Exhibit 13



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2005



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



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THE SOUTHERN BANC COMPANY, INC.



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Dear Fellow Shareholders,



Once again it is my privilege to report the results of our latest fiscal year. In 2005, we fought to maintain our interest rate margin while offering our
customers value and service. As short-term rates on deposits increased and long-term rates on loans did not, our business did not create the profits that we would have hoped. However, due to a lucky turn of events, an investment in our data
processing service bureau created a large windfall. Because of this good fortune, our results are better than we deserve.



It is not our practice to comment on future results, but we do not expect to be so fortunate next year and will wait out this painful but necessary shift
in monetary policy. We continue to invest in the future of the company and look to long-term results rather than managing for the next quarter. We invest only where we think it prudent and spend on those services which add value to your company.
This policy, combined with an effort to reduce costs, should provide us with years of solid returns.



Please call me with any questions or comments and thank you again for your support of the company.



Sincerely,





Gates Little

President and Chairman

The Southern Banc Company, Inc.



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THE SOUTHERN BANC COMPANY, INC.



The Southern Banc Company, Inc. (the Company) was incorporated at the direction of management of The Southern
Bank Company, formerly First Federal Savings and Loan Association of Gadsden, Alabama (the Bank), for the purpose of serving as the holding company of the Bank upon the acquisition of all of the capital stock issued by the Bank upon its
conversion from mutual to stock form in 1995. The Company is classified as a unitary savings institution holding company and is subject to regulation by the Office of Thrift Supervision (OTS). At June 30, 2005, the Company had total
consolidated assets of $104.8 million, deposits of $81.7 million and stockholders equity of $16.7 million, or 15.9% of total assets.



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



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



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



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MARKET FOR COMMON STOCK

AND RELATED STOCKHOLDER MATTERS



At June 30, 2005, there were 859,660 shares of the Common Stock outstanding and approximately 216 stockholders of record. This total does not reflect the number of persons or entities who hold Common Stock in
nominee or street name through various brokerage firms.



In January 2004, The Southern Banc Company, Inc. announced that its application to voluntarily delist its Common Stock from trading on the American Stock Exchange had been approved by the Securities and Exchange Commission
(SEC). In approving this action, the Companys Board of Directors determined that it was in the best interests of the Company and its stockholders to delist. The Board considered several factors, including the following:
(a) the limited number of stockholders of record, (b) the costs associated with maintaining the Companys status as a listed company, (c) the limited volume of trading of the shares, and (d) no analysts currently covering
the Company and its shares. The Board of Directors determined that the costs of remaining a listed company outweighed the benefits. Due to the Companys small number of stockholders and limited trading volume, the Company did not enjoy many of
the traditional benefits of being an exchange-listed company. The cost reductions associated with delisting are expected to make the Company more profitable and bring more long-term value to its stockholders.



The Companys common stock trades in the over-the-counter market on the
OTC Bulletin Board®(OTCBB) under the symbol SRNN. The following companies
have agreed to make a market in the common stock as long as the volume of trading and certain other market making considerations justify such activity- Sterne, Agee & Leach, Inc., Crown Financial Group, Inc., Hill Thompson Magid &
Co., Inc., Monroe Securities, Inc., and Knight Equity Markets, L.P.



Since delisting, the Board of Directors has considered terminating the Companys annual, quarterly and other periodic reports to the SEC. The Company will continue to submit these reports until a final determination is made.



The payment of dividends on the Common Stock is subject to
determination and declaration by the Board of Directors of the Company. The Board of Directors has adopted a policy of paying quarterly cash dividends on the Common Stock. In addition, from time to time, the Board of Directors may pay special cash
dividends in addition to, or in lieu of, regular cash dividends. The payment of future dividends will be subject to the requirements of applicable law and the determination by the Board of Directors of the Company that the net income, capital and
financial condition of the Company and the Bank, thrift industry trends and general economic conditions, justify the payment of dividends. There can be no assurance that future dividends will be paid. The Companys principal source of funds for
dividend payments is dividends from the Bank. See Note 11 of Notes to Consolidated Financial Statements.



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



|                |  |                 |       |                     |   |       |  |   |      
|--------------- |  | --------------- | ----- | ------------------- | - | ----- |  | - | -----
|                |  | Price Per Share |       | Dividends Per Share
|                |  | High            |       | Low                 |  
|Fiscal 2004     |  |                 |       |                     |   |       |  |   |      
|First Quarter   |  | $               | 19.00 |                     | $ | 15.20 |  | $ | .0875
|Second Quarter  |  | $               | 16.99 |                     | $ | 15.89 |  | $ | .0875
|Third Quarter*  |  | $               | 16.25 |                     | $ | 15.53 |  | $ | .0875
|Fourth Quarter* |  | $               | 17.50 |                     | $ | 16.00 |  | $ | .0875
|                |  |                 |      
|Fiscal 2005     |  |                 |       |                     |   |       |  |   |      
|First Quarter*  |  | $               | 17.75 |                     | $ | 16.75 |  | $ | .0875
|Second Quarter* |  | $               | 17.60 |                     | $ | 17.00 |  | $ | .0875
|Third Quarter*  |  | $               | 17.00 |                     | $ | 15.75 |  | $ | .0875
|Fourth Quarter* |  | $               | 18.00 |                     | $ | 15.10 |  | $ | .0875

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|* | On January 8, 2004, the Company voluntarily delisted its Common Stock from trading on the American Stock Exchange. Since that date, the Common Stock trades in the OTCBB.
Over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not reflect actual transactions.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA



|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|                                                    |  | Year Ended June 30,                   |        
|                                                    |  | 2005                                  |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                    |  | (In thousands, except per share data) |        
|INCOME STATEMENT DATA                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Interest income                                     |  | $                                     | 4,967   |   |      | $ | 5,007   |      |  | $ | 5,890   |   |  | $    | 6,299   |   |  | $ | 6,812  |  
|Interest expense                                    |  |                                       | 2,236   |   |      |   | 2,119   |      |  |   | 2,898   |   |  |      | 3,566   |   |  |   | 4,345  |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net interest income                                 |  |                                       | 2,731   |   |      |   | 2,888   |      |  |   | 2,992   |   |  |      | 2,733   |   |  |   | 2,467  |  
|Provision for loan losses                           |  |                                       | 15      |   |      |   | 12      |      |  |   | 13      |   |  |      | 27      |   |  |   | 30     |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net interest income after provision for loan losses |  |                                       | 2,716   |   |      |   | 2,876   |      |  |   | 2,979   |   |  |      | 2,706   |   |  |   | 2,437  |  
|Non-interest income                                 |  |                                       | 536     |   |      |   | 235     |      |  |   | 524     |   |  |      | 183     |   |  |   | 200    |  
|Non-interest expense                                |  |                                       | 2,209   |   |      |   | 2,153   |      |  |   | 2,013   |   |  |      | 1,853   |   |  |   | 1,892  |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Income before provision for income taxes            |  |                                       | 1,043   |   |      |   | 958     |      |  |   | 1,490   |   |  |      | 1,036   |   |  |   | 745    |  
|Provision for income taxes                          |  |                                       | 393     |   |      |   | 381     |      |  |   | 596     |   |  |      | 403     |   |  |   | 278    |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net income                                          |  | $                                     | 650     |   |      | $ | 577     |      |  | $ | 894     |   |  | $    | 633     |   |  | $ | 467    |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Earnings per share                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Basic                                               |  | $                                     | 0.78    |   |      | $ | 0.66    |      |  | $ | 1.02    |   |  | $    | 0.69    |   |  | $ | 0.53   |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Diluted                                             |  | $                                     | 0.76    |   |      | $ | 0.63    |      |  | $ | 1.00    |   |  | $    | 0.69    |   |  | $ | 0.53   |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|                                                    | 
|                                                    |  | Year Ended June 30,                   |        
|                                                    |  | 2005                                  |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                    |  | (In thousands)                        |        
|BALANCE SHEET DATA                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Total assets                                        |  | $                                     | 104,811 |   |      | $ | 106,353 |      |  | $ | 111,701 |   |  | $    | 110,002 |   |  | $ | 97,164 |  
|Loans receivable, net                               |  |                                       | 35,531  |   |      |   | 37,477  |      |  |   | 38,918  |   |  |      | 34,515  |   |  |   | 37,587 |  
|Securities:                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Available for sale                                  |  |                                       | 59,403  |   |      |   | 56,717  |      |  |   | 53,723  |   |  |      | 53,753  |   |  |   | 35,635 |  
|Held to maturity                                    |  |                                       | 3,660   |   |      |   | 4,194   |      |  |   | 7,215   |   |  |      | 11,527  |   |  |   | 17,513 |  
|Federal Home Loan Bank stock                        |  |                                       | 509     |   |      |   | 792     |      |  |   | 886     |   |  |      | 1,449   |   |  |   | 724    |  
|Deposits                                            |  |                                       | 81,737  |   |      |   | 82,005  |      |  |   | 84,357  |   |  |      | 81,557  |   |  |   | 79,843 |  
|Federal Home Loan Bank advances.                    |  |                                       | 6,083   |   |      |   | 6,917   |      |  |   | 7,750   |   |  |      | 9,583   |   |  |   | 0      |  
|Stockholders equity                                |  |                                       | 16,703  |   |      |   | 17,253  |      |  |   | 18,866  |   |  |      | 18,344  |   |  |   | 17,046 |  
|                                                    | 
|                                                    |  | Year Ended June 30,                   |        
|                                                    |  | 2005                                  |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|KEY OPERATING DATA                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Return on average assets                            |  |                                       | 0.61    | % |      |   | 0.54    | %    |  |   | 0.80    | % |  |      | 0.58    | % |  |   | 0.48   | %
|Return on average equity                            |  |                                       | 3.73    | % |      |   | 3.25    | %    |  |   | 4.68    | % |  |      | 3.48    | % |  |   | 2.74   | %
|Average equity to average assets                    |  |                                       | 16.27   | % |      |   | 16.67   | %    |  |   | 17.02   | % |  |      | 16.62   | % |  |   | 17.59  | %
|Dividend payout ratio                               |  |                                       | 43.75   | % |      |   | 53.03   | %    |  |   | 31.31   | % |  |      | 48.61   | % |  |   | 66.04  | %
|Number of offices                                   |  |                                       | 4       |   |      |   | 4       |      |  |   | 4       |   |  |      | 4       |   |  |   | 4      |  



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MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General



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



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



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



Comparison of Financial
Condition at June 30, 2005 and June 30, 2004



Total assets decreased approximately $1.5 million, or 1.5%, from $106.4 million at June 30, 2004 to $104.8 million at June 30, 2005. During the year ended June 30, 2005, net loans decreased approximately $2.0 million, or
5.2%, from $37.5 million to $35.5 million. The decrease in net loans was primarily attributable to loan repayments and a decrease in origination of new loans. For the period ended June 30, 2005, securities available for sale increased
approximately $2.7 million, or 4.7%, from $56.7 million to $59.4 million. During the period ended June 30, 2005, securities held to maturity decreased approximately $534,000, or 12.7%, from $4.2 million to $3.7 million.



