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2002





A N N U A L   R E P O R T





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THE SOUTHERN BANC COMPANY, INC.




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[LETTERHEAD OF THE SOUTHERN BANC COMPANY, INC.]





Dear Fellow Stockholders:





We are happy to report the results of
Fiscal Year 2002 for The Southern Banc Company, Inc.





We believe that 2002 was a good year for the Company as our
margins returned to more normal levels from the previous twelve months. As rates continued their downward trend our rates on assets declined at a more gradual pace than did those on our deposits. We maintained or increased our market share in all
locations and defended our loan portfolio without increasing our credit risk, despite intense competition. In the coming year we will try to continue our success in what is likely to be a fragile economic environment.





As always, we appreciate your continued support of our Company and welcome all comments and questions.





Sincerely,





Gates Little




---

THE SOUTHERN BANC COMPANY, INC.





The Southern Banc Company, Inc. (the Company) was incorporated at the direction of management of The Southern Bank Company, formerly First Federal Savings and Loan Association of Gadsden,
Alabama (the Bank), for the purpose of serving as the holding company of the Bank upon the acquisition of all of the capital stock issued by the Bank upon its conversion from mutual to stock form in 1995. The Company is classified as a
unitary savings institution holding company and is subject to regulation by the Office of Thrift Supervision (OTS). At June 30, 2002, the Company had total consolidated assets of $110.0 million, deposits of $81.6 million and
stockholders equity of $18.3 million, or 16.7% of total assets.





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





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





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




1




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MARKET FOR COMMON STOCK


AND RELATED STOCKHOLDER MATTERS





The Companys Common
Stock began trading on the American Stock Exchange in 1995 under the symbol SRN. At June 30, 2002, there were 1,006,498 shares of the Common Stock outstanding and approximately 267 stockholders of record. This total does not reflect the
number of persons or entities who hold Common Stock in nominee or street name through various brokerage firms.





The payment of dividends on the Common Stock is subject to determination and declaration by the Board of Directors of the Company. The Board of Directors has adopted a policy of paying quarterly cash dividends on the Common Stock. In
addition, from time to time, the Board of Directors may determine to pay special cash dividends in addition to, or in lieu of, regular cash dividends. The payment of future dividends will be subject to the requirements of applicable law and the
determination by the Board of Directors of the Company that the net income, capital and financial condition of the Company and the Bank, thrift industry trends and general economic conditions, justify the payment of dividends. There can be no
assurance that dividends will be paid.





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





Price Per Share

DividendsHigh

Low

Per ShareFiscal 2001First Quarter

$
11.500

$
8.875

$
.0875Second Quarter

$
10.500

$
8.688

$
.0875Third Quarter

$
10.750

$
8.625

$
.0875Fourth Quarter

$
10.500

$
9.350

$
.0875Fiscal 2002First Quarter

$
10.500

$
9.910

$
.0875Second Quarter

$
11.250

$
9.900

$
.0875Third Quarter

$
11.600

$
10.850

$
.0875Fourth Quarter

$
13.310

$
11.150

$
.0875




2




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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA





Year Ended June 30,2002


2001


2000


1999


1998(In thousands, except per share data)INCOME STATEMENT DATAInterest income

$
6,299


$
6,812


$
6,944


$
6,990


$
7,418Interest expense


3,566



4,345



4,081



4,100



4,519Net interest income


2,733



2,467



2,863



2,890



2,899Provision for loan losses


27



30



17



27



Net interest income after provision for loan losses


2,706



2,437



2,846



2,863



2,899Noninterest income


183



200



118



196



92Noninterest expense


1,853



1,892



1,962



2,148



2,171Income before provision for income taxes


1,036



745



1,002



911



820Provision for income taxes


403



278



356



313



277Net income

$
633


$
467


$
646


$
598


$
543Earnings per shareBasic

$
0.69


$
0.53


$
0.71


$
0.59


$
0.51Diluted

$
0.69


$
0.53


$
0.71


$
0.57


$
0.49Year Ended June 30,2002


2001


2000


1999


1998(In thousands)BALANCE SHEET DATATotal assets

$
110,002


$
97,164


$
98,087


$
96,875


$
105,087Loans receivable, net


34,515



37,587



39,840



42,109



41,153Securities:Available for sale


53,753



35,635



26,402



20,627



21,444Held to maturity


11,527



17,513



23,886



23,706



34,077Federal Home Loan Bank stock


1,449



724



724



724



795Deposits


81,557



79,843



81,437



79,734



85,926Federal Home Loan Bank advances


9,583



0



0



0



0Stockholders equity


18,344



17,046



16,319



16,645



18,570Year Ended June 30,2002


2001


2000


1999


1998KEY OPERATING DATAReturn on average assets


0.58
%


0.48
%


0.66
%


0.61
%


0.52
%Return on average equity


3.48



2.74



4.03



3.38



2.96Average equity to average assets


16.62



17.59



16.33



18.12



17.43Dividend payout ratio


48.61



66.04



49.30



59.32



68.63Number of offices


4



4



4



4



4




3




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MANAGEMENTS DISCUSSION AND ANALYSIS


OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





General





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





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





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





Comparison of Financial Condition at June 30, 2002 and June 30, 2001





Total assets increased approximately $12.8 million, or 13.2%, from $97.2 million at June 30, 2001 to $110.0
million at June 30, 2002. During the year ended June 30, 2002, net loans decreased approximately $3.1 million, or 8.2%, securities available for sale increased approximately $18.1 million, or 50.8%, and securities held to maturity decreased
approximately $6.0 million, or 34.2%. The increase in assets was primarily a result of the investment of a $10 million FHLB advance.




4




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Cash and cash equivalents increased approximately $3.2 million, or 72.9%, from
$4.4 million at June 30, 2001 to $7.5 million at June 30, 2002. The increase in cash and cash equivalents was primarily attributable to principal repayments on loans.





Accrued interest and dividends receivable decreased approximately $14,500, or 2.4%, from $600,000 at June 30, 2001 to $586,000 at June 30, 2002. This decrease was primarily
attributable to a decrease in interest receivable on held to maturity securities. Prepaid expenses and other assets decreased approximately $54,000, or 18.8%, from $284,000 at June 30, 2001 to $231,000 at June 30, 2002.





Total deposits increased approximately $1.7 million, or 2.2%, from $79.8 million at June 30, 2001 to $81.6 million at June 30, 2002. Other
liabilities during the fiscal year ended June 30, 2002 increased approximately $242,000, or 87.7%, from $276,000 at June 30, 2001 to $517,000 at June 30, 2002. The increase in other liabilities was primarily attributable to an increase in deferred
tax liabilities for taxes on securities available for sale. At June 30, 2002, FHLB advances were approximately $9.6 million.





Total equity increased approximately $1.3 million, or 7.6%, from $17.0 million at June 30, 2001 to $18.3 million at June 30, 2002. This increase was primarily attributable to an increase in retained earnings and additional paid-in
capital resulting from current year earnings of $633,000 in addition to the unrealized gain (loss) on securities available for sale of approximately $867,000, offset by the payment of common stock dividends and amortization of unearned compensation.





