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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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(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



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THE SOUTHERN BANC COMPANY, INC.

(Name of Small Business Issuer in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



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



Not Applicable



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



Not Applicable



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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)
|-- | -----------------------------------------------------------------------------------------------------------------------------



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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 |   |  |        |  
|                                |  |                        |        |   |        |   |        |   |        |   |  |        |  

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|(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 | %
|                                                                                          |  |                        |      |   |      |   |      |  



10



---

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 ofLoans inCategoryto TotalLoans |        |   | 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.



11



---

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.



12



---

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.



14



---

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.
|--- | --------------------------------------------------------------------------------



15



---

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.



16



---

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.



17



---

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 | %
|              |  |               |  |                              |  |                |        |          |   |                             |  |        |  



18



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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 |   |        | Certificatesof 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
|                               |  |                          |       



19



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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.



20



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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



21



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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.



22



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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



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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



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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 otherloans. 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.



25



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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



26



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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           |  | TotalNumber ofSharesPurchased |  | Average PricePaid per Share |       | Total Number of SharesPurchased As Part of Publicly Announced Programs |   | Maximum Number ofShares that May Yet BePurchased Under theProgram
|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 |                                                                        |  |                                                                   | 
|                 |  |                               |  |                             |       |                                                                        |   |                                                                   |  



27



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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.



28



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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 atJune 30,2004 |  | Year FirstElected asDirector (1) |     |  | CurrentTerm to Expire |  | Shares ofCommon StockBeneficiallyOwned at theRecord Date (2) |  | Percentof 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.



29



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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, IIIis 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. Cantrellis 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



30



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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. 6thStreet, 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.



31



---

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.



32



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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.



33



---

|                                                       |  |              |  |                     |                      |                              |   |                           |  |                        |          |                               |   |                            |  |         |  |   |                   
|------------------------------------------------------ |  | ------------ |  | ------------------- | -------------------- | ---------------------------- | - | ------------------------- |  | ---------------------- | -------- | ----------------------------- | - | -------------------------- |  | ------- |  | - | ------------------
|                                                       |  |              |  | Annual Compensation |                      | Long-TermCompensation Awards |   |                          
|Name and Principal Position                            |  | Fiscal Year  |  | Salary (1)          |                      | Bonus                        |   | Other Annual Compensation |  | RestrictedStock Awards |          | Securities Underlying Options |   | All Other Compensation (2)
|Gates Little President and Chief Executive Officer (3) |  | 200420032002 |  | $                   | 109,600107,40099,600 |                              | $ | 7,500                   |  | $                      | 14414451 |                               | $ |                         |  |      |  | $ | 23,66721,34319,128

---

|(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



34



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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



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(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 tobe issued upon Exerciseof Outstanding Options,Warrants and Rights |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of Securities Remaining Available forFuture Issuance UnderEquity CompensationPlans( 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



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|                                                                                                                                          |  |                                          |     |  |                                             |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | --- |  | ------------------------------------------- | -
|Name and Address of Beneficial Owner                                                                                                      |  | Amount and Nature ofBeneficial Ownership |     |  | Percent of Sharesof Common StockOutstanding |  
|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.



37



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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



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| | (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 Year2004 |        | % ofTotal |     |   | Fiscal Year2003 |   | % 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



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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



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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



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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