Cash and cash equivalents decreased approximately $1.6 million, or 28.4%,
from $5.7 million at June 30, 2004 to $4.1 million at June 30, 2005. This decrease was primarily attributable to purchases of securities available for sale and decreases in deposits and FHLB advances.



Accrued interest and dividends receivable increased approximately $1,000, or
0.3%, from $440,000 at June 30, 2004 to $441,000 at June 30, 2005. This increase was primarily attributable to an increase in interest receivable on securities available for sale. Prepaid expenses and other assets increased approximately
$38,000, or 7.3%, from $514,000 at June 30, 2004 to $552,000 at June 30, 2005.



Total deposits decreased approximately $269,000, or 0.3%, from $82.0 million at June 30, 2004 to $81.7 million at June 30, 2005. This decrease was primarily attributable to the competitive interest rate
market. FHLB advances decreased approximately $833,000, or 12.1%, from $6.9 million at June 30, 2004 to $6.1 million at June 30, 2005. The decrease in FHLB Advances was attributable to repayments based on the fixed payment schedule. Other
liabilities during the fiscal year ended June 30, 2005 increased approximately $110,000, or 61.2%, from $179,000 at June 30, 2004 to $289,000 at June 30, 2005. The increase in other liabilities was primarily attributable to an
increase in accrued expenses for federal and state income taxes.



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Total equity decreased approximately $550,000, or 3.2%, from $17.3 million at June 30, 2004 to $16.7
million at June 30, 2005. This decrease was primarily attributable to an increase in the unrealized losses on securities available for sale, payment of cash dividends on common stock, and stock repurchases, offset by the amortization of
unearned compensation and an increase in retained earnings resulting from current year earnings of $650,000.



Comparison of Results of Operations for the Fiscal Years Ended June 30, 2005 and 2004



The Company reported net income for the fiscal years ended June 30, 2005 and 2004 of approximately $672,000 and $577,000, respectively. The increase
in net income for the fiscal year ended June 30, 2005 was primarily attributable to an increase in non-interest income of approximately $301,000, or 128.2%, offset in part by a decrease in the net interest margin of approximately $160,000 and
an increase in non-interest expense of approximately $56,000. The increase in non-interest income was primarily attributable to a gain on the sale of stock owned by the Company in its data processing service bureau. The decrease in the net interest
margin was primarily attributable to a decrease in interest income of approximately $40,000, primarily interest and dividends on securities, and an increase in interest on deposits of approximately $116,000, during a period of rising interest rates.
The increase in non-interest expense was primarily due to an increase in office building and equipment expense related to an upgrade of the teller platform and operating system.



Net Interest Income. Net interest income decreased approximately $156,000, or 5.4%, from $2.9 million at
June 30, 2004 to $2.7 million at June 30, 2005. This decrease was primarily attributable to decreases in interest and fees on loans and securities held to maturity of approximately $202,000, or 9.0% and $128,000, or 32.6% respectively.
Total interest income decreased approximately $40,000, or 0.8%, for the fiscal year ended June 30, 2005. The decrease in interest income was primarily due to the decrease in average yields on interest earning assets.Total interest
expense increased approximately $116,000, or 5.5%, for the fiscal year ended June 30, 2005 compared with the fiscal year ended June 30, 2004. The increase in total interest expense was primarily attributable to an increase in the average
cost of interest-bearing liabilities during a period of rising interest rates.



Provision for Loan Losses. During the fiscal year ended June 30, 2005, the provision for loan losses increased approximately $4,000, or 29.3%, from $11,000 at June 30, 2004 to approximately $15,000 at
June 30, 2005. The allowance for loan losses is based on managements evaluation of possible loan losses inherent in the Banks loan portfolio. Management considers, among other factors, past loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other relevant factors.



Non-Interest Income. Non-interest income increased approximately $301,000, or 128.2%, for the fiscal year ended June 30, 2005, from $235,000 for the year ended June 30, 2004 to $536,000. The increase
in non-interest income was primarily attributable to a gain on the sale of stock owned by the Company in its data processing service bureau of approximately $329,000 offset in part by a decrease in gains on available for sale securities of
approximately $29,000.



Non-Interest Expense.
Non-interest expense increased approximately $56,000, or 2.6%, for the fiscal year ended June 30, 2005. This increase was primarily attributable to an increase in salaries and employee benefits of approximately $28,000, or 2.3%, an increase in
office building and equipment expenses of approximately $97,000, or 119.3%, and an increase in data processing expense of approximately $24,000, or 11.23%, offset by a decrease in professional service expense of approximately $38,000 or 16.0%, and a
decrease in other operating expenses of approximately $54,000, or 14.4%. The increases were primarily attributable to purchases of computer equipment and services associated with the upgrade of the banks core processing system. The decreases were
primarily attributable to reduced expenses related to employee benefits, legal fees and other miscellaneous one time fees associated with the delisting of the Companys common stock.



Provision for Income Taxes. During the fiscal year ended June 30, 2005, the provision for income tax expense
increased approximately $13,000, or 3.4%. This increase was primarily attributable to an increase in taxable net income for the year ended June 30, 2005, as compared to the year ended June 30, 2004. Income tax expense was approximately
$394,000 for the year ended June 30, 2005, compared to approximately $381,000 for the year ended June 30, 2004, resulting in an effective tax rate of 38% and 40%, respectively. The statutory federal tax rate in both years was 34%. See Note
8 of Notes to Consolidated Financial Statements for reconciliation between statutory tax rate and effective tax rate.



5



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Asset/Liability Management



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



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



The OTS requires the Bank to measure its interest rate risk by computing
estimated changes in the net present value (NPV) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. These computations estimate the effect on the
Banks NPV of sudden and sustained 100 basis point to 400 basis point increases and decreases in market interest rates. The Banks Board of Directors has adopted an interest rate risk policy which establishes maximum increases and
decreases in the Banks estimated NPV of 25%, 50% and 77% and 25%, 35% and 50% in the event of 100, 200 and 300 basis point increases and decreases in market interest rates, respectively. At June 30, 2005, based on the most recent
information provided by the OTS, management estimated that the Banks NPV would decrease 11%, 22% and 33% and increase 7% and 9% in the event of 100, 200 and 300 basis point increases and a 100 and 200 basis point decreases in market interest
rates, respectively. These calculations indicate that the Banks net portfolio value could be adversely affected by increases in interest rates. Changes in interest rates also may affect the Banks net interest income, with increases in
rates expected to decrease income and decreases in rates expected to increase income, as the Banks interest-bearing liabilities would be expected to mature or reprice more quickly than the Banks interest-earning assets.



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



6



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



Average Balance, Interest and Average Yields and Rates



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



The table also presents information for the periods indicated and at
June 30, 2005 with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or interest rate spread, which savings
institutions have traditionally used as an indicator of profitability. Another indicator of an institutions net interest income is its net yield on interest-earning assets, which is its net interest income divided by the average
balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate net interest income.



|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------- | -------- | ---- | ------------------- |  | ------ | -------------- |  | -------- | ------- | ------------------- | - | ----- |  | ------ | -
|                                                                                 |  | Years Ended June 30,   |        
|                                                                                 |  | 2005                   |         |          | 2004 |                    
|                                                                                 |  | AverageBalance         |         | Interest |      | Average Yield/ Cost |  |        | AverageBalance |  | Interest |         | Average Yield/ Cost |  
|                                                                                 |  | (Dollars in thousands) |        
|Interest-earning assets:                                                         |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Loans receivable                                                                 |  | $                      | 35,868  |          | $    | 2,042               |  | 5.69   | %              |  | $        | 37,544  |                     | $ | 2,243 |  | 5.97   | %
|Securities                                                                       |  |                        | 63,233  |          |      | 2,865               |  | 4.53   |                |  |          | 60,136  |                     |   | 2,721 |  | 4.52   |  
|Other interest-earning assets                                                    |  |                        | 2,598   |          |      | 60                  |  | 2.31   |                |  |          | 4,296   |                     |   | 43    |  | 1.00   |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total interest-earning assets                                                    |  |                        | 101,699 |          |      | 4,967               |  | 4.89   |                |  |          | 101,976 |                     |   | 5,007 |  | 4.91   |  
|Non-interest-earning assets                                                      |  |                        | 5,058   |          |      |                     |  |        |                |  |          | 4,238   |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total assets                                                                     |  | $                      | 106,757 |          |      |                     |  |        |                |  | $        | 106,214 |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Interest-bearing liabilities:                                                    |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Deposits                                                                         |  | $                      | 82,273  |          |      | 1,937               |  | 2.36   |                |  | $        | 81,079  |                     |   | 1,780 |  | 2.20   |  
|FHLB advances                                                                    |  |                        | 6,555   |          |      | 299                 |  | 4.56   |                |  |          | 6,913   |                     |   | 340   |  | 4.92   |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total interest-bearing liabilities                                               |  |                        | 88,828  |          |      | 2,236               |  | 2.52   |                |  |          | 87,992  |                     |   | 2,120 |  | 2.41   |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Non-interest-bearing liabilities                                                 |  |                        | 521     |          |      |                     |  |        |                |  |          | 437     |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total liabilities                                                                |  |                        | 89,349  |          |      |                     |  |        |                |  |          | 88,429  |                     |   |       |  |        |  
|Stockholders Equity                                                             |  |                        | 17,408  |          |      |                     |  |        |                |  |          | 17,785  |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total liabilities and equity                                                     |  | $                      | 106,757 |          |      |                     |  |        |                |  | $        | 106,214 |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Net interest income                                                              |  |                        |         |          | $    | 2,731               |  |        |                |  |          |         |                     | $ | 2,887 |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Interest rate spread                                                             |  |                        |         |          |      |                     |  | 2.37   | %              |  |          |         |                     |   |       |  | 2.50   | %
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Net interest margin                                                              |  |                        |         |          |      |                     |  | 2.69   | %              |  |          |         |                     |   |       |  | 2.83   | %
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                        |         |          |      |                     |  | 114.49 | %              |  |          |         |                     |   |       |  | 115.89 | %
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  