Comparison of Results of Operations for the Fiscal Years Ended June 30, 2002 and 2001





The Company reported net income for the fiscal years ended June 30, 2002 and 2001 of approximately $633,000 and $468,000, respectively.
The increase in net income for the fiscal year ended June 30, 2002 was primarily attributable to an increase in the Banks net interest margin.





Net Interest Income.    Net interest income increased approximately $265,000, or 10.7%, from $2.5 million at June 30, 2001 to $2.7 million at June 30, 2002. This increase was
primarily attributable to deposits repricing faster than loans in a decreasing interest rate environment. Total interest income decreased approximately $513,000, or 7.5%, for the fiscal year ended June 30, 2002. The decline in interest income from
loans was due to prepayments and the rapid decrease on yields available for reinvestment. This decline was partially offset by the interest earned on the investment of FHLB advances in investment securities. Total interest expense decreased
approximately $778,000, or 17.9%, for the fiscal year ended June 30, 2002 compared with the fiscal year ended June 30, 2001.





Provision for Loan Losses.    During the fiscal year ended June 30, 2002, the provision for loan losses decreased approximately $3,000, or 10.0%, from $30,000 at June 30, 2001 to $27,000 at June 30, 2002.
The allowance for loan losses is based on managements evaluation of possible loan losses inherent in the Banks loan portfolio. Management considers, among other




5




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factors, past loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors.





Non-Interest Income.    Non-interest income decreased approximately $17,000, or 8.5%, for the fiscal year ended June 30, 2002, from $200,000
for the year ended June 30, 2001 to $183,000. This decrease was primarily attributable to decreases in customer service fees and other miscellaneous income, offset by a gain on the sale of securities available for sale.





Non-Interest Expense.    Non-interest expense decreased approximately $40,000, or 2.1%, for the fiscal year
ended June 30, 2002. This decrease was primarily attributable to a decrease in salaries and employee benefits of approximately $86,000, or 7.6%, a decrease in office building and equipment expense of approximately $1,400, or 1.6% and a decrease in
other operating expenses of approximately $20,000, or 5.0%, offset by an increase in data processing expense of approximately $11,000, or 6.2%, and an increase in professional service expenses of approximately $57,000, or 53.6%, for the fiscal year
ended June 30, 2002.





Provision for Income Taxes.    During the fiscal year ended June
30, 2002, the provision for income tax expense increased approximately $125,000, or 45.0%. This increase was primarily attributable to an increase in pre-tax earnings resulting from an increase in net interest margin. Income tax expense was
approximately $278,000 for the year ended June 30, 2001 compared to approximately $403,000 for the year ended June 30, 2002 resulting in effective tax rates of 37% and 39%, respectively. The statutory federal tax rate in both years was 34%.





Asset/Liability Management





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





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




6




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securities with maturities of primarily five to ten years and originates limited amounts of shorter term consumer loans.





The OTS requires the Bank to measure its interest rate risk by computing estimated changes in the net present value (NPV) of its cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. These computations estimate the effect on the Banks NPV of sudden and sustained 1% to 4% increases and decreases in market interest
rates. The Banks Board of Directors has adopted an interest rate risk policy which establishes maximum increases and decreases in the Banks estimated NPV of 25%, 50% and 77% and 25%, 35% and 50% in the event of 1%, 2% and 3% increases
and decreases in market interest rates, respectively. At June 30, 2002, based on the most recent information provided by the OTS, it was estimated that the Banks NPV would decrease 11%, 22% and 34% and increase 6% in the event of 1%, 2% and 3%
increases and a 1% decrease in market interest rates, respectively. These calculations indicate that the Banks net portfolio value could be adversely affected by increases in interest rates. Changes in interest rates also may affect the
Banks net interest income, with increases in rates expected to decrease income and decreases in rates expected to increase income, as the Banks interest-bearing liabilities would be expected to mature or reprice more quickly than the
Banks interest-earning assets.





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





The Banks
Board of Directors is responsible for reviewing the Banks asset and liability policies. On at least a quarterly basis, the Board reviews interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Banks
management is responsible for administering the policies and determinations of the Board of Directors with respect to the Banks asset and liability goals and strategies. Management expects that the Banks asset and liability policies and
strategies will continue as described above so long as competitive and regulatory conditions in the financial institution industry continue as they have in recent years.




7




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Average Balance, Interest and Average Yields and Rates





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





The table also presents information for the periods
indicated and at June 30, 2002 with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or interest rate spread, which savings
institutions have traditionally used as an indicator of profitability. Another indicator of an institutions net interest income is its net yield on interest-earning assets, which is its net interest income divided by the average
balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate net interest income.





Years Ended June 30,2002


2001Average Balance

Interest

Average Yield/ Cost


Average Balance

Interest

Average Yield/ Cost(Dollars in thousands)Interest-earning assets:Loans receivable

$
34,362

$
2,581

7.51
%

$
37,082

$
2,935

7.91
%Securities


65,117


3,625

5.57



51,979


3,591

6.91Other interest-earning assets


6,052


93

1.54



5,708


285

4.99Total interest-earning assets


105,531


6,299

5.97



94,769


6,811

7.19Non-interest-earning assets


4,008








2,311Total assets

$
109,539







$
97,080Interest-bearing liabilities:Deposits

$
80,940


3,356

4.15


$
79,322


4,344

5.48FHLB advances


9,582


210

2.19



0


0

0Total interest-bearing liabilities


90,522


3,566

3.94



79,322


4,344

5.48Non-interest-bearing liabilities


810








678Total liabilities


91,332








80,000Equity


18,207








17,080Total liabilities and equity

$
109,539







$
97,080Net interest income




$
2,733







$
2,467Interest rate spread







2.03
%







1.71
%Net interest margin







2.59
%







2.60
%Ratio of average interest-earning assets to average interest-bearing liabilities







116.58
%







119.47
%




8




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Rate/Volume Analysis





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





Year Ended June 30,2002 vs. 2001Increase (Decrease) Due
toRate


Volume


Total(In thousands)Interest incomeLoans

$
(140
)

$
(214
)

$
(354
)Securities


(875
)


908



33Other interest-earning assets


(274
)


81



(193
)Total interest-earning assets


(1,289
)


775



(514
)Interest expenseDeposits


(1,078
)


89



(989
)Interest on FHLB Advances


0



210



210Total interest-bearing liabilities


(1078
)


299



(779
)Change in net interest income

$
(211
)

$
476


$
265





Liquidity and Capital Resources





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





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





The Bank continues to maintain a high level of liquid assets in order to meet its funding requirements. At June 30, 2002, the Bank had approximately $7.5 million in cash on
hand and




9




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interest-bearing deposits in other banks, which represented 6.8% of total assets. The Banks average liquidity ratio well exceeded the required minimum at and during the fiscal year ended
June 30, 2002. At June 30, 2002, the Banks level of liquid assets, as measured for regulatory compliance purposes, was $16.4 million, or 14.9% of total assets of the Bank.





