Edgar Filing: COMMUNITY BANCSHARES INC /DE/

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

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

COMMISSION FILE NO. 000-16461

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

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

68149 MAIN STREET, P. O. BOX 1000, BLOUNTSVILLE, AL 35031
--------------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 429-1000
--------------

NO CHANGE
---------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)

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

YES [X] NO [ ]

AS OF APRIL 30, 2001, THERE WERE 4,808,331 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.10 PAR VALUE PER SHARE, OUTSTANDING.

INDEX
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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

Consolidated Statements of Income - Three months ended March 31,
2001 and 2000............................................................................. 4

Consolidated Statements of Other Comprehensive Income - Three months
ended March 31, 2001 and 2000............................................................. 5

Consolidated Statements of Cash Flows - Three months ended March 31,
2001 and 2000............................................................................. 6

Notes to Consolidated Financial Statements - March 31, 2001............................... 8

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 15

Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 24

PART II. OTHER INFORMATION

Item 1. Legal Proceedings......................................................................... 25

Item 2. Changes in Securities and Use of Proceeds................................................. 25

Item 5. Other Information......................................................................... 25

Item 6. Exhibits and Reports on Form 8-K.......................................................... 26

2
3

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

MARCH 31, December 31,
2001 2000
-------------- --------------
(UNAUDITED)

ASSETS
Cash ................................................................. $ 5,609,583 $ 7,627,215
Due from banks........................................................ 18,327,685 18,379,396
Interest-bearing deposits with banks.................................. 700,000 700,000
Federal funds sold ................................................... 11,000,000 3,000,000
Securities available for sale ........................................ 104,985,252 101,569,818
Loans ................................................................ 525,470,463 528,467,345
Less: Unearned income ................................................ 106,035 151,184
Allowance for loan losses .................................... 7,492,812 7,107,430
-------------- --------------
NET LOANS ................................................. 517,871,616 521,208,731

Premises and equipment, net .......................................... 39,669,614 39,325,645
Accrued interest ..................................................... 7,274,865 8,432,321
Intangibles, net ..................................................... 5,639,178 5,757,055
Other real estate .................................................... 2,273,129 1,880,548
Other assets ......................................................... 7,063,960 5,637,313
-------------- --------------
TOTAL ASSETS .............................................. $ 720,414,882 $ 713,518,042
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing .............................................. $ 68,544,181 $ 67,285,705
Interest-bearing ................................................. 538,113,433 533,615,062
-------------- --------------
TOTAL DEPOSITS .......................................... 606,657,614 600,900,767
Other short-term borrowings .......................................... 1,582,394 2,265,231
Accrued interest ..................................................... 5,675,035 5,375,725
FHLB borrowings ...................................................... 38,000,000 38,000,000
Capitalized lease obligations ......................................... 5,831,826 5,850,225
Long-term debt ....................................................... 5,435,353 5,675,204
Guaranteed preferred beneficial interest in the Company's junior
subordinated deferrable interest debentures ...................... 10,000,000 10,000,000
Other liabilities .................................................... 3,844,427 4,261,120
-------------- --------------
TOTAL LIABILITIES ....................................... 677,026,649 672,328,272
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, 4,808,331 shares issued as of March 31, 2001
and 4,674,995 shares issued as of December 31, 2000 ......... 480,833 467,499
Capital surplus ................................................... 30,829,082 29,804,921
Treasury Stock, 20,803 shares at cost as of March 31, 2001
and December 31, 2000 ....................................... (396,768) (396,768)
Retained earnings ................................................. 14,295,888 13,490,799
Unearned ESOP shares - 194,980 and 199,877 shares as of
March 31, 2001 and December 31, 2000, respectively .......... (2,525,032) (2,574,002)
Accumulated other comprehensive income ........................... 704,230 397,321
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY ........................... 43,388,233 41,189,770
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $ 720,414,882 $ 713,518,042
============== ==============

See notes to consolidated financial statements

3
4

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

Three Months Ended
March 31,
------------------------------
2001 2000
------------ ------------

REVENUE FROM EARNING ASSETS
Interest and fees on loans.............................................. $ 13,416,990 $ 12,805,249
Interest on investment securities:
Taxable securities...................................................... 1,344,085 1,339,448
Securities exempt from federal income taxes............................. 199,809 125,848
Interest on federal funds sold.......................................... 127,021 30,799
Interest on deposits in other banks..................................... 17,315 13,733
------------ ------------
TOTAL REVENUE FROM EARNING ASSETS............................... 15,105,220 14,315,077
------------ ------------
INTEREST EXPENSE
Interest on deposits.................................................... 7,697,670 6,741,700
Interest on other short-term borrowings................................. 36,691 29,556
FHLB borrowings......................................................... 569,609 526,709
Interest on capitalized lease obligations............................... 122,499 -0-
Interest on long-term debt.............................................. 116,208 106,534
Interest on guaranteed preferred beneficial interest in the
Company's junior subordinated deferrable interest debentures.......... 271,875 60,225
------------ ------------
TOTAL INTEREST EXPENSE.......................................... 8,814,552 7,464,724
------------ ------------

NET INTEREST INCOME 6,290,668 6,850,353
Provision for loan losses................................................. 951,118 1,008,102
------------ ------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....................... 5,339,550 5,842,251
NONINTEREST INCOME
Service charges on deposits.............................................. 1,026,102 981,616
Insurance commissions.................................................... 540,842 578,952
Bank club dues........................................................... 169,431 175,554
Debt cancellation fees................................................... 152,067 196,043
Other operating income................................................... 420,331 589,229
Investment securities losses............................................. 353,015 (26,886)
------------ ------------
TOTAL NONINTEREST INCOME........................................ 2,661,788 2,494,508
------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits.......................................... 4,081,442 4,835,885
Occupancy expense....................................................... 712,088 645,166
Furniture and equipment expense......................................... 449,806 463,048
Director and committee fees............................................. 117,498 148,504
Other operating expense................................................. 1,503,755 1,576,291
------------ ------------
TOTAL NONINTEREST EXPENSES...................................... 6,864,589 7,668,894
------------ ------------

Income before income taxes................................................ 1,136,749 667,865
PROVISION FOR INCOME TAXES................................................ 331,659 213,928
------------ ------------
NET INCOME...................................................... $ 805,090 $ 453,937
============ ============

NET INCOME PER COMMON SHARE - BASIC....................................... $ 0.18 $ 0.10
NET INCOME PER COMMON SHARE - DILUTED..................................... $ 0.18 $ 0.10

See notes to consolidated financial statements

4
5

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

Three Months Ended
March 31,
--------------------------
2001 2000
---------- ----------