7



---

Rate/Volume Analysis



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



|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|---------------------------------- |  | -------------------------- | ---- | - | ------ | - | ---- | ----- |  | - | ---- | -
|                                   |  | Year Ended June 30,        |     
|                                   |  | 2005 vs. 2004              |     
|                                   |  | Increase (Decrease) Due to |     
|                                   |  | Rate                       |      |   | Volume |   |      | Total | 
|                                   |  | (In thousands)             |     
|Interest income                    |  |                            |      |   |        |   |      |       |  |   |      |  
|Loans                              |  | $                          | (101 | ) |        | $ | (100 | )     |  | $ | (201 | )
|Securities                         |  |                            | 4    |   |        |   | 140  |       |  |   | 144  |  
|Other interest-earning assets      |  |                            | 71   |   |        |   | (54  | )     |  |   | 17   |  
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Total interest-earning assets      |  |                            | (26  | ) |        |   | (14  | )     |  |   | (40  | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Interest expense                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Deposits                           |  |                            | 131  |   |        |   | 26   |       |  |   | 157  |  
|Interest on FHLB advances          |  |                            | (23  | ) |        |   | (18  | )     |  |   | (41  | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Total interest-bearing liabilities |  |                            | 108  |   |        |   | 8    |       |  |   | 116  |  
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Change in net interest income      |  | $                          | (134 | ) |        | $ | (22  | )     |  | $ | (156 | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  



Liquidity and Capital Resources



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



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



The Bank
continues to maintain a high level of liquid assets in order to meet its funding requirements. At June 30, 2005, the Bank had approximately $4.1 million in cash on hand and interest-bearing deposits in other banks, which represented 3.9% of
total assets. The Banks average liquidity ratio well exceeded the required minimum at and during the fiscal year ended June 30, 2005. At June 30, 2005, the Banks level of liquid assets, as measured for regulatory compliance
purposes, was $13.9 million, or 16.7% of total liquid assets of the Bank.



At June 30, 2005, the Bank had $15.8 million of total equity, or 15.0% of total assets. The Bank continued to exceed its regulatory capital requirement ratios at June 30, 2005. Tangible capital and core capital were
each $15.8 million, which represented 14.8% of adjusted total assets, and risk-based capital was $15.9 million, which represented 43.1% of total risk-weighted assets at June 30, 2005. Such amounts exceeded the respective minimum required ratios
of 1.5%, 4.0% and 8.0% by 13.4%, 10.9% and 35.1%, respectively. At June 30, 2005, the Bank continued to meet the definition of a well-capitalized institution, the highest of the five categories under the prompt corrective action
standards adopted by the OTS. See Note 11 of Notes to Consolidated Financial Statements.



8



---

Contractual Obligations



The following table sets forth the contractual obligations of the Bank as of June 30, 2005.



|                           |  |                 |        |                            |   |                             |  |                |        |       |   |    |  |   |       
|-------------------------- |  | --------------- | ------ | -------------------------- | - | --------------------------- |  | -------------- | ------ | ----- | - | -- |  | - | ------
|                           |  | One Yearor Less |        | Over OnethroughThree Years |   | Over ThreethroughFive Years |  | OverFive Years |        | Total
|                           |  | (In thousands)  |        |                           
|FHLB advances(1)           |  | $               | 2,833  |                            | $ | 3,250                       |  | $              | 0      |       | $ | 0  |  | $ | 6,083 
|Operating leases(2)        |  |                 | 4      |                            |   | 0                           |  |                | 0      |       |   | 0  |  |   | 4     
|Certificates of deposit(3) |  |                 | 29,312 |                            |   | 15,757                      |  |                | 14,731 |       |   | 49 |  |   | 59,849
|                           |  |                 |        |                            |   |                             |  |                |        |       |   |    |  |   |       
|Total                      |  | $               | 31,316 |                            | $ | 19,840                      |  | $              | 14,731 |       | $ | 49 |  | $ | 65,936
|                           |  |                 |        |                            |   |                             |  |                |        |       |   |    |  |   |       

---

|(1) | See Note 9 of Notes to Consolidated Financial Statements.
|--- | ---------------------------------------------------------

|(2) | See Note 10 of Notes to Consolidated Financial Statements.
|--- | ----------------------------------------------------------

|(3) | See Note 7 of Notes to Consolidated Financial Statements.
|--- | ---------------------------------------------------------



Off-Balance Sheet Arrangements



The following table sets forth off-balance sheet arrangements of the Bank as of June 30, 2005.



|                                           |  |                 |       |                            |   |                             |  |                |       |       |   |   |  |   |      
|------------------------------------------ |  | --------------- | ----- | -------------------------- | - | --------------------------- |  | -------------- | ----- | ----- | - | - |  | - | -----
|                                           |  | One Yearor Less |       | Over OnethroughThree Years |   | Over ThreethroughFive Years |  | OverFive Years |       | Total
|                                           |  | (In thousands) 
|Lines of credit  consumer                 |  | $               | 0     |                            | $ | 0                           |  | $              | 1,171 |       | $ | 0 |  | $ | 1,171
|Lines of creditcommercial                 |  |                 | 197   |                            |   | 0                           |  |                | 0     |       |   | 0 |  |   | 197  
|Commitments to originate real estate loans |  |                 | 972   |                            |   | 0                           |  |                | 0     |       |   | 0 |  |   | 972  
|Overdraft protection                       |  |                 | 6     |                            |   | 0                           |  |                | 0     |       |   | 0 |  |   | 6    
|                                           |  |                 |       |                            |   |                             |  |                |       |       |   |   |  |   |      
|Total                                      |  | $               | 1,175 |                            | $ | 0                           |  | $              | 1,171 |       | $ | 0 |  | $ | 2,346
|                                           |  |                 |       |                            |   |                             |  |                |       |       |   |   |  |   |      



In the normal course
of business, the Bank is a party to activities that contain credit, market and operational risk that are not reflected in the Companys Consolidated Financial Statements. The Bank provides customers with off-balance sheet credit support through
loan commitments and lines of credit. Many of the commitments expire unused or are only partially used. Therefore, the total amount of commitments does not necessarily represent future cost requirements. The Company anticipates that the Bank will
continue to have sufficient funds together with available borrowings to satisfy its commitments. At June 30, 2005, the Bank had approximately $972,000 in outstanding commitments to originate residential real estate. See Note 10(b) of Notes to
Consolidated Financial Statements.



Critical Accounting Policy



The accounting principles followed by the Company and the
methods of applying principles conform with accounting principles generally accepted in the United States and with general practices followed by the banking industry. The most critical accounting policy relates to the allowance for loan losses.



The allowance for loan losses is maintained at a level which
management considers to be adequate to absorb losses inherent in the loan portfolio. Managements estimation of the amount of the allowance is based on a continuing evaluation of the loan portfolio and includes such factors as economic
conditions, analysis of individual loans, overall portfolio characteristics, delinquencies and balance of any impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans).



Management reviews the adequacy of the allowance for loan losses on a
continuous basis by assessing the quality of the loan portfolio and adjusting the allowance when appropriate. Managements evaluation of certain specifically identified loans includes a review of the financial condition and capacity of the
borrower, the value of the collateral, current economic trends, historical losses, workout and collective arrangements, and possible



9



---

concentrations of credit. The loan review process also includes a collective evaluation of credit quality within the mortgage and installment loan
portfolios. In establishing the allowance, loss percentages are applied to groups of loans with similar risk characteristics. These loss percentages are determined by historical experience, portfolio mix, regulatory influence, and other economic
factors. Each month this review is quantified in a report to management, which uses it to determine whether an appropriate allowance is being maintained. This report is then submitted to the Board of Directors monthly.



Changes in the allowance can result from changes in economic events or
changes in the creditworthiness of the borrowers. The effect of these changes is reflected when known. Though management believes the allowance for loan losses to be adequate, ultimate losses may vary from estimations. Specific allowances for
impaired loans are generally based on comparisons of the carrying values of the loans to the estimated fair value of the collateral.



Impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans) are measured based on the
present value of expected future cash flows discounted at each loans original effective interest rate. As a practical expedient, impairment is measured based on the loans observable market price or the fair value of the collateral if the
loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment of the loan, the impairment is recorded through a valuation allowance.



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



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment. The Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.This Statement supersedes APB Option
No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. It
also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. The
Statement focuses primarily on accounting for transactions in which an entity obtains employee service in share-based payment transactions. The Statement requires a public entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award- the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
The Statement eliminates the alternative to use APB Opinion 25s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in
recognition of no compensation cost. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The
Statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, and for public entities that file as small business
issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company currently accounts for its stock options under APB No. 25, and is currently evaluating the impact the adoption of
this statement will have on its statement of condition and results of operations.



Forward-Looking Statements



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



10



---

Change in Independent Registered Public Accounting Firm



On December 3, 2004, the Audit Committee dismissed the Companys
independent registered public accounting firm, KPMG LLP (KPMG), and appointed Barfield, Murphy, Shank & Smith, P.C. (BMSS) as its new independent registered public accounting firm. This determination followed the
Companys decision to seek proposals from independent accountants to audit the Companys financial statements for the fiscal year ended June 30, 2005. The decision not to renew the engagement of KPMG and to retain BMSS was approved by
the Audit Committee. KPMGs report on the Companys 2004 financial statements dated August 3, 2004, was issued in conjunction with the filing of the Companys Annual Report on Form 10-KSB for the fiscal year ended June 30,
2004.



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



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



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



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



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



11



---

THE SOUTHERN BANC COMPANY, INC.



Consolidated Financial Statements



June 30, 2005 and 2004



(With Independent Auditors Report Thereon)



---

Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholders

of The Southern Banc Company, Inc.



We have audited the accompanying consolidated statement of financial condition of The Southern Banc Company, Inc. (a Delaware corporation) and subsidiaries as of
June 30, 2005, and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of The Southern Banc Company, Inc. as of June 30, 2004 were audited by other independent accountants,
whose report dated August 3, 2004 expressed an unqualified opinion on those consolidated financial statements.



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



In our opinion, the 2005 consolidated financial
statements referred to above present fairly, in all material respects, the financial position of The Southern Banc Company, Inc. and subsidiaries as of June 30, 2005, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United States of America.



