability of the borrowers to comply with original repayment
terms. The amount identified does not represent management's estimate of the
potential losses since a large portion of these loans are secured by real estate
and other marketable collateral.

Secured versus Unsecured Loans

The Corporation does not aggressively seek to make unsecured loans,
since these loans may be somewhat more risky than collateralized loans. There
are, however, occasions when it is in the business interests of the Corporation
to provide short-term, unsecured loans to selected customers. In 2001 the
Corporation had $16.1 million in unsecured loans or 6.6% of its loan portfolio.
In 2000 the Corporation had $12.4 million in unsecured loans or 6.4% of its loan
portfolio. Such loans are made on the basis of management's evaluation of the
customer's ability to repay and net worth.

Loan Participations

Periodically, the Corporation's banking subsidiaries enter into sales
or purchases of loan participations with one another and other financial
institutions. The banks generally only sell participations in loans that would
cause the bank to exceed its lending limitation to a single customer. As the
Banks' lending limits increase they may buy back such loan participations. Such
loans are usually commercial in nature, subject to the purchasing Bank's
standard underwriting requirements, and all risks associated with the portion of
the loan sold flow to the purchaser.

At the end of 2001 the three banks had $16,868,000 in loan
participations purchased. Of these loans $5,265,000 was with nonaffiliated
banks.

At the end of 2001 the three banks had $11,953,000 in loan
participations sold. Of these loans $801,000 was with nonaffiliated banks.

At the end of 2000 the three banks had $14,748,000 in loan
participations purchased. Of these loans $6,017,000 was with nonaffiliated
banks.

23

At the end of 2000 the three banks had $10,895,000 in loan
participations sold. Of these loans $2,164,000 was with nonaffiliated banks.

Other Real Estate

Other real estate, consisting of foreclosed properties, was $267,000 in
2001 and $0 in 2000 and 1999. Other real estate is initially recorded at the
lower of net loan balance or its estimated fair value, net of estimated disposal
costs. The estimate of fair value for foreclosed properties is determined by
appraisal at the time of acquisition.

SUMMARY OF LOAN LOSS EXPERIENCE

Allowance for Loan Losses

The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously charged-off loans are
credited to the allowance. At December 31, 2001 and 2000 the allowance for loan
losses was 1.23% and 1.24%, respectively, of total loans. The following table
provides details on the changes in the allowance for loan losses during the past
five fiscal years.

24

(1) The provision expense for 2001 includes $28,000 that was acquired with the
purchase of Community Resource Mortgage. The amount attributed to the
operation of the banks was $650,000.

Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and loans to individuals. The combination of
a relatively short operating history and relatively high asset quality precludes
management from establishing a meaningful specific loan loss percentage for the
computation of the allowance for each category. Instead management assigns an
estimated percentage factor to each in the computation of the overall allowance.
In general terms, the real estate portfolio is subject to the least risk,
followed by the commercial loan portfolio, followed by the loans to individuals
portfolio. The Banks' internal and external loan review programs will from time

25

to time identify loans that are subject to specific weaknesses and such loans
will be reviewed for a specific loan loss allowance.

The Corporation operates three independent community banks in South
Carolina. Under the provisions of the National Bank Act each board of directors
is responsible for determining the adequacy of its bank's loan loss allowance.
In addition, each bank is supervised and regularly examined by the Office of the
Comptroller of the Currency (the "OCC"). As a normal part of a safety and
soundness examination, the OCC examiners will assess and comment on the adequacy
of a national bank's allowance for loan losses. The allowance presented in the
financial statements is on an aggregated basis and as such might differ from the
allowance that would be present if the Corporation had only one banking
subsidiary.

The nature of community banking is such that the loan portfolios will
be predominantly comprised of small and medium size business and consumer loans.
As community banks there is by definition a geographic concentration of loans
within the Banks' respective city or county. Management at each bank monitors
the loan concentrations and loan portfolio quality on an ongoing basis
including, but not limited to: quarterly analysis of loan concentrations,
monthly reporting of past dues, non-accruals, and watch loans, and quarterly
reporting of loan charge-offs and recoveries. These efforts focus on historical
experience and are bolstered by quarterly analysis of local and state economic
conditions, which is part of the Banks' assessment of the adequacy of their
allowances for loan losses.

Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 2002 will at least approximate the
2001 levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of December 31, 2001 is sufficient to absorb the expected charge-offs and
provide adequately for the inherent losses that remain in the loan portfolio.
Management will continue to closely monitor the levels of non-performing and
potential problem loans and address the weaknesses in these credits to enhance
the amount of ultimate collection or recovery of these assets. Management
considers the levels and trends in non-performing and past due loans in
determining how the provision for loan losses is adjusted.

The following table presents the allocation of the allowance for loan
losses, as of December 31, 1997 through 2001, compared with the percent of loans
in the applicable categories to total loans.

26

The Corporation maintains an allowance for loan losses it believes
sufficient to cover estimated losses. The allowance is allocated to different
segments of the portfolio, based on management's expectations of risk in that
segment of the portfolio. This allocation is an estimate only and is not
intended to restrict the Corporation's ability to respond to losses. The
Corporation charges losses from any segment of the portfolio to the allowance,
regardless of the allocation.

In reviewing the adequacy of the allowance for loan losses at the end
of each period, the Corporation considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, and the quality of collateral securing problem loans. The
allowance for loan losses is management's best estimate of probable loan losses
that have been incurred as of December 31, 2001.

Provision for Loan Losses

The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio, general
economic conditions and the adequacy of the allowance for loan losses. The
amount of the provision is the amount which is necessary to cause the allowance
to be adequate. Provisions for loan losses totaled $678,000 and $688,000 in 2001
and 2000, respectively. Based on the available information, the Corporation
considers its 2001 provision for loan losses adequate.

Net charge-offs in 2001 were $272,000 or 40.1% of the provision for
loan losses compared to $200,000 or 29.1% of the provision for loan losses in
the prior year. See "Allowance for Loan Losses" for a discussion of the factors
management considers in its review of the adequacy of the allowance and
provision for loan losses.

AVERAGE DEPOSITS

The Corporation's average deposits in 2001 were $234 million compared
to $203 million in 2000, an increase of $30.8 million or 15.2%.

The total average deposits for the Corporation for the years ended
December 31, 2001, 2000 and 1999 are summarized below:

27

At December 31, 2001 the Corporation had $51,374,000 in certificates of
deposit of $100,000 or more. The maturities of these certificates are as
follows:

Maturity
(Dollar amounts in
thousands)
Of 3 months or less ................. $16,522
From 3 to 6 months .................. 18,072
From 6 to 12 months ................. 12,048
Over 12 months ...................... 4,732
-------
Total ............................... $51,374
=======

RETURN ON EQUITY AND ASSETS

The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2001, 2000, and 1999.

2001 2000 1999
---- ---- ----
Return on assets (ROA) .................. 1.36% 1.26% 1.06%
Return on equity (ROE) .................. 15.58% 14.67% 11.12%
Dividend payout ratio
(dividends/net income) ................ 23.13% 20.50% 27.82%
Equity as a percent of assets ........... 8.71% 8.59% 9.49%

SHORT-TERM BORROWINGS

The Corporation's short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
mature each business day. There was $4,171,000, $9,352,000, and $2,782,000
outstanding at year-end 2001, 2000 and 1999, respectively. Further information
is provided in the following table.

