COMMUNITY BANCSHARES INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

OR

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

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

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

68149 MAIN STREET, P. O. BOX 1000
BLOUNTSVILLE, ALABAMA 35031
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

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

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

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

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

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

YES [X] NO [ ]

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

AS OF MARCH 15, 2000, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING
STOCK HELD BY NON-AFFILIATES WAS $71,862,900 BASED UPON A SALE PRICE OF $25.00
PER SHARE ON MARCH 15, 2000.

AS OF MARCH 15, 2000, THERE WERE 4,674,995 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.10 PAR VALUE SHARES, OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K: PROXY
STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS.

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PART 1

ITEM 1 - BUSINESS

GENERAL

Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank
holding company registered with the Board of Governors of the Federal Reserve
Board (the "Federal Reserve") under the Bank Holding Act of 1956, as amended
(the "Bank Holding Company Act"). The Company was organized in 1983 and
commenced business in 1985. The Company has one bank subsidiary, Community Bank,
an Alabama banking corporation which conducts a general commercial banking
business in north and west-central Alabama and south-central Tennessee. At
December 31, 1999, the Company and its subsidiaries had total assets of about
$674,898,000, deposits of about $573,261,000 and shareholders' equity of about
$44,475,000.

SUBSIDIARY BANK

Community Bank currently conducts business through 30 locations in 9 counties in
north Alabama, 2 counties in west-central Alabama and 1 county in south-central
Tennessee. It offers a wide range of commercial and retail banking services,
including savings and time deposit accounts, personal and commercial loans and
personal and commercial checking accounts. The majority of loans by Community
Bank are to individuals and small to mid-sized businesses in Alabama and
Tennessee. Community Bank seeks to provide superior service to its customers and
to become a vital component of each of the communities it serves.

Community Bank operates in small non-urban communities, including locations in
Blountsville, Cleveland, Oneonta, Snead and West Blount in Blount County,
Alabama; Fort Payne and Rainsville in DeKalb County, Alabama; Rogersville in
Lauderdale County, Alabama; Elkmont in Limestone County, Alabama; Gurley,
Meridianville and New Hope in Madison County, Alabama; Demopolis in Marengo
County, Alabama; Hamilton in Marion County, Alabama; Arab, Albertville, Boaz and
Guntersville in Marshall County, Alabama; Falkville and Hartselle in Morgan
County, Alabama; Uniontown in Perry County, Alabama; Double Springs and
Haleyville in Winston County, Alabama; and Pulaski in Giles County, Tennessee.
Community Bank operates 26 full service offices as well as four paying and
receiving offices located within Wal-Mart stores, which primarily open deposit
accounts, cash checks and receive deposits and loan payments. In December 1999,
Community Bank established a real estate mortgage department as an approved
seller/servicer for the Federal Home Loan Mortgage Corporation. The real estate
mortgage department, located in the Company's headquarters in Blountsville,
Alabama, offers mortgage loan products at competitive rates to customers
referred by Community Bank and the Company's finance company offices.

SUBSIDIARIES OF COMMUNITY BANK

1st Community Credit Corporation currently operates 12 finance company offices
in 12 Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman,
Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Oneonta,
Alabama. In November 1999, 1st Community Credit Corporation established its
Oneonta office, and in December 1999, it closed its Moulton, Alabama office and
consolidated the operations into its Decatur office. At December 31, 1999, 1st
Community Credit Corporation's loan portfolio totaled approximately $29,958,000.
1st Community Credit Corporation provides loans to a market segment
traditionally not pursued by Community Bank. These loans have typically
generated higher yields and involved greater risk than standard commercial bank
loans.

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Community Insurance Corp. serves as an agent in the sale of title, property,
casualty and life insurance products to individuals and businesses through four
locations in north Alabama. In April 1998, Community Insurance Corp. acquired
100% ownership of the outstanding shares of capital stock of Chafin Insurance
Agency, Inc. and Jim Murphree Insurance Agency, Inc., insurance agencies located
in Graysville and Oneonta, Alabama, respectively. Both agencies merged into
Community Insurance Corp. in January 1999. In June 1999, Community Insurance
Corp. established an office in Huntsville, Alabama through the acquisition of
certain assets and the assumption of certain liabilities of Cummings, Gazaway,
Gardner and Pate, Inc., a Huntsville-based insurance agency. In December 1999,
Community Insurance Corp. established an office in the Community Bank building
in Hamilton, Alabama. In April 1998, Community Insurance Corp. acquired 100%
ownership of the outstanding shares of capital stock of Southern Select
Insurance, Inc., a managing general agency which brokers agricultural,
commercial and personal insurance products for several insurance carriers
located outside of the state of Alabama through a network of approximately 125
insurance agencies located in Alabama. Community Insurance Corp. had acquired a
controlling interest in Southern Select Insurance, Inc. in August 1997. In
December 1999, Southern Select Insurance, Inc. relocated its offices to
Huntsville, Alabama from Birmingham, Alabama.

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

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

COMPETITION

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

EMPLOYEES

At December 31, 1999, the Company and its subsidiaries had approximately 433
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans and other benefit programs for their employees. The Company
maintains continuing education and training programs for its employees, designed
to prepare the employees for positions of increasing responsibility in
management or operations. Membership and participation by employees in
professional and industry organizations is encouraged and supported by the
Company.

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SUPERVISION AND REGULATION

The following is a brief summary of the regulatory environment in which the
Company and its subsidiaries operate and is not designed to be a complete
discussion of all statutes and regulations affecting such operations, including
those statutes and regulations specifically mentioned herein.

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

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

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

Community Bank is incorporated under the banking laws of the State of Alabama
and is subject to the applicable provisions of Alabama banking laws and
regulation and examination by the Alabama Banking Department. State regulations
in Alabama relate to such matters as loans, mortgages, consolidations, required
reserves, allowable investments, issuance of securities, payment of dividends,
establishment of branches, filing of periodic reports and other matters
affecting the business of Community Bank.

Deposits in Community Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and, therefore, Community Bank is subject to the
provisions of the Federal Deposit Insurance Act ("FDIA") and to examination by
the FDIC.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") provides, among other things, that commonly controlled federally
insured financial institutions must reimburse the FDIC for losses incurred by
the FDIC in connection with the default of another commonly controlled financial
institution or in connection with the provision of FDIC assistance to such a
commonly controlled financial institution in danger of default. Reimbursement
liability under FIRREA is superior to any obligations to shareholders of such
federally insured institutions (including a bank holding company such as the
Company), arising as a result of their status as a shareholder of a reimbursing
financial institution.

The Company and Community Bank are subject to the provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA
expanded the regulatory powers of federal banking agencies to permit prompt
corrective actions to resolve problems of insured depository institutions
through the regulation of banks and their affiliates, including bank holding
companies. The provisions are

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designed to minimize the potential loss to depositors and to FDIC insurance
funds if financial institutions default on their obligations to depositors or
become in danger of default. Among other things, FDICIA provides a framework for
a system of supervisory actions based primarily on the capital levels of
financial institutions. FDICIA also provides for a risk-based deposit insurance
premium structure. The FDIC charges an annual assessment for the insurance of
deposits based on the risk a particular institution poses to its deposit
insurance fund.

The Company is required to comply with the risk-based capital guidelines
established by the Federal Reserve, and to other tests relating to capital
adequacy which the Federal Reserve adopts from time to time. Under the
risk-based capital assessment system, assets are weighted by a risk factor and a
ratio is calculated by dividing the qualifying capital by the risk-weighted
assets. Tier I capital generally includes common stock and retained earnings.
Total capital is comprised of Tier I capital and Tier II capital, which includes
certain allowances for loan losses and certain subordinated debt. The Company's
Tier I and total capital ratios exceeded the required minimum levels as of
December 31, 1999.

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

The Community Reinvestment Act of 1977 ("CRA") and its implementing regulations
are intended to encourage regulated financial institutions to meet the credit
needs of their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The regulations provide that the appropriate regulatory authority
will assess CRA reports in connection with applications for establishment of
domestic branches, acquisitions of banks or mergers involving bank holding
companies. An unsatisfactory CRA rating may serve as a basis to deny an
application to acquire or establish a new bank, to establish a new branch or to
expand banking services. At December 31, 1999, the Company had a "satisfactory"
CRA rating.

The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") was signed into law on
November 12, 1999. Under the GLBA, banks are no longer prohibited by the
Glass-Steagall Act from associating with a company engaged principally in
securities activities. The GLBA also permits a bank holding company to elect to
become a "financial holding company," which would expand the powers of the bank
holding company. The repeal of the Glass-Steagall Act provisions and the
availability of financial holding company powers became effective on March 11,
2000. Financial holding company powers relate to financial activities that are
determined by the Federal Reserve to be financial in nature, incidental to an
activity that is financial in nature, or complementary to a financial activity
(provided that the complementary activity does not pose a safety and soundness
risk). The GLBA itself defines certain activities as financial in nature,
including

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lending activities, underwriting and selling insurance, providing
financial or investment advice, underwriting, dealing and making markets in
securities and merchant banking. In order to qualify as a financial holding
company, a bank holding company's depository subsidiaries must be both well
capitalized and well managed, and must have at least a satisfactory rating under
the CRA. The bank holding company must also declare its intention to become a
financial holding company to the Federal Reserve and certify that its depository
subsidiaries meet the capitalization and management requirements. The GLBA
establishes the Federal Reserve as the umbrella regulator of financial holding
companies, with subsidiaries of the financial holding company being more
specifically regulated by other regulatory authorities, such as the Securities
and Exchange Commission, the Commodity Futures Trading Commission and state
securities and insurance regulators, based upon the subsidiaries' particular
activities. The GLBA also provides for minimum federal standards of privacy to
protect the confidentiality of personal financial information of customers and
to regulate use of such information by financial institutions. A bank holding
company that does not elect to become a financial holding company remains
subject to the Bank Holding Company Act of 1956.

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

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

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

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ITEM 1 - STATISTICAL DISCLOSURE

Statistical and other information regarding the following items are set forth in
"Item 5 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on the pages indicated below.

Page(s)

Loan Portfolio and Selected Loan Maturity and Interest Rate Sensitivity.................................. 16

Investment Portfolio..................................................................................... 17

Investment Portfolio Maturity Schedule................................................................... 18

Maturities of Large Time Deposits........................................................................ 19

Maturities of Long-term Debt ............................................................................ 20

Rate Shock Analysis...................................................................................... 21

Interest Sensitivity..................................................................................... 22

Capital Adequacy Ratios.................................................................................. 24

Return on Equity and Assets.............................................................................. 24

Yields, Rates, Interest Rate Spread and Net Yield on Earning Assets...................................... 26

Consolidated Average Balances,
Interest Income/Expense and Yields/Rates............................................................... 27-28

Rate/Volume Variance Analysis............................................................................ 29-30

Summary of Loan Loss Experience.......................................................................... 32

Allocation of the Allowance for Loan Losses.............................................................. 33

Nonperforming Assets..................................................................................... 34

Noninterest Income....................................................................................... 35

Noninterest Expense...................................................................................... 36

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ITEM 2 - PROPERTIES

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

The flagship banking office of Community Bank is located at 69156 Main Street,
Blountsville, Alabama, in a one story brick building constructed in 1975 and
extensively remodeled during 1994. The premises are owned by Community Bank.

Community Bank owns or leases buildings that are used in the normal course of
business in 11 counties in Alabama, including Blount, DeKalb, Lauderdale,
Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry and Winston
counties, and in Giles County, Tennessee. 1st Community Credit Corporation owns
or leases buildings that are used in the normal course of business in 10
counties in Alabama, including Blount, Cullman, Marshall, Morgan, Limestone,
Lawrence, Etowah, Madison, DeKalb and Walker counties. Community Insurance Corp.
and its subsidiary, Southern Select Insurance, Inc., own or lease buildings that
are used in the normal course of business in Blount, Jefferson, Madison and
Marion counties in Alabama.

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

ITEM 3 - LEGAL PROCEEDINGS

On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. On December 21, 1998, the Company and its directors filed
a motion with the court seeking to have the complaint dismissed. On March 1,
1999, the Company's Board of directors appointed a special Board committee,
comprised of Roy B. Jackson, Merritt M. Robbins and R. Wayne Washam, each of
whom is a non-employee director of the Company, to review the plaintiff's
allegations in accordance with Delaware law. On April 6, 1999, each of the
parties to the action requested that the court stay the litigation and related
discovery, motions and hearings, pending completion of the special committee's
review. On April 30, 1999, the court entered an order staying the litigation and
related discovery, motions and hearing in accordance with the parties' request.
On October 15, 1999, the special committee filed its final report with the
court. On October 21, 1999, the parties forwarded to the court an agreed-upon
order governing the confidentiality of the special committee's report, which the
court entered on January 2, 2000. On January 19, 2000, the Company and its
directors filed a motion to dismiss the complaints, based upon the Special
Committee's report. The parties are awaiting a hearing on this motion. The
complaint alleged that the directors of the Company breached their fiduciary
duties to the Company and its shareholders, engaged in fraud, fraudulent
concealment, suppression of material fact and suppression of the plaintiff
shareholders, failed to supervise management, and conspired to conceal wrongful
acts from the Company's shareholders and paid themselves excessive director
fees. The complaint also alleged that the Board of Directors acquiesced in
mismanagement and misconduct by Kennon R. Patterson, Sr., the Chairman of the
Board, Chief Executive Officer and President of the Company, including alleged
self dealing, payment of excessive compensation, misappropriation of corporate
opportunities and misappropriation of funds. The complaint sought an unspecified
amount of

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compensatory and punitive damages, removal of the current directors, appointment
of a new Board of Directors, and attorneys fees and cost. Management of the
Company believes that the plaintiffs' allegations are false and that the action
lacks merit. The Company and its directors intend to defend the action
vigorously, and management of the Company believes that the action will not have
a material adverse effect on the Company's financial condition or results of
operations.

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

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

No matter was submitted to a vote of security holders by solicitation of proxies
or otherwise during the fourth quarter of 1999.

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EXECUTIVE OFFICERS OF THE REGISTRANT

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

Name, Age and Position Held in the Company
and its Subsidiaries Principal Experience During Past Five Years
- -------------------- -------------------------------------------

Kennon R. Patterson, Sr. (57)
Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer
of the Company; Chairman and Chief Executive of the Company (1985-present); Chairman and
Officer of Community Bank; Director of Chief Executive Officer of Community Bank
Community Appraisals, Inc., Community (1993-present)
Insurance Corp., 1st Community Credit
Corporation and Southern Select Insurance, Inc.

Bishop K. Walker, Jr. (68)
Director, Vice Chairman, Secretary, Senior Vice Chairman, Senior Executive Vice President
Executive Vice President and General Counsel of and General Counsel of the Company (1987-
the Company; Director, Senior Executive Vice present); President and Director of Community
President and Secretary of Community Bank; Insurance Corp. (1987-1997)
Director of Community Insurance Corp. and
Southern Select Insurance, Inc.

Denny G. Kelly (60)
Director and Executive Vice President of the President of Community Bank (1993-present)
Company; Director and President of Community
Bank; Director of 1(st) Community Credit
Corporation, Community Appraisals, Inc.,
Community Insurance Corp. and Southern Select
Insurance, Inc.

Michael A. Bean (52)
Acting Chief Accounting Officer of the Company; Director, Executive Vice President and Chief Financial
Executive Vice President and Chief Financial Officer Officer of Community Bank (1998-present); Chief
of Community Bank; Director of Community Appraisals, Inc. Accounting Officer of Compass Bancshares, Inc.
(1991-1998)

William H. Caughran, Jr. (43)
Assistant Secretary and Treasurer of Community Senior Vice President and General Counsel of
Bancshares, Inc: Senior Vice President and Community Bank (1998-present); Associate Counsel
General Counsel of Community Bank; Director of of AmSouth Bank of Alabama (1992-1998)
1(st) Community Credit Corporation, Community
Appraisals, Inc.; Community Insurance Corp. and
Southern Select Insurance, Inc.

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PART II

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

Shares of the common stock (the "Common Stock") of the Company were held by
approximately 2,350 shareholders of record as of March 15, 2000. There is no
established trading market for the Common Stock, which has been purchased and
sold infrequently in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock is provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.

Estimated Price Range
Per Share
-----------------------
High Low
------- -------

1999:
FIRST QUARTER.................................................................. $ 24.00 $ 20.00
SECOND QUARTER................................................................. 24.00 24.00
THIRD QUARTER.................................................................. 24.00 24.00
FOURTH QUARTER................................................................. 24.00 24.00

1998:
First Quarter.................................................................. $ 15.00 $ 15.00
Second Quarter................................................................. 19.00 15.00
Third Quarter.................................................................. 19.00 19.00
Fourth Quarter................................................................. 20.00 19.00

Annual dividends of $.60 per share and $.50 per share were declared by the Board
of Directors on the Company's Common Stock and paid on January 8, 1999 and
January 12, 1998, respectively. The payment of dividends on the Common Stock is
subject to the prior payment of principal and interest on the Company's
long-term debt, the retention of sufficient earnings and capital in the
Company's operating subsidiaries and regulatory restrictions. See the Company's
Consolidated Financial Statements and related notes included elsewhere in this
Report.

During 1999, the following equity securities were issued by the Company without
registration under the Securities Act of 1933 (the "Securities Act"):

In March 1999, the Company issued an aggregate of 8,923 shares of Common Stock
to certain of Community Bank's city directors in payment of director fees, in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act.

In December 1999, the Company granted options to purchase an aggregate of
204,000 shares of Common Stock to the directors and certain senior officers of
the Company and Community Bank. The exercise price for each of such options is
equal to the market value of the Common Stock on the date of grant. The Company
did not receive any payment in exchange for granting any of such options, which
were granted in reliance upon an exemption from registration under Section 4(2)
of the Securities Act.

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ITEM 6 - SELECTED FINANCIAL DATA

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

Year Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands Except Per Share Data)

Interest income ............................... $ 52,194 $ 44,365 $ 37,791 $ 33,600 $ 26,304
Interest expense .............................. 25,522 22,693 19,541 17,426 13,751
Net interest income ........................... 26,672 21,672 18,250 16,174 12,553
Provision for loan losses ..................... 4,459 885 773 834 1,088
Non-interest income ........................... 9,155 8,102 4,891 4,447 3,717
Non-interest expense .......................... 29,208 23,784 17,423 14,902 12,046
Net income .................................... 1,658 3,579 3,512 3,459 2,705

Per Share Data:
Earnings per share - basic ................ $ .37 $ .90 $ .92 $ .93 $ .81
Earnings per share - diluted .............. .36 .88 .92 .93 .81
Cash dividends ............................ .60 .50 .38 .25 .25
Shareholders' equity (book value)
at period end ......................... 9.53 10.16 8.85 8.63 8.13

Balance Sheet:
Loans, net of unearned income ............. $498,726 $433,853 $326,134 $322,762 $237,841
Deposits .................................. 573,261 538,586 440,889 400,338 320,149
FHLB borrowings ........................... 40,000 -0- -0- -0- -0-
Long-term debt ............................ 6,637 7,569 7,398 8,281 7,920
Average equity ............................ 44,203 37,318 33,428 30,079 24,839
Average assets ............................ 632,713 538,470 473,381 421,839 328,244
Total assets .............................. 674,898 603,244 491,839 454,710 362,824
Ratios:
Return on average assets .................. 0.26% 0.67% 0.74% 0.82% 0.82%
Return on average equity .................. 3.75% 9.59% 10.51% 11.50% 10.88%
Dividend payout ratio ..................... 162.16% 55.60% 40.50% 26.90% 30.90%
Average equity to average assets .......... 6.99% 6.93% 7.06% 7.13% 7.57%
Total risk-based capital .................. 9.37% 11.03% 11.86% 11.45% 14.10%
Leverage ratio ............................ 6.39% 7.79% 6.94% 9.20% 8.61%

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13

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

The purpose of this discussion is to focus on the significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during 1997, 1998 and 1999. This discussion and analysis is
intended to supplement and highlight information contained in the Company's
consolidated financial statements and the selected financial data presented
elsewhere in this Report.