LOGO



Birmingham, Alabama

August 12, 2005



---

Report of Independent Registered Public Accounting Firm



The Board of Directors

The Southern Banc Company, Inc.:



We have audited the accompanying consolidated statement of financial condition of The Southern Banc Company, Inc. (a Delaware corporation) and subsidiaries as of
June 30, 2004, and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.



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



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of The Southern Banc Company, Inc. and subsidiaries as of June 30, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.



/s/ KPMG LLP



Birmingham, Alabama

August 3, 2004



---

THE SOUTHERN BANC COMPANY, INC.



Consolidated Statements of Financial Condition



June 30, 2005 and 2004



|                                                                                                               |  |      |             |   |      |             |  
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | ----------- | -
|                                                                                                               |  | 2005 |             |   | 2004 |            
|Assets                                                                                                         |  |      |             |   |      |             |  
|Cash and cash equivalents:                                                                                     |  |      |             |   |      |             |  
|Cash on hand and in other banks                                                                                |  | $    | 2,364,078   |   |      | 3,169,215   |  
|Interestbearing deposits in other banks                                                                       |  |      | 1,742,422   |   |      | 2,564,790   |  
|                                                                                                               |  |      |             |   |      |             |  
|Total cash and cash equivalents                                                                                |  |      | 4,106,500   |   |      | 5,734,005   |  
|                                                                                                               |  |     
|Securities available for sale, at fair value                                                                   |  |      | 59,403,333  |   |      | 56,717,031  |  
|Securities held to maturity (fair value of $3,788,749 and $4,474,510, respectively)                            |  |      | 3,660,129   |   |      | 4,194,141   |  
|Federal Home Loan Bank stock                                                                                   |  |      | 508,900     |   |      | 792,300     |  
|Loans receivable, net of allowance for loan losses of $135,472 and $144,298 , respectively                     |  |      | 35,530,975  |   |      | 37,476,587  |  
|Accrued interest and dividends receivable                                                                      |  |      | 440,952     |   |      | 439,616     |  
|Premises and equipment, net                                                                                    |  |      | 608,840     |   |      | 485,565     |  
|Prepaid expenses and other assets                                                                              |  |      | 551,744     |   |      | 514,140     |  
|                                                                                                               |  |      |             |   |      |             |  
|Total assets                                                                                                   |  | $    | 104,811,373 |   |      | 106,353,385 |  
|                                                                                                               |  |      |             |   |      |             |  
|                                                                                                               |  |     
|Liabilities and Stockholders Equity                                                                           |  |      |             |   |      |             |  
|                                                                                                               |  |     
|Deposits                                                                                                       |  | $    | 81,736,517  |   |      | 82,005,081  |  
|Federal Home Loan Bank advances                                                                                |  |      | 6,083,334   |   |      | 6,916,667   |  
|Other liabilities                                                                                              |  |      | 288,579     |   |      | 178,970     |  
|                                                                                                               |  |      |             |   |      |             |  
|Total liabilities                                                                                              |  |      | 88,108,430  |   |      | 89,100,718  |  
|                                                                                                               |  |      |             |   |      |             |  
|Commitments and contingencies                                                                                  |  |      |             |   |      |             |  
|                                                                                                               |  |     
|Stockholders equity:                                                                                          |  |      |             |   |      |             |  
|Preferred stock, par value $0.01 per share. Authorized 500,000 shares; no shares issued and outstanding        |  |      |            |   |      |            |  
|Common stock, par value $0.01 per share. Authorized 3,500,000 shares; issued 1,454,750 shares in 2005 and 2004 |  |      | 14,548      |   |      | 14,548      |  
|Additional paid-in capital                                                                                     |  |      | 13,997,847  |   |      | 13,910,384  |  
|Retained earnings                                                                                              |  |      | 11,696,782  |   |      | 11,340,830  |  
|Unearned compensation                                                                                          |  |      |            |   |      | (70,715     | )
|Shares held in trust, at cost, 49,355 and 34,799 shares in 2005 and 2004, respectively                         |  |      | (868,350    | ) |      | (495,412    | )
|Treasury stock, at cost, 595,090 and 562,452 shares in 2005 and 2004, respectively                             |  |      | (7,923,346  | ) |      | (7,346,782  | )
|Accumulated other comprehensive loss                                                                           |  |      | (214,538    | ) |      | (100,186    | )
|                                                                                                               |  |      |             |   |      |             |  
|Total stockholders equity                                                                                     |  |      | 16,702,943  |   |      | 17,252,667  |  
|                                                                                                               |  |      |             |   |      |             |  
|Total liabilities and stockholders equity                                                                     |  | $    | 104,811,373 |   |      | 106,353,385 |  
|                                                                                                               |  |      |             |   |      |             |  



See accompanying notes to consolidated
financial statements.



---

THE SOUTHERN BANC COMPANY, INC.



Consolidated Statements of Income



Years ended June 30, 2005 and 2004



|                                                        |  |      |           |      |          
|------------------------------------------------------- |  | ---- | --------- | ---- | ---------
|                                                        |  | 2005 |           | 2004
|Interest income:                                        |  |      |           |      |          
|Interest and fees on loans                              |  | $    | 2,041,503 |      | 2,242,975
|Interest and dividends on securities available for sale |  |      | 2,601,573 |      | 2,329,473
|Interest and dividends on securities held to maturity   |  |      | 263,843   |      | 391,719  
|Other interest income                                   |  |      | 59,999    |      | 43,145   
|                                                        |  |      |           |      |          
|Total interest income                                   |  |      | 4,966,918 |      | 5,007,312
|                                                        |  |     
|Interest expense:                                       |  |      |           |      |          
|Interest on deposits                                    |  |      | 1,937,155 |      | 1,779,908
|Interest on borrowed funds                              |  |      | 298,534   |      | 339,687  
|                                                        |  |      |           |      |          
|Total interest expense                                  |  |      | 2,235,689 |      | 2,119,595
|                                                        |  |      |           |      |          
|Net interest income before provision for loan losses    |  |      | 2,731,229 |      | 2,887,717
|                                                        |  |     
|Provision for loan losses                               |  |      | 15,000    |      | 11,600   
|                                                        |  |      |           |      |          
|Net interest income after provision for loan losses     |  |      | 2,716,229 |      | 2,876,117
|                                                        |  |      |           |      |          
|Noninterest income:                                     |  |      |           |      |          
|Customer service fees                                   |  |      | 122,494   |      | 124,937  
|Gain on sale of available for sale securities           |  |      | 361,650   |      | 62,490   
|Other income                                            |  |      | 51,661    |      | 47,358   
|                                                        |  |      |           |      |          
|Total noninterest income                                |  |      | 535,805   |      | 234,785  
|                                                        |  |      |           |      |          
|Noninterest expense:                                    |  |      |           |      |          
|Salaries and employee benefits                          |  |      | 1,271,604 |      | 1,243,546
|Data processing expense                                 |  |      | 237,257   |      | 213,312  
|Professional service expense                            |  |      | 199,767   |      | 238,105  
|Office building and equipment expense                   |  |      | 177,861   |      | 81,103   
|Other expense                                           |  |      | 322,256   |      | 376,599  
|                                                        |  |      |           |      |          
|Total noninterest expense                               |  |      | 2,208,745 |      | 2,152,665
|                                                        |  |      |           |      |          
|Income before provision for income taxes                |  |      | 1,043,289 |      | 958,237  
|                                                        |  |     
|Provision for income taxes                              |  |      | 393,693   |      | 380,883  
|                                                        |  |      |           |      |          
|Net income                                              |  | $    | 649,596   |      | 577,354  
|                                                        |  |      |           |      |          
|Earnings per share:                                     |  |      |           |      |          
|Basic                                                   |  | $    | 0.78      |      | 0.66     
|Diluted                                                 |  |      | 0.76      |      | 0.63     
|                                                        |  |     
|Average shares outstanding  basic                      |  |      | 836,034   |      | 878,391  
|Average shares outstanding  diluted                    |  |      | 854,353   |      | 912,704  



See accompanying notes to consolidated
financial statements.



---

THE SOUTHERN BANC COMPANY, INC.



Consolidated Statements of Stockholders Equity



Years ended June 30, 2005 and 2004



|                                                                       |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       |            |  
|---------------------------------------------------------------------- |  | ----------- | ------ | ------------------------ | ---------- | ---------------- | ---------- | - | -------------------- | -------- | - | ------------------- | -------- | - | ------------- | ---------- | - | ------------------------------------------ | ---------- | - | ----- | ---------- | -
|                                                                       |  | Commonstock |        | Additionalpaid-incapital |            | Retainedearnings |            |   | Unearnedcompensation |          |   | Shares heldin trust |          |   | Treasurystock |            |   | Accumulatedothercomprehensiveincome (loss) |            |   | Total |           
|Balance, June 30, 2003                                                 |  | $           | 14,548 |                          | 13,818,230 |                  | 11,082,024 |   |                      | (156,495 | ) |                     | (852,141 | ) |               | (6,182,391 | ) |                                            | 1,142,003  |   |       | 18,865,778 |  
|Net income                                                             |  |             |       |                          |           |                  | 577,354    |   |                      |         |   |                     |         |   |               |           |   |                                            |           |   |       | 577,354    |  
|Change in unrealized loss on securities available for sale, net of tax |  |             |       |                          |           |                  |           |   |                      |         |   |                     |         |   |               |           |   |                                            | (1,242,189 | ) |       | (1,242,189 | )
|                                                                       |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       |            |  
|Comprehensive loss                                                     |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       | (664,835   | )
|Amortization of unearned compensation                                  |  |             |       |                          | 92,154     |                  |           |   |                      | 85,780   |   |                     |         |   |               |           |   |                                            |           |   |       | 177,934    |  
|Purchase of 69,200 shares of treasury stock                            |  |             |       |                          |           |                  |           |   |                      |         |   |                     |         |   |               | (1,164,391 | ) |                                            |           |   |       | (1,164,391 | )
|Stock Options exercised                                                |  |             |       |                          |           |                  |           |   |                      |         |   |                     | 356,729  |   |               |           |   |                                            |           |   |       | 356,729    |  
|Dividends paid ($0.35 per share)                                       |  |             |       |                          |           |                  | (318,548   | ) |                      |         |   |                     |         |   |               |           |   |                                            |           |   |       | (318,548   | )
|                                                                       |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       |            |  
|Balance, June 30, 2004                                                 |  |             | 14,548 |                          | 13,910,384 |                  | 11,340,830 |   |                      | (70,715  | ) |                     | (495,412 | ) |               | (7,346,782 | ) |                                            | (100,186   | ) |       | 17,252,667 |  
|Net income                                                             |  |             |       |                          |           |                  | 649,596    |   |                      |         |   |                     |         |   |               |           |   |                                            |           |   |       | 649,596    |  
|Change in unrealized loss on securities available for sale, net of tax |  |             |       |                          |           |                  |           |   |                      |         |   |                     |         |   |               |           |   |                                            | (114,352   | ) |       | (114,352   | )
|                                                                       |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       |            |  
|Comprehensive income                                                   |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       | 535,244    |  
|Amortization of unearned compensation                                  |  |             |       |                          | 87,463     |                  |           |   |                      | 70,715   |   |                     |         |   |               |           |   |                                            |           |   |       | 158,178    |  
|Purchase of 32,638 shares of treasury stock                            |  |             |       |                          |           |                  |           |   |                      |         |   |                     |         |   |               | (576,564   | ) |                                            |           |   |       | (576,564   | )
|Purchase of 49,073 shares of common stock to fund Trust                |  |             |       |                          |           |                  |           |   |                      |         |   |                     | (778,080 | ) |               |           |   |                                            |           |   |       | (778,080   | )
|Stock Options exercised                                                |  |             |       |                          |           |                  |           |   |                      |         |   |                     | 405,142  |   |               |           |   |                                            |           |   |       | 405,142    |  
|Dividends paid ($0.35 per share)                                       |  |             |       |                          |           |                  | (293,644   | ) |                      |         |   |                     |         |   |               |           |   |                                            |           |   |       | (293,644   | )
|                                                                       |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       |            |  
|Balance, June 30, 2005                                                 |  | $           | 14,548 |                          | 13,997,847 |                  | 11,696,782 |   |                      |         |   |                     | (868,350 | ) |               | (7,923,346 | ) |                                            | (214,538   | ) |       | 16,702,943 |  
|                                                                       |  |             |        |                          |            |                  |            |   |                      |          |   |                     |          |   |               |            |   |                                            |            |   |       |            |  