At June 30, 2002, the Bank had $17.0 million of total equity, or 15.4% of total assets. The Bank continued to exceed its regulatory capital requirement ratios at June 30,
2002. Tangible capital and core capital were each $16.1 million, which represented 14.8% of adjusted total assets, and risk-based capital was $16.3 million, which represented 54.2% of total risk-weighted assets at June 30, 2002. Such amounts
exceeded the respective minimum required ratios of 1.5%, 4.0% and 8.0% by 13.3%, 10.8% and 46.2%, respectively. At June 30, 2002, the Bank continued to meet the definition of a well-capitalized institution, the highest of the five
categories under the prompt corrective action standards adopted by the OTS. See Note 11 of Notes to Consolidated Financial Statements.





Significant Accounting Policies and Recent Accounting Pronouncements





The
accounting principles followed by the Company and the methods of applying principles conform with accounting principles generally accepted in the United States and with general practices followed by the banking industry. Significant account policies
relate to securities, loans, allowance for loan losses, and intangibles. These policies, which significantly affect the determination of financial position, results of operations, and cash flows are summarized in Note 1, Organization and Summary of
Significant Account Policies, in the Notes to Consolidated Financial Statements, included elsewhere in this report.





See Note 1 of Notes to Consolidated Financial Statements regarding Recent Accounting Pronouncements.





Forward-Looking
Statements





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





Changes in Certifying Accountant





Effective July 23, 2002, the Company dismissed its
independent accountants, Arthur Andersen LLP (Andersen), and appointed KPMG LLP (KPMG) as its new independent accountants. This determination followed the Companys decision to seek proposals from




10




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independent accountants to audit the Companys financial statements for the fiscal year ended June 30, 2002. The decision to dismiss Andersen and to retain KPMG was approved by the
Companys Board of Directors upon the recommendation of its Audit Committee. Andersens report on the Companys 2001 financial statements was issued in August 2001, in conjunction with the filing of the Companys Annual Report on
Form 10-KSB for the fiscal year ended June 30, 2001.





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





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





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





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




11




---




Independent Auditors Report





The Board of Directors


The Southern Banc Company, Inc.:





We have audited the accompanying consolidated statement of financial condition of The Southern Banc Company, Inc. (a Delaware corporation)
and subsidiaries as of June 30, 2002, and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated financial statements of The Southern Banc Company, Inc. and subsidiaries as of June 30, 2001 were
audited by other auditors who have ceased operations, whose report thereon dated August 3, 2001 expressed an unqualified opinion on those statements.





We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.





In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of The Southern Banc Company, Inc. and subsidiaries as of June 30, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of
America.





/s/    KPMG LLP





Birmingham, Alabama


August 2, 2002







12




---

THE SOUTHERN BANC COMPANY, INC.





Consolidated Statements of Financial Condition





June 30, 2002
and 2001





Assets

2002


2001Cash and cash equivalents:Cash on hand and in other banks

$
2,533,710


1,765,639Interest-bearing deposits in other banks


4,995,659


2,588,920Total cash and cash equivalents


7,529,369


4,354,559Securities available for sale, at fair value


53,753,006


35,635,137Securities held to maturity (fair value of $12,178,417 and $17,650,612, respectively)


11,527,430


17,513,159Federal Home Loan Bank stock


1,448,800


724,400Loans receivable, net


34,514,563


37,586,788Accrued interest and dividends receivable


585,550


600,039Premises and equipment, net


530,022


465,984Prepaid expenses and other assets


112,954


284,406Total assets

$
110,001,694


97,164,472Liabilities and Stockholders EquityDeposits

$
81,557,160


79,842,784Federal Home Loan Bank advances


9,583,333


Other liabilities


517,298


275,670Total liabilities


91,657,791


80,118,454Commitments and contingenciesStockholders equity:Preferred stock, par value $0.01 per share. Authorized 500,000 shares; no shares issued and outstanding





Common stock, par value $0.01 per share. Authorized 3,500,000 shares; issued 1,454,750 shares in 2002 and
2001


14,548


14,548Additional paid-in capital


13,761,758


13,750,679Retained earnings


10,497,569


10,186,386Unearned compensation


(245,469
)

(354,531
)Shares held in trust, at cost, 65,738 shares in 2002 and 2001


(852,141
)

(852,141
)Treasury stock, at cost, 448,252 shares in 2002 and 2001


(5,642,391
)

(5,642,391
)Accumulated other comprehensive income (loss)


810,029


(56,532
)Total stockholders equity


18,343,903


17,046,018Total liabilities and stockholders equity

$
110,001,694


97,164,472





See accompanying notes to consolidated financial statements.




13




---

THE SOUTHERN BANC COMPANY, INC.





Consolidated Statements of Income





Years ended June 30, 2002 and
2001





2002

2001Interest income:Interest and fees on loans

$
2,580,604

2,935,114Interest and dividends on securities available for sale


2,602,757

2,109,268Interest and dividends on securities held to maturity


1,022,195

1,482,182Other interest income


93,267

285,426Total interest income


6,298,823

6,811,990Interest expense:Interest on deposits


3,356,408

4,344,516Interest on borrowed funds


209,747

Total interest expense


3,566,155

4,344,516Net interest income before provision for loan losses


2,732,668

2,467,474Provision for loan losses


27,000

30,000Net interest income after provision for loan losses


2,705,668

2,437,474Noninterest income:Customer service fees


139,788

126,001Gain on sale of available for sale securities


41,517

33,023Other income


1,782

41,016Total noninterest income


183,087

200,040Noninterest expense:Salaries and employee benefits


1,048,936

1,134,997Data processing expense


186,982

176,001Professional service expense


164,163

106,871Office building and equipment expense


83,913

85,296Other expense


369,096

388,613Total noninterest expense


1,853,090

1,891,778Income before provision for income taxes


1,035,665

745,736Provision for income taxes


402,723

278,195Net income

$
632,942

467,541Earnings per share:Basic

$
0.69

0.53Diluted


0.69

0.53Average shares outstandingbasic


911,123

883,056Average shares outstandingdiluted


913,011

888,855





See accompanying notes to consolidated financial statements.




14




---




THE SOUTHERN BANC COMPANY, INC.