Net income $ 805,090 $ 453,937

Components of other comprehensive income:
Unrealized holding gains (losses) arising during the period
Before income tax and reclassification adjustments............ 864,531 (686,494)
Reclassification adjustments for net gain (losses) included
in net income.................................................. (353,015) 26,886
---------- ----------
Other comprehensive gain (losses), before income tax................. 511,516 (659,608)
Income tax expense (benefit) related to other
comprehensive income........................................... 204,607 (263,843)
---------- ----------
Total other comprehensive income (loss), net of income tax........... 306,909 (395,765)
---------- ----------

Comprehensive income.................................................. $1,111,999 $ 58,172
========== ==========

See notes to consolidated financial statements

5
6

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

Three Months Ended
March 31,
------------------------------
2001 2000
------------ ------------

OPERATING ACTIVITIES
Net income $ 805,090 $ 453,937
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................ 951,118 1,008,102
Provision for depreciation and amortization.............. 632,593 610,317
Amortization of investment security premiums and
accretion of discounts............................... 20,335 38,081
Deferred tax (benefit)/expense........................... (146,684) (97,464)

Loss/(gain) on sale of premises and equipment............ 13,195 824
Realized investment security (gains)/losses.............. (353,015) 26,886
(Increase)/decrease in accrued interest receivable....... 1,157,456 (156,260)
Increase/(decrease) in accrued interest payable.......... 299,310 314,504
Other.................................................... (1,417,245) (2,145,872)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,962,153 53,055
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities - AFS............... 9,652,796 4,684,487
Proceeds from maturity of investment securities - AFS............ 15,692,087 16,893,838
Purchase of investment securities - AFS.......................... (27,916,121) (22,469,514)
Net decrease/(increase) in loans to customers.................... 2,385,997 (17,347,623)
Proceeds from sale of premises and equipment..................... 87,478 117,660
Net proceeds from sale of other real estate...................... -0- 210,462
Capital expenditures............................................. (959,358) (1,692,551)
------------ ------------
NET CASH (USED) BY INVESTING ACTIVITIES (1,057,121) (19,603,241)
------------ ------------
FINANCING ACTIVITIES:
Net (decrease)/increase in demand deposits, NOW accounts, and
savings accounts............................................. (2,975,141) 7,260,243
Net increase/(decrease) in certificates of deposit............... 8,731,988 10,595,976
Net(decrease)/increase in short-term borrowings.................. (682,837) (1,256,228)
Decrease in FHLB borrowings...................................... -0- (2,000,000)
Decrease in capitalized lease obligations........................ (18,399) -0-
Decrease in long-term debt....................................... (239,851) (194,490)
Issuance of guaranteed preferred beneficial interest in
junior subordinated deferrable interest debentures........... -0- 10,000,000
Proceeds from issuance of common stock........................... 209,865 222,804
Cash dividends................................................... -0- (3,499,136)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,025,625 21,129,169
------------ ------------

Net increase in cash and cash equivalents.......................... $ 5,930,657 $ 1,578,983

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

CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 34,937,268 $ 28,376,494
============ ============

See notes to consolidated financial statements

6
7

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

Three Months Ended
March 31,
--------------------------
2001 2000
---------- ----------

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest..................................... $9,122,290 $7,779,228
Income taxes................................. 3,530 4,110

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

UPON THE PLEDGING OF PURCHASED SHARES TO OBTAIN ADDITIONAL ESOP DEBT OF
$1,076,958 ON DECEMBER 1, 1998, LONG-TERM DEBT WAS INCREASED AND EQUITY WAS
DECREASED. THE DEBT WAS REDUCED AND SHARES AMOUNTING TO $48,970 AND $38,143 WERE
RELEASED DURING THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000,
RESPECTIVELY, AS A RESULT OF PAYMENTS MADE BY THE COMPANY'S ESOP ON THE
OUTSTANDING ESOP DEBT.

NET UNREALIZED LOSSES ON INVESTMENT SECURITIES AVAILABLE FOR SALE INCREASED BY
$511,516 AND $659,608 DURING THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000,
RESPECTIVELY.

See notes to consolidated financial statements

7
8

COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001

NOTE A - BASIS OF PRESENTATION

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

NOTE B - INVESTMENT SECURITIES

At March 31, 2001 and December 31, 2000, the Company's investment securities
were 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 March 31, 2001, the Company's available-for-sale investment securities
reflected net unrealized gains of $1,173,718, which resulted in an increase in
shareholders' equity of $704,230, net of a deferred tax asset. The net increase
in shareholders' equity as a result of this adjustment in the fair value of the
available-for-sale investment securities from December 31, 2000 to March 31,
2001 was $306,909.

NOTE C - SHAREHOLDERS' EQUITY

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

In March 1996, the Company issued options to purchase a total of 270,000 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 has 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 were exercisable through March 27, 2001. In March 1997,
the Company issued options to purchase a total of 103,000 shares of the
Company's common stock to the Company's directors with an exercise price of
$12.50 per share, the market value (as determined by the Board of Directors) of
the Company's common stock at the time of issuance. These options are
exercisable through March 26, 2002. In March 1998, options to purchase a total
of 203,331 shares of the Company's common stock were issued to directors and
certain senior officers with an exercise price of $15.00 per share, the market
value (as determined by the Board of Directors) of the Company's common stock at
the time of

8
9

NOTE C - SHAREHOLDERS' EQUITY (CONTINUED)

issuance. These options are exercisable through March 25, 2003. In December
1999, options to purchase a total of 204,000 shares of the Company's common
stock were issued to directors and certain senior officers with an exercise
price of $20.00 per share, the market value (as determined by the Board of
Directors) of the Company's common stock at the time of issuance. These options
are exercisable through December 3, 2004. In August 2000, the Company granted
options to purchase an aggregate of 15,000 shares of the Company's common stock
to certain senior officers of Community Bank. Each of these options has an
exercise price of $18.00 per share, the market value (as determined by the Board
of Directors) of the Company's common stock at the time of issuance. These
options are exercisable through August 24, 2005. The Company did not receive any
payment in exchange for granting any of such options, which were granted in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act of 1933.

In March 2001, options to purchase 329,561 shares of the Company's common stock
were exercised with a total exercise price of $3,741,915. These options were
exercised in transactions whereby 207,886 shares of the Company's common stock
owned by the grantees of the options and valued at $18.00 per share (as
determined by the Board of Directors) were delivered to the Company in payment
of the exercise price under the options. The cash portion of these transactions
was immaterial and related almost entirely to the settlement of fractional
shares. These transactions resulted in a net increase of 121,675 shares in the
total outstanding shares of the Company's common stock at March 31, 2001. In
addition, options to purchase 35,000 shares of the Company's common stock
expired during the first quarter of 2001 without being exercised.

Options that have an exercise price below the current fair value of the
Company's common stock are assumed to be exercised in the calculation of diluted
average shares of common stock outstanding, causing the equivalent average
number of shares outstanding on a diluted basis for the three months ended March
31, 2001 to be 30,101 shares greater than that used to calculate basic earnings
per share for the three months ended March 31, 2001. Average shares outstanding
when assuming dilution were greater than average shares outstanding for basic
earnings per share by 207,749 shares for the three months ended March 31, 2000.

