10KSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

(Mark One)

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

For the fiscal year ended June 30, 2004

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

For the transition period from              to             

Commission File Number: 33-93218

THE SOUTHERN BANC COMPANY, INC.

(Name of Small Business Issuer in Its Charter)

Delaware	63-1146351
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
221 S. 6th Street, Gadsden, Alabama	35901
(Address of Principal Executive Offices)	(Zip Code)

Issuer’s Telephone Number, Including Area Code: (256) 543-3860

Securities registered pursuant to Section 12(b) of the Act:

Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Not Applicable

Check whether the issuer: (1) filed all reports required by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or 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  ¨

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x

Registrant’s revenues for the fiscal year ended June 30, 2004: $5,242,097

The aggregate market value of the 598,701 shares of Common Stock of the registrant issued and outstanding held by non-affiliates was approximately $10.5 million based on the closing sales price of $17.45 per share of the registrant’s Common Stock on September 21, 2004 as listed on the OTC Bulletin Board^® (“OTCBB”). For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 10% of the registrant’s outstanding voting stock are affiliates.

Number of shares of Common Stock outstanding as of September 21, 2004: 892,298

Transitional Small Business Disclosure Format    Yes  ¨    No  x

DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents incorporated by reference and the part of this report into which the document is incorporated:

1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended June 30, 2004 (the “Annual Report”). (Parts I and II)

PART I

Item 1. Description of Business

General

The Southern Banc Company, Inc. The Southern Banc Company, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in May 1995 at the direction of management of The Southern Bank Company, formerly First Federal Savings and Loan Association of Gadsden (the “Bank”), for the purpose of serving as the holding company of the Bank upon the Company’s acquisition of all of the capital stock issued by the Bank in connection with the Bank’s conversion from mutual to stock form.

The holding company structure permits the Company to expand the financial services offered through the Bank. As a holding company, the Company has greater flexibility than the Bank to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions. The Company qualifies as a unitary savings institution holding company and is subject to regulation by the Office of Thrift Supervision (“OTS”). The Company’s principal business is the business of the Bank. At June 30, 2004, the Company had total consolidated assets of $106.4 million, deposits of $82.0 million, net loans receivable of $37.5 million and stockholders’ equity of $17.3 million, or 16.2% of total assets.

On December 9, 2003, the Company filed an application with the Securities and Exchange Commission (“SEC”) to withdraw the Company’s common stock from listing and registration on the American Stock Exchange. On January 7, 2004, the SEC ordered that the application be granted, effective at the opening of business on January 8, 2004.

The Company is continuing to voluntarily submit reports to the Commission under the Securities Exchange Act of 1934 until the Board of Directors determines whether to terminate the Company’s filings.

Since January 8, 2004, the Company’s common stock has traded in the over-the-counter market on the OTC Bulletin Board^® (“OTCBB”) under the symbol “SRNN.”

The Company’s executive offices are located at 221 S. 6th Street, Gadsden, Alabama 35901, and its telephone number is (256) 543-3860.

The Southern Bank Company. The Bank is an independent community-oriented savings institution dedicated to providing quality customer service. The Bank was organized in 1936 as a federally chartered mutual savings and loan association, at which time it also became a member of the Federal Home Loan Bank (“FHLB”) System and obtained federal deposit insurance.

In 1999, the Bank changed its corporate title from “First Federal Savings and Loan Association of Gadsden” to “The Southern Bank Company.” The change of name was made to increase public awareness of the expanded banking services which the Bank is authorized to offer. The Bank currently operates through four full-service banking offices located in Gadsden, Albertville, Guntersville and Centre, Alabama.

As a federally chartered savings institution, the Bank is subject to extensive regulation by the OTS. The lending activities and other investments of the Bank must comply with various federal regulatory requirements, and the OTS periodically examines the Bank for compliance with various regulatory requirements. The Federal Deposit Insurance Corporation (“FDIC”) also has the authority to conduct special examinations. The Bank must file reports with OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”).

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Special Note Regarding Forward Looking Statements

Certain matters discussed in this document are “forward looking statements,” intended to qualify for the safe harbors from liability established by the Private Securities Legislation Reform Act of 1995. These forward looking statements can generally be identified as such because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “estimates,” or words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward looking statements. Such forward looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Stockholders, potential investors, and other readers are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Business Strategy

The Bank’s business strategy has been to operate as a profitable and independent community-oriented savings institution dedicated to providing quality customer service. Generally, the Bank has sought to implement this strategy by using retail deposits as its sources of funds and maintaining most of its assets in loans secured by owner-occupied one-to-four-family residential real estate located in the Bank’s market area, mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation (“FHLMC”), the Government National Mortgage Association (“GNMA”) and the Federal National Mortgage Association (“FNMA”), U.S. government and agency securities, interest-earning deposits, cash and equivalents, and consumer loans. The Bank’s business strategy incorporates the following key elements: (1) remaining a community-oriented financial institution while maintaining a strong core customer base by providing quality service and offering customers the access to senior management and services that a community-based institution can offer; (2) attracting a retail deposit base from the communities served by the Bank’s four banking offices; (3) maintaining asset quality by emphasizing investment in local residential mortgage loans and consumer loans, mortgage-backed securities and other securities issued or guaranteed by the U.S. government or agencies thereof; and (4) maintaining liquidity and capital substantially in excess of regulatory requirements.

Market Area

The Bank considers its primary market area to consist of Etowah, Cherokee, and Marshall counties in Northeast Alabama. The Bank’s four offices are located in these three counties. The City of Gadsden, where the Bank’s main office is located, is in Etowah County, approximately 60 miles northeast of Birmingham, Alabama. Etowah County, with an area of approximately 555 square miles, is the second smallest of Alabama’s 67 counties in area, but ranks ninth in population. According to 2000 Census Bureau data, the combined population of Etowah, Cherokee and Marshall Counties was approximately 210,000.

The economy in the Bank’s market area includes a mixture of manufacturing and agriculture. The largest employer in Etowah County is Goodyear Tire and Rubber Company, presently employing around 1,400 workers. In Talladega County, 17 miles from Etowah County, Honda Motor Company began automobile and engine production in November 2001. Approximately 900 jobs were awarded to Etowah county residents as a result of the Honda Plant, suppliers, and economic opportunities for local businesses. In July 2002, Honda Motor Company announced a second expansion to the manufacturing

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plant that began production in April 2004. The second expansion doubled production and increased the work force of the plant from 2,400 to 3,700 jobs. Honda officials estimate that approximately 20% of the plant’s work force are residents of Etowah County with approximately 9% coming from Marshall and Cherokee Counties. Through the current date, 18 Honda suppliers have located in Alabama, creating another 2000 jobs. Several other new projects and industries have been announced in the past year which could boost the economy in the Bank’s primary market area. According to the Alabama Department of Industrial Relations, the unemployment rates for August 2004 in Etowah, Cherokee, and Marshall Counties were 7.3%, 4.7% and 4.6%, respectively, compared to 6.0% for the state of Alabama.

Competition

The Bank experiences substantial competition both in attracting and retaining savings deposits and in the making of mortgage and other loans.

Direct competition for savings deposits comes from other savings institutions, credit unions, regional bank holding companies and commercial banks located in its primary market area. Significant competition for the Bank’s other deposit products and services comes from money market mutual funds and brokerage firms. The primary factors in competing for loans are interest rates and loan origination fees and the range of services offered by various financial institutions. Competition for origination of real estate loans normally comes from other savings institutions, commercial banks, credit unions, mortgage bankers, and mortgage brokers.

The Bank’s primary competition comes from institutions headquartered in the Bank’s market area as well as numerous additional commercial banks which have branch offices located in the Bank’s market area. Many competing financial institutions have financial resources substantially greater than the Bank and offer a wider variety of deposit and loan products.

Lending Activities

General. The Bank’s principal lending activity consists of the origination of loans secured by mortgages on existing one-to-four-family residences and a variety of consumer loans in the Bank’s market area. The Bank also makes limited amounts of non-residential real estate and commercial loans.

With certain limited exceptions, the maximum amount that a savings institution such as the Bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Savings institutions are additionally authorized to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the savings institution is in compliance with its fully phased-in capital requirements; (iii) the loans comply with applicable loan-to-value requirements, and; (iv) the aggregate amount of loans made under this authority does not exceed 15% of unimpaired capital and surplus.

At June 30, 2004, the maximum amount that the Bank could have loaned to any one borrower without prior OTS approval was approximately $4.2 million. At such date, the largest aggregate amount of loans that the Bank had outstanding to any one borrower was approximately $462,000.

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Loan Portfolio Composition. The following table sets forth selected data relating to the composition of the Bank’s loan portfolio by type of loan at the dates indicated. At June 30, 2004, the Bank had no concentrations of loans exceeding 10% of total loans that are not disclosed below.

	At June 30,
	2004				2003
	Amount		%		Amount			%
	(Dollars in thousands)
Type of Loan:
Real estate loans:
One-to-four-family residential	$	27,542	72.69	%	$	30,681		77.90	%
Non-residential		1,164	3.07			451		1.15
Consumer loans(1)		8,055	21.26			7,261		18.44
Commercial loans		413	1.09			179		0.45
Savings account loans		714	1.89			813		2.06
Total gross loans		37,888	100.00	%		39,385		100.00	%
Less:
Unearned income		246				360
Deferred loan fees (costs), net		21				(33	)
Allowance for loan losses		144				140
Total	$	37,477			$	38,918

(1) Consumer loans include home equity line of credit loans of approximately $2,135,000 and $1,327,000, at June 30, 2004 and 2003, respectively.

The following table sets forth information at June 30, 2004 regarding the dollar amount of loans maturing or repricing in the Bank’s portfolio, based on contractual terms to maturity or repricing period. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

	Due Within 1 Year After 6/30/04		Due After 1 through 5 Years After 6/30/04		Due After 5 Years After 6/30/04		Total
			(In thousands)
Real estate mortgage	$	870	$	1,953	$	25,883	$	28,706
Consumer, commercial and savings account loans		2,685		5,288		1,209		9,182
Total	$	3,555	$	7,241	$	27,092	$	37,888

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The following table sets forth at June 30, 2004, the dollar amount of gross loans due after one year after that date, based upon contractual maturity dates or period to reprice, and whether such loans have fixed or adjustable rates.

	Predetermined Rate		Floating or Adjustable Rates
	(In thousands)
Real estate	$	28,338	$	368
Consumer, commercial and savings account loans		6,634		2,548
Total	$	34,972	$	2,916

Scheduled contractual principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of long-term loans is substantially less than their contractual terms, due to prepayments. The average life of mortgage loans tends to increase when current mortgage loan market rates are higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are lower than rates on existing mortgage loans.

Originations, Purchases and Sales of Loans. The Bank’s loans are primarily originated by salaried loan officers of the Bank, although, from time to time, the Bank purchases loans. During fiscal 2004, the Bank purchased no loans. During the fiscal year ended June 30, 2004, the Bank originated and sold a total of $1,197,000 in loans to the secondary market.

One-to-Four-Family Residential Lending. Historically, the Bank’s principal lending activity has been the origination of fixed rate loans secured by first mortgages on existing one-to-four-family residences in the Bank’s market area. The purchase price or appraised value of most of such residences generally has been between $51,000 and $400,000, with the Bank’s loan amounts averaging approximately $89,000. At June 30, 2004, $27.5 million, or 72.7%, of the Bank’s total loans were secured by one-to-four-family residences, a substantial portion of which were existing, owner-occupied, single-family residences in the Bank’s market area. At June 30, 2004, $28.3 million, or 98.7% of the Bank’s real estate loans, had fixed rates, and $368,000 or 1.3%, had adjustable rates.

The Bank’s one-to-four-family residential mortgage loans generally are for terms of up to 30 years, amortized on a monthly basis, with principal and interest due each month. The majority of the Bank’s one-to-four-family mortgage loans are underwritten with terms of 15 years or less. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain “due-on-sale” clauses which permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged property.

The Bank previously offered a mortgage loan product which provided for a term of up to 21 years with the interest rate increasing one percentage point every seven years. This increase is not contingent upon any corresponding increase in market interest rates. As of June 30, 2004, the Bank had originated $7.4 million of these graduated rate loans. The Bank no longer offers the graduated rate loan program.

The Bank’s lending policies generally limit the maximum loan-to-value ratio on one-to-four-family residential mortgage loans secured by owner-occupied properties to 100% of the lesser of the appraised value or purchase price. The Bank’s lending policies generally require private mortgage insurance for any loan that exceeds an 80% loan-to-value ratio.

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The Bank has not originated any adjustable rate, one-to-four-family residential mortgage loans in recent years. However, total loans at June 30, 2004 included adjustable rate, one-to-four-family residential loans with an aggregate principal balance of $368,000, substantially all of which were purchased during fiscal 1996. The rates at which interest accrues on these loans are adjustable annually, generally with limitations on adjustments of 2.0% per adjustment period and 6.0% - 6.5% over the life of the loan. While such loans may include initial discounted rates, they were underwritten and borrowers were qualified based on the fully indexed interest rate. The Bank’s adjustable rate loans do not permit negative amortization.

The Bank also originates second mortgage loans. Such loans, when combined with the first mortgage, generally are limited to 75% of the appraised value. Such loans have a fixed rate and a maximum term of 10 years.

The retention of adjustable and graduated rate loans in the Bank’s portfolio helps reduce the Bank’s exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of such loans. It is possible that during periods of rising interest rates, the risk of default on adjustable and graduated rate loans may increase due to increases in interest costs to borrowers. Adjustable and graduated rate loans which provide for initial rates of interest below the fully indexed rates may be subject to increased risk of delinquency or default as the higher, fully indexed rate of interest subsequently replaces the lower, initial rate. Further, although adjustable rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed rate period before the first adjustment, the periodic and lifetime interest rate adjustment limitations, and the ability of borrowers to convert the loans to fixed rates. Accordingly, there can be no assurance that yields on the Bank’s adjustable rate loans will fully adjust to compensate for increases in the Bank’s cost of funds. Finally, adjustable rate loans increase the Bank’s exposure to decreases in prevailing market interest rates, although decreases in the Bank’s cost of funds tend to offset this effect.

Consumer Lending. At June 30, 2004, the Bank’s total consumer loan portfolio was approximately $8.1 million and consisted primarily of new and used automobile loans, home equity lines of credit, and both secured and unsecured demand loans. These loans totaled approximately $4.7 million, $2.1 million, $1.1 million and $219,000, respectively, at June 30, 2004. Management plans to continue the Bank’s expansion of these programs as part of the Bank’s plan to provide a wider range of financial services to the Bank’s customers while increasing the Bank’s portfolio yields.

The Bank makes home equity lines of credit secured by the borrower’s residence. These loans, combined with the first mortgage loan, which usually is from the Bank, generally are limited to 75% of the appraised value of the residence as long as the first mortgage is held by the Bank and 70% if the first mortgage is held by another lender. Home equity lines of credit are open-end with the rate on such loans adjusting monthly based on the Prime Rate as published in The Wall Street Journal as of the first day of the month.

The Bank’s new and used automobile loans generally are underwritten in amounts up to 85% of the purchase price, dealer cost or the loan value as published by the National Automobile Dealers Association (i.e., the “Black Book”). The terms of such loans generally do not exceed 60 months with loans for older used cars underwritten for shorter terms. The Bank requires that the vehicles be insured and that the Bank be listed as loss payee on the insurance policy. The Bank originates a portion of its automobile loans on an indirect basis through various dealerships located in its market area. See “ Loan Solicitation and Processing.”

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The Bank generally makes savings account loans for up to 80% of the balance of the account. The interest rate on these loans is generally two percentage points above the rate paid on the account, and interest is billed on a monthly basis. These loans are payable on demand, and the account must be pledged as collateral to secure the loan.

Consumer loans generally involve more risk than first mortgage loans. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against the Bank, and a borrower may be able to assert against the Bank claims and defenses which it has against the seller of the underlying collateral. In underwriting consumer loans, the Bank considers the borrower’s credit history, an analysis of the borrower’s income, expenses and ability to repay the loan, and the value of the collateral.

Loan Solicitation and Processing. The Bank’s loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers, as well as walk-in customers. In addition, the Bank originates a portion of its automobile loans on an indirect basis through various dealerships located in the Bank’s market area. The Bank’s solicitation programs consist of calls by the Bank’s officers to local realtors and builders and advertisements in local media, television, newspapers, billboards and real estate-related periodicals. Loan applications are accepted at each of the Bank’s offices for processing and approval.

Upon receipt of a loan application from a prospective borrower, the Bank’s staff obtains the necessary information and then prepares the file for processing. Once in processing, a credit report is requested and the Bank verifies the loan applicant’s employment, income and credit standing. It is the Bank’s policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from a Bank-approved appraiser. The Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made, except if the Bank is aware of a particular risk of environmental contamination.

It is the Bank’s policy to record a lien on the real estate securing the loan and, in most instances, to obtain a title insurance policy which insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a designated flood plain, paid flood insurance policies are required.

The Board of Directors has the overall responsibility and authority for general supervision of the Bank’s loan policies. The Board has established written lending policies for the Bank. The Bank has established a loan committee which is comprised of Board members and Executive Officers. Any loan committee member has the authority to approve mortgage loans of $200,000 or under. Mortgage loans over $200,000 require the approval of one committee member accompanied by the approval of the Chairman of the Board. Consumer loans up to $20,000 may be approved by individual loan officers. Consumer loans greater than $20,000 must be approved by at least two members of the Bank’s consumer loan committee which is comprised of all of the Bank’s loan officers. Loan applicants are promptly notified of the decision of the Bank. It has been management’s experience that substantially all approved loans are funded.

Interest Rates and Loan Fees. Interest rates charged by the Bank on mortgage loans are primarily determined by competitive loan rates offered in its market area and the Bank’s minimum yield

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requirements. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Federal Reserve Board, the general supply of money in the economy, tax policies and governmental budget matters.

The Bank receives fees in connection with loan originations, loan modifications, late payments, changes of property ownership, and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Bank typically receives fees of up to 1.0% in connection with the origination of fixed rate mortgage loans. The excess, if any, of loan origination fees over direct loan origination expenses is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time.

Collection Policies. When a borrower fails to make a payment on a loan, the Bank generally takes prompt steps to have the delinquency cured and the loan restored to current status. Once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower, and a late charge is imposed, if applicable. Loans on which payments are 30 or more days delinquent and possess credit deficiencies or potential weaknesses are designated as “special mention.” The Bank’s Board of Directors reviews a list of all classified assets on a monthly basis. See “Asset Classification, Allowances for Losses and Non-Performing Assets.” If a loan remains delinquent 90 days or more, the Bank generally makes demand for payment and/or initiates foreclosure or other legal proceedings.

Asset Classification, Allowances for Losses and Non-performing Assets. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset is classified as substandard if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management’s close attention. Assets classified as substandard or doubtful require an institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, an institution must either establish a specific allowance for loss in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with an institution’s classifications. If an institution does not agree with an examiner’s classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any assets require classification or re-classification. The Board of Directors reviews and approves all classifications on a monthly basis. At June 30, 2004, the Bank had no assets classified as loss, no assets classified as doubtful, $137,487 of assets classified as substandard and $430,323 of assets designated as special mention.

In extending credit, the Bank recognizes that losses will occur and that the risk of loss will vary with, among other things, the type of credit being extended, the creditworthiness of the obligor over the term of the obligation, general economic conditions and, in the case of a secured obligation, the quality of the security. It is management’s policy to maintain allowances for losses based on, among other things, regular reviews of delinquencies and credit portfolio quality, character and size, the Bank’s historical loss experience and current and forecasted economic conditions. The Bank increases its allowance for loan losses by charging provisions for losses against the Bank’s income.

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Management actively monitors the Bank’s asset quality and charges off loans against the allowance for losses on such loans and makes additional loss provisions in its discretion. Allowances are provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value or net realizable value of the collateral. Although management believes it uses the best information available to make determinations with respect to the allowance for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations.

At the date of foreclosure or other repossession, the Bank transfers the property to real estate acquired in settlement of loans at the lower of recorded investment in the loan or fair value, net of estimated cost of disposition. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a property would yield in a current sale between a willing buyer and a willing seller. Fair value is measured by market transactions. If a market does not exist, fair value of the property is estimated based on selling prices of similar properties in active markets or, if there are no active markets for similar properties, by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. Fair value generally is determined through an appraisal at the time of foreclosure. Any amount of the recorded investment in the loan in excess of fair value is charged-off against the allowance for loan losses. Subsequent to foreclosure, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate may be recorded if certain conditions are met. At June 30, 2004, the Bank held no properties acquired in settlement of loans.

