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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, 2006



| ̈ | 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes ̈No  x

Registrants revenues for the fiscal year ended June 30, 2006: $5,269,496

The aggregate market value of the
601,046 shares of Common Stock of the registrant issued and outstanding held by non-affiliates was approximately $9.6 million based on the closing sales price of $15.95 per share of the registrants Common Stock on September 22, 2006 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 27, 2006: 807,186

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, 2006 (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, 2006, the Company had total consolidated assets of $102.6 million, deposits of $82.2 million, net loans receivable of $33.7 million and stockholders equity of $14.9 million, or 14.5% 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.

On September 19, 2006 the Company announced that it will file a Form 15 with the Securities and Exchange Commission and cease filing periodic
reports with the SEC under the Securities Exchange Act of 1934. The Company expects to take this action shortly after the annual meeting of the stockholders. As of the date of filing the Form 15, the Company will no longer file periodic reports with
the SEC, including Forms 10-KSB, 10-QSB and 8-K. Factors influencing the Companys decision include: (a) the administrative and third party professional costs associated with being a SEC reporting company under the 1934 Act,
including significant additional costs arising under the Sarbanes-Oxley Act of 2002, (b) the increased time to be available for management to focus on growing the Companys business and (c) the limited trading in the Companys
common stock.

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.



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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).

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 2004 Census Bureau data, the combined population of Etowah, Cherokee and Marshall
Counties was approximately 213,000.



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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. At the
present time, the facility in Talladega County employs approximately 4,500 associates. Honda officials project that approximately 20% of the plants work force are residents of Etowah County with approximately 9% coming from Marshall and
Cherokee Counties.

In 2006, Honda Motor Company will complete construction of a $70 million expansion of its machining facility which will
add additional jobs and will benefit the economy in the Banks primary market area.

According to the Alabama Department of Industrial
Relations, the unemployment rates for August 2006 in Etowah, Cherokee, and Marshall Counties were 3.9%, 3.9% and 3.1%, respectively, compared to 3.9% 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 come 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, 2006, the maximum amount that the Bank could have loaned to any one borrower without prior OTS approval was approximately $3.7 million. At such date, the largest aggregate amount of loans that the Bank had outstanding to any one
borrower was approximately $417,000.



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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, 2006, the Bank had no concentrations of loans exceeding 10% of total loans that are not disclosed below.



|                                |  |                        |        |   |        |   |        |   |        |  |        |  
|------------------------------- |  | ---------------------- | ------ | - | ------ | - | ------ | - | ------ |  | ------ | -
|                                |  | At June 30,            |       
|                                |  | 2006                   |        |   | 2005   |  
|                                |  | Amount                 |        | % |        |   | Amount |   | %      | 
|                                |  | (Dollars in thousands) |       
|Type of Loan:                   |  |                        |        |   |        |   |        |   |        |  |        |  
|Real estate loans:              |  |                        |        |   |        |   |        |   |        |  |        |  
|One-to-four-family residential  |  | $                      | 21,994 |   | 64.88  | % |        | $ | 24,598 |  | 68.76  | %
|Non-residential                 |  |                        | 1,157  |   | 3.41   |   |        |   | 1,299  |  | 3.63   |  
|Consumer loans(1)               |  |                        | 7,290  |   | 21.50  |   |        |   | 7,729  |  | 21.60  |  
|Commercial loans                |  |                        | 2,565  |   | 7.57   |   |        |   | 1,306  |  | 3.65   |  
|Savings account loans           |  |                        | 896    |   | 2.64   |   |        |   | 843    |  | 2.36   |  
|                                |  |                        |        |   |        |   |        |   |        |  |        |  
|Total gross loans               |  |                        | 33,902 |   | 100.00 | % |        |   | 35,775 |  | 100.00 | %
|                                |  |                        |        |   |        |   |        |   |        |  |        |  
|Less:                           |  |                        |        |   |        |   |        |   |        |  |        |  
|Unearned income                 |  |                        | 24     |   |        |   |        |   | 83     |  |        |  
|Deferred loan fees (costs), net |  |                        | 29     |   |        |   |        |   | 25     |  |        |  
|Allowance for loan losses       |  |                        | 139    |   |        |   |        |   | 136    |  |        |  
|                                |  |                        |        |   |        |   |        |   |        |  |        |  
|Total                           |  | $                      | 33,710 |   |        |   |        | $ | 35,531 |  |        |  
|                                |  |                        |        |   |        |   |        |   |        |  |        |  

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|(1) | Consumer loans include home equity line of credit loans of approximately $1,844,000 and $1,747,000, at June 30, 2006 and 2005, respectively.
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The following table sets forth information at June 30, 2006 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 6/30/06 |       | Due After 1 through 5 Years After 6/30/06 |   | Due After 5 Years After 6/30/06 |  | Total
|                                               |  | (In thousands)                  |       |                                          
|Real estate mortgage                           |  | $                               | 876   |                                           | $ | 1,415                           |  | $     | 20,860 |  | $ | 23,151
|                                               |  |                                 |       |                                          
|Consumer, commercial and savings account loans |  |                                 | 4,777 |                                           |   | 4,819                           |  |       | 1,155  |  |   | 10,751
|                                               |  |                                 |       |                                           |   |                                 |  |       |        |  |   |       
|Total                                          |  | $                               | 5,653 |                                           | $ | 6,234                           |  | $     | 22,015 |  | $ | 33,902
|                                               |  |                                 |       |                                           |   |                                 |  |       |        |  |   |       