NOTE D - EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own shares of the Company's common stock. An employee becomes a
participant in the ESOP on June 30 or December 31 after completing 12 months of
employment during which the employee is credited with 1,000 or more hours of
service. Contributions by the Company to the ESOP are made at the discretion of
the Company's Board of Directors, but may not be less than the amount required
to cover the debt service on the ESOP loan. The Company's contributions are
allocated to eligible participants in proportion to their compensation, which
equals W-2 wages plus pre-tax reductions for the Company's cafeteria plan. The
Internal Revenue Code imposes a limit ($170,000 in 2001) on the amount of
compensation which may be considered under the ESOP.

9
10

NOTE D - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

guaranteed this debt and, in accordance with applicable accounting and reporting
guidelines, the debt has been recognized on the Company's consolidated balance
sheet, with an offsetting charge against equity. As principal payments are made
by the ESOP, the debt and offsetting charge against equity are reduced. The
shares securing the note are released on a pro rata basis by the lender as
monthly payments of principal and interest are made. As of March 31, 2001, there
were 194,980 unreleased shares with a fair value, based on an independent
valuation of $18 per share, of approximately $3,510,000. These shares are
subtracted from outstanding shares of the Company's common stock for earnings
per share calculations. Effective January 1, 1994, the Company applied the
accounting and reporting requirements of Statement of Position No. 93-6,
Employers' Accounting for Employee Stock Ownership Plans ("SOP 93-6"). Under the
provisions of SOP 93-6, the employer must recognize the indebtedness of its
sponsored ESOP on its financial statements and reduce its shareholders' equity
for shares of stock which have not been released by a lender to the ESOP for
allocation to its participating employees. The portion of payments made by the
Company to the ESOP on behalf of its participating employees which is used to
pay interest on the ESOP debt ($57,488 and $59,541 during the first quarter of
2001 and 2000, respectively) is classified as interest expense on the Company's
income statement.

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

At March 31, 2001 and December 31, 2000, the Company's financial statements
reflect long-term debt and a corresponding contra-equity account, as a result of
the ESOP debt, of $2,525,032 and $2,574,002, respectively.

Company contributions to the ESOP amounted to $101,556 and $97,684 for the three
months ended March 31, 2001 and 2000, respectively.

NOTE E - CONTINGENCIES

At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money Community Bank
had paid subcontractors in connection with the construction of a new Community
Bank office. Management of the Company commenced an investigation of the
expenditures. At the request of management, the architects and subcontractors
involved in the construction project made presentations to the Boards of
Directors of the Company and Community Bank on July 15 and July 18, 2000,
respectively. At the July 18, 2000 meeting of the Board of Directors of
Community Bank, another director made a presentation alleging that Community
Bank had been overcharged by subcontractors on that construction project and
another current construction project. On July 18, 2000, the Boards of Directors
of the Company and Community Bank appointed a joint committee comprised of
independent directors of the Company and of Community Bank to investigate the
alleged overcharges. Upon completion of its investigation, the joint committee
is to inform the Boards of Directors of the Company and Community Bank of its
findings and recommendations. The joint committee has retained legal counsel and
an independent accounting firm to assist the committee in its investigation.
Management has also been informed that the directors of Community Bank who
alleged the construction overcharges have contacted bank regulatory agencies and
law enforcement authorities. Management believes that these agencies and
authorities either have conducted or are currently conducting investigations
regarding this matter.

On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community Bank. The complaint alleges that the
directors, officers and employee named as

10
11

NOTE E - CONTINGENCIES (CONTINUED)

defendants in the complaint breached their fiduciary duties, failed to properly
supervise officers and agents of the Company and Community Bank, and permitted
waste of corporate assets by allegedly permitting the subcontractor defendants
to overcharge Community Bank in connection with the construction of two new
Community Bank offices, and to perform the construction work without written
contracts, budgets, performance guarantees and assurances of indemnification. In
addition, the complaint alleges that Kennon R. Patterson, Sr., the Chairman,
President and Chief Executive Officer of the Company, breached his fiduciary
duties by allegedly permitting the two named subcontractors to overcharge for
work performed on the two construction projects in exchange for allegedly
discounted charges for work these subcontractors performed in connection with
the construction of Mr. Patterson's residence. The complaint further alleges
that the director defendants knew or should have known of this alleged
arrangement between Mr. Patterson and the subcontractors. The complaint also
alleges that Mr. Patterson, the Community Bank employee and the two
subcontractor defendants made false representations and suppressed information
about the alleged overcharges and arrangement between Mr. Patterson and the
subcontractors. On August 15, 2000, the plaintiffs filed an amended complaint
adding Andy C. Mann, a shareholder of the Company, as a plaintiff and adding a
former director of the Company and Community Bank as a defendant. The amended
complaint generally reiterates the allegations of the original complaint. In
addition, the amended complaint alleges that Community Bank was overcharged on
all construction projects from January 1997 to the present. The amended
complaint also alleges that the defendants breached their fiduciary duties and
are guilty of gross financial mismanagement, including allegations concerning
the making or approval of certain loans and taking allegedly improper actions to
conceal the fact that certain loans were uncollectible. On September 18, 2000
the plaintiffs filed a second amended complaint. The second amended complaint
generally reiterates the allegations of the original and first amended
complaints. In addition, the second amended complaint alleges that the
plaintiffs were improperly denied their rights to inspect and copy certain
records of the Company and Community Bank. The second amended complaint also
alleges that the directors of the Company abdicated their roles as directors
either by express agreement or as a result of wantonness and gross negligence.
The second amended complaint asserts that the counts involving inspection of
corporate records and director abdication are individual, nonderivative claims.
The second amended complaint seeks, on behalf of the Company, an unspecified
amount of compensatory damages in excess of $1 million, punitive damages,
disgorgement of allegedly improperly paid profits and appropriate equitable
relief. Upon motion of the defendants, the case was transferred to the state
Circuit Court in Blount County, Alabama by order dated September 21, 2000, as
amended on October 12, 2000. On August 24, 2000, the Board of Directors of the
Company designated the directors of the Company who serve on the joint
investigative committee as a special litigation committee to investigate and
evaluate the allegations and issues raised in this lawsuit and to arrive at such
decisions and take such action as the special litigation committee deems
appropriate. At a hearing on February 23, 2001 the court stayed discovery with
respect to the Company, Community Bank and the directors, officers and employees
of each until May 24, 2001, at which time the court expects to receive a report
from the special litigation committee. Because the special litigation committee
has not yet completed its investigation, and as a result of the inherent
uncertainties of the litigation process, the Company is unable at this time to
predict the outcome of this lawsuit and its effect on the Company's financial
condition and results of operations. Regardless of the outcome, however, this
lawsuit could be costly, time-consuming and a diversion of management's
attention.

