Southern Community Bancshares, Inc. (the "Holding Company"), a unitary savings and loan holding company incorporated under the laws of the State of Delaware, owns all of the issued and outstanding common shares of First Federal Savings and Loan Association of Cullman, a savings and loan association chartered under federal law (the "Association"). In December 1996, the Holding Company acquired all of the common shares issued by the Association upon its conversion from a mutual savings and loan association to a stock savings and loan association (the "Conversion"). Since its formation, the Holding Company's activities have been limited primarily to holding the common shares of the Association.

As a savings and loan holding company, the Holding Company is subject to regulation, supervision, and examination by the Office of Thrift Supervision (the "OTS") of the United States Department of the Treasury. As a savings and loan association incorporated under federal law, the Association is subject to regulation, supervision, and examination by the OTS. The Association is also a member of the Federal Home Loan Bank (the "FHLB") of Atlanta.

The Company's common stock began trading on the NASDAQ on December 23, 1996, under the symbol "SCBS." At September 30, 2000, there were 977,074 shares of the common stock outstanding and approximately 300 stockholders of record. The following table sets forth information as to high and low sales prices of the Company's common stock and cash dividends per share of common stock for the fiscal quarters indicated.

The principal business of the Association consists of accepting deposits from the general public and investing those funds in loans secured by one- to four-family residential properties located in the Association's primary market area and loans for other general purposes to individuals and businesses. The Association's securities portfolio consists primarily of U.S. Treasury notes and government agency securities and mortgage-backed securities.

The Association's earnings are primarily dependent upon its net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amount of deposits outstanding during the same period and interest rates paid on such deposits. The Association's earnings are also affected by provisions for loan losses, service charges, and other noninterest income, operating expenses, and income taxes.

The Association is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing, and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities, and the level of personal income and savings within the Association's market. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions, and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of housing lenders, the availability and cost of funds, and various other items. Sources of funds for lending activities of the Association include deposits and income provided from operations.

This report contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "expect," "seek," and "intend," and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risk and uncertainties, some of which cannot be predicted or qualified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

At September 30, 2000, the Company's assets totaled $64.2 million, as compared to $62.8 million at September 30, 1999. Total assets increased by $1.4 million or 2.27% from September 30, 1999 to September 30, 2000. The increase in total assets during this period resulted from an increase in loans receivable of $4.4 million. The increase in loans receivable was offset by a decrease in total mortgage-backed securities of $1.3 million, a decrease of $1.3 million in interest bearing deposits and the purchase of $482,000 in treasury stock.

During the fiscal year ended September 30, 2000, total deposits increased by $1.3 million, or 2.5%, to $55.2 million, and total equity increased by $71,000.

The Company had net income of $598,000 for the year ended September 30, 2000 compared to net income of $582,000 for the year ended September 30, 1999. The $16,000 increase in net income represented a 2.7% increase over fiscal 1999. The Company's net income of $582,000 for the fiscal year ended September 30, 1999 represented a decrease of $241,000 or 29.3%, from fiscal 1998. The increase from fiscal 1999 to fiscal 2000 was primarily the result of an increase in noninterest income.

Total interest income decreased by $44,000, or .9%, in fiscal year ended September 30, 2000 compared to fiscal year ended September 30, 1999. Total interest income decreased by $410,000, or 7.8%, during the fiscal year ended September  1999 compared to fiscal 1998. The decrease was primarily the result of a decrease in interest on mortgage-backed and related securities and other interest income.

Total interest expense increased by $40,000, or 1.8%, during fiscal year ended September 30, 2000 compared to fiscal 1999. Total interest expense decreased by $215,000, or 8.9%, in fiscal year ended September 30, 1999 compared to fiscal 1998 due primarily to market conditions.

The Company's net interest income is determined by its interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.

Net interest income decreased by $83,000, or 3.2%, in the fiscal year ended September 30, 2000 compared to fiscal 1999. Interest income from other interest earning assets decreased $252,000 in 2000 as the average balance of other interest bearing assets decreased.