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The following table sets forth at June 30, 2006, the dollar amount of gross loans that have fixed or
adjustable rates.



|                                               |  |                    |        |                             |   |      
|---------------------------------------------- |  | ------------------ | ------ | --------------------------- | - | -----
|                                               |  | Predetermined Rate |        | Floating orAdjustable Rates
|                                               |  | (In thousands)    
|Real estate                                    |  | $                  | 22,968 |                             | $ | 183  
|Consumer, commercial and savings account loans |  |                    | 7,534  |                             |   | 3,217
|                                               |  |                    |        |                             |   |      
|Total                                          |  | $                  | 30,502 |                             | $ | 3,400
|                                               |  |                    |        |                             |   |      

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 2006, the Bank
purchased $1,372,500 in commercial real estate participation loans. During the fiscal year ended June 30, 2006, the Bank originated and sold a total of approximately $2,543,000 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 $35,000 and $391,000, with the Banks loan amounts
averaging approximately $93,000. At June 30, 2006, $22.0 million, or 64.9%, 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, 2006, $23.0 million, or 99.2% of the Banks real estate loans, had fixed rates, and $183,000 or 0.80%, 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.

Until November 1999, 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, 2006, the Bank had originated $7.4 million of these graduated rate loans.

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, 2006 included adjustable rate, one-to-four-family residential loans with an aggregate principal balance of $183,000, 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, 2006, the Banks total consumer loan portfolio was approximately $7.3 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 $3.6 million, $1.8 million, $1.8 million and $76,000, respectively, at June 30, 2006. 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, 2006, the Bank had no assets classified as loss, no assets classified as doubtful, $85,456 of assets classified as substandard and $352,408 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, 2006, the Bank held $2,936 in repossessed assets pending disposal.

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



|                                                                                          |  |                        |      |   |      |   |      |  
|----------------------------------------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | -
|                                                                                          |  | Years Ended June 30,   |     
|                                                                                          |  | 2006                   |      |   | 2005 |  
|                                                                                          |  | (Dollars in thousands) |     
|Balance at beginning of period                                                            |  | $                      | 135  |   |      | $ | 144  |  
|Charge-offs                                                                               |  |                        | (11  | ) |      |   | (27  | )
|Recoveries                                                                                |  |                        | 0    |   |      |   | 3    |  
|Provision for loan losses                                                                 |  |                        | 15   |   |      |   | 15   |  
|                                                                                          |  |                        |      |   |      |   |      |  
|Balance at end of period                                                                  |  | $                      | 139  |   |      | $ | 135  |  
|                                                                                          |  |                        |      |   |      |   |      |  
|Ratio of net charge-offs during the period to average loans outstanding during the period |  |                        | 0.03 | % |      |   | 0.08 | %
|                                                                                          |  |                        |      |   |      |   |      |  



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,            |    
|                                               |  | 2006                   |     |                                         | 2005   |  
|                                               |  | 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                 |  | $                      | 45  |                                         | 64.88  | % |        | $ | 50                                          |  | 68.76  | %
|Non-residential                                |  |                        |    |                                         | 3.41   |   |        |   |                                            |  | 3.63   |  
|Consumer, commercial and savings account loans |  |                        | 94  |                                         | 31.71  |   |        |   | 85                                          |  | 27.61  |  
|                                               |  |                        |     |                                         |        |   |        |   |                                             |  |        |  
|Total allowance for loan losses                |  | $                      | 139 |                                         | 100.00 | % |        | $ | 135                                         |  | 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,            |     
|                                                                 |  | 2006                   |      |   | 2005 |  
|                                                                 |  | (Dollars in thousands) |     
|Loans accounted for on a non-accrual basis:(1)                   |  |                        |      |   |      |   |      |  
|Real estate loans:                                               |  |                        |      |   |      |   |      |  
|One-to-four-family residential                                   |  | $                      | 40   |   |      | $ | 8    |  
|Non-residential                                                  |  |                        |     |   |      |   |     |  
|Consumer, commercial and savings account loans                   |  |                        | 43   |   |      |   | 22   |  
|Other loans                                                      |  |                        |     |   |      |   |     |  
|                                                                 |  |                        |      |   |      |   |      |  
|Total                                                            |  | $                      | 83   |   |      | $ | 30   |  
|                                                                 |  |                        |      |   |      |   |      |  
|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   |  | $                      | 83   |   |      | $ | 30   |  
|                                                                 |  |                        |      |   |      |   |      |  
|Percentage of total loans                                        |  |                        | 0.24 | % |      |   | 0.08 | %
|                                                                 |  |                        |      |   |      |   |      |  
|Other non-performing assets(2)                                   |  | $                      | 3    |   |      | $ | 6    |  
|                                                                 |  |                        |      |   |      |   |      |  
|Percentage of total assets                                       |  |                        | 0.08 | % |      |   | 0.03 | %
|                                                                 |  |                        |      |   |      |   |      |  

---

|(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, 2006 and 2005.