2001 2000 1999
---- ---- ----
(Dollar amounts in thousands)
Outstanding at year-end .............. $ 4,171 $ 9,352 $ 2,782
Interest rate at year-end ............ 2.08% 5.01% 3.50%
Maximum month-end balance
during the year .................... $10,976 $ 9,532 $ 6,473
Average amount outstanding
during the year .................... $ 7,533 $ 4,501 $ 5,210
Weighted average interest
rate during the year ............... 3.15% 4.84% 3.26%

Lines of credit payable represent warehouse lines funding loan
production for CRM. At year end these balances totaled $9,028,000. Of this
amount $8,324,000 was borrowed from BB&T at the one month LIBOR rate plus 1.95%.
The BB&T line expires in October 2002. The lines are secured with the value of
the underlying mortgages and the guarantee of the Corporation to a maximum of $9
million. The remaining lines are priced at prime plus 1.5% to 2% and are being
phased out in favor of the BB&T line. The operations of CRM are included for
only the two month period ended December 31, 2001, and accordingly the average
balance of the lines are small and included with the above reported table.

28

FEDERAL HOME LOAN BANK ADVANCES

The Corporation's banking subsidiaries are members of the Federal Home
Loan Bank of Atlanta. As such they have access to long-term borrowing from the
FHLB. There were $20,280,000, $20,350,000 and $19,420,000 outstanding in such
advances at year-end 2001, 2000 and 1999, respectively. Further information on
these borrowings from the FHLB is provided in the following table.

2001 2000 1999
---- ---- ----
(Dollar amounts in thousands)
Outstanding at year-end .............. $20,280 $20,350 $19,420
Interest rate at year-end ............ 5.54% 6.04% 5.55%
Maximum month-end balance
during the year .................... $20,350 $20,350 $19,420
Average amount outstanding
during the year .................... $19,899 $19,385 $12,335
Weighted average interest
rate during the year ............... 5.77% 6.01% 5.47%

CAPITAL

Dividends

During 2001 the Corporation paid cash dividends to shareholders of 28
cents per share, which totaled $904,000. This represented a dividend payout
ratio (dividends divided by net income) of 23%. During 2000 the Corporation paid
cash dividends to shareholders of 22 cents per share, which totaled $645,000.
This represented a dividend payout ratio of 20.5%.

Common Stock Account

The common stock account at December 31, 2001 totaled $17,208,000
compared to $15,928,000 the prior year, an increase of $1,280,000. Virtually all
of this increase was related to the issuance of 95,454 shares in connection with
the acquisition of Resource Mortgage Inc. at November 1, 2001.

Capital Adequacy

The Federal Reserve and federal bank regulatory agencies have adopted a
risk-based capital standard for assessing the capital adequacy of a bank holding
company or financial institution. The minimum required ratio is 8%. Orangeburg
National Bank, Sumter National Bank, and Florence National Bank are each
considered `well capitalized' for regulatory purposes. This category requires a
minimum risk based capital ratio of 10%. Detailed information on the
Corporation's capital position, as well as that of its subsidiary banks, is
provided in Note 20 to the consolidated financial statements. The Corporation
considers its current and projected capital position to be adequate.

NONINTEREST INCOME AND EXPENSE

Noninterest income, 2001 compared to 2000

Noninterest income increased to $3,584,000 in 2001 from $1,966,000 in
2000, a $1,618,000 or 82.3% increase. There were two major components of this
increase. The Corporation acquired a mortgage company during the fourth quarter

29

of 2001, which was a boom period for mortgage originations. This accounted for
most of the increase in gains on sales of loans, which was $1,033,000 in 2001
compared to only $98,000 in 2000. Also during the second quarter of 2001 the
banks began offering an automated overdraft product to customers. This product
enables customers to overdraw their accounts within specific dollar limits in
exchange for a fee; they then have thirty days to bring their account into a
positive balance. The product accounted for most of the increase in service
charge income, which was $2,058,000 in 2001 compared to $1,475,000 in 2000.

Noninterest expense, 2001 compared to 2000

Overall, non-interest expenses increased to $7,810,000 in 2001 from
$6,552,000 in 2000, an increase of $1,258,000 or 19.2%. Of this increase,
approximately $515,000 or 41% is associated with the operations of Community
Resource Mortgage.

Personnel costs in 2001 were $4,651,000 compared to $3,779,000 the
prior year, an increase of $872,000 or 23.1%.

Premises and equipment expenses in 2001 were $1,009,000 compared to
$942,000 the prior year, a $67,000 or 7.1% increase.

Marketing expenses in 2001 were $266,000 compared to $207,000 the prior
year, a $59,000 or 28.5% increase.

Regulatory fees in 2001 were $181,000 compared to $140,000 the prior
year, a $41,000 or 29.3% decrease.

Supplies expense was $166,000 in 2001 compared to $160,000 in the prior
year, an increase of $6,000 or 3.8%.

Director fees were $162,000 in 2001 compared to $137,000 in the prior
year, an increase of $25,000 or 18.2%. Orangeburg National Bank pays outside
directors $600 per month. Sumter National Bank and Florence National Bank pay
their outside directors $300 per month. The Florence bank began paying director
fees during 2000. The Corporation pays its outside directors $200 per month.

FDIC insurance costs were $48,000 in 2001 compared to $33,000 in the
prior year, an increase of $15,000 or 45.5%.

All other expenses were $1,327,000 in 2001 compared to $1,154,000 in
the prior year, an increase of $173,000 or 15%.

Income Taxes, 2001 compared to 2000

The Corporation pays U. S. corporate income taxes and South Carolina
bank and corporate income taxes. The 2001 provision for income taxes was
$2,156,000 compared to $1,807,000 the prior year, an increase of $349,000 or
19.3%. The Corporation's effective average tax rate was 35.6% in 2001 compared
to 36.5% the prior year.

30

Noninterest income, 2000 compared to 1999

Noninterest income increased to $1,966,000 in 2000 from $1,479,000 in
1999, a $487,000 or 32.9% increase. The major component of this change was in
service charge income, which in 2000 was $1,475,000 compared to $1,031,000 in
the prior year, a $444,000 or 43.1% increase. Most of this increase was related
to growth in the Florence and Sumter banks' returned check fees and deposit
account service charge income.

Noninterest expense, 2000 compared to 1999

Overall, non-interest expenses increased to $6,552,000 in 2000 from
$6,066,000 in 1999, an increase of $486,000 or 8%.

Personnel costs in 2000 were $3,779,000 compared to $3,493,000 the
prior year, an increase of $286,000 or 8.2%.

Premises and equipment expenses in 2000 were $942,000 compared to
$886,000 the prior year, a $56,000 or 6.3% increase.

Marketing expenses in 2000 were $207,000 compared to $180,000 the prior
year, a $27,000 or 15% increase.

Regulatory fees in 2000 were $140,000 compared to $155,000 the prior
year, a $15,000 or 9.7% decrease.

Supplies expense was $160,000 in 2000 compared to $155,000 in the prior
year, an increase of $5,000 or 3.1%.

Director fees were $137,000 in 2000 compared to $121,000 in the prior
year, an increase of $16,000 or 13.2%. Orangeburg National Bank pays outside
directors $600 per month. Sumter National Bank and Florence National Bank pay
their outside directors $300 per month. The Florence bank began paying director
fees during 2000. The Corporation pays its outside directors $200 per month.

FDIC insurance costs were $33,000 in 2000 compared to $23,000 in the
prior year, an increase of $10,000 or 43.4%.

All other expenses were $1,154,000 in 2000 compared to $1,053,000 in
the prior year, an increase of $101,000 or
9.6%.

Income Taxes, 2000 compared to 1999

The Corporation pays U. S. corporate income taxes and South Carolina
bank income taxes. The 2000 provision for income taxes was $1,807,000 compared
to $1,049,000 the prior year, an increase of $758,000 or 72.3%. The
Corporation's effective average tax rate was 36.5% in 2000 compared to 32.4% the
prior year. The Corporation received a tax benefit from the exercise of
non-qualified stock options on 27,500 shares during 1999. The benefit
approximated $89,000 and accounts for the temporary reduction in the effective
tax rate during 1999.