Net interest income decreased by $194,000, or 6.9%, in the fiscal year ended September 30, 1999 compared to fiscal 1998. The decrease was due primarily to a decrease in average interest earning assets as a result of the payment of special dividends in 1999.

The Association did not record a provision for loan losses during the fiscal years ended September 30, 2000, 1999, or 1998. Favorable charge-off experience has not warranted additions to the allowance.

The Association's methodology for evaluating the adequacy of its allowance for loan losses, which conforms with GAAP, considers collateral valuation, changes in the loan portfolio mix, and certain economic indicators, causing it to be a leading indicator of inherent risk in the loan portfolio. The methodology incorporates economic indicators such as growth in personal income and unemployment rates as well as other economic indicators affecting the Association's market area and considers higher risk loan groups, including growth in the Association's consumer and multi-family and non-residential loan portfolios. Commercial and consumer loans traditionally have higher rates of default and are secured by collateral that often depreciates or is less liquid than the real estate securing mortgage loans.

Non-interest income increased to $294,000 in fiscal 2000. Non-interest income amounted to $165,000 for the fiscal year ended September 30, 1999 compared to $180,000 for fiscal 1998. The primary difference in non-interest income between fiscal 2000 and fiscal 1999 was the addition of fees on deposit accounts, while differences between fiscal 1999 and fiscal 1998 were from reductions in existing fees on deposit accounts.

Non-interest expense increased $79,000 to $1.9 million during the fiscal year ended September 30, 2000. Non-interest expense amounted to $1.8 million for the fiscal year ended September 30, 1999 compared to $1.7 million for fiscal 1998. The primary reason for the increase in non-interest expenses in fiscal 2000 was a conversion to a new computer system during fiscal 2000.

The provisions for income taxes were $342,000, $391,000, and $466,000 in fiscal 2000, 1999, and 1998, respectively. The changes in such respective amounts are consistent with the fluctuations in levels of income before income taxes of the Company during those fiscal years of $940,000, $973,000, and $1,289,000, respectively.

The Association is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of United States Government, federal agency, and other investments having maturities of five years or less. Current OTS regulations require that a savings association maintain liquid assets of not less than 5% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less than 1%. Monetary penalties may be imposed for failure to meet applicable liquidity requirements. At September 30, 2000, the Association's liquidity, as measured for regulatory purposes, was in excess of the minimum OTS requirement.

Cash was generated by the Association's operating activities during the years ended September 30, 2000 and 1999 primarily as a result of net income. The adjustments to reconcile net income to cash provided by operating activities during the periods presented consisted primarily of amortization of unearned compensation and premiums and discounts, proceeds from the sale of loans, and increases or decreases in interest and dividends receivable, prepaid income taxes, accrued interest payable, and accrued expenses and other liabilities. The primary investing activity of the Association is lending, which is funded with cash provided by operations, as well as principal collections and maturities of interest-bearing deposits in banks. For additional information about cash flows from the Association's operating, financing, and investing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.

At September 30, 2000, the Association had outstanding $195,000 in the undisbursed portion of mortgage loans. At the same date, the total amount of certificates of deposit which are scheduled to mature by September 30, 2001 was $26.3  million. The Association believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If the Association requires funds beyond its internal funding capabilities, advances from the Federal Home Loan Bank of Atlanta ("FHLB") are available as an additional source of funds.

The Association is required to maintain specified amounts of capital pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and regulations promulgated thereunder by the OTS. The capital standards generally require the maintenance of regulatory capital sufficient to meet a tangible capital requirement, a core capital requirement, and a risk-based requirement. At September 30, 2000, the Association's tangible and core capital totaled $8.8 million, or 13.7% of adjusted total assets, which exceeded the minimum requirements at that date by approximately $7.9 million and $6.3 million, respectively. The Association's risk-based capital totaled $9.3 million at September 30, 2000, or 23.6% of risk-weighted assets, which exceeded the current requirement of 8% by approximately $6.2 million.

The financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.

Unlike most industrial companies, virtually all of the Association's assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does the effect of inflation.