Consolidated Statements of Stockholders Equity





Years ended June 30, 2002 and 2001





Common stock

Additional paid-in capital

Retained earnings


Unearned compensation


Shares held in trust


Treasury stock


Accumulated other comprehensive income (loss)


TotalBalance, June 30, 2000

$
14,548

13,744,707

10,034,813


(535,417
)

(846,197
)

(5,624,141
)

(469,016
)

16,319,297Net income






467,541














467,541Change in unrealized gain on securities available for sale, net of tax


















412,484


412,484Comprehensive income





















880,025Purchase of treasury stock, at cost















(18,250
)




(18,250
)Amortization of unearned compensation




5,972




181,891











187,863Forfeitures of Management Recognition Plan shares









5,944


(5,944
)







Dividends paid ($0.35 per share)






(315,968
)

(6,949
)










(322,917
)Balance, June 30, 2001


14,548

13,750,679

10,186,386


(354,531
)

(852,141
)

(5,642,391
)

(56,532
)

17,046,018Net income






632,942














632,942Change in unrealized gain on securities available for sale, net of tax


















866,561


866,561Comprehensive income





















1,499,503Amortization of unearned compensation




11,079




109,062











120,141Dividends paid ($0.35 per share)






(321,759
)













(321,759
)Balance, June 30, 2002

$
14,548

13,761,758

10,497,569


(245,469
)

(852,141
)

(5,642,391
)

810,029


18,343,903





See accompanying notes to consolidated financial statements.




15




---




THE SOUTHERN BANC COMPANY, INC.





Consolidated Statements of Cash Flows





Years ended June 30, 2002 and 2001





2002


2001Cash flows from operating activities:Net income

$
632,942


467,541Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


49,151


44,865Accretion, net


(13,698
)

(62,282
)Amortization of intangible asset


21,309


24,247Amortization of unearned compensation


120,141


187,863Provision for loan losses


27,000


30,000Deferred income tax benefit


(9,582
)

(40,651
)Gain on sale of available for sale securities


(41,517
)

(33,023
)Change in assets and liabilities:Decrease in accrued interest and dividends receivable


14,489


76,908Decrease in prepaid expenses and other assets


150,143


29,855Decrease in other liabilities


(71,596
)

(235,821
)Net cash provided by operating activities


878,782


489,502Cash flows from investing activities:Purchase of securities available for sale


(38,307,337
)

(34,886,541
)Proceeds from maturities and principal payments on securities available for sale


14,667,989


23,096,687Proceeds from sales of securities available for sale


6,751,969


3,256,993Purchases of securities held to maturity





(300,000
)Proceeds from maturities and principal payments on securities held to maturity


5,999,821


6,694,210Purchase of Federal Home Loan Bank stock


(724,400
)

Loan repayments, net of originations


3,045,225


2,223,473Capital expenditures, net


(113,189
)

(38,286
)Net cash (used in) provided by investing activities


(8,679,922
)

46,536Cash flows from financing activities:Purchase of treasury stock





(18,250
)Federal Home Loan Bank advances


9,583,333


Cash dividends paid


(321,759
)

(315,968
)Increase (decrease) in deposits, net


1,714,376


(1,593,707
)Net cash provided by (used in) financing activities


10,975,950


(1,927,925
)Net increase (decrease) in cash and cash equivalents


3,174,810


(1,391,887
)Cash and cash equivalents, beginning of year


4,354,559


5,746,446Cash and cash equivalents, end of year

$
7,529,369


4,354,559Supplemental cash flow information:Cash paid during the period for:Income taxes, net of refund received

$
291,000


285,000Interest


3,536,181


4,346,937





See accompanying notes to consolidated financial statements.




16




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







(1)    Organization and Summary of Significant Accounting Policies





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




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





The Bank is primarily engaged in the business of obtaining
funds in the form of various savings deposit products and investing those funds in mortgage loans or single family real estate and, to a lesser extent, in consumer loans. The Bank operates from its four offices in the northeast portion of Alabama
and originates the majority of its loans in this market area.





| | (b) |  | Use of Estimates
| | --- |  | ----------------




The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (GAAP) and with general
practices within the thrift industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated
statement of financial condition and income and expense for the period. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant changes in the near term is the determination
of the allowance for loan losses. A substantial portion of the Companys loans are secured by real estate in its primary market area. Accordingly, the ultimate collectibility of a substantial portion of the Companys loan portfolio is
susceptible to changes in economic conditions in the Companys primary market area.





| | (c) |  | Securities
| | --- |  | ----------




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





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





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




(Continued)




17




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001




Amortization of premiums and accretion of discounts on mortgage-backed securities and other investments are
computed using the level yield method and the straight-line method, which is not materially different from the level yield method, respectively. The adjusted cost of the specific security sold is used to compute gain or loss on the sale of
securities.





| | (d) |  | Loans and Allowance for Loan Losses
| | --- |  | -----------------------------------




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





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





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





Impaired loans (generally
considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans) are measured based on the present value of expected future cash flows discounted at each loans original effective interest rate. As a practical
expedient, impairment is measured based on the loans observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment of the loan, the
impairment is recorded through a valuation allowance. The Company had no loans designated as impaired at either June 30, 2002 or 2001.





The Company ceases accrual of interest on a loan when payment on the loan is in excess of 90 days past due. Income is subsequently recognized only to the extent that cash payments are received until, in managements
judgment, the borrowers ability to make periodic interest and principal payments has been reestablished, in which case the loan is returned to accrual status.





Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Included in the lower of cost or
fair value analysis are the loans in the mortgage pipeline which are expected to close and the related forward delivery commitments used to hedge interest rate locks. There were no loans held for sale at June 30, 2002 and 2001.





As a part of normal mortgage originations, the Company makes commitments to originate loans at a specific interest rate
(interest rate locks). The Company also enters into forward sale commitments,




(Continued)




18




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001




which are sales of mortgage loans to third parties at a specified price. As of June 30, 2002 and 2001, the
Company had no interest rate locks or forward sales commitments outstanding.





| | (e) |  | Loan Origination Fees and Related Costs and Discounts
| | --- |  | -----------------------------------------------------




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





| | (f) |  | Premises and Equipment
| | --- |  | ----------------------




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





Building and improvements

10-40 years

Accelerated/Straight-lineLeasehold improvements

10 years

Straight-lineFurniture and equipment

5-20 years

Accelerated/Straight-lineAutomobile

3 years

Straight-line





| | (g) |  | Core Deposit Premium
| | --- |  | --------------------




At June 30, 2002 and 2001, core deposit premiums were $30,534 and $51,843, respectively, net of accumulated amortization of $313,807 and $292,498, respectively. Core deposit premiums are being
amortized over a period of ten years using an accelerated method. Amortization of core deposit premiums was $21,309 and $24,247 in fiscal years 2002 and 2001, respectively.





| | (h) |  | Statements of Cash Flows
| | --- |  | ------------------------




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





| | (i) |  | Recent Accounting Pronouncements
| | --- |  | --------------------------------




In June 2001, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations.SFAS No. 141 addresses financial accounting
and reporting for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations,and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises.This Statement
eliminates the pooling of interests method for accounting for business combinations and requires intangible assets that meet certain criteria to be reported separately from goodwill. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001. The Company adopted this Statement effective July 1, 2001. The adoption of this Statement did not have a material impact on the Companys financial position or results of operations.