The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated.

	Years Ended June 30,
	2004			2003
	(Dollars in thousands)
Balance at beginning of period	$	140		$	133
Charge-offs		(7	)		(7	)
Recoveries		0			1
Provision for loan losses		11			13
Balance at end of period	$	144		$	140
Ratio of net charge-offs during the period to average loans outstanding during the period		0.02	%		0.02	%

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The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

	At June 30,
	2004				2003
	Amount		Percent of Loans in Category to Total Loans		Amount		Percent of Loans in Category to Total Loans
			(Dollars in thousands)
Real estate loans:
One-to four-family residential	$	55	73.41	%	$	56	77.90	%
Non-residential		—	2.25			—	1.15
Consumer, commercial and savings account loans		89	24.34			84	20.95
Total allowance for loan losses	$	144	100.00	%	$	140	100.00	%

The Bank ceases accrual of interest on a loan when payment on the loan is delinquent in excess of 90 days. 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 has been reestablished, in which case the loan is returned to accrual status.

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The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated.

	At June 30,
	2004			2003
	(Dollars in thousands)
Loans accounted for on a non-accrual basis:(1)
Real estate loans:
One-to-four-family residential	$	109		$	68
Non-residential		—			—
Consumer, commercial and savings account loans		34			33
Other loans		—			—
Total	$	143		$	101
Accruing loans which are contractually past due 90 days or more:
Real Estate loans:
One-to-four-family residential	$	—		$	—
Non-residential		—			—
Consumer, commercial and savings account loans		—			—
Other loans		—			—
Total	$	—		$	—
Total of non-accrual and accruing loans 90 days past due loans	$	143		$	101
Percentage of total loans		0.38	%		0.26	%
Other non-performing assets(2)	$	—		$	—
Percentage of total assets		0.14	%		0.09	%

(1) The Bank ceases accrual of interest on a loan when payment on the loan is delinquent in excess of 90 days. 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 has been reestablished, in which case the loan is returned to accrual status.

(2) Other non-performing assets may include real estate or other assets acquired by the Bank through foreclosure or repossession. Real estate owned is recorded at the lower of the recorded investment in the loan or fair value of the property, less estimated costs of disposition.

Neither cash basis interest income nor interest income foregone on non-accrual loans was considered significant for the years ended June 30, 2004 and June 30, 2003.

At June 30, 2004, management had identified no loans which were not reflected in the preceding table but as to which known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms.

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Investment Activities

The Bank is permitted under federal law to make certain investments, including investments in securities issued by FNMA, FHLMC, GNMA, various federal agencies and state and municipal governments; deposits at the FHLB of Atlanta; certificates of deposit in federally insured institutions; certain bankers’ acceptances; and federal funds. The Bank may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. Federal regulations require the Bank to maintain an investment in FHLB of Atlanta stock and a minimum amount of liquid assets which may be invested in cash and specified securities. From time to time, the OTS adjusts the percentage of liquid assets which savings institutions are required to maintain.

The Bank invests in investment securities in order to diversify its assets, manage cash flow and interest rate risk, obtain yields, and maintain the minimum levels of qualified and liquid assets required by regulatory authorities. The investment activities of the Bank consist primarily of investments in mortgage-backed securities, U.S. Treasury securities and U.S. Government agency securities, and other securities. Investment decisions are generally made by the President of the Bank and are ratified by the Board of Directors. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Bank’s investment policy. The Bank’s investment policy does not permit the Bank to invest in any futures, options or other investments that exhibit a high degree of price volatility.

Securities designated as “available for sale” are carried at their fair value with unrealized gains or losses, net of tax effect, recognized in equity. At June 30, 2004, investment securities with an aggregate amortized cost of approximately $56.9 million and an aggregate fair value of approximately $56.7 million were included in the portfolio of securities designated as available for sale. The aggregate impact on equity was a net decrease of approximately $1.2 million for the year ended June 30, 2004. The net unrealized pre-tax loss on securities available for sale at June 30, 2004 was approximately $211,000. For additional information, see Consolidated Statements of Stockholders’ Equity and Note 2 to Consolidated Financial Statements in the Annual Report filed as Exhibit 13 to this Report. Securities designated as “held to maturity” are those assets which the Bank has the ability and management has the intent to hold to maturity and are carried at amortized cost. At June 30, 2004, securities designated as held to maturity had an aggregate amortized cost of approximately $4.2 million and an aggregate fair value of approximately $4.5 million. Upon acquisition, securities are classified as to the Bank’s intent.

Mortgage-Backed Securities. The Bank maintains a substantial portfolio of mortgage-backed securities in the form of GNMA, FHLMC and FNMA participation certificates. GNMA, FHLMC and FNMA certificates are each guaranteed by their respective agencies as to principal and interest, and GNMA certificates are backed by the full faith and credit of the U.S. Government. Mortgage-backed securities generally entitle the Bank to receive a pro rata portion of the cash flows from an identified pool of mortgages. Although mortgage-backed securities generally yield less than the underlying loans, they present substantially lower credit risk, they are more liquid than individual mortgage loans, and they may be used to collateralize obligations of the Bank. In addition, the Bank’s portfolio of mortgage-backed securities qualify as “Qualified Thrift Investments” for purposes of determining the Bank’s compliance with the “Qualified Thrift Lender” test and may also be considered for purposes of meeting certain definitional tests prescribed by the Internal Revenue Code which entitle thrift institutions to favorable tax treatment. See “Regulation — Regulation of the Bank — Qualified Thrift Lender Test” and “ — Taxation — Federal Income Taxation.”

Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-

13

rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages.

The actual maturity of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby affecting its yield to maturity and the related market value of the mortgage-backed security. The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accreted over the estimated life of the securities using a level yield method. Prepayments of the underlying mortgages depend on many factors, including the type of mortgage, the coupon rate, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates. The difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates is an important determinant in the rate of prepayments. During periods of falling mortgage interest rates, prepayments generally increase, and, conversely, during periods of rising mortgage interest rates, prepayments generally decrease. If the coupon rate of the underlying mortgage significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities.

The Bank’s mortgage-backed securities portfolio consists primarily of seasoned fixed-rate and adjustable rate mortgage-backed securities. At June 30, 2004, the Bank had approximately $4.1 million in mortgage-backed securities which are considered to be held to maturity and which are insured or guaranteed by FNMA, FHLMC or GNMA and approximately $61,000 in U. S. Government agency securities. At June 30, 2004, the carrying value of mortgage-backed securities designated as available for sale was approximately $46.9 million and the carrying value of U.S. Government agency securities designated as available for sale and U. S. Treasury securities was approximately $7.0 million. See Notes 2 and 3 of Notes to Consolidated Financial Statements in the Annual Report.

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The following table sets forth the carrying value of the Bank’s investment portfolio at the dates indicated.

	At June 30,
	2004		2003
	(In thousands)
Securities available for sale:(1)
U.S. Treasury securities	$	—	$	—
U.S. Government agency securities		7,006		4,672
Mortgage-backed securities		46,942		49,034
Other		2,769		17
Total securities available for sale	$	56,717	$	53,723
Securities held to maturity:(2)
U.S. Government agency securities	$	61	$	101
Mortgage-backed securities		4,133		7,114
Total securities held to maturity	$	4,194	$	7,215
Total securities	$	60,911	$	60,938

(1) The carrying value is the approximate fair value of the security at each reporting date.

(2) The carrying value is the amortized cost of the security at each reporting date.

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The following table sets forth information regarding the scheduled maturities, amortized costs, fair values and weighted average yields for the Bank’s investment securities at June 30, 2004.

	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Portfolio
	Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Amortized Cost		Fair Value		Average Yield
									(Dollars in Thousands)
Securities available for sale:(1)
U.S. Government agency Securities	$	—	0.0	%	$	832	6.2	%	$	5,522	5.1	%	$	652	6.2	%	$	6,911	$	7,006	5.4	%
Mortgage-backed securities		—	0.0			3,308	4.9			15,594	4.5			28,040	4.9			47,211		46,942	4.8
Other(3)		1,004	2.0			—	0.0			—	0.0			1,765	3.8			2,806		2,769	3.1
Total securities available for sale	$	1,004	2.0	%	$	4,140	5.2	%	$	21,116	4.7	%	$	30,457	4.9	%	$	56,928	$	56,717	4.8	%
Securities held to maturity:(2)
U.S. Government agency Securities	$	61	6.7	%	$	—	0.0	%	$	—	0.0	%	$	—	0.0	%	$	61	$	64	6.7	%
Mortgage-backed securities		0	0.0			1,991	6.8			1,128	7.5			1,014	7.5			4,133		4,411	7.1
Total securities held to maturity	$	61	6.7	%	$	1,991	6.8	%	$	1,128	7.5	%	$	1,014	7.5	%	$	4,194	$	4,475	7.1	%
Total securities	$	1,065	2.3	%	$	6,131	5.7	%	$	22,244	4.8	%	$	31,471	5.0	%	$	61,122	$	61,192	4.9	%

(1) Carrying value of securities available for sale is their approximate fair value at the reporting date. Average yield on securities available for sale is based on their amortized historical costs at the reporting date.

(2) Carrying value of securities held to maturity is their amortized historical cost at their reporting date. Average yield on securities held to maturity is based on their amortized historical cost at the reporting date.

(3) Other securities includes the Bank’s investment, at cost, in Intrieve, Inc., the Bank’s data processing service bureau.

For additional information, see Notes 2 and 3 of Notes to Consolidated Financial Statements in the Annual Report filed as Exhibit 13 to this Report.

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Deposit Activity and Other Sources of Funds

General. Deposits are the primary source of the Bank’s funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from loan principal repayments, interest payments, maturing investments and FHLB advances. Loan repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates and money market conditions.

Deposits. The Bank attracts deposits principally from within its market area by offering a variety of deposit instruments, including regular checking, passbook, statement savings accounts and certificates of deposit which range in term from seven days to ten years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. The Bank also offers Individual Retirement Accounts (“IRAs”).

The Bank’s policies are designed primarily to attract deposits from local residents through the Bank’s branch network rather than from outside the Bank’s market area. The Bank’s interest rates, maturities, service fees and withdrawal penalties on deposits are established by management on a periodic basis. Management determines deposit interest rates and maturities based on the Bank’s funds acquisition and liquidity requirements, the rates paid by the Bank’s competitors, the Bank’s growth goals, and applicable regulatory restrictions and requirements. The Bank does not solicit deposits from brokers and currently does not bid for public unit funds.

The Bank plans to remain competitive in its primary market area by introducing new products and services which include various checking account products, enhancements to the savings portfolio, offering competitive interest rates and fees, and to attract new customers by providing full service banking.

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Deposits in the Bank as of June 30, 2004 were represented by the various programs described below.

Interest Rate	Minimum Term	Category	Minimum Amount		Balances		Percentage of Total Savings
			(In thousands)
0.494%	None	NOW Accounts	$	100	$	507	0.62	%
0.275	None	Passbook Statement Accounts		100		3,352	4.09
0.500	None	Gold Star Savings Account		100		2,894	3.53
0.500	None	Money Market Deposit Account		1,500		257	0.31
0.499	None	High Yield Account		100		1,096	1.34
0.497	None	Best Checking Account		50		162	0.20
0.488	None	Merit Checking		50		932	1.14
0.500	None	Classic 55 Checking		50		2,476	3.02
0.000	None	Free Checking		—		124	0.15
0.000	None	Business Checking		50		456	0.56
0.484	None	First Checking		50		4,298	5.24
1.727	None	Premium MMDA		10,000		5,166	6.30
		Certificates of Deposit
1.000%	91 Days	3-Month Money Market		1,000		161	0.20	%
1.250	5 Month	Fixed Term, Fixed Rate		1,000		1,182	1.44
1.000	182 Days	6-Month Money Market		1,000		824	1.00
1.325	7 Month	Fixed Term, Fixed Rate		1,000		1,081	1.32
1.000	8 Month	Fixed Term, Fixed Rate		1,000		21	0.03
1.000	9 Month	Fixed Term, Fixed Rate		1,000		58	0.07
1.000	10 Month	Fixed Term, Fixed Rate		1,000		210	0.26
1.135	12 Month	Fixed Term, Fixed Rate		1,000		519	0.63
1.416	14 Month	Fixed Term, Fixed Rate		1,000		1,287	1.57
1.723	18 Month	Fixed Term, Fixed Rate		1,000		247	0.30
2.045	18 Month-IRA	Fixed Term, Fixed Rate - IRA		250		1,131	1.38
2.186	20 Month	Fixed Term, Fixed Rate		1,000		6,288	7.67
2.045	24 Month	Fixed Term, Fixed Rate		1,000		3,994	4.87
2.061	30 Month	Fixed Term, Fixed Rate		1,000		10,468	12.73
2.270	36 Month	Fixed Term, Fixed Rate		1,000		1,390	1.70
2.773	48 Month	Fixed Term, Fixed Rate		1,000		9,481	11.56
3.710	60 Month	Fixed Term, Fixed Rate		1,000		11,665	14.22
4.744	72 Month	Fixed Term, Fixed Rate		1,000		107	0.13
3.310	96 Month	Fixed Term, Fixed Rate		1,000		29	0.04
5.188	120 Month	Fixed Term, Fixed Rate		1,000		46	0.06
0.944	3-Month-State	Fixed Term, Fixed Rate		1,000		1,325	1.62
1.686	11 Month	Fixed Term, Fixed Rate		1,000		7,671	9.35
1.536	17 Month	Fixed Term, Fixed Rate		1,000		546	0.67
1.080	19 Month	Fixed Term, Fixed Rate		1,000		554	0.68
		Total			$	82,005	100.00	%

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The following tables set forth the average balances and average interest rates paid for deposits in the Bank as of the dates indicated.

	Years Ended June 30,
	2004									2003
	Passbook Savings			Interest- Bearing Demand Deposits			Certificates of Deposit			Passbook Savings			Interest- Bearing Demand Deposits			Certificates of Deposit
							(Dollars in thousands)
Average balance	$	5,937		$	15,450		$	60,147		$	7,129		$	11,662		$	65,820
Average interest rate		0.72	%		0.59	%		2.73	%		1.48	%		1.13	%		3.47	%

The following table sets forth the certificates of deposit in the Bank classified by rates at the dates indicated.

	At June 30,
	2004		2003
	(In thousands)
0.01 – 2.00%	$	20,525	$	13,949
2.01 – 4.00%		36,405		42,476
4.01 – 6.00%		3,458		8,575
6.01 – 8.00%		0		679
	$	60,388	$	65,679

The following table indicates the amount of the certificates of deposit of $100,000 or more in the Bank by time remaining until maturity at June 30, 2004.

Maturity Period	Certificates of Deposits
	(In thousands)
Three months or less	$	2,614
Over three through six months		632
Over six through twelve months		2 490
Over twelve months		7,705
Total	$	13,441

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Borrowings. Savings deposits historically have been the primary source of funds for the Bank’s lending, investment and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, the Bank is required to own stock in the FHLB of Atlanta and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. As of June 30, 2004, Federal Home Loan Bank advances were approximately $6.9 million.

Subsidiary Activities

Federally chartered savings institutions are permitted to invest up to 2% of their assets in subsidiary service corporations, plus an additional 1% in subsidiaries engaged in specific community purposes. Under such limitation, as of June 30, 2004, the Bank was authorized to invest approximately $2.0 million in the stock of or loans to subsidiaries. The Bank currently does not have a subsidiary.

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REGULATION

The following discussion is intended to be a summary of certain statutes, rules and regulations affecting the Company and the Bank. A number of other statutes and regulations have an impact on their operations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (the “SOX Act”) provides for sweeping changes with respect to corporate governance, accounting policies and disclosure requirements for public companies, and also for their directors and officers. The SOX Act required the SEC to adopt new rules to implement its requirements, including new financial reporting requirements and rules concerning corporate governance. SEC rules require a reporting company’s chief executive and chief financial officers to certify certain financial and other information included in the company’s quarterly and annual reports. The rules also require these officers to certify that they are responsible establishing, maintaining and regularly evaluating the effectiveness of the company’s disclosure controls and procedures; that they have made certain disclosures to the auditors and to the audit committee of the board of directors about the company’s controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Certifications by the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the financial statements and other information are included as an exhibit to this Form 10-KSB. See Item 8A. “Controls and Procedures” hereof for the Company’s evaluation of disclosure controls and procedures. The certifications required by Section 906 of the SOX Act also have been filed as an Exhibit to this Form 10-KSB.

USA Patriot Act

The USA Patriot Act authorizes new regulatory powers to combat international terrorism. The provisions that affect financial institutions most directly provide the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions have to follow new minimum verification of identity standards for all new accounts and are permitted to share information with law enforcement authorities under circumstances that were not previously permitted.

Regulation of the Company

Activities Restrictions. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which authority also permits the OTS to restrict or prohibit activities that are determined to be serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of the stockholders of the Company.

As a unitary savings and loan holding company, the Company generally is not subject to any restrictions on its business activities. While the Gramm-Leach-Bliley Act (the “GLB Act”) terminated the “unitary thrift holding company” exemption from activity restrictions on a prospective basis, the Company enjoys grandfathered status under this provision of the GLB Act. As a result, the Company’s

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freedom from activity restrictions as a unitary savings and loan holding company was not affected by the GLB Act. However, if the Company were to acquire control of an additional savings association, its business activities would be subject to restriction under the Home Owners’ Loan Act. Furthermore, if the Company were in the future to sell control of the Bank to any other company, such company would not succeed to the Company’s grandfathered status under the GLB Act and would be subject to the same activity restrictions. The continuation of the Company’s exemption from restrictions on business activities as a unitary savings and loan holding company is also subject to the Company’s continued compliance with the Qualified Thrift Lender (“QTL”) test. See “-Regulation of the Bank- Qualified Thrift Lender Test.”

Restrictions on Acquisitions. The Company must obtain approval from the OTS before acquiring control of any other saving institution or saving and loan holding company, substantially all the assets thereof or in excess of 5% of the outstanding shares of another savings institution or saving and loan holding company. The Company’s directors and officers or persons owning or controlling more than 25% of the Company’s stock must also obtain approval of the OTS before acquiring control of any savings institution or savings and loan holding company.

Regulation of the Bank

General. As a federally chartered, SAIF-insured savings institution, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board.

The OTS regularly examines the Bank and prepares reports for the consideration of the Bank’s Board of Directors on any deficiencies that are found in the Bank’s operations. The Bank’s relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Bank’s mortgage documents.

The Bank must file reports with the OTS concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

Branching. Subject to certain limitations, OTS regulations currently permit a federally chartered savings institution like the Bank to establish branches in any state of the United States, provided that the federal savings institution qualifies as a “domestic building and loan associations under the Internal Revenue Code. See “— Qualified Thrift Lender Test. The authority for a federal savings institution to establish an interstate branch network would facilitate a geographic diversification of the institution’s activities.

Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total adjusted assets for savings institutions that receive the highest supervisory rating for safety and soundness and 4% of total adjusted assets for all other thrifts, and (3) risk-based capital equal to 8% of total risk-weighted assets. At June 30, 2004, the Bank was in compliance with its regulatory capital requirements.

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For purposes of the OTS capital regulations, tangible capital is defined as core capital less all intangible assets, less certain mortgage servicing rights and less certain investments. Core, or Tier 1, capital includes common stockholders’ equity, noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less nonqualifying intangible assets, certain mortgage servicing rights and certain investments.

The risk-based capital standard for savings institutions requires the maintenance of total risk-based capital of 8% of risk-weighted assets. Risk-based capital equals the sum of core and supplementary capital. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate—term preferred stock, the portion of the allowance for loan losses not designated for specific loan losses, and up to 45% of unrealized gains on equity securities. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. A savings institution must calculate its risk-weighted assets by multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS, which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans, and other assets.

In addition to the above regulatory capital requirements, the OTS’ prompt corrective action regulation classifies savings institutions by capital levels and provides that the OTS will take various corrective actions, including imposing significant operational restrictions, against any savings institution that fails to meet the regulation’s capital standards. Under this regulation, a ‘well capitalized” savings institution is one that has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a leverage capital ratio of 5%, and is not subject to any capital order or directive. A savings institution is deemed “adequately capitalized” category if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” depending on their capital levels. A savings institution that falls within any of the three undercapitalized categories is subject to severe regulatory sanctions under the prompt corrective action regulation. At June 30, 2004, the Bank was classified as “well capitalized.”