On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. The complaint alleged that the directors of the Company
breached their fiduciary duty to the Company and its shareholders, engaged in
fraud, fraudulent concealment, suppression of material fact and suppression of
the plaintiff shareholders, failed to supervise management, and conspired to
conceal wrongful acts from the Company's shareholders and paid themselves
excessive 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

11
12

NOTE E - CONTINGENCIES (CONTINUED)

misappropriation of funds. The complaint sought an unspecified amount of
compensatory and punitive damages, removal of the current directors, appointment
of a new Board of Directors, and attorneys fees and cost. On December 21, 1998,
the Company and its directors filed a motion with the court seeking to have the
complaint dismissed. On March 1, 1999, the Company's Board of Directors
appointed a special Board committee, comprised of non-employee directors of the
Company, to review the plaintiffs' 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 August 3, 2000, the Company, Community Bank and the
Company's directors filed a motion to stay the proceedings until the Company's
and Community Bank's joint investigative committee had completed its
investigation of the alleged construction overcharges discussed above. At the
request of the Company and the other defendants in the action, the court
continued a hearing on the motion to dismiss. On February 23, 2001, the court
indicated that there was no reason to continue the stay of this action. The
parties are awaiting a hearing on the defendants' motion to dismiss the case.
Management of the Company believes that the plaintiffs' allegations are false
and that the action lacks merit. The Company and its directors intend to defend
the action vigorously, 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. Regardless of the outcome, however, this lawsuit could be
costly, time consuming and a diversion of management's attention.

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

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

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

12
13

NOTE E - CONTINGENCIES (CONTINUED)

On June 28, 2000, Community Bank filed an action in the United States District
Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc.,
an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug
Broaddus, the owners of the dealership, several employees and former employees
of the dealership and Gerald Scot Parrish, a former employee of Community Bank,
with respect to certain loans originated during 1998 in Community Bank's
Wal-Mart office in Ft. Payne, Alabama. In the complaint Community Bank alleged
that the defendants willingly and knowingly conducted, participated in, were
employed by or associated with, or aided and abetted an enterprise within the
meaning of the Racketeer Influenced and Corrupt Organizations Act (RICO) for the
purpose of defrauding Community Bank. The complaint also asserted that the
defendants committed fraud, misrepresentation and deceit by submitting to
Community Bank and/or approving applications for automobile loans which
contained false and/or fraudulent information for the purpose of deceiving,
influencing and persuading Community Bank to provide loans to customers of the
automobile dealership who were otherwise not qualified to receive such loans,
and suppressed material facts regarding the veracity of information contained in
loan applications and the ability of persons seeking the loans to repay them.
Community Bank also alleged in the complaint that the automobile dealership is
responsible for the acts of its officers, agents and employees, and that the
dealership and its management failed to adequately train and/or supervise its
employees. The complaint stated that the defendants participated in a conspiracy
to violate RICO and Alabama statutes dealing with fraud, misrepresentation and
suppression of material facts, and asserted civil liability under Alabama law
for violation of federal statutes dealing with financial institution fraud, mail
and wire fraud and making false statements for the purpose of influencing the
actions of a financial institution upon an application or loan. On June 29, 2000
and August 31, 2000 the court granted Community Bank's motions to dismiss
without prejudice two of the employees of the automobile dealership as
defendants in the action. On September 13, 2000, the court granted Mr. Parrish's
motion to dismiss the complaint, but granted Community Bank 15 days to amend the
complaint. On September 27, 2000, Community Bank filed an amended complaint
which generally reiterated the allegations of the original complaint and added
specific information concerning the allegedly fraudulent activity and the use of
the United States mail, telephone and other wire transmissions in the conduct of
such activity. On December 1, 2000, the court dismissed Community Bank's claims
based upon mail and wire fraud in the amended complaint but otherwise denied Mr.
Parrish's motion to dismiss the complaint. The defendants have filed answers to
the amended complaint which generally deny the material allegations in the
complaint and allege that any injury suffered by Community Bank was the result
of the contributory negligence of Community Bank, its officers, employees and
agents. In the lawsuit, Community Bank seeks damages of an unspecified amount to
recover losses incurred in connection with the loans made at Community Bank's
Wal-Mart office in Ft. Payne, Alabama, along with all costs associated with the
lawsuit. Any amounts received by Community Bank as a result of this litigation
will be treated as a recovery on loan losses.

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

13
14

NOTE F - SUBSEQUENT EVENTS

On April 18, 2001, the Board of Directors of Community Bank (the "Bank"), a
wholly owned subsidiary of Community Bancshares, Inc. (the "Company"), made
written assurances to the Regional Director of the Federal Deposit Insurance
Corporation's Atlanta Regional Office and the Alabama Superintendent of Banks
(the "Supervisory Agencies"). In making these written assurances, the Bank
committed to take certain actions. The Bank committed to adopt a management plan
relating to bank officers, change the composition of the Bank's Board to include
a majority of outside directors who are neither bank officers nor relatives of
bank officers or principal shareholders, develop an educational program for bank
directors, provide for periodic review of bank policies by the Board, require
periodic reporting of policy exceptions to the Board, and adopt an ethics policy
for bank officers and directors. The Bank also committed to adopt and implement
policies and procedures relating to certain areas of bank operations including:
strategic planning, budgeting, acquisition of property for future expansion,
loan approval, loan documentation, loan review, the allowance for loan and lease
losses, reduction and charge-off of nonperforming loans, liquidity and interest
rate risk, and internal routine and controls. The Bank has also committed to
certain financial goals relating to capital ratios, dependence upon potentially
volatile liabilities, and adequacy of the allowance for loan and lease losses.
In connection with these financial goals, the Bank committed to pay no cash
dividends without the concurrence of it Supervisory Agencies. It should also be
noted that the Bank may, at various times, be subject to the provisions of
Section 5-5A-21 of the Alabama Banking Code requiring the prior approval of cash
dividends by the Alabama Superintendent of Banks. Management of the Company
cannot currently estimate the effects of these commitments on the financial
condition, liquidity and results of operations of the Bank or the Company.