See accompanying notes to
consolidated financial statements.



---

THE SOUTHERN BANC COMPANY, INC.



Consolidated Statements of Cash Flows



Years ended June 30, 2005 and 2004



|                                                                                  |  |      |             |   |      |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | ----------- | -
|                                                                                  |  | 2005 |             |   | 2004 |            
|Cash flows from operating activities:                                             |  |      |             |   |      |             |  
|Net income                                                                        |  | $    | 649,596     |   |      | 577,354     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |             |  
|Depreciation                                                                      |  |      | 60,125      |   |      | 44,989      |  
|Amortization of premiums on securities, net                                       |  |      | 71,725      |   |      | 253,465     |  
|Amortization of intangible asset                                                  |  |      |            |   |      | 12,115      |  
|Amortization of unearned compensation                                             |  |      | 158,178     |   |      | 177,934     |  
|Provision for loan losses                                                         |  |      | 15,000      |   |      | 11,600      |  
|Deferred income tax provision                                                     |  |      | 15,888      |   |      | 1,230       |  
|Gain on loans held for sale                                                       |  |      | (12,598     | ) |      | (18,953     | )
|Proceeds from sale of loans held for sale                                         |  |      | 1,849,738   |   |      | 1,265,653   |  
|Loans originated for sale                                                         |  |      | (1,837,140  | ) |      | (1,196,700  | )
|Gain on sale of available for sale securities                                     |  |      | (358,231    | ) |      | (62,490     | )
|Change in assets and liabilities:                                                 |  |      |             |   |      |             |  
|(Increase) decrease in accrued interest and dividends receivable                  |  |      | (1,336      | ) |      | 43,343      |  
|(Increase) decrease in prepaid expenses and other assets                          |  |      | (37,604     | ) |      | 730         |  
|Increase in other liabilities                                                     |  |      | 109,609     |   |      | 977         |  
|                                                                                  |  |      |             |   |      |             |  
|Net cash provided by operating activities                                         |  |      | 682,950     |   |      | 1,111,247   |  
|                                                                                  |  |      |             |   |      |             |  
|Cash flows from investing activities:                                             |  |      |             |   |      |             |  
|Purchase of securities available for sale                                         |  |      | (19,707,703 | ) |      | (29,144,626 | )
|Purchase of securities held to maturity                                           |  |      | (1,000,000  | ) |      |            |  
|Proceeds from maturities and principal payments on securities available for sale  |  |      | 14,225,146  |   |      | 21,172,190  |  
|Proceeds from sales of securities available for sale                              |  |      | 2,974,330   |   |      | 2,983,710   |  
|Proceeds from maturities and principal payments on securities held to maturity    |  |      | 1,542,949   |   |      | 3,030,968   |  
|Sale of Federal Home Loan Bank stock                                              |  |      | 283,400     |   |      | 93,700      |  
|Loan repayments, net                                                              |  |      | 1,930,612   |   |      | 1,429,420   |  
|Capital expenditures, net                                                         |  |      | (183,400    | ) |      | (23,778     | )
|                                                                                  |  |      |             |   |      |             |  
|Net cash (used in) provided by investing activities                               |  |      | 65,334      |   |      | (458,416    | )
|                                                                                  |  |      |             |   |      |             |  
|Cash flows from financing activities:                                             |  |      |             |   |      |             |  
|Purchase of treasury stock                                                        |  |      | (576,564    | ) |      | (1,164,391  | )
|Purchase of shares of common stock to fund Trust                                  |  |      | (863,826    | ) |      |            |  
|Federal Home Loan Bank repayments                                                 |  |      | (833,333    | ) |      | (833,333    | )
|Cash dividends paid                                                               |  |      | (293,644    | ) |      | (318,548    | )
|Decrease in deposits, net                                                         |  |      | (268,564    | ) |      | (2,352,228  | )
|Proceeds from short-term borrowings                                               |  |      | 55,000      |   |      |            |  
|Proceeds from exercise of stock options                                           |  |      | 405,142     |   |      | 356,729     |  
|                                                                                  |  |      |             |   |      |             |  
|Net cash used in financing activities                                             |  |      | (2,375,789  | ) |      | (4,311,771  | )
|                                                                                  |  |      |             |   |      |             |  
|Net decrease in cash and cash equivalents                                         |  |      | (1,627,505  | ) |      | (3,658,940  | )
|Cash and cash equivalents, beginning of year                                      |  |      | 5,734,005   |   |      | 9,392,945   |  
|                                                                                  |  |      |             |   |      |             |  
|Cash and cash equivalents, end of year                                            |  | $    | 4,106,500   |   |      | 5,734,005   |  
|                                                                                  |  |      |             |   |      |             |  
|Supplemental cash flow information:                                               |  |      |             |   |      |             |  
|Cash paid during the year for:                                                    |  |      |             |   |      |             |  
|Income taxes, net of refund received                                              |  | $    | 279,168     |   |      | 357,785     |  
|Interest                                                                          |  |      | 2,234,355   |   |      | 2,124,322   |  



See accompanying notes to consolidated
financial statements.



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



|(1) | Organization and Summary of Significant Accounting Policies
|--- | -----------------------------------------------------------



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



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



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



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



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



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



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



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



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



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



Amortization of premiums and accretion of discounts on mortgagebacked securities and other
investments are computed using the level yield method. The adjusted cost of the specific security sold is used to compute gain or loss on the sale of securities.



Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be
other than temporary, if any, are reflected in earnings as realized losses. In estimating other than temporary impairment losses, management considers independent price quotations, projected target prices of investment analysts within the short term
and the financial condition of the issuer.



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



Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to income. All loans sold in the secondary market are sold servicing released. There were no secondary market loans pending sale at June 30, 2005 and 2004.



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



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



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



Impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans) are measured based on the present value of expected future cash flows discounted at each
loans original effective interest rate. As a practical expedient, impairment is measured based on the loans observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired
loan is less than the recorded investment of the loan, the impairment is recorded through a valuation allowance. The Company had no loans designated as impaired at either June 30, 2005 or 2004.



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



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



The Company enters into interest rate locks, where customers have locked into mortgages at a set
interest rate, and forward sales commitments, which are sales of mortgage loans to third parties at a specified price. These interest rate locks and forward sales commitments qualify as derivatives; however, the change in fair value of these
derivatives during the year did not have a material impact on the Companys financial position or results of operations.



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



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



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



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



|                          |  |               |  |                          
|------------------------- |  | ------------- |  | -------------------------
|Building and improvements |  | 10  40 years |  | Accelerated/Straightline
|Leasehold improvements    |  | 10 years      |  | Straightline            
|Furniture and equipment   |  | 5  20 years  |  | Accelerated/Straightline
|Automobile                |  | 3 years       |  | Straightline            



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



At June 30, 2005 and 2004, core deposit premiums were $0, net of accumulated amortization of $344,341. Core deposit premiums were being amortized
over a period of ten years using an accelerated method. Amortization of core deposit premiums was $0 and $12,115 in fiscal years 2005 and 2004, respectively.



| | (h) | Stock Based Compensation
| | --- | ------------------------



The Company applies Accounting Principles Bulletin (APB) Opinion 25, Accounting for Stock Issued to Employees,and related interpretations in
accounting for employee stock compensation plans and, accordingly, does not recognize compensation cost for stock options granted when the option price is greater than or equal to the underlying stock price. This accounting method is referred to as
the intrinsic value method. The Company follows the proforma disclosures of Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, Accounting for StockBased Compensation  Transition and
Disclosure, using the fair value method of accounting for stockbased compensation.



