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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-KSB





(Mark One)





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




For the fiscal year ended June 30, 2002





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




For the transition period
from            to





Commission File Number: 1-13964





THE SOUTHERN BANC COMPANY, INC.


(Name of Small Business Issuer in Its Charter)





Delaware

63-1146351(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)





221 S. 6th Street, Gadsden, Alabama

35901(Address of Principal Executive Offices)

(Zip Code)





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





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





Common stock, par value $.01 per share

American Stock Exchange(Title of Class)

(Name of Exchange on Which Registered)





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





Not Applicable





Check whether the issuer: (1) filed all reports required by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈





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





Registrants revenues for the
fiscal year ended June 30, 2002:    $6,481,910





The aggregate market value of the 706,467
shares of Common Stock of the registrant issued and outstanding held by non-affiliates was approximately $8.5 million based on the closing sales price of $12.00 per share of the registrants Common Stock on September 27, 2002 as listed on the
American Stock Exchange. For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 10% of the registrants outstanding voting stock are affiliates.





Number of shares of Common Stock outstanding as of September 26, 2002:    961,498





Transitional Small Business Disclosure Format  Yes  ̈ No  x





DOCUMENTS INCORPORATED BY REFERENCE





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





|1. |  | Portions of the Annual Report to Stockholders for the Fiscal Year Ended June 30, 2002 (the Annual Report). (Parts I and II)
|-- |  | -----------------------------------------------------------------------------------------------------------------------------




|2. |  | Portions of the Proxy Statement for the registrants 2002 Annual Meeting of Stockholders (the Proxy Statement). (Part III)
|-- |  | ----------------------------------------------------------------------------------------------------------------------------




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PART I





Item 1.Description of Business





General





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





The holding company structure permits the Company to expand the financial services offered through
the Bank. As a holding company, the Company has greater flexibility than the Bank to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions. The Company
qualifies as a unitary savings institution holding company and is subject to regulation by the Office of Thrift Supervision (OTS). The Companys principal business is the business of the Bank. At June 30, 2002, the Company had total
consolidated assets of $110.0 million, deposits of $81.6 million, net loans receivable of $34.5 million and stockholders equity of $18.3 million, or 16.7% of total assets.





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





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





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





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





Sarbanes-Oxley Act of 2002





On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the Act), which sets forth broad accounting and corporate governance reforms intended to restore confidence in the integrity of
public company disclosure and accounting practices. The Act is expected to have a significant impact on public companies, their officers, directors and stockholders, and the accounting and legal professions. Some provisions of the Act are effective
immediately, while others will be effective as




1




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soon as the Securities and Exchange Commission (SEC) adopts the relevant rules, which the SEC must do within mandated time periods. Until these rules are adopted, the Company is
unable to determine whether the Act will have a material impact on the operations of the Company and the Bank.





CEO and CFO Certifications.    The Act contains two separate provisions requiring chief executive officers and chief financial officers of public companies to make certifications with respect to such
companies periodic reports to the SEC. One provision imposes criminal penalties and became immediately effective upon passage of the Act, while the other imposes civil penalties for certifications pursuant to recently adopted SEC rules. The
Companys Chief Executive Officer and Chief Financial Officer has submitted both certifications in connection with this Annual Report on Form 10-KSB.





Special Note Regarding Forward Looking Statements





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





Business Strategy





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





Market Area





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




2




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Census Bureau data, the combined population of Etowah, Cherokee and Marshall Counties was approximately 210,000.





The economy in the Banks market area includes a mixture of manufacturing and agriculture. For years the two major industrial employers were Goodyear Tire and Rubber
Company (Goodyear) and Gulf States Steel Corporation (Gulf States). Goodyear, Etowah Countys largest employer, presently employs around 1,400 workers. Gulf States, which previously employed 1,850 workers, ceased
production on August 21, 2000 after filing Chapter 11 Bankruptcy in July 1999. In Talladega County, 17 miles from Etowah County, Honda Motor Company completed construction of a manufacturing plant and began production in November 2001. Approximately
900 jobs were awarded to Etowah county residents as a result of the Honda Plant, suppliers, and economic opportunities for local businesses. In July 2002, Honda Motor Company announced a second expansion to the manufacturing plant that will double
production and create another 2,000 jobs at the plant. Several other new projects and industries have been announced in the past year which could boost the economy in the Banks primary market area. According to the Alabama Department of
Industrial Relations, the unemployment rates for June 2002 in Etowah, Cherokee and Marshall Counties were 6.6%, 3.7% and 6.1%, respectively, as compared to 5.4% for the state of Alabama.