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

Certain statements in this Report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1993, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are not based on historical facts and may be identified by their
reference to a future period or by the use of forward-looking terminology, such
as "anticipate," "estimate," "expect," "may" and "should." These forward-looking
statements include, without limitation, those relating to the Company's future
growth and profitability, dividends, pending litigation, non-compliant and
impaired loans originated in Community Bank's Ft. Payne, Alabama office, capital
requirements, operating strategy, consumer base allowance for loan losses,
non-performing assets, interest rate sensitivity, market risk, impact of
inflation and impact of Year 2000 issues. We caution you not to place undue
reliance on these forward-looking statements. Actual results could differ
materially from those indicated in such forward-looking statements due to a
variety of factors. These factors include, but are not limited to, economic
conditions, government fiscal and monetary policies, changes in prevailing
interest rates and effectiveness of the Company's interest rate strategies,
laws, regulations and regulatory authorities affecting financial institutions,
changes in and effectiveness of the Company's operating or expansion strategies,
geographic concentration of the Company's assets and operations, competition
from other financial services companies, Year 2000 compliance issues, the
Company's ability to obtain reimbursement from its fidelity bond insurance
carrier or other persons responsible for originating non-compliant and impaired
loans in Community Bank's Ft. Payne, Alabama office and other risks detailed
from time to time in the Company's press releases and filings with the
Securities and Exchange Commission. We undertake no obligation to update these
forward-looking statements to reflect events or circumstances occurring after
the date of this Report.

SUMMARY

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

Management believes that the economies of the areas served by the Company are
healthy and expanding, but not at a pace that threatens the areas' stability.
With the exception of Blount, Marengo, Marion, Perry and Winston counties in
Alabama, the markets in which the Company operates share one common

12
14

characteristic: they are separate and distinct economies, but each is close
enough to Huntsville, Alabama, to share in the economic and employment benefits
of that city.

The Huntsville Metropolitan Statistic Area (the "MSA") had a 1996 per capita
income of $22,595, 13.8% over the 1996 state per capita income of $19,864.
Huntsville is located in Madison County, which has the highest median income of
the Alabama counties at $41,855, as reported by the U.S. Census Bureau in 1995.
Unemployment for the Huntsville MSA was 2.9% in 1998 as compared to 4.2% for
Alabama during that period. The Huntsville MSA possesses a diverse economic base
with employers that include the military and aerospace industries, manufacturers
of durable goods, machinery, transportation, as well as retailers and service
industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco,
dairy and poultry farming, also makes up a significant portion of the MSA's
economy.

Similarly, Blount County is close enough to Birmingham, Alabama, to share in the
economic and employment benefits of that city. The Birmingham MSA had a 1998
unemployment rate of 2.8% and 1996 per capita income of $24,227, compared to the
United States per capita income of $24,169 for that period, and 22.0% above the
Alabama per capita income of $19,864 for that period. The Birmingham area still
retains some of the steel and related manufacturers that built the city, but the
economy is now more diverse with the University of Alabama in Birmingham and the
healthcare industry providing many jobs.

Marion and Winston counties lie in northwest Alabama, near the Mississippi
border. In both counties the manufacturing sector provides more jobs and higher
sales or receipts, than the wholesale, retail, and service sectors, according to
the U.S. Census Bureau's 1992 Economic Census. Manufactured housing and
furniture production are two prominent industries in these counties. Marion
County reported a median household income of $25,960 and an unemployment rate of
6.9%. Winston County reported a median household income of $24,947 and an
unemployment rate of 5.6%.

Marengo and Perry counties are located in west-central Alabama. According to the
U.S. Census Bureau's 1992 Economic Census, manufacturing provides more jobs in
these counties than the wholesale, retail, and service sectors. In addition,
catfish farming and the timber industry are important components in the economy
of these counties. Median household income for Marengo County was $23,722 and
the unemployment rate was 7.3%. Perry County reported a median household income
of $17,324 and an unemployment rate of 8.4%.

The average of the median household incomes in the counties served by the
Company is 6% above the Alabama median income of $27,357. Based on 1998
estimates, the average population for the counties served by the Company and its
subsidiaries exceeds 70,000 persons per county. The current economic prospects
in the Company's markets are good, and the Company attempts to assist those
prospects by returning the deposits of its customers to the communities from
which they come in the form of loans.

The Company's net income of $1,658,000 for 1999 represented a 53.7% decline from
1998's net income of $3,579,000, which was 1.9% more than the net income of
$3,512,000 for 1997. When stated as changes in basic earnings per share, 1999
basic earnings per share of $.92 represented a 58.9% decrease from 1998 basic
earnings per share of $.90, which represented a 2.2% decrease from 1997 basic
earnings per share of $.92. The decrease in earnings per share for 1999 resulted
primarily from additional provisions to the Company's

13
15

allowance for loan losses in connection with impaired loans originated in
Community Bank's Ft. Payne, Alabama office and a significant increase in
non-interest expenses associated with the Company's 1999 annual meeting of
shareholders. In addition, the average number of shares outstanding increased
10.9% during 1999, compared to 1998, due to the issuance of an additional
500,000 shares of Common Stock in the Company's public offering during the
fourth quarter of 1998. Other factors that have impacted the Company's basic
earnings per share during 1999 and 1998 include increases in non-interest
expenses associated with expansion of Community Bank's office network, new
finance company facilities and additional insurance offices.

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

In 1993, 1995 and 1998, the Company raised capital through the sale of shares of
its Common Stock. All three offerings were closed upon being fully subscribed.
The Company sold to the public, in the fourth quarter of 1998, 500,000 newly
issued shares of Common Stock at a price of $19.00 per share raising
approximately $9,467,000 after reduction for offering expenses. This additional
capital and internally generated retained earnings have allowed the Company to
remain in a strong capital position to support current, as well as anticipated
future, growth and expansion.

The Company plans to issue approximately $10,000,000 of fixed rate capital
securities. Although there can be no assurances, management believes the closing
of this transaction will take place by the end of the first quarter of the year
2000.

EARNING ASSETS

The Company's average earning assets in 1999 increased 17.2% over that for 1998,
primarily as a result of increases in the loan portfolio, and accounted for
approximately 88.7% of the Company's average total assets for 1999. This is
compared to an increase during 1998 of 13.3% in average earning assets, which
represented 89.0% of the Company's average total assets for 1998.

During 1999, the Company's mix of average earning assets continued to shift to
the loan portfolio as average loans, net of unearned income, increased 22.5% in
1999 and represented 82.5% of the total average earning assets for 1999, up from
78.9% for 1998 and 76.8% for 1997. Investment securities averaged 16.9%, 18.5%
and 19.4% during 1999, 1998 and 1997, respectively. The other earning assets
category accounted for less than 4.0% of total earning assets for all three
periods. The increased volume in earning assets contributed to the higher net
interest income reported by the Company during these three periods.

Total loans, net of unearned income, outstanding at year-end 1999 increased
15.0% compared to year-end 1998, with no concentration of the increase in any
one specific loan category. Commercial, financial and agricultural loans
increased 32.1% in 1999 over year-end 1998, while consumer loans increased 11.7%
from year-end 1998 to year-end 1999. Real estate-mortgage loans, which made up
44.9% of the total loans, increased 9.1% at year-end 1999 when compared to
year-end 1998. Real estate-construction loans increased

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16

5.2% at year-end 1999 when compared to year-end 1998, but had little effect due
to representing only 1.3% of total loans outstanding at year-end 1999.

The Company's current strategy is to avoid the national market in loans to
finance leveraged buy-outs, intending not to participate in nationally
syndicated leveraged buy-out loans. The Company's strategy also includes
avoiding exposure to lesser developed country ("LDC") debt, and it currently has
no LDC loans in its portfolio.

[The remainder of this page intentionally left blank]

15
17

The following table shows the classification of loans by major category at
December 31, 1999 and at the end of each of the preceding four years. The second
table provides maturities of certain loan classifications and an analysis of
these loans maturing in over one year.

LOAN PORTFOLIO

December 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
(Dollars in Thousands)

Commercial,
financial and
agricultural ..... $124,245 24.9% $ 94,057 21.6% $ 64,136 19.6% $ 65,634 20.2% $ 44,686 18.6%
Real estate -
construction ..... 6,470 1.3 6,153 1.4 3,499 1.1 5,262 1.6 5,624 2.3
Real estate -
mortgage ......... 224,129 44.9 205,457 47.2 172,504 52.7 162,994 50.2 116,289 48.4
Consumer ........... 144,453 28.9 129,334 29.7 86,945 26.6 90,682 27.9 73,479 30.6
-------- ------ -------- ------ -------- ------ -------- ------- -------- ------
499,297 100.0% 435,001 100.0% 327,084 100.0% 324,572 100.0% 240,078 100.0%
====== ====== ====== ======= ======

Less: Unearned
income ........... 571 1,148 950 1,810 2,237
Allowance for
loan losses ...... 2,603 2,971 2,131 2,425 2,209
-------- -------- -------- -------- --------

Net loans .......... $496,123 $430,882 $324,003 $320,337 $235,632
======== ======== ======== ======== ========

SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

December 31, 1999
----------------------------------------------------------------------------------------
Rate Structure For Loans
Maturity Maturing Over One Year
------------------------------------------------------- ----------------------------
Over One
Year
Through Over Predetermined Floating or
Year or Five Five Interest Adjustable
Less Years Years Total Rate Rate
(in Thousands)

Commercial, financial
and agricultural ..... $ 51,835 $ 30,805 $ 41,605 $124,245 $ 50,995 $ 21,415
Real estate -
construction ......... 5,030 1,440 0 6,470 1,087 353
-------- -------- -------- -------- -------- --------

$ 56,865 $ 32,245 $ 41,605 $130,715 $ 52,082 $ 21,768
======== ======== ======== ======== ======== ========

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18

INVESTMENT PORTFOLIO

The composition of the Company's investment securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The primary objectives of the Company's investment
strategy are to maintain an appropriate level of liquidity and provide a tool to
assist in controlling the Company's interest rate position while at the same
time producing adequate levels of interest income. The Company's entire
portfolio is classified as available for sale to appropriately reflect the
nature of the Company's holdings that are available for sale should liquidity
needs dictate. Management of the maturity of the portfolio is necessary to
provide liquidity and to control interest rate risk. During 1999, gross
investment securities sales were $11,628,000 and maturities were $10,778,000,
representing 12.2% and 11.3%, respectively, of the average portfolio for the
year. Net gains associated with the sales totaled $179,000 during 1999,
accounting for 2.0% of noninterest income during 1999. At December 31, 1999,
gross unrealized gains in the portfolio were $72,000 while gross unrealized
losses amounted to $2,827,000.

Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risk.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Company's mortgage-backed securities
portfolio as of December 31, 1999 and 1998 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
1999 was $242,000. The recoverability of the Company's investment in
mortgage-backed securities is reviewed periodically by management, and if
necessary, appropriate adjustments would be made to income for impaired values.

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

INVESTMENT PORTFOLIO

December 31,
-----------------------------------------------
1999 1998 1997
------------ ----------- ------------
(in Thousands)

U. S. Treasury and U.S. Government agencies................... $ 55,870 $ 49,145 $ 51,153
Mortgage-backed securities.................................... 30,521 31,324 21,241
State and municipal securities................................ 8,356 15,187 12,698
Equity securities............................................. 2,100 1,736 -0-
------------ ----------- ------------
Total investment securities............................... $ 96,847 $ 97,392 $ 85,092
============ =========== ============

Average investment securities increased 7.6% and 8.0% during 1999 and 1998,
respectively. Average taxable securities accounted for 83.8% of the investment
portfolio in 1999 and 84.7% in 1998 while average tax-exempt securities were
16.2% of the investment portfolio in 1999 and 15.3% in 1998. During 1999, the
Company experienced actual growth in taxable investment securities and an actual
decline in non-taxable investment securities. Period-end securities for 1999
declined 0.6% from the previous year-end.

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19

The maturities and weighted average yields of the investments in the year-end
1999 portfolio of investment securities are presented below. Taxable equivalent
adjustments (using a 34% tax rate) have been made in calculating yields on
tax-exempt obligations. The average maturity of the investment portfolio at
December 31, 1999 was 6.13 years with an average yield of 5.94%. Mortgage-backed
securities have been included in the maturity table based upon the guaranteed
payoff date of each security.

INVESTMENT PORTFOLIO MATURITY SCHEDULE

December 31, 1999
------------------------------------------------------------------------------------------------
Maturing
------------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
------------------- ------------------ ----------------------- ---------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ---- - ----- ------ ----
(Dollars in Thousands)

Securities- All Available for Sale:
- -----------------------------------

U. S. Treasury .... $10,175 5.59% $ 6,997 5.66% $ -0- 0.00% $ -0- 0.00%
U. S. Government
agencies ......... 12,059 5.72 7,747 5.65 23,123 5.44 26,290 6.31
State and municipal
securities ...... 361 6.98 798 7.26 2,013 8.11 5,184 7.81
Equity securities . -0- 0.00 -0- 0.00 -0- 0.00 2,100 4.18
------- ---- ------- ---- ------- ---- ------- ----
Total .......... $22,595 5.68 $15,542 5.73 $25,136 5.65 $33,574 6.41
======= ==== ======= ==== ======= ==== ======= ====

There were no securities held by the Company whose aggregate value on December
31, 1999 exceeded 10.0% of the Company's consolidated shareholders' equity at
that date. Average Federal Funds sold decreased 84.9% during 1999 , reflecting
growth in loans and investment securities in excess of deposit growth. During
1998, average Federal Funds sold increased 15.7% from 1997 levels. As a
percentage of average earning assets, these funds represented 0.3% for 1999
compared to 2.4% for 1998.

Interest-bearing deposits with other banks has accounted for less than 0.2% of
the Company's average earning assets during 1999 . The average balance of
interest-bearing deposits with other banks have reflected an increase of 33.5%
during 1999 compared to a decline of 59.5% during 1998.

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

DEPOSITS AND BORROWED FUNDS

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

The portion of the Company's average liabilities represented by interest-bearing
deposits increased in both 1999 and 1998 by 12.3% and 14.6%, respectively.
Average interest-bearing demand deposits, average savings and average time
deposits increased 11.4%, 15.9% and 12.0%, respectively, during 1999. Average

18
20

noninterest-bearing demand deposits increased 15.1% and 8.4% during 1999 and
1998, respectively. Customer confidence and satisfaction is evidenced by the
increase in total average deposits of 12.7% in 1999 and 13.8% in 1998. The two
categories of lowest cost deposits comprised the following percentages of total
average deposits during 1999 and 1998, respectively: average noninterest-bearing
demand deposits - 12.7% and 12.4%; and average interest-bearing demand deposits
- - 17.4% and 17.6%. During 1999, interest-bearing demand accounts increased
$8,589,000, or 9.6%, while certificates of deposit of less than $100,000
increased $8,503,000, or 3.9%. Certificates of deposit of $100,000 or more
increased $6,868,000, or 7.6%, during this same period. Of total time deposits
at December 31, 1999, approximately 34.2% were large denomination certificates
of deposit and other time deposits of $100,000 or more, up slightly from 33.3%
at December 31, 1998. The maturities of the time certificates of deposit and
other time deposits of $100,000 or more issued by the Company at December 31,
1999 are summarized in the table below.

MATURITIES OF LARGE TIME DEPOSITS

December 31, 1999
-------------------------------------------------
Time Other
Certificates Time
of Deposit Deposits Total
-------------- ------------- --------------
(in Thousands)

Three months or less.......................................... $ 18,678 $ 20,850 $ 39,528
Over three through six months................................. 20,884 -0- 20,884
Over six through twelve months................................ 30,815 -0- 30,815
Over twelve months............................................ 26,941 -0- 26,941
-------------- ------------- --------------

Total...................................................... $ 97,318 $ 20,850 $ 118,168
============== ============= ==============

Borrowed funds consist primarily of short-term borrowings, borrowings from the
Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and long-term debt.
Short-term borrowings at year-end 1999 and 1998 consisted of the U. S. Treasury
Tax and Loan Note Option account, Federal Funds purchased, overnight funds
purchased from the FHLB-Atlanta (1998 only), and securities sold under
agreements to repurchase. Community Bank had $11,000,000 at year-end 1999 and
$10,000,000 at year-end 1998 in available lines to purchase Federal Funds, on an
unsecured basis, from commercial banks. At December 31, 1999 and 1998, Community
Bank had no funds advanced against these lines.

In the fourth quarter of 1998, Community Bank became a member of the
FHLB-Atlanta and was approved to borrow up to $65,000,000 under various
short-term and long-term programs offered by the FHLB-Atlanta. These borrowings
are secured under a blanket lien agreement on certain qualifying mortgage
instruments in Community Bank's loan and investment portfolios. While Community
Bank has drawn up to a maximum of $20,000,000 under the FHLB-Atlanta's
"Overnight Borrowings" program since becoming a member of the FHLB-Atlanta, no
funds were advanced against its line as of December 31, 1999 and 1998. On June
1, 1999, Community Bank borrowed $30,000,000 under the FHLB-Atlanta's
"Convertible Advance Program." This advance had a final maturity of June 1, 2009
(120 months), with a call feature every three months during the life of the
obligation, and carried a fixed rate of 4.62% per annum. These funds were used
to replace $20,000,000 in FHLB-Atlanta overnight borrowings and to fund loan
growth. This obligation was called on September 1, 1999 due to an increase in
market interest rates. As a result of this call, Community Bank refinanced the
original advance and borrowed an additional $10,000,000, to fund anticipated
loan growth, under the same "Convertible Advance Program." This advance,
totaling $40,000,000 at December 31, 1999, has a final maturity of September 1,
2009 (120 months), with a call feature every six months during the life of the
obligation, and carries a fixed rate of 4.99% per annum. Principal is due at
final maturity or on a call date, with interest payable each quarter. The first
call date for this advance was March 1, 2000.

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21

Long-term debt consisted of various commitments with scheduled maturities from 1
to 20 years. The following table sets forth expected debt service for the next
five years based on interest rates and repayment provisions as of December 31,
1999. A more detailed explanation of long-term debt is included in the
accompanying notes to the Company's Consolidated Financial Statements included
elsewhere in this Report.

MATURITIES OF LONG-TERM DEBT
--------------------------------------------------------------

2000 2001 2002 2003 2004
---------- ----------- ----------- ----------- -----------
(in Thousands)

Interest on indebtedness....................... $ 502 $ 422 $ 341 $ 286 $ 261
Repayment of principal......................... 942 961 982 293 318
---------- ----------- ----------- ----------- -----------

$ 1,444 $ 1,383 $ 1,323 $ 579 $ 579
========== =========== =========== =========== ===========

LIQUIDITY MANAGEMENT

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

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

Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its shareholders and
other needs. Certain restrictions exist regarding the ability of Community Bank
to transfer funds to the Company in the form of cash dividends, loans or
advances. The approval of the Alabama Banking Department is required to pay
dividends in excess of Community Bank's earnings retained in the current year
plus retained net profits for the preceding two years less any required
transfers to surplus. At December 31, 1999, Community Bank could have declared
dividends of approximately $4,258,000 without approval of regulatory
authorities.

The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales, maturities, calls and paydowns of investment
securities. Real estate-construction and commercial, financial and agricultural
loans that mature in one year or less totaled approximately $56,865,000, or
11.4% of loans, net of unearned income, at December 31, 1999, and investment
securities maturing in one year or less totaled $22,595,000, or 23.3% of the
investment portfolio, at December 31, 1999. Other sources of liquidity include
short-term investments such as Federal Funds sold and maturing interest-bearing
deposits with other banks.

The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. Funds are
also available through the purchase of Federal Funds from

20
22

other commercial banks and borrowings against available line through the
FHLB-Atlanta. Liquidity management involves the daily monitoring of the sources
and uses of funds to maintain an acceptable Company cash position.

INTEREST RATE SENSITIVITY AND MARKET RISK

The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities. Management monitors
its interest rate risk exposure through the use of a static gap analysis and an
interest rate shock analysis. The static gap analysis measures the amount of
repricing risk embedded in the balance sheet at a specific point in time, by
comparing the difference in the volume of interest-earning assets and
interest-bearing liabilities that are subject to repricing within specific time
periods. Community Bank was liability sensitive at year-end 1999, indicating
that it has more liabilities than assets repricing during 2000. The cumulative
static gap position of rate sensitive assets to rate sensitive liabilities at
December 31, 1999 was: i) .27% at 30 days; ii) .36% at 90 days; iii) .37% at 180
days; and iv) .37% at 365 days.