(Continued)




19




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. This Statement requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. This Statement also requires that intangible assets with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and also be reviewed for impairment. Impairment losses resulting from the initial application of this statement are to be reported as a change in accounting principle. The Company adopted this Statement
effective July 1, 2002. The adoption of this Statement did not have a material impact on the Companys financial position or results of operations.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed ofand the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This Statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The effects of this statement did not have a material impact on the Companys financial position or
results of operations upon adoption on July 1, 2002.





In May 2002, the FASB issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishments of Debt, and amends SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. This Statement also amends SFAS No. 113, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this statement are effective May 15, 2002. The effects of this statement did not have a material impact on the Companys consolidated financial position or results of operations.





In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard
include lease termination costs and certain employee severance costs that are associated with a restructuring, discounted operation, plant closing, or other exit or disposal activity. This Statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The effects of this Statement are not expected to have a material impact on the Companys consolidated financial position or results of operations.




(Continued)




20




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







| | (j) |  | Prior Year Classification
| | --- |  | -------------------------




Certain prior year amounts have been reclassified to conform to the current year presentation. These classifications have no effect on previously reported total equity or net income during the periods
involved.





(2)    Securities Available For Sale





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





June 30, 2002Amortized cost

Gross unrealized gain

Gross unrealized (loss)


Fair valueU.S. Treasury securities

$
1,498,320

29,180




1,527,500U.S. Government agency securities


7,950,587

190,378

(7,123
)

8,133,842Mortgage-backed securities


43,206,546

884,438

(16,036
)

44,074,948Other


16,716






16,716$
52,672,169

1,103,996

(23,159
)

53,753,006June 30, 2001Amortized cost

Gross unrealized gain

Gross unrealized (loss)


Fair valueU.S. Treasury securities

$
1,001,227

23,265




1,024,492U.S. Government agency securities


15,082,744

89,262

(80,937
)

15,091,069Mortgage-backed securities


19,641,881

76,233

(215,254
)

19,502,860Other


16,716






16,716$
35,742,568

188,760

(296,191
)

35,635,137




(Continued)




21




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







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





June 30, 2002Amortized cost

Fair valueDue in one year or less

$
1,000,000

1,017,810Due after one year through five years


4,673,600

4,764,039Due after five years through ten years


2,957,023

3,008,097Due after ten years


818,284

871,3969,448,907

9,661,342Mortgage-backed securities


43,206,546

44,074,948Other


16,716

16,716$
52,672,169

53,753,006





Proceeds from sales of available for sale securities were
$6,751,969 and $3,256,993 in 2002 and 2001, respectively. Gross gains of $42,803 and $33,023 and gross losses of $1,286 and $0 were realized on these sales in 2002 and 2001, respectively.





A security designated as available for sale with a carrying value (fair value) of $1,328,967 has been pledged as collateral for certain large deposits (public funds) with
an aggregate balance of $1,325,000 at June 30, 2002.




(Continued)




22




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







(3)    Securities Held to Maturity





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





June 30, 2002Amortized cost

Gross unrealized gain

Gross unrealized (loss)


Fair valueU.S. Government agency securities

$
1,832,751

78,278




1,911,029Mortgage-backed securities


9,694,679

572,710

(1
)

10,267,388$
11,527,430

650,988

(1
)

12,178,417June 30, 2001Amortized cost

Gross unrealized gain

Gross unrealized (loss)


Fair valueU.S. Government agency securities

$
2,848,198

10,224

(9,285
)

2,849,137Mortgage-backed securities


14,664,961

200,934

(64,420
)

14,801,475$
17,513,159

211,158

(73,705
)

17,650,612





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





June 30, 2002Amortized cost

Fair valueDue in one year or less

$


Due after one year through five years


815,847

853,642Due after five years through ten years


248,635

259,170Due after ten years


768,269

798,2171,832,751

1,911,029Mortgage-backed securities


9,694,679

10,267,388$
11,527,430

12,178,417




(Continued)




23




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







(4)    Loans Receivable, Net





Loans receivable are summarized as follows:





June 302002


2001Mortgage loans:Secured by one-to-four family residential properties

$
27,888,220


30,743,366Secured by nonresidential properties


140,000


81,336Consumer loans


5,581,876


5,999,503Savings account loans


1,023,632


820,022Commercial loans


186,540


139,03434,820,268


37,783,261Less:Unearned interest income


287,875


324,873Deferred loan costs, net


(115,403
)

(251,676
)Allowance for loan losses


133,233


123,276Loans receivable, net

$
34,514,563


37,586,788





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





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





In the normal course of business,
loans are made to officers, directors, and employees of the Company and the Bank. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with others. As of June
30, 2002 and 2001, $386,071 and $287,111, respectively, of these loans were outstanding. The change from June 30, 2001 to June 30, 2002 reflects payments amounting to $88,707 and advances of $187,667 made during the year.




(Continued)




24




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







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





Years ended June 302002


2001Balance, beginning of year

$
123,276


114,836Provision for loan losses


27,000


30,000Charge-offs


(17,043
)

(21,560
)Balance, end of year

$
133,233


123,276





At June 30, 2002 and 2001, nonaccrual loans totaled $48,866 and
$148,065, respectively. Neither cash income recognized nor interest income foregone on nonaccrual loans was not significant for fiscal years 2002 and 2001, respectively.





(5)    Accrued Interest and Dividends Receivable





Accrued interest and dividends receivable is summarized as follows:





June 302002

2001Securities available for sale

$
346,067

317,790Securities held to maturity


68,332

103,956Loans receivable, net


152,188

162,590Federal Home Loan Bank stock


18,963

12,191Interest-bearing deposits in other banks




3,512$
585,550

600,039





(6)    Premises and Equipment, Net





Premises and equipment are summarized as follows:





June 302002


2001Land

$
340,486


320,085Building and improvements


421,030


349,743Leasehold improvements


44,161


63,956Furniture, fixtures, and equipment


645,976


604,6801,451,653


1,338,464Less accumulated depreciation and leasehold amortization


(921,631
)

(872,480
)$
530,022


465,984




(Continued)




25




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







Depreciation and leasehold amortization expense charged to office
building and equipment expense in 2002 and 2001 totaled approximately $49,151 and $44,865, respectively.





(7)    Deposits





Deposits are summarized as follows:





June 30, 2002


June 30, 2001Amount

Percent


Amount

PercentDemand, NOW, and money market accounts, including non-interest bearing deposits of $229,158 and $315,439 at June 30,
2002 and 2001, respectively

$
8,489,529

10.41
%

7,029,504

8.81
%Passbook savings


7,954,452

9.75
%

4,664,926

5.84
%16,443,981

20.16
%

11,694,430

14.65
%Certificates of deposit:0.01  2.00% interest rate


1,812,832

2.22
%



2.00  4.00% interest rate


40,311,785

49.43
%

5,845,376

7.32
%4.01  6.00% interest rate


13,862,214

17.00
%

28,443,148

35.62
%6.01  8.00% interest rate


9,126,348

11.19
%

33,859,830

42.41
%65,113,179

79.84
%

68,148,354

85.35
%$
81,557,160

100.00
%

79,842,784

100.00
%





The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100,000 was $13,202,887 and $11,304,665 at June 30, 2002 and 2001, respectively.