[The remainder of this page intentionally left blank]

14
15

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

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

Certain statements in this Report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are not based on historical facts and may be identified by their
reference to a future period or by the use of forward-looking terminology, such
as "anticipate," "estimate," "expect," "may" and "should." These forward-looking
statements include, without limitation, those relating to the Company's future
growth and profitability, pending litigation, non-compliant and impaired loans
originated in Community Bank's Double Springs, Alabama office, capital resources
operating strategy, deposits, consumer base, allowance for loan losses,
noninterest expenses, market risk and commitments to regulatory authorities. We
caution you not to place undue reliance on these forward-looking statements.
Actual results could differ materially from those indicated in such
forward-looking statements due to a variety of factors. These factors include,
but are not limited to, changes in economic conditions and 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,
unexpected financial results or outcomes of legal proceedings, 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 and Double Springs, Alabama offices 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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 AND 2000

SUMMARY

The Company's net income for the three months ended March 31, 2001 was
approximately $805,000, an increase of $351,000, or 77.3%, from $454,000 for the
same period in 2000. Basic net income per share was $.18 for the three months
ended March 31, 2001, as compared to $.10 for the same period in 2000. Diluted
net income per share was $.18 and $.10 for the three months ended March 31, 2001
and 2000, respectively. This increase during the first quarter of 2001 compared
to the same period of 2000 primarily resulted from an increase of approximately
$167,000, or 6.7%, in noninterest income and a reduction of approximately
$804,000, or 10.5%, in noninterest expense during the first quarter of 2001
compared to the first quarter of 2000, which offset a decline of approximately
$560,000, or 8.2%, in net interest income, before provision for loan losses
during the first quarter of 2001 compared to the first quarter of 2000. The
provision for loan losses decreased $57,000, or 5.7%, to approximately $951,000
during the three months ended March 31, 2001, from approximately $1,008,000 in
the same period of 2000.

NET INTEREST INCOME

Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of the Company's
net income. Net interest income, before provision for loan losses, decreased
$560,000, or 8.2%, to approximately $6,290,000 for the three months ended March
31, 2001,from approximately $6,850,000 for the same period of 2000.
Revenues from interest earning assets of the Company increased $790,000, or
5.5%, to approximately $15,105,000 for the three months ended March 31, 2001
from approximately $14,315,000 for the same period in 2000. This increase was
due to both higher average outstanding balances of earning assets coupled with a
slight increase in the average yield on these balances. Average earning assets
outstanding during the first quarter of 2001 were approximately $638,829,000,
which represents an increase of approximately $35,483,000, or 5.9%, from
approximately $603,346,000 for the first quarter of 2000. In addition, the
Company's fully taxable equivalent yield on its average earning assets increased
eight basis points to 9.69% for the first three months of 2001, compared to
9.61% for the same period of 2000. Interest expense for the three months ended
March 31, 2001 increased approximately $1,350,000, or 18.1%, to $8,815,000 from
$7,465,000 for the corresponding period of 2000. This increase was due to both
higher average outstanding balances of interest-bearing liabilities and an
increase in the average rate paid on these balances. Average interest-bearing
liabilities during the first quarter of 2001 were approximately $596,803,000,
which represents an increase of $32,903,000, or 5.8%, from approximately
$563,900,000 for the same period of 2000. The rate paid on average
interest-bearing liabilities increased 67 basis points to 5.99% for the three
month period ended March 31, 2001, compared to 5.32% for the first three months
of 2000. A portion of this increase in the rate paid on average interest-
bearing liabilities was attributable to the Company's junior subordinated
deferrable interest debentures, which carry an annual interest rate of 10.875%
and were outstanding for the entire first quarter of 2001, compared to only nine
days during the first quarter of 2000. In addition, during the first and second
quarters of 2000 Community Bank offered several special certificate of deposit
products at higher rates with maturities ranging from 11 to 24 months.

The Company's net interest margin, on a fully taxable equivalent basis, for the
three months ended March 31, 2001 decreased 55 basis points to 4.09%, from 4.64%
for the three months ended March 31, 2000, due to a decline in net interest
income, on a fully taxable equivalent basis, coupled with an increase in average
interest earning assets. Net interest margin is computed by dividing net
interest income, on a fully taxable equivalent basis, by average interest
earning assets. This ratio represents the difference between the average yield
returned on average interest earning assets and the average rate paid on funds
used to support those interest earning assets, including both interest-bearing
and noninterest-bearing sources.

The Company's net interest spread, on a fully taxable equivalent basis, for the
three months ended March 31, 2001 decreased 59 basis points to 3.7%, from 4.29%
for the three months ended March 31, 2000, as the average cost of
interest-bearing sources of funds increased 67 basis points while the fully
taxable equivalent average yield on interest earning assets increased eight
basis points. Net interest spread measures the difference between the average
yield on interest earning assets and the average rate paid on interest-bearing
sources of funds.

PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

The Company maintains an allowance for loans losses to absorb losses inherent in
the loan portfolio. The allowance is based upon management's estimated range of
those losses. Actual losses for these loans may vary significantly from this
estimate. At March 31, 2001, the allowance for loan losses was approximately
$7,493,000, which represented a $386,000, or 5.4%, increase over the December
31, 2000 amount of $7,107,000. This increase was primarily due to a provision
made in connection with certain loans originated in Community Bank's Double
Springs, Alabama, office, which are discussed below. As a percentage of total
loans, net of unearned income, the allowance for loan losses increased to 1.43%
at March 31, 2001 from 1.35% at December 31, 2000. Management believes that the
allowance for loan losses at March 31, 2001 is adequate to absorb known risks in
the Company's loan portfolio based upon the Company's historical experience. No
assurance can be given, however, that increased loan volume, adverse economic
conditions or other circumstances will not result in increased losses in the
Company's loan portfolio or additional provisions to the allowance for loan
losses.

In assessing the adequacy of the allowance for loan losses, management relies
predominantly on its ongoing review of the loan portfolio, 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. Loans
identified as having increased credit risk are classified in accordance with the
Company's loan policy and appropriate reserves are established for each loan
classification category based on pre-determined reserve percentages. Reserves
are established for the remaining unclassified portion of the loan portfolio
based on actual historical loss factors associated with certain loan types.

The provision for loan losses is charged to current earnings to bring the
allowance for loan losses to a level deemed appropriate by management. Actual
loan losses are charged directly to the allowance for loan losses while
recoveries on charged-off loans are credited to the allowance for loan losses.
The amount of the provision for loan losses is based on the growth of the loan
portfolio, the amount of net loan losses incurred and management's estimation of
potential future losses based on an evaluation of the risk in the loan
portfolio. The provision for loan losses decreased $57,000, or 5.7%, to
approximately $951,000 for the three months ended March 31, 2001 from
approximately $1,008,000 for the same period of 2000. This decrease in the
provision for loan losses reflects a 17.7% decline in gross loans charged-off
during the first quarter of 2001 compared to the same period of 2000. The
decline in charge-offs is primarily due to the high level of loan losses
recognized in 2000. Charge-offs exceeded recoveries by approximately $565,000
for the three months ended March 31, 2001, compared to approximately $770,000
for the same period of 2000.

In March 2001, management of Community Bank became aware that an employee in
Community Bank's Double Springs, Alabama location had improperly originated
approximately $1,200,000 in loans primarily during 2000 and the first quarter of
2001, in violation of Community Bank's lending policies, and had manipulated
loan payments to make it falsely appear that payments under the loans were
current. The bank employee has admitted wrongdoing in connection with the loans
and his employment with Community Bank has been terminated. Management has
notified federal and state banking regulatory authorities, law enforcement
authorities and the Company's fidelity bond carrier, and is cooperating with law
enforcement authorities in their investigation of the matter. While the Company
has not completed its investigation of these loans, management's estimate of the
impairment of such loans at March 31, 2001 was approximately $839,000. As of
December 31, 2000, the Company had made a provision and increased its allowance
for loan losses by approximately $501,000 to reflect the estimated impairment of
these loans at year-end 2000. The Company made a additional provision and
increased its allowance for loan losses by approximately $338,000 to reflect
this increase in the estimated impairment of these loans at March 31, 2001. An
appropriate charge with respect to actual losses determined will be made to the
Company's allowance for loan losses.