31

INFLATION

The assets and liabilities of the Corporation are mostly monetary in
nature. Accordingly, the financial results and operations of the Corporation are
much more affected by changes in interest rates than changes in inflation. There
is, however, a strong correlation between increasing inflation and increasing
interest rates. The impact of inflation has been very moderate, about 1.5%,
during 2001. Prospects appear good for continued low inflation, despite some
increases in energy costs. Although inflation does not normally affect a
financial institution as dramatically as it affects businesses with large
investments in plants and inventories, it does have an effect. During periods of
high inflation there are usually corresponding increases in the money supply,
and banks experience above average growth in assets, loans, and deposits.
General increases in the prices of goods and services also result in increased
operating expenses.

LIQUIDITY

Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being the ability to attract deposits
within the Banks' service areas. Core deposits (total deposits less certificates
of deposit of $100,000 or more) provide a relatively stable funding base.
Certificates of deposit of $100,000 or more are generally more sensitive to
changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available-for-sale.

The Corporation maintains an available-for-sale investment portfolio.
While investment securities purchased for this portfolio are generally purchased
with the intent to be held to maturity, such securities are marketable and
occasional sales may occur prior to maturity as part of the process of
asset/liability and liquidity management. The Corporation also maintains a
held-to-maturity investment portfolio. Securities in this portfolio are
generally not considered a primary source of liquidity. Management deliberately
maintains a short-term maturity schedule for its investments so that there is a
continuing stream of maturing investments. The Corporation intends to maintain a
short-term investment portfolio in order to continue to be able to supply
liquidity to its loan portfolio and for customer withdrawals.

The Corporation has substantially more liabilities that mature in the
next 12 months than it has assets maturing in the same period. Further, the
Corporation has legal obligations to extend credit pursuant to loan commitments,
lines of credit and standby letters of credit which totaled $11,596,000,
$18,342,000 and $2,877,000, respectively, at December 31, 2001 (see Note 14 to
the consolidated financial statements). However, based on its historical
experience, and that of similar financial institutions, the Corporation believes
that it is unlikely that so many deposits would be withdrawn, without being
replaced by other deposits, and extensions of credit would be required, that the
Corporation would be unable to meet its liquidity needs with the proceeds of
maturing assets, in the ordinary course of business.

The Corporation also maintains various federal funds lines of credit
with correspondent banks and is able to borrow from the Federal Home Loan Bank
and the Federal Reserve's discount window.

32

The Corporation, through its Banks, has a demonstrated ability to
attract deposits from its market area. Deposits have grown from $72 million in
1995 to over $255 million in 2001. This stable growing base of deposits is the
major source of operating liquidity.

The Corporation's long-term liquidity needs are expected to be
primarily affected by the maturing of long-term certificates of deposit. At
December 31, 2001 the Corporation had approximately $18.6 million in
certificates of deposit and other obligations maturing in one to five years. The
Corporation had $18.3 million in obligations maturing after five years. The
Corporation's assets maturing in the same periods were $139 million and $25.8
million, respectively. Even with a substantially larger dollar amount of assets
maturing in both periods than liabilities, the Corporation believes that it will
not have any significant long-term liquidity problems.

In the opinion of management, the current and projected liquidity
position is adequate.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices
and rates. The Corporation's market risk arises principally from interest rate
risk inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Corporation manages other risks, such as credit quality and liquidity risk in
the normal course of business, management considers interest rate risk to be its
most significant market risk and this risk could potentially have the largest
material effect on the Corporation's financial condition and results of
operations. Other types of market risks such as foreign currency exchange risk
and commodity price risk, do not arise in the normal course of community banking
activities.

Achieving consistent growth in net interest income is the primary goal
of the Corporation's asset/liability function. The Corporation attempts to
control the mix and maturities of assets and liabilities to achieve consistent
growth in net interest income despite changes in market interest rates. The
Corporation seeks to accomplish this goal while maintaining adequate liquidity
and capital. The Corporation's asset/liability mix is sufficiently balanced so
that the effect of interest rates moving in either direction is not expected to
be significant over time.

The Corporation's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Corporation's balance sheet and income statement under several different
rate scenarios. The model's inputs (such as interest rates and levels of loans
and deposits) are updated on a quarterly basis in order to obtain the most
accurate forecast possible. The forecast presents information over a
twelve-month period. It reports a base case in which interest rates remain flat
and reports variations that occur when rates increase and decrease 100 and 200
basis points. According to the model, as of December 31, 2001 the Corporation is
positioned so that net interest income would increase $803,000 and net income
would increase $494,000 if interest rates were to rise 300 basis points in the
next twelve months. Conversely, net interest income would decline $535,000 and
net income would decline $329,000 if interest rates were to decline 200 basis
points. Given the current state of market interest rates, in the opinion of
management it appears more likely that rates will rise or remain stable than
that they will decline further. Computation of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates and loan prepayment, and should not be
relied upon as indicative of actual results. Further, the computations do not
contemplate any actions the Corporation could undertake in response to changes
in interest rates.

33

The Market Risk table, which follows this discussion, shows the
Corporation's financial instruments that are sensitive to changes in interest
rates. The Corporation uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments, and prepayment of principal and potential calls.
For core deposits without contractual maturity (i.e., interest checking, savings
and money market accounts), the table presents principal cash flows based on
management's judgment concerning their most likely runoff. The actual maturities
and runoff could vary substantially if future prepayments, runoff and calls
differ from the Corporation's historical experience.

34

The static interest rate sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to the static repricing structure of the Banks' assets and
liabilities. At December 31, 2001 on a cumulative basis through twelve months,
rate sensitive liabilities exceeded rate sensitive assets, by $93.9 million. The
liability sensitive position is largely due to the assumption that the Banks'
$41 million in interest bearing transaction accounts, savings accounts and money
market accounts will reprice within a year. This assumption may or may not be
valid, since these accounts vary greatly in their sensitivity to interest rate
changes in the market.

35

The following table summarizes the Corporation's interest sensitivity
position as of December 31, 2001.

Interest Sensitivity Analysis

RSA- rate sensitive assets; RSL- rate sensitive
liabilities

The above table reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing loans are reflected at the earliest date at which they
may be repriced contractually. Deposits in other banks and debt securities are
reflected at each instrument's ultimate maturity date. Overnight federal funds
sold are reflected as instantly repriceable. Interest bearing liabilities with
no contractual maturity, such as savings deposits and interest bearing
transaction accounts, are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at the earlier of their next repricing or
maturity dates.

Item 8. Financial Statements and Supplementary Data

Please see the attached audited financial statements for the period
ended December 31, 2001.

36

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

37

INDEPENDENT AUDITORS' REPORT

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

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

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

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

s/J. W. Hunt & Company, LLP

Columbia, South Carolina
February 1, 2002

38

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2001 AND 2000

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS

39

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME,
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

(Continued)-1.

40

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS

(concluded) -2

41

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

(continued)-1

42

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

(concluded)-2

43

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

(Continued)-1.

44

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

(Concluded) - 2.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS

45

COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

NOTE 1 - ORGANIZATION:

Community Bankshares, Inc. (the "Corporation"), was organized under the laws of
the State of South Carolina and was chartered as a business corporation on
November 30, 1992. Pursuant to the provisions of the Federal Bank Holding
Company Act, an application was filed with and approved by the Board of
Governors of the Federal Reserve System for the Corporation to become a bank
holding company by the acquisition of Orangeburg National Bank (ONB).

In June 1996, Sumter National Bank (SNB) and in July 1998, Florence National
Bank (FNB) commenced operations in Sumter and Florence, South Carolina,
respectively, following approval by the Comptroller of the Currency and other
regulators. Upon completion of their organization, the common stock of SNB and
FNB was acquired by the Corporation.