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

The following tables estimate the impact of shifts in interest rates on the
Company's net interest income for the 12 months ending December 31, 2000:

RATE SHOCK ANALYSIS

-200 +200
Basis Basis
Points Level Points
---------------------------------------------------
(Dollars in thousands)

Prime Rate ............................. 6.50% 8.50% 10.50%

Interest Income ........................ $ 57,095 $ 59,084 $ 62,778
Interest Expense ....................... 26,136 29,633 34,714
-------- -------- --------

Net Interest Income ................. $ 30,959 $ 29,451 $ 28,064
======== ======== ========

Dollar change from Level ............... $ 1,508 $ (1,387)
Percentage change from Level ........... 5.12% (4.71)%

[The remainder of this page intentionally left blank]

21
23
INTEREST SENSITIVITY

Percentage Increase (Decrease)
in Interest Income/Expense
Principal Amount of Given Immediate and Sustained
Earning Assets, Interest Rate Shifts
Interest-bearing ------------------------------
Liabilities at Down 200 Up 200
December 31, 1999 Basis Points Basis Points
---------------------- ------------------------------
(Dollars in Thousands)

Assets which reprice in:
One year or less ............... $ 182,131 (2.43)% 9.12%
Over one year .................. 416,897 (3.71) 5.20
------------

$ 599,028 (3.37) 6.25
============

Liabilities which reprice in:
One year or less ............... $ 486,233 (13.62) 14.22
Over one year .................. 71,318 (4.19) 29.39
------------

$ 557,551 (11.80) 17.15
============

Total net interest income sensitivity.................................. 5.12 (4.71)

While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to move slightly higher during 2000 and
believes that the Company's current interest rate sensitivity analysis fairly
reflects its interest rate risk exposure during the 12 months ending December
31, 2000. Management continually evaluates the condition of the economy, the
pattern of market interest rates and other economic data to determine the types
of investments that should be made and at what maturities.

CAPITAL RESOURCES

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

In 1993, 1995 and 1998, the Company raised capital through the sale of shares
of its Common Stock. All three offerings were closed upon being fully
subscribed. The Company sold to the public, in the fourth quarter of 1998,
500,000 newly issued shares of Common Stock at a price of $19.00 per share
raising approximately $9,467,000 after reduction for offering expenses.

The Company plans to issue approximately $10,000,000 of fixed rate capital
securities. Although there can be no assurances, management believes the
closing of this transaction will take place by the end of the first quarter of
the year 2000.

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

Bank regulatory authorities have issued risk-based capital guidelines that take
into consideration risk factors associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk-adjusted assets
to determine the

22
24
risk-based capital ratios. The Company's Tier I capital, which consists of
common equity, amounted to approximately $39,976,000 at December 31, 1999
compared to $41,521,000 at December 31, 1998. Tier II capital components
include supplemental capital components, such as qualifying allowance for loan
losses and qualifying subordinated debt. Tier I capital plus the Tier II
capital components are referred to as Total Risk-based capital, which was
approximately $44,067,000 and $46,083,000 at year-end 1999 and 1998,
respectively. The percentage ratios, as calculated under the guidelines, for
Tier I and Total Risk-based capital, respectively, were 8.50% and 9.37% at
December 31, 1999, compared to 9.94% and 11.03% at year-end 1998. While Tier I
capital exceeded the regulatory well capitalized ratio of 6% at year-end 1999,
the Company was considered adequately capitalized at December 31, 1999, as both
Tier I and Total Risk-based capital exceeded the regulatory minimum ratios of
4% and 8%, respectively. Applying the current guidelines to 1998 and 1997
resulted in capital ratios exceeding both the regulatory minimum requirements
and requirements to be considered a well capitalized bank.

Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The leverage ratio is defined as the ratio that the Company's
shareholders' equity, minus goodwill, bears to total average assets minus
goodwill. The Company's leverage ratios as of December 31, 1999, 1998 and 1997
exceeded the regulatory minimum requirement of 4%.

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23
25
The following table illustrates the Company's regulatory capital ratios at
December 31, 1999, 1998 and 1997:

CAPITAL ADEQUACY RATIOS

December 31,
` ----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(Dollars in thousands)

Tier I Capital ......................... $ 39,976 $ 41,521 $ 32,638
Tier II Capital ........................ 4,091 4,562 3,773
------------ ------------ ------------

Total Qualifying Capital ........ $ 44,067 $ 46,083 $ 36,411
============ ============ ============

Risk-weighted Total Assets (including
off-balance-sheet exposures) ......... $ 470,305 $ 417,945 $ 306,947
============ ============ ============

Tier I Risk-based Capital Ratio ........ 8.50% 9.94% 10.63%

Total Risk-based Capital Ratio ......... 9.37% 11.03% 11.86%

Leverage Ratio ......................... 6.39% 7.79% 6.94%

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

RETURN ON EQUITY AND ASSETS

Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------ ------ ------

Return on average assets .................... 0.26% 0.67% 0.74%
Return on average equity .................... 3.75 9.59 10.51
Dividend payout ratio ....................... 162.16 55.56 40.50
Average equity to average assets ratio ...... 6.99 6.93 7.06

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24
26
RESULTS OF OPERATIONS

NET INTEREST INCOME

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

Net interest income for 1999, on a fully taxable equivalent (FTE) basis,
increased 22.6% from 1998, compared to an increase of 18.0% in 1998 over 1997.
An increase in average earning assets and average interest-bearing liabilities
in 1999 and 1998 accounted for the majority of the increase. The "Rate/Volume
Variance Analysis" table in the section below provides the detail changes in
interest income, interest expense and net interest income due to changes in
average balances and rates.

The Company's FTE interest income increased 17.5% in 1999 and 17.1% in 1998.
The increase in 1999 was due almost entirely to the 17.2% increase in average
earning assets as the FTE yield on average earning assets rose only two basis
points. The 1998 increase was due both to the 13.3% increase in average earning
assets and the 30 basis point rise in the FTE yield on average earning assets.
During 1999, the FTE interest income on loans increased 20.5% primarily due to
the 22.5% increase in the average loan balances outstanding as the FTE yield on
loans declined 16 basis points. The FTE interest income on loans increased
20.7% during 1998, due primarily to an increase in the average loan balances
outstanding of 16.5% coupled with an increase in the FTE yield on loans of 36
basis points. Interest income on investment securities increased 8.2% from 1998
to 1999 and 2.3% from 1997 to 1998, due primarily to changes in the average
investment security balances outstanding.

During 1999, total interest expense increased 12.5%. While the Company
experienced a 17.7% increase in average interest-bearing liabilities
outstanding during this period, the rate paid on the Company's interest-bearing
liabilities declined by 23 basis points during 1999. The 16.1% increase in
total interest expense in 1998 was due primarily to the effect of a 14.2%
increase in average interest-bearing liabilities, coupled with the effect of a
9 basis point increase in the rate paid. Interest-bearing deposits are the
major component of interest bearing liabilities, representing 93.2% in 1999,
97.7% in 1998 and 97.3% in 1997 of average total interest-bearing liabilities
outstanding. While average interest-bearing deposits outstanding increased
12.3% and 14.6% during 1999 and 1998, respectively, the rate paid on these
average balances reflected a decline of 22 basis points during 1999 compared to
an increase of 11 basis points during 1998. The rise in interest expense on
short-term borrowings and long-term debt was due primarily to an increase in
average balances outstanding as opposed to changes in rates paid. A new
component of interest expense resulted during 1999 when Community Bank borrowed
funds under the FHLB-Atlanta's "Convertible Advance Program" (FHLB borrowings).
The average FHLB borrowings outstanding during 1999 were approximately
$20,932,000, which represented 4.1% of the Company's average total
interest-bearing liabilities.

The trend in net interest income is also evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing net
interest income by average earning assets. This ratio represents the difference
between the average yield returned on average earning assets and the average
rate paid for funds used to support those earning assets, including both
interest-bearing and noninterest-bearing sources. The Company's FTE net
interest margin for 1999 was 4.86% compared to 4.64% and 4.46% for 1998 and
1997, respectively.

25
27
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest-bearing sources of funds.
The interest rate spread eliminates the impact of noninterest-bearing funds and
gives a more direct perspective to the effect of market interest rate
movements. The FTE net interest spread for 1999 increased 25 points to 4.40%
from the Company's 1998 spread of 4.15% as the FTE yield on earning assets
increased and the cost of interest-bearing sources of funds decreased. The FTE
net interest spread for 1997 was 3.94%. See the tables in this section below
entitled "Consolidated Average Balances, Interest Income/Expenses and
Yields/Rates" and "Rate/Volume Variance Analysis" for more information.

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

Years Ended December 31,
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----

Rate earned on earning assets ..... 9.30% 9.26% 8.94% 8.85% 8.82%

Rate paid on borrowed funds ....... 5.00 5.23 5.14 5.18 5.17

Interest rate spread .............. 4.30 4.03 3.80 3.67 3.66

Net yield on earning assets ....... 4.75 4.52 4.32 4.26 4.21

During 1999, the banking industry experienced an increasing interest rate
environment, as evidenced by increases in the prime interest rate, of 25 basis
points each, in July, August and November. This is in contrast to a declining
interest rate environment as evidenced by two drops, of 25 basis points each,
in the prime rate during October 1998 and an additional drop of 25 basis points
in the prime rate again in November 1998. The Company's net interest income
increased 23.1% during 1999 and 17.2% in 1998. These increases were due
primarily to the 17.2% and 13.3% increases in average earning assets
outstanding during 1999 and 1998, respectively. The interest rate environment
during 1997 was relatively flat.

Net interest income was $26,672,000, $21,672,000 and $18,250,000 for the 12
months ended December 31, 1999, 1998 and 1997, respectively. This represented
changes of $5,000,000 from 1998 to 1999 and $3,422,000 from 1997 to 1998, as
reported in the Company's Consolidated Statements of Income included elsewhere
in this Report. The net interest margin, not modified for assumed tax
equivalency, increased to 4.75% in 1999 from 4.52% in 1998 and the interest
rate spread, not modified for assumed tax equivalency, increased to 4.30% for
1999 from 4.03% for 1998. The net interest margin and interest rate spread, not
modified for assumed tax equivalency, were 4.32% and 3.80%, respectively, for
1997.

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26
28
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (Dollars in Thousands)

YEAR ENDED DECEMBER 31,
-----------------------------------------
1999
-----------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-----------------------------------------

ASSETS
Earning assets:
Loans, net of unearned income (1) ............. $ 463,298 $ 46,549 10.05%
Investment securities:
Taxable ...................................... 79,733 4,782 6.00
Tax-exempt ................................... 15,412 1,305 8.47
---------- ----------
Total investment securities ................. 95,145 6,087 6.40
Interest bearing deposits in other banks ..... 1,343 74 5.51
Federal funds sold ........................... 1,740 88 5.06
---------- ----------
Total interest-earning assets (2) .............. 561,526 52,798 9.40

Noninterest-earning assets:
Cash and due from banks .................... 22,332
Premises and equipment ..................... 32,527
Accrued interest and other assets .......... 19,087
Allowance for loan losses .................. (2,759)
----------

Total assets .............................. $ 632,713
==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ............................... $ 94,763 4,131 4.36
Savings deposits .............................. 53,730 1,886 3.51
Time deposits ................................. 327,481 17,577 5.37
---------- ----------
475,974 23,594 4.96
Other short-term borrowings ................... 6,714 333 4.96
FHLB borrowings ............................... 20,932 1,037 4.95
Long-term debt ................................ 7,100 558 7.86
---------- ----------
Total interest-bearing liabilities ........... 510,720 25,522 5.00
----------
Noninterest-bearing liabilities:
Demand deposits ............................ 69,248
Accrued interest and other liabilities ..... 8,542
Shareholders' equity ....................... 44,203
----------

Total liabilities and shareholders' equity $ 632,713
==========

Net interest income/net interest spread .......... $ 27,276 4.40%
==========

Net yield on earning assets ...................... 4.86%
Taxable equivalent adjustment:
Loans .......................................... $ 159
Investment securities .......................... 444
----------
Total taxable equivalent adjustment ........... 603
----------

Net interest income .............................. $ 26,673
==========

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

27
29

Years Ended December 31,
- -------------------------------------------------------------------------------
1998 1997
- ------------------------------------- -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------------------------------- -----------------------------------

$ 378,189 $ 38,616 10.21% $ 324,745 $ 31,999 9.85%

74,952 4,488 5.99 69,432 4,410 6.35
13,488 1,139 8.44 12,475 1,080 8.66
- ---------- ---------- ---------- ----------
88,440 5,627 6.36 81,907 5,490 6.70
1,006 91 9.05 2,483 113 4.55
11,558 611 5.29 13,704 796 5.81
- ---------- ---------- ---------- ----------
479,193 44,945 9.38 422,839 38,398 9.08

21,609 19,732
26,986 20,126
13,642 13,156
(2,960) (2,472)
- ---------- ----------

$ 538,470 $ 473,381
========== ==========

$ 85,044 3,286 3.86 $ 66,265 2,722 4.11
46,374 1,651 3.56 50,393 1,784 3.54
292,357 17,026 5.82 253,095 14,258 5.63
- ---------- ---------- ---------- ----------
423,775 21,963 5.18 369,753 18,764 5.07
3,258 164 5.03 2,524 146 5.78
0 0 0 0
6,878 566 8.23 7,833 631 8.06
- ---------- ---------- ---------- ----------
433,911 22,693 5.23 380,110 19,541 5.14
- ---------- ---------- ---------- ----------

60,147 55,466
7,094 4,377
37,318 33,428
- ---------- ----------

$ 538,470 $ 473,381
========== ==========

$ 22,252 4.15% $ 18,857 3.94%
========== ==========

4.64% 4.46%

$ 193 $ 240
387 367
---------- ----------
580 607

$ 21,672 $ 18,250
========== ==========

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30
RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS

Average Volume Change in Volume
---------------------------------------- -------------------------
1999 1998 1997 1999-1998 1998-1997
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)

EARNING ASSETS:
Loans, net of unearned income ............... $ 463,298 $ 378,189 $ 324,745 $ 85,109 $ 53,444

Investment securities:
Taxable .................................. 79,733 74,952 69,432 4,781 5,520
Tax exempt ............................... 15,412 13,488 12,475 1,924 1,013
---------- ---------- ---------- ---------- ----------

Total investment securities ............ 95,145 88,440 81,907 6,705 6,533
Interest-bearing deposits with other banks .. 1,343 1,006 2,483 337 (1,477)
Federal funds sold .......................... 1,740 11,558 13,704 (9,818) (2,146)
---------- ---------- ---------- ---------- ----------

Total earning assets .................. $ 561,526 $ 479,193 $ 422,839 $ 82,333 $ 56,354
========== ========== ========== ========== ==========

INTEREST-BEARING LIABILITIES:
Deposits:
Demand ................................... $ 94,763 $ 85,044 $ 66,265 $ 9,719 $ 18,779
Savings .................................. 53,730 46,374 50,393 7,356 (4,019)
Time ..................................... 327,481 292,357 253,095 35,124 39,262
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ....... 475,974 423,775 369,753 52,199 54,022

Other short-term borrowings ................. 6,714 3,258 2,524 3,456 734
FHLB borrowings ............................. 20,932 0 0 20,932 0
Long-term borrowings ........................ 7,100 6,878 7,833 222 (955)
---------- ---------- ---------- ---------- ----------

Total interest-bearing liabilities .... $ 510,720 $ 433,911 $ 380,110 $ 76,809 $ 53,801
========== ========== ========== ========== ==========

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

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

Net cost of funds......................................................................................................

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

29
31

Average Rate Interest Income/Expense
- ------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
- -------- -------- -------- ---------- ---------- ----------
(Dollars in Thousands)

10.05% 10.21% 9.85% $ 46,549 $ 38,616 $ 31,999

6.00 5.99 6.35 4,782 4,488 4,410
8.47 8.44 8.66 1,305 1,139 1,080
---------- ---------- ----------
6.40 6.36 6.70 6,087 5,627 5,490
5.51 9.05 4.55 74 91 113
5.06 5.29 5.81 88 611 796
---------- ---------- ----------

9.40 9.38 9.08 52,798 44,945 38,398

4.36 3.86 4.11 4,131 3,286 2,722
3.51 3.56 3.54 1,886 1,651 1,784
5.37 5.82 5.63 17,577 17,026 14,258
---------- ---------- ----------
4.96 5.18 5.07 23,594 21,963 18,764

4.96 5.03 5.78 333 164 146
4.95 0.00 0.00 1,037 0 0
7.86 8.23 8.06 558 566 631
---------- ---------- ----------

5.00 5.23 5.14 25,522 22,693 19,541
- ------ ------ ------ ---------- ---------- ----------

4.40% 4.15% 3.94% $ 27,276 $ 22,252 $ 18,857
====== ====== ====== ========== ========== ==========

4.86% 4.64% 4.46%

4.54% 4.74% 4.62%

Variance Attributed to (1)
------------------------------------------------
Variance 1999 1998
- --------------------- ---------------------- -----------------------
1999-1998 1998-1997 VOLUME RATE Volume Rate
- --------- --------- --------- ----------- ---------- -----------
(Dollars in Thousands)

$7,933 $6,617 $8,548 $ (615) $ 5,415 $ 1,202
294 78 287 7 337 (259)
166 59 162 4 87 (28)
------ ------ ------ ---------- ---------- ----------
460 137 449 11 424 (287)
(17) (22) 25 (42) (92) 70
(523) (185) (498) (25) (118) (67)
------ ------ ------ ---------- ---------- ----------
7,853 6,547 8,524 (671) 5,629 918
845 564 396 449 737 (173)
235 (133) 258 (23) (143) 10
551 2,768 1,936 (1,385) 2,273 495
------ ------ ------ ---------- ---------- ----------
1,631 3,199 2,590 (959) 2,867 332
169 18 171 (2) 39 (21)
1,037 0 1,037 0 0 0
(8) (65) 18 (26) (78) 13
------ ------ ------ ---------- ---------- ----------
1,792 3,152 2,779 (987) 2,828 324
------ ------ ------ ---------- ---------- ----------
$6,061 $3,395 $5,745 $ 316 $ 2,801 $ 594
====== ====== ====== ========== ========== ==========

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32
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES

At December 31, 1999, unpaid balances on certain loans originated through
Community Bank's Ft. Payne, Alabama office and identified as not being in
compliance with Community Bank's lending policy totaled approximately
$2,631,000. Management has determined that these unpaid balances are impaired
and has therefore, made an appropriate charge to the allowance for loan losses.
Concurrently, a one-time charge, in the same amount, was made to the provision
for loan losses in order to return the allowance for loan losses to its balance
prior to the charge for the impaired loans. Management currently believes that
Community Bank has a valid claim and the right to receive reimbursement from
its fidelity bond insurance carrier or through litigation against persons
involved in originating the impaired loans. Any future reimbursements will be
considered recoveries and the resulting effect will be an increase to the
Company's allowance for loan losses.

The provision for loan losses, which is charged to operations, is based on the
growth of the loan portfolio, the amount of net loan losses incurred and
management's estimation of potential future losses based on an evaluation of
the risk in the loan portfolio. The provision for loan losses was $4,459,000,
$885,000 and $773,000 in 1999, 1998 and 1997, respectively. This represents
increases of $3,574,000, or 403.8%, in 1999 and $112,000, or 14.5%, in 1998,
compared to a decline of $61,000, or 7.4%, in 1997. Excluding the effect of the
impaired loans in the Ft. Payne office, the provision for loan losses would
have increased $942,000, or 106.4%, during 1999. This increase in the provision
during 1999 is due primarily to an increase in the monthly provision for
Community Bank, based on anticipated loan growth, and an increase in the
provision for 1st Community Credit Corporation due to an increase in consumer
loan charge-offs. There was a $368,000, or 12.4%, decline in the allowance for
loan losses at December 31, 1999 as compared to December 31, 1998, in contrast
to an increase of $840,000, or 39.4%, in the allowance for loan losses at
year-end 1998 over year-end 1997 and a decrease of $294,000, or 12.1%, at
year-end 1997 as compared to year-end 1996. The decline in the allowance for
loan losses at December 31, 1999 was due primarily to an increase in net
charge-offs in consumer loans. The increase in the allowance for loan losses
during 1998 was due primarily to reserves acquired through acquisitions,
coupled with an increase in net charge-offs of consumer loans. During 1999, net
loan charge-offs increased $3,500,000, or 264.0%, compared to an increase in
net loan charge-offs of $249,000, or 23.1%, in 1998 and a decrease of $70,000,
or 6.1%, in 1997. Excluding the effect of the isolated occurrence of the
impaired loans in the Ft. Payne office, net loan charge-offs for 1999 would
have increased $869,000, or 65.5%. Net charge-offs of consumer loans
represented 96.9% of total net charge-offs for 1999, compared to 82.7% for 1998
and 63.7% in 1997. Management believes that the $2,603,000 in the allowance for
loan losses at December 31, 1999 (.52% of total net outstanding loans at that
date) is adequate to absorb known risks in the portfolio based upon the
Company's historical experience. No assurance can be given, however, that
increased loan volume, adverse economic conditions or other circumstances will
not result in increased losses in the Company's loan portfolio.

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31
33
The following table sets forth certain information with respect to the
Company's loans, net of unearned income, and the allowance for loan losses for
the five years ended December 31, 1999.