NONINTEREST INCOME

Noninterest income for the three months ended March 31, 2001 increased $167,000,
or 6.7%, to approximately $2,662,000, from approximately $2,495,000 for the
same period of 2000, due to gains recognized on the sale of investment
securities. Service charges on deposit accounts increased $44,000, or 4.5%, to
approximately $1,026,000 for the first quarter of 2001 from approximately
$982,000 in the first quarter of 2000. Other noninterest income decreased
$169,000, or 28.7%, to approximately $420,000 for the first quarter of 2001 from
approximately $589,000 for the same period of 2000. This decrease was primarily
due to decreases in service fees through the Company's appraisal company
subsidiary and profit sharing income through the Company's insurance company
subsidiary. During the first quarter of 2001, insurance commissions decreased
approximately $38,000, or 6.6%, to approximately $541,000 and debt cancellation
fees decreased approximately $44,000, or 22.4%, to approximately $152,000,
compared to the same period of 2000. The Company recorded net gains on the sale
of investment securities of approximately $353,000 during the three months ended
March 31, 2001, compared to net losses on the sale of investment securities of
approximately $27,000 for the same period of 2000.

NONINTEREST EXPENSES

Noninterest expenses for the three months ended March 31, 2001 were
approximately $6,865,000, representing a $804,000, or 10.5%, decrease from
$7,669,000 for the same period of 2000. This decrease reflects efforts begun by
management in the first quarter of 2000 to limit noninterest expenses. The
primary components of noninterest expenses are salaries and employee benefits,
which decreased $755,000, or 15.6%, to approximately $4,081,000 for the three
months ended March 31, 2001 from approximately $4,836,000 for the same period of
2000. The decrease in salaries and employee benefits was primarily due to salary
reductions at the executive officer level of Community Bank and the Company and
staff reductions through attrition and down-sizing. Occupancy costs increased
$67,000, or 10.4%, to approximately $712,000 for the first quarter of 2001 from
approximately $645,000 for the same period of 2000, primarily due to higher
costs associated with the Company's expansion activities during 2000. Furniture
and equipment expenses for the three month periods ended March 31, 2001 declined
$13,000, or 2.8%, to approximately $450,000 for the three months ended March 31,
2001 from approximately $463,000 for the same period of 2000, primarily due to a
reduction in the number of automobiles owned or leased by the Company and its
subsidiaries. Director and committee fees decreased $31,000, or 20.9%, to
approximately $117,000 for the first quarter of 2001 from approximately $148,000
for the first quarter of 2000. Other operating expenses were approximately
$1,504,000 and $1,576,000 for the three month periods ended March 31, 2001 and
2000, respectively. This decrease of approximately $72,000, or 4.6%, was
primarily due to reductions in advertising and promotions, travel and
entertainment, civic and social dues and donations.

INCOME TAXES

The Company attempts to maximize its net income through active tax planning. The
provision for income taxes increased $118,000, or 55.1%, to approximately
$332,000 for the three months ended March 31, 2001 from approximately $214,000
for the same period of 2000. The effective tax rate of approximately 29.2% for
the first quarter of 2001 was 85.9% of the statutory Federal tax rate and
represents a decrease from the effective tax rate of approximately 32.0% for the
same period of 2000. This decrease is in part due to the effect of an increase
in tax-exempt interest income.

[The remainder of this page intentionally left blank]

FINANCIAL CONDITION

MARCH 31, 2001 COMPARED TO DECEMBER 31, 2000

LOANS

Loans comprised the largest single category of the Company's earning assets at
March 31, 2001. Loans, net of unearned income and reserve for loan losses, were
71.9% and 73.1% of total assets at March 31, 2001 and December 31, 2000,
respectively. Loans, net of unearned income and allowance for loan losses, were
approximately $517,872,000 at March 31, 2001, representing a $3,337,000, or
0.6%, decrease from the December 31, 2000 total of approximately $521,209,000.
This decrease primarily resulted from a decline in outstanding loans originated
by 1st Community Credit Corporation, the Company's finance company subsidiary.

Commercial, financial and agricultural loans increased by approximately
$6,411,000, or 4.6%, to approximately $147,184,000 at March 31, 2001 from
approximately $140,773,000 at December 31, 2000, and represented 28.0% of total
loans at March 31, 2001, compared to 26.6% at December 31, 2000. Real
estate-mortgage loans decreased by approximately $2,864,000, or 1.2%, to
approximately $233,728,000 at March 31, 2001 from approximately $236,592,000 at
December 31, 2000, and represented 44.5% of total loans at March 31, 2001,
compared to 44.8% at December 31, 2000. Consumer loans decreased by
approximately $5,259,000, or 3.6%, to approximately $140,414,000 at March 31,
2001 from $145,673,000 at December 31, 2000, and represented 26.7% of total
loans at March 31, 2000, compared to 27.6% a December 31, 2000. Real
estate-construction loans decreased by approximately $1,284,000, or 23.7%, to
approximately $4,145,000 at march 31, 2001 from approximately $5,429,000 at
December 31, 2000, and represented 0.8% of total loans at March 31, 2001,
compared to 1.0% at December 31, 2000.

INVESTMENT SECURITIES AND OTHER EARNING ASSETS

Investment securities increased $3,415,000, or 3.4%, to approximately
$104,985,000 at March 31, 2001 from approximately $101,570,000 at December 31,
2000. The investment securities portfolio is used to make various term
investments, to provide a source of liquidity and to serve as collateral to
secure certain government deposits. Short-term investments in the form of
interest-bearing deposits with banks were $700,000 at both March 31, 2001 and
December 31, 2000. The Company had $11,000,000 in federal funds sold at March
31, 2001, compared to $3,000,000 at December 31, 2000, representing an increase
of $8,000,000, or 266.7%. The increase in federal funds sold was primarily due
to growth in deposits coupled with the decline in outstanding loans during the
first quarter of 2001.