At June
30, 2002, the scheduled maturities of time deposits are as follows:





2003

$
44,968,4732004


15,830,8102005


2,304,3672006


1,415,6312007


545,356Thereafter


48,542Total

$
65,113,179




(Continued)




26




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







Interest expense on deposits consisted of the following:





Years ended June 302002

2001Passbook savings

$
147,796

173,426NOW and money market accounts


144,040

164,551Certificates of deposit


3,064,572

4,006,539$
3,356,408

4,344,516





(8)    Income Taxes





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





Years ended June 302002


2001Current provision:Federal

$
367,646


283,773State


44,659


35,073412,305


318,846Deferred benefit


(9,582
)

(40,651
)$
402,723


278,195





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





Years ended June 302002


2001Pretax income at statutory rates

$
351,266


253,550Add:State income tax, net of federal tax benefit


42,474


20,242Other, net


8,983


4,403$
402,723


278,19539
%

37
%




(Continued)




27




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







The components of the net deferred tax asset or
liability at June 30, 2002 and 2001 were as follows:





June 302002


2001Amortization of intangibles

$
79,119


79,236Bad debt reserve, net


65,822


37,463Reserves for employee benefit plans


93,816


93,105Depreciation





15,918Unrealized net loss on securities available for sale





50,899Gain on securities


46,005


34,691Other


2,389


3,807Deferred tax asset


287,151


315,119Depreciation


(16,240
)

Federal Home Loan Bank stock dividend


(59,368
)

(58,919
)Accretion of discount on securities


(239,206
)

(197,822
)Deferred loan fees and costs, net


(88,362
)

(103,627
)Other





(29,459
)Unrealized net gain on securities available for sale


(301,055
)

Deferred tax liability


(704,231
)

(389,827
)Net deferred tax liability

$
(417,080
)

(74,708
)





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





(9)    Federal Home Loan Bank Advances





Federal Home Loan Bank advances at June 30, 2002 consisted of the following:





2.96% note payable, due March 19, 2003

$
1,000,0004.03% note payable, due March 19, 2004


1,000,0005.22% note payable, due March 20, 2006


2,000,0004.08% note payable, due October 17, 2007


2,116,0584.16% note payable, due October 17, 2007


2,467,2755.72% note payable, due March 19, 2008


1,000,000$
9,583,333




(Continued)




28




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







The Bank has remaining available credit of approximately $17,900,000
at the Federal Home Loan Bank of Atlanta, Georgia. The Federal Home Loan Bank notes are payable to the Federal Home Loan Bank of Atlanta and are secured by the Federal Home Loan Bank stock owned by the Bank with a carrying value of $1,448,800 as
well as a pledge of all the real estate loans owned by the Bank secured by first liens on one- to four unit single family dwellings. The total carrying value of qualified mortgages owned by the Bank at June 30, 2002 was approximately $26,520,000.
Interest rates on the notes are fixed and interest is payable monthly. Principal on the notes is payable at maturity or in semiannual principal reductions until maturity.





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





2003

$
1,000,0002004


1,000,0002005


2006


2,000,000Thereafter


5,583,333$
9,583,333





(10)    Commitments and Contingencies





| | (a) |  | Leases
| | --- |  | ------




The Company has operating lease agreements for its branch offices. Rental expense under these leases aggregated $7,843 and $14,312 for fiscal years 2002 and 2001, respectively. The aggregate annual minimum rental commitments under
the terms of all noncancelable leases at June 30, 2002 are as follows:





AmountFiscal year:2003

$
7,2002004


7,2002005


6002006


2007


$
15,000





| | (b) |  | Off-Balance-Sheet Items
| | --- |  | -----------------------




The Companys policies as to collateral and assumption of credit risk for off-balance sheet items are essentially the same as those for extension of credit to its customers. Generally, the
off-balance sheet exposures the Bank has are its commitments to fund unused lines of credit. At June 30, 2002, the Company had no outstanding commitments to originate residential real estate loans. Additionally, at June 30, 2002, the Bank had
provided approximately $856,637 in unused lines of credit.




(Continued)




29




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







| | (c) |  | Litigation
| | --- |  | ----------




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





| | (d) |  | Stock Conversion
| | --- |  | ----------------




On October 5, 1995, the Conversion of the Bank from a Federally-chartered mutual institution to a Federally-chartered stock savings association through amendment of its charter and issuance of common stock to the Company was
completed. Related thereto, the Company sold 1,454,750 shares of common stock, par value $0.01 per share, at an initial price of $10 per share in subscription and community offerings. Costs associated with the Conversion were approximately $880,000,
including underwriting fees. These conversion costs were deducted from the gross proceeds of the sale of the common stock. In connection with the Offering, the Bank established a liquidation account in an amount equal to its regulatory capital as of
the latest practicable date prior to consummation of the Offering.





(11)    Stockholders Equity





| | (a) |  | Regulatory Matters
| | --- |  | ------------------




The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.





Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table which follows) of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2002 and 2001, that the Bank meets all capital adequacy requirements to which it is subject.





As of June 30, 2002 and 2001, the most recent notification from the regulatory authorities categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the tables which follow.




(Continued)




30




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







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





Actual


For capital adequacy purposes


To be well capitalized under prompt corrective action provisionsAmount

Ratio


Amount

Ratio


Amount

RatioJune 30,2002:Total capital (to risk weighted assets):Consolidated

$
17,637

58.8
%

$
2,399

8.0
%

$
N/A

N/ASouthern Bank Company


16,264

54.2
%


2,399

8.0
%


2,998

10.0
%Tier 1 (core) capital (to risk weighted assets):Consolidated


17,503

58.4
%


1,199

4.0
%


N/A

N/ASouthern Bank Company


16,131

53.8
%


1,199

4.0
%


1,799

6.0
%Tier 1 (core) capital (to adjusted total assets):Consolidated


17,503

16.0
%


4,372

4.0
%


N/A

N/ASouthern Bank Company


16,131

14.8
%


4,372

4.0
%


5,465

5.0
%Tangible capital (to adjusted total assets):Consolidated


17,503

16.0
%


1,639

1.5
%


N/A

N/ASouthern Bank Company


16,131

14.8
%


1,639

1.5
%


N/A

N/AJune 30, 2001:Total capital (to risk weighted assets):Consolidated

$
17,174

57.6
%

$
2,386

8.0
%

$
N/A

N/ASouthern Bank Company


15,477

51.9
%


2,386

8.0
%


2,982

10.0
%Tier 1 (core) capital (to risk weighted assets):Consolidated


17,051

57.2
%


1,193

4.0
%


N/A

N/ASouthern Bank Company


15,354

51.5
%


1,193

4.0
%


1,789

6.0
%Tier 1 (core) capital (to adjusted total assets):Consolidated


17,051

17.6
%


3,891

4.0
%


N/A

N/ASouthern Bank Company


15,354

15.8
%


3,891

4.0
%


4,864

5.0
%Tangible capital (to adjusted total assets):Consolidated


17,051

17.5
%


1,459

1.5
%


N/A

N/ASouthern Bank Company


15,354

15.8
%


1,459

1.5
%


N/A

N/A





Pursuant to regulations, an institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution and has not been advised by the Office of Thrift Supervision (OTS) that it is in need of more than the normal supervision can, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its surplus capital ratio (the
excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four-quarter period. Any additional capital distributions require prior regulatory approval.