SUMMARY OF LOAN LOSS EXPERIENCE

1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)

Allowance for loan losses at beginning of year ........ $ 2,971 $ 2,131 $ 2,425 $ 2,209 $ 1,548
Loans charged off:
Commercial, financial and agricultural .............. 282 190 80 392 110
Real Estate - mortgage .............................. 92 50 325 158 -0-
Consumer ............................................ 4,814 1,223 783 680 399
---------- ---------- ---------- ---------- ----------
Total loans charged off ........................... 5,188 1,463 1,188 1,230 509
---------- ---------- ---------- ---------- ----------
Recoveries on loans previously charged off:
Commercial, financial and agricultural .............. 220 11 5 10 22
Real Estate - mortgage ................................ 4 -0- 9 1 1
Consumer .............................................. 138 126 97 72 59
---------- ---------- ---------- ---------- ----------
Total recoveries ...................................... 362 137 111 83 82
---------- ---------- ---------- ---------- ----------

Net loans charged off ................................. 4,826 1,326 1,077 1,147 427

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

Provision for loan losses ............................. 4,458 885 773 834 1,088
---------- ---------- ---------- ---------- ----------

Allowance for loan losses at end of period ............ $ 2,603 $ 2,971 $ 2,131 $ 2,425 $ 2,209
========== ========== ========== ========== ==========

Loans, net of unearned income, at end of period ....... $ 498,726 $ 433,853 $ 326,134 $ 322,762 $ 237,841
========== ========== ========== ========== ==========

Average loans, net of unearned income,
outstanding for the period .......................... $ 463,298 $ 378,189 $ 324,745 $ 276,878 $ 223,222
========== ========== ========== ========== ==========

1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)

Ratios:
Allowance at end of period to loans, net of
unearned income ................................... .52% .68% .65% .75% .93%
Allowance at end of period to average loans,
net of unearned income ............................ .56 .79 .66 .88 .99
Net charge-offs to average loans, net of
unearned income ................................... 1.04 .35 .33 .41 .19
Net charge-offs to allowance at end of period ....... 185.40 44.63 50.54 47.30 19.33
Recoveries to prior year charge-offs ................ 24.74 11.53 9.02 16.31 20.00

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

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34
In evaluating the allowance, management also considers the historical loan loss
experience of Community Bank, the amount of past due and nonperforming loans,
current and anticipated economic conditions, lender requirements and other
appropriate information. Community Bank allocates its allowance for loan losses
to specific loan categories based on an average of net losses for each loan
type during the previous five years.

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

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

December 31,
-------------------------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
PERCENT Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)

Domestic loans
Commercial,
financial and
and agricultural $ 234 9% $ 526 18% $ 149 7%
Real estate -
mortgage ....... 182 7 357 12 618 29
Consumer ........ 2,187 84 2,088 70 1,364 64
------ ------ ------ ------ ------ ------

$2,603 100% $2,971 100% $2,131 100%
====== ====== ====== ====== ====== ======

December 31,
------------------------------------
1996 1995
---------------- -----------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)

Domestic loans
Commercial,
financial and
and agricultural $ 800 33% $ 442 20%
Real estate -
mortgage ....... 340 14 -- --
Consumer ........ 1,285 53 1,767 80
------ ------ ------ ------

$2,425 100% $2,209 100%
====== ====== ====== ======

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33
35

NONPERFORMING ASSETS

Nonperforming assets as of December 31, 1999 increased 2.6% from year-end 1998,
compared to increases of 71.9 and 49.2% for 1998 and 1997, respectively.
Nonperforming loans include loans classified as nonaccrual or renegotiated and
those past due 90 days or more for which interest is still being accrued. During
1999, the Company experienced a shift in the components of nonperforming loans
as nonaccrual loans increased 69.3% and loans past due 90 days or more for which
interest is still being accrued declined 44.1%. There were no commitments to
lend any additional funds on nonaccrual or renegotiated loans at December 31,
1999. The following table summarizes the Company's nonperforming assets for each
of the last five years.

NONPERFORMING ASSETS

December 31,
--------------------------------------------------------------

1999 1998 1997 1996 1995
--------- --------- -------- -------- ---------
(Dollars in Thousands)

Nonaccruing loans................................. $ 2,709 $ 1,600 $ 1,093 $ 565 $ 491
Loans past due 90 days or more.................... 1,332 2,384 975 470 317
Restructured loans................................ -0- -0- -0- -0- -0-
--------- --------- -------- -------- ---------
Total nonperforming loans......................... 4,041 3,984 2,068 1,035 808
Other real estate................................. 766 699 656 791 417
--------- --------- -------- -------- ---------

Total nonperforming assets...................... $ 4,807 $ 4,683 $ 2,724 $ 1,826 $ 1,255
========= ========= ======== ======== =========

Ratios:
Loan loss allowance to
total nonperforming assets...................... 0.540% 0.630% 0.780% 1.330% 1.800%
Total nonperforming loans to total
loans (net of unearned income).................. 0.008% 0.009% 0.006% 0.003% 0.003%
Total nonperforming assets
to total assets................................. 0.007% 0.008% 0.006% 0.004% 0.003%

The ratio of loan loss allowance to total nonperforming assets decreased 14.3%,
to 0.54%, during 1999, compared to declines of 19.2%, to 0.63%, during 1998, and
41.4%, to 0.78%, during 1997. The ratio of total nonperforming loans to total
loans, net of unearned income, decreased 11.1% during 1999, to .008% at December
31, 1999, compared to 0.009% and 0.006% at year-end 1998 and 1997, respectively.
Total nonperforming assets to total assets declined 12.5% during 1999 to 0.007%
at year-end 1999, compared to 0.008% at year-end 1998 and 0.006% at year-end
1997. Each of these ratios compare favorably with industry averages, and
management is aware of no factors which should suggest that they are prone to
increases in future periods.

At December 31, 1999 and 1998, the Company's recorded investment in loans
considered to be impaired was approximately $345,000 and $42,000, respectively,
of which all were on nonaccrual status. The related valuation allowance for
impaired loans, included as a component of the allowance for loan losses, was

34
36

$52,000 at December 31, 1999 and $6,000 at December 31, 1998. There was no
related amount of interest income recognized on impaired loans during 1999 and
1998.

The difference between the gross interest income that would have been recorded
in each period if nonaccruing loans had been current in accordance with their
original terms and the amount of interest income on those loans that was
included in each period's net income was $115,098 for the year ended December
31, 1999 and $58,829 for the year ended December 31, 1998, while the amount for
the year ended December 31, 1997 was immaterial.

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

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

NONINTEREST INCOME

Noninterest income for 1999 totaled $9,155,000, compared to $8,102,000 in 1998
and $4,891,000 in 1997. These amounts are primarily from service charges on
deposit accounts, insurance commissions, bank club dues (a deposit account
packaged with other financial services) and debt cancellation fees. Service
charge increases are primarily a reflection of the deposit growth of the Company
as it has expanded into new markets. Insurance commissions increased in 1998,
and remained relatively flat during 1999, as a result of the activities of
Community Insurance Corp. unit in the areas of property, casualty and life
insurance. Service charges and bank club dues increased during 1999 and 1998,
primarily due to the continued geographic expansion of Community Bank, leading
to increases in the transaction accounts which generate these types of fees. The
Company also recognized gains on the sale of investment securities in connection
with its asset/liability management during 1999, and the restructuring of its
investment portfolio in October 1998.

NONINTEREST INCOME

Years Ended December 31, Percent Change
-------------------------------------- -------------------------
1999 1998 1997 1999/1998 1998/1997
---------- ---------- ----------- ----------- -----------
(Dollars in Thousands)

Service charges on deposits............... $ 3,627 $ 3,055 $ 2,512 18.7% 21.6%
Insurance commissions..................... 2,243 2,269 796 (1.1) 185.1
Investment securities gains (losses)...... 179 466 (3) (61.6) 15633.3
Bank club dues............................ 706 631 562 11.9 12.3
Debt cancellation fees.................... 622 688 275 (9.6) 150.2
Other..................................... 1,778 993 749 79.1 32.6
---------- ---------- -----------

$ 9,155 $ 8,102 $ 4,891 13.0 65.7
========== ========== ===========

35
37

In previous filings, the Company reported that it had recognized an "other
asset" equal to amount of the impaired loan balances originated in Community
Bank's Ft. Payne, Alabama office and the related income statement impact was
included as a component of non-interest income. Based on the subsequent
discussions with the Company's bank regulatory authorities in February of 2000,
management reevaluated its position on this issue and decided to reverse the
receivable and its related income effective for fiscal year 1999. (See Note 13
in the "Notes To Consolidated Financial Statements")

NONINTEREST EXPENSES

Noninterest expenses totaled $29,208,000 in 1999, $23,784,000 in 1998 and
$17,423,000 in 1997. These levels represent increases of 22.8%, 36.5% and 16.9%
for the years-ended December 31, 1999, 1998 and 1997, respectively. The primary
component of noninterest expenses is salaries and employee benefits, which
increased $2,821,000, or 19.9%, during the 12 months ended December 31, 1999 to
$17,010,000, compared to $14,189,000 for the year-ended December 31, 1998. The
increase in salaries and employee benefits during 1999 resulted from staffing
for new bank and finance locations as well as merit increases. Director and
committee fees, which were $711,000 in 1998 and $638,000 in 1997, decreased
$110,000, or 15.5%, in 1999 to $601,000. This decline in director and committee
fees during 1999 reflects the Company's new policy where only outside directors
are paid for their participation on the boards of directors and various
committees of the Company and its subsidiaries. Employee directors no longer
receive board or committee fees. Occupancy expense increased 25.7% in 1999 to
$2,655,000, compared to $2,113,000 in 1998, while furniture and equipment
expenses increased 14.4% in 1999 to $1,767,000, as compared to $1,544,000 in
1998. These increases reflect the higher costs associated with the Company's
expansion activities during 1999 and 1998. Other operating expenses increased
$1,949,000, or 37.3%, to $7,174,000 during 1999, compared to a 41.6% increase
during 1998 to $5,226,000. The increase in other operating expenses during 1999
resulted primarily from increases in telephone and supply costs associated with
expansion activities, and accounting fees, legal fees, and public relations,
printing and advertising cost associated with the Company's 1999 annual
shareholders' meeting.

NONINTEREST EXPENSES

Years Ended December 31, Percent Change
-------------------------------------- --------------------------
1999 1998 1997 1999/1998 1998/1997
---------- ---------- ----------- ------------ -----------
(Dollars in Thousands)

Salaries and employee benefits............ $ 17,010 $ 14,189 $ 10,403 19.9% 36.4%
Occupancy expense......................... 2,655 2,113 1,478 25.7 43.0
Furniture and equipment expense........... 1,767 1,544 1,214 14.4 27.2
Director and committee fees............... 601 711 638 (15.5) 11.4
Amortization of intangibles............... 493 440 328 12.0 34.1
Insurance................................. 171 130 283 31.5 (54.1)
Legal Fees................................ 894 116 90 670.7 28.9
Professional fees......................... 166 360 273 (53.9) 31.9
Supplies.................................. 623 471 537 32.3 (12.3)
Postage................................... 380 364 280 4.4 30.0
Telephone................................. 769 554 357 38.8 55.2
Other..................................... 3,679 2,792 1,542 31.8 81.1
---------- ---------- -----------

$ 29,208 $ 23,784 $ 17,423 22.8 36.5
========== ========== ===========

36
38

INCOME TAXES

The Company attempts to maximize its net income through active tax planning.
This planning resulted in a provision for income taxes of $502,000 (23.3%) for
1999, on pretax income of $2,161,000. The tax for 1998 was $1,526,000 (29.9%) on
income of $5,106,000 and for 1997 was $1,451,000 (29.3%) on income of
$4,945,000. These tax amounts and rates are lower than the statutory Federal tax
rate of 34% primarily due to investments in loans and securities earning
interest income that is exempt from Federal taxation. As proportionately fewer
available funds are invested in tax-exempt assets, the effective tax rate will
more closely approximate the statutory Federal tax rate. In 1999, the effective
tax rate was 68.5% of the statutory Federal tax rate, compared to 87.9% in 1998
and 86.2% in 1997. A more detailed explanation of income tax expense is included
in the accompanying notes to the Company's Consolidated Financial Statements
included elsewhere in this Report.

IMPACT OF INFLATION AND CHANGING PRICES

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

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

YEAR 2000 UPDATE

As described in its Annual Report on Form 10-K for the year ended December 31,
1998 and in its quarterly reports on Form 10-Q filed during 1999, the Company
developed plans to address its potential exposure related to the impact of the
Year 2000 ("Y2K") on the Company's information technology and other systems. The
Company did not experience any unusual liquidity pressure due to an increase in
customer withdrawals prior to year-end 1999. On December 31, 1999, the Company
successfully processed all core applications without any disruption in its
operations. During normal year-end processing, all core applications were
processed and balanced through January 3, 2000, the first banking day of Year
2000. On January 1, 2000, all automated teller machines and Fed-line operations,
as well as the Company's infrastructure, including all internal security
systems, utilities and communication systems, were confirmed to be operational.
As a result of the Company's comprehensive Y2K readiness, there was no
disruption in operations during the year-end date change period. The Company has
experienced no material adverse impact as a result of Y2K noncompliance by any
of the depositors, credit customers and other third parties with which it
transacts business. However, there remain some associated risks with certain
critical dates in the Year 2000. These dates include March 31, (the first
quarter-end in the year 2000,) December 31, (the first year-end in the year
2000) and January 1, 2001 (the first new year after the year 2000.) Management
will continue to monitor the Company's Y2K readiness in connection with these
Year 2000 dates. Management currently believes that the Company will not
experience any disruption in operations or material adverse impact on the
Company's financial condition and results of operations in conjunction with
these Year 2000 dates.

37
39

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities. Management monitors
its interest rate risk exposure through the use of a static gap analysis and an
interest rate shock analysis. The static gap analysis measures the amount of
repricing risk embedded in the balance sheet at a specific point in time, by
comparing the difference in the volume of interest-earning assets and
interest-bearing liabilities that are subject to repricing within specific time
periods. Community Bank was liability sensitive at year-end 1999, indicating
that it had more liabilities than assets repricing during the year 2000. The
cumulative static gap position of rate sensitive assets to rate sensitive
liabilities at December 31, 1999 was: i) .27% at 30 days; ii) .36% at 90 days;
iii) .37% at 180 days; and iv) .37% at 365 days.

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

The following tables estimate the impact of shifts in interest rates on the
Company's net interest income for the 12 months ending December 31, 2000:

RATE SHOCK ANALYSIS

-200 +200
Basis Basis
Points Level Points
-------------------------------------------------
(Dollars in thousands)

Prime Rate.............................. 6.50% 8.50% 10.50 %

Interest Income......................... $ 57,095 $ 59,084 $ 62,778
Interest Expense........................ 26,136 29,633 34,714
-------------- -------------- --------------

Net Interest Income.................. $ 30,959 $ 29,451 $ 28,064
============== ============== ==============

Dollar change from Level................ $ 1,508 $ (1,387)
Percentage change from Level............ 5.12% (4.71)%

38
40

INTEREST SENSITIVITY

Percentage Increase (Decrease)
Principal Amount of in Interest Income/Expense
Earning Assets, Given Immediate and Sustained
Interest-bearing Interest Rate Shifts
Liabilities at --------------------------------
December 31, 1999
----------------------- Down 200 Up 200
(Dollars in Thousands) Basis Points Basis Points
--------------------------------

Assets which reprice in:
One year or less.............. $ 182,131 (2.43)% 9.12%
Over one year................. 416,897 (3.71) 5.20
-----------------------

$ 599,028 (3.37) 6.25
=======================

Liabilities which reprice in:
One year or less.............. $ 486,233 (13.62) 14.22
Over one year................. 71,318 (4.19) 29.39
-----------------------

$ 557,551 (11.80) 17.15
=======================

Total net interest income sensitivity................................... 5.12 (4.71)

While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to move slightly higher during 2000 and
believes that the Company's current interest rate sensitivity analysis fairly
reflects its interest rate risk exposure during the 12 months ending December
31, 2000. Management continually evaluates the condition of the economy, the
pattern of market interest rates and other economic data to determine the types
of investments that should be made and at what maturities.

[The remainder of this page intentionally left blank]

39
41

MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION

COMMUNITY BANCSHARES, INC.

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

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

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

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

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

40
42

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Financial Statements Page(s)
-------

Independent Auditor's Report........................................................... 42

Consolidated Statements of Financial Condition as of December 31, 1999 and 1998........ 43

Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997..................................................... 44

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997..................................................... 45

Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997..................................................... 46-47

Notes to Consolidated Financial Statements -
December 31, 1999, 1998 and 1997..................................................... 48-87

Quarterly Results (Unaudited).......................................................... 88

41
43

INDEPENDENT AUDITOR'S REPORT

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

We have audited the consolidated statements of financial condition of Community
Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community
Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.

Birmingham, Alabama
March 10, 2000

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

42
44

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

December 31,
---------------------------------
1999 1998
--------------- --------------

ASSETS
Cash.......................................................................... $ 11,698,392 $ 6,204,531
Due from banks.................................................................. 15,099,119 19,348,639
Interest-bearing deposits with banks.......................................... 700,000 950,000
Securities available for sale................................................. 96,847,273 97,391,609
Loans......................................................................... 499,297,647 435,000,601
Less: Unearned income......................................................... 571,295 1,147,965
Allowance for loan losses............................................... 2,603,128 2,970,597
--------------- --------------
NET LOANS..................................................... 496,123,224 430,882,039
Premises and equipment, net................................................... 35,683,614 29,545,798
Accrued interest.............................................................. 6,537,114 5,991,588
Intangibles, net.............................................................. 7,156,449 6,355,833
Other real estate............................................................. 766,005 699,014
Other assets.................................................................. 4,287,061 5,874,546
--------------- --------------
TOTAL ASSETS.................................................. $ 674,898,251 $ 603,243,597
=============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing........................................................ $ 64,840,153 $ 62,562,296
Interest-bearing........................................................... 508,420,641 476,023,225
--------------- --------------
TOTAL DEPOSITS................................................ 573,260,794 538,585,521
Other short-term borrowings................................................... 2,493,842 2,191,841
Accrued interest.............................................................. 3,743,606 3,580,934
FHLB borrowing .............................................................. 40,000,000 -0-
Long-term debt................................................................ 6,637,162 7,568,716
Other liabilities............................................................. 4,287,471 4,083,184
------------- --------------
TOTAL LIABILITIES............................................. 630,422,875 556,010,196

Shareholders' equity
Preferred stock, par value $.01 per share, 200,000 shares
authorized, no shares issued........................................... -0- -0-
Common stock, par value $.10 per share, 20,000,000
shares authorized, 4,665,514 and 4,647,924 shares
issued, as of December 31, 1999 and 1998, respectively................. 466,551 464,792
Capital surplus............................................................ 29,411,513 29,100,383
Retained earnings.......................................................... 19,038,875 20,169,519
Unearned ESOP shares - 221,321 and 241,350 shares
as of December 31, 1999 and 1998, respectively......................... (2,788,442) (2,944,232)
Accumulated other comprehensive (loss) income.............................. (1,653,121) 442,939
--------------- --------------

TOTAL SHAREHOLDERS' EQUITY.................................... 44,475,376 47,233,401
--------------- --------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $ 674,898,251 $ 603,243,597
=============== ==============

See notes to consolidated financial statements

43
45

CONSOLIDATED STATEMENTS OF INCOME

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- --------------

INTEREST INCOME
Interest and fees on loans..................................... $ 46,390,060 $ 38,422,899 $ 31,759,123
Interest on investment securities:
Taxable securities........................................... 4,781,553 4,488,336 4,410,193
Securities exempt from federal income taxes.................. 860,689 752,013 712,565
Interest on federal funds sold................................. 87,702 611,030 795,620
Interest on deposits in other banks............................ 74,250 90,641 113,523
-------------- ------------- --------------
TOTAL INTEREST INCOME.......................... 52,194,254 44,364,919 37,791,024
-------------- ------------- --------------
INTEREST EXPENSE
Interest on deposits........................................... 23,593,922 21,963,493 18,764,865
Interest on other short-term borrowings........................ 332,551 163,673 145,991
FHLB borrowings ............................................... 1,036,704 -0- -0-
Interest on long-term debt..................................... 558,484 565,887 630,553
-------------- ------------- --------------
TOTAL INTEREST EXPENSE......................... 25,521,661 22,693,053 19,541,409
-------------- ------------- --------------

NET INTEREST INCOME.............................................. 26,672,593 21,671,866 18,249,615
Provision for loan losses........................................ 4,458,636 884,682 772,579
-------------- ------------- --------------

NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES.............. 22,213,957 20,787,184 17,477,036

NONINTEREST INCOME
Service charges on deposits.................................... 3,626,448 3,055,298 2,511,501
Insurance commissions.......................................... 2,243,358 2,268,680 795,805
Bank club dues................................................. 706,080 630,427 562,552
Debt cancellation fees......................................... 622,048 688,859 274,989
Other operating income......................................... 1,777,641 993,152 748,723
Investment securities gains (losses)........................... 179,303 465,982 (2,590)
-------------- ------------- --------------
TOTAL NONINTEREST INCOME....................... 9,154,878 8,102,398 4,890,980
-------------- ------------- --------------

NONINTEREST EXPENSES
Salaries and employee benefits................................. 17,010,366 14,189,168 10,402,726
Occupancy expense.............................................. 2,654,567 2,113,400 1,477,721
Furniture and equipment expense................................ 1,767,388 1,543,634 1,213,978
Director and committee fees.................................... 601,312 711,358 638,120
Other operating expenses....................................... 7,174,614 5,226,325 3,690,116
-------------- ------------- --------------
TOTAL NONINTEREST EXPENSES..................... 29,208,247 23,783,885 17,422,661
-------------- ------------- --------------

Income before income taxes....................................... 2,160,588 5,105,697 4,945,355
Provision for income taxes....................................... 502,478 1,526,204 1,451,419
-------------- ------------- --------------
NET INCOME BEFORE MINORITY INTEREST............ 1,658,110 3,579,493 3,493,936
Minority interest in consolidated subsidiary..................... -0- -0- 18,342
-------------- ------------- --------------

NET INCOME..................................... $ 1,658,110 $ 3,579,493 $ 3,512,278
============== ============= ==============

EARNINGS PER COMMON SHARE - basic................................ $ .37 $ .90 $ .92
EARNINGS PER COMMON SHARE - diluted.............................. $ .36 $ .88 $ .92

See notes to consolidated financial statements

44
46

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

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

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

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

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

Comprehensive Income ..............