ASSET QUALITY

Between December 31, 2000 and March 31, 2001, the ratio of the allowance for
loan losses to total nonperforming assets (defined as nonaccruing loans, loans
past due 90 days or greater, restructured loans, nonaccruing securities, and
other real estate) declined from 112.3% at year-end 2000 to 105.3% at March
31,2001. The ratio of total nonperforming assets to total assets increased to
1.0% at March 31, 2001 from 0.9% at year-end 2000, while the ratio of
nonperforming loans to total loans, net of unearned income, increased to 0.9% at
March 31, 2001 from 0.8% at December 31, 2000. These changes were primarily due
to an increase in nonaccruing loans of $897,000, or 47.8%, to approximately
$2,774,000 at March 31, 2001 from $1,877,000 at December 31, 2000 and an
increase in other real estate of $392,000, or 20.8%, to approximately $2,273,000
at March 31, 2001 from approximately $1,881,000 at December 31, 2000. These
increases were partially offset by a decline in loans past due 90 days or more
of $501,000, or 19.5%, to approximately $2,070,000 at March 31, 2001 from
approximately $2,571,000 at December 31, 2000. Total nonperforming assets
increased $788,000, or 12.5%, to approximately $7,117,000 at March 31, 2001 from
approximately $6,329,000 at December 31, 2000.

In March 2001, management of Community Bank became aware that an employee in
Community Bank's Double Springs, Alabama location had improperly originated
approximately $1,200,000 in loans, primarily during 2000 and the first quarter
of 2001, in violation of Community Bank's lending policies, and had manipulated
loan payments to make it falsely appear that payments under the loans were
current. The bank employee has admitted wrongdoing in connection with the loans
and his employment with Community Bank has been terminated. Management has
notified federal and state banking regulatory authorities, law enforcement
authorities and the Company's fidelity bond carrier, and is cooperating with law
enforcement authorities in their investigation of the matter. While the Company
has not completed its investigation of these loans, management's estimate of the
impairment of such loans at March 31, 2001 was approximately $839,000. As of
December 31, 2000, the Company had made a provision and increased its allowance
for loan losses by approximately $501,000 to reflect the estimated impairment of
these loans at year-end 2000. The Company made a additional provision and
increased its allowance for loan losses by approximately $338,000 to reflect the
increase in the estimated impairment of these loans at March 31, 2001. An
appropriate charge with respect to actual losses determined will be made to the
Company's allowance for loan losses. See "- Results of Operations - Provision
for Loan Losses and Allowance for Loan Losses" above.

DEPOSITS

Total deposits of approximately $606,658,000 at March 31, 2001 reflected an
increase of $5,757,000, or 1.0%, from approximately $600,901,000 at year-end
2000. Deposits are Community Bank's primary source of funds. Noninterest-bearing
deposits increased $1,258,000, or 1.9%, to approximately $68,544,000 at March
31, 2001 from approximately $67,286,000 at December 31, 2000, while
interest-bearing deposits increased $4,498,000, or 0.8%, to approximately
$538,113,000 at March 31, 2001 from approximately $533,615,000 at December 31,
2000. Certificates of deposit of $100,000 or more increased $2,774,000, or 2.7%,
to approximately $103,786,000 at March 31, 2001 from, approximately $101,012,000
at December 31, 2000.

BORROWINGS

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

Other short-term borrowings totaled approximately $1,582,000 at March 31, 2001,
a $683,000, or 30.1%, decrease from approximately $2,265,000 at December 31,
2000. At March 31, 2001, short-term borrowings primarily consisted of the U. S.
Treasury Tax and Loan Note Option account and securities sold under agreement to
repurchase. Balances under the U. S. Treasury Tax and Loan Note Option are
subject to call at any time by the U. S. Treasury. The decrease during the first
quarter of 2001 was due to a decrease of approximately $1,165,000 in balances
outstanding under the U. S. Treasury Tax and Loan Note Option, which was
partially offset by an increase of approximately $482,000 in securities sold
under agreement to repurchase.

At March 31, 2001 and December 31, 2000, the Company had notes payable totaling
approximately $5,435,000 and $5,675,000, respectively.

In December 1992, the Company entered into a loan agreement with a regional bank
for amounts up to $6,500,000. At March 31, 2001 and December 31, 2000, the
amounts outstanding under this loan agreement were approximately $1,245,000 and
$1,423,000, respectively, due December 2002, bearing interest at a floating
prime rate, and collateralized by 100% of the common stock of Community Bank,
the Company's subsidiary bank. The note agreement contains provisions which
limit the Company's right to transfer or issue shares of Community Bank's stock.
Principal payments of $59,292 are due monthly; however, the Company has the
option of postponing up to 24 monthly principal payments, provided that no more
than six consecutively scheduled installments are deferred. The Company did not
postpone any principal payments under this loan agreement during the first
quarter of 2001.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase shares of the Company's common stock in the
Company's initial public offering. The note was originally secured by 80,000
shares of purchased stock. The promissory note has been refinanced as additional
shares were purchased by the ESOP. On December 1, 1998, this note was refinanced
and an additional 56,682 shares of the Company's common stock were obtained by
the ESOP. This refinanced note, in the original principal of $2,963,842, was
secured by 261,433 shares of the Company's common stock, and bears interest at a
floating rate, with principal and interest payments due monthly through November
16, 2010, with the remaining principal, if any, due on that date. The initial
monthly principal and interest payment on this debt in December 1998 was
$31,677. As changes occur in the interest rate on the loan, appropriate
adjustments are made to the monthly principal and interest payments. At March
31, 2001, the monthly payment was $33,852. The Company has guaranteed this debt
and, in accordance with applicable accounting and reporting guidelines, the debt
has been recognized on the Company's consolidated balance sheet, with an
offsetting charge against equity. As principal payments are made by the ESOP,
the debt and offsetting charge against equity are reduced. The shares securing
the note are released on a pro rata basis by the lender as monthly payments of
principal and interest are made. The outstanding balance of this note was
approximately $2,562,000 at March 31, 2001 and approximately $2,606,000 at
December 31, 2000, and was secured by 194,980 and 199,877 unreleased shares of
the Company's common stock at March 31, 2001 and December 31, 2000,
respectively.

On October 4, 1994, the Company entered into a 20-year subordinated installment
capital note due October 1, 2014 for the purchase of treasury stock. Monthly
principal and interest payments of $15,506 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 approximately
$1,628,000 at March 31, 2001 and $1,646,000 at December 31, 2000.

Since June 1999, Community Bank has borrowed funds under the Federal Home Loan
Bank of Atlanta's (FHLB-Atlanta) "Convertible Advance Program." These advances
have had original maturities of 10 years, with stated call features during the
life of the obligation, at fixed interest rates for the life of the obligations.
Principal is due at final maturity or on stated call dates, with interest
payable each quarter. On June 1, 1999, Community Bank, the Company's bank
subsidiary, 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 interest 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 under the same "Convertible Advance
Program." This advance, totaling $40,000,000 at December 31, 1999, had a final
maturity of September 1, 2009 (120 months), with a call feature every six months
during the life of the obligation, and carried a fixed rate of 4.99% per annum.
Due to the call of this obligation on March 1, 2000, Community Bank made a
$2,000,000 reduction in the amount advanced under the FHLB-Atlanta "Convertible
Advance Program" and refinanced $38,000,000. This new obligation has a final
maturity of March 1, 2010 (120 months), a call feature every 12 months during
the life of the obligation, and a fixed interest rate of 5.93% per annum. This
advance was not called on March 1, 2001. Outstanding funds advanced to Community
Bank under the FHLB-Atlanta "Convertible Advance Program" totaled $38,000,000 at
March 31, 2001.