The Companys principal source of funds for dividend payments is dividends from the Bank. Certain
restrictions exist regarding the ability of the Bank to pay dividends to the Company. At July 1, 2001, dividend payments by the Bank were subject to regulatory approval. The Companys ability to pay dividends will be largely dependent upon
dividends to the Company from the Bank. Pursuant to the OTS regulations, the Bank will not be permitted to pay dividends on its capital stock or repurchase




(Continued)




31




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001




shares of its stock if its stockholders equity would be reduced below the amount required for the
liquidation account or if stockholders equity would be reduced below the amount required by the OTS.





| | (b) |  | Comprehensive Income
| | --- |  | --------------------




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





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





2002Before tax amount


Tax effect


After tax amountUnrealized gains arising during the year

$
1,245,140


(337,062
)

908,078Less reclassification for adjustments for gains included in net earnings


(56,872
)

15,355


(41,517
)Net change in unrealized gain on securities

$
1,188,268


(321,707
)

866,5612001Before tax amount


Tax effect


After tax amountUnrealized gains arising during the year

$
675,011


(229,504
)

445,507Less reclassification for adjustments for gains included in net earnings


(48,041
)

15,018


(33,023
)Net change in unrealized gain on securities

$
626,970


(214,486
)

412,484





(12)    Earnings Per Share





Basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during
the years ended June 30, 2002 and 2001. Common stock outstanding consists of issued shares less treasury stock, unallocated Employee Stock Ownership Plan (ESOP) shares (see note 13), and shares held in trust. Diluted earnings per share for the years
ended June 30, 2002 and 2001 was computed by dividing net income by the weighted average number of shares of common stock




(Continued)




32




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001




outstanding and the dilutive effects of the shares awarded under the Management Recognition Plan (MRP) and the Stock Option Plan, based on the treasury stock method, using an average fair market
value of the stock during the respective periods.





The following table represents the earnings per share
calculations for the years ended June 30, 2002 and 2001:





Income

Shares

Per share amount2002:Basic earnings per share

$
632,942

911,123

$
0.69Dilutive securities:Incentive stock option plan shares




1,888Dilutive earnings per share

$
632,942

913,011


0.692001:Basic earnings per share

$
$467,541

883,056


0.53Dilutive securities:Management recognition plan shares




5,799Dilutive earnings per share

$
467,541

888,855


0.53





Options to purchase 111,777 shares of common stock at $11.6875 per
share were outstanding during all four quarters of 2002 and 2001 and were included in the computation of diluted EPS because the options exercise price was less than the average market price of the common shares. Options to purchase 11,800
shares of common stock at $14.5625 per share were outstanding during all four quarters of 2002 and 2001. These options were not included in the computation of diluted EPS because the options exercise price was greater than the average market
price of the common shares.




(Continued)




33




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







(13)    Employee Retirement and Savings Plans





| | (a) |  | Employee Stock Ownership Plan
| | --- |  | -----------------------------




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





Expense related to the ESOP was approximately $94,000 and $82,000 for 2002 and 2001. Unearned compensation related to the ESOP was $245,469 and $354,531 at June 30, 2002 and 2001, respectively, and is shown as a reduction of
stockholders equity in the accompanying consolidated statements of financial condition.





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





| | (b) |  | Management Recognition Plan (MRP)
| | --- |  | ---------------------------------




During fiscal 1996, the Bank established an MRP which purchased 58,190 shares of the Companys common stock on the open market. The MRP provides for awards of common stock to directors and
officers of the Bank. The aggregate fair market value of the shares purchased by the MRP is reflected in shares held in trust at the time of purchase. As shares in the MRP are granted to employees, an amount equal to the award is reclassified from
shares held in trust to unearned compensation. Compensation is earned ratably over the stipulated vesting period. The expense related to the MRP was approximately $0 and $76,000 for 2002 and 2001, respectively. As of June 30, 2001, all awarded
shares related to the MRP were allocated to directors and officers of the Bank.





Shares held in trust related to
the MRP totaled 14,430 at June 30, 2002 and 2001, respectively. These shares, which were purchased for an average price per share of $12.84, amounted to $185,234 at June 30, 2002 and 2001, respectively, and are shown as a reduction of
stockholders equity in the accompanying consolidated statements of financial condition.





| | (c) |  | Simplified Employee Pension Plan
| | --- |  | --------------------------------




The Company established a Simplified Employee Pension Plan (SEP) for all employees who have completed one year of service, pursuant to Section 408(k) of the Internal Revenue Code of 1986. The Company
can make a discretionary contribution to the SEP each year. The cost to the Company under the SEP was $37,154 and $38,203 for fiscal years 2002 and 2001, respectively.




(Continued)




34




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







| | (d) |  | Supplemental Executive Retirement Agreement
| | --- |  | -------------------------------------------




During fiscal 1996, the Company entered into a Supplemental Executive Retirement Agreement (SERA) with an executive of the Company. Under the provisions of the SERA, the
Company established an account for the executive and credited to the executives account an amount equal to the difference between 25% of his compensation for the plan year and the annual additions credited to him under any tax-qualified plans
sponsored by the Company (including the ESOP and the SEP).





During 2001, the board of directors of the Company
amended the agreement to provide for a lump sum payment of approximately $141,000 for the executive in satisfaction of all benefits to which the executive was entitled.





| | (e) |  | Employment Agreements
| | --- |  | ---------------------




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





(14)    Stock-Based Compensation Plan





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





The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. This Statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the
employers stock.




(Continued)




35




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







Under the Option Plan, the Company may grant options up to 145,745
shares and has granted options outstanding of 123,577 shares through June 30, 2002. Under the Option Plan, the options vest 20% per year and become exercisable upon the participants completion of five years of service. Had compensation costs
for these plans been determined consistent with SFAS No. 123, the Companys net income and earnings per share would have been reduced to the following pro forma amounts:





2002

2001Net income:As reported

$
632,942

467,541Pro forma


630,036

454,600Earnings per share:As reported:Basic

$
0.69

0.53Diluted


0.69

0.53Pro forma:Basic


0.69

0.52Diluted


0.69

0.51





The Company purchased shares in the open market to be issued upon
exercise of stock options. Such shares are reflected at cost as shares held in trust in the accompanying consolidated statements of financial condition. During 2002 and 2001, the Company did not purchase any shares to be used for the exercise of
options. The total number of shares held in trust related to the Option Plan were 51,308 and amounted to $666,907 at June 30, 2002 and 2001.