Insurance of Deposit Accounts. The deposit accounts held by the Bank are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution’s primary regulator.

The Bank is required to pay insurance premiums based on a percentage of its insured deposits to the FDIC for insurance of its deposits by the SAIF. The FDIC has set the deposit insurance assessment rates for SAIF-member institutions for the first six months of 2001 at 0% to .027% of insured deposits on an annualized basis, with the assessment rate for most savings institutions set at 0%. In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212% of insured deposits to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017.

Qualified Thrift Lender Test. Federal savings institutions must meet one of two Qualified Thrift Lender (“QTL”) tests. To qualify as a QTL, a savings institution must either (i) be deemed a “domestic building and loan association” under the Internal Revenue code by maintaining at least 60% of its total

23

assets in specified types of assets, including cash, certain government securities, loans secured by and other assets related to residential real property, educational loans and investments in premises of the institution or (ii) satisfy the statutory QTL test set forth in the Home Owner’s Loan Act by maintaining at least 65% of its “portfolio assets” in certain “Qualified Thrift investments” (defined to include residential mortgages and related equity investments, certain mortgage-related securities, small business loans, student loans and credit card loans, and 50% of certain community development loans). For purposes of the statutory QTL test, portfolio assets are defined as total assets minus intangible assets, property used by the institution in conducting its business, and liquid assets equal to 10% of total assets. A savings institution must maintain its status as a QTL on a monthly basis in at least nine out of every 12 months. A failure to qualify as a QTL would result in a number of sanctions, including certain operating restrictions. At June 30, 2004, the Bank was in compliance with its QTL requirement.

Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions, including cash dividends. A savings institution, such as the Bank, that is a subsidiary of a savings and loan holding company, must file an application or a notice with the OTS at least 30 days before making a capital distribution. Savings institutions are not required to file an application for permission to make a capital distribution and need only file a notice if the following conditions are met: (1) they are eligible for expedited treatment under OTS regulations. (2) they would remain adequately capitalized after the distribution, (3) the annual amount of capital distribution does not exceed net income for that year to date added to retained net income for the two preceding years, and (4) the capital distribution would not violate any agreements between the OTS and the savings institution or any OTS regulations. Any other situation would require an application to the OTS.

The OTS may disapprove an application or notice if the proposed capital distribution would: (i) make the savings institution undercapitalized, significantly undercapitalized, or critically undercapitalized; (ii) raise safety or soundness concerns; or (iii) violate a statue, regulation, or agreement with the OTS (or with the FDIC), or a condition imposed in an OTS approved application or notice. Further, a federal savings institution, like the Bank, cannot distribute regulatory capital that is needed for its liquidation account.

Loans to One Borrower. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution’s unimpaired capital and surplus. An additional amount may be lent, equal to 10% of the unimpaired capital and surplus, under certain circumstances. At June 30, 2004, the Registrant’s lending limit for loans to one borrower was approximately $4.2 million and had no outstanding commitments that exceeded the loans to one borrower limit at the time originated or committed.

Federal Home Loan Bank System. The Bank is a member of the FHLB of Atlanta, which is one of 12 regional FHLB’s that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB.

As a member, the Bank is required to purchase and maintain stock in the FHLB of Atlanta in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Bank’s advances from the FHLB. At June 30, 2004, the Bank was in compliance with this requirement.

Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily

24

checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At June 30, 2004, the Bank was in compliance with these Federal Reserve Board requirements.

Taxation

General. The Company and the Bank file a consolidated federal income tax return on a calendar year basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur.

Federal Income Taxation. Savings institutions, such as the Bank, generally are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same manner as other corporations. For tax years beginning before December 31, 1995, however, by meeting certain definitional tests and other conditions prescribed by the Internal Revenue Code, thrift institutions could benefit from special deductions for annual additions to tax bad debt reserves with respect to loans. For purposes of the bad debt reserve deduction, loans were separated into “qualifying real property loans,” which generally were loans secured by interests in improved real property, and “nonqualifying loans,” which were all other loans. The bad debt reserve deduction with respect to nonqualifying loans was based on actual loss experience. The bad debt reserve deduction with respect to qualifying real property loans could he based upon actual loss experience (the “experience method”) or a percentage of taxable income determined without regard to such deduction (the “percentage of taxable income method”). The Bank historically used whichever method resulted in the highest bad debt reserve deduction in any given year.

Beginning with the first taxable year beginning after December 31, 1995, savings institutions, such as the Bank, have been treated the same as commercial banks. Institutions with $500 million or more in assets are able to take a tax deduction only when a loan is actually charged off. Institutions with less than $500 million in assets are still permitted to make deductible bad debt additions to reserves, but only using the experience method. As a result, thrifts must recapture into taxable income the amount of their post-1987 tax bad debt allowance over a six-year period beginning after 1995. This recapture can be deferred for up to two years if the thrift satisfies a residential loan portfolio test. All of the bad debt reserve was recaptured in 2001.

Under the experience method, the bad debt deduction to an addition to the reserve for qualifying real property loans is an amount determined under a formula based generally on the bad debts actually sustained by a savings institution over a period of years. Under the percentage of taxable income method, the bad debt reserve deduction for qualifying real property loans was computed as 8% of the thrift’s taxable income. The maximum deduction could be taken as long as not less than 60% of the total dollar amount of the assets of an institution fell within certain designated categories. If the amount of qualifying assets fell below 60%, the institution would get no deduction and could be required to recapture, generally over a period of years, its existing bad debt reserves (although net operating loss carryforwards could be used to offset such recapture).

The bad debt deduction under the percentage of taxable income method was limited to the extent that the amount accumulated in the reserve for losses on qualifying real property loans exceeded 6% of such loans outstanding at the end of the taxable year. In addition, the amount claimed as a bad debt deduction when added to accumulated loss reserves was limited to the excess, if any, of 12% of total deposits or withdrawable accounts of depositors at year-end in excess of the sum of surplus, undivided profits and reserves at the beginning of the year. The percentage bad debt deduction was reduced by the deduction for losses on nonqualifying loans.

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Earnings appropriated to the Bank’s tax bad debt reserves and claimed as tax deductions will not be available for the payment of cash dividends or other distributions to the Company (including distributions made upon dissolution or liquidation), unless the Bank includes the amounts distributed in taxable income, along with the amounts deemed necessary to pay the resulting federal income tax. At June 30, 2004, the Bank had approximately $2.8 million of pre-1988 accumulated bad debt reserves for which federal income taxes have not been provided.

The Internal Revenue Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”) and is payable to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code provides that an item of tax preference is the excess of the bad debt deduction allowable for a taxable year pursuant to the percentage of taxable income method over the amount allowable under the experience method. The other items of tax preference that constitute AMTI include (a) tax-exempt interest on newly-issued private activity bonds other than certain qualified bonds and (b) for taxable years including 1987 through 1989, 50% of the excess of (i) the taxpayer’s pre-tax adjusted net book income over (ii) AMTI (determined without regard to this latter preference and prior to reduction by net operating losses). For taxable years beginning after 1989, this latter preference has been replaced by 75% of the excess (if any) of (i) adjusted current earnings as defined in the Internal Revenue Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating losses). For any taxable year beginning after 1986, net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum taxes may be used as credits against regular tax liabilities in future years. In addition, for taxable years after 1986 and before 1992, corporations, including savings institutions, are also subject to an environmental tax equal to 0.12% of the excess of AMTI for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2.0 million. The Bank is not currently paying any amount of alternative minimum tax but may depending on future results of operations, be subject to this tax.

The Bank’s federal income tax returns have not been examined by the regulatory authorities within the past five years. For additional information, see Note 8 of Notes to Consolidated Financial Statements in the Annual Report filed as Exhibit 13 to this Report.

Employees

As of June 30, 2004, the Company and the Bank had 29 full-time employees none of whom was represented by a collective bargaining agreement.

Item 2. Description of Property

The following table sets forth information regarding the Bank’s offices at June 30, 2004.

	Year Opened	Net Book Value at June 30, 2004		Approximate Square Footage	Owned or Leased
Main Office:
221 South 6th Street Gadsden, Alabama 35901	1968	$	184,029	6,500	Owned
Branch Offices:
202 Sand Mountain Drive Albertville, Alabama 35950	1965		1,683	1,405	Leased

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	Year Opened	Net Book Value at June 30, 2004	Approximate Square Footage	Owned or Leased
2204 Henry Street Guntersville, Alabama 35976	2000	200,514	1,100	Owned
390 W. Main Street Centre, Alabama 35960	1994	61,827	2,263	Owned

The net book value of the Bank’s investment in furnishings and equipment totaled $37,512 at June 30, 2004.

Item 3. Legal Proceedings

From time to time, the Bank is a party to various legal proceedings incident to its business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial statements.

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

The information required by this item is incorporated by reference to “Item 1. Description of Business – Regulation – Regulation of the Bank – Dividend and Other Capital Distribution Limitations” herein and “Market for Common Stock and Related Stockholder Matters” and Note 11 of the Notes to Consolidated Financial Statements in the portions of the Annual Report filed as Exhibit 13 to this Report.

The following table details stock repurchases by the Company during the quarter ended June 30, 2004.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased As Part of Publicly Announced Programs	Maximum Number of Shares that May Yet Be Purchased Under the Program
April 1-30, 2004	—	$	—	—	—
May 1-31, 2004	21,000	$	17.16	—	—
June 1-30, 2004	20,400	$	17.27	—	—
Total	41,400	$	17.21	—	—

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Item 6. Management’s Discussion and Analysis or Plan of Operation

The information required by this item is incorporated by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the portions of the Annual Report filed as Exhibit 13 to this Report.

Item 7. Financial Statements

The financial statements required by this item are incorporated by reference to the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Independent Auditors’ Report in the portions of the Annual Report filed as Exhibit 13 to this Report.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

The information required by this item is incorporated by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Changes in Certifying Accountant” in the portions of the Annual Report filed as Exhibit 13 to this Report.

Item 8A. Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

In addition, the Company reviewed its internal controls. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls of the Company.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the CEO and CFO to allow timely decisions regarding required disclosures. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and transactions are properly recorded and unauthorized or improper use and transactions are properly recorded and reported.

Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the control’s cost relative to their benefits. Additionally, controls can be circumvented. No post-effective control system can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

Item 8B. Other Information

Not Applicable.

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PART III

Item 9. Directors and Executive Officers of the Registrant

General

The Board of Directors has nominated Grady Gillam, Rex G. Keeling, Jr., and James B. Little, III for election as directors to serve for a three-year period. All nominees are currently members of the Board.

The following table sets forth the names of the nominees for election as directors and the directors whose terms expire in future years. Also set forth is certain other information with respect to each person’s age, the year he first became a director, the expiration of his term as a director, and the number and percentage of shares of Common Stock beneficially owned.

Name	Age at June 30, 2004	Year First Elected as Director (1)		Current Term to Expire	Shares of Common Stock Beneficially Owned at the Record Date (2)	Percent of Class
BOARD NOMINEES FOR TERMS TO EXPIRE IN 2007
Grady Gillam	80	1989		2004	14,451	1.6	%
Rex G. Keeling, Jr.	61	1974		2004	13,542	1.5	%
James B. Little, III	43	2000	(3)	2004	1,163	0.1	%
(1) DIRECTORS CONTINUING IN OFFICE
Thomas F. Dowling, III	67	1972		2005	12,123	1.4	%
Gates Little	34	1994		2005	47,277	5.3	%
Fred Taylor	77	1993		2005	17,334	1.9	%
Craig G. Cantrell	75	1961		2006	12,271	1.4	%
James B. Little, Jr.	74	1957		2006	68,651	7.7	%

(1) Except for James B. Little, III, includes term of office as director of the Bank prior to formation of the Company as holding company for the Bank. All directors, other than James B. Little, III, were initially appointed as directors of the Company in 1995 in connection with the incorporation of the Company and also serve as directors of the Bank.

(2) Includes exercisable stock options for 2,600, 6,362, 10,455, 6,362, 4,771 and 9,407 shares held by Messrs. Gillam, Keeling, Dowling, Gates Little, Taylor, Cantrell, and Little, Jr., respectively; does not include unallocated shares held by the ESOP; does not include shares held by the Company’s stock option and incentive plan trust. See “Voting Securities and Beneficial Ownership” above.

(3) James B. Little, III was appointed to the Board of Directors of the Company in 2000 to fill a vacancy. He does not serve as a director of the Bank.

Set forth below is information concerning the Company’s nominees for election as directors, continuing directors and executive officers. Unless otherwise stated, all directors have held the positions indicated for at least the past five years.

Grady Gillam is retired. Prior to his retirement in 1984, Mr. Gillam was employed as President of the American National Bank of Gadsden, Alabama.

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Rex G. Keeling, Jr. is a pharmacy consultant and former pharmacy owner for over 30 years. Mr. Keeling is an investor in residential and commercial real estate. He also serves as a volunteer football coach for local high schools and colleges.

James B. Little, III is founder and has been a partner of New Capital Partners, LLC, a private equity firm which invests in privately held companies throughout the southeast, since May 2000. Previously, Mr. Little founded and was President and Chief Executive Officer of Momentum Health Services, Inc. (1997-1999) and, prior to that, was President and Chief Executive Officer of Trident Health Systems, L.L.C. (1995-1996). Mr. Little also serves on the boards of Electronic Healthcare Systems, Inc. and Cogent Partners, LP. Mr. Little is the son of James B. Little, Jr. and the brother of Gates Little.

Thomas F. Dowling, III is a dentist in private practice in Gadsden. He is a deacon of the First Baptist Church of Gadsden.

Gates Little joined the Bank in 1993 and served as Executive Vice President from 1998 until September 2000, when he was elected President and Chief Operating Officer. Previously, he served as Vice President of the Bank. In March 2001, he became Chief Executive Officer of the Bank. Mr. Little served as Vice President of the Company from 1995 until April 2001 when he was elected President, Chief Executive Officer, and Chairman of the Board. Mr. Little is the son of James B. Little, Jr. and the brother of James B. Little, III.

Fred Taylor is a realtor and owner of Taylor Realty, located in Albertville. Mr. Taylor is a member of the First Baptist Church in Albertville, the National Real Estate Association, the Alabama Realtors and the Marshall County Board of Realtors.

Craig G. Cantrell is a retired physician. From 1957 to 1992, Dr. Cantrell was in private practice specializing in internal medicine. Dr. Cantrell is a Deacon of the First Baptist Church in Gadsden.

James B. Little, Jr. joined the Bank in 1957 and served as its Chief Executive Officer from 1966 until March 2001 and its Chairman of the Board from 1976 until March 2001. Mr. Little also served as President of the Bank from 1966 until September 2000. He is currently Investment Officer of the Bank. Mr. Little served as Chairman of the Board, President and Chief Executive Officer of the Company from 1995 until April 2001 when he became a Vice President of the Company. Mr. Little is a member of the Gadsden Chamber of Commerce. Mr. Little is the father of Gates Little and James B. Little, III.

Corporate Governance and Other Matters

Board of Director and Stockholder Meetings. The Boards of Directors of the Company and the Bank hold regular monthly meetings and special meetings as needed. The Board of Directors of the Company and the Bank met six times and 12, respectively, during the fiscal year ended June 30, 2004. All directors attended at least 75% of the Board of Directors meetings and assigned committee meetings during the fiscal year. While the Company encourages all members of the Board of Directors to attend annual meetings, there is no formal policy as to their attendance. Beginning after the Meeting, directors will be expected to be present at stockholder meetings. A majority of the members of the Board of Directors attended the 2003 Annual Meeting of Stockholders.

Board of Director Independence. Each year, the Board of Directors reviews the relationships that each director has with the Company and with other parties. Only those directors who do not have any of the categorical relationships that preclude them from being independent and who the Board of

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Directors affirmatively determines have no relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director are considered to be “independent directors”. The Board of Directors has reviewed a number of factors to evaluate the independence of each of its members. These factors include its members’ relationships with the Company and its competitors, suppliers and customers; their relationships with management and other directors; the relationships their current and former employers have with the Company; and the relationships between the Company and other companies of which the Company’s Board members are directors or executive officers. After evaluating these factors, the Board of Directors has determined that Messrs. Cantrell, Dowling, Gillam, Keeling and Taylor are independent directors of the Company within the meaning of Nasdaq rules.

Independent members of the Board of Directors of the Company meet in executive session without management present.

Stockholder Communications. Stockholders may communicate directly with members of the Board of Directors or the individual chairman of standing Board of Directors committees by writing directly to those individuals at the following address: The Southern Banc Company, Inc., 221 S. 6^th Street, Gadsden, Alabama 35901. The Company’s general policy is to forward, and not to intentionally screen, any mail received at the Company’s corporate office that is sent directly to an individual, unless the Company believes the communication may pose a security risk.

Code of Ethics. The Board of Directors has adopted a Code of Ethics that applies to all officers, other employees and directors, which is attached as Exhibit 14 to this Report.

Committees of the Board of Directors

The Board of Directors has a standing Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. The Board of Directors has determined that all of the directors who serve on these committees are independent within the meaning of Nasdaq rules.

The Board of Directors has adopted a charter for each of the three standing committees.

Audit Committee. The members of the Audit Committee are the independent directors of the Company. The Board of Directors has determined that, while the Board believes that each of the members of the Audit Committee is highly qualified to discharge his duties, it is appropriate to disclose that the Board has not designated any particular member of the Audit Committee as qualifying as an “audit committee financial expert” under the SEC’s rules. The Board of Directors has determined that each of the members of the Audit Committee is capable of: (i) understanding accounting principles generally accepted in the United States (“GAAP”) and financial statements; (ii) assessing the general application of GAAP in connection with the accounting for estimates, accruals and reserves; (iii) analyzing and evaluating the Company’s consolidated financial statements; (iv) understanding internal control over financial reporting; and (v) understanding audit committee functions, all of which are attributes of an “audit committee financial expert” under the SEC’s rules. As the Board of Directors, and more specifically the Nominating and Corporate Governance Committee, consider new directors, one of the criteria to be considered will be the financial background and expertise of prospective Board members. It is the Company’s long-term intention to continue to strengthen the financial expertise of the Board of Directors through the normal course of adding new directors.

The Audit Committee has oversight responsibility for the quality and integrity of the Company’s financial statements. The committee meets privately with the independent auditors, has the sole authority to retain and dismiss the independent auditors and reviews their performance and independence from management. The independent auditors have unrestricted access and report directly to the committee.

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The Audit Committee met four times during the fiscal year ended June 30, 2004. The primary functions of the Audit Committee are to oversee: (i) the audit of the financial statements of the Company provided to the SEC, the shareholders and the general public; (ii) the Company’s internal financial and accounting processes; and (iii) the independent audit process. Additionally, the Audit Committee has responsibilities relating to: (i) registered public accounting firms; (ii) complaints relating to accounting, internal accounting controls or auditing matters; (iii) authority to engage advisors; and (iv) funding as determined by the audit committee. These and other aspects of the Audit Committee’s authority are more particularly described in the Audit Committee Charter adopted by the Board of Directors and attached to last year’s Proxy Statement.

The Audit Committee approves audit and non-audit services to be provided to the Company by its independent auditor. All services to be provided by the independent auditor, including audit services and permitted audit-related and non-audit services, must be pre-approved by the Audit Committee. The Audit Committee approved all audit and non-audit services provided during the fiscal year ended June 30, 2004. See “Independent Public Accountants.”

Compensation Committee. The members of the Compensation Committee are Messrs. Dowling and Gillam, each of whom is a non-employee director and is also independent within the meaning of Nasdaq rules. The Compensation Committee met one time during the fiscal year ended June 30, 2004. The functions of the Compensation Committee include making recommendations to the Board of Directors concerning compensation, including incentive compensation, of the executive officers.

Nominating and Corporate Governance Committee. The independent members of the Board of Directors serve as the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is responsible for evaluating and recommending individuals for election or re-election to the Board of Directors, including those recommendations submitted by stockholders, the evaluation of the performance of the Board of Directors and its committees, and the evaluation of the performance of the Board of Directors and its committees, and the evaluation and recommendation of corporate governance policies. In the year ended June 30, 2004, the full Board of Directors held one meeting in its capacity as a Nominating Committee for selecting management nominees for election as directors. The Nominating Committee has been renamed and reconstituted as a fully independent Nominating and Corporate Governance Committee.