At June 30, 2006, 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, 2006, investment securities with an aggregate amortized cost of approximately $59.8 million and an aggregate fair value of approximately $57.6 million were included in the portfolio of securities designated as available for
sale. The aggregate impact on equity was a net decrease of approximately $1.1 million for the year ended June 30, 2006. The net unrealized pre-tax loss on securities available for sale at June 30, 2006 was approximately $2.2 million. 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, 2006, securities designated as held to maturity had an aggregate amortized cost of approximately $2.6 million
and an aggregate fair value of approximately $2.6 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-rate



13



---

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, 2006, the Bank had approximately $1.6 million in mortgage-backed securities which are considered to be held to maturity and which are insured or guaranteed by FNMA, FHLMC or GNMA. At June 30, 2006, the carrying value of
mortgage-backed securities designated as available for sale was approximately $32.5 million and the carrying value of U.S. Government agency securities designated as available for sale and U. S. Treasury securities was approximately $20.5 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,   
|                                    |  | 2006           |        | 2005
|                                    |  | (In thousands)
|Securities available for sale:(1)   |  |                |        |      |   |       
|U.S. Treasury securities            |  | $              | 770    |      | $ |      
|U.S. Government agency securities   |  |                | 19,735 |      |   | 7,659 
|Mortgage-backed securities          |  |                | 32,487 |      |   | 44,345
|Other                               |  |                | 4,631  |      |   | 7,399 
|                                    |  |                |        |      |   |       
|Total securities available for sale |  | $              | 57,623 |      | $ | 59,403
|                                    |  |                |        |      |   |       
|Securities held to maturity:(2)     |  |                |        |      |   |       
|Mortgage-backed securities          |  | $              | 1,580  |      | $ | 2,656 
|Other                               |  |                | 1,000  |      |   | 1,004 
|                                    |  |                |        |      |   |       
|Total securities held to maturity   |  | $              | 2,580  |      | $ | 3,660 
|                                    |  |                |        |      |   |       
|Total securities                    |  | $              | 60,203 |      | $ | 63,063
|                                    |  |                |        |      |   |       

---

|(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, 2006.



|                                    |  |                  |       |               |                   |   |                |                   |                        |  |                    |                |  |                            |        |  |                |   |               |   |        |                |     |            |  |               |        |  |   |        |  |     |  
|----------------------------------- |  | ---------------- | ----- | ------------- | ----------------- | - | -------------- | ----------------- | ---------------------- |  | ------------------ | -------------- |  | -------------------------- | ------ |  | -------------- | - | ------------- | - | ------ | -------------- | --- | ---------- |  | ------------- | ------ |  | - | ------ |  | --- | -
|                                    |  | One Year or Less |       |               | One to Five Years |   |                | Five to Ten Years |                        |  | More than TenYears |                |  | 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   |  | $                | 2,118 |               | 4.0               | % |                | $                 | 7,731                  |  | 4.9                | %              |  | $                          | 7,653  |  | 4.9            | % |               | $ | 2,232  |                | 5.1 | %          |  | $             | 20,233 |  | $ | 19,735 |  | 4.8 | %
|U. S. Treasury securities           |  |                  |      |               | 0.0               |   |                |                   | 261                    |  | 3.5                |                |  |                            | 509    |  | 0.0            |   |               |   |       |                | 0.0 |            |  |               | 757    |  |   | 770    |  | 1.2 |  
|Mortgage-backed securities          |  |                  | 43    |               | 6.1               |   |                |                   | 4,968                  |  | 4.6                |                |  |                            | 6,268  |  | 4.6            |   |               |   | 21,209 |                | 4.7 |            |  |               | 33,992 |  |   | 32,487 |  | 4.7 |  
|Other(3)                            |  |                  | 2     |               | 0.0               |   |                |                   |                       |  | 0.0                |                |  |                            | 2,504  |  | 4.9            |   |               |   | 2,125  |                | 3.9 |            |  |               | 4,807  |  |   | 4,631  |  | 4.4 |  
|                                    |  |                  |       |               |                   |   |                |                   |                        |  |                    |                |  |                            |        |  |                |   |               |   |        |                |     |            |  |               |        |  |   |        |  |     |  
|Total securities available for sale |  | $                | 2,163 |               | 4.1               | % |                | $                 | 12,960                 |  | 4.7                | %              |  | $                          | 16,934 |  | 4.6            | % |               | $ | 25,566 |                | 4.3 | %          |  | $             | 59,790 |  | $ | 57,623 |  | 4.6 | %
|                                    |  |                  |       |               |                   |   |                |                   |                        |  |                    |                |  |                            |        |  |                |   |               |   |        |                |     |            |  |               |        |  |   |        |  |     |  
|Securities held to maturity:(2)     |  |                  |       |               |                   |   |                |                   |                        |  |                    |                |  |                            |        |  |                |   |               |   |        |                |     |            |  |               |        |  |   |        |  |     |  
|Mortgage-backed securities          |  | $                | 30    |               | 7.7               | % |                | $                 | 946                    |  | 6.9                | %              |  | $                          | 390    |  | 7.2            | % |               | $ | 214    |                | 7.6 | %          |  | $             | 1,580  |  | $ | 1,616  |  | 7.1 | %
|Other                               |  |                  | 1,000 |               | 5.0               |   |                |                   |                       |  | 0.0                |                |  |                            |       |  | 0.0            |   |               |   |       |                | 0.0 |            |  |               | 1,000  |  |   | 1,000  |  | 5.0 |  
|                                    |  |                  |       |               |                   |   |                |                   |                        |  |                    |                |  |                            |        |  |                |   |               |   |        |                |     |            |  |               |        |  |   |        |  |     |  
|Total securities held to maturity   |  | $                | 1,030 |               | 5.1               | % |                | $                 | 946                    |  | 6.9                | %              |  | $                          | 390    |  | 7.2            | % |               | $ | 214    |                | 7.6 | %          |  | $             | 2,580  |  | $ | 2,616  |  | 6.3 | %
|                                    |  |                  |       |               |                   |   |                |                   |                        |  |                    |                |  |                            |        |  |                |   |               |   |        |                |     |            |  |               |        |  |   |        |  |     |  
|Total securities                    |  | $                | 3,193 |               | 4.4               | % |                | $                 | 13,906                 |  | 4.8                | %              |  | $                          | 17,324 |  | 4.7            | % |               | $ | 25,780 |                | 4.7 | %          |  | $             | 62,370 |  | $ | 60,239 |  | 4.5 | %
|                                    |  |                  |       |               |                   |   |                |                   |                        |  |                    |                |  |                            |        |  |                |   |               |   |        |                |     |            |  |               |        |  |   |        |  |     |  