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

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

Release of ESOP shares ............ 116,989
----------- ------------ ------------ ----------- -----------

Balance at December 31, 1997 ...... 203,161 18,524,301 18,824,795 (2,002,902) 429,693

Net Income - 1998 ................. 3,579,493

Other comprehensive income, net:
Net Change in Unrealized Gains
(Losses) on Securities ............ 13,246

Comprehensive Income ..............

Cash dividends: Common ............ (2,031,608)

2:1 Stock Split ................... 203,161 (203,161)

Issuance of Common Stock .......... 58,470 10,576,082

Release of ESOP shares ............ 135,628

Pledging of additional ESOP
shares ........................... (1,076,958)
----------- ------------ ------------ ----------- -----------
Balance at December 31, 1998 ...... 464,792 29,100,383 20,169,519 (2,944,232) 442,939

NET INCOME - 1999 ................. 1,658,110

OTHER COMPREHENSIVE INCOME, NET:
NET CHANGE IN UNREALIZED GAINS
(LOSSES) ON SECURITIES ............ (2,096,060)

COMPREHENSIVE INCOME ..............

CASH DIVIDENDS: COMMON ............ (2,788,754)

ISSUANCE OF COMMON STOCK .......... 1,759 311,130

RELEASE OF ESOP SHARES ............ 155,790
----------- ------------ ------------ ----------- -----------

BALANCE AT DECEMBER 31, 1999 ...... $ 466,551 $ 29,411,513 $ 19,038,875 $(2,788,442) $(1,653,121)
=========== ============ ============ =========== ===========

Comprehensive
Total Income
----------- -------------

Balance at December 31, 1996 ...... $32,558,786

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

Other comprehensive income, net:
Net Change in Unrealized Gains
(Losses) on Securities ............ 583,255 583,255
-----------
Comprehensive Income .............. $ 4,095,533
===========
Cash dividends: Common ............ (1,500,000)

Issuance of Common Stock .......... 707,740

Release of ESOP shares ............ 116,989
-----------

Balance at December 31, 1997 ...... 35,979,048

Net Income - 1998 ................. 3,579,493 $ 3,579,493

Other comprehensive income, net:
Net Change in Unrealized Gains
(Losses) on Securities ............ 13,246 13,246
-----------
Comprehensive Income .............. $ 3,592,739
===========
Cash dividends: Common ............ (2,031,608)

2:1 Stock Split ................... -0-

Issuance of Common Stock .......... 10,634,552

Release of ESOP shares ............ 135,628

Pledging of additional ESOP
shares ........................... (1,076,958)
-----------
Balance at December 31, 1998 ...... 47,233,401

NET INCOME - 1999 ................. 1,658,110 $ 1,658,110

OTHER COMPREHENSIVE INCOME, NET:
NET CHANGE IN UNREALIZED GAINS
(LOSSES) ON SECURITIES ............ (2,096,060) (2,096,060)
-----------

COMPREHENSIVE INCOME .............. $ (437,950)
===========

CASH DIVIDENDS: COMMON ............ (2,788,754)

ISSUANCE OF COMMON STOCK .......... 312,889

RELEASE OF ESOP SHARES ............ 155,790
-----------

BALANCE AT DECEMBER 31, 1999 ...... $44,475,376
===========

See notes to consolidated financial statements

45
47

CONSOLIDATED STATEMENTS OF CASH FLOWS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- --------------

OPERATING ACTIVITIES:
Net income..................................................... $ 1,658,110 $ 3,579,493 $ 3,512,278
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................................... 4,458,636 884,682 772,579
Provision for depreciation and amortization.................. 2,296,843 1,990,250 1,577,243
Amortization of investment security
premiums and accretion of discounts....................... 162,032 166,455 82,839
Deferred tax expense........................................ 225,413 308,759 386,061
Realized investment security (gains) losses................. (179,303) (465,982) 2,590
Loss (gain) on sale of premises and equipment............... 4,396 26,599 (64,787)
Increase in accrued interest receivable..................... (545,526) (901,823) (242,457)
Increase in accrued interest payable........................ 162,672 668,648 369,461
Other....................................................... 1,460,171 (3,520,039) (439,836)
-------------- ------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 9,703,444 2,737,042 5,955,971
-------------- ------------- --------------

INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale........... 11,627,522 24,045,040 5,007,863
Proceeds from maturity of securities available for sale........ 10,778,482 21,785,801 6,636,625
Purchase of securities available for sale...................... (25,337,831) (57,808,777) (8,938,589)
Net decrease (increase) in interest-bearing
deposits with other banks.................................... 250,000 1,564,558 (740,780)
Cash used in acquisition of insurance operations............... (750,000) (5,321,041) -0-
Loans purchased................................................ (2,312,592) -0- -0-
Net increase in loans to customers............................. (67,674,628) (99,903,246) (5,349,333)
Proceeds from sale of premises and equipment................... 72,680 87,630 250,596
Capital expenditures........................................... (7,254,322) (8,452,082) (6,420,709)
Net proceeds from sale of other real estate.................... 415,941 1,119,355 240,000
-------------- ------------- --------------
NET CASH USED IN INVESTING ACTIVITIES............................ (80,184,748) (122,882,762) (9,314,327)
-------------- ------------- --------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts......................................... 16,952,243 30,636,345 8,114,624
Net increase in certificates of deposit........................ 17,723,030 61,416,395 31,022,542
Net increase (decrease) in short-term borrowings............... 302,001 (438,546) (5,275,058)
Increase in borrowings from FHLB............................... 40,000,000 -0- -0-
Repayment of long-term debt.................................... (775,764) (770,226) (766,848)
Issuance of common stock....................................... 312,889 10,634,552 402,897
Cash dividends................................................. (2,788,754) (2,031,608) (1,500,000)
-------------- ------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............... 71,725,645 99,446,912 31,998,157
-------------- -------------- --------------

Net increase (decrease) in cash and cash equivalents............. 1,244,341 (20,698,808) 28,639,801

Cash and cash equivalents at beginning of year................... 25,553,170 46,251,978 17,612,177
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................... $ 26,797,511 $ 25,553,170 $ 46,251,978
============== ============= ==============

See notes to consolidated financial statements

46
48

CONSOLIDATED STATEMENTS OF CASH FLOWS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- --------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:
Interest..................................................... $ 25,684,333 $ 22,024,405 $ 19,171,945
Income taxes................................................. 1,121,889 843,623 1,933,488

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:

Other real estate of $840,902, $792,518 and $808,150 was acquired in 1999, 1998
and 1997, respectively, through foreclosure. Other assets acquired by
foreclosure amounted to $3,969,795 in 1999, $277,675 in 1998 and $471,027 in
1997.

Upon the pledging of additional shares to obtain additional ESOP debt of
$1,076,958 on December 1, 1998 and $1,260,007 on May 17, 1996, long-term debt
was increased and equity was decreased. The debt was reduced and shares were
released by $155,790, $135,628 and $116,989, respectively, during each of the
years ended December 31, 1999, 1998, and 1997 as a result of payments made by
the Company's ESOP on the outstanding ESOP debt.

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

[The remainder of this page intentionally left blank]

See notes to consolidated financial statements

47
49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

The Company and its subsidiaries have no trading securities. At December 31,
1999 and 1998, all of the Company's investments in securities were classified
as securities available for sale.

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

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

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

48
50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

Generally, all nonaccrual loans not meeting the definition of smaller balance
homogeneous loans are considered impaired. Smaller balance homogeneous loans
include, but are not limited to, residential mortgages and consumer installment
loans. For those loans classified as impaired, impairment is measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor shall measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
The Company's policy for recognizing interest income on impaired loans is
consistent with its nonaccrual policy.

Allowance for Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential loan losses in the
loan portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loan loss experience, current
domestic and international economic conditions, volume, growth and composition
of the loan portfolio, and other relevant factors. Loans deemed uncollectible
are charged to the allowance. Provisions for loan losses and recoveries on
loans previously charged off are added to the allowance.

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

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

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

Other Real Estate: Other real estate comprises properties acquired through a
foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These
properties are carried at the lower of cost or fair market

49
51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

value based on appraised value at the date acquired. Loan losses arising from
the acquisition of such properties are charged against the allowance for loan
losses.

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

1999 1998 1997
------------- ------------ --------------

Weighted average of common shares outstanding................. 4,429,303 3,994,798 3,807,232
Effect of dilutive options.................................... 165,769 57,461 22,999
------------- ------------ --------------

Weighted average of common shares
outstanding effected for dilution............................ 4,595,072 4,052,259 3,830,231
============= ============ ==============

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

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

Pension and Employee Stock Ownership Plans: The Company and its subsidiaries
have various employee benefit plans which cover substantially all employees.
Pension expense is determined based on an actuarial valuation. The Company
contributes amounts to the pension fund sufficient to satisfy funding
requirements of the Employee Retirement Income Security Act. Contributions to
the Employee Stock Ownership Plan ("ESOP") are determined by the Board of
Directors but may not be less than the amount required to cover the debt service
on the ESOP loan. In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132, Employer's
Disclosures about Pensions and Other Postretirement Benefits. This Statement
standardizes the disclosure requirement for pensions and other post-retirement
benefits to the extent practicable, and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain other disclosures
previously required. The adoption of this statement had no material impact on
the financial condition or results of operations of the Company.

50
52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

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

The Company also has available as a source of short-term financing the purchase
of federal funds from other commercial banks from available lines of up to
$11,000,000. In addition, the Company has an available overnight funds line of
up to $65,000,000 from the Federal Home Loan Bank of Atlanta (FHLB-Atlanta).

Debt Cancellation Contracts: The Company began issuing debt cancellation
contracts on certain loans to customers as of October 1, 1995. The contract
represents an agreement by the Company to cancel the debt of the borrower upon
said borrower's death. Contracts may not be written on loans in excess of
$25,000 per borrower. The Company charges fees equivalent to that authorized by
the state banking authorities and establishes a reserve account, from fees
collected, to cover potential claims. The reserve for debt cancellation
contracts totaled $151,866 and $137,803 at December 31, 1999 and 1998,
respectively.

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

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

Repurchase Agreements: In June 1996, the Financial Accounting Standards board
issued Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
relating to repurchase agreements, securities lending and other similar
transactions, and pledged collateral. This statement established new criteria
for determining whether a transfer of financial assets in exchange for cash or
other consideration should be accounted for as a sale or as a pledge of
collateral. Subsequently, Statement of Financial Accounting Standards No. 127,
Deferral of the Effective Date of Certain Provisions of SFAS No. 125 was issued
and deferred implementation of certain aspects of the original statement until
January 1, 1998. The adoption of these provisions did not have a material
impact on the Company's financial position or results of operations.

51
53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

Reclassification: Certain amounts in 1998 and 1997 have been reclassified to
conform with the 1999 presentation.

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

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

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

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Bank is required to maintain average reserve balances either in vault cash
or on deposit with the Federal Reserve. The amount of those reserves required
at December 31, 1999 was approximately $1,049,000.

During 1998 the Bank implemented a system, which under Regulation D and recent
Federal Reserve Rulings, allows the Bank to segregate its transaction accounts
into a transaction sub-account component and a non-transaction sub-account
component. The transaction sub-account component remains subject to the higher

52
54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS - CONTINUED

10% reserve requirement while the non-transaction sub-account component is
subject to a 3% reserve requirement. This process allows the Bank to maintain
lower reserves required by the Federal Reserve System.

NOTE 3 - INVESTMENT SECURITIES

At December 31, 1999 and 1998, the Company's investment securities are
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Unrealized holding gains and losses,
net of applicable deferred taxes, are included as a component of shareholders'
equity, (Accumulated Other Comprehensive Income) until realized.

At December 31, 1999, the Company's available-for-sale securities reflected net
unrealized losses of $2,755,202, which resulted in a decrease in shareholders'
equity of $1,653,121, net of deferred tax expense, compared to net unrealized
gains of $738,232 and a resultant increase in stockholders' equity of $442,939,
net of deferred tax liability, at December 31, 1998.

[The remainder of this page intentionally left blank]

53
55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The carrying amounts of investment securities as shown in the consolidated
statements of financial condition of the Company and their approximate fair
values at December 31, 1999 and 1998 are presented below.

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

AS OF DECEMBER 31, 1999:

SECURITIES AVAILABLE FOR SALE:

U. S. GOVERNMENT AND AGENCY SECURITIES............. $ 57,109,784 $ 8,303 $ 1,248,220 $ 55,869,867

STATE AND MUNICIPAL SECURITIES..................... 8,696,808 53,277 393,563 8,356,522

MORTGAGE-BACKED SECURITIES......................... 31,695,883 10,380 1,185,379 30,520,884

EQUITY SECURITIES.................................. 2,100,000 -0- -0- 2,100,000
------------- ----------- ------------- ------------

$ 99,602,475 $ 71,960 $ 2,827,162 $ 96,847,273
============= =========== ============= ============

As of December 31, 1998:

Securities available for sale:

U. S. government and agency securities ............ $ 48,877,741 $ 484,437 $ 217,017 $ 49,145,161

State and municipal securities .................... 14,640,733 545,949 -0- 15,186,682

Mortgage-backed securities ........................ 31,399,003 54,712 129,849 31,323,866

Equity securities ................................. 1,735,900 -0- -0-
------------ ------------ ------------
1,735,900

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

54
56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 3 - INVESTMENT SECURITIES - CONTINUED

The contractual maturities of securities available for sale at December 31,
1999 are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

Estimated
Amortized Fair
Cost Value
-------------- --------------

AS OF DECEMBER 31, 1999:

DUE IN ONE YEAR OR LESS.................................................... $ 22,637,209 $ 22,594,678
DUE AFTER ONE YEAR THROUGH FIVE YEARS...................................... 15,832,019 15,541,904
DUE AFTER FIVE YEARS THROUGH TEN YEARS..................................... 26,176,322 25,136,204
DUE AFTER TEN YEARS........................................................ 32,856,925 31,474,487
EQUITY SECURITIES.......................................................... 2,100,000 2,100,000
-------------- --------------

$ 99,602,475 $ 96,847,273
============== ==============

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

Gross realized gains and losses on investments in debt securities available for
sale for each of the years ended December 31, 1999, 1998 and 1997 were as
follows:

1999 1998 1997
------------- ------------ --------------

Gross realized gains........................................ $ 186,853 $ 472,904 $ 48,454
Gross realized losses....................................... 7,550 6,922 51,044

The carrying value of investment securities pledged to secure public funds on
deposit, securities sold under agreements to repurchase, and for other purposes
as required by law amounted to approximately $82,331,000 and $80,163,283 at
December 31, 1999 and 1998, respectively.

55
57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 4 - LOANS

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

The major classifications of loans as of December 31, 1999 and 1998 were as
follows:

1999 1998
------------- -------------

Commercial, financial and agricultural.......................................... $ 124,244,731 $ 94,056,615
Real estate - construction...................................................... 6,469,943 6,152,759
Real estate - mortgage.......................................................... 224,129,260 205,457,289
Consumer ....................................................................... 144,453,713 129,333,938
------------- -------------
499,297,647 435,000,601
Unearned income................................................................. 571,295 1,147,965
Allowance for loan losses....................................................... 2,603,128 2,970,597
------------- -------------

Net loans....................................................................... $ 496,123,224 $ 430,882,039
============= =============

At December 31, 1999 and 1998, the Company's recorded investment in loans
considered to be impaired was approximately $345,288 and $41,671, respectively,
of which all were on nonaccrual status. The related valuation allowance for
impaired loans was $51,793 at December 31, 1999 and $6,251 at December 31,
1998. There was no related amount of interest income recognized on impaired
loans during 1999 and 1998.

Other nonaccrual loans at December 31, 1999 and 1998 amounted to approximately
$2,363,755 and $1,557,768, respectively. The difference between gross interest
income that would have been recorded in each period if nonaccruing loans had
been current in accordance with their original terms and the amount of interest
income on those loans that was included in each period's net income was
$115,098 for the year ended December 31, 1999 and $58,829 for the year ended
December 31, 1998, while this amount for the year ended December 31, 1997 was
immaterial.

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

[The remainder of this page intentionally left blank]

56
58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 5 - ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for each of the years ended December
31, 1999, 1998 and 1997, were as follows:

1999 1998 1997
------------- ------------ --------------

Balance at beginning of year...................................... $ 2,970,597 $ 2,131,354 $ 2,424,847

Charge-offs....................................................... (5,188,037) (1,463,450) (1,187,263)
Recoveries........................................................ 361,932 137,264 112,417
------------- ------------ --------------
Net charge-offs................................................. (4,826,105) (1,326,186) (1,074,846)

Provision for loan losses......................................... 4,458,636 884,682 772,579

Reserves acquired through acquisitions............................ -0- 1,280,747 8,774
------------- ------------ --------------

Balance at end of year............................................ $ 2,603,128 $ 2,970,597 $ 2,131,354
============= ============ ===============

NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment at December 31, 1999 and 1998 is as follows:

1999 1998
------------- -------------

Land............................................................................ $ 3,497,061 $ 3,911,361
Buildings, land improvements and construction in process........................ 26,711,593 19,904,561
Furniture and equipment......................................................... 11,328,601 10,123,164
Automobiles..................................................................... 1,896,663 1,925,544
Leasehold improvements.......................................................... 1,073,148 927,894
------------- -------------
44,507,066 36,792,524
Less allowance for depreciation................................................. 8,823,452 7,246,726
------------- -------------

$ 35,683,614 $ 29,545,798
============= =============

The provisions for depreciation charged to occupancy and furniture and
equipment expense for the years ended December 31, 1999, 1998 and 1997 were
$1,798,679, $1,549,920 and $1,249,420, respectively. The Bank capitalized
$241,167 and $123,099 in interest costs related to building construction in
1999 and 1998, respectively.

57
59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 7 - DEPOSITS

The major classifications of deposits as of December 31, 1999 and 1998, were as
follows:

1999 1998
------------- --------------

Noninterest-bearing demand...................................................... $ 64,840,153 $ 62,562,296
Interest-bearing demand......................................................... 98,397,437 89,808,368
Savings......................................................................... 64,845,420 58,722,767
Time............................................................................ 227,009,814 218,507,099
Certificates of deposit of $100,000 or more..................................... 97,317,970 90,449,991
Other time deposits............................................................. 20,850,000 18,535,000
------------- --------------

$ 573,260,794 $ 538,585,521
============= ==============

The maturities of time deposits following December 31, 1999, are as follows:

2000...............................................$ 246,004,604
2001................................................ 34,618,984
2002................................................ 25,327,333
2003................................................ 13,324,568
2004................................................ 4,832,816
Thereafter.......................................... 21,069,479
--------------
$ 345,177,784
==============

NOTE 8 - FHLB BORROWINGS AND LONG TERM DEBT

At December 31, 1999 and 1998, the Company had notes payable totaling
$46,637,162 and $7,568,716, respectively.