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



If the Company had elected to recognize compensation cost for options based on the fair value of the
options as permitted by SFAS No. 123, net income and earnings per share would have remained unchanged as indicated below:



|                                      |  |      |         |      |        
|------------------------------------- |  | ---- | ------- | ---- | -------
|                                      |  | 2005 |         | 2004
|Net income:                           |  |      |         |      |        
|As reported                           |  | $    | 649,596 |      | 577,354
|Less stock based compensation expense |  |      |        |      |       
|                                      |  |      |         |      |        
|Pro forma                             |  | $    | 649,596 |      | 577,354
|                                      |  |      |         |      |        
|Earnings per share:                   |  |      |         |      |        
|As reported:                          |  |      |         |      |        
|Basic                                 |  | $    | 0.78    |      | 0.66   
|Diluted                               |  |      | 0.76    |      | 0.63   
|Pro forma:                            |  |      |         |      |        
|Basic                                 |  |      | 0.78    |      | 0.66   
|Diluted                               |  |      | 0.76    |      | 0.63   



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



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



| | (j) | Recent Accounting Pronouncements
| | --- | --------------------------------



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004)
Share-Based Payment. The Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.This Statement supersedes APB Option No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. The Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. The Statement focuses primarily on accounting for transactions in which an
entity obtains employee service in share-based payment transactions. The Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for
the award- the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The Statement eliminates the alternative to use APB Opinion
25s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities
to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The Statement is effective for public



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005,
and for public entities that file as small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company currently accounts for its stock options under APB No. 25, and
is currently evaluating the impact the adoption of this statement will have on its statement of condition and results of operations.



|(2) | Securities Available for Sale
|--- | -----------------------------



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



|                                  |  |               |            |                     |           |                       |            |   |            |           
|--------------------------------- |  | ------------- | ---------- | ------------------- | --------- | --------------------- | ---------- | - | ---------- | ----------
|                                  |  | June 30, 2005
|                                  |  | Amortizedcost |            | Grossunrealizedgain |           | Grossunrealized(loss) |            |   | Fair value
|U.S. Government agency securities |  | $             | 7,934,201  |                     | 29,142    |                       | (304,218   | ) |            | 7,659,125 
|Mortgagebacked securities        |  |               | 44,914,301 |                     | 1,122,801 |                       | (1,692,200 | ) |            | 44,344,902
|Other                             |  |               | 6,957,138  |                     | 509,003   |                       | (66,835    | ) |            | 7,399,306 
|                                  |  |               |            |                     |           |                       |            |   |            |           
|                                  |  | $             | 59,805,640 |                     | 1,660,946 |                       | (2,063,253 | ) |            | 59,403,333
|                                  |  |               |            |                     |           |                       |            |   |            |           
|                                  | 
|                                  |  | June 30, 2004
|                                  |  | Amortizedcost |            | Grossunrealizedgain |           | Grossunrealized(loss) |            |   | Fair value
|U.S. Government agency securities |  | $             | 6,911,086  |                     | 123,923   |                       | (28,839    | ) |            | 7,006,170 
|Mortgagebacked securities        |  |               | 47,210,716 |                     | 369,044   |                       | (637,414   | ) |            | 46,942,346
|Other                             |  |               | 2,805,831  |                     | 114       |                       | (37,430    | ) |            | 2,768,515 
|                                  |  |               |            |                     |           |                       |            |   |            |           
|                                  |  | $             | 56,927,633 |                     | 493,081   |                       | (703,683   | ) |            | 56,717,031
|                                  |  |               |            |                     |           |                       |            |   |            |           



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



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



|                                       |  |                |            |            |           
|-------------------------------------- |  | -------------- | ---------- | ---------- | ----------
|                                       |  | June 30, 2005 
|                                       |  | Amortized cost |            | Fair value
|U.S. Government agency securities:     |  |                |            |            |           
|                                       |  |               
|Due in one year or less                |  | $              |           |            |          
|Due after one year through five years  |  |                | 2,978,539  |            | 2,943,282 
|Due after five years through ten years |  |                | 1,000,000  |            | 1,019,185 
|Due after ten years                    |  |                | 3,955,662  |            | 3,696,658 
|                                       |  |                |            |            |           
|                                       |  |                | 7,934,201  |            | 7,659,125 
|Mortgage-backed securities             |  |                | 44,914,301 |            | 44,344,902
|Other                                  |  |                | 6,957,138  |            | 7,399,306 
|                                       |  |                |            |            |           
|                                       |  | $              | 59,805,640 |            | 59,403,333
|                                       |  |                |            |            |           



Proceeds from sales
of available for sale securities were $2,974,330 and $2,983,710 in 2005 and 2004, respectively. Gross gains of $361,650 and $62,490 were realized on these sales in 2005 and 2004, respectively. Gross losses of $3,419 and $0 were realized on these
sales in 2005 and 2004, respectively.



Securities designated
as available for sale with carrying values (fair values) of $2,565,129 have been pledged as collateral for certain large deposits (public funds) with an aggregate balance of $1,325,000 at June 30, 2005.



The following table shows the Companys combined investments
gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at June 30, 2005:



|                                  |  |                     |            |                       |                     |   |            |            |                        |            |   |            |            |                        |            |  
|--------------------------------- |  | ------------------- | ---------- | --------------------- | ------------------- | - | ---------- | ---------- | ---------------------- | ---------- | - | ---------- | ---------- | ---------------------- | ---------- | -
|                                  |  | Less than 12 months |            |                       | More than 12 months |   |            | Total      |                       
|                                  |  | Fair value          |            | Unrealizedgrosslosses |                     |   | Fair value |            | Unrealizedgross losses |            |   | Fair value |            | Unrealizedgross losses |           
|U.S. Government agency securities |  | $                   | 1,965,654  |                       | (34,346             | ) |            | 2,474,256  |                        | (209,057   | ) |            | 4,439,910  |                        | (243,403   | )
|Mortgagebacked securities        |  |                     | 9,813,050  |                       | (522,530            | ) |            | 20,163,753 |                        | (1,232,581 | ) |            | 29,976,803 |                        | (1,755,111 | )
|Other                             |  |                     | 968,867    |                       | (39,155             | ) |            | 567,910    |                        | (25,584    | ) |            | 1,536,777  |                        | (64,739    | )
|                                  |  |                     |            |                       |                     |   |            |            |                        |            |   |            |            |                        |            |  
|                                  |  | $                   | 12,747,571 |                       | (596,031            | ) |            | 23,205,919 |                        | (1,467,222 | ) |            | 35,953,490 |                        | (2,063,253 | )
|                                  |  |                     |            |                       |                     |   |            |            |                        |            |   |            |            |                        |            |  



At June 30,
2005, the Company has 84 individual availableforsale securities that were in an unrealized loss position. All of these securities impairments are deemed not to be other than temporary impairment and is primarily due to the fact
that these securities have experienced volatility in their market prices as a result of current market conditions, with no credit concerns related to the entities that issued the securities.



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



|(3) | Securities Held to Maturity
|--- | ---------------------------



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



|                                  |  |               |           |                     |         |                       |   |            |          
|--------------------------------- |  | ------------- | --------- | ------------------- | ------- | --------------------- | - | ---------- | ---------
|                                  |  | June 30, 2005
|                                  |  | Amortizedcost |           | Grossunrealizedgain |         | Grossunrealized(loss) |   | Fair value
|Mortgagebacked securities        |  | $             | 2,656,198 |                     | 124,784 |                       |  |            | 2,780,982
|Other                             |  |               | 1,003,931 |                     | 71      |                       |  |            | 1,004,002
|                                  |  |               |           |                     |         |                       |   |            |          
|                                  |  | $             | 3,660,129 |                     | 124,855 |                       |  |            | 3,784,984
|                                  |  |               |           |                     |         |                       |   |            |          
|                                  | 
|                                  |  | June 30, 2004
|                                  |  | Amortizedcost |           | Grossunrealizedgain |         | Grossunrealized(loss) |   | Fair value
|U.S. Government agency securities |  | $             | 61,459    |                     | 2,113   |                       |  |            | 63,572   
|Mortgagebacked securities        |  |               | 4,132,682 |                     | 278,256 |                       |  |            | 4,410,938
|                                  |  |               |           |                     |         |                       |   |            |          
|                                  |  | $             | 4,194,141 |                     | 280,369 |                       |  |            | 4,474,510
|                                  |  |               |           |                     |         |                       |   |            |          



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



|                                       |  |                |           |            |          
|-------------------------------------- |  | -------------- | --------- | ---------- | ---------
|                                       |  | June 30, 2005 
|                                       |  | Amortized cost |           | Fair value
|U.S. Government agency securities:     |  |                |           |            |          
|Due in one year or less                |  | $              |          |            |         
|Due after one year through five years  |  |                |          |            |         
|Due after five years through ten years |  |                |          |            |         
|Due after ten years                    |  |                |          |            |         
|                                       |  |                |           |            |          
|                                       |  |                |          |            |         
|Mortgagebacked securities             |  |                | 2,656,198 |            | 2,780,982
|Other                                  |  |                | 1,003,931 |            | 1,004,002
|                                       |  |                |           |            |          
|                                       |  | $              | 3,660,129 |            | 3,784,984
|                                       |  |                |           |            |          



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



|(4) | Loans Receivable, Net
|--- | ---------------------



Loans receivable are summarized as follows:



|                                                     |  |         |            |      |           
|---------------------------------------------------- |  | ------- | ---------- | ---- | ----------
|                                                     |  | June 30
|                                                     |  | 2005    |            | 2004
|Mortgage loans:                                      |  |         |            |      |           
|Secured by onetofour family residential properties |  | $       | 24,598,109 |      | 27,541,741
|Secured by nonresidential properties                 |  |         | 1,298,292  |      | 1,164,000 
|Consumer loans                                       |  |         | 7,729,154  |      | 8,054,443 
|Savings account loans                                |  |         | 843,369    |      | 714,397   
|Commercial loans                                     |  |         | 1,306,165  |      | 413,453   
|                                                     |  |         |            |      |           
|                                                     |  |         | 35,775,089 |      | 37,888,034
|Less:                                                |  |         |            |      |           
|Unearned interest income                             |  |         | 83,489     |      | 246,342   
|Deferred loan costs, net                             |  |         | 25,153     |      | 20,807    
|Allowance for loan losses                            |  |         | 135,472    |      | 144,298   
|                                                     |  |         |            |      |           
|Loans receivable, net                                |  | $       | 35,530,975 |      | 37,476,587
|                                                     |  |         |            |      |           



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



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



In the normal course of business, loans are made to officers, directors, and
employees of the Company and the Bank. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with others. As of June 30, 2005 and 2004, $335,316 and
$456,428, respectively, of these loans were outstanding. The change from June 30, 2004 to June 30, 2005 reflects payments amounting to $169,653 and advances of $48,541 made during the year.