---

|(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 include the Banks investment in other common stock.
|--- | ---------------------------------------------------------------------

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, 2006 were represented by the various programs described below.



|              |  |               |  |                              |  |                |        |          |   |                             |  |        |  
|------------- |  | ------------- |  | ---------------------------- |  | -------------- | ------ | -------- | - | --------------------------- |  | ------ | -
|Interest Rate |  | Minimum Term  |  | Category                     |  | Minimum Amount |        | Balances |   | Percentage of Total Savings | 
|              |  |               |  |                              |  | (In thousands) |        |          |  
|0.250%        |  | None          |  | NOW Accounts                 |  | $              | 100    |          | $ | 417                         |  | 0.51   | %
|0.312         |  | None          |  | Passbook Statement Accounts  |  |                | 100    |          |   | 2,488                       |  | 3.03   |  
|0.499         |  | None          |  | Gold Star Savings Account    |  |                | 100    |          |   | 1,076                       |  | 1.31   |  
|0.250         |  | None          |  | Money Market Deposit Account |  |                | 1,500  |          |   | 53                          |  | 0.06   |  
|0.250         |  | None          |  | High Yield Account           |  |                | 100    |          |   | 939                         |  | 1.14   |  
|0.249         |  | None          |  | Best Checking Account        |  |                | 50     |          |   | 74                          |  | 0.09   |  
|0.248         |  | None          |  | Merit Checking               |  |                | 50     |          |   | 918                         |  | 1.12   |  
|0.250         |  | None          |  | Classic 55 Checking          |  |                | 50     |          |   | 1,512                       |  | 1.84   |  
|0.000         |  | None          |  | Free Checking                |  |                |       |          |   | 139                         |  | 0.17   |  
|0.000         |  | None          |  | Business Checking            |  |                | 50     |          |   | 428                         |  | 0.52   |  
|0.248         |  | None          |  | First Checking               |  |                | 50     |          |   | 4,185                       |  | 5.10   |  
|3.327         |  | None          |  | Premium MMDA                 |  |                | 10,000 |          |   | 6,838                       |  | 8.32   |  
|              |  |               |  |                              | 
|              |  |               |  | Certificates of Deposit      |  |                |        |          |   |                             | 
|2.000%        |  | 91 Days       |  | 3-Month Money Market         |  |                | 1,000  |          |   | 182                         |  | 0.22   | %
|2.626         |  | 5 Month       |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 115                         |  | 0.14   |  
|1.000         |  | 182 Days      |  | 6-Month Money Market         |  |                | 1,000  |          |   | 148                         |  | 0.18   |  
|3.958         |  | 7 Month       |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 3,024                       |  | 3.68   |  
|1.000         |  | 8 Month       |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 11                          |  | 0.01   |  
|1.000         |  | 10 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 45                          |  | 0.05   |  
|4.800         |  | 12 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 11,958                      |  | 14.55  |  
|1.370         |  | 14 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 202                         |  | 0.25   |  
|1.500         |  | 18 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 181                         |  | 0.22   |  
|3.322         |  | 18 Month-IRA  |  | Fixed Term, Fixed Rate - IRA |  |                | 250    |          |   | 605                         |  | 0.74   |  
|3.261         |  | 21 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 10,602                      |  | 12.90  |  
|3.660         |  | 24 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 1,756                       |  | 2.14   |  
|1.520         |  | 30 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 2,046                       |  | 2.49   |  
|2.000         |  | 36 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 640                         |  | 0.78   |  
|1.949         |  | 48 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 6,884                       |  | 8.38   |  
|3.192         |  | 60 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 16,764                      |  | 20.40  |  
|3.625         |  | 72 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 109                         |  | 0.13   |  
|5.227         |  | 120 Month     |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 39                          |  | 0.05   |  
|3.821         |  | 3-Month-State |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 1,325                       |  | 1.61   |  
|4.025         |  | 11 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 6,291                       |  | 7.66   |  
|1.000         |  | 17 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 67                          |  | 0.08   |  
|1.000         |  | 19 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |   | 109                         |  | 0.13   |  
|              |  |               |  |                              |  |                |        |          |   |                             |  |        |  
|              |  |               |  | Total                        |  |                |        |          | $ | 82,170                      |  | 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, |      
|                      |  | 2006                 |       |   | 2005                              |  
|                      |  | Savings              |       |   | Interest- Bearing Demand Deposits |   |        | Certificates of Deposit |  |   | Savings |   |  | Interest- Bearing Demand Deposits |       |   | Certificates of Deposit |  
|                      |  |                      |       |   |                                   |   |        | (Dollars in thousands)  |  |   |         |   |  |                                   |      
|Average balance       |  | $                    | 4,121 |   |                                   | $ | 15,637 |                         |  | $ | 61,370  |   |  | $                                 | 5,393 |   |                         | $ | 16,366 |   |  | $ | 60,737 |  
|Average interest rate |  |                      | 0.54  | % |                                   |   | 1.51   | %                       |  |   | 3.45    | % |  |                                   | 0.57  | % |                         |   | 1.32   | % |  |   | 2.80   | %