It is a policy of the Nominating and Corporate Governance Committee that candidates for director possess the highest personal and professional integrity, have demonstrated exceptional ability and judgment and have skills and expertise appropriate for the Company and serving the long-term interests of the Company’s stockholders. The committee’s process for identifying and evaluating nominees is as follows: (1) in the case of incumbent directors whose terms of office are set to expire, the committee reviews such directors’ overall service to the Company during their terms, including the number of meetings attended, level of participation, quality of performance, and any related party transactions with the Company during the applicable time period (incumbent directors whose terms are to expire do not participate in such review): and (2) in the case of new director candidates, the committee first conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the Board of Directors. The committee meets to discuss and consider such candidates’ qualifications, including whether the nominee is independent, and then selects a candidate for recommendation to the Board of Directors by majority vote. In seeking potential nominees, the Nominating and Corporate Governance Committee uses its and management’s network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. To date, the Nominating and Corporate Governance Committee has not paid a fee to any third party to assist in the process of identifying or evaluating director candidates, nor has the committee rejected a timely director nominee from a stockholder(s) holding more than 5% of the Company’s voting stock.

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The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders, provided the stockholders follow the procedures set forth in the Company’s Certificate of Incorporation. The committee does not intend to alter the manner in which it evaluates candidates, including the criteria set forth above, based on whether the candidate was recommended by a stockholder or otherwise.

The Company’s Certificate of Incorporation provides that, to be timely, a stockholder’s notice of nomination must be delivered or mailed to the Secretary of the Company not less than 30 days nor more than 60 days prior to an annual meeting; provided, however, that in the event that less than 40 days’ notice of the meeting is given or made to stockholders, notice by the stockholder, to be timely, must be not later than close of business on the 10th day following the date on which notice is mailed. A stockholder’s notice of nomination must also set forth as to each person who the stockholder proposes to nominate for election as a director, (a) the name, age, business address and, if known, residence address of such person, (b) the principal occupation or employment of such person, (c) the number of shares of the Company which are beneficially owned by such person, and (d) any other information reasonably requested by the Company. Stockholder nominations may be proposed by any shareholder eligible to vote at an annual meeting, provided the notice is timely and complies with the informational requirements of the Certificate of Incorporation.

The Nominating and Corporate Governance Committee may reject any nomination by a stockholder not made in accordance with the requirements of the Company’s Certificate of Incorporation. Notwithstanding the foregoing procedures, if neither the Board of Directors nor such committee makes a determination as to the validity of any nominations by a stockholder, the chairman of the annual meeting shall, if the facts warrant, determine at the annual meeting whether the nomination was made in accordance with the terms of the Certificate of Incorporation.

Executive Committee. The Board of Directors of each of the Company and the Bank have not established an Executive Committee.

Item 10. Executive Compensation

Director Compensation

The Company’s directors meet on a quarterly basis and receive $300 per meeting. For fiscal 2004, the Company’s directors’ fees totaled $9,300. The Bank’s directors receive fees of $700 per monthly meeting attended and $350 per committee meeting attended. Directors may miss up to two monthly meetings and still receive the monthly fee. For fiscal 2004, the Bank’s directors’ fees totaled $59,500.

Executive Compensation

Summary Compensation Table. The following table sets forth cash and non-cash compensation for each of the fiscal years ended June 30, 2004, 2003 and 2002 awarded to or earned by the Company’s President and Chief Executive Officer for services rendered in all capacities to the Company and its subsidiaries. No other executive officer earned in excess of $100,000 in salary and bonus.

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		Annual Compensation						Long-Term Compensation Awards
Name and Principal Position	Fiscal Year	Salary (1)		Bonus		Other Annual Compensation		Restricted Stock Awards		Securities Underlying Options	All Other Compensation (2)
Gates Little President and Chief Executive Officer (3)	2004 2003 2002	$	109,600 107,400 99,600	$	7,500 —   —	$	144 144 51	$	—   —   —	—   —   —	$	23,667 21,343 19,128

(1) Includes directors’ fees of $9,600 for fiscal 2004.

(2) Includes contributions to the Bank’s defined contribution qualified pension plan, pursuant to which the Bank contributes 5% of each employee’s annual salary and bonus to an IRA account, and ESOP share allocations, valued at the respective fiscal year ends.

(3) Mr. Little served as Vice President of the Company until April 2001 when he became President and Chief Executive Officer.

Stock Options

The following table sets forth information regarding the number and value of options held by the Company’s President and Chief Executive Officer at the end of fiscal 2004. No options were granted to or exercised by such officer during the year.

	Number of Securities Underlying Unexercised Options at Fiscal Year-End		Value of Unexercised In-the-Money Options at Fiscal Year-End (1)
	Exercisable	Unexercisable	Exercisable		Unexercisable
Gates Little	10,455	—	$	41,180	$	—

(1) Based on difference between exercise prices of $11.69 and $14.56 and closing price on June 30, 2004 ($17.00). Options are in-the-money if the fair market value of the underlying securities exceeds the exercise price of the option.

Employment Agreements

In 2001, the Company amended its employment agreement with Gates Little, its former Vice President, to provide that thereafter Mr. Little shall serve as President and Chief Executive Officer of the Company. In addition, the Bank amended its separate employment agreement with Mr. Little to provide that he shall serve thereafter as President and Chief Executive Officer of the Bank.

The agreements provide for terms of three years, with a minimum annual base salary of $100,000 per year. On each anniversary date from the date of commencement of the agreements, the terms of employment will be extended to a date up to 36 months thereafter, upon a determination by the Boards of Directors that the performance of the employee has met the required performance standards and that such agreements should be extended. Additionally, the agreements provide for an automatic 36-month extension of the term upon the occurrence of a “Change in Control” (as defined below). The agreements provide for a salary review by the Boards of Directors not less often than annually, as well as inclusion in any discretionary bonus plans, retirement and medical plans, customary fringe benefits and vacation and sick leave. The agreements will terminate

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upon the employee’s death or disability and are terminable for “just cause” as defined in the agreements (for example, personal dishonesty, willful misconduct or material breach of the agreements). In the event of termination for just cause, no severance benefits are available. If the Company or the Bank terminates the employee without just cause, he will be entitled to a continuation of his salary and benefits from the date of termination through the remaining terms of the agreements plus his salary only for an additional 12-month period (but not in an aggregate amount in excess of three times his five years’ average annual compensation). If the agreements are terminated due to the employee’s disability (as defined in the employment agreements), his salary and benefits will terminate. In the event of the employee’s death during the terms of the agreements, his estate will be entitled to receive his salary through the end of the month in which his death occurs. Severance benefits will be paid in a lump sum or in installments, as he elects. The employee is able to terminate the agreements voluntarily by providing 90 days’ written notice to the Boards of Directors of the Company and the Bank, in which case he is entitled to receive only his compensation, vested rights and benefits up to the date of termination. However, in the event the employee voluntarily terminates his employment within 90 days following the occurrence of one of the following events (other than in connection with a “Change in Control”) (i) a material reduction in his base compensation, (ii) the failure to continue to provide him with the compensation and benefits provided for under the agreements or with benefits substantially similar to those provided to him under an employee benefit plan of the Bank in which he is a participant, or the taking of any action that would directly or indirectly reduce any of such benefits or deprive him of any material fringe benefit enjoyed by him, (iii) the assignment to him of duties and responsibilities materially different from those normally associated with his position, or (iv) a material diminution or reduction in his responsibilities or authority, he will be entitled to those benefits and payments he would be entitled to receive if he had been involuntarily terminated without just cause.

The agreements contain provisions stating that in the event of the employee’s involuntary or constructive termination of employment in connection with, or within 6 months before or 24 months after, any “Change in Control” of the Company or the Bank, other than for just cause, he will be paid within 10 days of such termination an amount equal to the difference between (i) 2.99 times his base amount (as defined in Section 280G(b)(3) of the Internal Revenue Code) and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Internal Revenue Code) that he receives on account of the change in control. Under the agreements, a “Change in Control” is defined as (i) the acquisition, by any person or entity, of the ownership or power to vote more than 25% of the Company’s or the Bank’s voting stock, (ii) the control of the election of a majority of the Company’s or the Bank’s directors, (iii) the exercise of a controlling influence over the management or policies of the Company or the Bank, or (iv) during any consecutive two-year period, directors of the Company or the Bank at the beginning of such period cease to constitute two-thirds of the Board of Directors of the Company or the Bank, unless the election of replacement directors was approved by a two-thirds vote of the initial directors then in office. The agreements provide that the amount to be paid to the employee in the event of such an involuntary termination will be paid in one lump sum within 10 days of such termination. The agreements also provide for a similar lump sum payment to be made in the event of the employee’s voluntary termination of employment for any reason within 30 days of a Change in Control upon the occurrence, or within 90 days thereafter, of certain specified events following the Change in Control which have not been consented to in advance in writing by him, including (i) the requirement that he move his personal residence or perform his principal executive functions more than 30 miles from the Bank’s primary office as of the date of the Change in Control, (ii) a material reduction in his base compensation as then in effect, (iii) the failure to continue to provide him with compensation and benefits substantially similar to those provided to him under any of the employee benefit plans in which he is or becomes a participant or under his employment agreements, or the taking of any action by the Company or the Bank which would directly or indirectly deprive him of any material fringe benefit enjoyed by him as of the date of the Change in Control, (iv) the assignment to him of duties and responsibilities which are other than those normally associated with his position with the Bank, (v) a material reduction in his authority and responsibility,

35

(vi) the failure to re-elect him to the Board of Directors; or (vii) a material reduction in his secretarial or administrative support. The aggregate payments that would be made assuming termination of employment under the foregoing circumstances at June 30, 2004 would have been approximately $286,000. These provisions may have an anti-takeover effect by making it more expensive for a potential _omplian to obtain control of the Company. If the employee were to prevail over the Company and the Bank in a legal dispute with respect to the agreements, he would be reimbursed for his legal and other expenses.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plans

The following table provides information as of September 17, 2004 with respect to the shares of Common Stock that may be issued under the Company’s existing equity compensation plans.

Plan Category	Number of Securities to be issued upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans( 2)
Equity Compensation Plans Approved by Stockholders(1)	58,526	$	12.25	23,896
Equity Compensation Plans Not Approved by Stockholders	—		—	—
Total	58,526	$	12.25	23,896

(2) Consists of the 1996 Stock Option and Incentive Plan.

(3) Includes shares available for future issuance under the Option Plan. As of September 17, 2004, an aggregate of 23,896 shares of Common Stock were available for issuance under the Option Plan. In addition, shares of Common Stock subject to options which remain unissued after the cancellation, expiration or exchange of such options shall again become available for grant under the Option Plan. Excludes shares available for issuance under the ESOP.

Based on reports regarding ownership of the Common Stock filed with the SEC and certain other information received by the Company, the following table sets forth, as of the Record Date, certain information as to those persons who were believed to be beneficial owners of more than 5% of the Company’s outstanding shares of Common Stock and those shares that were believed to be beneficially owned by all directors and executive officers of the Company as a group.

36

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percent of Shares of Common Stock Outstanding
Jeffrey L. Gendell Tontine Financial Partners, L.P. Tontine Management, L.L.C. 55 Railroad Avenue, 3rd Floor Greenwich, Connecticut 06830	95,300	(1)	10.7	%
James B. Little, Jr. 221 S. 6th Street Gadsden, Alabama 35901	68,651		7.7	%
All directors and executive officers as a group (8 persons)	186,812	(2)	21.0	%

(1) Based on a Schedule 13G filed in February 2003, Jeffrey L. Gendell, Tontine Financial Partners, L.P. and Tontine Management, L.L.C. have shared voting and dispositive power over the reported shares.

(2) Includes exercisable stock options for 39,957 shares; does not include 11,485 unallocated shares held by the Employee Stock Ownership Plan (“ESOP”), does not include 35,028 shares held by the Company’s stock option and incentive plan trust, of which Directors Dowling, Taylor and Keeling are trustees.

See Item 9. “Directors and Executive Officers of the Registrant” regarding Common Stock owned by directors, nominees and executive officers.

Item 12. Certain Relationships and Related Transactions

The Bank offers loans to directors, officers and other employees of the Company and the Bank. These loans are made in the ordinary course of business on substantially the same terms, including collateral, interest rates and repayment terms as those prevailing for comparable transactions with non-affiliated persons. It is management’s belief that these loans do not involve more than the normal risk of collectibility or present other unfavorable features. At June 30, 2004, the Bank’s loans to directors and executive officers totaled approximately $64,950.

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Item 13. Exhibits, Lists and Reports on Form 8-K

(a) The following exhibits are filed as part of this report.

No.	Description
3.1 *	Certificate of Incorporation of The Southern Banc Company, Inc.(as amended)
3.2 **	Bylaws of The Southern Banc Company, Inc. (as amended)
4.1 ***	Specimen Common Stock Certificate of The Southern Banc Company, Inc.
4.2****	Rights Agreement
10.1 *****	Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan Association of Gadsden and James B. Little, Jr.
10.2 *****	First Federal Savings and Loan Association of Gadsden Supplemental Executive Retirement Agreement
10.3 ******	The Southern Banc Company, Inc. 1996 Stock Option and Incentive Plan and trust
10.4 ******	First Federal Savings and Loan Association of Gadsden Management Recognition Plan and trust
10.5 *******	1997 Amendments to Employment Agreements between the Southern Banc Company, Inc. and First Federal Savings and Loan Association and James B. Little, Jr.
10.6 *******	Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan Association of Gadsden and Gates Little.
10.7 ********	2001 Amendment to Employment Agreement between the Southern Banc Company, Inc. and Gates Little
10.8 ********	2000 Amendment to Employment Agreement between the Southern Bank Company and Gates Little
10.9 ********	2001 Amendment to Employment Agreement between the Southern Banc Company, Inc. and James B. Little, Jr.
10.10 ********	2000 Amendment to Employment Agreement between the Southern Bank Company and James B. Little, Jr.
10.11 *	2001 Amendment to Employment Agreement between the Southern Bank Company and Gates Little
10.12 *	2001 Amendment to Employment Agreement between the Southern Banc Company, Inc. and James B. Little, Jr.
10.13 *	2001 Amendment to Employment Agreement between the Southern Bank Company, Inc. and James B. Little, Jr.
13	Annual Report to Stockholders. Except for these portions of the Annual Report to Stockholders which are expressly incorporated herein by reference, such Annual Report is furnished for the information of the Commission and is not to be deemed “filed” as part of this Report.
14	Code of Ethics
21	Subsidiaries
23	Consent of KPMG LLP
31	Rule 13a-14(a)/15d-14(a) Certifications
32	Certification pursuant to 18 U.S.C. Section 1350

*	Incorporated by reference to Annual Report on Form 10-KSB for fiscal year ended June 30, 2001.
**	Incorporated by reference to Annual Report on Form 10-KSB for fiscal year ended June 30, 2003.
***	Incorporated by reference to Registration Statement on Form 8-A (No. 1-13964).
****	Incorporated by reference to Current Report on Form 8-K dated July 15, 1999.
*****	Incorporated by reference to Registration Statement on Form S-1 (No. 33-93218).
******	Incorporated by reference to Registration Statement on Form S-8 (No. 333-3546).
*******	Incorporated by reference to Annual Report on Form 10-KSB for fiscal year ended June 30, 1998.
********	Incorporated by reference to Quarterly Report on Form 10-QSB for fiscal quarter ended March, 31, 2001

38

(b) Reports on Form 8-K.

Current Report on Form 8-K dated September 8, 2004, furnishing under Item 2.02 (“Results of Operations and Financial Condition”) announcement of results of operations for the quarter and fiscal year ended June 30, 2004 and under Item 8.01 (“Other Events”) announcement of a stock purchase program.

Item 14. Principal Accountant Fees and Services

Audit Fees and Other Matters

KPMG provided audit services to the Company consisting of the annual audit of the Company’s 2004 and 2003 consolidated financial statements contained in the Company’s Annual Reports on Form 10-KSB and reviews of the financial statements contained in the Company’s Quarterly Reports on Form 10-QSB for 2004 and 2003.

Fee Category	Fiscal Year 2004		% of Total		Fiscal Year 2003		% of Total
Audit Fees	$	46,152	79	%	$	50,300	79	%
Audited-Related Fees	$	—	—	%	$	—	—	%
Tax Fees	$	12,600	21	%	$	12,600	21	%
All Other Fees	$	—	—	%	$	—	—	%
Total Fees	$	58,752	100	%	$	62,900	100	%

KPMG did not provide any services related to the financial information systems design and implementation to the Company during 2004 and 2003.

Audit Fees. These are fees related to professional services rendered in connection with the audit of the Company’s annual financial statements, reviews of the financial statements included in each of the Company’s Quarterly Reports on Form 10-QSB, and accounting consultations that relate to the audited financial statements and are necessary to comply with generally accepted auditing standards.

Tax Fees These are fees billed for professional services related to tax compliance, tax advice and tax planning, including services provided in connection with assistance in the preparation and filing of tax returns.

The Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the independence of KPMG.

Pre-approval Policy

The Audit Committee is authorized to pre-approve all audit and permissible non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent accountants and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent accountants in accordance with this pre-approval, and the fees for the services

39

performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. For the fiscal year ended June 30, 2004, pre-approved non-audit services included only those services described above for “Audit-Related Fees” and “Tax Fees.”

Change in Independent Public Accountants

Effective July 23, 2002, the Company dismissed its independent accountants, Arthur Andersen LLP (“Andersen”), and appointed KPMG as its new independent accountants. This determination followed the Company’s decision to seek proposals from independent accountants to audit the Company’s financial statements for the fiscal year ended June 30, 2002. The decision to dismiss Andersen and to retain KPMG was approved by the Company’s Board of Directors upon the recommendation of its Audit Committee. Andersen’s report on the Company’s 2001 financial statements was issued in August 2001, in conjunction with the filing of the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2001.

During the Company’s two most recent fiscal years ended June 30, 2001, and the subsequent interim period through July 23, 2002, there were no disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to Andersen’s satisfaction, would have caused Andersen to make reference to the subject matter of the disagreement in connection with its reports.

The audit reports of Andersen on the consolidated financial statements of the Company and subsidiaries as of and for the fiscal years ended June 30, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

During the Company’s two most recent fiscal years ended June 30, 2001, and the subsequent interim period through July 23, 2002, the Company did not consult with KPMG regarding any of the matters or events set forth in Item 304(a) (2)(i) and (ii) of Regulation S-B.

The Company requested Andersen to furnish a letter addressed to the Board of Directors of the Company stating whether Andersen agrees with the above statements. The Company was informed that Andersen was no longer providing such letters.

40

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	THE SOUTHERN BANC COMPANY, INC.
Date: September 28, 2004	By:	/s/ Gates Little
		Gates Little
		Chairman of the Board, President and Chief Executive Officer
		(Duly Authorized Representative)

In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

By:	/s/ Gates Little	By:	/s/ Thomas F. Dowling
	Gates Little		Thomas F. Dowling
	Chairman of the Board, President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer)		Director
Date:	September 28, 2004	Date:	September 28, 2004
By:	/s/ Craig G. Cantrell	By:	/s/ James B. Little III
	Craig G. Cantrell		James B. Little III
	Director		Director
Date:	September 28, 2004	Date:	September 28, 2004
By:	/s/ Grady Gillam	By:	/s/ James B. Little, Jr.
	Grady Gillam		James B. Little, Jr.
	Director		Investment Officer and Director
Date:	September 28, 2004	Date:	September 28, 2004
By:	/s/ Rex G. Keeling, Jr.	By:	/s/ Fred Taylor
	Rex G. Keeling, Jr.		Fred Taylor
	Director		Director
Date:	September 28, 2004	Date:	September 28, 2004

41

SUPPLEMENTAL INFORMATION TO BE FURNISHED

WITH REPORTS FILED PURSUANT TO SECTION 15(d)

OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

No annual report to security holders covering the registrant’s list fiscal year and no proxy soliciting materials with respect to the 2004 Annual Meeting of Stockholders has been sent to security holders as of the date of filing this Annual Report on Form 10-KSB. The registrant shall furnish copies of such materials to the Commission when they are sent to security holders.

42

EX-13

EXHIBIT 13

2004

A N N U A L     R E P O R T

THE SOUTHERN BANC COMPANY, INC.

Dear Fellow Stockholders,

We are happy to report the results of Fiscal Year 2004 for The Southern Banc Company, Inc. In our core holding, The Southern Bank Company, we have had a successful year. Despite a flattening yield curve and an increasingly competitive marketplace, we continued to increase the number of new Southern Bank customers and the number of services per customer provided by the Bank. We have also maintained an adequate interest rate risk profile. Please read the section in this report concerning interest rate risk if you are not familiar with it. It is an essential part of the business in which you are invested. The risks associated with lending long and borrowing short are not new, but have been much ignored by many over the decreasing rate environment of the past decade.