Competition





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





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





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





Lending Activities





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





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




3




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and; (iv) the aggregate amount of loans made under this authority does not exceed 15% of unimpaired capital and surplus.





At June 30, 2002, the maximum amount that the Bank could have loaned to any one borrower without prior OTS approval was approximately $4.3 million. At such date, the
largest aggregate amount of loans that the Bank had outstanding to any one borrower was approximately $359,000.





Loan Portfolio Composition.    The following table sets forth selected data relating to the composition of the Banks loan portfolio by type of loan at the dates indicated. At June 30, 2002, the Bank
had no concentrations of loans exceeding 10% of total loans that are not disclosed below.





At June 30,2002


2001Amount


%


Amount


%(Dollars in thousands)Type of Loan:Real estate loans:One-to-four-family residential

$
27,888


80.09
%

$
30,743


81.37
%Non-residential


140


0.40



81


0.21Consumer loans(1)


5,582


16.03



6,000


15.88Commercial loans


186


0.54



139


0.37Savings account loans


1,024


2.94



820


2.17Total gross loans


34,820


100.00
%


37,783


100.00
%Less:Unearned income


288






325Deferred loan fees (costs), net


(116
)





(252
)Allowance for loan losses


133






123Total

$
34,515





$
37,587


---

|(1) |  | Consumer loans include home equity line of credit loans of approximately $1,220,000 and $1,274,000, at June 30, 2002 and 2001, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------



4




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The following table sets forth information at June 30, 2002 regarding the dollar
amount of loans maturing or repricing in the Banks portfolio, based on contractual terms to maturity or repricing period. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one
year or less.





Due Within 1
Year After 6/30/02

Due After 1
through 5 Years After 6/30/02

Due After 5 Years
After 6/30/02

Total(In thousands)Real estate mortgage

$
2,163

$
1,652

$
24,213

$
28,028Consumer, commercial and savings account loans


1,393


3,125


2,274


6,792Total

$
3,556

$
4,777

$
26,487

$
34,820





The following table sets forth at June 30, 2002, the dollar amount
of gross loans due after one year after that date, based upon contractual maturity dates or period to reprice, and whether such loans have fixed or adjustable rates.





Predetermined Rate

Floating or Adjustable Rates(In thousands)Real estate

$
27,353

$
675Consumer, commercial and savings account loans


5,362


1,430Total

$
32,715

$
2,105





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





Originations, Purchases and Sales of Loans.    The Banks loans are primarily originated by salaried loan officers of the Bank, although,
from time to time, the Bank purchases loans. During fiscal 2002, the Bank purchased no loans. During the fiscal year ended June 30, 2002, the Bank originated and sold a total of $1,636,000 in loans to the secondary market.





One-to-Four-Family Residential Lending.    Historically, the Banks principal lending activity
has been the origination of fixed rate loans secured by first mortgages on existing one-to-four-family residences in the Banks market area. The purchase price or appraised value of most of such residences generally has been between $27,000 and
$285,000, with the Banks loan amounts averaging approximately $67,000. At June 30, 2002, $27.9 million, or 80.1% of the Banks total loans were secured by one-to-four-family residences, a substantial portion of which were existing,
owner-occupied, single-family residences in the Banks market area. At June 30, 2002, $27.4 million, or 98.0% of the Banks one-to-four-family residential loans, had fixed rates, and $675,000, or 2.0%, had adjustable rates.




5




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The Banks one-to-four-family residential mortgage loans generally are for
terms of up to 21 years, amortized on a monthly basis, with principal and interest due each month. The majority of the Banks one-to-four-family mortgage loans are underwritten with terms of 15 years or less. Residential real estate loans often
remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain due-on-sale clauses which permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged
property.





The Bank previously offered a mortgage loan product which provided for a term of up to 21 years with
the interest rate increasing one percentage point every seven years. This increase is not contingent upon any corresponding increase in market interest rates. As of June 30, 2002, the Bank had originated $7.4 million of these graduated rate loans.
The Bank no longer offers the graduated rate loan program.





The Banks lending policies generally limit the
maximum loan-to-value ratio on one-to-four-family residential mortgage loans secured by owner-occupied properties to 97% of the lesser of the appraised value or purchase price. The Banks lending policies generally require private mortgage
insurance for any loan that exceeds an 80% loan-to-value ratio. Pursuant to its First-Time Home Buyer Plan, the Bank may lend up to 100% of the purchase price of a one-to-four-family residence provided that the borrower (or third party)
provides additional collateral in the form of a pledge of a savings deposit or certificate of deposit equal to 25% of the loan amount for loans up to 15 years and 28% of the loan amount for loans with terms greater than 15 years up to 21 years.
Securities may also be pledged as additional collateral, but such securities must have a current market value equal to 140% of the required collateral amount.