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



|             |  |                |        |      |   |       
|------------ |  | -------------- | ------ | ---- | - | ------
|             |  | At June 30,   
|             |  | 2006           |        | 2005
|             |  | (In thousands)
|0.01  2.00% |  | $              | 3,998  |      | $ | 6,945 
|2.01  4.00% |  |                | 30,575 |      |   | 47,369
|4.01  6.00% |  |                | 28,530 |      |   | 5,535 
|             |  |                |        |      |   |       
|             |  | $              | 63,103 |      | $ | 59,849
|             |  |                |        |      |   |       

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, 2006.



|                               |  |                          |       
|------------------------------ |  | ------------------------ | ------
|Maturity Period                |  | Certificates of Deposits
|                               |  | (In thousands)          
|Three months or less           |  | $                        | 3,516 
|Over three through six months  |  |                          | 911   
|Over six through twelve months |  |                          | 5,202 
|Over twelve months             |  |                          | 8,336 
|                               |  |                          |       
|Total                          |  | $                        | 17,965
|                               |  |                          |       



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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, 2006, Federal Home Loan Bank advances were approximately $5.3 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, 2006, the Bank was authorized
to invest approximately $2.0 million in the stock of or loans to subsidiaries. The Bank currently does not have a subsidiary.



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REGULATION

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

Sarbanes-Oxley Act of 2002

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

USA Patriot Act

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

Regulation of the Company

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

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



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

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

Regulation of the Bank

General. As a federally chartered, FDIC-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, 2006, the Bank was in compliance with its regulatory capital requirements.



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

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

In addition to the above regulatory capital requirements, the
OTS prompt corrective action regulation classifies savings institutions by capital levels and provides that the OTS will take various corrective actions, including imposing significant operational restrictions, against any savings institution
that fails to meet the regulations capital standards. Under this regulation, a well capitalized savings institution is one that has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%
and a leverage capital ratio of 5%, and is not subject to any capital order or directive. A savings institution is deemed adequately capitalized category if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based
capital ratio of at least 4%, and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized,
depending on their capital levels. A savings institution that falls within any of the three undercapitalized categories is subject to severe regulatory sanctions under the prompt corrective action regulation. At June 30, 2006, the Bank was
classified as well capitalized.

Insurance of Deposit Accounts.The deposit accounts held by the Bank are insured to applicable limits
by the FDIC. Although the FDIC is authorized to assess premiums under a risk-based system for such deposit insurance, most insured depository institutions have not been required to pay premiums for the last 10 years. The Federal Deposit Insurance
Reform Act of 2005, which was signed into law on February 15, 2006, has resulted in significant changes to the federal deposit insurance program: (i) effective July 1, 2006, the Bank Insurance Fund (which formerly insured the deposits
of banks) and the Savings Association Insurance Fund (which formerly insured the deposits of savings associations like the Bank) were merged into a new combined fund, called the Deposit Insurance Fund; (ii) the current $100,000 deposit
insurance coverage will be indexed for inflation (with adjustments every five years, commencing January 1, 2011); and (iii) deposit insurance coverage for retirement accounts has been increased to $250,000 per participant subject to
adjustment for inflation. The FDIC has been given greater latitude in setting the assessment rates for insured depository institutions, which could be used to impose minimum assessments.

The FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. If the
Deposit Insurance Funds reserves exceed the designated reserve ratio, the Federal Deposit Insurance Corporation is required to pay out all or, if the reserve ratio is less than 1.5%, a portion of the excess as a dividend to insured depository
institutions based on the percentage of insured deposits held on December 31, 1996 adjusted for subsequently paid



23



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premiums. Insured depository institutions that were in existence on December 31, 1996 and paid assessments prior to that date (or their successors) are
entitled to a one-time credit against future assessments based on their past contributions to the BIF or SAIF.

In addition, all
FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association
Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019.

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 2006 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 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 20% 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, 2006, 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; (ii) raise safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement. 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



24



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additional amount may be lent, equal to 10% of the unimpaired capital and surplus, under certain circumstances. At June 30, 2006, the Registrants
lending limit for loans to one borrower was approximately $3.7 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, 2006, the Bank was in compliance with this requirement. The Federal Home Loan Bank imposes various limitations on advances such as limiting the amount of
certain types of real estate related collateral to 30% of a members capital and limiting total advances to a member.

The Federal
Home Loan Banks are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have adversely affected the level of Federal Home Loan Bank dividends paid and could continue to do so in the future. In addition, the Federal Housing Finance Board has proposed that the Federal
Home Loan Banks increase their capital levels by retaining more earnings, and this proposal has led several Federal Home Loan Banks to reduce their dividends.

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 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, 2006, 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.



25



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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 reserve deduction 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.

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, 2006, 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,



26



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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, 2006, the Company and the Bank had 31 full-time employees none of whom was represented by a collective bargaining agreement.