The following table sets forth certain information relating to the Company's average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the periods and at the dates indicated. Such yields and costs are derived by dividing income or expense by the average monthly balances of assets or liabilities, respectively, for the periods indicated.

The table also presents information for the periods indicated and at September 30, 2000 and 1999 with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net yield on interest-earning assets" which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

The table below sets forth certain information regarding changes in interest income and interest expense of the Association for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by prior period rate) and (ii) changes in rates (change in rate multiplied by prior period volume). Changes in rate-volume (changes in rate multiplied by changes in volume) are allocated proportionately between changes in volume and changes in rates.

To Southern Community Bancshares, Inc.:

We have audited the accompanying consolidated statements of financial condition of Southern Community Bancshares, Inc. (a Delaware corporation) as of September 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Community Bancshares, Inc. as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States.

Birmingham, Alabama
October 28, 2000

Southern Community Bancshares, Inc. (the "Company") was incorporated in the State of Delaware in July 1996, for the purpose of becoming a holding company to own all of the outstanding capital stock of First Federal Savings and Loan Association of Cullman (the "Association") upon the Association's conversion from a federally chartered mutual savings association to a federally chartered stock savings association (the "Conversion"). The accounting for the Conversion was in a manner similar to that utilized in a pooling of interests.

The Association received its federal charter in 1905 and was converted to a federally chartered stock organization on December 23, 1996 through the sale of all of its common stock to the Company. The Association is primarily engaged in the business of obtaining funds in the form of various savings deposit products and investing those funds in mortgage loans or single family real estate and, to a lesser extent, in consumer loans. The Association operates from its two offices in the primary market area of Cullman County, Alabama.

The accompanying consolidated financial statements include the accounts of the Company and the Association. All significant intercompany balances and transactions have been eliminated in consolidation.

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with generally accepted accounting principles ("GAAP") and with general practices within the thrift industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and real estate owned, management obtains independent appraisals for significant properties, evaluates the overall portfolio characteristics and delinquencies and monitors economic conditions.

A substantial portion of the Company's loans are secured by real estate in its primary market area. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a portion of the carrying amount of foreclosed real estate are susceptible to changes in economic conditions in the Company's primary market area.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits in banks, and federal funds sold. Federal funds are generally purchased and sold for one-day periods.

Securities classified as held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts on the constant effective yield method. Management has the positive intent and the Company has the ability to hold these securities to maturity. Available-for-sale securities are carried at fair value, except for FHLB required stock holdings which are carried at cost, and include all equity securities and debt not classified as held-to-maturity or trading. Trading securities are those held principally for the purpose of selling in the near future and are carried at fair value. The Company does not currently have any trading securities.

Unrealized gains and losses for trading securities are included in earnings. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported, net of any income tax effect, as a separate component of retained earnings. Realized gains and losses for securities classified as either available-for-sale or held-to-maturity are reported in earnings based on the adjusted cost of the specific security sold.

Loans receivable are stated at their unpaid balances, less the allowance for loan losses and net deferred loan origination fees and discounts.

The Company ceases accrual of interest on substantially all loans when payment on a loan is in excess of 90 days past due. An allowance is established by a charge to interest income equal to all interest previously accrued but unpaid. Interest income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is in accordance with the terms of the loan agreement; in which case the loan is returned to accrual status.

The allowance for loan losses is increased by charges to income and decreased by loan charge-offs, net of recoveries. The allowance for loan losses is maintained at a level which management considers adequate to absorb losses inherent in the loan portfolio at each reporting date. Management's estimation of this amount includes a review of all loans for which full collectibility is not reasonably assured and considers, among other factors, prior years' loss experience, economic conditions, distribution of portfolio loans by risk class, and the estimated value of the underlying collateral. Though management believes the allowance for loan losses to be adequate, ultimate losses may vary from their estimates. However, estimates are reviewed periodically, and as adjustments become necessary, they are reported in earnings in periods in which they become known. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans and the carrying value of foreclosed real estate. Such agencies may require the Company to recognize adjustments to the allowances based on their judgments about information available to them at the time of their examinations.