The Bank has not originated any adjustable rate, one-to-four-family residential mortgage loans in recent years. However, total loans at June 30, 2002 included adjustable
rate, one-to-four-family residential loans with an aggregate principal balance of $675,000, substantially all of which were purchased during fiscal 1996. The rates at which interest accrues on these loans are adjustable annually, generally with
limitations on adjustments of 2.0% per adjustment period and 6.0%-6.5% over the life of the loan. While such loans may include initial discounted rates, they were underwritten and borrowers were qualified based on the fully indexed interest rate.
The Banks adjustable rate loans do not permit negative amortization.





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





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




6




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Consumer Lending.    At June 30, 2002, the Banks
total consumer loan portfolio was approximately $6.6 million and consisted primarily of home equity lines of credit, new and used automobile loans, and secured demand loans. These loans totaled approximately $1.2 million, $4.4 million and $1.0
million, respectively, at June 30, 2002. Management plans to continue the Banks expansion of these programs as part of the Banks plan to provide a wider range of financial services to the Banks customers while increasing the
Banks portfolio yields.





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





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





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





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





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





Upon receipt of a loan application from a prospective borrower, the Banks staff obtains the necessary information and then prepares the file for processing. Once in
processing, a credit report and




7




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verifications of the loan applicants employment, income and credit standing are made. It is the Banks policy to obtain an appraisal of the real estate intended to secure a proposed
mortgage loan from a Bank-approved appraiser. The Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made, except when the Bank becomes aware of a particular risk of environmental contamination.





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





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





Interest Rates
and Loan Fees.    Interest rates charged by the Bank on mortgage loans are primarily determined by competitive loan rates offered in its market area and the Banks minimum yield requirements. Mortgage loan rates reflect
factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal
government, including the Federal Reserve Board, the general supply of money in the economy, tax policies and governmental budget matters.





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





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





Asset Classification, Allowances for Losses and Non-performing
Assets.    Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset is classified as substandard if it is determined to be inadequately protected by the
current net worth and




8




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paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if
it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose an institution to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving managements close attention. Assets classified as substandard or doubtful require an institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, an institution must either establish a specific allowance for loss in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with
an institutions classifications. If an institution does not agree with an examiners classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any
assets require classification or re-classification. The Board of Directors reviews and approves all classifications on a monthly basis. At June 30, 2002, the Bank had no assets classified as loss, no assets classified as doubtful, $44,613 of assets
classified as substandard and $684,890 of assets designated as special mention.





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





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





At the date of foreclosure or other
repossession, the Bank transfers the property to real estate acquired in settlement of loans at the lower of recorded investment in the loan or fair value, net of estimated cost of disposition. Fair value is defined as the amount in cash or
cash-equivalent value of other consideration that a property would yield in a current sale between a willing buyer and a willing seller. Fair value is measured by market transactions. If a market does not exist, fair value of the property is
estimated based on selling prices of similar properties in active markets or, if there are no active markets for similar properties, by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. Fair value generally
is determined through an appraisal at the time of foreclosure. Any amount of the recorded investment in the loan in excess of fair value is charged-off against the allowance for loan losses. Subsequent to foreclosure, the property is periodically
evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the
property, a gain on sale of real estate may be recorded if certain conditions are met. At June 30, 2002, the Bank held no properties acquired in settlement of loans.




9




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





Years Ended June 30,2002


2001(Dollars in thousands)Balance at beginning of period

$
123


$
115Charge-offs(1)


(17
)


(22
)Recoveries






Provision for loan losses


27



30Balance at end of period

$
133


$
123Ratio of net charge-offs during the period to average loans outstanding during the period


0.05
%


0.06
%


---

|(1) |  | Charge-offs of approximately $17,000 for the year ended June 30, 2002 and $22,000 for the year ended June 30, 2002 were realized due to losses incurred upon the
sale of repossessed automobiles contained in the Banks consumer loan portfolio. There were no charge-offs realized in the other loan categories.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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





At June 30,2002


2001Amount

Percent of Loans in
Category to Total Loans


Amount

Percent of Loans in
Category to Total Loans(Dollars in thousands)Real estate loans:One-to four-family residential

$
60

80.09
%

$
65

81.37
%Non-residential


0

0.40



0

0.21Consumer, commercial and savings account loans


73

19.51



58

18.42Total allowance for loan losses

$
133

100.00
%

$
123

100.00
%





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




10




---




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





At June 30,2002


2001(Dollars in thousands)Loans accounted for on a non-accrual basis:(1)Real estate loans:One-to-four-family residential

$
37


$
117Non-residential






Consumer, commercial and savings account loans


12



31Other loans






Total

$
49


$
148Accruing loans which are contractually past due 90 days or more:Real Estate loans:One-to-four-family residential

$



$
Non-residential






Consumer, commercial and savings account loans






Other loans






Total

$



$
Total of non-accrual and accruing loans 90 days past due loans

$
49


$
148Percentage of total loans


0.14
%


0.39
%Other non-performing assets(2)

$



$
Percentage of total assets


0.04
%


0.15
%


---

|(1) |  | The Bank ceases accrual of interest on a loan when payment on the loan is delinquent in excess of 90 days. Income is subsequently recognized only to the extent
that cash payments are received until, in managements judgment, the borrowers ability to make periodic interest and principal payments has been reestablished, in which case the loan is returned to accrual status.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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




Neither cash basis, interest income nor interest income foregone on non-accrual loans was considered insignificant for the years ended June 30, 2002 and June 30, 2001.





At June 30, 2002, management had identified no loans which were not reflected in the preceding table but as to which known information
about possible credit problems of borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms.




11




---




Investment Activities





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





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





Securities designated as available for sale are carried at their fair value with unrealized gains or losses, net of tax effect, recognized in equity. At
June 30, 2002, investment securities with an aggregate amortized cost of approximately $52.6 million and an aggregate fair value of approximately $53.8 million were included in the portfolio of securities designated as available for sale. The
aggregate impact on equity was a net increase of approximately $867,000 for the year ended June 30, 2002. The gross unrealized pre-tax gain on securities available for sale at June 30, 2002 was approximately $1.1 million, with an after-tax
unrealized gain of approximately $810,000. For additional information, see Consolidated Statements of Stockholders Equity and Note 2 to Consolidated Financial Statements in the Annual Report filed as Exhibit 13 to this Report. Securities
designated as held to maturity are those assets which the Bank has the ability and management has the intent to hold to maturity and are carried at amortized cost. At June 30, 2002, securities designated as held to maturity had an
aggregate amortized cost of approximately $11.5 million and an aggregate fair value of approximately $12.2 million. Upon acquisition, securities are classified as to the Banks intent.





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




12




---




Mortgage-backed securities typically are issued with stated principal amounts and
the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-rate mortgage loans.
Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages.





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





The Banks mortgage-backed securities portfolio consists primarily of seasoned fixed-rate and adjustable rate mortgage-backed securities. At June 30, 2002, the Bank had approximately $9.7 million
in mortgage-backed securities and approximately $1.8 million in U. S. Government agency securities which are considered to be held to maturity and which are insured or guaranteed by FNMA, FHLMC or GNMA. At June 30, 2002, the Bank had approximately
$44.1 million in mortgage-backed securities and approximately $9.6 million in U. S. Government agency securities and U. S. Treasury securities designated as available for sale.




13




---




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





At June 30,2002

2001(In thousands)Securities available for sale:(1)U.S. Treasury securities

$
1,527

$
1,024U.S. Government agency securities


8,134


15,091Mortgage-backed securities


44,075


19,503Other


17


17Total securities available for sale

$
53,753

$
35,635Securities held to maturity:(2)U.S. Government agency securities

$
1,832

$
2,848Mortgage-backed securities


9,695


14,665Total securities held to maturity

$
11,527

$
17,513Total securities

$
65,280

$
53,148


---

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

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



14




---




The following table sets forth information regarding the scheduled maturities,
amortized costs, fair values and weighted average yields for the Banks investment securities at June 30, 2002.





One Year or Less


One to Five Years


Five to Ten Years


More than Ten Years


Total Investment PortfolioCarrying Value

Average Yield


Carrying Value

Average Yield


Carrying Value

Average Yield


Carrying Value

Average Yield


Amortized Cost

Fair Value

Average Yield(Dollars in Thousands)Securities available for sale:(1)U.S. treasury securities

$
1,018

5.8
%

$
509

3.9
%

$



%

$



%

$
1,498

$
1,527

5.2
%U.S. Government agency Securities








4,255

5.0



3,008

6.3



871

6.2



7,950


8,134

5.6Mortgage-backed securities








3,157

5.7



9,155

5.9



31,763

5.9



43,207


44,075

5.9Other(3)




















17





17


17

Total securities available for sale

$
1,018

5.8
%

$
7,921

5.2
%

$
12,163

6.0
%

$
32,651

5.9
%

$
52,672

$
53,753

5.8
%Securities held to maturity:(2)U.S. Government agency Securities

$





$
815

6.8
%

$
249

7.6
%

$
768

6.7
%

$
1,832

$
1,911

6.6
%Mortgage-backed securities


238

6.6



836

7.9



5,890

6.9



2,731

7.4



9,695


10,267

6.7Total securities held to maturity

$
238

6.6
%

$
1,651

7.4
%

$
6,139

6.9
%

$
3,499

7.2
%

$
11,527

$
12,178

6.7
%Total securities

$
1,256

6.0
%

$
9,572

5.6
%

$
18,302

6.3
%

$
36,150

6.0
%

$
64,199

$
65,931

6.0
%


---

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

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

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




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




15




---




Deposit Activity and Other Sources of Funds





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





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





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





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




16




---




Deposits in the Bank as of June 30, 2002 were represented by the various programs
described below.





Interest Rate

MinimumTerm

Category

Minimum Amount

Balances

Percentage of Total Savings(In thousands)2.095%

None

NOW Accounts

$
100

$
333

0.41%2.026

None

Passbook Statement Accounts


100


2,967

3.642.245

None

Gold Star Savings Account


100


4,021

4.931.971

None

Money Market Deposit Account


1,500


128

0.161.971

None

High Yield Account


100


1,125

1.382.250

None

Best Checking Account


50


197

0.241.963

None

Merit Checking


50


666

0.822.250

None

Classic 55 Checking


50


1,958

2.400.000

None

Free Checking





90

0.110.000

None

Business Checking


50


166

0.201.500

None

First Checking


50


3,013

3.692.319

None

Premium MMDA


10,000


1,780

2.18Certificates of Deposit2.000

91 Days

3-Month Money Market


1,000


488

0.602.333

5 Month

Fixed Term, Fixed Rate


1,000


2,434

2.982.503

182 Days

6-Month Money Market


1,000


1,472

1.802.517

7 Month

Fixed Term, Fixed Rate


1,000


4,415

5.412.490

8 Month

Fixed Term, Fixed Rate


1,000


198

0.242.595

9 Month

Fixed Term, Fixed Rate


1,000


209

0.262.508

10 Month

Fixed Term, Fixed Rate


1,000


491

0.602.922

12 Month

Fixed Term, Fixed Rate


1,000


990

1.212.847

14 Month

Fixed Term, Fixed Rate


1,000


4,715

5.783.045

18 Month

Fixed Term, Fixed Rate


1,000


405

0.503.727

18 Month-IRA

Fixed Term, Fixed Rate-IRA


250


3,131

3.843.527

20 Month

Fixed Term, Fixed Rate


1,000


3,041

3.733.567

24 Month

Fixed Term, Fixed Rate


1,000


1,146

1.414.376

30 Month

Fixed Term, Fixed Rate


1,000


10,774

13.215.969

36 Month

Fixed Term, Fixed Rate


1,000


6,511

7.983.271

48 Month

Fixed Term, Fixed Rate


1,000


1,508

1.855.253

60 Month

Fixed Term, Fixed Rate


1,000


3,827

4.694.853

72 Month

Fixed Term, Fixed Rate


1,000


104

0.134.595

96 Month

Fixed Term, Fixed Rate


1,000


39

0.055.241

120 Month

Fixed Term, Fixed Rate


1,000


736

0.901.713

3-Month-State

Fixed Term, Fixed Rate


1,000


1,325

1.623.028

11 Month

Fixed Term, Fixed Rate


1,000


8,546

10.483.380

17 Month

Fixed Term, Fixed Rate


1,000


6,627

8.132.588

19 Month

Fixed Term, Fixed Rate


1,000


1,981

2.44Total

$
81,557

100.00%




17




---




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





Years Ended June 30,2002


2001Passbook Savings


Interest-Bearing Demand Deposits


Certificates of Deposit


Passbook Savings


Interest-Bearing Demand Deposits


Certificates of Deposit(Dollars in thousands)Average balance

$
6,657


$9,557


$64,726


$4,620


$7,142


$67,561Average interest rate


2.22
%

1.74
%

4.73
%

3.75
%

2.31
%

5.95
%





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





At June 30,2002

2001(In thousands)0.01  2.00%

$
1,813

$
2.00  4.00%


40,312


5,8454.01  6.00%


13,862


28,4436.01  8.00%


9,126


33,860$
65,113

$
68,148





The following table indicates the amount of the certificates of
deposit of $100,000 or more in the Bank by time remaining until maturity at June 30, 2002.





Maturity Period

Certificates of Deposits(In thousands)Three months or less

$
2,687Over three through six months


2,062Over six through twelve months


4,369Over twelve months


4,085Total

$
13,203




18




---




Borrowings.    Savings deposits historically have been
the primary source of funds for the Banks lending, investment and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, the Bank is required to own stock in the FHLB of Atlanta
and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. As of June 30, 2002, Federal Home Loan Bank advances were approximately $9.6 million.





Contractual Obligations and Commitments





The following table sets forth the contractual obligations and commitments of the Bank as of June 30, 2002.





CONTRACTUAL OBLIGATIONS(Dollars in Thousands)One Year or Less

Over One through Three Years

Over Three through Five Years

Over Five Years

TotalFHLB advances

$
1,000

$
3,000

$
5,583

$
0

$
9,583Operating Leases


7,200


7,800


0


0


15,000Certificates of Deposit


44,968


18,135


2,010


0


65,113Total

$
53,168

$
28,935

$
7,593

$
0

$
89,696COMMITMENTSLines of Credit

$
0

$
0

$
857

$
0

$
857Total

$
0

$
0

$
857

$
0

$
857





Subsidiary Activities





Federally chartered savings institutions are permitted to invest up to 2% of their assets in subsidiary service corporations, plus an additional 1% in subsidiaries engaged
in specific community purposes. Under such limitation, as of June 30, 2002, the Bank was authorized to invest approximately $2.0 million in the stock of or loans to subsidiaries. The Bank currently does not have a subsidiary.




19




---




REGULATION





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





Regulation of the Company





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





As a unitary savings and loan holding company, the Company generally is not subject to any restrictions on its business activities. While
the Gramm-Leach-Bliley Act (the GLB Act), enacted in November 2001, terminated the unitary thrift holding company exemption from activity restrictions on a prospective basis, the Company enjoys grandfathered status under this
provision of the GLB Act because it acquired the Bank prior to May 4, 2001. As a result, the Companys freedom from activity restrictions as a unitary savings and loan holding company were not affected by the GLB Act. However, if the Company
were to acquire control of an additional savings association, its business activities would be subject to restriction under the Home Owners Loan Act. Furthermore, if the Company were in the future to sell control of the Bank to any other
company, such company would not succeed to the Companys grandfathered status under the GLB Act and would be subject to the same activity restrictions. The continuation of the Companys exemption from restrictions on business activities as
a unitary savings and loan holding company is also subject to the Companys continued compliance with the Qualified Thrift Lender (QTL) test. See Regulation of the BankQualified Thrift Lender Test.





Regulation of the Bank





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





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





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




20




---

including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.





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





Regulatory Capital Requirements.    OTS capital regulations require savings institutions to meet three capital standards: (1) tangible
capital equal to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total adjusted assets for savings institutions that receive the highest supervisory rating for safety and soundness and 4% of total adjusted assets for all
other thrifts, and (3) risk-based capital equal to 8% of total risk-weighted assets. At June 30, 2002, the Bank was in compliance with its regulatory capital requirements.





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





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





In addition to the above regulatory capital requirements, the
OTS prompt corrective action regulation classifies savings institutions by capital levels and provides that the OTS will take various corrective actions, including imposing significant operational restrictions, against any savings institution
that fails to meet the regulations capital standards. Under this regulation, a well capitalized savings institution is one that has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%
and a leverage capital ratio of 5%, and is not subject to any capital order or directive. A savings institution is deemed adequately capitalized category if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based
capital ratio of at least 4%, and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized,
depending on their capital levels. A savings institution that falls within any of the three undercapitalized categories is subject to severe regulatory sanctions under the prompt corrective action regulation. At June 30, 2002, the Bank was
classified as well capitalized.





Insurance of Deposit Accounts.    The
deposit accounts held by the Bank are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of




21




---

deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC or the institutions primary regulator.





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





Qualified Thrift Lender
Test.    Federal savings institutions must meet one of two Qualified Thrift Lender (QTL) tests. To qualify as a QTL, a savings institution must either (i) be deemed a domestic building and loan
association under the Internal Revenue code by maintaining at least 60% of its total assets in specified types of assets, including cash, certain government securities, loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy the statutory QTL test set forth in the Home Owners Loan Act by maintaining at least 65% of its portfolio assets in certainQualified Thrift
investments (defined to include residential mortgages and related equity investments, certain mortgage-related securities, small business loans, student loans and credit card loans, and 50% of certain community development loans). For purposes
of the statutory QTL test, portfolio assets are defined as total assets minus intangible assets, property used by the institution in conducting its business, and liquid assets equal to 10% of total assets. A savings institution must maintain its
status as a QTL on a monthly basis in at least nine out of every 12 months. A failure to qualify as a QTL would result in a number of sanctions, including certain operating restrictions. At June 30, 2002, the Bank was in compliance with its QTL
requirement.





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





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





Loans to One Borrower.    A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15%
of the institutions unimpaired capital and surplus. An additional amount may be lent, equal to 10% of the unimpaired capital and surplus, under certain




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circumstances. At June 30, 2002, the Registrants lending limit for loans to one borrower was approximately $4.6 million and had no outstanding commitments that exceeded the loans to one
borrower limit at the time originated or committed.





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





As a member, the Bank is required to purchase and maintain stock in the FHLB
of Atlanta in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Banks advances from the FHLB. At June 30, 2002,
the Bank was in compliance with this requirement.





Federal Reserve System.    The
Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits.
The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At June 30, 2002, the Bank was in compliance with these Federal Reserve
Board requirements.





Taxation





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





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







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Beginning with the first taxable year beginning after December 31, 1995, savings institutions, such as the Bank, have
been treated the same as commercial banks. Institutions with $500 million or more in assets are able to take a tax deduction only when a loan is actually charged off. Institutions with less than $500 million in assets are still permitted to make
deductible bad debt additions to reserves, but only using the experience method. As a result, thrifts must recapture into taxable income the amount of their post-1987 tax bad debt allowance over a six-year period beginning after 1995. This recapture
can be deferred for up to two years if the thrift satisfies a residential loan portfolio test. At June 30, 2002, the Banks post-1987 tax bad debt allowance subject to recapture was approximately $46,000. The recapture did not have any effect
on the Banks net income because the related tax expense had already been accrued. All of the bad debt reserve was recaptured in 2001.





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





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





Earnings appropriated to the Banks tax bad debt reserves and claimed as tax deductions will not be
available for the payment of cash dividends or other distributions to the Company (including distributions made upon dissolution or liquidation), unless the Bank includes the amounts distributed in taxable income, along with the amounts deemed
necessary to pay the resulting federal income tax. At June 30, 2002, the Bank had approximately $2.8 million of pre-1988 accumulated bad debt reserves for which federal income taxes have not been provided.





The Internal Revenue Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of
regular taxable income plus certain tax preferences (alternative minimum taxable income or AMTI) and is payable to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code provides that an item of tax
preference is the excess of the bad debt deduction allowable for a taxable year pursuant to the percentage of taxable income method over the amount allowable under the experience method. The other items of tax preference that constitute AMTI include
(a) tax-exempt interest on newly-issued private activity bonds other than certain qualified bonds and (b) for taxable years including 1987 through 1989, 50% of the excess of (i) the taxpayers pre-tax adjusted net book income over (ii) ANTI
(determined without regard to this latter preference and prior to reduction by net operating losses). For taxable years beginning after 1989, this latter preference has been replaced by 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Internal




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Revenue Code, over (ii) ANTI (determined without regard to this preference and prior to reduction by net operating losses). For any taxable year beginning after 1986, net operating losses can
offset no more than 90% of ANTI. Certain payments of alternative minimum taxes may be used as credits against regular tax liabilities in future years. In addition, for taxable years after 1986 and before 1992, corporations, including savings
institutions, are also subject to an environmental tax equal to 0.12% of the excess of ANTI for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2.0 million. The Bank is not
currently paying any amount of alternative minimum tax but may. depending on future results of operations, be subject to this tax.





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





Employees





As of June 30, 2002, the Company and the Bank had 28 full-time employees none of whom was represented by a collective bargaining agreement.





Significant Accounting Policies





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) of Notes to Consolidated Financial Statements, filed as Exhibit 13 to this Report.




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Item 2.Description of Property





The following table sets forth information regarding the Banks offices at June 30, 2002.





Year Opened

Net Book Value
at June 30, 2002

Approximate Square Footage

Owned or LeasedMain Office:221 South 6th Street

1968

$
194,992

6,500

OwnedGadsden, Alabama 35901Branch Offices:202 Sand Mountain Drive

1965


4,124

1,405

LeasedAlbertville, Alabama 359502204 Henry Street Guntersville, Alabama 35976

2000


209,745

1,100

Owned390 W. Main Street

1994


62,975

2,263

OwnedCentre, Alabama 35960





The net book value of the Banks investment in furnishings and
equipment totaled $59,407 at June 30, 2002.





Item 3.Legal Proceedings





From time to time, the Bank is a party to various legal proceedings incident to its business. At June 30, 2002, the Company was
a party to litigation and claims 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.





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





No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.




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PART II





Item 5.Market for Common Equity and Related Stockholder Matters





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





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





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





Item 7.Financial Statements





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





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





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





PART III





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





Information concerning the directors and executive officers of the Company is incorporated herein by reference to the section captioned Election of Directors in
the Proxy Statement.





Item 10.Executive Compensation





The information required by this item is incorporated herein by reference to the section captioned Election of Directors
Executive Compensation in the Proxy Statement.





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





The information required by this
item is incorporated herein by reference to the sections captioned Voting Securities and Beneficial Ownership and Election of Directors in the Proxy Statement.




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Item 12.Certain Relationships and Related Transactions





The information required by this item is incorporated herein by reference to the section captioned
Election of DirectorsTransactions with Management in the Proxy Statement.





Item
13.Exhibits List and Reports on Form 8-K





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





No.

Description3.1*

Certificate of Incorporation of The Southern Banc Company, Inc. (As Amended)3.2**

Bylaws of The Southern Banc Company, Inc.4.1**

Specimen Common Stock Certificate of The Southern Banc Company, Inc.4.2***

Rights Agreement10.1****

Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan Association of
Gadsden and James B. Little Jr.10.2****

First Federal Savings and Loan Association of Gadsden Supplemental Executive Retirement Agreement10.3*****

The Southern Banc Company, Inc. 1996 Stock Option and Incentive Plan and trust10.4*****

First Federal Savings and Loan Association of Gadsden Management Recognition Plan and trust10.5******

1997 Amendments to Employment Agreements between the Southern Banc Company, Inc. and First Federal Savings and Loan
Association and James B. Little Jr.10.6******

Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan Association of
Gadsden and Gates Little.13

Annual Report to Stockholders. Except for these portions of the Annual Report to Stockholders which are expressly
incorporated herein by reference, such Annual Report is furnished for the information of the Commission and is not to be deemed filed as part of this Report.




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21

Subsidiaries23

Consent of KPMG


---

|* |  | Incorporated by reference to Annual Report on Form 10-KSB for fiscal year ended June 30, 2001.
|- |  | ----------------------------------------------------------------------------------------------

|** |  | Incorporated by reference to Registration Statement on Form 8-A (No. 1-13964).
|-- |  | ------------------------------------------------------------------------------

|*** |  | Incorporated by reference to Current Report on Form 8-K dated July 15, 1999.
|--- |  | ----------------------------------------------------------------------------

|**** |  | Incorporated by reference to Registration Statement on Form S-1 (No. 33-93218).
|---- |  | -------------------------------------------------------------------------------

|***** |  | Incorporated by reference to Registration Statement on Form S-8 (No. 333-3546).
|----- |  | -------------------------------------------------------------------------------

|****** |  | Incorporated by reference to Annual Report on Form 10-KSB for fiscal year ended June 30, 1998.
|------ |  | ----------------------------------------------------------------------------------------------




(b)    Reports on Form 8-K.


Not Applicable




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SIGNATURES





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





THE SOUTHERN BANC COMPANY, INC.Date: September 26, 2002



By:

/s/    GATES LITTLEGates Little Chairman of the
Board, President and Chief Executive Officer (Duly Authorized
Representative)





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





By:

/s/    GATES LITTLE



By:

/s/    THOMAS F.
DOWLINGGates Little Chairman of the
Board, President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer)





Thomas F. Dowling DirectorDate:    September 26, 2002



Date:    September 26, 2002By:

/s/    CRAIG G.
CANTRELL



By:

/s/    JAMES B. LITTLE
IIICraig G. Cantrell Director





James B. Little III DirectorDate:    September 26, 2002



Date:    September 26, 2002By:

/s/    GRADY GILLAM



By:

/s/    JAMES B. LITTLE,
JR.Grady Gillam Director





James B. Little, Jr. DirectorDate:    September 26, 2002



Date:    September 26, 2002By:

/s/    REX G. KEELING,
JR.



By:

/s/    FRED TAYLORRex G. Keeling, Jr. Director





Fred Taylor DirectorDate:    September 26, 2002



Date:    September 26, 2002




30




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CERTIFICATION





I, Gates Little, certify that:





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




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




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




Date: September 26, 2002





By:

/s/    GATES LITTLEGates Little Chairman of the
Board, President and Chief Executive Officer (Principal
Executive and Financial Officer)




31