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Item 2. Description of Property

The following table sets forth information regarding the Banks offices at June 30, 2006.



|                                                |  |             |  |                                 |         |                            |       |                 |      
|----------------------------------------------- |  | ----------- |  | ------------------------------- | ------- | -------------------------- | ----- | --------------- | -----
|                                                |  | Year Opened |  | Net Book Value at June 30, 2006 |         | Approximate Square Footage |       | Owned or Leased
|Main Office:                                    |  |             |  |                                 |         |                            |       |                 |      
|221 South 6th Street Gadsden, Alabama 35901     |  | 1968        |  | $                               | 179,646 |                            | 6,500 |                 | Owned
|Branch Offices:                                 |  |             |  |                                 |         |                            |       |                 |      
|625 East Main Street Albertville, Alabama 35950 |  | 2005        |  |                                 | 481,686 |                            | 6500  |                 | Owned
|2204 Henry Street Guntersville, Alabama 35976   |  | 2000        |  |                                 | 199,616 |                            | 1,100 |                 | Owned
|390 W. Main Street Centre, Alabama 35960        |  | 1994        |  |                                 | 53,557  |                            | 2,263 |                 | Owned

The net book value of the Banks investment in furnishings and equipment totaled $131,958 at
June 30, 2006.

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 2006.

PART II

Item 5. Market for Common Equity
and Related Stockholder Matters

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.



28



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The following table details stock repurchases by the Company during the year ended June 30, 2006.



|                     |  |                               |  |                             |       |                                                                       |   |                                                                    |  
|-------------------- |  | ----------------------------- |  | --------------------------- | ----- | --------------------------------------------------------------------- | - | ------------------------------------------------------------------ | -
|Period               |  | TotalNumber ofSharesPurchased |  | Average PricePaid per Share |       | Total Number of SharesPurchased As Part of PubliclyAnnounced Programs |   | Maximum Number of Sharesthat May Yet Be PurchasedUnder the Program
|August 1-31, 2005    |  | 6,444                         |  | $                           | 16.75 |                                                                       |  |                                                                    | 
|September 1-30, 2005 |  | 17,000                        |  | $                           | 16.75 |                                                                       |  |                                                                    | 
|December 1-31, 2005  |  | 200                           |  | $                           | 16.20 |                                                                       |  |                                                                    | 
|May 1-31, 2006       |  | 26,655                        |  | $                           | 16.98 |                                                                       |  |                                                                    | 
|June 1-30, 2006      |  | 75                            |  | $                           | 16.91 |                                                                       |  |                                                                    | 
|                     |  |                               |  |                             |       |                                                                       |   |                                                                    |  
|Total                |  | 50,374                        |  | $                           | 16.80 |                                                                       |  |                                                                    | 
|                     |  |                               |  |                             |       |                                                                       |   |                                                                    |  

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
as of June 30, 2006. 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.



29



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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

On September 27, 2006, the registrant announced its results of operations for the quarter and fiscal year ended June 30, 2006. A copy of the
press release is attached as Exhibit 99 to this Annual Report on Form 10-KSB and is incorporated herein by reference.



30



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PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance With Section 16(a) of the Exchange Act

General

The Nominating and Corporate Governance Committee of the Board of Directors has nominated Craig G. Cantrell and
James B. Little, Jr. to serve as directors for a three-year period. All nominees are currently members of the Board and will be considered and voted upon at the Annual Meeting of the Stockholders to be held on November 8, 2006 (the
Meeting).

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 30,2006 |  | Year FirstElected asDirector (1) |     |  | CurrentTermto Expire |  | Shares ofCommon StockBeneficiallyOwned at theRecord Date (2) |  | Percentof Class |  
|BOARD NOMINEES FOR TERMS TO EXPIRE IN 2009 | 
|                                           |  |                    |  |                                  |    
|Craig G. Cantrell                          |  | 77                 |  | 1961                             |     |  | 2006                 |  | 7,500                                                        |  | 0.9             | %
|James B. Little, Jr.                       |  | 76                 |  | 1957                             |     |  | 2006                 |  | 49,984                                                       |  | 6.2             | %
|                                          
|DIRECTORS CONTINUING IN OFFICE             | 
|                                           |  |                    |  |                                  |    
|Grady Gillam                               |  | 82                 |  | 1989                             |     |  | 2007                 |  | 14,451                                                       |  | 1.8             | %
|Rex G. Keeling, Jr.                        |  | 63                 |  | 1974                             |     |  | 2007                 |  | 2,180                                                        |  | 0.3             | %
|James B. Little, III                       |  | 45                 |  | 2000                             | (3) |  | 2007                 |  | 1,454                                                        |  | 0.2             | %
|Thomas F. Dowling, III                     |  | 69                 |  | 1972                             |     |  | 2008                 |  | 12,123                                                       |  | 1.5             | %
|Gates Little                               |  | 36                 |  | 1994                             |     |  | 2008                 |  | 50,848                                                       |  | 6.3             | %
|Fred Taylor                                |  | 79                 |  | 1993                             |     |  | 2008                 |  | 12,600                                                       |  | 1.6             | %

---

|(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 291 and 5,000 shares held by Messrs. James B. Little, III and Gates Little, respectively; 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 and continuing directors. Unless otherwise stated, all
directors have held the positions indicated for at least the past five years.



31



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Craig G. Cantrellis a retired physician. From 1957 to 1994, 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.

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

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.
Mr. Keeling serves on The Riverview Medical Center Hospital Board, in Gadsden, Alabama.

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.

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 five and twelve times, respectively, during the fiscal year ended June 30, 2006. All directors attended 100% of the Board of Directors
meetings and assigned committee meetings during the fiscal year with the exception of James B. Little, III who attended 50%. The Company expects all members of the Board of Directors to attend annual meetings. All members of the Board of Directors
attended the 2005 Annual Meeting of Stockholders.



32



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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 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.

Committees of The Board Of Directors

The Boards 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.



33



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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. The Audit Committee met four times during the fiscal year ended June 30, 2006. 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.

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, 2006. 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, 2006. The functions of
the Compensation Committee include making recommendations to the Board of Directors concerning compensation, including incentive compensation, of the executive officers. The Compensation Committee also administers the stock option plans.

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 and recommendation of corporate governance policies. In the year ended June 30, 2006, the Nominating and Corporate Governance Committee held one
meeting.

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. Incumbent director-nominees
abstained from the nomination process. In seeking potential nominees, the Nominating and Corporate Governance Committee uses its and managements network of contacts to compile a list of potential



34



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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.

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 class and number of
shares of the Company which are beneficially owned by such person, and (d) any other information reasonably requested by the Company. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Company that information required to be set forth in a stockholders notice of nomination which pertains to the nominee. 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. To be timely under the Certificate of Incorporation, nominations by any stockholder eligible to vote at the
Meeting must be received by the Company on or before October 27, 2006.

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.

Item 10. Executive Compensation

Director Compensation

The Companys directors meet on a quarterly basis and receive $300 per
meeting. For fiscal 2006, the Companys directors fees totaled $9,000. 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 2006, 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, 2006,
2005 and 2004 awarded to or earned by the Companys President and Chief Executive Officer for services rendered in all capacities to the



35



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Company and its subsidiaries. No other executive officer earned in excess of $100,000 in salary and bonus.



|                            |  |             |  |                     |         |                               |   |                            |  |                               |     |  |   |   |  |   |  |   |       
|--------------------------- |  | ----------- |  | ------------------- | ------- | ----------------------------- | - | -------------------------- |  | ----------------------------- | --- |  | - | - |  | - |  | - | ------
|Name and Principal Position |  | Fiscal Year |  | Annual Compensation |         | Long-Term Compensation Awards |   | All Other Compensation (2)
|                            |  | Salary (1)  |  | Bonus               |         | Other Annual Compensation     |   | RestrictedStock Awards     |  | Securities Underlying Options |    
|Gates Little                |  | 2006        |  | $                   | 109,600 |                               | $ | 7,500                      |  | $                             | 162 |  | $ |  |  |  |  | $ | 20,441
|President &                 |  | 2005        |  | $                   | 109,600 |                               | $ | 7,500                      |  | $                             | 162 |  |   |  |  |  |  | $ | 22,673
|Chief Executive Officer     |  | 2004        |  | $                   | 109,600 |                               | $ | 7,500                      |  | $                             | 144 |  |   |  |  |  |  | $ | 23,667

---

|(1) | Includes directors fees of $9,600 for each of fiscal years 2006, 2005 and 2004.
|--- | --------------------------------------------------------------------------------

|(2) | Includes contributions to the Banks defined contribution qualified pension plan, pursuant to which the Bank contributes 15% of each employees annual salary and bonus to
an IRA account, and ESOP share allocations, valued at the respective fiscal year ends.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 2006. No options were granted to 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 |  | 5,000                                                                  |  |                                                                 |  | $           | 7,700 |               | $ | 

---

|(1) | Based on difference between exercise price of $14.56 and closing price on June 30, 2006 ($16.10).
|--- | -------------------------------------------------------------------------------------------------

Options are in-the-money if the fair market value of the underlying securities exceeds the exercise price of the option.

Employment Agreements

Each of the Company and the
Bank has entered into an employment agreement with Gates Little to serve as President and Chief Executive Officer. 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 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



36



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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, (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, 2006 would have been approximately $239,800 These provisions may have an anti-takeover effect by making it more expensive for
a potential acquiror 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.



37



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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 16, 2006 with respect to the shares of Common Stock that may be issued under the Companys existing equity compensation plans.



|                                                       |  |                                                                                          |  |                                                                           |       |                                                                                     |       
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------- | ------
|Plan Category                                          |  | Number of Securitiesto be issued uponExercise
ofOutstanding,Options, Warrants and Rights |  | Weighted AverageExercise Price of OutstandingOptions, Warrants and Rights |       | Number of SecuritiesRemaining for
FutureIssuance Under EquityCompensation Plans (2)
|Equity Compensation Plans Approved by Stockholders(1)  |  | 5,291                                                                                    |  | $                                                                         | 14.17 |                                                                                     | 17,077
|Equity Compensation Plans Not Approved by Stockholders |  |                                                                                         |  |                                                                           |      |                                                                                     |      
|                                                       |  |                                                                                          |  |                                                                           |       |                                                                                     |       
|Total                                                  |  | 5,291                                                                                    |  | $                                                                         | 14.17 |                                                                                     | 17,077

---

|(1) | Consists of the 1996 Stock Option and Incentive Plan (the Option Plan).
|--- | -------------------------------------------------------------------------

|(2) | Includes shares available for future issuance under the Option Plan. As of September 16, 2006, an aggregate of 17,077 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 12. Certain Relationships and Related Transactions

Transactions with Management

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, 2006, the Banks loans to directors and
executive officers totaled approximately $42,714.



38



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Item 13. Exhibits



|             |  |                                                                                                                                                                                                                                                                                  
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                        
|             | 
|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                                                                                                                                                                                                                                                                     
|             | 
|23.1         |  | Consent of Barfield, Murphy, Shank & Smith, P.C.                                                                                                                                                                                                                                 
|             | 
|31           |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                                          
|             | 
|32           |  | Certification pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                 
|             | 
|99           |  | Press Release dated September 27, 2006 announcing results of operations.                                                                                                                                                                                                         

---

|* | 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 Annual Report on Form 10-KSB for fiscal year ended June 30, 2004.
|-------- | ----------------------------------------------------------------------------------------------



39



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Item 14. Principal Accountant Fees and Services

Barfield, Murphy, Shank & Smith PC (BMSS) audited the Companys annual financial statements for the fiscal year ended
June 30, 2006. The Audit Committee currently intends to appoint BMSS to be the Companys independent public accountants for the 2007 fiscal year. A representative of BMSS is not expected to be present at the Meeting.