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



|                           |  |                     |         |   |      |         |  
|-------------------------- |  | ------------------- | ------- | - | ---- | ------- | -
|                           |  | Years ended June 30 |        
|                           |  | 2005                |         |   | 2004 |        
|Balance, beginning of year |  | $                   | 144,298 |   |      | 139,573 |  
|Provision for loan losses  |  |                     | 15,000  |   |      | 11,600  |  
|Chargeoffs                |  |                     | (23,826 | ) |      | (6,875  | )
|                           |  |                     |         |   |      |         |  
|Balance, end of year       |  | $                   | 135,472 |   |      | 144,298 |  
|                           |  |                     |         |   |      |         |  



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



At June 30, 2005 and 2004, nonaccrual loans totaled $30,567 and $143,445, respectively. Neither
cash income recognized nor interest income foregone on nonaccrual loans was significant for fiscal years 2005 and 2004, respectively.



|(5) | Accrued Interest and Dividends Receivable
|--- | -----------------------------------------



Accrued interest and dividends receivable is summarized as follows:



|                              |  |         |         |      |        
|----------------------------- |  | ------- | ------- | ---- | -------
|                              |  | June 30
|                              |  | 2005    |         | 2004
|Securities available for sale |  | $       | 288,915 |      | 285,703
|Securities held to maturity   |  |         | 29,082  |      | 24,953 
|Loans receivable, net         |  |         | 117,246 |      | 122,065
|Federal Home Loan Bank stock  |  |         | 5,709   |      | 6,895  
|                              |  |         |         |      |        
|                              |  | $       | 440,952 |      | 439,616
|                              |  |         |         |      |        



|(6) | Premises and Equipment, Net
|--- | ---------------------------



Premises and equipment are summarized as follows:



|                                                         |  |         |           |   |      |           |  
|-------------------------------------------------------- |  | ------- | --------- | - | ---- | --------- | -
|                                                         |  | June 30 |          
|                                                         |  | 2005    |           |   | 2004 |          
|Land                                                     |  | $       | 340,486   |   |      | 340,486   |  
|Building and improvements                                |  |         | 487,031   |   |      | 468,059   |  
|Leasehold improvements                                   |  |         | 11,390    |   |      | 11,390    |  
|Furniture, fixtures, and equipment                       |  |         | 414,967   |   |      | 295,629   |  
|                                                         |  |         |           |   |      |           |  
|                                                         |  |         | 1,253,874 |   |      | 1,115,564 |  
|Less accumulated depreciation and leasehold amortization |  |         | (645,034  | ) |      | (629,999  | )
|                                                         |  |         |           |   |      |           |  
|                                                         |  | $       | 608,840   |   |      | 485,565   |  
|                                                         |  |         |           |   |      |           |  



Depreciation and
leasehold amortization expense charged to office building and equipment expense in 2005 and 2004 totaled approximately $60,125 and $44,989, respectively.



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



|(7) | Deposits
|--- | --------



Deposits are summarized as follows:



|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ------- | ------------- | - | ------ | ---------- | ------- | ------ | -
|                                                                                                                                                |  | June 30, 2005 |            |         | June 30, 2004 |  
|                                                                                                                                                |  | Amount        |            | Percent |               |   | Amount |            | Percent |       
|Demand, NOW, and money market accounts, including noninterest bearing deposits of $396,932 and $548,415 at June 30, 2005 and 2004
respectively |  | $             | 17,011,465 |         | 20.81         | % |        | 14,735,265 |         | 17.97  | %
|Passbook savings                                                                                                                                |  |               | 4,875,818  |         | 5.97          | % |        | 6,881,697  |         | 8.39   | %
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|                                                                                                                                                |  |               | 21,887,283 |         | 26.78         | % |        | 21,616,962 |         | 26.36  | %
|                                                                                                                                                |  |               |            |        
|Certificates of deposit:                                                                                                                        |  |               |            |         |               |   |        |            |         |        |  
|0.01  2.00% interest rate                                                                                                                      |  |               | 6,945,662  |         | 8.50          | % |        | 20,525,383 |         | 25.03  | %
|2.01  4.00% interest rate                                                                                                                      |  |               | 47,369,228 |         | 57.95         | % |        | 36,404,409 |         | 44.39  | %
|4.01  6.00% interest rate                                                                                                                      |  |               | 5,534,344  |         | 6.77          | % |        | 3,458,327  |         | 4.22   | %
|6.01  8.00% interest rate                                                                                                                      |  |               |           |         |              |   |        |           |         |       |  
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|                                                                                                                                                |  |               | 59,849,234 |         | 73.22         | % |        | 60,388,119 |         | 73.64  | %
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|                                                                                                                                                |  | $             | 81,736,517 |         | 100.00        | % |        | 82,005,081 |         | 100.00 | %
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  



The aggregate amount
of jumbo certificates of deposit with a minimum denomination of $100,000 was $14,095,187 and $13,441,055 at June 30, 2005 and 2004, respectively.



At June 30, 2005, the scheduled maturities of time deposits are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2006       |  | $ | 29,311,770
|2007       |  |   | 10,937,432
|2008       |  |   | 4,819,776 
|2009       |  |   | 8,949,155 
|2010       |  |   | 5,782,041 
|Thereafter |  |   | 49,060    
|           |  |   |           
|Total      |  | $ | 59,849,234
|           |  |   |           



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



Interest expense on deposits consisted of the following:



|                              |  |                     |           |      |          
|----------------------------- |  | ------------------- | --------- | ---- | ---------
|                              |  | Years ended June 30
|                              |  | 2005                |           | 2004
|Passbook savings              |  | $                   | 30,864    |      | 42,834   
|NOW and money market accounts |  |                     | 216,527   |      | 91,330   
|Certificates of deposit       |  |                     | 1,689,764 |      | 1,645,744
|                              |  |                     |           |      |          
|                              |  | $                   | 1,937,155 |      | 1,779,908
|                              |  |                     |           |      |          



|(8) | Income Taxes
|--- | ------------



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



|                   |  |                     |         |      |        
|------------------ |  | ------------------- | ------- | ---- | -------
|                   |  | Years ended June 30
|                   |  | 2005                |         | 2004
|Current provision: |  |                     |         |      |        
|Federal            |  | $                   | 336,040 |      | 335,143
|State              |  |                     | 41,765  |      | 44,510 
|                   |  |                     |         |      |        
|                   |  |                     | 377,805 |      | 379,653
|Deferred provision |  |                     | 15,888  |      | 1,230  
|                   |  |                     |         |      |        
|                   |  | $                   | 393,693 |      | 380,883
|                   |  |                     |         |      |        



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



|                                             |  |                     |         |   |      |         |  
|-------------------------------------------- |  | ------------------- | ------- | - | ---- | ------- | -
|                                             |  | Years ended June 30 |        
|                                             |  | 2005                |         |   | 2004 |        
|Pretax income at statutory rates             |  | $                   | 354,718 |   |      | 325,800 |  
|Add:                                         |  |                     |         |   |      |         |  
|State income tax, net of federal tax benefit |  |                     | 30,639  |   |      | 29,505  |  
|Other, net                                   |  |                     | 8,336   |   |      | 25,578  |  
|                                             |  |                     |         |   |      |         |  
|                                             |  | $                   | 393,693 |   |      | 380,883 |  
|                                             |  |                     |         |   |      |         |  
|Effective tax rate                           |  |                     | 38      | % |      | 40      | %



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



The components of the net deferred tax asset or liability at June 30, 2005 and 2004 were as
follows:



|                                                     |  |         |          |   |      |          |  
|---------------------------------------------------- |  | ------- | -------- | - | ---- | -------- | -
|                                                     |  | June 30 |         
|                                                     |  | 2005    |          |   | 2004 |         
|Accumulated amortization of intangibles              |  | $       | 33,260   |   |      | 41,954   |  
|Allowance for loan losses, net                       |  |         | 23,967   |   |      | 27,144   |  
|Accruals for employee benefit plans                  |  |         | 138,279  |   |      | 124,388  |  
|Unrealized net loss on securities available for sale |  |         | 157,522  |   |      | 80,169   |  
|Other                                                |  |         | 16,748   |   |      | 16,833   |  
|                                                     |  |         |          |   |      |          |  
|Deferred tax asset                                   |  |         | 369,776  |   |      | 290,488  |  
|                                                     |  |         |          |   |      |          |  
|Federal Home Loan Bank stock dividend                |  |         | (20,152  | ) |      | (31,373  | )
|Accretion of discount on securities                  |  |         | (235,019 | ) |      | (226,602 | )
|Deferred loan fees and costs, net                    |  |         | (155,043 | ) |      | (134,415 | )
|                                                     |  |         |          |   |      |          |  
|Deferred tax liability                               |  |         | (410,214 | ) |      | (392,390 | )
|                                                     |  |         |          |   |      |          |  
|Net deferred tax liability                           |  | $       | (40,438  | ) |      | (101,902 | )
|                                                     |  |         |          |   |      |          |  



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



|(9) | Federal Home Loan Bank Advances
|--- | -------------------------------



Federal Home Loan Bank advances at June 30, 2005 consisted of the following:



|                                         |  |   |          
|---------------------------------------- |  | - | ---------
|5.22% note payable, due March 20, 2006   |  | $ | 2,000,000
|3.22% note payable, due December 4, 2006 |  |   | 1,000,000
|4.08% note payable, due October 17, 2007 |  |   | 961,845  
|4.16% note payable, due October 17, 2007 |  |   | 1,121,489
|5.72% note payable, due March 19, 2008   |  |   | 1,000,000
|                                         |  |   |          
|                                         |  | $ | 6,083,334
|                                         |  |   |          



The Federal Home Loan
Bank notes are payable to the Federal Home Loan Bank of Atlanta and are secured by the Federal Home Loan Bank stock owned by the Bank with a carrying value of $508,900, as well as a pledge of certain securities with a carrying value of $15,169,294
at June 30, 2005. Interest rates on the notes are fixed and interest is payable monthly. Principal on the notes is payable at maturity or in semiannual principal reductions until maturity.



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



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



|     |  |   |          
|---- |  | - | ---------
|2006 |  |   | 2,833,333
|2007 |  |   | 1,833,333
|2008 |  |   | 1,416,668
|     |  |   |          
|     |  | $ | 6,083,334
|     |  |   |          



|(10) | Commitments and Contingencies
|---- | -----------------------------



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



The Company has operating lease agreements for one of its branch offices. Rental expense under these leases aggregated $7,364 for fiscal years 2005 and
2004. The aggregate annual minimum rental commitments under the terms of all noncancelable leases at June 30, 2005 are as follows:



|             |  |        |      
|------------ |  | ------ | -----
|             |  | Amount
|Fiscal year: |  |        |      
|2006         |  | $      | 3,682
|2007         |  |        |     
|2008         |  |        |     
|             |  |        |      
|             |  | $      | 3,682
|             |  |        |      



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



The Companys policies as to collateral and assumption of credit risk for offbalance sheet items are essentially the same as those for
extension of credit to its customers. Generally, the offbalance sheet exposures the Bank has are its commitments to fund unused lines of credit. At June 30, 2005, the Company had $972,400 in outstanding commitments to originate
residential real estate loans. Additionally, at June 30, 2005, the Bank had provided approximately $1,368,338 in unused lines of credit.