A summary of the status of the Companys Option Plan at June 30, 2002 and 2001 and the changes during the years then ended is as follows:





2002

2001Shares

Weighted average exercise price

Shares

Weighted average exercise priceOutstanding at beginning of year:

123,577

$
11.96

123,577

$
11.96Forfeitures









Exercised









Granted









Outstanding at end of year

123,577

$
11.96

123,577

$
11.96Exercisable at end of year

120,913

$
11.69

118,553

$
11.69Weighted average fair value of the options granted

N/A




N/A




(Continued)




36




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







(15)    Fair Value of Financial Instruments





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





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





June 302002

2001Carrying amount

Estimated fair value

Carrying amount

Estimated fair value(in thousands)

(in thousands)Assets:Cash on hand and in banks

$
7,529

7,529

4,355

4,355SecuritiesAvailable for sale


53,753

53,753

35,635

35,635SecuritiesHeld to maturity


11,527

12,178

17,513

17,651Federal Home Loan Bank stock


1,449

1,449

724

724Loans receivable, net


34,515

36,324

37,587

38,136Accrued interest and dividends receivable


586

586

600

600Liabilities:Deposits


81,557

82,215

79,843

79,887Federal Home Loan Bank advances


9,583

9,629



Accrued interest payable


57

57

51

51





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





| | (a) |  | Cash and Cash Equivalents
| | --- |  | -------------------------




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




(Continued)




37




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







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




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





| | (c) |  | Federal Home Loan Bank Stock
| | --- |  | ----------------------------




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





| | (d) |  | Loans Receivable, Net
| | --- |  | ---------------------




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





| | (e) |  | Accrued Interest Receivable
| | --- |  | ---------------------------




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





| | (f) |  | Deposits
| | --- |  | --------




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





| | (g) |  | FHLB Advances
| | --- |  | -------------




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





| | (h) |  | Accrued Interest Payable
| | --- |  | ------------------------




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





| | (i) |  | Off-Balance-Sheet Instruments
| | --- |  | -----------------------------




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




(Continued)




38




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







(16)    Parent Company Financial Statements





Separate condensed financial statements of The Southern Banc Company, Inc. (the Parent Company) as of and for the years ended
June 30, 2002 and 2001 are presented below:





Statements of Financial Condition





June 30, 2002 and 2001





(Dollar amounts in thousands)





2002


2001Assets:Cash and cash equivalents

$
1,042


1,325Investment in subsidiary


16,973


15,318ESOP loan receivable


337


443Other assets


23


29Total assets

$
18,375


17,115Liabilities:Other liabilities

$
31


69Stockholders equity:Preferred stock





Common stock


15


15Additional paid-in capital


13,761


13,751Retained earnings


10,497


10,186Unearned compensation


(245
)

(355
)Shares held in trust


(852
)

(852
)Treasury stock


(5,642
)

(5,642
)Accumulated other comprehensive income (loss)


810


(57
)Total stockholders equity


18,344


17,046Total liabilities and stockholders equity

$
18,375


17,115




(Continued)




39




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







Statements of Income





Years ended June 30, 2002 and 2001





(Dollar amounts in thousands)





2002


2001Income from subsidiaries:Interest

$
23


50Equity in undistributed income of subsidiaries


656


466Total income


679


516Operating expense, net


58


31Income before income taxes


621


485Income tax provision (benefit of)


(12
)

17Net income

$
633


468







(Continued)




40




---



THE SOUTHERN BANC COMPANY, INC.





Notes to Consolidated Financial Statements





June 30, 2002 and
2001







Statements of Cash Flows





Years ended June 30, 2002 and 2001





(Dollar amounts in thousands)





2002


2001Operating activities:Net income

$
633


468Adjustments to reconcile net income to net cash provided by operating activities:Equity in undistributed income of subsidiaries


(656
)

(466
)Decrease in other assets


6


2Decrease in other liabilities


(50
)

33Net cash (used in) provided by operating activities


(67
)

37Investing activities:Net cash provided by investing activities





Financing activities:Payments received on ESOP loan


106


105Purchase of treasury stock





(18
)Cash dividends paid


(322
)

(316
)Net cash used in financing activities


(216
)

(229
)Decrease in cash and cash equivalents


(283
)

(192
)Cash and cash equivalents at beginning of year


1,325


1,517Cash and cash equivalents at end of year

$
1,042


1,325




41




---

CORPORATE INFORMATION





Directors and Executive Officers:





Gates Little


Chairman of the Board, President and Chief


Executive Officer of the Company and of the Bank





Craig G. Cantrell


Retired





Thomas F. Dowling, III


Dentist


Gadsden, Alabama





Grady Gillam


Retired





Rex G. Keeling Jr.


Pharmacy Consultant and


Real Estate Investor





James B. Little, Jr.


Investment Officer of the Bank and


Vice President of the Company





James B.
Little III


New Capital Partners, LLC


Founder and Partner





Fred Taylor


Owner of Taylor Realty


Albertville, Alabama





Officers:





Rodney Rich


Vice President of
the Bank





Janice Stephens


Comptroller of
the Bank





Teresa Elkins


Vice President of
the Bank





Peggy Smith


Secretary-Treasurer
of the Company and of the Bank





Martha Garrett


Vice President of the Bank





Annette Espy


Vice President of the Bank





Judy Cater


Vice President of the Bank





Main Office:





221 S. 6th Street


Gadsden, Alabama





Branch Offices:





202 Sand Mountain Drive


Albertville, Alabama





2204 Henry Street


Guntersville, Alabama





390 W. Main Street


Centre, Alabama





Independent Public Accountants:





KPMG LLP


Birmingham, Alabama





General Counsel:





Inzer, Haney & McWhorter, P.A.


Gadsden, Alabama





Securities and Regulatory
Counsel:





Cozen OConnor


Washington, D.C.





Annual Stockholders Meeting:





November 13, 20025:00 p.m.


The
Southern Bank Company


221 S. 6th Street


Gadsden, Alabama


Record DateSeptember 20, 2002





A
copy of the Annual Report on Form 10-KSB for the fiscal year ended June 30, 2002 as filed with the SEC will be furnished to stockholders as of the Record Date upon written request to the Secretary of the Company, 221 South 6th Street, Gadsden, AL
35901.




42




---

---










---




THE SOUTHERN BANC COMPANY, INC.





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




---




[ANDERSEN LOGO]





REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To The Southern
Banc Company, Inc.:





We have audited the accompanying consolidated statements of financial condition of THE
SOUTHERN BANC COMPANY, INC. (a Delaware corporation) AND SUBSIDIARIES as of June 30, 2001 and 2000 and the related consolidated statements of income, stockholders equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of The Southern Banc Company, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United
States.





/s/    ARTHUR ANDERSEN LLP





Birmingham, Alabama


August 3, 2001