We believe that reaching out to customers with value and service is the only way to create long-term strength and stable growth for our Company. Our success depends on serving the local small businesses and individuals that want good, flexible service and fast responses to their questions or problems.

As for the best uses of our capital, we have repurchased 69,200 shares of our common stock since the beginning of our last fiscal year. Since our initial public offering in 1995, we have repurchased over 30% of our outstanding shares and have paid a dividend in every quarter.

We hope that, as shareholders, you will also become advocates for our services. It is important that we tell everyone about the opportunities that we offer.

Please do not hesitate to call on me if I may be of any assistance to you or to anyone you know.

Sincerely,

Gates Little

President and Chairman

The Southern Banc Company, Inc.

THE SOUTHERN BANC COMPANY, INC.

The Southern Banc Company, Inc. (the “Company”) was incorporated at the direction of management of The Southern Bank Company, formerly First Federal Savings and Loan Association of Gadsden, Alabama (the “Bank”), for the purpose of serving as the holding company of the Bank upon the acquisition of all of the capital stock issued by the Bank upon its conversion from mutual to stock form in 1995. The Company is classified as a unitary savings institution holding company and is subject to regulation by the Office of Thrift Supervision (“OTS”). At June 30, 2004, the Company had total consolidated assets of $106.4 million, deposits of $82.0 million and stockholders’ equity of $17.3 million, or 16.3% of total assets.

The Bank was organized in 1936 as a federally chartered mutual savings and loan association, at which time it also became a member of the Federal Home Loan Bank (“FHLB”) System and obtained federal deposit insurance. The Bank currently operates through four banking offices located in Gadsden, Albertville, Guntersville and Centre, Alabama. In 1999, the Bank adopted its current corporate title to increase public awareness of the expanded banking services which the Bank offers.

The Bank’s business strategy has been to operate as a profitable and independent community-oriented financial institution dedicated to providing quality customer service. Generally, the Bank has sought to implement this strategy by using retail deposits as its sources of funds and maintaining most of its assets in loans secured by owner-occupied one-to-four family residential real estate properties located in the Bank’s market area, consumer loans, mortgage-backed securities issued by Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“Fannie Mae”), U.S. government and agency securities, interest-earning deposits, and cash and equivalents. The Bank’s business strategy incorporates the following key elements: (1) remaining a community-oriented financial institution while maintaining a strong core customer base by providing quality service and offering customers the access to senior management and services that a community-based institution can offer; (2) attracting a retail deposit base from the communities served by the Bank’s four banking offices; (3) maintaining asset quality by emphasizing investment in local residential mortgage loans, consumer loans, mortgage-backed securities and other securities issued or guaranteed by the U.S. government or agencies thereof; and (4) maintaining liquidity and capital substantially in excess of regulatory requirements.

As a federally chartered savings institution, the Bank is subject to extensive regulation by the OTS. The lending activities and other investments of the Bank must comply with various federal regulatory requirements, and the OTS periodically examines the Bank for compliance with various regulatory requirements. The Federal Deposit Insurance Corporation (“FDIC”) also has the authority to conduct examinations. The Bank must file reports with the OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System.

MARKET FOR COMMON STOCK

AND RELATED STOCKHOLDER MATTERS

The Company’s common stock trades in the over-the-counter market on the OTC Bulletin Board^® (OTCBB) under the symbol “SRNN”. At June 30, 2004, there were 892,298 shares of the Common Stock outstanding and approximately 226 stockholders of record. This total does not reflect the number of persons or entities who hold Common Stock in nominee or “street name” through various brokerage firms.

On January 8, 2004, The Southern Banc Company, Inc. announced that its application to voluntarily delist its Common Stock from trading on the American Stock Exchange had been approved by the Securities and Exchange Commission (“SEC”), effective at the opening of business on January 8, 2004.

In approving this action, the Company’s Board of Directors determined that it was in the best interests of the Company and its stockholders to delist. The Board considered several factors, including the following: (a) the limited number of stockholders of record, (b) the costs associated with maintaining the Company’s status as a listed company, (c) the limited volume of trading of the shares, and (d) no analysts currently covering the Company and its shares.

The Board of Directors determined that the costs of remaining a listed company outweighed the benefits. Due to the Company’s small number of stockholders and limited trading volume, the Company did not enjoy many of the traditional benefits of being an exchange-listed company. The cost reductions associated with delisting are expected to make the Company more profitable and bring more long-term value to its stockholders.

Since delisting, the Company’s common stock trades in the over-the-counter market on the OTC Bulletin Board^® (OTCBB) under the symbol “SRNN.” The following companies have agreed to make a market in the common stock as long as the volume of trading and certain other market making considerations justify such activity- Sterne, Agee & Leach, Inc., Crown Financial Group, Inc., Hill Thompson Magid & Co., Inc., Monroe Securities, Inc., and Knight Equity Markets, L.P.

The Board of Directors is considering terminating the Company’s reports to the SEC. The Company will continue to submit annual, quarterly and other periodic reports under the Securities Exchange Act of 1934 until a final determination is made.

The payment of dividends on the Common Stock is subject to determination and declaration by the Board of Directors of the Company. The Board of Directors has adopted a policy of paying quarterly cash dividends on the Common Stock. In addition, from time to time, the Board of Directors may pay special cash dividends in addition to, or in lieu of, regular cash dividends. The payment of future dividends will be subject to the requirements of applicable law and the determination by the Board of Directors of the Company that the net income, capital and financial condition of the Company and the Bank, thrift industry trends and general economic conditions, justify the payment of dividends. There can be no assurance that future dividends will be paid. The Company’s principal source of funds for dividend payments is dividends from the Bank. See Note 11 of Notes to Consolidated Financial Statements.

The following table sets forth information as to high and low sales prices of the Company’s Common Stock and cash dividends declared per share of Common Stock for the calendar quarters indicated.

	Price Per Share				Dividends Per Share
	High		Low
Fiscal 2003
First Quarter	$	12.80	$	11.71	$	.0875
Second Quarter	$	15.50	$	11.71	$	.0875
Third Quarter	$	15.00	$	13.56	$	.0875
Fourth Quarter	$	15.40	$	13.75	$	.0875
Fiscal 2004
First Quarter	$	19.00	$	15.20	$	.0875
Second Quarter	$	16.99	$	15.89	$	.0875
Third Quarter*	$	16.25	$	15.53	$	.0875
Fourth Quarter*	$	17.50	$	16.00	$	.0875

* On January 8, 2004, the Company voluntarily delisted its Common Stock from trading on the American Stock Exchange. Since that date, the Common Stock trades in the OTCBB. Over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not reflect actual transactions.

2

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

	Year Ended June 30,
	2004			2003			2002			2001			2000
	(In thousands, except per share data)
INCOME STATEMENT DATA
Interest income	$	5,007		$	5,890		$	6,299		$	6,812		$	6,944
Interest expense		2,119			2,898			3,566			4,345			4,081
Net interest income		2,888			2,992			2,733			2,467			2,863
Provision for loan losses		12			13			27			30			17
Net interest income after provision for loan losses		2,876			2,979			2,706			2,437			2,846
Non-interest income		235			524			183			200			118
Non-interest expense		2,153			2,013			1,853			1,892			1,962
Income before provision for income taxes		958			1,490			1,036			745			1,002
Provision for income taxes		381			596			403			278			356
Net income	$	577		$	894		$	633		$	467		$	646
Earnings per share
Basic	$	0.66		$	1.02		$	0.69		$	0.53		$	0.71
Diluted	$	0.63		$	1.00		$	0.69		$	0.53		$	0.71
	Year Ended June 30,
	2004			2003			2002			2001			2000
	(In thousands)
BALANCE SHEET DATA
Total assets	$	106,353		$	111,701		$	110,002		$	97,164		$	98,087
Loans receivable, net		37,477			38,918			34,515			37,587			39,840
Securities:
Available for sale		56,717			53,723			53,753			35,635			26,402
Held to maturity		4,194			7,215			11,527			17,513			23,886
Federal Home Loan Bank stock		792			886			1,449			724			724
Deposits		82,005			84,357			81,557			79,843			81,437
Federal Home Loan Bank advances.		6,917			7,750			9,583			0			0
Stockholders’ equity		17,253			18,866			18,344			17,046			16,319
	Year Ended June 30,
	2004			2003			2002			2001			2000
KEY OPERATING DATA
Return on average assets		0.54	%		0.80	%		0.58	%		0.48	%		0.66	%
Return on average equity		3.25			4.68			3.48			2.74			4.03
Average equity to average assets		16.67			7.02			16.62			17.59			16.33
Dividend payout ratio		53.03			31.31			48.61			66.04			49.30
Number of offices		4			4			4			4			4

3

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The principal business of the Company consists of accepting deposits from the general public through the Bank’s main and branch offices and investing those funds in loans secured by one-to-four family residential properties and consumer loans located in the Bank’s primary market area. Due to the competition for one-to-four family mortgage loans and consumer loans in the Bank’s market area, the Bank maintains a substantial portfolio of investment and mortgage-backed securities. The Bank’s mortgage-backed securities are all guaranteed as to principal and interest by GNMA, Freddie Mac or Fannie Mae. The Bank’s securities portfolio consists primarily of mortgage backed securities, government agency securities, including agency notes and U. S. Treasury Notes. See Notes 2 and 3 of Notes to Consolidated Financial Statements. The Bank maintains a substantial amount in interest-bearing deposits in other banks, primarily an interest-bearing account with the FHLB of Atlanta.

The Company’s net income is dependent primarily on the Bank’s net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities and securities portfolio and interest paid on customers’ deposits and any other borrowings. The Company’s net income is also affected by the Bank’s level of non-interest income, such as service charges on customers’ deposit accounts, net gains or losses on the sale of securities and other fees. In addition, net income is affected by the level of non-interest expense, primarily consisting of compensation and employee benefit expense, data processing expense, professional service expense, office building and equipment expense, and other expenses.

The operations of the Company and the financial institution industry as a whole are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the economy and supply of housing and competition among lenders and the level of interest rates in the Bank’s market area. The Bank’s deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings in the Bank’s market area.

Comparison of Financial Condition at June 30, 2004 and June 30, 2003

Total assets decreased approximately $5.3 million, or 4.8%, from $111.7 million at June 30, 2003 to $106.4 million at June 30, 2004. During the year ended June 30, 2004, net loans decreased approximately $1.4 million, or 3.7%, from $38.9 million to $37.5 million. The decrease in net loans was primarily attributable to loan repayments and a decrease in origination of new loans. For the period ended June 30, 2004, securities available for sale increased approximately $3.0 million, or 5.6%, from $53.7 million to $56.7 million. During the period ended June 30, 2004, securities held to maturity decreased approximately $3.0 million, or 41.9%, from $7.2 million to $4.2 million. This decrease was primarily attributable to maturities of securities classified as held to maturity.

Cash and cash equivalents decreased approximately $3.7 million, or 39.4%, from $9.4 million at June 30, 2003 to $5.7 million at June 30, 2004. This decrease was primarily attributable to decreases in deposits and FHLB advances.

Accrued interest and dividends receivable decreased approximately $44,000, or 9.1%, from $483,000 at June 30, 2003 to $440,000 at June 30, 2004. This decrease was primarily attributable to a decrease in market interest rates. Prepaid expenses and other assets decreased approximately $13,000, or 2.5%, from $527,000 at June 30, 2003 to $514,000 at June 30, 2004.

Total deposits decreased approximately $2.4 million, or 2.8%, from $84.4 million at June 30, 2003 to $82.0 million at June 30, 2004. This decrease was primarily attributable to the competitive interest rate market. FHLB advances decreased approximately $833,000, or 10.8%, from $7.8 million at June 30, 2003 to $6.9 million at June 30, 2004. The decrease in FHLB Advances was primarily attributable to repayments based on the fixed payment schedule. Other liabilities during the fiscal year ended June 30, 2004 decreased approximately $549,000, or 75.4%, from $728,000 at June 30, 2003 to $179,000 at June 30, 2004. The decrease in other liabilities was primarily

4

attributable to a decrease in the deferred tax liability associated with the decreased unrealized gain on securities available for sale.

Total equity decreased approximately $1.6 million, or 8.6%, from $18.9 million at June 30, 2003 to $17.3 million at June 30, 2004. This decrease was primarily attributable to a decrease in the unrealized gains on securities available for sale, payment of common stock dividends, and treasury stock repurchases offset by the amortization of unearned compensation and an increase in retained earnings resulting from current year earnings of $577,000.

Comparison of Results of Operations for the Fiscal Years Ended June 30, 2004 and 2003

The Company reported net income for the fiscal years ended June 30, 2004 and 2003 of approximately $577,000 and $894,000, respectively. The decrease in net income for the fiscal year ended June 30, 2004 was primarily attributable to a decrease in the Bank’s net interest margin of approximately $105,000 and a decrease in gains on sales of available for sale securities of approximately $291,000.

Net Interest Income. Net interest income decreased approximately $105,000, or 3.5%, from $3.0 million at June 30, 2003 to $2.9 million at June 30, 2004. This decrease was primarily attributable to a decrease in interest income, primarily interest and dividends on securities, net of a decrease in interest on deposits during a decreasing interest rate environment. Total interest income decreased approximately $883,000, or 15.0%, for the fiscal year ended June 30, 2004. The decrease in interest income was primarily due to the decrease in average yields on interest earning assets. Total interest expense decreased approximately $778,000, or 26.8%, for the fiscal year ended June 30, 2004 compared with the fiscal year ended June 30, 2003. The decrease in total interest expense was primarily attributable to a decrease in the average cost of interest-bearing liabilities.

Provision for Loan Losses. During the fiscal year ended June 30, 2004, the provision for loan losses decreased approximately $2,000, or 15.4%, from $13,000 at June 30, 2003 to approximately $12,000 at June 30, 2004. The allowance for loan losses is based on management’s evaluation of possible loan losses inherent in the Bank’s loan portfolio. Management considers, among other factors, past loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors.

Non-Interest Income. Non-interest income decreased approximately $289,000, or 55.2%, for the fiscal year ended June 30, 2004, from $524,000 for the year ended June 30, 2003 to $235,000. The decrease in non-interest income was primarily attributable to decreases in customer service fees of approximately $32,000, or 20.4%, and gains on the sale of securities available for sale of approximately $291,000, or 82.2%, for the fiscal year ended June 30, 2004. The decrease in customer service fees was primarily attributable to a decrease in fees of approximately $38,000 associated with secondary market loan sales.

Non-Interest Expense. Non-interest expense increased approximately $140,000, or 7.0%, for the fiscal year ended June 30, 2004. This increase was primarily attributable to an increase in salaries and employee benefits of approximately $134,000, or 12.1%, an increase in data processing expense of approximately $11,000, or 5.5%, and an increase in professional service expense of approximately $51,000, or 27.3%, for the fiscal year ended June 30, 2004. The increase in salaries and employee benefits were primarily attributable to salary adjustments and increases in other benefit expenses. The increase in professional service expense was primarily attributable to legal fees associated with the delisting of the Company’s common stock.

Provision for Income Taxes. During the fiscal year ended June 30, 2004, the provision for income tax expense decreased approximately $215,000, or 36.1%. This decrease was primarily attributable to an decrease in taxable net income for the year ended June 30, 2004, as compared to the year ended June 30, 2003. Income tax expense was approximately $381,000 for the year ended June 30, 2004 compared to approximately $596,000 for the year ended June 30, 2003 resulting in effective tax rate of 40% in both years. The statutory federal tax rate in both years was 34%. See Note 8 of Notes to Consolidated Financial Statements for reconciliation between statutory tax rate and effective tax rate.

5

Asset/Liability Management

Net interest income, the primary component of the Company’s net income, is determined by the difference or “spread” between the yields earned on the Bank’s interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity on both the interest-earning assets and interest-bearing liabilities. The matching of the Bank’s assets and liabilities may be analyzed by examining the extent to which its assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on an institution’s net portfolio value.

An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Bank’s assets mature or reprice more quickly or to a greater extent than its liabilities, the Bank’s net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. If the Bank’s assets mature or reprice more slowly or to a lesser extent than its liabilities, the Bank’s net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. The Bank’s policy has been to mitigate the interest rate risk inherent in the historical savings institution business of originating long term loans funded by short term deposits by pursuing the following strategies: (i) the Bank has historically maintained substantial liquidity and capital levels to sustain unfavorable movements in market interest rates; and (ii) in order to minimize the adverse effect of interest rate risk on future operations, the Bank purchases adjustable- and fixed-rate securities with maturities of primarily five to fifteen years and originates limited amounts of shorter term consumer loans.

The OTS requires the Bank to measure its interest rate risk by computing estimated changes in the net present value (“NPV”) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. These computations estimate the effect on the Bank’s NPV of sudden and sustained 100 basis point to 400 basis point increases and decreases in market interest rates. The Bank’s Board of Directors has adopted an interest rate risk policy which establishes maximum increases and decreases in the Bank’s estimated NPV of 25%, 50% and 77% and 25%, 35% and 50% in the event of 100, 200 and 300 basis point increases and decreases in market interest rates, respectively. At June 30, 2004, based on the most recent information provided by the OTS, it was estimated that the Bank’s NPV would decrease 7%, 17% and 27% and increase 2% in the event of 100, 200 and 300 basis point increases and a 100 basis point decrease in market interest rates, respectively. These calculations indicate that the Bank’s net portfolio value could be adversely affected by increases in interest rates. Changes in interest rates also may affect the Bank’s net interest income, with increases in rates expected to decrease income and decreases in rates expected to increase income, as the Bank’s interest-bearing liabilities would be expected to mature or reprice more quickly than the Bank’s interest-earning assets.

While management cannot predict future interest rates or their effects on the Bank’s NPV or net interest income, management does not expect current interest rates to have a material adverse effect on the Bank’s NPV or net interest income in the future. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments and deposit run-offs and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in such computations. Although certain assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable rate mortgages, generally have features which restrict changes in interest rates on a short term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making calculations set forth above. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Finally, virtually all of the adjustable rate loans in the Bank’s portfolio contain conditions which restrict the periodic change in interest rate.

The Bank’s Board of Directors is responsible for reviewing the Bank’s asset and liability policies. On at least a quarterly basis, the Board reviews interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank’s management is responsible for administering the policies and determinations of the

6

Board of Directors with respect to the Bank’s asset and liability goals and strategies. Management expects that the Bank’s asset and liability policies and strategies will continue as described above so long as competitive and regulatory conditions in the financial institution industry continue as they have in recent years.

Average Balance, Interest and Average Yields and Rates

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 balance of assets or liabilities, respectively, for the periods indicated.

The table also presents information for the periods indicated and at June 30, 2004 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.

	Years Ended June 30,
	2004						2003
	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	37,544	$	2,243	5.97	%	$	38,680	$	2,374	6.14	%
Securities		60,136		2,721	4.52			63,324		3,448	5.45
Other interest-earning assets		4,296		43	1.00			5,184		68	1.31
Total interest-earning assets		101,976		5,007	4.91			107,188		5,890	5.50
Non-interest-earning assets		4,238						5,191
Total assets	$	106,214					$	112,379
Interest-bearing liabilities:
Deposits	$	81,079		1,780	2.20		$	84,611		2,518	2.98
FHLB advances		6,913		340	4.92			7,746		380	4.91
Total interest-bearing liabilities		87,992		2,120	2.41			92,357		2,898	3.14
Non-interest-bearing liabilities		437						896
Total liabilities		88,429						93,253
Equity		17,785						19,126
Total liabilities and equity	$	106,214					$	112,379
Net interest income			$	2,887					$	2,992
Interest rate spread					2.50	%					2.36	%
Net interest margin					2.83	%					2.79	%
Ratio of average interest-earning assets to average interest-bearing liabilities					115.89	%					116.06	%

7

Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense of the Company 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 old rate) and (ii) changes in rates (changes in rate multiplied by old volume).