In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). The proceeds from the issuance
of the Capital Securities and common securities ($310,000) were used by the
Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. The
principal balance outstanding is due at maturity on March 8, 2030. However, as
specified in the indenture, the debentures can be redeemed prior to maturity at
a redemption price equal to a percentage of the principal amount, ranging from
105.438% in the year 2010 to 100.00% in and after the year 2020, plus accrued
but unpaid interest. As of March 31, 2001, the Company's consolidated financial
statements reflected $10,000,000 in junior subordinated deferrable interest
debentures, after the effects of elimination.

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

Notes Subordinated FHLB Junior
Payable Debt Borrowings Subordinated
Debentures
--------------- ----------------- ---------------- ------------------

2001......................................... $ 655,311 $ 55,354 $ -0- $ -0-
2002......................................... 893,705 78,461 38,000,000 -0-
2003......................................... 200,287 84,133 -0- -0-
2004......................................... 220,165 90,215 -0- -0-
2005......................................... 242,015 96,737 -0- -0-
Thereafter................................... 1,595,710 1,223,260 -0- 10,000,000
--------------- ----------------- ---------------- ------------------
$ 3,807,193 $ 1,628,160 $ 38,000,000 $ 10,000,000
=============== ================= ================ ==================

SHAREHOLDERS' EQUITY

The Company's shareholders' equity increased $2,198,000, or 5.3%, to
approximately $43,388,000 at March 31, 2001 from approximately $41,190,000 at
December 31, 2000, due to net earnings of approximately $805,000, a reduction in
unearned ESOP shares of approximately $49,000 coupled with an increase in
capital surplus of approximately $39,000 resulting from compensation expense
recorded on released ESOP shares, the issuance of additional common stock of
approximately $210,000, an increase in unrealized losses, net of a deferred tax
assets, on securities available for sale totaling approximately $307,000 and an
increase in capital surplus of approximately $788,000 for the tax benefit
associated with the exercise of stock options in March 2001.

CAPITAL RESOURCES

Bank regulatory authorities have placed increased emphasis on the maintenance of
adequate capital, and subsequently developed risk-based capital guidelines. The
guidelines take into consideration risk factors, as defined by regulators,
associated with various categories of assets, both on and off the balance sheet.
Under the guidelines, capital strength is measured in two tiers which are used
in conjunction with risk-adjusted assets to determine the risk-based capital
ratios. The Company's Tier I capital, which consists of common equity and junior
subordinated deferrable interest debentures, less goodwill and unrealized gains
on debt securities, amounted to approximately $47,944,000 at March 31, 2001.
Tier II capital components, totaling approximately $7,770,000 at March 31, 2001,
include supplemental capital components such as qualifying allowance for loan
losses and qualifying subordinated debt. Tier I capital plus Tier II capital
components are referred to as Total Risk-Based capital and were approximately
$55,714,000 at March 31, 2001.

As of March 31, 2001, the Company and Community Bank, its banking subsidiary,
were classified as well capitalized under the financial institutions regulatory
framework. Management has reviewed and will continue to monitor the Company's
asset mix, product pricing and loan loss allowance, which are the areas
determined to be most affected by these requirements.

On April 9, 2001, the Company's Board of Directors entered into a memorandum of
understanding with the Federal Reserve Bank of Atlanta. As part of this
agreement, the Company agreed to maintain a quarterly Tier I leverage capital
ratio (the ratio of Tier I capital to average assets, less goodwill) of at least
6.5%. At March 31, 2001, the Company's Tier I leverage capital ratio was 6.78%.
On April 18, 2001, the Board of Directors of Community Bank, the Company's
subsidiary bank, also made a commitment to the Regional Director of the Federal
Deposit Insurance Corporation's Atlanta Regional Office and the Alabama
Superintendent of Bank's with regard to certain financial goals related to
Community Bank's capital ratios.

[The remainder of this page intentionally left blank]

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The 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. During the first quarter of
2001, Community Bank experienced increases in both its interest earning assets
and its interest bearing liabilities repricing within one year compared to
year-end 2000. While the Company remained more liability sensitive at March 31,
2001, indicating that it had more interest bearing liabilities than interest
earning assets repricing during the twelve months ending March 31, 2002, rate
sensitive assets increased more than rate sensitive liabilities during the first
quarter of 2000 and resulted in a slight improvement in the Company's static gap
position. The cumulative static gap position of rate sensitive assets to rate
sensitive liabilities at March 31, 2000 was: i) 68% at 30 days; ii) 65% at 90
days; iii) 62% at 180 days; and iv) 56% at 365 days.

The interest rate shock analysis measures the impact on Community Bank's net
interest income as a result of immediate and sustained shift in interest rates.
The movement in market rates are based on statistical regression analyses while
management makes assumptions concerning balance sheet growth and the magnitude
of interest rate movements for certain interest earning asset and
interest-bearing liabilities. Using actual maturity and repricing opportunities
of Community Bank's portfolio, in conjunction with management's assumptions, a
rate shock analysis is performed using a plus 200 basis points shift and a minus
200 basis points shift in interest rates. Based on the Company's March 31, 2001
Asset/Liability Analysis, the improvement in net interest income, over the next
12 months, resulting from a 200 basis points decrease in the interest rate
environment would result in a $1,598,000, or 5.9%, decrease in net interest
income. Conversely, a 200 basis points increase in interest rates would result
in a $171,000, or 0.6%, decrease in net interest income for the same period.

[The remainder of this page intentionally left blank]

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There have been no material developments in the legal proceedings disclosed in
the section captioned "Item 3 - Legal Proceedings" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

In February 2001, the Company issued an aggregate of 11,661 shares of its 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 of 1933.

ITEM 5 - OTHER INFORMATION

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit Number Description of Exhibit
-------------- ----------------------

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

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

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

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

11 Computation of Earnings Per Share

(b) Reports on Form 8-K

The Company filed the following current report on Form 8-K during the
quarter ended March 31, 2001:

1. Current Report on Form 8-K filed February 15, 2001, and
reporting changes in certifying accountant under "Item 4.
Changes in Registrant's Certifying Accountant."

[The remainder of this page intentionally left blank]

SIGNATURES

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

COMMUNITY BANCSHARES, INC

May 21, 2001 /s/ Kennon R. Patterson, Sr.
----------------------- --------------------------------
Date Kennon R. Patterson, Sr.
Chairman, President and
Chief Executive Officer

May 21, 2001 /s/ William E. Blackmon
----------------------- --------------------------------
Date William E. Blackmon
Acting Chief Financial Officer