The Banks operate as wholly-owned subsidiaries of the Corporation with separate
Boards of Directors and operating policies and provide a variety of financial
services to individuals and small to medium size businesses through their
offices in South Carolina. The primary deposit products are checking, savings
and term certificate accounts and the primary lending products are consumer,
commercial and mortgage loans.

In November 2001 the Corporation acquired all the common stock of Resource
Mortgage Inc., a Columbia, South Carolina based mortgage company. The
Corporation issued 95,454 shares of its common stock in exchange for 100% of the
common stock of Resource. The transaction was accounted for as a purchase. The
subsidiary was renamed Community Resource Mortgage Inc. (CRM).

Also in November 2001 the Corporation entered into an agreement to acquire the
common stock of Ridgeway Bancshares Inc., the holding company for the Bank of
Ridgeway. The Corporation agreed to issue 1,000,000 shares of its stock and to
pay $4,000,000 cash in exchange for 100% of the stock of Ridgeway. The
transaction must be approved by two-thirds of the shareholders of both
companies, as well as various regulators. The Corporation anticipates completion
of the transaction by July 1, 2002.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of the Corporation
(the Parent Holding Company) and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES:

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the balance sheet and the
reported amounts of revenues and expenses during the reporting period.

46

Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the related deferred tax
asset.

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:

Most of the Corporation's activities are with customers located within South
Carolina. Note 4 discusses the types of securities the Corporation purchases.
Note 5 discusses the types of lending that the Corporation engages in. The Banks
grant agribusiness, commercial, consumer and residential loans to customers
throughout the State of South Carolina. Although the Banks have diversified loan
portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economies of Florence, Orangeburg and Sumter
Counties, South Carolina and the surrounding areas. The mortgage company
originates and sells loans into the secondary market; it generally does not
maintain loans for its own portfolio.

ORGANIZATION, STOCK OFFERING AND PREOPENING COSTS:

Preopening costs associated with the organization of the Banks were expensed as
incurred while stock issuance costs were charged to common stock as incurred.

CASH AND CASH EQUIVALENTS:

For purposes of the consolidated statements of cash flows, the Corporation has
defined cash and cash equivalents as those amounts included in the balance
sheets under the caption, "Cash and due from banks" and "Federal funds sold",
all of which mature within ninety days.

INTEREST-BEARING DEPOSITS WITH BANKS:

Interest-bearing deposits with banks generally mature within one year and are
carried at cost.

SECURITIES:

Securities that management has both the ability and positive intent to hold to
maturity are classified as held to maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, increase in regulatory capital,
or other similar factors, are classified as available for sale and are carried
at fair value. Unrealized gains and losses on securities available for sale are
excluded from earnings and reported in other comprehensive income. Gains and
losses on the sale of securities available for sale are recorded on the trade
date and are determined using the specific identification method. Declines in
the fair value of held to maturity and available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses.

Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities.

No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.

47

LOAN SALES:

The Corporation originates loans for sale generally without recourse to other
financial institutions under commitments or other arrangements in place prior to
loan origination. Sales are completed at or near the loan origination date.

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Gains and
losses, if any, on the sale of such loans are determined using the specific
identification method. All fees and other income from these activities are
recognized in income when loan sales are completed.

The Corporation's mortgage subsidiary, Community Resource Mortgage, Inc.,
engages in the origination and sale of residential mortgage loans. Virtually all
the loans they originate are sold into the secondary market within thirty days.
Accordingly, fees and costs associated with this process are recognized when
received or incurred.

LOANS RECEIVABLE:

The Corporation grants mortgage, commercial and consumer loans to customers. The
ability of the Corporation's debtors to honor their contracts is dependent upon
the real estate and general economic conditions in its service areas. Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balance adjusted for charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. Interest income is accrued on the
unpaid principal balance.

The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well collateralized and
in process of collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Unsecured personal
credit lines and certain consumer finance loans are typically charged off no
later than the time the loan is 180 days delinquent.

Other consumer loans are charged off at the time the loan is 120 days
delinquent. In all cases, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual status. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.

ALLOWANCE FOR LOAN LOSSES:

The allowance for loan losses is established through a provision for loan losses
charged against earnings as losses are estimated to have occurred. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,

48

adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Management of each Bank reviews its allowance for loan losses in three broad
categories: commercial and industrial, loans secured by real estate, and loans
to individuals, and assigns an estimated percentage factor to each in the
determination of the estimate of the allowance for loan losses. Where the Banks'
internal and external loan review programs identify loans that are subject to
specific weaknesses, such loans are reviewed for a specific loan loss allowance.

A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
known circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.

STOCK-BASED COMPENSATION:

Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No 25, "Accounting for Stock Issued to
Employees", whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Corporation's stock option plans have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them. The
Corporation has elected to continue with the accounting methodology in Opinion
No. 25 and, as a result, has provided pro forma disclosures of net income and
earnings per share and other disclosures, as if the fair value based method of
accounting had been applied.

FORECLOSED ASSETS:

Foreclosed assets, which are recorded in other assets, include properties
acquired through foreclosure or in full or partial satisfaction of the related
loan and are held for sale.

Foreclosed assets are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,

49

management periodically performs valuations and the assets are carried at the
lower of carrying amount or fair value less costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in other
expenses.

PREMISES AND EQUIPMENT:

Premises and equipment are stated at cost, less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Useful lives generally used in providing for depreciation are as
follows:

Building ......................................................... 40 years
Building components .............................................. 5-30 years
Vault doors, safe deposit boxes, night depository, etc. .......... 40 years
Furniture, fixtures and equipment ................................ 5-25 years

INCOME TAXES:

Deferred income tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The provision (benefit) for income taxes of each
subsidiary is recorded as if each subsidiary filed a separate return.

ADVERTISING COSTS:

The cost of advertising is expensed as incurred.

FINANCIAL INSTRUMENTS:

In the ordinary course of business the Banks enter into commitments to extend
credit and grant standby letters of credit. Such off-balance-sheet financial
instruments are recorded in the consolidated financial statements when they are
funded.

SEGMENTS:

Community Bankshares, Inc. through its banking subsidiaries, ONB, SNB, and FNB,
and its mortgage subsidiary, CRM, provides a broad range of financial services
to individuals and companies in South Carolina. These services include demand,
time, and savings deposits; lending services; ATM processing; and similar
financial services. While the Corporation's decision makers monitor the revenue
streams of the various financial products and services, operations are managed
and financial performance is evaluated on a corporate-wide basis. Accordingly,
the subsidiary operations are not considered by management to comprise more than
one reportable operating segment.

COMPREHENSIVE INCOME:

Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for

50

sale, are reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of comprehensive
income. Currently, the Corporation's only component of Comprehensive Income
(Loss) is its unrealized gains (losses) on securities available for sale.

RECENT ACCOUNTING PRONOUNCEMENTS:

In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS 140) which replaces SFAS 125. SFAS 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain additional disclosures
regarding these activities. SFAS 140 is effective for transfers and servicing of
financial assets or extinguishment of liabilities that occur after March 31,
2001. SFAS 140 was adopted by the Corporation with no resulting material effect
on its financial condition or operating results.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS 141). SFAS 141 supercedes APB Opinion Number
16, "Business Combinations". SFAS 141 eliminates the pooling-of-interests method
of accounting for business combinations and requires that all business
combinations in the scope of SFAS 141 be accounted for using the purchase method
of accounting. SFAS 141 is effective for business combinations initiated after
June 30, 2001. SFAS 141 was adopted by the Corporation and was applied to the
acquisition of Community Resource Mortgage, Inc.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that
goodwill and other intangible assets that have indefinite lives are to no longer
be amortized unless there is an impairment. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. Management expects that adoption of
this standard will not have a material effect on the financial statements for
2002.