On December 17, 1992, the Company entered into a loan agreement with a regional
bank for amounts up to $6,500,000. At December 31, 1999 and 1998, the amounts
outstanding were $2,134,505 and $2,846,631, respectively, due December 17,
2002, bearing interest at a floating prime rate, collateralized by 100% of the
common stock of the Bank. The note agreement contains provisions which limit
the Company's right to transfer or issue shares of the Bank's stock. Principal
payments of $59,292 are due monthly; however, the Company has the option of
postponing up to twenty-four monthly principal payments, provided that no more
than six consecutively scheduled installments are deferred.

58
60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 8 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED

On November 3, 1993, the Trustees of the Company's ESOP executed a promissory
note of $1,200,000 in order to purchase common stock from the Company's public
offering of new common stock. The note was originally secured by 80,000 shares
of purchased stock. The promissory note had been refinanced in years subsequent
to 1993 as additional shares were purchased by the ESOP. On December 1, 1998,
this note was refinanced and an additional 56,682 shares of the Company's
common stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments
due monthly through November 16, 2010, with all remaining principal, if any,
due upon that date. The initial principal and interest payment on this debt was
$31,677. As changes occur in the interest rate on the loan, appropriate
adjustments are made to the monthly principal and interest payments. At
December 31, 1999, the monthly payment was $32,195. The Company has guaranteed
this debt and in accordance with the applicable accounting and reporting
guidelines the debt has been recognized on the Company's statement of
condition, with an offsetting charge against equity. As principal payments are
made by the ESOP, the debt and offsetting charge against equity are reduced.
The shares securing the note are released on a prorata basis by the lender as
monthly payments of principal and interest are made. The outstanding balance of
this note was $2,788,442 at December 31, 1999, secured by 221,321 of unreleased
shares of Company stock. See Note 16.

On October 4, 1994, the Company entered into a twenty year, subordinated
installment capital note due October 1, 2014 for the purchase of treasury
stock. Monthly principal and interest payments of $15,506 are made on the note,
which bears interest at the fixed rate of 7%. The Company maintains the right
to prepay the note at its sole discretion. The balance of the note was
$1,714,215 and $1,777,853 at December 31, 1999 and 1998, respectively.

On June 1, 1999, Community Bank, the Company's bank subsidiary, borrowed
$30,000,000 under the Federal Home Loan Bank of Atlanta's "Convertible Advance
Program." This advance had a final maturity of June 1, 2009 (120 months), with
a call feature every three months during the life of the obligation, and
carried a fixed interest rate of 4.62% per annum. This obligation was called on
September 1, 1999 due to an increase in market interest rates. As a result of
this call, Community Bank refinanced the original advance and borrowed an
additional $10,000,000 under the same "Convertible Advance Program." This
advance, totaling $40,000,000 at December 31, 1999, has a final maturity of
September 1, 2009 (120 months), with a call feature every six months during the
life of the obligation, and carries a fixed rate of 4.99% per annum. Principal
is due at final maturity or on a call date, with interest payable each quarter.
The first call date for this advance is March 1, 2000.

[The remainder of this page intentionally left blank]

59
61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 8 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED

Maturities of long-term debt and FHLB borrowings following December 31, 1999
are as follows:

NOTES SUBORDINATED FHLB
PAYABLE DEBT BORROWINGS

2000............................................................. $ 873,627 $ 68,238 $ 40,000,000
2001............................................................. 887,958 73,171 -0-
2002............................................................. 903,554 78,461 -0-
2003............................................................. 209,028 84,133 -0-
2004............................................................. 227,504 90,215 -0-
Thereafter....................................................... 1,821,276 1,319,997 -0-
------------- ------------- --------------

$ 4,922,947 $ 1,714,215 $ 40,000,000
============= ============= ==============

NOTE 9 - OTHER OPERATING EXPENSES

Other operating expenses consist of the following:

Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- --------------

Amortization of intangibles................................... $ 493,602 $ 440,330 $ 327,823
Insurance..................................................... 171,165 129,572 282,791
Legal fees.................................................... 893,874 116,482 90,130
Professional fees............................................. 166,021 359,981 272,999
Supplies...................................................... 622,980 471,676 537,374
Postage....................................................... 380,060 363,948 280,346
Telephone..................................................... 768,944 553,693 357,048
Other......................................................... 3,677,968 2,790,643 1,541,605
------------- ------------- --------------

$ 7,174,614 $ 5,226,325 $ 3,690,116
============= ============= ==============

60
62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 10 - INCOME TAXES

Federal and state income taxes receivable and (payable) as of December 31, 1999
and 1998 included in other assets and other liabilities, respectively, were as
follows:

1999 1998
------------- ------------

Current
Federal....................................................... $ 829,614 $ (30,282)
============= ============
State......................................................... $ 15,781 $ (162,232)
============= ============

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

1999 1998
------------ ------------

Deferred tax asset:
Federal..................................................................... $ 1,469,530 $ 652,659
State....................................................................... 231,276 114,763
------------ ------------
Total gross deferred income tax asset...................................... 1,700,806 767,422
------------ ------------
Deferred tax liability:
Federal..................................................................... (991,638) (1,194,959)
State....................................................................... (122,789) (159,583)
------------ ------------
Total gross deferred income tax liability.................................. (1,114,427) (1,354,542)
------------ ------------

Net deferred income tax asset (liability)..................................... $ 586,379 $ (587,120)
============ ============

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

1999 1998
-------------- ------------

Net unrealized losses (gains) on securities
available for sale.......................................................... $ 1,102,081 $ (295,293)
Depreciation.................................................................. (1,072,654) (945,316)
Pension expense............................................................... 309,774 260,079
Provision for loan losses..................................................... 210,819 335,450
Deferred compensation......................................................... 15,596 15,152
Provision for debt cancellation............................................... 55,691 55,121
Other......................................................................... (34,928) (12,313)
-------------- ------------

$ 586,379 $ (587,120)
============== ============

61
63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 10 - INCOME TAXES - CONTINUED

The components of income tax expense for each of the years ended December 31,
1999, 1998 and 1997 were:

1999 1998 1997
---------------------------- ------------------------------- -------------------------------
CURRENT DEFERRED Current Deferred Current Deferred
----------- ------------ ------------- -------------- ------------ ---------------

Federal........ $ 277,441 $ 213,177 $ 1,070,862 $ 264,234 $ 1,041,065 $ 322,262
State.......... (376) 12,236 146,583 44,525 24,293 63,799
----------- ------------ ------------- -------------- ------------ ---------------

$ 277,065 $ 225,413 $ 1,217,445 $ 308,759 $ 1,065,358 $ 386,061
=========== ============= ============= ============== ============ ===============

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

1999 1998 1997
------------- ------------- ------------

Depreciation............................ $ 127,338 $ 205,360 $ 140,117
Provision for loan losses............... 124,631 135,538 159,886
Pension expense......................... (49,695) (109,558) (61,630)
Other................................... 23,139 77,419 147,688
------------- ------------- ------------

$ 225,413 $ 308,759 $ 386,061
============= ============= ============

Tax effects of securities transactions resulted in an increase (decrease) in
income taxes for 1999, 1998 and 1997 of $65,750, $170,876 and ($950),
respectively.

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

Years Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ --------------

Statutory federal income tax rates............................ 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities....................................... (13.5) (5.0) (4.9)
Tax-exempt loan income...................................... (4.9) (2.5) (3.2)
State income tax, net of federal tax benefit................ 0.5 2.5 1.2
Interest expense disallowance............................... 1.9 0.6 0.7
Other items................................................. 5.3 0.3 1.5
------------- ------------ --------------
Effective income tax rate..................................... 23.3% 29.9% 29.3%
============= ============ ==============

62

64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 11 - PRIOR PERIOD RESTATEMENT

Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, was adopted by the Company during 1997. Earnings per share amounts for
1997 have been restated to give effect for the 2 for 1 stock split effected in
the form of a 100% stock dividend paid on March 26, 1998.

NOTE 12 - SHAREHOLDERS' EQUITY

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

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

In March 1996, the Company issued a total of 270,000 options to its directors to
purchase shares of the Company's common stock. The options were issued to the
directors based upon their years of service and their positions with the
Company. Each of the options have an exercise price of $10.00 per share, the
market value (as determined by the Board of Directors) of the Company's common
stock at the time of issuance. The options are exercisable through March 27,
2001. In March 1997, an additional 103,000 options were issued to the Company's
directors with an exercise price of $12.50 per share, the market value (as
determined by the Board of Directors) of the Company's common stock at the time
of issuance. These

63
65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

options are exercisable through March 26, 2002. In March 1998, 203,331 options
were issued to directors and certain senior officers with an exercise price of
$15.00 per share, the market value (as determined by the Board of Directors) of
the Company's common stock at the time of issuance. These options are
exercisable through March 25, 2003. In December 1999, 204,000 options were
issued to directors and certain senior officers with an exercise price of $20.00
per share, the market value (as determined by the Board of Directors) of the
Company's common stock at the time of issuance. These options are exercisable
through December 3, 2004. Each of the above described options is treated as a
non-qualified option under the provisions of the Internal Revenue Code of 1986.
The agreements evidencing these options also contain a provision whereby the
Company will compensate each optionee in cash for any federal or state tax
liability incurred upon the exercise of the options.

The following sets forth certain information regarding stock options for the
years ended December 31, 1999, 1998 and 1997:

Number Wgt. Average
Of Shares Exercise Price
--------- --------------

Balance, December 31, 1996 ............................ 270,000 $ 10.00
Granted, Year Ended December 31, 1997 ................. 103,000 12.50
Exercised, Year Ended December 31, 1997 ............... (30,000) (10.17)
-------- ----------

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

Granted, Year Ended December 31, 1998 ................. 203,331 15.00
Exercised, Year Ended December 31, 1998 ............... (32,000) (11.72)
-------- ----------

Balance, December 31, 1998 ............................ 514,331 12.36

GRANTED, YEAR ENDED DECEMBER 31, 1999 ................. 204,000 20.00
EXERCISED AND EXPIRED, YEAR ENDED DECEMBER 31, 1999 ... (27,000) (14.81)
-------- ----------

BALANCE, DECEMBER 31, 1999 ............................ 691,331 $ 14.52
======== =========

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

Options with Exercise Price of $10.00............ 222,000 3-27-2001 222,000
Options with Exercise Price of $12.50............ 97,000 3-26-2002 97,000
Options with Exercise Price of $15.00............ 168,331 3-25-2003 168,331
Options with Exercise Price of $20.00............ 204,000 12-03-2004 204,000
--------- ----------
Total outstanding, December 31, 1999............. 691,331 691,331
========= ==========

64
66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

The number of shares and weighted average exercise price have been restated to
give effect for the 2 for 1 stock split effected in the form of a 100% stock
dividend paid on March 26, 1998.

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

For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 1999, 1998 and 1997, was estimated at
the date of grant using a Black-Scholes option pricing model. The Black-Scholes
option pricing model was originally developed for use in estimating the fair
value of traded options which have different characteristics from the Company's
employee stock options. The model is also sensitive to changes in the subjective
assumptions which can materially affect the fair value estimate. As a result,
management believes that the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.

The Company's options outstanding have a weighted average contractual life of
3.19 years. The weighted average fair value of options granted was $3.10 in
1999, $3.68 in 1998 and $3.32 in 1997. The fair value of each option granted is
estimated using the following weighted-average assumptions in the option pricing
model: expected dividend yield of 4.25% for 1999, 3.33% for 1998 and 3.00% for
1997; an expected option life of 5 years; expected volatility of 0.164 for 1999,
0.289 for 1998 and 1997; and a risk free interest rate of 6.60%, 5.49% and 6.12%
for 1999, 1998 and 1997, respectively.

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

1999 1998 1997
----------- --------- ---------

Pro forma earnings ($000's) $ 1,258 $ 3,101 $ 3,361
Pro forma Earnings per Common Share - basic .28 .78 .88
Pro forma Earnings per Common Share - diluted .27 .77 .88

These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent average number of shares
outstanding on a diluted basis to be 165,769 greater than that used to calculate
basic earnings per share for 1999. Average shares outstanding when assuming
dilution were greater than average shares outstanding for basic earnings per
share by 57,461 for 1998 and 22,999 for 1997. The dilutive effect on earnings
per share was $.01 for the year ended December 31, 1999 and $.02 for the year
ended December 31, 1998, while there was no dilutive effect on the book value of
the Company's common shares at December 31, 1997.

65
67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED

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

Annual dividends of $.60 per share, $.50 per share and $.38 per share were
declared by the Company's Board of Directors on its common stock and paid in
January of 1999, 1998 and 1997, respectively. The payment of dividends on common
stock is subject to the prior payment of principal and interest on the Company's
long-term debt, maintenance of sufficient earnings and capital of the
subsidiaries, and to regulatory restrictions. (See Notes 8 and 17).

NOTE 13 - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements. Commitments to extend credit, credit card arrangements, commercial
letters of credit and standby letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extensions of credit that are recorded on the consolidated
statements of financial condition. Because these instruments have fixed maturity
dates, and because many of them expire without being drawn upon, they do not
generally present any significant liquidity risk to the Company. The Company has
not been required to perform on any financial guarantees nor has it incurred any
losses on its commitments in either 1999 or 1998. Following is a discussion of
these commitments:

Standby Letters of Credit: These agreements are used by the Company's customers
as a means of improving their credit standings in their dealings with others.
Under these agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do so. As of December
31, 1999 and 1998, the Company has issued standby letters of credit of
approximately $1,235,000 and $621,000, respectively.

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

Loan Commitments: As of December 31, 1999 and 1998, the Company had commitments
outstanding to extend credit totaling approximately $18,165,000 and $15,698,000,
respectively. These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.

66
68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

Leases: Community Bank has proposed to enter into sale-leaseback transactions
whereby Community Bank would sell and lease back the real estate for its Boaz
and Hamilton, Alabama locations. Management anticipates that the sale price for
these properties will result in the recording of no gain or loss to the Company.
The related leases will be accounted for as operating leases. These
sale-leaseback transactions will be with certain directors of Community Bank.
The Company contemplates entering into similar arrangements with other directors
on other bank locations.

Capital Securities: The Company plans to issue approximately $10,000,000 of
fixed rate capital securities. Although there can be no assurances, management
believes the closing of this transaction will take place by the end of the first
quarter of the year 2000.

Litigation: On November 19, 1998, Mr. William Towns, a shareholder of the
Company, filed a shareholder derivative action against the directors of the
Company in the state Circuit Court of Blount County, Alabama. Mr. Towns amended
his complaint on January 14, 1999 to add the Company and Community Bank as
defendants in the action. On February 11, 1999, the complaint was again amended
to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the
Company, as additional plaintiffs. On December 21, 1998, the Company and its
directors filed a motion with the court seeking to have the complaint dismissed.
On March 1, 1999, the Company's Board of directors appointed a special Board
committee, comprised of Roy B. Jackson, Merritt M. Robbins and R. Wayne Washam,
each of whom is a non-employee director of the Company, to review the
plaintiff's allegations in accordance with Delaware law. On April 6, 1999, each
of the parties to the action requested that the court stay the litigation and
related discovery, motions and hearings, pending completion of the special
committee's review. On April 30, 1999, the court entered an order staying the
litigation and related discovery, motions and hearing in accordance with the
parties' request. On October 15, 1999, the special committee filed its final
report with the court. On October 21, 1999, the parties forwarded to the court
an agreed-upon order governing the confidentiality of the special committee's
report, which the court entered on January 2, 2000. The parties are awaiting for
the court to schedule a hearing on the motion previously filed by the Company
and its directors to dismiss the complaint.

The complaint alleged that the directors of the Company breached their fiduciary
duties to the Company and its shareholders, engaged in fraud, fraudulent
concealment, suppression of material fact and suppression of the plaintiff
shareholders, failed to supervise management, and conspired to conceal wrongful
acts from the Company's shareholders and paid themselves excessive director
fees. The complaint also alleged that the Board of Directors acquiesced in
mismanagement and misconduct by Kennon R. Patterson, Sr., the Chairman of the
Board, Chief Executive Officer and President of the Company, including alleged
self dealing, payment of excessive compensation, misappropriation of corporate
opportunities and misappropriation of funds. The complaint sought an unspecified
amount of compensatory and punitive damages, removal of the current directors,
appointment of a new Board of Directors, and attorneys fees and cost. Management
of the Company believes that the plaintiffs' allegations are false and that the
action lacks merit. The Company and its directors intend to defend the action
vigorously, and management of the Company believes that the action will not have
a material adverse effect on the Company's financial condition or results of
operations.

67
69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED

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

In September 1998, Community Bank determined that $9,360,000 in automobile and
truck loans originated in its Ft. Payne, Alabama Wal-Mart location during a
four-month period beginning in May 1998 were not in compliance with the Bank's
lending policy. As of December 31, 1999, approximately $5,594,000 of these loans
were in default. Community Bank has notified the appropriate authorities and the
Bank's fidelity bond insurance carrier, which are currently investigating these
loans. Management believes that these non-compliant loans are an isolated
occurrence, and that the Company has taken appropriate steps to prevent their
re-occurrence. Through December 31, 1999, Community Bank had taken possession of
a total of 362 vehicles which served as collateral for such defaulted loans, and
had received approximately $2,963,000 from the sale of substantially all of the
vehicles. These funds were applied to the outstanding balances of the defaulted
loans, reducing the total unpaid balances at December 31, 1999 to approximately
$2,631,000. Management has determined that these unpaid balances were impaired
and has, therefore, made an appropriate charge to its allowance for loan losses.
Although investigation of the Ft. Payne loans has not yet been completed,
management currently believes that Community Bank has a valid claim and the
right to receive reimbursement from its fidelity bond carrier or through
litigation against persons involved in originating the impaired loans, and will
not incur any material losses from such loans.

NOTE 14 - CONCENTRATIONS OF CREDIT

All of the Company's loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Company. Investments in state and municipal
securities also involve governmental entities within the Company's market area.
The concentrations of credit by type of loan are set forth in Note 4. The
commitments to extend credit relate primarily to consumer cash lines which
represented approximately $2,277,256 and $2,399,000 of the unused commitment
balances at December 31, 1999 and 1998. All remaining commitments consist
primarily of unused real estate commitment lines.

The Company maintains its cash accounts at various commercial banks in Alabama.
The total cash balances are insured by the FDIC up to $100,000. Total uninsured
balances held at other commercial banks amounted to $13,705,879 and $18,440,464,
at December 31, 1999 and 1998, respectively.