Losses on individually identified impaired loans are measured based on the present value of expected future cash flows discounted at each loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the fair value of the loan is less than the recorded investment in the loan, the impairment is recorded through a provision added to the allowance for loan losses. Because the Company's loan portfolio primarily consists of one-to-four family residential mortgages and consumer installment loans that are evaluated collectively for impairment, the Company had no loans designated as impaired under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114 at September 30, 2000 or 1999.

Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan over the remaining period to contractual maturity.

Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Costs to maintain or hold the property are expensed and amounts incurred to improve the property, to the extent that fair value is not exceeded, are capitalized. Valuations are periodically performed by management, and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its fair value less the estimated costs to sell.

Land is carried at cost. Buildings, leasehold improvements, and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line and accelerated methods over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the life of the lease. The estimated useful lives of furniture, fixtures, and equipment range from 5 to 15 years and for building and improvements range from 5 to 33 years.

The Company accounts for income taxes through the use of the asset and liability method. Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date.

Treasury stock purchases and sales are accounted for using the cost method.

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under certain conditions, a derivative may be specifically designated as a hedge. Accounting for changes in fair values of derivatives will depend on their designation. In June 1999 the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133. This statement amended the effective date of SFAS No. 133, and made it effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Given the Company's September 30 fiscal year-end, this statement was effective October 1, 2000. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging Activities-An Amendment to FASB Statement No. 133. This statement addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133, and amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. The impact of adoption of these new statements in fiscal 2001 was not significant.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the years ended September 30, 2000 and 1999. Common stock outstanding consists of issued shares less unallocated Employee Stock Option Plan ("ESOP") shares and shares owned by the Management Retention Plan ("MRP") and Stock Option Plan ("SOP") Trust.

The following table represents the earnings per share calculations for the years ended September 30, 2000, 1999, and 1998:

Details of securities are as follows:

The amortized cost and estimated fair value of securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturity because borrowers may have the right to call or prepay obligations:

All mortgage-backed securities were issued by either U.S. government agencies (Government National Mortgage Association) or government-sponsored enterprises (Federal Home Loan Mortgage Corporation or "Freddie Mac").

During the year ended September 30, 2000, the Company sold equity securities with a book value of $100,000 and fair value of $103,750. There were no other sales of securities during the years ended September 30, 2000, 1999, and 1998.

The Company has pledged U.S. government and government agency obligations totaling $3,235,000 at September 30, 2000 and 1999, as collateral against certain large deposits.

Loans receivable are summarized as follows:

In the ordinary course of business, the Company makes loans to officers, directors, employees, and other related parties of the Company. Management believes that these loans are made on substantially the same terms as those prevailing for comparable transactions with others and that they do not involve more than normal risk of collectibility nor do they present other unfavorable features. The amounts of such related party loans at September 30, 2000 and 1999 were $783,000 and $756,000, respectively. During the year ended September 30, 2000, new loans totaled $132,000 and repayments were $105,000.

Activity in the allowance for loan losses is summarized as follows:

The Company had loans on nonaccrual status of approximately $31,000, $140,000, and $103,000 at September 30, 2000, 1999, and 1998, respectively. Interest income foregone on these nonaccrual loans was not significant for fiscal years 2000, 1999, and 1998.

The Company services mortgage loans which had been sold to Freddie Mac in prior years. Mortgage loans serviced for Freddie Mac are not included in the accompanying statements of financial condition. Unpaid principal balances of serviced loans totaled $5,985,917 at September 30, 2000 and $6,290,739 at September 30, 1999. The serviced loans were sold without recourse. The Company did not sell any loans to Freddie Mac in the current year.

Accrued interest receivable at September 30 is summarized as follows:

A summary of premises and equipment at September 30 is as follows:

Deposits are summarized as follows:

The aggregate amounts of jumbo certificates of deposit with a minimum denomination of $100,000 were $11,479,079 at September 30, 2000 and $7,661,021 at September 30, 1999.

Scheduled maturities of certificates of deposit are as follows: