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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003



| ̈ |  | 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



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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



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



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



Registrants revenues for the fiscal year ended June 30, 2003: $6,411,549



The aggregate market value of the 752,854 shares of Common Stock of the registrant issued and outstanding held by
non-affiliates was approximately $12.6 million based on the closing sales price of $16.70 per share of the registrants Common Stock on September 25, 2003 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 25, 2003: 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, 2003 (the Annual Report).
|-- |  | ------------------------------------------------------------------------------------------------------------

| |  | (Parts I and II)
| |  | ----------------

|2. |  | Portions of the Proxy Statement for the registrants 2003 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 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, 2003, the Company had total consolidated assets of $111.7 million, deposits of $84.4 million, net loans receivable of $38.9 million and stockholders equity of $18.9
million, or 16.9% 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 its corporate title from First Federal
Savings and Loan Association of Gadsden to The Southern Bank Company. The change of name was made to increase public awareness of the expanded banking services which the Bank is authorized to offer. The Bank currently operates
through four full-service banking offices located in Gadsden, Albertville, Guntersville and Centre, Alabama.



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



Sarbanes-Oxley Act of 2002



On July 30, 2002, the President signed into law the
Sarbanes-Oxley Act of 2002 (the S-O Act) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality
control and independence standards, and will be funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, certain permitted non-audit
services being provided to an audit client will require preapproval by a



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companys audit committee members. In addition, the audit partners must be rotated. Chief executive officers and chief financial officers, or their
equivalent, are required to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the S-O Act, counsel will
be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will be applied to corporate executives who violate federal securities laws, the period during
which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a companys financial statements are now subject to disgorgement if such restatement
was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan blackout periods, and loans to company executives are restricted.



The S-O Act also increases the oversight of, and codifies certain requirements relating to audit committees of public
companies and how they interact with a companys registered public accounting firm. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In
addition, companies will have to disclose whether at least one member of the committee is an audit committee financial expert and if not, why not. Under the S-O Act, a registered public accounting firm is prohibited from
performing statutorily mandated audit services for a company if such companys chief executive officer, chief financial officer, comptroller, chief accounting officer, or any person serving in equivalent positions has been employed by such firm
and participated in the audit of such company during the one-year period preceding the audit initiation date. The S-O Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to
fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the audit of a companys financial statements for the purpose of rendering the financial statements materially misleading.



The Company has incurred, and anticipates that it will
continue to incur, additional expenses in complying with the provisions of the S-O Act and the related rules. Management expects that the cost of such compliance may be significant.



USA Patriot Act



The USA Patriot Act establishes a wide variety of new and enhanced ways of combating international terrorism. The provisions that affect financial
institutions most directly provide the Secretary of Treasury and other departments and agencies of the federal government with enhanced authority to identify, deter and punish international money laundering and other crimes.



Among other things, the USA Patriot Act prohibits financial institutions from
doing business with foreign shell banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions will have to follow new minimum verification
of identity standards for all new accounts and will be permitted to share information with law enforcement authorities under circumstances that were not previously permitted.



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



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similar import. Similarly, statements that describe the Companys future plans, objectives or goals are also forward looking statements. Such forward
looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Stockholders,
potential investors, and other readers are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect subsequent events or circumstances.



Business Strategy



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



Market Area



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



The
economy in the Banks market area includes a mixture of manufacturing and agriculture. The largest employer in Etowah County is Goodyear Tire and Rubber Company, presently employing around 1,400 workers. In Talladega County, 17 miles from
Etowah County, Honda Motor Company began automobile and engine production in November 2001. Approximately 900 jobs were awarded to Etowah county residents as a result of the Honda Plant, suppliers, and economic opportunities for local businesses. In
July 2002, Honda Motor Company announced a second expansion to the manufacturing 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 July 2003 in Etowah, Cherokee, and Marshall Counties were 6.0%, 5.0% and 5.0%, respectively, compared
to 6.0% for the state of Alabama.



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Competition



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



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



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



Lending Activities



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



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



At June 30, 2003, the maximum amount that the Bank could have loaned to any
one borrower without prior OTS approval was approximately $4.7 million. At such date, the largest aggregate amount of loans that the Bank had outstanding to any one borrower was approximately $499,000.



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Loan Portfolio Composition. The following table sets forth selected data relating to the
composition of the Banks loan portfolio by type of loan at the dates indicated. At June 30, 2003, the Bank had no concentrations of loans exceeding 10% of total loans that are not disclosed below.



|                               |  | At June 30,            |       
|------------------------------ |  | ---------------------- | ------
|                               |  | 2003                   |       
|                               |  | Amount                 |       
|                               |  | (Dollars in thousands) |       
|Type of Loan:                  |  |                        |       
|Real estate loans:             |  |                        |       
|One-to-four-family residential |  | $                      | 30,681
|Non-residential                |  |                        | 451   
|Consumer loans(1)              |  |                        | 7,261 
|Commercial loans               |  |                        | 179   
|Savings account loans          |  |                        | 813   
|                               |  |                        |       
|Total gross loans              |  |                        | 39,385
|                               |  |                        |       
|Less:                          |  |                        |       
|Unearned income                |  |                        | 360   
|Deferred loan fees, net        |  |                        | (33   
|Allowance for loan losses      |  |                        | 140   
|                               |  |                        |       
|Total                          |  | $                      | 38,918
|                               |  |                        |       

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|(1) |  | Consumer loans include home equity line of credit loans of approximately $1,327,000 and $1,220,000, at June 30, 2003 and 2002, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------



The following table sets forth information at June 30, 2003 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 6/30/03 |       | Due After 1 through 5 Years After 6/30/03 |   | Due After 5 Years After 6/30/03 |  | Total
|---------------------------------------------- |  | ------------------------------- | ----- | ----------------------------------------- | - | ------------------------------- |  | -----
|                                               |  | (In thousands)                  |       |                                          
|Real estate mortgage                           |  | $                               | 1,481 |                                           | $ | 1,607                           |  | $    
|Consumer, commercial and savings account loans |  |                                 | 946   |                                           |   | 4,224                           |  |      
|                                               |  |                                 |       |                                           |   |                                 |  |      
|Total                                          |  | $                               | 2,427 |                                           | $ | 5,831                           |  | $    
|                                               |  |                                 |       |                                           |   |                                 |  |      



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The following table sets forth at June 30, 2003, 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                                    |  | $                  | 30,629 |                             
|Consumer, commercial and savings account loans |  |                    | 6,624  |                             
|                                               |  |                    |        |                             
|Total                                          |  | $                  | 37,253 |                             
|                                               |  |                    |        |                             



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 2003, the Bank purchased no loans. During the fiscal year ended June 30, 2003, the Bank originated and sold a total of
$3,319,000 in loans to the secondary market.



One-to-Four-Family Residential Lending. Historically, the Banks principal lending activity has been the origination of fixed rate loans secured by first mortgages on existing one-to-four-family residences in the Banks
market area. The purchase price or appraised value of most of such residences generally has been between $51,000 and $375,000, with the Banks loan amounts averaging approximately $90,000. At June 30, 2003, $30.7 million, or 77.9% of the
Banks total loans were secured by one-to-four-family residences, a substantial portion of which were existing, owner-occupied, single-family residences in the Banks market area. At June 30, 2003, $30.6 million, or 98.4% of the
Banks one-to-four-family residential loans, had fixed rates, and $503,000, or 1.6%, had adjustable rates.



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



The Bank previously offered a mortgage loan product which provided for a term
of up to 21 years with the interest rate increasing one percentage point every seven years. This increase is not contingent upon any corresponding increase in market interest rates. As of June 30, 2003, the Bank had originated $7.4 million of these
graduated rate loans. The Bank no longer offers the graduated rate loan program.