[The remainder of this page intentionally left blank]

68
70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 15 - PENSION PLAN

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

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

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

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

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69
71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 15 - PENSION PLAN - CONTINUED

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

Pension Plan as of December 31:

1999 1998
----------- -----------

Change in benefit obligation:
Benefit obligation at beginning of year ............. $ 5,320,518 $ 4,051,109
Service cost ........................................ 485,701 410,795
Interest cost ....................................... 366,805 334,729
Amendments .......................................... -0- -0-
Actuarial (gain) or loss ............................ (733,903) 630,395
Benefits paid ....................................... (159,508) (106,510)
----------- -----------

Benefit obligation at end of year ................... $ 5,279,613 $ 5,320,518
=========== ===========

Change in plan assets:
Fair value of plan assets at beginning of year ...... $ 4,796,405 $ 4,001,126
Actual return on plan assets ........................ 346,230 534,351
Employer contribution ............................... -0- 367,438
Benefits paid from plan assets ...................... (159,508) (106,510)
----------- -----------

Fair value of plan assets at end of year ............ $ 4,983,127 $ 4,796,405
=========== ===========

Funded status of plan:
Funded status of plan ............................... $ (296,486) $ (524,113)
Unrecognized actuarial (gain) or loss ............... (294,873) 314,786
Unrecognized prior service cost ..................... 100,735 112,434
Unrecognized transition asset ....................... (37,552) (54,431)
----------- -----------
Accrued benefit cost ................................ $ (528,176) $ (151,324)
=========== ===========

Weighted average rate assumptions used in
determining pension cost and the
projected benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year .... 8.00% 7.25%
Expected long-term rate of return on plan
assets for the year ............................... 10.00% 10.00%
Expected rate of increase in future
compensation levels ............................... 6.00% 6.00%

70
72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 15 - PENSION PLAN - CONTINUED

Pension plan net periodic benefit cost:

1999 1998 1997
--------- --------- ---------

Service cost ........................... $ 485,701 $ 410,795 $ 310,756
Interest cost .......................... 366,805 334,729 280,601
Expected return on plan assets ......... (470,474) (395,136) (245,114)
Amortization of prior service cost ..... 11,699 11,699 11,699
Amortization of transitional asset ..... (16,879) (16,879) (16,879)
Recognized actuarial loss .............. -0- -0- -0-
--------- --------- ---------
Net periodic benefit cost .............. $ 376,852 $ 345,208 $ 341,063
========= ========= =========

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71
73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 15 - PENSION PLAN - CONTINUED

Benefit Restoration Plan as of December 31:

1999 1998
--------------- ----------------

Change in benefit obligation:
Benefit obligation at beginning of year................................ $ 1,188,395 $ 802,984
Service cost........................................................... 85,940 68,927
Interest cost.......................................................... 96,712 74,466
Amendments............................................................. -0- -0-
Actuarial loss......................................................... 711,116 242,018
Benefits paid.......................................................... -0- -0-
--------------- ----------------
Benefit obligation at end of year...................................... $ 2,082,163 $ 1,188,395
=============== ================

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

Funded status of plan:
Funded status of plan.................................................. $ (2,082,163) $ (1,188,395)
Unrecognized actuarial loss............................................ 1,077,383 404,666
Unrecognized prior service cost........................................ 168,253 203,160
Unrecognized transition (asset) or obligation.......................... -0- -0-
--------------- ----------------
Accrued benefit cost................................................... $ (836,527) $ (580,569)
=============== ================

Weighted average rate assumptions used in
determining pension cost and the
projected benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year....................... 8.00% 7.25%
Expected long-term rate of return on plan
assets for the year.................................................. 10.00% 10.00%
Expected rate of increase in future
compensation levels.................................................. 6.00% 6.00%

72
74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 15 - PENSION PLAN - CONTINUED

Benefit Restoration plan net periodic benefit cost:

1999 1998 1997
-------- -------- --------

Service cost .......................................... $ 85,940 $ 68,927 $ 52,515
Interest cost ......................................... 96,712 74,466 55,410
Expected return on plan assets ........................ -0- -0- -0-
Amortization of prior service cost .................... 34,907 34,907 34,907
Amortization of transitional (asset) or obligation .... -0- -0- -0-
Recognized actuarial loss ............................. 38,399 25,967 11,243
-------- -------- --------

Net periodic benefit cost ............................. $255,958 $204,267 $154,075
======== ======== ========

NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. An employee becomes a participant in
the ESOP on June 30 or December 31 after completing 12 months of employment
during which the employee is credited with 1,000 or more hours of service.
Contributions to the ESOP are made at the discretion of the Company's Board of
Directors, but may not be less than the amount required to cover the debt
service on the ESOP loan. Employer contributions are allocated to eligible
participants in proportion to their compensation, which equals W-2 wages plus
pre-tax reductions for the Company's cafeteria plan. The Internal Revenue Code
imposes a limit ($160,000 in 1999) on the amount of compensation which may be
considered under the plan.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. The promissory note has been refinanced in years subsequent to
1993 as additional shares were purchased by the ESOP. On December 31, 1998, this
note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments due
monthly through November 16, 2010, with the remaining principal, if any, due
upon that date. The initial principal and interest payment on this debt in
December 1998 was $31,677. As changes occur in the interest rate on the loan,
appropriate adjustments are made to the monthly principle and interest payments.
At December 31, 1999, the monthly payment was $32,195. The Company has
guaranteed this debt and in accordance with the applicable accounting and
reporting guidelines the debt has been recognized on the Company's statement of
condition, with an offsetting charge against equity. As principal payments are
made by the ESOP, the debt and offsetting charge against equity are reduced. The
shares securing the note are released on a prorata basis by the lender as
monthly payments of principal and interest are made. As of December 31, 1999,
there were 221,321 unreleased shares with a fair value of approximately
$4,426,420. These shares are subtracted from outstanding shares for earnings per
share calculations.

73
75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP 93-6,
the employer must recognize the indebtedness of its sponsored ESOP on its
financial statement and reduce its stockholders' equity for shares of stock
which have not been released by a lender to the ESOP for allocation to its
participating employees. The portion of payments made by the Company to the ESOP
on behalf of its participating employees which are used to pay interest on the
ESOP debt ($237,589, $165,808 and $165,550 in 1999, 1998 and 1997, respectively)
is classified as interest expense on the Company's income statement.

Dividends paid on released ESOP shares are credited to the accounts of the
participants to whom the shares are allocated. Dividends on unreleased shares
are treated as other income of the ESOP.

At December 31, 1999 and 1998, the Company's financial statements reflect long
term debt and a corresponding contra-equity account, as a result of the ESOP
debt, of $2,788,442, and $2,944,232 respectively.

Company contributions to the ESOP amounted to $452,739, $316,008 and $289,147
for 1999, 1998 and 1997, respectively.

NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its stockholders and
other needs. Certain restrictions exist regarding the ability of the Bank to
transfer funds to the Company in the form of cash dividends, loans or advances.
The approval of the Alabama Superintendent of Banks is required to pay dividends
in excess of the Bank's earnings retained in the current year plus retained net
profits for the preceding two years less any required transfers to surplus. At
December 31, 1999, Community Bank could have declared dividends of approximately
$4,258,000 without approval of regulatory authorities.

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74
76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 18 - REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company and Community Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999 and 1998, that the Bank meets all capital adequacy requirements to which it
is subject.

At December 31, 1999, under applicable banking regulations, the Company and
Community Bank, were considered adequately capitalized compared to both being
classified as well capitalized at year-end 1998. Other than the anticipated
capital securities transaction, there are no conditions or events since year-end
1999 that management believes have changed the institution's category. (See Note
13)

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75
77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 18 - REGULATORY CAPITAL - CONTINUED

The following table sets forth the actual capital ratios at December 31, 1999
and 1998, for the Company and the Bank, as well as the minimum total risk-base,
Tier 1 risked based and Tier 1 leverage ratios required to be classified as
adequately capitalized and well capitalized.

For Capital To Be
Actual Adequacy Purposes Well Capitalized
--------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)

AS OF DECEMBER 31, 1999:
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 44,067 9.37% $ 37,624 8.00% $ 47,031 10.00%
COMMUNITY BANK 46,192 9.87 37,437 8.00 46,797 10.00

TIER 1 CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 39,976 8.50% $ 18,812 4.00% $ 28,218 6.00%
COMMUNITY BANK 43,589 9.31 18,719 4.00 28,078 6.00

TIER 1 CAPITAL
(TO AVERAGE ASSETS):
CONSOLIDATED $ 39,976 6.39% $ 18,812 4.00% $ 23,515 5.00%
COMMUNITY BANK 43,589 6.97 18,719 4.00 23,398 5.00

For Capital To Be
Actual Adequacy Purposes Well Capitalized
--------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)

As of December 31, 1998:
Total Capital
(to Risk Weighted Assets):
Consolidated $ 46,083 11.03% $ 33,436 8.00% $ 41,795 10.00%
Community Bank 47,333 11.40 33,218 8.00 41,523 10.00

Tier 1 Capital
(to Risk Weighted Assets):
Consolidated $ 41,521 9.94% $ 16,718 4.00% $ 25,777 6.00%
Community Bank 44,362 10.68 16,609 4.00 24,914 6.00

Tier 1 Capital
(to Average Assets):
Consolidated $ 41,521 7.79% $ 21,328 4.00% $ 26,660 5.00%
Community Bank 44,362 8.34 21,268 4.00 26,585 5.00

76
78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 19 - COMPREHENSIVE INCOME

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

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

Year Ended December 31,
----------------------------------------
1999 1998 1997
----------- --------- --------

Unrealized holding gains (losses) arising during period .... $(3,314,131) $ 488,059 $969,502
-----------

Reclassification adjustments for net (gains) losses
included in net income ................................... (179,303) (465,982) 2,590
----------- --------- --------

Other comprehensive income (loss), before income taxes ..... (3,493,434) 22,077 972,092

Income tax expense (benefit) related to other
comprehensive income ..................................... (1,397,374) 8,831 388,837
----------- --------- --------

Other comprehensive income (loss) .......................... $(2,096,060) $ 13,246 $583,255
=========== ========= ========

NOTE 20 - RELATED PARTY TRANSACTIONS

Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 1999 and 1998. Except as noted below, all such loans are made in the
ordinary course of business on substantially the same credit terms, including
interest rates and collateral and do not represent more than a normal risk of
collection or present other unfavorable features. Total loans to these persons
at December 31, 1999 and 1998 amounted to approximately $8,779,000 and
$10,780,000, respectively. An analysis of activity during 1999 in loans to
related parties resulted in additions of $6,954,000, representing new loans,
reductions of $10,189,000, representing payments, and an increase of $1,234,000,
representing a change in the composition of related parties.

The Company, through Community Bank, its wholly owned subsidiary, offers all
regular full-time employees, including executive officers, loans at interest
rates which are 1% below the prevailing market rate. As of December 31, 1999,
executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interests, had loans outstanding pursuant to this policy
with total indebtedness of approximately $835,000.

77
79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED

The Company, through Community Bank, also offers first mortgage real estate
loans on the primary residence, at a rate of 5%, to employees who are required
to relocate in the course of their employment. As of December 31, 1999,
executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interest, had relocation loans outstanding with total
indebtedness of approximately $2,616,000.

Maintenance Contract: The Bank has a service contract with Heritage Valley
Farms, an unincorporated business owned by Kennon R. Patterson, Sr., a director
and officer of the Company, for the upkeep and maintenance of the external
grounds of five of the Bank's locations for the entire year of 1999. External
grounds upkeep and maintenance was also performed for most of 1999 for five
additional Bank locations and two 1st Community Credit Corporation locations.
Maintenance expense under this contract amounted to $62,323, $51,465 and $96,300
for the years ended December 31, 1999, 1998 and 1997, respectively, a monthly
average of $588, $468 and $422 per location.

Interior Design: The Company and the Bank, including the Bank's subsidiaries,
paid Heritage Interiors, a decorating and design firm owned and operated by the
wife of Kennon R. Patterson, Sr., a director and officer of the Company, for the
interior design, furniture, appliances, fixtures, hardware, carpets, wall
coverings, paint, drapes and accessories for new facilities and similar work
associated with the renovation of existing locations. During 1999, Heritage
Interiors was paid $262,912 in connection with the completion and opening of two
new bank buildings located in Boaz and Demopolis, Alabama. The Bank also paid
Heritage Interiors $279,026 in connection with the renovation and expansion of
its new permanent location in Fite House located in Hamilton, Alabama. As a
result of being listed on the state and national register of historical places,
a portion of the cost associated with furnishing and decorating the Fite House
was to preserve the architectural style and historical significance of the
building. The Bank also paid Heritage Interiors $120,080 during 1999 in
connection with the renovation of three offices furnished to the Bank's Area
Executive Vice Presidents and the first floor of the Company's headquarters
building. Additional payments totaling $16,121 were made to Heritage Interiors
during 1999 in connection with 24 other banking offices. 1st Community Credit
Corporation paid Heritage Interiors $23,835 for furnishings and decorating
associated with the opening of its new office in Oneonta, Alabama and $7,469 in
connection with the relocation of its office in Hartselle, Alabama. 1st
Community Credit Corporation also paid Heritage Interiors $78,632 during 1999 in
connection with the renovation of five of its offices located in Boaz, Gadsden,
Huntsville, Ft. Payne and Jasper, Alabama. Additional payments totaling $12,931
were made to Heritage Interiors by 1st Community Credit Corporation during 1999,
relating to the other five locations and its administrative offices. The
Company, Community Insurance Corp. and Southern Select Insurance, Inc. made
payments totaling $35,848 to Heritage Interiors for various services rendered
during 1999. Total payments to Heritage Interiors in 1999 were $836,854. During
1998, Heritage Interiors was paid $265,066 in connection with the completion of
three new buildings with a total of approximately 60,000 square feet and $31,876
for the renovation of an existing building at the Company's headquarters in
Blountsville, $150,723 in connection with the opening of a permanent location in
Double Springs, $38,647 in connection with the opening of bank offices in
Albertville, Boaz and Guntersville, $44,610 in connection with the opening of
six offices of 1st Community Credit Corporation, and additional amounts relating
to 23 other offices of the Company, Community Bank or its subsidiaries.

78
80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED

Total payments to Heritage Interiors in 1998 were $666,492. During 1997,
Heritage Interiors was paid $803,510 in connection with the construction of
three new buildings at the Company's headquarters in Blountsville, $136,133 for
goods and services for the Oneonta office, $139,484 for goods and services for
the Cleveland office and additional amounts for goods and services for 20 other
offices of the Company, Community Bank and its subsidiaries. Total payments to
Heritage Interiors in 1997 were $1,186,287.

Accounting Services: The Company has entered into an agreement with the
accounting firm of Schauer, Taylor, Cox and Vise, P.C. to provide certain
accounting and internal audit services. Doug Schauer, a member of the firm, is
Kennon R. Patterson, Sr.'s son-in-law. The Company or its subsidiaries paid
Schauer, Taylor, Cox and Vice, P.C. $143,000, $134,000 and $148,000 for their
services rendered during 1999, 1998 and 1997, respectively.

NOTE 21 - LEASES

The Company has a number of operating lease agreements, involving land and
buildings. These leases are noncancellable and expire on various dates through
the year 2013. The leases provide for renewal options and generally require the
Company to pay maintenance, insurance and property taxes. Options to purchase
are also included in some leases. For the years ended December 31, 1999, 1998
and 1997, rental expense for operating leases was approximately $687,994,
$539,655 and $232,759,respectively.

Future minimum lease payments for all leases at December 31, 1999 are as
follows:

OPERATING
-------------

Years Ending December 31,
2000................................................ $ 389,649
2001................................................ 264,869
2002................................................ 155,221
2003................................................ 64,543
2004................................................ 19,200
Thereafter.......................................... 292,000
-------------

Total minimum lease payments........................ $ 1,185,482
=============

NOTE 22 - BUSINESS COMBINATIONS

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

79
81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 22 - BUSINESS COMBINATIONS - CONTINUED

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

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

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

On June 1, 1999, Community Insurance Corp., established an office in Huntsville,
Alabama through the acquisition of certain assets and the assumption of certain
liabilities of Cummings, Gazaway, Gardner, and Pate, Inc., a Huntsville-based
insurance company. Community Insurance Corp. agreed to pay cash totaling $1,6
00,000 over 5 years, subject to adjustment based on revenues of the acquired
agency. As a result of this acquisition, Community Insurance Corp. acquired
$759,310 in premises, furniture and equipment and $229,626 in accounts
receivable, assumed accounts payable of $233,916 and paid a premium of $844,980.
This transaction was not material to the financial statements of the Company and
therefore required no restatement of the Company's financial statements for
periods prior to the acquisition date.

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

80
82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 23 - OTHER SHORT-TERM BORROWINGS

Other short-term borrowings at December 31, 1999 and 1998 consisted of the U.S.
Treasury Tax and Loan Note Option account, federal funds purchased, overnight
funds purchased from FHLB-Atlanta and securities sold under agreements to
repurchase.

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

1999 1998
---------- ----------

Average balance during the year .................. $ 558,551 $ 880,551
Average interest rate during the year ............ 5.08% 6.02%
Maximum month-end balance during the year ........ $ 381,658 $1,930,582

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

1999 1998
---------- ----------

Carrying Value ................................... $ 996,237 $1,901,763
Estimated Fair Value ............................. 996,633 1,852,228
Accrued Interest Receivable ...................... 19,008 25,801

Securities sold under agreements to repurchase are generally treated as
collateralized financing transactions. It is the Company's policy to deliver
underlying securities to custodian accounts for customers.

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81
83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

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82
84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The estimated fair values of the Company's financial instruments as of December
31, 1999 and 1998 are as follows:

1999 1998
----------------------------- ---------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- --------------
(in Thousands) (in Thousands)

FINANCIAL ASSETS:
Cash and short-term investments......... $ 27,498 $ 27,498 $ 26,503 $ 26,503
Investment securities................... 96,847 96,847 97,392 97,392
Loans................................... 498,726 433,853
Less: allowance for loan losses......... 2,603 2,971
------------- -------------
Net Loans............................... 496,123 493,121 430,882 436,914
------------- ------------- ------------- --------------
TOTAL FINANCIAL ASSETS.................. $ 620,468 $ 617,466 $ 554,777 $ 560,809
============= ============= ============= ==============

FINANCIAL LIABILITIES:
Deposits................................ $ 573,261 $ 574,097 $ 538,586 $ 543,221
Short-term borrowings................... 2,494 2,494 2,192 2,192
FHLB borrowings......................... 40,000 37,478 -0- -0-
Long-term debt.......................... 6,637 6,645 7,569 7,606
------------- ------------- ------------- --------------

TOTAL FINANCIAL LIABILITIES............. $ 622,392 $ 620,714 $ 548,347 $ 553,019
============= ============= ============= ==============

UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit............ $ -0- $ 18,165 $ -0- $ 15,698
Standby letters of credit............... -0- 1,235 -0- 621
------------- ------------- ------------- --------------
TOTAL UNRECOGNIZED
FINANCIAL INSTRUMENTS................. $ -0- $ 19,400 $ -0- $ 16,319
============= ============= ============= ==============

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83
85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION

STATEMENTS OF FINANCIAL CONDITION

December 31,
--------------------------------
1999 1998
-------------- --------------

ASSETS
Cash and due from banks..................................................... $ 1,475,219 $ 3,203,234
Investment in subsidiaries (equity method) -
eliminated upon consolidation.............................................. 48,089,079 50,073,892
Premises and equipment, net................................................. 82,305 80,684
Intangibles, net............................................................ 1,003,489 1,086,800
Other assets................................................................ 1,490,996 1,299,265
-------------- --------------

TOTAL ASSETS.......................................................... $ 52,141,088 $ 55,743,875
============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt.............................................................. $ 6,637,162 $ 7,568,716
Other liabilities........................................................... 1,028,550 941,758
-------------- --------------
TOTAL LIABILITIES..................................................... 7,665,712 8,510,474

TOTAL SHAREHOLDERS' EQUITY............................................ 44,475,376 47,233,401
-------------- --------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 52,141,088 $ 55,743,875
============== ==============

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84
86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF INCOME

Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- --------------

INCOME
From subsidiaries - eliminated upon consolidation
Dividends................................................ $ 3,702,566 $ 3,017,970 $ 2,548,201
Management fees.......................................... 600,000 600,000 600,000
Interest................................................. 51,578 22,222 30,513
Other Income............................................. 3,620 3,740 2,400
-------------- ------------- --------------
4,357,764 3,643,932 3,181,114

EXPENSES
Salaries and employee benefits............................ 1,857,053 1,751,593 1,385,633
Interest.................................................. 320,895 400,079 465,003
Other expenses............................................ 1,692,028 666,862 683,802
-------------- ------------- --------------
3,869,976 2,818,534 2,534,438

Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries.................... 487,788 825,398 646,676
Income tax benefit........................................... (1,059,075) (753,387) (719,485)
-------------- ------------- --------------

Income (loss) before equity in undistributed earnings
of subsidiaries........................................... 1,546,863 1,578,785 1,366,161
Equity in undistributed earnings of subsidiaries............. 111,247 2,000,708 2,146,117
-------------- ------------- --------------

NET INCOME....................................... $ 1,658,110 $ 3,579,493 $ 3,512,278
============== ============= ==============

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85
87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

STATEMENTS OF CASH FLOWS

Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
---------- ---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $1,658,110 $3,579,493 $3,512,278
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries ........ (111,247) (2,000,708) (2,146,117)
Provision for depreciation, amortization and acc ...... 94,629 118,571 111,642
Increase in other assets .............................. (191,731) (378,456) (1,277)
Increase in other liabilities ......................... 86,792 271,490 19,194
-------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ....................... 1,536,553 1,590,390 1,495,720
---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of securities available for ....... -0- 822,713 1,050,000
Increase in interest-bearing deposits with banks ......... -0- -0- (742,932)
Proceeds from sale of assets ............................. 15,599 -0- 39,584
Capitalization of bank subsidiary ........................ -0- (7,500,000) -0-
Capital expenditures ..................................... (28,538) (34,543) (17,041)
---------- ---------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ....................... (12,939) (6,711,830) 329,611
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt .............................. (775,764) (770,226) (766,848)
Issuance of common stock ................................. 312,889 10,634,552 707,740
Cash dividends ........................................... (2,788,754) (2,031,608) (1,500,000)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ....................... (3,251,629) 7,832,718 (1,559,108)
---------- ---------- ----------

Net (decrease) increase in cash and cash equivalents ....... (1,728,015) 2,711,278 266,223

Cash and due from banks at beginning of year ............... 3,203,234 491,956 225,733
---------- ---------- ----------

CASH AND DUE FROM BANKS AT END OF YEAR ..................... $1,475,219 $3,203,234 $491,956
========== ========== ==========

86
88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

DECEMBER 31, 1999, 1998 AND 1997

NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED

Years Ended December 31,
------------------------------------------------------
1999 1998 1997
---------- ---------- --------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during
the year for:
Interest ............................................... $ 317,671 $ 402,209 $467,424
Income taxes ........................................... (1,019,219) (780,000) (735,803)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Long-term debt was increased and equity was decreased $1,200,000 on January 1,
1994 to reflect the existence of leveraged, unreleased ESOP shares. Upon the
pledging of purchased shares to obtain additional ESOP debt of $1,076,958 on
December 1, 1998 and $1,260,007 on May 17, 1996 long-term debt was increased
and equity was decreased. The debt was reduced and shares were released by
$155,791, $135,628 and $116,989, respectively, during each of the years ended
December 31, 1999, 1998 and 1997 as a result of payments made by the Company's
ESOP on the outstanding ESOP debt.