	Year Ended June 30,
	2004 vs. 2003
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest income
Loans	$	(61	)	$	(70	)	$	(131	)
Securities		(553	)		(174	)		(727	)
Other interest-earning assets		17			(42	)		(25	)
Total interest-earning assets		(597	)		(286	)		(883	)
Interest expense
Deposits		(635	)		(103	)		(738	)
Interest on FHLB Advances		1			(41	)		(40	)
Total interest-bearing liabilities		(634	)		(144	)		(778	)
Change in net interest income	$	37		$	(142	)	$	(105	)

Liquidity and Capital Resources

As a holding company, the Company conducts its business through its subsidiary, the Bank, which is required to maintain minimum levels of liquid assets as defined by regulations of the OTS. The requirement, which varies from time to time depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio currently is 4.0%. The Bank adjusts its liquidity levels in order to meet funding needs of deposit outflows, repayment of borrowings and loan commitments. The Bank also adjusts liquidity as appropriate to meet its asset and liability management objectives.

The Bank’s primary sources of funds are deposits, payment of loans and mortgage-backed securities, maturities of investment securities and other investments. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank invests in short-term interest-earning assets which provide liquidity to meet lending requirements.

The Bank continues to maintain a high level of liquid assets in order to meet its funding requirements. At June 30, 2004, the Bank had approximately $5.7 million in cash on hand and interest-bearing deposits in other banks, which represented 5.4% of total assets. The Bank’s average liquidity ratio well exceeded the required minimum at and during the fiscal year ended June 30, 2004. At June 30, 2004, the Bank’s level of liquid assets, as measured for regulatory compliance purposes, was $16.8 million, or 20.2% of total liquid assets of the Bank.

At June 30, 2004, the Bank had $16.4 million of total equity, or 15.4% of total assets. The Bank continued to exceed its regulatory capital requirement ratios at June 30, 2004. Tangible capital and core capital were each $16.5 million, which represented 15.4% of adjusted total assets, and risk-based capital was $16.6 million, which represented 44.7% of total risk-weighted assets at June 30, 2004. Such amounts exceeded the respective minimum required ratios of 1.5%, 4.0% and 8.0% by 13.9%, 11.4% and 36.7%, respectively. At June 30, 2004, the Bank continued to meet the definition of a “well-capitalized” institution, the highest of the five categories under the prompt corrective action standards adopted by the OTS. See Note 11 of Notes to Consolidated Financial Statements.

8

Contractual Obligations

The following table sets forth the contractual obligations of the Bank as of June 30, 2004.

	One Year or Less		Over One through Three Years		Over Three through Five Years		Over Five Years		Total
	(In thousands)
FHLB advances (1)	$	0	$	3,000	$	3,917	$	0	$	6,917
Operating leases (2)		7		4		0		0		11
Certificates of deposit (3)		25,329		21,495		13,502		62		60,388
Total	$	25,336	$	24,499	$	17,419	$	62	$	67,316

(1) See Note 9 of Notes to Consolidated Financial Statements.

(2) See Note 10 of Notes to Consolidated Financial Statements.

(3) See Note 7 of Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements

The following table sets forth off-balance sheet exposures of the Bank as of June 30, 2004.

	One Year or Less		Over One through Three Years		Over Three through Five Years		Over Five Years		Total
	(In thousands)
Lines of credit – consumer	$	0	$	0	$	1,092	$	0	$	1,092
Lines of credit–commercial		0		0		52		0		52
Commitments to originate real estate loans		627		0		0		0		0
Overdraft Protection		9		0		0		0		9
Total	$	636	$	0	$	1,144	$	0	$	1,780

In the normal course of business, the Bank is a party to activities that contain credit, market and operational risk that are not reflected in the Company’s Consolidated Financial Statements. The Bank provides customers with off-balance sheet credit support through loan commitments and lines of credit. Many of the commitments expire unused or are only partially used. Therefore, the total amount of commitments does not necessarily represent future cost requirements. The Company anticipates that the Bank will continue to have sufficient funds together with available borrowings to satisfy its commitments. At June 30, 2004, the Bank had approximately $627,000 in outstanding commitments to originate residential real estate. See Note 10(b) of Notes to Consolidated Financial Statements.

Critical Accounting Policy

The accounting principles followed by the Company and the methods of applying principles conform with accounting principles generally accepted in the United States and with general practices followed by the banking industry. The most critical accounting policy relates to the allowance for loan losses.

The allowance for loan losses is maintained at a level which management considers to be adequate to absorb losses inherent in the loan portfolio. Management’s estimation of the amount of the allowance is based on a continuing evaluation of the loan portfolio and includes such factors as economic conditions, analysis of individual loans, overall portfolio characteristics, delinquencies and balance of any impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans).

9

Management reviews the adequacy of the allowance for loan losses on a continuous basis by assessing the quality of the loan portfolio and adjusting the allowance when appropriate. Management’s evaluation of certain specifically identified loans includes a review of the financial condition and capacity of the borrower, the value of the collateral, current economic trends, historical losses, workout and collective arrangements, and possible concentrations of credit. The loan review process also includes a collective evaluation of credit quality within the mortgage and installment loan portfolios. In establishing the allowance, loss percentages are applied to groups of loans with similar risk characteristics. These loss percentages are determined by historical experience, portfolio mix, regulatory influence, and other economic factors. Each month this review is quantified in a report to management, which uses it to determine whether an appropriate allowance is being maintained. This report is then submitted to the Board of Directors monthly.

Changes in the allowance can result from changes in economic events or changes in the creditworthiness of the borrowers. The effect of these changes is reflected when known. Though management believes the allowance for loan losses to be adequate, ultimate losses may vary from estimations. Specific allowances for impaired loans are generally based on comparisons of the carrying values of the loans to the estimated fair value of the collateral.

Impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous 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 is measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment of the loan, the impairment is recorded through a valuation allowance.

The Company ceases accrual of interest on a loan when payment on the loan is in excess of 90 days past due. 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 has been reestablished, in which case the loan is returned to accrual status.

Recent Accounting Pronouncements

On December 24, 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was issued on January 17, 2003. FIN 46 provides consolidation guidance for situations in which voting equity interests do not adequately reflect the controlling interests in an entity. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to operate without additional subordinated financial support from other parties. Management is currently assessing the impact of FIN 46R, and does not expect this interpretation to have any impact to the consolidated financial statements upon adoption on December 31, 2004.

In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 105, Application of Accounting Principles to Loan Commitments, which summarized the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The SAB requires that the fair value measurement of a loan commitment that is accounted for as a derivative includes only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected cash flows related to the customer relationship or loan servicing. This SAB is effective for loan commitments entered into after March 31, 2004. The Company adopted SAB 105 on April 1, 2004, and the effect was not material.

In March 2004, the FASB’s Emerging Issues Task Force reached a consensus of EITF Issue No. 03–1, The Meaning of Other–Than–Temporary Impairment and Its Application to Certain Investments. The guidance prescribes a three–step model for determining whether an investment is other–than–temporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting

10

periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The Company has adopted the requirements of this EITF.

Forward-Looking Statements

Management’s discussion and analysis includes certain forward-looking statements addressing, among other things, the Company’s prospects for earnings, asset growth and net interest margin. Forward-looking statements are accompanied by, and identified with, such terms as “anticipates,” “believes,” “expects,” “intends,” and similar phrases. Management’s expectations for the Company’s future involve a number of assumptions and estimates. Factors that could cause actual results to differ from the expectations expressed herein include: substantial changes in interest rates, and changes in the general economy; and changes in the Bank’s strategies for credit-risk management, interest-rate risk management and investment activities. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.

Changes in Certifying Accountant

Effective July 23, 2002, the Company dismissed its independent accountants, Arthur Andersen LLP (“Andersen”), and appointed KPMG LLP (“KPMG”) as its new independent accountants. This determination followed the Company’s decision to seek proposals from independent accountants to audit the Company’s financial statements for the fiscal year ended June 30, 2002. The decision to dismiss Andersen and to retain KPMG was approved by the Company’s Board of Directors upon the recommendation of its Audit Committee. Andersen’s report on the Company’s 2001 financial statements was issued in August 2001, in conjunction with the filing of the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2001.

During the Company’s fiscal years ended June 30, 2001 and 2000, and the subsequent interim period through July 23, 2003, there were no disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to Andersen’s satisfaction, would have caused Andersen to make reference to the subject matter of the disagreement in connection with its reports.

The audit reports of Andersen on the consolidated financial statements of the Company and subsidiaries as of and for the fiscal years ended June 30, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

During the Company’s fiscal years ended June 30, 2001 and 2000, and the subsequent interim period through July 23, 2003, the Company did not consult with KPMG regarding any of the matters or events set forth in Item 304(a) (2)(i) and (ii) of Regulation S-B.

The Company requested Andersen to furnish a letter addressed to the Board of Directors of the Company stating whether Andersen agrees with the above statements. The Company was informed that Andersen was no longer providing such letters.

11

CORPORATE INFORMATION

Directors and Executive Officers:	Main Office:
Gates Little Chairman of the Board, President and Chief Executive Officer of the Company and of the Bank	221 S. 6th Street Gadsden, Alabama
Craig G. Cantrell Retired	Branch Offices:
	202 Sand Mountain Drive Albertville, Alabama
Thomas F. Dowling, III Dentist
	2204 Henry Street Guntersville, Alabama
Grady Gillam Retired
	390 W. Main Street Centre, Alabama
Rex G. Keeling, Jr. Pharmacy Consultant and Real Estate Investor
	Independent Public Accountants:
	KPMG LLP Birmingham, Alabama
James B. Little, Jr. Investment Officer of the Bank and Vice President of the Company
	General Counsel:
	Inzer, Haney & McWhorter, P.A. Gadsden, Alabama
James B. Little, III New Capital Partners, LLC Founder and Partner
	Securities and Regulatory Counsel:
	Cozen O’Connor Washington, D.C.
Fred Taylor Owner of Taylor Realty
Officers: Rodney Rich Vice President of the Bank Janice Stephens Comptroller of the Bank	Annual Stockholders Meeting:
	November 10, 2004 - 5:00 p.m. The Southern Bank Company 221 S. 6th Street Gadsden, Alabama Record Date – September 17, 2004
Teresa Elkins Vice President of the Bank	A copy of the Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004 as filed with the SEC will be furnished to stockholders as of the Record Date upon written request to the Secretary of the Company, 221 South 6th Street, Gadsden, AL 35901.
Peggy Smith Secretary-Treasurer of the Company and of the Bank
Martha Garrett Vice President of the Bank
Annette Espy Vice President of the Bank
Judy Cater Vice President of the Bank

THE SOUTHERN BANC COMPANY, INC.

221 SOUTH 6TH STREET Ÿ GADSDEN, ALABAMA 35901 Ÿ (256) 543-3860

Report of Independent Registered Public Accounting Firm

The Board of Directors

The Southern Banc Company, Inc.:

We have audited the accompanying consolidated statements of financial condition of The Southern Banc Company, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. 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 the standards of the Public Company Accounting Oversight Board (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 financial position of The Southern Banc Company, Inc. and subsidiaries as of June 30, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

August 3, 2004

THE SOUTHERN BANC COMPANY, INC.

Consolidated Statements of Financial Condition

June 30, 2004 and 2003

	2004			2003
Assets
Cash and cash equivalents:
Cash on hand and in other banks	$	3,169,215		4,052,175
Interest–bearing deposits in other banks		2,564,790		5,340,770
Total cash and cash equivalents		5,734,005		9,392,945
Securities available for sale, at fair value		56,717,031		53,722,625
Securities held to maturity (fair value of $4,474,510 and $7,714,264, respectively)		4,194,141		7,214,938
Federal Home Loan Bank stock		792,300		886,000
Loans held for sale		—		50,000
Loans receivable, net of allowance for loan losses of $144,298 and $139,573, respectively		37,476,587		38,917,607
Accrued interest and dividends receivable		439,616		482,959
Premises and equipment, net		485,565		506,776
Prepaid expenses and other assets		514,140		526,985
Total assets	$	106,353,385		111,700,835
Liabilities and Stockholders’ Equity
Deposits	$	82,005,081		84,357,309
Federal Home Loan Bank advances		6,916,667		7,750,000
Other liabilities		178,970		727,748
Total liabilities		89,100,718		92,835,057
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share. Authorized 500,000 shares; no shares issued and outstanding		—		—
Common stock, par value $0.01 per share. Authorized 3,500,000 shares; issued 1,454,750 shares in 2004 and 2003		14,548		14,548
Additional paid-in capital		13,910,384		13,818,230
Retained earnings		11,340,830		11,082,024
Unearned compensation		(70,715	)	(156,495	)
Shares held in trust, at cost, 34,799 and 65,738 shares in 2004 and 2003, respectively		(495,412	)	(852,141	)
Treasury stock, at cost, 562,452 and 493,252 shares in 2004 and 2003, respectively		(7,346,782	)	(6,182,391	)
Accumulated other comprehensive income (loss)		(100,186	)	1,142,003
Total stockholders’ equity		17,252,667		18,865,778
Total liabilities and stockholders’ equity	$	106,353,385		111,700,835

See accompanying notes to consolidated financial statements.

THE SOUTHERN BANC COMPANY, INC.

Consolidated Statements of Income

Years ended June 30, 2004 and 2003

	2004		2003
Interest income:
Interest and fees on loans	$	2,242,975	2,373,829
Interest and dividends on securities available for sale		2,329,473	2,791,547
Interest and dividends on securities held to maturity		391,719	657,143
Other interest income		43,145	67,967
Total interest income		5,007,312	5,890,486
Interest expense:
Interest on deposits		1,779,908	2,518,249
Interest on borrowed funds		339,687	380,404
Total interest expense		2,119,595	2,898,653
Net interest income before provision for loan losses		2,887,717	2,991,833
Provision for loan losses		11,600	13,000
Net interest income after provision for loan losses		2,876,117	2,978,833
Noninterest income:
Customer service fees		124,937	156,651
Gain on sale of available for sale securities		62,490	353,929
Other income		47,358	13,154
Total noninterest income		234,785	523,734
Noninterest expense:
Salaries and employee benefits		1,243,546	1,109,806
Data processing expense		213,312	201,782
Professional service expense		238,105	186,650
Office building and equipment expense		81,103	93,454
Other expense		376,599	420,626
Total noninterest expense		2,152,665	2,012,318
Income before provision for income taxes		958,237	1,490,249
Provision for income taxes		380,883	595,787
Net income	$	577,354	894,462
Earnings per share:
Basic	$	0.66	1.02
Diluted		0.63	1.00
Average shares outstanding – basic		878,391	876,172
Average shares outstanding – diluted		912,704	894,421

See accompanying notes to consolidated financial statements.

THE SOUTHERN BANC COMPANY, INC.

Consolidated Statements of Stockholders’ Equity

Years ended June 30, 2004 and 2003

	Common stock		Additional paid-in capital	Retained earnings		Unearned compensation		Shares held in trust		Treasury stock		Accumulated other comprehensive income (loss)		Total
Balance, June 30, 2002	$	14,548	13,761,758	10,497,569		(245,469	)	(852,141	)	(5,642,391	)	810,029		18,343,903
Net income		—	—	894,462		—		—		—		—		894,462
Change in unrealized gain on securities available for sale, net of tax		—	—	—		—		—		—		331,974		331,974
Comprehensive income														1,226,436
Amortization of unearned compensation		—	56,472	—		88,974		—		—		—		145,446
Purchase of 45,000 shares of treasury stock		—	—	—		—		—		(540,000	)	—		(540,000	)
Dividends paid ($0.35 per share)		—	—	(310,007	)	—		—		—		—		(310,007	)
Balance, June 30, 2003		14,548	13,818,230	11,082,024		(156,495	)	(852,141	)	(6,182,391	)	1,142,003		18,865,778
Net income		—	—	577,354		—		—		—		—		577,354
Change in unrealized loss on securities available for sale, net of tax		—	—	—		—		—		—		(1,242,189	)	(1,242,189	)
Comprehensive loss														(664,835	)
Amortization of unearned compensation		—	92,154	—		85,780		—		—		—		177,934
Purchase of 69,200 shares of treasury stock		—	—	—		—		—		(1,164,391	)	—		(1,164,391	)
Stock Options exercised		—	—	—		—		356,729		—		—		356,729
Dividends paid ($0.35 per share)		—	—	(318,548	)	—		—		—		—		(318,548	)
Balance, June 30, 2004	$	14,548	13,910,384	11,340,830		(70,715	)	(495,412	)	(7,346,782	)	(100,186	)	17,252,667

See accompanying notes to consolidated financial statements.

THE SOUTHERN BANC COMPANY, INC.

Consolidated Statements of Cash Flows

Years ended June 30, 2004 and 2003

	2004			2003
Cash flows from operating activities:
Net income	$	577,354		894,462
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		44,989		58,143
Amortization of premiums on securities, net		253,465		190,420
Amortization of intangible asset		12,115		18,419
Amortization of unearned compensation		177,934		145,446
Provision for loan losses		11,600		13,000
Deferred income tax provision		1,230		64,816
Gain on loans held for sale		(18,953	)	(53,248	)
Proceeds from sale of loans held for sale		1,265,653		3,371,925
Loans originated for sale		(1,196,700	)	(3,368,677	)
Gain on sale of available for sale securities		(62,490	)	(353,929	)
Change in assets and liabilities:
Decrease in accrued interest and dividends receivable		43,343		102,591
Decrease (increase) in prepaid expenses and other assets		730		(432,450	)
Increase (decrease) in other liabilities		977		(25,383	)
Net cash provided by operating activities		1,111,247		625,535
Cash flows from investing activities:
Purchase of securities available for sale		(29,144,626	)	(33,154,397	)
Proceeds from maturities and principal payments on securities available for sale		21,172,190		22,872,040
Proceeds from sales of securities available for sale		2,983,710		10,965,222
Proceeds from maturities and principal payments on securities held to maturity		3,030,968		4,326,508
Sale of Federal Home Loan Bank stock		93,700		562,800
Loan (originations) repayments, net		1,429,420		(4,416,044	)
Capital expenditures, net		(23,778	)	(34,897	)
Net cash (used in) provided by investing activities		(458,416	)	1,121,232
Cash flows from financing activities:
Purchase of treasury stock		(1,164,391	)	(540,000	)
Federal Home Loan Bank (repayments) advances		(833,333	)	(1,833,333	)
Cash dividends paid		(318,548	)	(310,007	)
(Decrease) increase in deposits, net		(2,352,228	)	2,800,149
Proceeds from exercise of stock options		356,729		—
Net cash (used in) provided by financing activities		(4,311,771	)	116,809
Net (decrease) increase in cash and cash equivalents		(3,658,940	)	1,863,576
Cash and cash equivalents, beginning of year		9,392,945		7,529,369
Cash and cash equivalents, end of year	$	5,734,005		9,392,945
Supplemental cash flow information:
Cash paid during the year for:
Income taxes, net of refund received	$	357,785		554,524
Interest		2,124,322		2,915,506

See accompanying notes to consolidated financial statements.

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(1) Organization and Summary of Significant Accounting Policies

(a) Organization, Nature of Operations, and Principles of Consolidation

The Southern Banc Company, Inc. (the Company) was incorporated in the State of Delaware in May 1995, for the purpose of becoming a holding company to own all of the outstanding capital stock of The Southern Bank Company (the Bank), formerly First Federal Savings and Loan Association of Gadsden, upon the Bank’s conversion from a federally chartered mutual savings association to a federally chartered stock savings association (the Conversion). The accompanying consolidated financial statements include the accounts of the Company and its two wholly owned subsidiaries, the Bank and First Service Corporation. All significant intercompany balances and transactions have been eliminated in consolidation.

The Bank 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 Bank operates from its four offices in the northeast portion of Alabama and originates the majority of its loans in this market area.

(b) Use of Estimates

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (GAAP) and with general practices within the banking industry. In preparing the consolidated 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 consolidated statement of financial condition and income and expense for the period. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant changes in the near term is the determination of the allowance for loan losses. 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 is susceptible to changes in economic conditions in the Company’s primary market area.

(c) Securities

Securities have been classified as either available for sale or held to maturity based on management’s intentions at the time of purchase. Securities classified as available for sale are carried at fair value. The unrealized difference between amortized cost and fair value on securities available for sale is excluded from earnings and is reported, net of deferred taxes, as a separate component of stockholders’ equity. The available for sale classification includes securities that management intends to use as part of its asset/liability management strategy or that may be sold in response to changes in interest rates, liquidity needs, or for other purposes.

Securities designated as held to maturity are carried at amortized cost, as the Company has both the ability and the positive intent to hold these securities to maturity.

Federal Home Loan Bank stock is carried at cost, as there is no readily available market for this stock.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

Amortization of premiums and accretion of discounts on mortgage–backed securities and other investments are computed using the level yield method. The adjusted cost of the specific security sold is used to compute gain or loss on the sale of securities.

Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary, if any, are reflected in earnings as realized losses. In estimating other than temporary impairment losses, Management considers independent price quotations, projected target prices of investment analysts within the short term and the financial condition of the issuer.

(d) Loans and Allowance for Loan Losses

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. All loans sold in the secondary market are sold servicing released. Loans held for sale at June 30, 2004 and 2003 were $0 and $50,000, respectively.

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, discounts on loans, unearned interest income, and net deferred loan fees/costs. Unearned interest income on consumer loans is amortized to income by use of a method which approximates level yield over the lives of the related loans.

The allowance for loan losses is established through a provision charged to earnings when losses are estimated to have occurred. Loan losses are charged against the allowance when the loss is recognized. Subsequent recoveries, if any, are credited to the allowance.

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. To serve as a basis for establishing the allowance each quarter, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank’s customers, the payment performance of individual large loans and pools of homogeneous small loans, distribution of loans by risk class, portfolio seasoning, changes in collateral values, and detailed reviews of specific large loan relationships. Though management believes the allowance for loan losses is adequate, ultimate losses may vary from estimates; however, estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

Impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous 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 is measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment of the loan, the impairment is recorded through a valuation allowance. The Company had no loans designated as impaired at either June 30, 2004 or 2003.

The Company ceases accrual of interest on a loan when payment on the loan is in excess of 90 days past due. 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 has been reestablished, in which case the loan is returned to accrual status.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

The Company enters into interest rate locks, where customers have locked into mortgages at a set interest rate, and forward sales commitments, which are sales of mortgage loans to third parties at a specified price. These interest rate locks and forward sales commitments qualify as derivatives; however, the change in fair value of these derivatives during the year did not have a material impact on the Company’s financial position or results of operations.

(e) Loan Origination Fees and Related Costs and Discounts

Loan fees and certain direct costs of loan origination are deferred, and the net fee or cost is recognized as an adjustment to interest and fees on loans in the accompanying consolidated statements of income using the level yield method over the contractual life of the loans. Discounts associated with loans purchased are deferred and accreted to income over the contractual life of the loans using the level yield method.

(f) Premises and Equipment

Land is reported at cost. Building, furniture and equipment, and automobiles are stated at cost, less accumulated depreciation. Leasehold improvements are amortized using the straight–line method over the shorter of the estimated lives or the applicable lease periods. Depreciation methods and estimated service lives are as follows:

Building and improvements	10 – 40 years	Accelerated/Straight–line
Leasehold improvements	10 years	Straight–line
Furniture and equipment	5 – 20 years	Accelerated/Straight–line
Automobile	3 years	Straight–line

(g) Core Deposit Premium

At June 30, 2004 and 2003, core deposit premiums were $0 and $12,115, respectively, net of accumulated amortization of $344,341 and $332,226, respectively. Core deposit premiums were being amortized over a period of ten years using an accelerated method. Amortization of core deposit premiums was $12,115 and $18,419 in fiscal years 2004 and 2003, respectively.

(h) Stock Based Compensation

The Company applies Accounting Principles Bulletin (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for employee stock compensation plans and, accordingly, does not recognize compensation cost for stock options granted when the option price is greater than or equal to the underlying stock price. This accounting method is referred to as the intrinsic value method. The Company follows the pro–forma disclosures of Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, Accounting for Stock–Based Compensation — Transition and Disclosure, using the fair value method of accounting for stock–based compensation.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

If the Company had elected to recognize compensation cost for options based on the fair value of the options as permitted by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below:

	2004		2003
Net income:
As reported	$	577,354	894,462
Less stock based compensation expense		—	(1,378	)
Pro forma	$	577,354	893,084
Earnings per share:
As reported:
Basic	$	0.66	1.02
Diluted		0.63	1.00
Pro forma:
Basic		0.66	1.02
Diluted		0.63	1.00

(i) Statements of Cash Flows

The Company considers cash on hand and in other banks and interest–bearing deposits in other banks to be cash and cash equivalents.

(j) Recent Accounting Pronouncements

On December 24, 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was issued on January 17, 2003. FIN 46 provides consolidation guidance for situations in which voting equity interests do not adequately reflect the controlling interests in an entity. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to operate without additional subordinated financial support from other parties. Management is currently assessing the impact of FIN 46R, and does not expect this interpretation to have any impact to the consolidated financial statements upon adoption on December 31, 2004.

In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 105, Application of Accounting Principles to Loan Commitments, which summarized the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The SAB requires that the fair value measurement of a loan commitment that is accounted for as a derivative includes only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected cash flows related to the customer relationship or loan servicing. This SAB is effective for loan commitments entered into after March 31, 2004. The Company adopted SAB 105 on April 1, 2004, and the effect was not material.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

In March 2004, the FASB’s Emerging Issues Task Force reached a consensus of EITF Issue No. 03–1, The Meaning of Other–Than–Temporary Impairment and Its Application to Certain Investments. The guidance prescribes a three–step model for determining whether an investment is other–than–temporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The Company has adopted the requirements of this EITF.

(2) Securities Available for Sale

The amortized cost, gross unrealized gain and loss, and estimated fair value of securities designated as available for sale are summarized as follows:

	June 30, 2004
	Amortized cost		Gross unrealized gain	Gross unrealized (loss)		Fair value
U.S. Government agency securities	$	6,911,086	123,923	(28,839	)	7,006,170
Mortgage–backed securities		47,210,716	369,044	(637,414	)	46,942,346
Other		2,805,831	114	(37,430	)	2,768,515
	$	56,927,633	493,081	(703,683	)	56,717,031
	June 30, 2003
	Amortized cost		Gross unrealized gain	Gross unrealized (loss)		Fair value
U.S. Government agency securities	$	4,415,929	255,911	—		4,671,840
Mortgage–backed securities		47,706,152	1,328,937	(1,020	)	49,034,069
Other		16,716	—	—		16,716
	$	52,138,797	1,584,848	(1,020	)	53,722,625

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

The amortized cost and estimated fair value of debt securities available for sale by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2004
	Amortized cost		Fair value
Due in one year or less	$	—	—
Due after one year through five years		804,515	832,364
Due after five years through ten years		5,501,658	5,521,746
Due after ten years		604,913	652,061
		6,911,086	7,006,171
Mortgage-backed securities		47,210,716	46,942,345
Other		2,805,831	2,768,515
	$	56,927,633	56,717,031

Proceeds from sales of available for sale securities were $2,983,710 and $10,965,222 in 2004 and 2003, respectively. Gross gains of $62,490 and $353,929 were realized on these sales in 2004 and 2003, respectively. There were no gross losses realized on these sales in 2004 or 2003.

Securities designated as available for sale with carrying values (fair values) of $2,258,632 have been pledged as collateral for certain large deposits (public funds) with an aggregate balance of $1,325,000 at June 30, 2004.

The following table shows the Company’s combined investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at June 30, 2004:

	Less than 12 months				More than 12 months			Total
	Fair value		Unrealized gross losses		Fair value	Unrealized gross losses		Fair value	Unrealized gross losses
U.S. Government agency securities	$	3,136,575	(28,839	)	—	—		3,136,575	(28,839	)
Mortgage–backed securities		32,072,269	(628,361	)	599,567	(9,053	)	32,671,836	(637,414	)
Other		1,863,311	(37,430	)	—	—		1,863,311	(37,430	)
	$	37,072,155	(694,630	)	599,567	(9,053	)	37,671,722	(703,683	)

At June 30, 2004, the Company has 66 individual available–for–sale securities that were in an unrealized loss position. Only one of these investment securities had been in an unrealized loss position for longer than 12 months. All of these securities’ impairments are deemed not to be other than temporary impairment and is primarily due to the fact that these securities have experienced volatility in their market prices as a result of current market conditions, with no credit concerns related to the entities that issued the securities. The Company does not expect any permanent impairment to develop related to these securities.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(3) Securities Held to Maturity

The amortized cost, gross unrealized gain and loss, and estimated fair value of securities designated as held to maturity are summarized as follows:

	June 30, 2004
	Amortized cost		Gross unrealized gain	Gross unrealized (loss)	Fair value
U.S. Government agency securities	$	61,459	2,113	—	63,572
Mortgage– backed securities		4,132,682	278,256	—	4,410,938
	$	4,194,141	280,369	—	4,474,510
	June 30, 2003
	Amortized cost		Gross unrealized gain	Gross unrealized (loss)	Fair value
U.S. Government agency securities	$	101,110	7,204	—	108,314
Mortgage– backed securities		7,113,828	492,122	—	7,605,950
	$	7,214,938	499,326	—	7,714,264

The amortized cost and estimated fair value of debt securities held to maturity by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2004
	Amortized cost		Fair value
Due in one year or less	$	61,459	63,572
Due after one year through five years		—	—
Due after five years through ten years		—	—
Due after ten years		—	—
		61,459	63,572
Mortgage– backed securities		4,132,682	4,410,938
	$	4,194,141	4,474,510

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(4) Loans Receivable, Net

Loans receivable are summarized as follows:

	June 30
	2004		2003
Mortgage loans:
Secured by one–to–four family residential properties	$	27,541,741	30,680,390
Secured by nonresidential properties		1,164,000	451,000
Consumer loans		8,054,443	7,260,937
Savings account loans		714,397	812,500
Commercial loans		413,453	179,384
		37,888,034	39,384,211
Less:
Unearned interest income		246,342	359,599
Deferred loan costs, net		20,807	(32,568	)
Allowance for loan losses		144,298	139,573
Loans receivable, net	$	37,476,587	38,917,607

Loans secured by one–to–four family residential properties include second mortgage loans on properties for which the Bank holds the first mortgage. The proceeds on these second mortgage loans were used for improvements and consumer purposes.

As a savings and loan institution, the Bank has a credit concentration in residential real estate mortgage loans. Substantially all of the Bank’s customers are located in its trade area of Etowah, Marshall, and Cherokee Counties in Alabama. Although management believes that the Bank has generally conservative underwriting standards, including a collateral policy of low loan to collateral values, the ability of its borrowers to meet their residential mortgage obligations is dependent upon local economic conditions.

In the normal course of business, loans are made to officers, directors, and employees of the Company and the Bank. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with others. As of June 30, 2004 and 2003, $319,628 and $303,207, respectively, of these loans were outstanding. The change from June 30, 2003 to June 30, 2004 reflects payments amounting to $102,531 and advances of $118,952 made during the year.

An analysis of the Company’s allowance for loan losses is as follows:

	Years ended June 30
	2004			2003
Balance, beginning of year	$	139,573		133,233
Provision for loan losses		11,600		13,000
Charge–offs		(6,875	)	(6,660	)
Balance, end of year	$	144,298		139,573

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

At June 30, 2004 and 2003, nonaccrual loans totaled $143,445 and $100,601, respectively. Neither cash income recognized nor interest income foregone on nonaccrual loans was significant for fiscal years 2004 and 2003, respectively.

(5) Accrued Interest and Dividends Receivable

Accrued interest and dividends receivable is summarized as follows:

	June 30
	2004		2003
Securities available for sale	$	285,703	290,416
Securities held to maturity		24,953	42,854
Loans receivable, net		122,065	140,252
Federal Home Loan Bank stock		6,895	9,437
	$	439,616	482,959

(6) Premises and Equipment, Net

Premises and equipment are summarized as follows:

	June 30
	2004			2003
Land	$	340,486		340,486
Building and improvements		468,059		465,752
Leasehold improvements		11,390		11,390
Furniture, fixtures, and equipment		295,629		377,040
		1,115,564		1,194,668
Less accumulated depreciation and leasehold amortization		(629,999	)	(687,892	)
	$	485,565		506,776

Depreciation and leasehold amortization expense charged to office building and equipment expense in 2004 and 2003 totaled approximately $44,989 and $58,143, respectively.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(7) Deposits

Deposits are summarized as follows:

	June 30, 2004				June 30, 2003
	Amount		Percent		Amount	Percent
Demand, NOW, and money market accounts, including non–interest bearing deposits of $548,415 and $395,568 at June 30, 2004 and 2003 respectively	$	14,735,265	17.97	%	9,430,503	11.18	%
Passbook savings		6,881,697	8.39	%	9,247,684	10.96	%
		21,616,962	26.36	%	18,678,187	22.14	%
Certificates of deposit:
0.01 – 2.00% interest rate		20,525,383	25.03	%	13,949,297	16.54	%
2.01 – 4.00% interest rate		36,404,409	44.39	%	42,475,925	50.35	%
4.01 – 6.00% interest rate		3,458,327	4.22	%	8,574,471	10.16	%
6.01 – 8.00% interest rate		—	—		679,429	0.81	%
		60,388,119	73.64	%	65,679,122	77.86	%
	$	82,005,081	100.00	%	84,357,309	100.00	%

The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100,000 was $13,441,055 and $13,414,360 at June 30, 2004 and 2003, respectively.

At June 30, 2004, the scheduled maturities of time deposits are as follows:

2005	$	25,329,374
2006		14,380,527
2007		7,114,198
2008		4,459,919
2009		9,042,287
Thereafter		61,814
Total	$	60,388,119

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

Interest expense on deposits consisted of the following:

	Years ended June 30
	2004		2003
Passbook savings	$	42,834	105,361
NOW and money market accounts		91,330	131,846
Certificates of deposit		1,645,744	2,281,042
	$	1,779,908	2,518,249

(8) Income Taxes

The provision for income taxes for the periods indicated is summarized as follows:

	Years ended June 30
	2004		2003
Current provision:
Federal	$	335,143	469,184
State		44,510	61,787
		379,653	530,971
Deferred provision		1,230	64,816
	$	380,883	595,787

The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 34% to income before taxes were as follows:

	Years ended June 30
	2004			2003
Pretax income at statutory rates	$	325,800		506,685
Add:
State income tax, net of federal tax benefit		29,505		45,283
Other, net		25,578		43,819
	$	380,883		595,787
Effective tax rate		40	%	40	%

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

The components of the net deferred tax asset or liability at June 30, 2004 and 2003 were as follows:

	June 30
	2004			2003
Accumulated amortization of intangibles	$	41,954		74,665
Allowance for loan losses, net		27,144		68,415
Accruals for employee benefit plans		124,388		89,457
Unrealized net loss on securities available for sale		80,169		—
Other		16,833		—
Deferred tax asset		290,488		232,537
Federal Home Loan Bank stock dividend		(31,373	)	(57,369	)
Accretion of discount on securities		(226,602	)	(221,388	)
Deferred loan fees and costs, net		(134,415	)	(117,054	)
Other		—		(17,567	)
Unrealized net gain on securities available for sale		—		(472,072	)
Deferred tax liability		(392,390	)	(885,450	)
Net deferred tax liability	$	(101,902	)	(652,913	)

The portion of a thrift’s tax bad debt allowance that was not recaptured under the provisions of the Small Business Job Protection Act of 1996 is only subject to recapture at a later date under certain circumstances. These circumstances include stock repurchases and redemptions by the thrift or conversion of the thrift to a type of institution (such as a credit union) that is not considered a bank for tax purposes. However, no further recapture would be required if the thrift converted to a commercial bank charter or was acquired by a bank. The Bank does not anticipate engaging in any transactions at this time that would require the recapture of its pre–1988 tax bad debt allowance of approximately $2.8 million.

(9) Federal Home Loan Bank Advances

Federal Home Loan Bank advances at June 30, 2004 consisted of the following:

5.22% note payable, due March 20, 2006	$	2,000,000
3.22% note payable, due December 4, 2006		1,000,000
4.08% note payable, due October 17, 2007		1,346,583
4.16% note payable, due October 17, 2007		1,570,084
5.72% note payable, due March 19, 2008		1,000,000
	$	6,916,667

The Federal Home Loan Bank notes are payable to the Federal Home Loan Bank of Atlanta and are secured by the Federal Home Loan Bank stock owned by the Bank with a carrying value of $792,300, as well as a pledge of certain securities with a carrying value of $19,557,883 at June 30, 2004. Interest rates on the notes are fixed and interest is payable monthly. Principal on the notes is payable at maturity or in semiannual principal reductions until maturity.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

Scheduled principal payments required for Federal Home Loan Bank advances are as follows:

2005	$	—
2006		2,000,000
2007		1,000,000
2008		3,916,667
	$	6,916,667

(10) Commitments and Contingencies

(a) Leases

The Company has operating lease agreements for its branch offices. Rental expense under these leases aggregated $7,364 for fiscal years 2004 and 2003. The aggregate annual minimum rental commitments under the terms of all noncancelable leases at June 30, 2004 are as follows:

	Amount
Fiscal year:
2005	$	7,337
2006		3,682
2007		—
	$	11,019

(b) Off–Balance–Sheet Items

The Company’s policies as to collateral and assumption of credit risk for off–balance sheet items are essentially the same as those for extension of credit to its customers. Generally, the off–balance sheet exposures the Bank has are its commitments to fund unused lines of credit. At June 30, 2004, the Company had $627,000 in outstanding commitments to originate residential real estate loans. Additionally, at June 30, 2004, the Bank had provided approximately $1,144,127 in unused lines of credit.

(c) Litigation

The Company is a party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial statements.

(11) Stockholders’ Equity

(a) Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

measures of the Bank’s assets, liabilities, and certain off–balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table which follows) of Total and Tier 1 capital (as defined in the regulations) to risk–weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2004 and 2003, that the Bank meets all capital adequacy requirements to which it is subject.

As of June 30, 2004 and 2003, the most recent notification from the regulatory authorities categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk–based, Tier 1 risk–based, and Tier 1 leverage ratios as set forth in the tables which follow.

Actual capital amounts and ratios are presented in the table below for the Company and the Bank:

	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
June 30,2004:
Total capital (to risk weighted assets):
Consolidated	$	17,497	47.2	%	$	2,967	8.0	%	$	N/A	N/A
Southern Bank Company		16,595	44.7	%		2,967	8.0	%		3,709	10.0	%
Tier 1 (core) capital (to risk weighted assets):
Consolidated		17,353	46.8	%		1,483	4.0	%		N/A	N/A
Southern Bank Company		16,451	44.4	%		1,483	4.0	%		2,225	6.0	%
Tier 1 (core) capital (to adjusted total assets):
Consolidated		17,353	16.2	%		4,284	4.0	%		N/A	N/A
Southern Bank Company		16,451	15.4	%		4,284	4.0	%		5,355	5.0	%
Tangible capital (to adjusted total assets):
Consolidated		17,353	16.2	%		1,607	1.5	%		N/A	N/A
Southern Bank Company		16,451	15.4	%		1,607	1.5	%		N/A	N/A
June 30,2003:
Total capital (to risk weighted assets):
Consolidated	$	17,852	52.3	%	$	2,729	8.0	%	$	N/A	N/A
Southern Bank Company		15,400	45.2	%		2,729	8.0	%		3,411	10.0	%
Tier 1 (core) capital (to risk weighted assets):
Consolidated		17,712	51.9	%		1,364	4.0	%		N/A	N/A
Southern Bank Company		15,260	44.7	%		1,364	4.0	%		2,046	6.0	%
Tier 1 (core) capital (to adjusted total assets):
Consolidated		17,712	16.0	%		4,426	4.0	%		N/A	N/A
Southern Bank Company		15,260	13.8	%		4,426	4.0	%		5,532	5.0	%
Tangible capital (to adjusted total assets):
Consolidated		17,712	16.0	%		1,660	1.5	%		N/A	N/A
Southern Bank Company		15,260	13.8	%		1,660	1.5	%		N/A	N/A

Pursuant to regulations, an institution that exceeds all fully phased–in capital requirements before and after a proposed capital distribution and has not been advised by the Office of Thrift Supervision (OTS) that it is in need of more than the normal supervision can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(i) 100% of its net income to date during the calendar year plus the amount that would reduce by one–half its “surplus capital ratio” (the excess capital over its fully phased–in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four–quarter period. Any additional capital distributions require prior regulatory approval.

The Company’s principal source of funds for dividend payments is dividends from the Bank. Certain restrictions exist regarding the ability of the Bank to pay dividends to the Company. At July 1, 2004, dividend payments by the Bank were subject to regulatory approval. The Company’s ability to pay dividends will be largely dependent upon dividends to the Company from the Bank. Pursuant to the OTS regulations, the Bank will not be permitted to pay dividends on its capital stock or repurchase shares of its stock if its stockholders’ equity would be reduced below the amount required for the liquidation account or if stockholders’ equity would be reduced below the amount required by the OTS.