Also in July 2001, the Financial Accounting Standards Board issued SFAS 143,
Accounting for Asset Retirement Obligations. SFAS 143 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 can be made, and that
the associated asset retirement costs be capitalized as part of the carrying
amount of the long-lived asset. SFAS 143, if applicable, will be adopted by the
Corporation upon its required effective date, for its fiscal year ended December
31, 2002. Management expects that adoption of this standard will not have a
material effect on the financial statements for 2002.

In August 2001, the Financial Accounting Standards Board issued SFAS 144,
Accounting for the Impairment or Disposition of Long-Lived Assets. SFAS 144
requires that one accounting model be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discounted operations to include primarily all
disposal transactions. It further establishes criteria to determine when a
long-lived asset is held for sale and establishes measurement criteria at the
asset's or group of assets' lower of unamortized cost or fair value at the date
the asset is reclassified as held and used. SFAS 144, if applicable, will be
adopted by the Company upon its required effective date, for its fiscal year
ended December 31, 2002. Management expects that adoption of this standard will
not have a material effect on the financial statements for 2002.

OTHER:

Certain amounts previously reported in the statements have been reclassified to
conform to the current year's presentation and disclosure requirements. These
reclassifications had no effect on net income.

51

NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:

The Banks are required to maintain average reserve balances with the Federal
Reserve or in available cash. The average daily reserve balance requirements at
December 31, 2001 were approximately $1.9 million.

At December 31, 2001, the Corporation had cash balances with correspondent banks
totaling approximately $286,000, all but $36,000 of which were fully insured by
the FDIC.

NOTE 4 - SECURITIES:

Securities held to maturity consist of the following (in thousands of dollars):

52

Securities available for sale consist of the following (in thousands of
dollars):

53

The amortized cost and fair value of debt securities at December 31, 2001, by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

54

NOTE 4 - INVESTMENT SECURITIES (CONTINUED):

The following is a summary of maturities and weighted average yields of
securities held to maturity and securities available for sale as of December 31,
2001 (in thousands of dollars):

Yields on tax exempt obligations have been computed on a tax equivalent basis
using the maximum federal tax rate of 34%. No investments matured within one
year.

The Banks, as members of the Federal Home Loan Bank ("FHLB") of Atlanta, are
required to own capital stock in the FHLB of Atlanta based generally upon their
balances of residential mortgage loans and FHLB advances. FHLB capital stock
owned by ONB and SNB is pledged as collateral on FHLB advances. No ready market
exists for this stock and it has no quoted market value. However, redemption of
this stock has historically been at par value.

All equity securities including investments in the FHLB stock and Federal
Reserve Bank stock (as required of the respective banks) have no contractual
maturity and are classified in the maturity category of over ten years.

At December 31, 2001 and 2000, investment securities with a carrying value of
$29,167,000 and $19,282,000, respectively, were pledged to secure public
deposits, FHLB advances, and for other purposes required and permitted by law.
At December 31, 2001 and 2000, the carrying amount of securities pledged to
secure repurchase agreements was approximately $6,108,000 and $10,051,000,
respectively.

55

NOTE 5 - LOANS RECEIVABLE:

The following is a summary of loans by category at December 31, 2001 and 2000
(in thousands of dollars):

Loan category 2001 2000
---- ----
Commercial, financial and agricultural ........ $ 56,515 $ 52,264
Real estate - construction .................... 19,557 15,389
Real estate - mortgage ........................ 127,002 98,154
Installment loans to individuals .............. 26,831 29,270
-------- --------
Total loans - gross ...................... $229,905 $195,077
======== ========

The loan portfolio included fixed rate and adjustable rate loans totaling
$145,540,000 and $84,365,000, respectively, at December 31, 2001.

Total overdrawn demand deposits totaling $1,304,000 and $864,000 have been
reclassified as loan balances at December 31, 2001 and 2000, respectively.

Gross proceeds on mortgage loans originated for resale were approximately
$34,915,000, $5,868,000, and $9,963,000 for the years ended December 31, 2001,
2000, and 1999, respectively. The Bank sold all of these loans at par;
therefore, no gain or loss was recognized on the sales.

Loans outstanding to directors, executive officers, principal holders of equity
securities, or to any of their associates totaled $10,367,000 at December 31,
2001, and $7,299,000 at December 31, 2000. A total of $9,145,000 in loans were
made or added, while a total of $6,077,000 were repaid or deducted during 2001.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Changes in the composition of the board of directors or the
group comprising executive officers also result in additions to or deductions
from loans outstanding to directors, executive officers or principal holders of
equity securities.

56

Changes in the allowance for loan losses and related ratios for the years ended
December 31, 2001, 2000, and 1999, were as follows (in thousands of dollars):

(1) Provision expense includes $28,000 acquired with purchase of CRM on
November 1, 2001

The following is a summary of information pertaining to impaired loans:

December 31,
2001 2000
---- ----
(In thousands)

Impaired loans without a valuation allowance ............. $ - $ -
Impaired loans with a valuation allowance ................ 281 238
---- ----

Total impaired loans ..................................... 281 238
==== ====

Valuation allowance related to impaired loans ............ $ 42 $ 36

57

No additional funds are committed to be advanced in connection with impaired
loans.

Nonaccrual, past due loans, and other real estate owned at December 31, 2001 and
2000, were as follows (in thousands of dollars):

2001 2000
---- ----
Nonaccrual loans ..................................... $ 281 $ 238
Accruing loans 90 days or more past due .............. 17 93
-- ----- -----
Total ........................................... $ 298 $ 331
===== =====
Total as a % of outstanding loans ............... 0.13% 0.17%
Other Real Estate Owned .............................. $ 267 $ -

Gross interest income that would have been recorded for the years ended December
31, 2001, 2000, and 1999 if nonaccrual loans had been performing in accordance
with their original terms was approximately $7,000, $33,000, and $2,000,
respectively.

NOTE 6 - PREMISES AND EQUIPMENT:

Premises and equipment at December 31, 2001 and 2000, consist of the following
(in thousands of dollars):

2001 2000
---- ----
Land ............................................... $ 867 $ 761
Building and components ............................ 3,454 2,821
Furniture, fixtures and equipment .................. 3,576 3,055
------ ------
Total .................................... 7,897 6,637
Less, accumulated depreciation ..................... 2,720 2,226
------ ------
Premises and equipment - net ............. $5,177 $4,411
====== ======

Depreciation expense was approximately $467,000, $478,000, and $462,000, for the
years ended December 31, 2001, 2000, and 1999, respectively.

The FNB office building was built on leased land. The land is being leased under
a noncancellable operating lease for an initial term of ten years. The lease

58

terms provide for two ten year renewal options and a third renewal of two years.
FNB is responsible for property taxes and improvements. The annual basic rent in
lease years one through five is $48,000 and in years six through ten $53,000.

Rent expense totaled $48,000, $48,000, and $50,000 in 2001, 2000, and 1999,
respectively.

At the balance sheet date SNB was constructing a branch office on West Liberty
Street in Sumter, SC. The building was completed in January 2002. The building
is approximately 3,600 square feet and cost approximately $705,000. The land,
approximately one acre, is being leased under a noncancellable operating lease
for an initial term of twenty years. The lease terms provide for four five-year
renewal options after the initial term. SNB is responsible for property taxes
and improvements. The annual basic rent in lease years one through five is
$35,000; in years six through ten $36,000; in years eleven through fifteen
$38,000; and in years sixteen through twenty $40,000.

Rent expense, which began in October, totaled $9,000 in 2001.

CRM rents all three of its current locations. Rent expense for November and
December 2001 totaled $10,000.

NOTE 7 - DEPOSITS:

At December 31, 2001, the scheduled maturities of time deposits greater than
$100,000 are as follows (in thousands of dollars):

Maturing in
2002 $46,642
2003 3,556
2004 278
2005 797
2006 -
Thereafter 101
-------
Total $51,374
=======

Deposits of directors and officers totaled approximately $3,913,000 and
$3,825,000 at December 31, 2001 and 2000, respectively.

NOTE 8 - OTHER BORROWED FUNDS:

Federal funds purchased and securities sold under agreements with customers to
repurchase generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The Corporation monitors the
fair value of the underlying securities on a daily basis and it is the Banks'
policy to maintain a collateral value greater than the principal and accrued
interest of the transaction. All securities underlying these agreements are
institution-owned securities.

Information concerning securities sold under agreements to repurchase is
summarized as follows (in thousands of dollars):

59

2001 2000
---- ----
Outstanding at year end .............................. $ 4,171 $ 9,352
Interest rate at year end ............................ 2.08% 5.01%
Interest expense ..................................... $ 237 $ 218
Maximum month end balance during the year ............ $10,976 $ 9,532
Average amount outstanding during the year ........... $ 7,533 $ 4,501
Weighted average interest rate during the year ....... 3.15% 4.84%

At December 31, 2001 and 2000 there were no federal funds purchased.

Lines of credit payable represent warehouse lines funding loan production for
CRM. At year end these balances totaled $9,028,000. Of this amount $8,324,000
was borrowed from BB&T at the one month LIBOR rate plus 1.95%. The BB&T line
expires in October 2002. The lines are secured with the value of the underlying
mortgages and the guarantee of the Corporation to a maximum of $9 million. The
remaining lines are priced at prime plus 1.5% to 2% and are being phased out in
favor of the BB&T line. The operations of CRM are included for only the two
month period ended December 31, 2001, and accordingly the average balance of the
lines are small and included with the above reported table.

NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES:

The Banks are members of the Federal Home Loan Bank of Atlanta and as such, have
access to long-term borrowing. The collateral for any such borrowings consists
of blanket liens on ONB's and SNB's one-to-four family residential loans and all
the banks' stock in the Federal Home Loan Bank. Portions of FNB's investment
portfolio are also collateral for advances. Borrowings during 2001 and 2000 are
summarized as follows (in thousands of dollars):

2001 2000
---- ----

Outstanding at year-end .............................. $20,280 $20,350
Interest rate at year-end ............................ 5.54% 6.04%
Maximum amount outstanding at any month-end .......... $20,350 $20,350
Average amount outstanding during the year ........... 19,899 $19,385
Weighted average interest rate during the year ....... 5.77% 6.01%

Required principal reductions are as follows (in thousands of dollars):

YEAR ENDING:
2002 ................. $ -
2003 ................. -
2004 ................. -
2005 ................. 1,580
2006 ................. 500
Thereafter ............ 18,200
-------

Total ............. $20,280
=======

60

NOTE 10 - COMMON STOCK:

The Corporation repurchased 49,455 shares of its common stock from the
Corporation's former chief executive officer in January 1999. The repurchase
price per share was at the then market price of $12.74 and totaled approximately
$630,000.

The Corporation declared a five percent stock dividend in January 2000. The
average number of common shares outstanding and all earnings per common share
amounts included in the accompanying consolidated financial statements and notes
are based on the increased number of shares giving retroactive effect for the
stock dividend.

The Corporation issued 95,454 shares of its common stock in November 2001 in
exchange for 100% of the common stock of Resource Mortgage, Inc. The shares were
valued at the then market price of $13.00 and totaled approximately $1.2
million.

Under the Corporation's Dividend Reinvestment Plan, shareholders may reinvest
all or part of their cash dividends in shares of common stock and also purchase
additional shares of common stock.

NOTE 11 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES:

At December 31, 2001, 485,600 common shares were reserved for issuance pursuant
to an employee stock option plan and 630,000 common shares were reserved for
issuance pursuant to the dividend reinvestment and additional stock purchase
plan.

During 2001 the Corporation amended its 1997 Stock Option Plan to increase by
200,000 shares the number of shares reserved for issuance upon exercise of
options and to permit participation in the plan by non-employee directors. Under
the Plan, as amended, up to 485,600 shares of common stock were authorized to be
granted to selected officers, other employees, and non-employee directors of the
Corporation and/or its subsidiaries pursuant to exercise of incentive and
nonqualified stock options. Of such shares, 290,050 were reserved for issuance
pursuant to exercise of incentive stock options and 195,550 were reserved for
issuance pursuant to exercise of nonqualified stock options.

The exercise price of any incentive option granted is equal to the fair value of
the common stock on the date the option is granted. Nonqualified options can be
issued for less than fair value; however, the Corporation has not elected to
issue these options for less than fair value at the date of the grant. The
options are vested upon issuance, but may be exercised no earlier than one year
after issuance.

61

A summary of the status of the Corporation's 1997 pre-amended stock option plan
is presented below:

A summary of the status of the Corporation's 1997 stock option plan, as amended
in 1999 to increase the number of shares reserved for issuance, is presented
below:

62

A summary of the status of the Corporation's 1997 stock option plan, as amended
in 2001, is presented below:

Information pertaining to options outstanding at December 31, 2001 is as
follows:

The fair value of the option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:

Year Ended December 2001
------------------------
Dividend yield ...................................... 2.15%
Expected life ....................................... 10 years
Expected volatility ................................. 18%
Risk free interest rate ............................. 5.032%

The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized. Had compensation cost for the Corporation's stock
option plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the method prescribed by SFAS No. 123,
the Corporation's net income and earnings per share would have been adjusted to
the pro forma amounts indicated below:

63

No options were granted in 2000.

NOTE 12 - INCOME TAXES:

The Corporation files consolidated federal income tax returns on a calendar-year
basis.

The 2001, 2000, and 1999 provision for income taxes consists of the following
(in thousands of dollars):

2001 2000 1999
---- ---- ----
Current tax provision:
Federal ........................ $ 2,177 $ 1,801 $ 1,065
South Carolina ................. 119 154 85
Deferred tax benefit .............. (140) (148) (101)
------- ------- -------

Total ................... 2,156 1,807 1,049
======= ======= =======

The provision for income taxes differs from that computed by applying federal
statutory rates to income before federal income tax expense as indicated in the
following summary (in thousands of dollars):

64

Temporary differences, which give rise to deferred tax assets and liabilities at
December 31, 2001 and 2000, are as follows (in thousands of dollars):

2001 2000
---- ----
Deferred tax assets:
Allowance for loan losses .............................. $908 $ 778
Net unrealized losses on securities
available for sale .................................. 4 69
Preopening costs ....................................... 20 39
State tax net operating loss carry forward ............. 43 58
Other .................................................. - -
---- ----
Total deferred tax assets ...................... 975 944
---- ----

Deferred tax liabilities:
Depreciation ........................................... 105 120
Accretion .............................................. - 4
---- ----

Total deferred tax liabilities ................. 105 124
---- ----

Net deferred tax asset before valuation
allowance ................................. 870 820

Less, valuation allowance ...................... - (25)
---- ----

Net deferred tax asset ......................... 870 795
==== ====

At December 31, 2001, the Corporation and FNB had net operating loss (NOL)
carryforwards for state income tax purposes of approximately $899,000 available
to offset future state taxable income. The NOL carryforwards expire in the years
2007 through 2016. Beginning with the current year the Corporation has filed a
consolidated state income tax return with CRM, thus allowing the Corporation to
reverse the valuation allowance of its' separate state NOL carryfoward. For the
prior year the valuation allowance represented management's estimate of the
state NOL carryforwards that would not have been realized based on then
available information. Each of the Corporation's banking subsidiaries files a
separate state bank income tax return.