Audit Fees and Other Matters

KPMG LLP
(KPMG) provided audit services to the Company consisting of professional services rendered in connection with reissuing their letter of opinion included in the Companys 2005 10-K and Annual Report.

BMSS provided audit services for the annual audit of the Companys 2006 consolidated financial statements contained in the Companys Annual
Reports on Form 10-KSB and a review of the financial statements contained in the Companys Quarterly Reports on Form 10-QSB for the fiscal year 2006.



|                   |  |                 |        |           |     |   |                 |   |           |  |     |  
|------------------ |  | --------------- | ------ | --------- | --- | - | --------------- | - | --------- |  | --- | -
|Fee Category       |  | Fiscal Year2006 |        | % ofTotal |     |   | Fiscal Year2005 |   | % ofTotal | 
|BMSS:              |  |                 |        |           |     |   |                 |   |           |  |     |  
|Audit Fees         |  |                 | 34,812 |           | 83  | % |                 |   | 15,509    |  | 24  | %
|Audit-Related Fees |  |                 |       |           |    | % |                 |   |          |  |    | %
|Tax Fees           |  |                 | 5,072  |           | 12  | % |                 |   | 725       |  | 1   | %
|All Other Fees     |  |                 |       |           |    | % |                 |   |          |  |    | %
|                   |  |                 |        |          
|KPMG:              |  |                 |        |           |     |   |                 |   |           |  |     |  
|Audit Fees         |  |                 |       |           |    | % |                 |   | 43,000    |  | 66  | %
|Audit-Related Fees |  |                 |       |           |    | % |                 |   |          |  |    | %
|Tax Fees           |  |                 |       |           |    | % |                 |   | 6,300     |  | 9   | %
|All Other Fees     |  |                 | 2,000  |           | 5   | % |                 |   |          |  |    | %
|                   |  |                 |        |           |     |   |                 |   |           |  |     |  
|Total Fees         |  | $               | 41,884 |           | 100 | % |                 | $ | 65,534    |  | 100 | %
|                   |  |                 |        |           |     |   |                 |   |           |  |     |  

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. The total fees paid to KPMG for the fiscal year ended June 30, 2006 was $2,000. The total fees paid to BMSS for the fiscal year ended June 30, 2006 was $39,884.

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.



40



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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 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, 2006 pre-approved non-audit services included only those services described above for Tax Fees.

Change in Independent Registered Public Accounting Firm

On December 3, 2004, the Audit Committee dismissed the Companys independent registered public accounting firm, KPMG, and appointed BMSS as its new independent registered public accounting firm. 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, 2005. The decision not to renew the engagement of KPMG and to retain BMSS was approved by
the Audit Committee. KPMGs report on the Companys 2004 financial statements dated August 3, 2004, was issued in conjunction with the filing of the Companys Annual Report on Form 10-KSB for the fiscal year ended June 30,
2004.

During the Companys two most recent fiscal years ended June 30, 2004, and the subsequent interim period through
December 3, 2004, there were no disagreements between the Company and KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to
KPMGs satisfaction, would have caused KPMG to make reference thereto in their reports on the financial statements for such fiscal years.

The audit reports of KPMG on the consolidated financial statements of the Company and subsidiary as of and for the fiscal years ended June 30, 2004 and 2003 did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principle.

During the Companys two most recent fiscal years
ended June 30, 2004 and the subsequent interim period through December 3, 2004, there have been no reportable events (as defined in Regulation S-B Item 304(a)(1)(iv)(B)).

The Company requested that KPMG furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not KPMG agrees with the
above statements. A copy of such letter, dated December 9, 2004, was filed as Exhibit 16.1 to the Companys Current Report on Form 8-K dated December 3, 2004, as amended.

During the Companys two most recent fiscal years ended June 30, 2004, and the subsequent interim period through December 3, 2004, the
Companys did not consult with BMSS regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-B.



41



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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, 2006 |  | 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 |  |       |  | Director                       
|      |  | (Principal Executive, Financial and Accounting Officer)      |  | Date: |  | September 28, 2006             
|Date: |  | September 28, 2006                                           |  |       |  |                                
|      |  |                                                              | 
|By:   |  | /s/ Craig G. Cantrell                                        |  | By:   |  | /s/ James B. Little III        
|      |  | Craig G. Cantrell                                            |  |       |  | James B. Little III            
|      |  | Director                                                     |  |       |  | Director                       
|Date: |  | September 28, 2006                                           |  | Date: |  | September 28, 2006             
|      |  |                                                              | 
|By:   |  | /s/ Grady Gillam                                             |  | By:   |  | /s/ James B. Little, Jr.       
|      |  | Grady Gillam                                                 |  |       |  | James B. Little, Jr.           
|      |  | Director                                                     |  |       |  | Investment Officer and Director
|Date: |  | September 28, 2006                                           |  | Date: |  | September 28, 2006             
|      |  |                                                              | 
|By:   |  | /s/ Rex G. Keeling, Jr.                                      |  | By:   |  | /s/ Fred Taylor                
|      |  | Rex G. Keeling, Jr.                                          |  |       |  | Fred Taylor                    
|      |  | Director                                                     |  |       |  | Director                       
|Date: |  | September 28, 2006                                           |  | Date: |  | September 28, 2006             



42



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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 2006 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.



43