(b) Comprehensive Income

Comprehensive income is the change in equity during a period from transaction and other events and circumstances from non–owner sources. For the Company, comprehensive income includes changes in unrealized gains and losses on securities available–for–sale and net income.

In the determination of comprehensive income, certain reclassification adjustments are made to avoid double–counting items that are displayed as part of the net income and accumulated other comprehensive income in that period or earlier periods. The following table reflects the reclassification amounts and the related tax effects for the two years ended June 30:

	2004
	Before tax amount			Tax effect		After tax amount
Unrealized losses arising during the year	$	(1,731,940	)	532,918		(1,199,022	)
Reclassification for adjustments for gains included in net earnings		(62,490	)	19,323		(43,167	)
Net change in unrealized losses on securities	$	(1,794,430	)	552,241		(1,242,189	)
	2003
	Before tax amount			Tax effect		After tax amount
Unrealized gains arising during the year	$	856,920		(290,768	)	566,152
Reclassification for adjustments for gains included in net earnings		(353,929	)	119,751		(234,178	)
Net change in unrealized gains on securities	$	502,991		(171,017	)	331,974

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(12) Earnings Per Share

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 June 30, 2004 and 2003. Common stock outstanding consists of issued shares less treasury stock, unallocated Employee Stock Ownership Plan (ESOP) shares (see note 13), and shares held in trust. Diluted earnings per share for the years ended June 30, 2004 and 2003 was computed by dividing net income by the weighted average number of shares of common stock outstanding and the dilutive effects of the shares awarded under the Management Recognition Plan (MRP) and the Stock Option Plan, based on the treasury stock method, using an average fair market value of the stock during the respective periods.

The following table represents the earnings per share calculations for the years ended June 30, 2004 and 2003:

	Income		Shares	Per share amount
2004:
Basic earnings per share	$	577,354	878,391	$	0.66
Dilutive securities:
Incentive stock option plan shares		—	34,313
Dilutive earnings per share	$	577,354	912,704		0.63
2004:
Basic earnings per share	$	894,462	876,172	$	1.02
Dilutive securities:
Incentive stock option plan shares		—	18,249
Dilutive earnings per share	$	894,462	894,421		1.00

Options to purchase 11,800 shares of common stock at $14.56 per share were outstanding during all four quarters of 2004 and 2003. During 2004, these options were included in the computation of diluted EPS because the options’ exercise price was less than the average market price of the common shares. During 2003, these options were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

(13) Employee Retirement and Savings Plans

(a) Employee Stock Ownership Plan

In connection with the Conversion, the Bank established an ESOP for eligible employees. The ESOP purchased 116,380 shares of the Company’s common stock with the proceeds of a $1,163,800 note payable to the Bank and secured by the common stock owned by the ESOP. The note due from the ESOP has been reflected as a separate component of stockholders’ equity as unearned compensation. Principal payments under the note are due in equal annual installments through December 2005; interest is payable annually at a variable rate which is adjusted each January 1.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

Expense related to the ESOP was approximately $147,000 and $116,000 for 2004 and 2003. Unearned compensation related to the ESOP was $70,715 and $156,495 at June 30, 2004 and 2003, respectively, and is shown as a reduction of stockholders’ equity in the accompanying consolidated statements of financial condition.

The difference between the fair value of shares committed to be released and the cost of those shares to the ESOP (i.e. unearned compensation) is charged/credited to additional paid–in capital in accordance with AICPA Statement of Position 93–6, Employers’ Accounting for Employee Stock Ownership Plans. Unearned compensation is amortized into compensation expense based on employee services rendered in relation to shares which are committed to be released based on the fair value of shares.

(b) Management Recognition Plan (MRP)

During fiscal 1996, the Bank established an MRP which purchased 58,190 shares of the Company’s common stock on the open market. The MRP provides for awards of common stock to directors and officers of the Bank. As of June 30, 2004, all awarded shares related to the MRP were allocated to directors and officers of the Bank.

Shares held in trust related to the MRP totaled 14,430 at June 30, 2004 and 2003, respectively. These shares, which were purchased for an average price per share of $12.84, amounted to $185,234 at June 30, 2004 and 2003, respectively, and are shown as a reduction of stockholders’ equity in the accompanying consolidated statements of financial condition.

(c) Simplified Employee Pension Plan

The Company established a Simplified Employee Pension Plan (SEP) for all employees who have completed one year of service, pursuant to Section 408(k) of the Internal Revenue Code of 1986. The Company can make a discretionary contribution to the SEP each year. The cost to the Company under the SEP was $43,583 and $41,633 for fiscal years 2004 and 2003, respectively.

(d) Employment Agreements

The Company has a 36–month employment agreement with its President and another officer. These agreements provide that if employment under the agreement is terminated by the Company in connection with or within 12 months after any change in control of the Company, each employee will be paid approximately three times his salary.

(14) Stock–Based Compensation Plan

The Company has a stockholder–approved Option Plan. The Option Plan provides for the grant of incentive stock options (ISO’s) to employees and nonincentive stock options (non–ISO’s) to nonemployee directors. The Company utilizes the intrinsic value method of accounting for stock option grants. As the option price is equal to the fair value of the stock at the date of grant, no compensation cost is recognized.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

Under the Option Plan, the Company may grant options up to 145,745 shares and has granted options outstanding of 81,496 shares through June 30, 2004. Under the Option Plan, the options vest 20% per year and become exercisable upon the participant’s completion of five years of service.

The Company purchased shares in the open market to be issued upon exercise of stock options. Such shares are reflected at cost as shares held in trust in the accompanying consolidated statements of financial condition. During 2004 and 2003, the Company did not purchase any shares to be used for the exercise of options. The total number of shares held in trust related to the Option Plan was 20,369 and 51,308 and amounted to $310,178 and $666,907 at June 30, 2004 and 2003, respectively.

A summary of the status of the Company’s Option Plan at June 30, 2004 and 2003 and the changes during the years then ended is as follows:

	2004				2003
	Shares		Weighted average exercise price		Shares	Weighted average exercise price
Outstanding at beginning of year:	125,031		$	11.91	125,031	$	11.91
Forfeitures	(12,596	)		11.69	—		—
Exercised	(30,939	)		11.53	—		—
Granted	—			—	—		—
Outstanding at end of year	81,496		$	12.09	125,031	$	11.91
Exercisable at end of year	81,206		$	12.11	124,449	$	11.93
Weighted average fair value of the options granted	N/A				N/A

(15) Fair Value of Financial Instruments

The Company has a variety of financial instruments which include items recorded on the consolidated statement of financial condition and items which, by their nature, are not recorded on the consolidated statement of financial condition. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. In cases where quoted market prices are not available, fair values have been estimated using present value or other valuation techniques. These methods are highly sensitive to the assumptions used by management, such as those concerning appropriate discount rates and estimates of future cash flows. Different assumptions could significantly affect the estimated fair value amounts presented below. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instrument. Further, assets that are not financial instruments are not included in the following table. Accordingly, the aggregated estimated fair value amounts presented do not represent the underlying value of the Company.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

This table summarizes the Company’s carrying amount and fair value of financial instruments:

	June 30
	2004			2003
	Carrying amount		Estimated fair value	Carrying amount	Estimated fair value
	(in thousands )			(in thousands)
Assets:
Cash on hand and in banks	$	5,734	5,734	9,393	9,393
Securities – available for sale		56,717	56,717	53,723	53,723
Securities – held to maturity		4,194	4,475	7,215	7,714
Federal Home Loan Bank stock		792	792	886	886
Loans held for sale		—	—	50	50
Loans receivable, net		37,477	38,956	38,918	42,722
Accrued interest and dividends receivable		440	440	483	483
Liabilities:
Deposits		82,005	82,760	84,357	85,279
Federal Home Loan Bank advances		6,917	7,123	7,750	7,972
Accrued interest payable		35	35	39	39

The following methods and assumptions were used by the Company in estimating the fair values provided above:

(a) Cash and Cash Equivalents

The carrying value of highly liquid instruments, such as cash on hand and cash equivalents, are considered to approximate their fair value.

(b) Securities Available for Sale and Securities Held to Maturity

Substantially all of the Company’s securities available for sale and held to maturity have a readily determinable fair value. Fair values for these securities are based on quoted market prices, where available. If not available, fair values are based on market prices of comparable instruments. The carrying value of accrued interest on these instruments approximates fair value.

(c) Federal Home Loan Bank Stock

The Federal Home Loan Bank has historically repurchased its stock at cost. Therefore, the carrying amount is considered a reasonable estimate of its fair value.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(d) Loans Held for Sale

The fair value of loans held for sale is estimated using market rates, which approximate carrying values.

(e) Loans Receivable, Net

For loans with rates which are repriced in coordination with movements in market rates and with no significant change in credit risk, fair value estimates are based on carrying values. The fair values for certain mortgage loans are based on quoted market prices of similar loans sold in conjunction with securitizing transactions, adjusted for differences in loan characteristics. The fair values of other loans are estimated by discounting future cash flows using current rates at which loans with similar terms would be made to borrowers of similar credit ratings.

(f) Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value.

(g) Deposits

The fair value of deposits with no stated maturity, such as interest and non–interest demand deposits, NOW accounts, savings accounts, and money market accounts, is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow analysis that applies rates currently offered for certificates of similar remaining maturities.

(h) FHLB Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing FHLB advances.

(i) Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value.

(j) Off–Balance–Sheet Instruments

Off–balance–sheet financial instruments include commitments to extend credit. The fair value of such commitments is not material to the Company’s financial condition since there is no known credit risk for the Company to consider in its valuation.

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(16) Parent Company Financial Statements

Separate condensed financial statements of The Southern Banc Company, Inc. (the Parent Company) as of and for the years ended June 30, 2004 and 2003 are presented below:

Statements of Financial Condition

June 30, 2004 and 2003

(Dollar amounts in thousands)

	2004			2003
Assets:
Cash and cash equivalents	$	744		2,218
Investment in subsidiary		16,397		16,415
ESOP loan receivable		126		232
Other assets		8		11
Total assets	$	17,275		18,876
Liabilities:
Other liabilities	$	22		10
Stockholders’ equity:
Preferred stock		—		—
Common stock		15		15
Additional paid–in capital		13,910		13,818
Retained earnings		11,341		11,082
Unearned compensation		(71	)	(157	)
Shares held in trust		(495	)	(852	)
Treasury stock		(7,347	)	(6,182	)
Accumulated other comprehensive income		(100	)	1,142
Total stockholders’ equity		17,253		18,866
Total liabilities and stockholders’ equity	$	17,275		18,876

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

Statements of Income

Years ended June 30, 2004 and 2003

(Dollar amounts in thousands)

	2004			2003
Income:
Dividends	$	—		2,000
Interest		19		24
		19		2,024
Expense		(120	)	(117	)
(Loss) income before income taxes and equity in undistributed income of subsidiaries		(101	)	1,907
Benefit for income taxes		39		32
(Loss) income before equity in undistributed income of subsidiaries		(62	)	1,939
Distribution in excess of current year income of subsidiaries		—		(1,045	)
Equity in undistributed current year income of subsidiaries		639		—
Net income	$	577		894

(Continued)

THE SOUTHERN BANC COMPANY, INC.

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

Statements of Cash Flows

Years ended June 30, 2004 and 2003

(Dollar amounts in thousands)

	2004			2003
Cash flows from operating activities:
Net income	$	577		894
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distribution in excess of (equity in undistributed) current year earnings of subsidiaries’		(639	)	1,045
Decrease in other assets		3		12
Decrease in other liabilities		—		(30	)
Net cash (used in) provided by operating activities		(59	)	1,921
Cash flows from financing activities:
Payments received on ESOP loan		106		105
Purchase of treasury stock		(1,164	)	(540	)
Cash dividends paid		—		(310	)
Proceeds from stock options exercised		(357	)	—
Net cash used in financing activities		(1,415	)	(745	)
(Decrease) increase in cash and cash equivalents		(1,474	)	1,176
Cash and cash equivalents, beginning of year		2,218		1,042
Cash and cash equivalents, end of year	$	744		2,218

EX-14

EXHIBIT 14

Code of Ethics

The Code of Ethics of The Southern Banc Company, Inc. (the “Company”) provides the framework for our maintaining the highest standards of professional conduct. The Code of Ethics is a statement of the Company’s values and ethical standards. The Company requires its directors, officers and other employees to adhere to the Code of Ethics. It is a guide to protect the reputation of the Company and its subsidiaries, our most valuable asset.

The Company endorses the following principles of professional and ethical conduct:

• Compliance with all applicable laws, regulations, and Company policies.

• Decisions and actions shall be proper.

• The Company shall be honest, trustworthy, and fair in all of its actions and relationships.

• The Company’s books and records shall be maintained honestly, accurately, and in accordance with acceptable accounting practices.

• Directors, officers and other employees shall avoid situations in which their individual personal interests conflict, may conflict, or may appear to conflict, with the interests of the Company or its customers.

• Business is only to be secured for the Company on the basis of an honest and competitive market process. The Company shall provide customers with appropriate financial products and services.

• The Company shall maintain the appropriate level of confidentiality at all times with respect to information or data pertaining to customers, suppliers, employees, or the Company itself.

• The Company shall protect all of its assets, including facilities and equipment, and help maintain their value.

• Directors, officers and other employees shall act professionally and respect the dignity of others.

• Appropriate officers and directors shall be notified promptly if violations or possible violations are observed.

• Directors, officers and other employees shall maintain sound personal financial conditions by exercising good judgment in their own financial affairs.

Directors, officers and employees shall apply these principles in all of their business dealings. They must apply these principles to their communication in all media. Directors, officers and other employees must consider their actions in light of how they might be interpreted by others and whether they are behaving appropriately and performing in the best overall interests of the Company.

Key rules to ensure effectiveness of the Code of Ethics are set forth below:

Avoiding Conflicts of Interest

Directors, officers and other employees must make all business decisions for the Company free of conflicting influences. Conflicts of interest or potential conflicts of interest must be identified and addressed appropriately. Employees are subject to restrictions with respect to compensation offered and received, gifts and entertainment presented and received, personal fiduciary appointments, acceptance of bequests, outside employment and other affiliations, signing authority on accounts at the Company, and the holding of political office. Employees shall disclose conflicts and potential conflicts in the aforementioned categories, as well as relationships with customers, prospects, suppliers, and other employees. Appropriate senior officers shall determine if particular employee situations are acceptable.

Proper Use and Care of Information and Proper Record Keeping

The Company recognizes its obligation to stockholders, customers, and employees to protect the confidentiality and integrity of all forms of data and information entrusted to it. Directors, officers and other employees must maintain confidentiality even after leaving the Company. Directors, officers and other employees must also prevent misuse of confidential information.

Books and records must be accurate, in accordance with established accounting and record-keeping procedures and sound accounting controls, and in compliance with document retention requirements. Periodic reports submitted to the Securities and Exchange Commission, other regulators, management, and the public must reflect full, fair, accurate, timely, and understandable disclosure of the Company’s financial information.

Dealings with Customers, Prospects, Suppliers, and Competitors

All dealings with customers, prospects, suppliers, and competitors must be conducted in accordance with applicable laws and regulations and on terms that are fair and in the best interests of the Company. Decisions relating to relationships with current or prospective customers and suppliers must be based solely on business considerations. Personal relationships with current or prospective customers or suppliers should not influence business decisions. All applicable laws and regulations pertaining to anti-money laundering, record keeping, antitrust, fair competition, anti-racketeering, and anti-bribery laws shall be complied with.

Treating People Fairly and with Respect

Directors, officers and other employees shall deal with current and prospective customers, suppliers, visitors, and other employees without any discrimination because of race, color, creed, religion, sex, national origin, ancestry, citizenship status, age, marital status, sexual orientation, physical or mental disability, veteran status, liability for service in the Armed Forces of the United States, or any other classification prohibited by applicable laws and regulations. An environment free of harassment, discrimination, or intimidation shall be established.

2

Consequences of a violation of these laws and policies may include disciplinary action up to and including termination of employment. Any director, officer or other employee who believes that he or she has been the subject of harassment or discrimination, or who believes that an act of harassment or discrimination has occurred with respect to another employee or director, is encouraged to report the perceived violation.

Compliance with the Law

Directors, officers and other employees shall not participate in any illegal or criminal activity. Any employee who has been convicted of or pleaded guilty to a felony or who has been sanctioned by a regulatory agency must immediately report such information in writing to Gates Little. Directors, officers and other employees shall also respond to specific inquiries of the Company’s independent public accounting firm. Directors, officers and other employees shall protect the Company’s assets as appropriate to maintain their value to the Company. Directors, officers and other employees shall take care to use facilities, furnishings, and equipment properly and avoid abusive, careless and inappropriate behavior that may destroy, waste, or cause the deterioration of Company property.

Employees should be aware of the laws and regulations applicable to the Company. These include, for example, the Bank Secrecy Act, the Bank Bribery Act, the Foreign Corrupt Practices Act, Sections 23A and 23B of the Federal Reserve Act (Regulation W), Federal Reserve Regulation O, the Securities Exchange Act of 1934, the Gramm-Leach-Billey Act, the Sarbanes-Oxley Act of 2002, the Fair Credit Reporting, the USA PATRIOT Act, Antitrust Regulations, Laws and Regulations Regarding Tie-In Arrangements, Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the Uniform Services Employment and Reemployment Rights Act. Senior officers shall be familiar with these laws and regulations and understand their responsibility for promoting compliance among staff members.

Every possible situation cannot be anticipated in the Code of Ethics. If a director, officer or other employee is uncertain about any aspect of the Code and how it should be applied or interpreted, he or she is encouraged to discuss it with Gates Little. A director, officer or other employee who compromises or violates the law, and any employee who violates Company policies relating to the conduct of its business or the high ethical standards contained in the Code and related policy and procedures, shall be subject to corrective action, up to and including dismissal from employment or directorship at the Company, and, in some cases, may also be subject to criminal or civil proceedings under applicable laws.

Directors, officers or other employees are strongly encouraged to assist management in its efforts to ensure that the Code of Ethics is being followed by all employees and directors. If an employee or a director observes or suspect a breach of the Code or any law, regulation, or other Company policy by another employee or director in connection with that other employee’s or director’s business for the Company, then the employee or director observing or suspecting that breach must report such observations or suspicions and must describe their circumstances to management by memorandum or phone call. Such reports are treated as confidential to the extent consistent with appropriate investigation. Appropriate directors, officers or other employees will investigate matters reported and determine if remedial actions and/or notification

3

to regulators or law enforcement is appropriate. Retaliation of any kind against a director, officer or other employee who makes a good faith report of an observed or suspected violation of the Code of Ethics or any law, regulation, or Company policy is prohibited.

All directors, officers and other employees in supervisory, managerial, or other sensitive positions are required annually to certify that they have read, understand, and comply with the Code of Ethics.

The Code of Ethics shall be revised periodically to ensure that it addresses new statutes and contemporary legal issues, as appropriate.

4

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

Parent

The Southern Banc Company, Inc.

Subsidiaries (1)	State or Other Jurisdiction of Incorporation	Percentage Ownership
The Southern Bank Company	United States	100%
First Service Corporation	Alabama	100%

(1) The assets, liabilities and operations of the subsidiaries are included in the consolidated financial statements attached hereto as an exhibit.

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

The Southern Banc Company, Inc.

We consent to the incorporation by reference in the registration statement No. 333-3546 on Form S-8 of The Southern Banc Company, Inc. of our report dated August 3, 2004 with respect to the consolidated statements of financial condition of The Southern Banc Company, Inc. as of June 30, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended, which report appears in the June 30, 2004 annual report on Form 10-KSB of The Southern Banc Company, Inc.

/s/ KPMG LLP

Birmingham, Alabama

September 27, 2004

EX-31

EXHIBIT 31

CERTIFICATIONS

I, Gates Little, certify that:

1. I have reviewed this annual report on Form 10-KSB of The Southern Banc Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial information.

Date: September 28, 2004	By:	/s/ Gates Little
		Gates Little
		President and Chief Executive Officer
		(Chief Executive Officer and Chief Financial Officer)

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

In connection with the Annual Report on Form 10-KSB for the period ended June 30, 2004 (the “Report”) of The Southern Banc Company, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof, the undersigned, Chief Executive Officer and Chief Financial Officer of the Company, hereby certifies that to the best of my knowledge:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

Date: September 28, 2004	By:	/s/ Gates Little
		Gates Little
		President and Chief Executive Officer
		(Chief Executive Officer and Chief Financial Officer)

A signed original of the written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.