NOTE 13 - EMPLOYEE BENEFIT PLANS:

The Corporation provides a defined contribution plan with an Internal Revenue
Code Section 401(k) provision. All employees who have completed 500 hours of
service during a six-month period and have attained age 21 may participate in
the plan.

A participant may elect to make tax deferred contributions up to a maximum of
12% of eligible compensation. The Corporation will make matching contributions
on behalf of each participant in the amount of 100% of the elective deferral,
not exceeding 3% of the participant's compensation. The Corporation may also
make nonelective contributions determined at the discretion of the Board of
Directors.

65

The Corporation's contributions for 401K related profit sharing for the years
ended December 31, 2001, 2000, and 1999 totaled approximately $146,000,
$119,000, and $122,000, respectively. Beginning in 2001 the senior officers of
the Company are no longer included in this profit sharing program.

NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES:

The Banks are parties to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.

The Banks' exposure to credit loss is represented by the contractual amount of
these commitments. The Banks use the same credit policies in making commitments
as they do for on-balance-sheet instruments.

At December 31, 2001 and 2000, the following financial instruments were
outstanding whose contract amounts represent credit risk:

Contract Amount
---------------
2001 2000
---- ----
(Dollars in thousands)

Commitments to grant loans ....................... $11,596 $12,822
Unfunded commitments under lines of
credit ....................................... 18,342 12,115
Standby letters of credit ........................ 2,877 3,426

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks generally hold collateral supporting those
commitments if deemed necessary.

To reduce credit risk related to the use of credit-related financial
instruments, the Bank might deem it necessary to obtain collateral. The amount
and nature of the collateral obtained is based on the Banks' credit evaluation
of the customer. Collateral held varies but may include cash, securities,
accounts receivable, inventory, property, plant and equipment and real estate.

66

NOTE 15 - EARNINGS PER COMMON SHARE:

Basic earnings per common share represent income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the year. Diluted earnings per common share reflect additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. Potential common shares that may be issued by the Corporation
relate solely to outstanding stock options, and are determined using the
treasury stock method.

Earnings per common share have been computed based on the following:

NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS):

The components of other comprehensive income (loss) and related tax effects are
as follows:

NOTE 17 - CREDIT RISK CONCENTRATIONS

Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.

67

The Banks regularly monitor various segments of their credit risk portfolio to
assess potential concentration risks and to obtain collateral when considered
necessary.

NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS:

The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Corporation.

The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:

Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair values.

Interest-bearing deposits with banks. The carrying amounts of
interest-bearing deposits with banks approximate their fair values.

Securities available for sale and held to maturity. Fair values for
securities, excluding Federal Home Loan Bank and Federal Reserve Bank
stock, are based on quoted market prices. The carrying value of Federal
Home Loan Bank and Federal Reserve Bank stock approximates fair value based
on the redemption provisions of the Federal Home Loan Bank and Federal
Reserve Bank. The market values of state and local government securities
are established with the assistance of an independent pricing service. The
values are based on data which often reflect transactions of relatively
small size and are not necessarily indicative of the value of the
securities when traded in large volumes.

Loans held for sale. The carrying amounts approximate their fair values.

Loans receivable. For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans (for example, one-to-four
family residential) and other consumer loans are based on quoted market
prices of similar loans sold, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.

Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed-term money-market accounts and certificates of deposit (CDs)
approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that

68

applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings. The carrying amounts of federal funds purchased and
borrowings under repurchase agreements, approximate their fair values.

Federal Home Loan Bank advances. The fair values of the Federal Home Loan
Bank advances are estimated using discounted cash flow analyses based on
the Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.

Accrued interest. The carrying amounts of accrued interest approximate fair
value.

Off-balance-sheet instruments. Fair values for off-balance-sheet
credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standings.

The estimated fair values and related carrying or notional amounts of the
Corporation's financial instruments at December 31, 2001 and 2000, are as
follows (in thousands of dollars):

69

NOTE 19 - CONTINGENCIES:

CLAIMS AND LAWSUITS:

The Corporation is subject at times to claims and lawsuits arising out of the
normal course of business. As of December 31, 2001, no claims or lawsuits were
pending which, in the opinion of management, would have a material effect on the
Corporation's consolidated financial statements.

NOTE 20 - REGULATORY MATTERS:

The Banks, as national banks, are subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Banks may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two years. The dividends, at
December 31, 2001, that the Banks could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $5,936,000. In addition,
dividends paid by the Banks to the Corporation would be prohibited if the effect
thereof would cause the Banks' capital to be reduced below applicable minimum
capital requirements.

Under Federal Reserve regulation, the Banks also are limited as to the amount
they may lend to the Corporation unless such loans are collateralized by
specified obligations. The maximum amount available for transfer from the Banks
to the Corporation in the form of loans or advances totaled approximately
$4,817,000 at December 31, 2001.

Also under Federal Reserve regulation, the Banks are limited as to the amount
they may loan any non-depository affiliate, such as CRM. Such loans are subject
to the requirements of section 23A of the Federal Reserve Act and in general are
limited to not more than 10% of capital and must have at least 120% collateral
to loan amount.

The Corporation (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material adverse effect on the Corporation's and the Banks'
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Banks must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.

Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2001 and
2000, that the Corporation and the Banks met all capital adequacy requirements
to which they are subject.

As of December 31, 2001, for ONB, for SNB and for FNB, the most recent
notifications from the Office of the Comptroller of the Currency categorized the
Banks as well capitalized under the regulatory framework for prompt corrective

70

action. To be categorized as well capitalized, the Banks must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since the notifications that
management believes have changed the Banks' categories. The Corporation's and
the Banks' actual capital amounts and ratios are also presented in the following
table (in thousands of dollars).

71

NOTE 21 - CONDENSED FINANCIAL STATEMENTS:

Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only) (in thousands of dollars):

COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)

73

NOTE 21 - ACQUISITION

Resource Mortgage Inc. On November 1, 2001 the Corporation acquired 100% of the
common stock of Resource Mortgage Inc., which was renamed Community Resource
Mortgage, Inc. (CRM). The results of CRM's operations have been included in the
consolidated financial statements since that date. CRM is a mortgage company
with offices located in Columbia, Anderson and Sumter, South Carolina. As a
result of the acquisition the Corporation expects to be able to provide a
greater variety of one to four family mortgage products than it was previously
able to provide.

The aggregate purchase price was $1.2 million, which was comprised of 95,454
shares of CBI common stock. One-third of the shares were issued at the
consummation of the transaction. The remainder are being held in escrow pending
the attainment of certain financial goals. The value of the 95,454 shares was
determined based on the average market price of the Corporation's common stock
for the two day period before and after the announcement of the acquisition.
Based on the operating results for the year ended December 31, 2001 in March
2002, 47,727 additional shares were distributed to the former shareholders of
Resource Mortgage, Inc.

The following table summarizes the estimated fair market value of the assets
acquired and liabilities assumed at the date of the acquisition.

At November 1, 2001
(thousands of dollars)
Current assets ............................................ $ 582

Property, plant and equipment ............................. 69
Mortgages receivable ...................................... 10,395

Other assets .............................................. 46
Goodwill .................................................. 879
--------
Total assets acquired ..................................... 11,971
Liabilities acquired ...................................... (10,730)
--------
Net assets acquired .................................. $ 1,241
========

Subsequent to the acquisition date CBI recognized an additional $42,000 in costs
directly associated with the purchase of CRM. Accordingly, the balance in
goodwill at December 31, 2001 is $921,000.

Ridgeway Bancshares Inc. (proposed)
On November 21, 2001 the Corporation entered into an agreement to acquire 100%
of the common stock of Ridgeway Bancshares Inc., the parent company of the Bank
of Ridgeway. The Corporation agreed to issue 1,000,000 shares of common stock
and pay $4,000,000 cash, in exchange for 100% of the common stock of Ridgeway
Bancshares. Shareholder and regulatory approval must be obtained for the
acquisition. The Corporation anticipates completion of the transaction on July
1, 2002.