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



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The Bank has not originated any adjustable rate, one-to-four-family residential mortgage loans in recent
years. However, total loans at June 30, 2003 included adjustable rate, one-to-four-family residential loans with an aggregate principal balance of $503,000, substantially all of which were purchased during fiscal 1996. The rates at which interest
accrues on these loans are adjustable annually, generally with limitations on adjustments of 2.0% per adjustment period and 6.0% - 6.5% over the life of the loan. While such loans may include initial discounted rates, they were underwritten and
borrowers were qualified based on the fully indexed interest rate. The Banks adjustable rate loans do not permit negative amortization.



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



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



Consumer Lending. At June 30, 2003, the Banks total consumer loan portfolio was approximately $7.3 million and consisted primarily of new and used automobile loans, home equity lines of credit, and both secured and unsecured
demand loans. These loans totaled approximately $4.7 million, $1.3 million, $1.0 million and $290,000, respectively, at June 30, 2003. Management plans to continue the Banks expansion of these programs as part of the Banks plan to
provide a wider range of financial services to the Banks customers while increasing the Banks portfolio yields.



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



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



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



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



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



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



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



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



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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
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, 2003, the Bank had no assets classified as loss, no assets classified as doubtful, $99,888 of assets classified as substandard and $459,649 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



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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, 2003, the Bank held no properties acquired in settlement of loans.



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



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



11



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



|                                               |  | At June 30,            |    
|---------------------------------------------- |  | ---------------------- | ---
|                                               |  | 2003                   |    
|                                               |  | Amount                 |    
|                                               |  | (Dollars in thousands) |    
|Real estate loans:                             |  |                        |    
|One-to four-family residential                 |  | $                      | 56 
|Non-residential                                |  |                        |   
|Consumer, commercial and savings account loans |  |                        | 84 
|                                               |  |                        |    
|Total allowance for loan losses                |  | $                      | 140
|                                               |  |                        |    



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.



12



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



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

---

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

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



Neither cash basis interest income nor interest income foregone on non-accrual loans was considered significant for the years ended June 30, 2003 and June
30, 2002.



At June 30, 2003, 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.



13



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Investment Activities



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



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



Securities designated as available for sale are carried at their fair value with unrealized gains or losses, net of tax effect, recognized in equity. At June 30, 2003, investment securities with an aggregate amortized cost of
approximately $52.1 million and an aggregate fair value of approximately $53.7 million were included in the portfolio of securities designated as available for sale. The aggregate impact on equity was a net increase of approximately $332,000 for the
year ended June 30, 2003. The gross unrealized pre-tax gain on securities available for sale at June 30, 2003 was approximately $1.6 million. For additional information, see Consolidated Statements of Stockholders Equity and Note 2 to
Consolidated Financial Statements in the Annual Report filed as Exhibit 13 to this Report. Securities designated as held to maturity are those assets which the Bank has the ability and management has the intent to hold to maturity and
are carried at amortized cost. At June 30, 2003, securities designated as held to maturity had an aggregate amortized cost of approximately $7.2 million and an aggregate fair value of approximately $7.7 million. Upon acquisition, securities are
classified as to the Banks intent.



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



Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have



14



---

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 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, 2003, the Bank had approximately $7.1 million in mortgage-backed securities which are considered to be held to maturity and which are insured or guaranteed by FNMA, FHLMC or GNMA and approximately $101,000 in
U. S. Government agency securites. At June 30, 2003, the carrying value of mortgage-backed securities designated as available for sale was approximately $49.0 million and the carrying value of U.S. Government agency securities designated as
available for sale and U.S. Treasury securities was approximately $4.7 million. See Notes 2 and 3 of Notes to Consolidated Financial Statements in the Annual Report.



15



---

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



|                                    |  | At June 30,   
|----------------------------------- |  | --------------
|                                    |  | 2003          
|                                    |  | (In thousands)
|Securities available for sale:(1)   |  |               
|U.S. Treasury securities            |  | $             
|U.S. Government agency securities   |  |               
|Mortgage-backed securities          |  |               
|Other                               |  |               
|                                    |  |               
|Total securities available for sale |  | $             
|                                    |  |               
|Securities held to maturity:(2)     |  |               
|U.S. Government agency securities   |  | $             
|Mortgage-backed securities          |  |               
|                                    |  |               
|Total securities held to maturity   |  | $             
|                                    |  |               
|Total securities                    |  | $             
|                                    |  |               

---

|(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.
|--- |  | --------------------------------------------------------------------------------



16



---

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, 2003.



|                                    |  | One Year or Less       |     | One to Five Years |      |                | Five to Ten Years |              |  | More than Ten Years |                | Total Investment Portfolio |             
|----------------------------------- |  | ---------------------- | --- | ----------------- | ---- | -------------- | ----------------- | ------------ |  | ------------------- | -------------- | -------------------------- | ------------
|                                    |  | Carrying Value         |     | AverageYield      |      | Carrying Value |                   | AverageYield |  |                     | Carrying Value |                            | AverageYield
|                                    |  | (Dollars in Thousands) |    
|Securities available for sale:(1)   |  |                        |     |                   |      |                |                   |              |  |                     |                |                            |             
|U.S. Government agency Securities   |  | $                      | 501 |                   | 5.8% |                | $                 | 1,219        |  | 6.0                 | %              |                            | $           
|Mortgage-backed securities          |  |                        | 78  |                   | 7.0  |                |                   | 4,447        |  | 4.9                 |                |                            |             
|Other(3)                            |  |                        |    |                   | 0.0  |                |                   |             |  | 0.0                 |                |                            |             
|                                    |  |                        |     |                   |      |                |                   |              |  |                     |                |                            |             
|Total securities available for sale |  | $                      | 579 |                   | 5.9% |                | $                 | 5,666        |  | 5.1                 | %              |                            | $           
|                                    |  |                        |     |                   |      |                |                   |              |  |                     |                |                            |             
|Securities held to maturity:(2)     |  |                        |     |                   |      |                |                   |              |  |                     |                |                            |             
|U.S. Government agency Securities   |  | $                      |    |                   |  %  |                | $                 | 101          |  | 6.7                 | %              |                            | $           
|Mortgage-backed securities          |  |                        | 29  |                   | 7.9  |                |                   | 1,198        |  | 7.4                 |                |                            |             
|                                    |  |                        |     |                   |      |                |                   |              |  |                     |                |                            |             
|Total securities held to maturity   |  | $                      | 29  |                   | 7.9% |                | $                 | 1,299        |  | 7.4                 | %              |                            | $           
|                                    |  |                        |     |                   |      |                |                   |              |  |                     |                |                            |             
|Total securities                    |  | $                      | 608 |                   | 6.0% |                | $                 | 6,965        |  | 5.6                 | %              |                            | $           
|                                    |  |                        |     |                   |      |                |                   |              |  |                     |                |                            |             

---

|(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.



17



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Deposit Activity and Other Sources of Funds



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



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



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



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



18



---

Deposits in the Bank as of June 30, 2003 were represented by the various programs described below.



|Interest Rate |  | Minimum Term  |  | Category                     |  | Minimum Amount |        | Balances |        | Percentage of Total Savings | 
|------------- |  | ------------- |  | ---------------------------- |  | -------------- | ------ | -------- | ------ | --------------------------- | 
|              |  |               |  |                              |  | (In thousands) |       
|0.693%        |  | None          |  | NOW Accounts                 |  | $              | 100    |          | $      | 490                         | 
|0.387         |  | None          |  | Passbook Statement Accounts  |  |                | 100    |          |        | 2,966                       | 
|0.500         |  | None          |  | Gold Star Savings Account    |  |                | 100    |          |        | 4,071                       | 
|0.500         |  | None          |  | Money Market Deposit Account |  |                | 1,500  |          |        | 229                         | 
|0.500         |  | None          |  | High Yield Account           |  |                | 100    |          |        | 1,463                       | 
|0.500         |  | None          |  | Best Checking Account        |  |                | 50     |          |        | 169                         | 
|0.486         |  | None          |  | Merit Checking               |  |                | 50     |          |        | 657                         | 
|0.500         |  | None          |  | Classic 55 Checking          |  |                | 50     |          |        | 2,975                       | 
|0.000         |  | None          |  | Free Checking                |  |                |       |          |        | 97                          | 
|0.000         |  | None          |  | Business Checking            |  |                | 50     |          |        | 220                         | 
|0.484         |  | None          |  | First Checking               |  |                | 50     |          |        | 3,809                       | 
|1.260         |  | None          |  | Premium MMDA                 |  |                | 10,000 |          |        | 1,532                       | 
|              |  |               |  |                              | 
|              |  |               |  | Certificates of Deposit      |  |                |        |          |        |                             | 
|              |  |               |  |                              | 
|1.000%        |  | 91 Days       |  | 3-Month Money Market         |  |                | 1,000  |          |        | 486                         | 
|1.437         |  | 5 Month       |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 1,991                       | 
|1.000         |  | 182 Days      |  | 6-Month Money Market         |  |                | 1,000  |          |        | 1,047                       | 
|1.539         |  | 7 Month       |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 1,787                       | 
|1.707         |  | 8 Month       |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 137                         | 
|1.160         |  | 9 Month       |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 185                         | 
|1.524         |  | 10 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 448                         | 
|1.558         |  | 12 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 812                         | 
|2.071         |  | 14 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 1,790                       | 
|2.256         |  | 18 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 390                         | 
|2.865         |  | 18 Month-IRA  |  | Fixed Term, Fixed RateIRA   |  |                | 250    |          |        | 2,513                       | 
|2.826         |  | 20 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 5,992                       | 
|2.382         |  | 24 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 1,102                       | 
|3.568         |  | 30 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 12,782                      | 
|4.403         |  | 36 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 2,735                       | 
|2.878         |  | 48 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 6,955                       | 
|4.283         |  | 60 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 3,673                       | 
|4.743         |  | 72 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 106                         | 
|3.462         |  | 96 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 28                          | 
|5.245         |  | 120 Month     |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 718                         | 
|1.430         |  | 3-Month-State |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 1,325                       | 
|2.321         |  | 11 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 14,442                      | 
|3.003         |  | 17 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 2,928                       | 
|2.327         |  | 19 Month      |  | Fixed Term, Fixed Rate       |  |                | 1,000  |          |        | 1,307                       | 
|              |  |               |  |                              |  |                |        |          |        |                             | 
|              |  |               |  | Total                        |  | $              | 84,357 |          | 100.00 | %                          
|              |  |               |  |                              |  |                |        |          |        |                             | 



19



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



|                      |  | Years Ended June 30,   |      
|--------------------- |  | ---------------------- | -----
|                      |  | 2003                   |      
|                      |  | Passbook Savings       |      
|                      |  | (Dollars in thousands) |      
|Average balance       |  | $                      | 7,129
|Average interest rate |  |                        | 1.48 



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



|             |  | At June 30,   
|------------ |  | --------------
|             |  | 2003          
|             |  | (In thousands)
|0.01  2.00% |  | $             
|2.01  4.00% |  |               
|4.01  6.00% |  |               
|6.01  8.00% |  |               
|             |  |               
|             |  | $             
|             |  |               



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, 2003.



|Maturity Period                |  | Certificates of Deposits
|------------------------------ |  | ------------------------
|                               |  | (In thousands)          
|Three months or less           |  | $                       
|Over three through six months  |  |                         
|Over six through twelve months |  |                         
|Over twelve months             |  |                         
|                               |  |                         
|Total                          |  | $                       
|                               |  |                         



20



---

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, 2003, Federal Home Loan Bank advances were approximately $7.8 million.



Subsidiary Activities



Federally chartered savings institutions are permitted to invest up to 2% of their assets in subsidiary service
corporations, plus an additional 1% in subsidiaries engaged in specific community purposes. Under such limitation, as of June 30, 2003, 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.



21



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REGULATION



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



Regulation of the Company



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



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



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



AMEX.The American Stock Exchange (the AMEX) has proposed
numerous corporate governance rules intended to address corporate accountability, transparency and integrity. The proposals encompass significant changes to the following: board of director composition and independence standards, audit committee
composition and authority, compensation and nominating committees and ethics and disclosure obligations. In addition, the AMEX has proposed a rule change related to shareholder approval requirements for stock option plans. These rules, if adopted,
would affect the Company because its common stock is listed on the AMEX under the symbol SRN. The Board of Directors is currently considering voluntarily withdrawing the common stock from listing on the AMEX due to the limited number of
stockholders of record, the compliance costs associated with maintaining the Companys status as an AMEX-listed company (which are expected to increase), and the limited volume of trading of the shares.



22



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Regulation of the Bank



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



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



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



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



Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total adjusted assets for savings institutions that receive the highest supervisory rating for safety and soundness and 4% of total adjusted assets for all other thrifts, and
(3) risk-based capital equal to 8% of total risk-weighted assets. At June 30, 2003, 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



23



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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, 2003, the Bank was
classified as well capitalized.



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



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



Qualified Thrift Lender Test. Federal savings
institutions must meet one of two Qualified Thrift Lender (QTL) tests. To qualify as a QTL, a savings institution must either (i) be deemed a domestic building and loan association under the Internal Revenue code by
maintaining at least 60% of its total 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, 2003, 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



24



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file an application or a notice with the OTS at least 30 days before making a capital distribution. Savings institutions are not required to file an
application for permission to make a capital distribution and need only file a notice if the following conditions are met: (1) they are eligible for expedited treatment under OTS regulations. (2) they would remain adequately capitalized after the
distribution, (3) the annual amount of capital distribution does not exceed net income for that year to date added to retained net income for the two preceding years, and (4) the capital distribution would not violate any agreements between the OTS
and the savings institution or any OTS regulations. Any other situation would require an application to the OTS.



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



Loans to One Borrower. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the
institutions unimpaired capital and surplus. An additional amount may be lent, equal to 10% of the unimpaired capital and surplus, under certain circumstances. At June 30, 2003, the Registrants lending limit for loans to one borrower was
approximately $4.7 million and had no outstanding commitments that exceeded the loans to one borrower limit at the time originated or committed.



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



As a member, the Bank is required to purchase and maintain stock in the FHLB of Atlanta in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Banks advances from the FHLB. At June 30, 2003, 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, 2003, 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.



25



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



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



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



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



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, 2003, 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



26



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AMTI include (a) tax-exempt interest on newly-issued private activity bonds other than certain qualified bonds and (b) for taxable years including 1987
through 1989, 50% of the excess of (i) the taxpayers pre-tax adjusted net book income over (ii) AMTI (determined without regard to this latter preference and prior to reduction by net operating losses). For taxable years beginning after 1989,
this latter preference has been replaced by 75% of the excess (if any) of (i) adjusted current earnings as defined in the Internal Revenue Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating
losses). For any taxable year beginning after 1986, net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum taxes may be used as credits against regular tax liabilities in future years. In addition, for
taxable years after 1986 and before 1992, corporations, including savings institutions, are also subject to an environmental tax equal to 0.12% of the excess of AMTI for the taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million. The Bank is not currently paying any amount of alternative minimum tax but may depending on future results of operations, be subject to this tax.



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



Employees



As of June 30, 2003, the Company and the Bank had 30 full-time employees none of whom was represented by a collective
bargaining agreement.



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Item 2. Description of Property



The following table sets forth information regarding the Banks offices at June 30, 2003.



|                            |  | Year Opened |  | Net Book Value at June 30, 2003 |         | Approximate Square Footage |       | Owned or Leased
|--------------------------- |  | ----------- |  | ------------------------------- | ------- | -------------------------- | ----- | ---------------
|Main Office:                |  |             |  |                                 |         |                            |       |                
|221 South 6th Street        |  | 1968        |  | $                               | 189,117 |                            | 6,500 |                
|Gadsden, Alabama 35901      |  |             |  |                                 |         |                            |       |                
|                            |  |             |  |                                
|Branch Offices:             |  |             |  |                                 |         |                            |       |                
|202 Sand Mountain Drive     |  | 1965        |  |                                 | 2,553   |                            | 1,405 |                
|Albertville, Alabama 35950  |  |             |  |                                 |         |                            |       |                
|                            |  |             |  |                                
|2204 Henry Street           |  | 2000        |  |                                 | 205,426 |                            | 1,100 |                
|Guntersville, Alabama 35976 |  |             |  |                                 |         |                            |       |                
|                            |  |             |  |                                
|390 W. Main Street          |  | 1994        |  |                                 | 66,539  |                            | 2,263 |                
|Centre, Alabama 35960       |  |             |  |                                 |         |                            |       |                



The net book value of
the Banks investment in furnishings and equipment totaled $43,141 at June 30, 2003.



Item 3. Legal Proceedings



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



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



No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2003.



PART II



Item 5. Market for Common Equity and Related Stockholder Matters



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



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



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



Item 7. Financial Statements



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



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



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



Item 8A. Controls and Procedures



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



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



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



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



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PART III



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



The information required by this item 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.



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 and Reports
on Form 8-K



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



|No.       |  | Description                                                                                                                                    
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|3.1 *     |  | Certificate of Incorporation of The Southern Banc Company, Inc.(as amended)                                                                    
|          | 
|3.2       |  | Bylaws of The Southern Banc Company, Inc. (as amended)                                                                                         
|          | 
|4.1 **    |  | Specimen Common Stock Certificate of The Southern Banc Company, Inc.                                                                           
|          | 
|4.2***    |  | Rights Agreement                                                                                                                               
|          | 
|10.1 **** |  | Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan Association of Gadsden and James B. Little Jr.
|          | 
|10.2 **** |  | First Federal Savings and Loan Association of Gadsden Supplemental Executive Retirement Agreement                                              



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|            | 
|----------- | 
|10.3 *****  | 
|            | 
|10.4 *****  | 
|            | 
|10.5 ****** | 
|            | 
|10.6 ****** | 
|            | 
|13          | 
|            | 
|21          | 
|            | 
|23          | 
|            | 
|31          | 
|            | 
|32          | 

---

|* |  | 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.



Item 14. Principal Accountant Fees and Services



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 29, 2003 |  | By: |  | /s/ Gates Little               
|                         |  |     |  |                                



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



|By:                         |  | /s/ Gates Little                                                                                                                  |  | By: |  | /s/ Thomas F. Dowling                               
|--------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | --- |  | ----------------------------------------------------
|                            |  | Gates Little Chairman of the Board, President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer) |  |     |  | Thomas F. Dowling Director                          
|                            |  | Date:    September 29, 2003                                                                                                      
|                            |  |                                                                                                                                  
|Date:    September 29, 2003 |  |                                                                                                                                  
|                            |  |                                                                                                                                   | 
|By:                         |  | /s/ Craig G. Cantrell                                                                                                             |  | By: |  | /s/ James B. Little III                             
|                            |  | Craig G. Cantrell Director                                                                                                        |  |     |  | James B. Little III Director                        
|Date:    September 29, 2003 |  | Date:    September 29, 2003                                                                                                      
|                            |  |                                                                                                                                   | 
|By:                         |  | /s/ Grady Gillam                                                                                                                  |  | By: |  | /s/ James B. Little, Jr.                            
|                            |  | Grady Gillam Director                                                                                                             |  |     |  | James B. Little, Jr. Investment Officer and Director
|Date:    September 29, 2003 |  | Date:    September 29, 2003                                                                                                      
|                            |  |                                                                                                                                   | 
|By:                         |  | /s/ Rex G. Keeling, Jr.                                                                                                           |  | By: |  | /s/ Fred Taylor                                     
|                            |  | Rex G. Keeling, Jr. Director                                                                                                      |  |     |  | Fred Taylor Director                                
|Date:    September 29, 2003 |  | Date:    September 29, 2003                                                                                                      



32