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87
89

QUARTERLY RESULTS (UNAUDITED)

A summary of the unaudited results of operations for each quarter of 1999 and
1998 follows:

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

1999:
TOTAL INTEREST INCOME........................................... $ 12,138 $ 12,596 $ 13,566 $ 13,894
TOTAL INTEREST EXPENSE.......................................... 6,017 6,184 6,635 6,685
PROVISION FOR LOAN LOSSES....................................... 380 464 545 3,070
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES..................................... 5,741 5,948 6,385 4,139
INVESTMENT SECURITIES GAINS (LOSSES) ........................... - - 7 173
TOTAL NONINTEREST INCOME........................................ 1,866 2,114 2,275 2,719
TOTAL NONINTEREST EXPENSE....................................... 6,833 7,262 7,052 8,061
INCOME TAX EXPENSE.............................................. 188 214 589 (489)
NET INCOME (LOSS)............................................... 586 586 1,027 (541)

PER COMMON SHARE:
BASIC EARNINGS (LOSS).......................................... $ .13 $ .13 $ .23 $ (.12)
DILUTED EARNINGS (LOSS)........................................ .13 .13 .22 (.12)

1998:
Total interest income........................................... $ 9,794 $ 10,715 $ 11,677 $ 12,179
Total interest expense.......................................... 5,307 5,452 5,751 6,183
Provision for loan losses....................................... 188 208 226 263
Net interest income after
provision for loan losses..................................... 4,299 5,055 5,700 5,733
Investment securities gains (losses) ........................... 9 3 7 447
Total noninterest income........................................ 1,573 2,058 2,037 1,968
Total noninterest expense....................................... 5,115 5,667 6,419 6,583
Income tax expense.............................................. 211 411 401 503
Net income...................................................... 555 1,038 924 1,062

Per Common Share:
Basic earnings................................................. $ .14 $ .27 $ .24 $ .25
Diluted earnings............................................... .14 .26 .23 .25

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

None

88
90

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item with respect to the directors and nominees for
director of the Company is incorporated by reference from the sections entitled
"Election of Directors" and "Executive Compensation and Other Information" in
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
during 2000. Information regarding the executive officers of the Company is
included in Part I of this Report.

ITEM 11 - EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from the section
entitled "Executive Compensation" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held during 2000.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Information required by this item is incorporated by reference from the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
during 2000.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference from the section
entitled "Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held during 2000.

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89
91

PART IV

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

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

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

Auditor's Report.......................................................................................... 42

Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998.............................................................................. 43

Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997........................................................................ 44

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................................................ 45

Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................................................................ 46-47

Notes to Consolidated Financial Statements -
December 31, 1999, 1998 and 1997........................................................................ 48-87

Quarterly Results (Unaudited)............................................................................. 88

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter ended December 31,
1999.

(c) Exhibits

3.1 Certificate of Incorporation, as amended (1)
3.2 Certificate of Amendment to the Certificate of Incorporation,
changing the name of the Registrant to Community Bancshares,
Inc. (2)
3.3 By-Laws of Registrant, as amended and restated January 1999
(3)
3.4 Certificate of Amendment to the Certificate of Incorporation,
providing for directors' indemnification (4)
3.5 Certificate of Amendment to the Certificate of Incorporation,
increasing the number of authorized shares (5)
3.6 Amended Certificate of Amendment of the Certificate of
Incorporation, increasing the number of authorized shares (6)
4.1 Certificate of Registrant establishing the Series 1984-1
Preferred Stock, dated August 17, 1984 ("Certificate of Stock
Designation") (7)
4.2 Certificate of Amendment to the Certificate of Stock
Designation (8)
4.3 Rights Agent Agreement, dated January 13, 1999, between
Community Bancshares, Inc. and the Bank of New York (9)

90
92

10.1 Promissory Note, Guaranty and Pledge Agreement, dated December
1, 1998, by and between Community Bancshares, Inc. and
Colonial Bank, N.A. (10)
10.2 Plan document for the Community Bancshares, Inc. Benefit
Restoration Plan adopted April 12, 1994, effective January 1,
1995 (11) (*)
10.3 Subordinated Promissory Note, dated October 4, 1994, between
Community Bancshares, Inc. as borrower and Jeffrey K.
Cornelius as holder (12)
10.4 Employment Agreement, dated March 28, 1996 by and between
Kennon R. Patterson, Sr. and Community Bancshares, Inc. (13)
(*)
10.5 Amendment to Employment Agreement, dated October 14, 1999, by
and between Kennon R. Patterson, Sr. and Community Bancshares,
Inc. (14) (*)
10.6 Employment Agreement, dated March 28, 1996, by and between
Bishop K. Walker, Jr. and Community Bancshares, Inc. (15) (*)
10.7 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 28, 1996 (16) (*)
10.8 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, dated March 28, 1996 (17) (*)
10.9 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 28, 1996 (18) (*)
10.10 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 28, 1996 (19) (*)
10.11 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 28, 1996 (20) (*)
10.12 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins, dated March 28, 1996 (21) (*)
10.13 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam, dated March 28, 1996 (22) (*)
10.14 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter, dated March 28, 1996 (23) (*)
10.15 Stock Option Agreement between Community Bancshares, Inc. and
Robert O. Summerford, dated March 28, 1996 (24) (*)
10.16 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 27, 1997 (25) (*)
10.17 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr., dated March 27, 1997 (26) (*)
10.18 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 27, 1997 (27) (*)
10.19 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 27, 1997 (28) (*)
10.20 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 27, 1997 (29) (*)
10.21 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins, dated March 27, 1997 (30) (*)
10.22 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam, dated March 27, 1997 (31) (*)
10.23 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter, dated March 27, 1997 (32) (*)
10.24 Stock Option Agreement between Community Bancshares, Inc. and
Robert O. Summerford, dated March 27, 1997 (33) (*)
10.25 Stock Option Agreement between Community Bancshares, Inc. and
John J. Lewis, Jr., dated March 27, 1997 (34) (*)

91
93

10.26 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 26, 1998 (35) (*)
10.27 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr., dated March 26, 1998 (36) (*)
10.28 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 26, 1998 (37) (*)
10.29 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 26, 1998 (38) (*)
10.30 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 26, 1998 (39) (*)
10.31 Form of Stock Option Agreement between Community Bancshares,
Inc. and grantees, dated March 26, 1998 (40) (*)
10.32 Form of Change in Control Agreement between Community
Bancshares, Inc. and each of Kennon R. Patterson, Sr., Bishop
K. Walker, Jr., Denny Kelly, Hodge Patterson, III, Loy
McGruder, Michael A. Bean and William H. Caughran, Jr., dated
December 4, 1999 (*)
10.33 Form of Stock Option Agreement for Non-Employee Directors
between Community Bancshares, Inc., and each of Glynn Debter,
Roy B. Jackson, John J. Lewis, Jr., Merritt Robbins, Robert O.
Summerford and Wayne Washam, dated December 4, 1999 (*)
10.34 Form of Stock Option Agreement for Employees between Community
Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop
K. Walker, Jr., Denny Kelly, Hodge Patterson, III, Loy
McGruder, Michael A. Bean and William H. Caughran, Jr., dated
December 4, 1999 (*)

11 Statement of computation of earnings per common share
12 Statement of Computation of Ratios
21 Subsidiaries of the Registrant
24 Power of Attorney (included on page 95)
27 Financial Data Schedule

Notes to Exhibits:

(1) Filed as appendix II to the Proxy Statement included in Part I
of the Registration Statement on Form S-14, Registration No
2-92974, and incorporated herein by reference
(2) Filed as Exhibit 4 to Form 10-K for the year ended December
31, 1985, and incorporated herein by reference
(3) Filed as Exhibit 3.3 to Form 10-K for the year ended December
31, 1998, and incorporated herein by reference
(4) Filed as Exhibit 3.4 to Form 10-K for the year ended December
31, 1987, and incorporated herein by reference
(5) Filed as Exhibit 3.5 to Form 10-K for the year ended December
31, 1993, and incorporated herein by reference
(6) Filed as Exhibit 3 to Form 10-Q/A-1 for the quarter ended
September 30, 1998, and incorporated herein by reference
(7) Filed as Appendix I to the Proxy Statement included in Part I
of the Registration Statement on Form S-14, Registration No.
2-92974, and incorporated herein by reference
(8) Filed as Exhibit 4.1 to the Registration Statement on Form
S-1, Registration No. 33-7032, and incorporated herein by
reference
(9) Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and
incorporated herein by reference
(10) Filed as Exhibit 10.2 to Form 10-K for the year ended December
31, 1998, and incorporated herein by reference

92
94

(11) Filed as Exhibit 10.13 to Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference
(12) Filed as Exhibit 10.15 to Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference
(13) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended
September 30, 1998, and incorporated herein by reference
(14) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference
(15) Filed as Exhibit 10.2 to Form 10-Q/A-2 for the quarter ended
September 30, 1998, and incorporated herein by reference
(16) Filed as Exhibit 10.20 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(17) Filed as Exhibit 10.21 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(18) Filed as Exhibit 10.22 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(19) Filed as Exhibit 10.23 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(20) Filed as Exhibit 10.24 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(21) Filed as Exhibit 10.27 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(22) Filed as Exhibit 10.28 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(23) Filed as Exhibit 10.29 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(24) Filed as Exhibit 10.30 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(25) Filed as Exhibit 10.37 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(26) Filed as Exhibit 10.38 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(27) Filed as Exhibit 10.39 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(28) Filed as Exhibit 10.40 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(29) Filed as Exhibit 10.41 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(30) Filed as Exhibit 10.44 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(31) Filed as Exhibit 10.45 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(32) Filed as Exhibit 10.46 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(33) Filed as Exhibit 10.47 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(34) Filed as Exhibit 10.50 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(35) Filed as Exhibit 10.36 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(36) Filed as Exhibit 10.37 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(37) Filed as Exhibit 10.38 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference

93
95

(38) Filed as Exhibit 10.39 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(39) Filed as Exhibit 10.40 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(40) Filed as Exhibit 10.41 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(*) Management contract or Compensation plan or arrangement

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

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94
96

SIGNATURES

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

COMMUNITY BANCSHARES, INC.

Date: March 24, 2000 By /s/ Kennon R. Patterson, Sr.
------------------------ -----------------------------------
KENNON R. PATTERSON, SR.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER

Date: March 24, 2000 By /s/ Michael A. Bean
----------------------- -----------------------------------
MICHAEL A. BEAN
ACTING CHIEF ACCOUNTING OFFICER

POWER OF ATTORNEY

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

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

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

/s/ Glynn Debter March 24, 2000
- --------------------------------------- ----------------------
GLYNN DEBTER

/s/ Roy B. Jackson March 24, 2000
- --------------------------------------- ----------------------
ROY B. JACKSON

/s/ Denny Kelly March 24, 2000
- --------------------------------------- ----------------------
DENNY KELLY

95
97

SIGNATURES, Continued

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

/s/ John J. Lewis, Jr. March 24, 2000
- ------------------------------------ -----------------
JOHN J. LEWIS, JR.

/s/ Loy McGruder March 24, 2000
- ------------------------------------ -----------------
LOY MCGRUDER

/s/ Hodge Patterson, III March 24, 2000
- ------------------------------------ -----------------
HODGE PATTERSON, III

/s/ Kennon R. Patterson, Sr. March 24, 2000
- ------------------------------------ -----------------
KENNON R. PATTERSON, SR.

/s/ Merritt Robbins March 24, 2000
- ------------------------------------ -----------------
MERRITT ROBBINS

/s/ Robert O, Summerford March 24, 2000
- ------------------------------------ -----------------
ROBERT O. SUMMERFORD

/s/ Bishop K. Walker, Jr. March 24, 2000
- ------------------------------------ -----------------
BISHOP K. WALKER, JR.

/s/ Wayne Washam March 24, 2000
- ------------------------------------ -----------------
WAYNE WASHAM

96
98

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99
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

-----------

EXHIBITS TO

ANNUAL REPORT ON FORM 10-K

for the

Year Ended December 31, 1999

-----------

COMMUNITY BANCSHARES, INC.

P.O. BOX 1000

MAIN STREET

BLOUNTSVILLE, ALABAMA 35031

================================================================================
100

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101

Exhibits
--------

3.1 Certificate of Incorporation, as amended (1)
3.2 Certificate of Amendment to the Certificate of Incorporation,
changing the name of the Registrant to Community Bancshares,
Inc. (2)
3.3 By-Laws of Registrant, as amended and restated January 1999
(3)
3.4 Certificate of Amendment to the Certificate of Incorporation,
providing for directors' indemnification (4)
3.5 Certificate of Amendment to the Certificate of Incorporation,
increasing the number of authorized shares (5)
3.6 Amended Certificate of Amendment of the Certificate of
Incorporation, increasing the number of authorized shares (6)
4.1 Certificate of Registrant establishing the Series 1984-1
Preferred Stock, dated August 17, 1984 ("Certificate of Stock
Designation") (7)
4.2 Certificate of Amendment to the Certificate of Stock
Designation (8)
4.3 Rights Agent Agreement, dated January 13, 1999, between
Community Bancshares, Inc. and the Bank of New York (9)
10.1 Promissory Note, Guaranty and Pledge Agreement, dated December
1, 1998, by and between Community Bancshares, Inc. and
Colonial Bank, N.A. (10)
10.2 Plan document for the Community Bancshares, Inc. Benefit
Restoration Plan adopted April 12, 1994, effective January 1,
1995 (11) (*)
10.3 Subordinated Promissory Note, dated October 4, 1994, between
Community Bancshares, Inc. as borrower and Jeffrey K.
Cornelius as holder (12)
10.4 Employment Agreement, dated March 28, 1996 by and between
Kennon R. Patterson, Sr. and Community Bancshares, Inc. (13)
(*)
10.5 Amendment to Employment Agreement, dated October 14, 1999, by
and between Kennon R. Patterson, Sr. and Community Bancshares,
Inc. (14) (*)
10.6 Employment Agreement, dated March 28, 1996, by and between
Bishop K. Walker, Jr. and Community Bancshares, Inc. (15) (*)
10.7 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 28, 1996 (16) (*)
10.8 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, dated March 28, 1996 (17) (*)
10.9 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 28,1996 (18) (*)
10.10 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 28, 1996 (19) (*)
10.11 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 28, 1996 (20) (*)
10.12 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins, dated March 28, 1996 (21) (*)
10.13 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam, dated March 28, 1996 (22) (*)
10.14 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter, dated March 28, 1996 (23) (*)
10.15 Stock Option Agreement between Community Bancshares, Inc. and
Robert O. Summerford, dated March 28, 1996 (24) (*)
10.16 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 27, 1997 (25) (*)
10.17 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr., dated March 27, 1997 (26) (*)
10.18 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 27, 1997 (27) (*)
10.19 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 27, 1997 (28) (*)

102

10.20 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 27, 1997 (29) (*)
10.21 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins, dated March 27, 1997 (30) (*)
10.22 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam, dated March 27, 1997 (31) (*)
10.23 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter, dated March 27, 1997 (32) (*)
10.24 Stock Option Agreement between Community Bancshares, Inc. and
Robert O. Summerford, dated March 27, 1997 (33) (*)
10.25 Stock Option Agreement between Community Bancshares, Inc. and
John J. Lewis, Jr., dated March 27, 1997 (34) (*)
10.26 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr., dated March 26, 1998 (35) (*)
10.27 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr., dated March 26, 1998 (36) (*)
10.28 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 26, 1998 (37) (*)
10.29 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III, dated March 26, 1998 (38) (*)
10.30 Stock Option Agreement between Community Bancshares, Inc. and
Loy McGruder, dated March 26, 1998 (39) (*)
10.31 Form of Stock Option Agreement between Community Bancshares,
Inc. and grantees, dated March 26, 1998 (40) (*)
10.32 Form of Change in Control Agreement between Community
Bancshares, Inc. and each of Kennon R. Patterson, Sr., Bishop
K. Walker, Jr., Denny Kelly, Hodge Patterson, III, Loy
McGruder, Michael A. Bean and William H. Caughran, Jr., dated
December 4, 1999 (*)
10.33 Form of Stock Option Agreement for Non-Employee Directors
between Community Bancshares, Inc., and each of Glynn Debter,
Roy B. Jackson, John J. Lewis, Jr., Merritt Robbins, Robert O.
Summerford and Wayne Washam, dated December 4, 1999 (*)
10.34 Form of Stock Option Agreement for Employees between Community
Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop
K. Walker, Jr., Denny Kelly, Hodge Patterson, III, Loy
McGruder, Michael A. Bean and William H. Caughran, Jr., dated
December 4, 1999 (*)

11 Statement of computation of earnings per common share
12 Statement of Computation of Ratios
21 Subsidiaries of the Registrant
24 Power of Attorney (included on page 95)
27 Financial Data Schedule

Notes to Exhibits:

(1) Filed as appendix II to the Proxy Statement included in Part I
of the Registration Statement on Form S-14, Registration No
2-92974, and incorporated herein by reference
(2) Filed as Exhibit 4 to Form 10-K for the year ended December
31, 1985, and incorporated herein by reference
(3) Filed as Exhibit 3.3 to Form 10-K for the year ended December
31, 1998, and incorporated herein by reference
(4) Filed as Exhibit 3.4 to Form 10-K for the year ended December
31, 1987, and incorporated herein by reference
(5) Filed as Exhibit 3.5 to Form 10-K for the year ended December
31, 1993, and incorporated herein by reference
(6) Filed as Exhibit 3 to Form 10-Q/A-1 for the quarter ended
September 30, 1998, and incorporated herein by reference

103

(7) Filed as Appendix I to the Proxy Statement included in Part I
of the Registration Statement on Form S-14, Registration No.
2-92974, and incorporated herein by reference
(8) Filed as Exhibit 4.1 to the Registration Statement on Form
S-1, Registration No. 33-7032, and incorporated herein by
reference
(9) Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and
incorporated herein by reference
(10) Filed as Exhibit 10.2 to Form 10-K for the year ended December
31, 1998, and incorporated herein by reference
(11) Filed as Exhibit 10.13 to Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference
(12) Filed as Exhibit 10.15 to Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference
(13) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended
September 30, 1998, and incorporated herein by reference
(14) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference
(15) Filed as Exhibit 10.2 to Form 10-Q/A-2 for the quarter ended
September 30, 1998, and incorporated herein by reference
(16) Filed as Exhibit 10.20 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(17) Filed as Exhibit 10.21 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(18) Filed as Exhibit 10.22 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(19) Filed as Exhibit 10.23 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(20) Filed as Exhibit 10.24 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(21) Filed as Exhibit 10.27 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(22) Filed as Exhibit 10.28 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(23) Filed as Exhibit 10.29 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(24) Filed as Exhibit 10.30 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference
(25) Filed as Exhibit 10.37 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(26) Filed as Exhibit 10.38 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(27) Filed as Exhibit 10.39 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(28) Filed as Exhibit 10.40 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(29) Filed as Exhibit 10.41 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(30) Filed as Exhibit 10.44 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(31) Filed as Exhibit 10.45 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(32) Filed as Exhibit 10.46 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(33) Filed as Exhibit 10.47 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference
(34) Filed as Exhibit 10.50 to Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference

104

(35) Filed as Exhibit 10.36 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(36) Filed as Exhibit 10.37 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(37) Filed as Exhibit 10.38 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(38) Filed as Exhibit 10.39 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(39) Filed as Exhibit 10.40 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(40) Filed as Exhibit 10.41 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference
(*) Management contract or Compensation plan or arrangement

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

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