At year end 2001 Ridgeway Bancshares Inc. had approximately $79 million in total
assets, with equity of $8.7 million and earned net income of $1 million.

74

NOTE 22 - GOODWILL

At December 31, 2001 the Corporation had total goodwill of $921,000 associated
entirely with the current year acquisition of Community Resource Mortgage Inc.

75

NOTE 23 - QUARTERLY DATA (UNAUDITED):

THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS

76

Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

There were no disagreements with or changes in accountants.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information set forth under the caption "Management - Directors"
and "Management - Executive Officers" and under "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement to be used in conjunction
with the 2002 Annual Meeting of Shareholders (the "Proxy Statement"), which will
be filed within 120 days of the Corporation's fiscal year end, is incorporated
herein by reference.

Item 11. Executive Compensation

With the exception of the information set forth under the captions
"Board Report on Executive Officer Compensation" and "Shareholder Performance
Graph", which is not incorporated herein by reference, the information set forth
under the caption "Management Compensation" in the Proxy Statement is
incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.

Item 13. Certain Relationships and Related Transactions

The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.

77

Item 14. Exhibits and Reports on Form 8-K

(a) (1) All financial statements:

Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Income, Years Ended December 31, 2001, 2000 and
1999
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows, Years Ended December 31, 2001, 2000
and 1999
Notes to Consolidated Financial Statements

(2) Financial statement schedules:

Quarterly Data for 2001 and 2000

(3)
Exhibit No. Description
(from item
601 of S-K)

2.1 Agreement and Plan of Merger between Registrant and
Ridgeway Bancshares, Inc. (incorporated by reference
to exhibits filed in the Registrant's Form S-4,
Commission File No. 333-819000).

3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form
10-QSB filed September 30, 1997).

3.2 Bylaws, as amended (incorporated by reference to
exhibits filed in the Registrant's Form S-4,
Commission File No. 33-55314).

4 Stock certificate (incorporated by reference to exhibits
filed in the Registrant's Registration Statement on
Form S-2, filed September 11, 1995, Commission File
No. 33-96746).

10.1 1997Stock Option Plan (incorporated by reference to
Registrant's Form S-8, filed June 22, 2001,
Commission File No. 333-63598).

10.2 Lease for site of Florence National Bank (incorporated
by reference to Registrant's Form 10-K for the year
ended December 31, 1999).

10.3 Change of Control Agreements between the Registrant and
each of William W. Traynham, Michael A. Wolfe,
William H. Nock and Jesse A. Nance (incorporated by
reference to exhibits to Registrant's Form 10-QSB
for the quarter ended June 30, 1999).

10.4 Loan Agreement, dated November 1, 2001, among
Registrant, Resource Mortgage, Inc. and Branch Bank
and Trust Company (incorporated by reference to
exhibits filed in the Registrant's Form 10-Q for the
quarter end September 30, 2001).

10.5 Guaranty, dated November 1, 2001, by Registrant of
obligations of Resource Mortgage, Inc. to Branch
Bank and Trust Company (incorporated by reference to
exhibits filed in the Registrant's Form 10-Q for the
quarter end September 30, 2001).

10.6 Employment Agreement between Community Resource Mortgage
Inc. and A. Wade Douroux (incorporated by reference
to exhibits filed in the Registrant's Form S-4,
Commission File No. 333-819000).

10.7 Form of Employment Agreement between the Corporation and
William A. Harwell (incorporated by reference to
exhibits filed in the Registrant's Form S-4,
Commission File No. 333-819000).

78

21 Subsidiaries of the registrant (incorporated by
reference to exhibits filed in the Registrant's Form
S-4, Commission File No. 333-819000).

23 Consent of J. W. Hunt and Company, LLP

(b) Reports on Form 8-K. None.

79

Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DATED: March 25, 2002

By: s/E. J. Ayers, Jr.
-------------------
Chief Executive Officer

By s/William W. Traynham, Jr.
--------------------------
Chief Financial Officer

80

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

s/ Alvis J. Bynum
- ---------------------------------- March 25, 2002
Alvis J. Bynum, Director

s/ Martha Rose C. Carson
- ---------------------------------- March 25, 2002
Martha Rose C. Carson, Director

s/ Anna O. Dantzler
- ---------------------------------- March 25, 2002
Anna O. Dantzler, Director

s/ A. Wade Douroux
- ---------------------------------- March 25, 2002
A. Wade Douroux, Director

s/J. M. Guthrie
- ---------------------------------- March 25, 2002
J. M. Guthrie, Director

s/Richard L. Havekost
- ---------------------------------- March 25, 2002
Richard L. Havekost, Director

s/ Phil P. Leventis
- ---------------------------------- March 25, 2002
Phil P. Leventis, Director

s/Jess A. Nance
- ---------------------------------- March 25, 2002
Jess A. Nance, Director

s/William H. Nock
- ---------------------------------- March 25, 2002
William H. Nock, Director

s/ Samuel F. Reid, Jr.
- ---------------------------------- March 25, 2002
Samuel F. Reid, Jr., Director

s/ J. Otto Warren, Jr.
- ---------------------------------- March 25, 2002
J. Otto Warren, Jr., Director

- ----------------------------------
Wm. Reynolds Williams, II, Director

s/ Michael A. Wolfe, II
- ---------------------------------- March 25, 2002
Michael A. Wolfe, II, Director

81

EXHIBIT INDEX

Exhibit No.
from item 601 of S-K) Description
- --------------------- -----------

2.1 Agreement and Plan of Merger between Registrant and
Ridgeway Bancshares, Inc. (incorporated by reference
to exhibits filed in the Registrant's Form S-4,
Commission File No. 333-819000).

3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form
10-QSB filed September 30, 1997).

3.2 Bylaws, as amended (incorporated by reference to
exhibits filed in the Registrant's Form S-4,
Commission File No. 33-55314).

4 Stock certificate (incorporated by reference to exhibits
filed in the Registrant's Registration Statement on
Form S-2, filed September 11, 1995, Commission File
No. 33-96746).

10.1 1997Stock Option Plan (incorporated by reference to
Registrant's Form S-8, filed June 22, 2001,
Commission File No. 333-63598).

10.2 Lease for site of Florence National Bank (incorporated
by reference to Registrant's Form 10-K for the year
ended December 31, 1999).

10.3 Change of Control Agreements between the Registrant and
each of William W. Traynham, Michael A. Wolfe,
William H. Nock and Jesse A. Nance (incorporated by
reference to exhibits to Registrant's Form 10-QSB
for the quarter ended June 30, 1999).

10.4 Loan Agreement, dated November 1, 2001, among
Registrant, Resource Mortgage, Inc. and Branch Bank
and Trust Company (incorporated by reference to
exhibits filed in the Registrant's Form 10-Q for the
quarter end September 30, 2001).

10.5 Guaranty, dated November 1, 2001, by Registrant of
obligations of Resource Mortgage, Inc. to Branch
Bank and Trust Company (incorporated by reference to
exhibits filed in the Registrant's Form 10-Q for the
quarter end September 30, 2001).

10.6 Employment Agreement between Community Resource Mortgage
Inc. and A. Wade Douroux (incorporated by reference
to exhibits filed in the Registrant's Form S-4,
Commission File No. 333-819000).

10.7 Form of Employment Agreement between the Corporation and
William A. Harwell (incorporated by reference to
exhibits filed in the Registrant's Form S-4,
Commission File No. 333-819000).

21 Subsidiaries of the registrant (incorporated by
reference to exhibits filed in the Registrant's Form
S-4, Commission File No. 333-819000).

23 Consent of J. W. Hunt and Company, LLP

82