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



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



|(11) | Stockholders Equity
|---- | --------------------



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



The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



measures of the Banks assets, liabilities, and certain offbalance sheet items as calculated under regulatory accounting practices. The
Banks capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table which follows) of Total and Tier 1 capital (as defined in the regulations) to riskweighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of June 30, 2005 and 2004, that the Bank meets all capital adequacy requirements to which it is subject.



As of June 30, 2005 and 2004, the most recent notification from the regulatory authorities categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total riskbased, Tier 1 riskbased, and Tier 1 leverage ratios as set forth in the tables which follow.



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



|                                                  |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|------------------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | ----- |  | --- | ------ |  | ----- | ----- |  | ---- | -
|                                                  |  | Actual                 |        |       | For capital adequacypurposes |   |        | To be well capitalizedunder prompt correctiveaction provisions |      
|                                                  |  | Amount                 |        | Ratio |                              |   | Amount |                                                                | Ratio |  |     | Amount |  | Ratio |      
|                                                  |  | (Dollars in thousands) |       
|June 30,2005:                                     |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Total capital (to risk weighted assets):          |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  | $                      | 17,054 |       | 46.3                         | % |        | $                                                              | 2,945 |  | 8.0 | %      |  | $     | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,877 |       | 43.1                         | % |        |                                                                | 2,945 |  | 8.0 | %      |  |       | 3,681 |  | 10.0 | %
|Tier 1 (core) capital (to risk weighted assets):  |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 16,918 |       | 46.0                         | % |        |                                                                | 1,472 |  | 4.0 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,741 |       | 42.8                         | % |        |                                                                | 1,472 |  | 4.0 | %      |  |       | 2,208 |  | 6.0  | %
|Tier 1 (core) capital (to adjusted total assets): |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 16,918 |       | 16.0                         | % |        |                                                                | 4,241 |  | 4.0 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,741 |       | 14.8                         | % |        |                                                                | 4,241 |  | 4.0 | %      |  |       | 5,302 |  | 5.0  | %
|Tangible capital (to adjusted total assets):      |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 16,918 |       | 16.0                         | % |        |                                                                | 1,590 |  | 1.5 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,741 |       | 14.8                         | % |        |                                                                | 1,590 |  | 1.5 | %      |  |       | N/A   |  | N/A  |  
|                                                  |  |                        |        |       |                              |  
|June 30,2004:                                     |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Total capital (to risk weighted assets):          |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  | $                      | 17,497 |       | 47.2                         | % |        | $                                                              | 2,967 |  | 8.0 | %      |  | $     | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 16,595 |       | 44.7                         | % |        |                                                                | 2,967 |  | 8.0 | %      |  |       | 3,709 |  | 10.0 | %
|Tier 1 (core) capital (to risk weighted assets):  |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 17,353 |       | 46.8                         | % |        |                                                                | 1,483 |  | 4.0 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 16,451 |       | 44.4                         | % |        |                                                                | 1,483 |  | 4.0 | %      |  |       | 2,225 |  | 6.0  | %
|Tier 1 (core) capital (to adjusted total assets): |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 17,353 |       | 16.2                         | % |        |                                                                | 4,284 |  | 4.0 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 16,451 |       | 15.4                         | % |        |                                                                | 4,284 |  | 4.0 | %      |  |       | 5,355 |  | 5.0  | %
|Tangible capital (to adjusted total assets):      |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 17,353 |       | 16.2                         | % |        |                                                                | 1,607 |  | 1.5 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 16,451 |       | 15.4                         | % |        |                                                                | 1,607 |  | 1.5 | %      |  |       | N/A   |  | N/A  |  



Pursuant to
regulations, an institution that exceeds all fully phasedin capital requirements before and after a proposed capital distribution and has not been advised by the Office of Thrift Supervision (OTS) that it is in need of more than the normal
supervision can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



(i) 100% of its net income to date during the calendar year plus the amount that would reduce by onehalf its surplus capital ratio
(the excess capital over its fully phasedin capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent fourquarter period. Any additional capital distributions require prior
regulatory approval.



The Companys principal source of
funds for dividend payments is dividends from the Bank. Certain restrictions exist regarding the ability of the Bank to pay dividends to the Company. At July 1, 2005, dividend payments by the Bank were subject to regulatory approval. The
Companys ability to pay dividends will be largely dependent upon dividends to the Company from the Bank. Pursuant to the OTS regulations, the Bank will not be permitted to pay dividends on its capital stock or repurchase shares of its stock if
its stockholders equity would be reduced below the amount required for the liquidation account or if stockholders equity would be reduced below the amount required by the OTS.



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



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



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



|                                                                    |  |                  |            |   |            |         |   |                 |            |  
|------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------- | ------- | - | --------------- | ---------- | -
|                                                                    |  | 2005             |           
|                                                                    |  | Before taxamount |            |   | Tax effect |         |   | After taxamount |           
|Unrealized gains arising during the year                            |  | $                | 166,526    |   |            | (57,700 | ) |                 | 108,826    |  
|Reclassification for adjustments for gains included in net earnings |  |                  | (358,231   | ) |            | 135,053 |   |                 | (223,178   | )
|                                                                    |  |                  |            |   |            |         |   |                 |            |  
|Net change in unrealized losses on securities                       |  | $                | (191,705   | ) |            | 77,353  |   |                 | (114,352   | )
|                                                                    |  |                  |            |   |            |         |   |                 |            |  
|                                                                    | 
|                                                                    |  | 2004             |           
|                                                                    |  | Before taxamount |            |   | Tax effect |         |   | After taxamount |           
|Unrealized losses arising during the year                           |  | $                | (1,731,940 | ) |            | 532,918 |   |                 | (1,199,022 | )
|Reclassification for adjustments for gains included in net earnings |  |                  | (62,490    | ) |            | 19,323  |   |                 | (43,167    | )
|                                                                    |  |                  |            |   |            |         |   |                 |            |  
|Net change in unrealized losses on securities                       |  | $                | (1,794,430 | ) |            | 552,241 |   |                 | (1,242,189 | )
|                                                                    |  |                  |            |   |            |         |   |                 |            |  



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



|(12) | Earnings Per Share
|---- | ------------------



Basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the years ended
June 30, 2005 and 2004. Common stock outstanding consists of issued shares less treasury stock, unallocated Employee Stock Ownership Plan (ESOP) shares (see Note 13), and shares held in trust. Diluted earnings per share for the years ended
June 30, 2005 and 2004 was computed by dividing net income by the weighted average number of shares of common stock outstanding and the dilutive effects of the shares awarded under the Management Recognition Plan (MRP) and the Stock Option
Plan, based on the treasury stock method, using an average fair market value of the stock during the respective periods.



The following table represents the earnings per share calculations for the years ended June 30, 2005 and 2004:



|                                   |  |        |         |        |         |                 |   |     
|---------------------------------- |  | ------ | ------- | ------ | ------- | --------------- | - | ----
|                                   |  | Income |         | Shares |         | Per shareamount
|2005:                              |  |        |         |        |         |                 |   |     
|Basic earnings per share           |  | $      | 649,596 |        | 836,034 |                 | $ | 0.78
|Dilutive securities:               |  |        |         |        |         |                 |   |     
|Incentive stock option plan shares |  |        |        |        | 18,319  |                 |   |     
|                                   |  |        |         |        |         |                 |   |     
|Dilutive earnings per share        |  | $      | 649,596 |        | 854,353 |                 |   | 0.76
|                                   |  |        |         |        |         |                 |   |     
|2004:                              |  |        |         |        |         |                 |   |     
|Basic earnings per share           |  | $      | 577,354 |        | 878,391 |                 | $ | 0.66
|Dilutive securities:               |  |        |         |        |         |                 |   |     
|Incentive stock option plan shares |  |        |        |        | 34,313  |                 |   |     
|                                   |  |        |         |        |         |                 |   |     
|Dilutive earnings per share        |  | $      | 577,354 |        | 912,704 |                 |   | 0.63
|                                   |  |        |         |        |         |                 |   |     



|(13) | Employee Retirement and Savings Plans
|---- | -------------------------------------



(a) Employee Stock Ownership Plan



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



Expense related to the ESOP was approximately $124,000 and $147,000 for 2005 and 2004. Unearned compensation related to the
ESOP was $0 and $70,715 at June 30, 2005 and 2004, respectively, and is shown as a reduction of stockholders equity in the accompanying consolidated statements of financial condition.



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



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



(b) Management Recognition Plan (MRP)



During fiscal 1996, the Bank established an MRP which purchased 58,190 shares of the Companys common stock on the open
market. The MRP provides for awards of common stock to directors and officers of the Bank. As of June 30, 2005, all awarded shares related to the MRP were allocated to directors and officers of the Bank.



Shares held in trust related to the MRP totaled 0 and 14,430 at
June 30, 2005 and 2004, respectively. These shares, which were purchased for an average price per share of $12.84, amounted to $185,234 at June 30, 2004 and are shown as a reduction of stockholders equity in the accompanying
consolidated statements of financial condition. During the regular meeting of the Board of Directors held July 15, 2004, the Board voted to transfer the remaining 14,430 unallocated shares held in trust from the MRP to the Stock Option and
Incentive Plan.



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



The Company established a Simplified Employee Pension Plan (SEP) for all employees who have completed one year of service, pursuant to
Section 408(k) of the Internal Revenue Code of 1986. The Company can make a discretionary contribution to the SEP each year. The cost to the Company under the SEP was $49,208 and $43,583 for fiscal years 2005 and 2004, respectively.



(d) Employment Agreements



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



|(14) | StockBased Compensation Plan
|---- | -----------------------------



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



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



Under the Option Plan, the Company may grant options up to 145,745 shares and has granted options
outstanding of 46,980 shares through June 30, 2005. Under the Option Plan, the options vest 20% per year and become exercisable upon the participants completion of five years of service.



The Company purchased shares in the open market to be issued upon exercise
of stock options. Such shares are reflected at cost as shares held in trust in the accompanying consolidated statements of financial condition. During 2005 and 2004, the Company purchased 49,073 and 0 shares, respectively, to be used for the
exercise of options. The total number of shares held in trust related to the Option Plan was 49,355 and 20,369 and amounted to $719,565 and $310,178 at June 30, 2005 and 2004, respectively.



A summary of the status of the Companys Option Plan at June 30,
2005 and 2004 and the changes during the years then ended is as follows:



|                                                   |  |         |   |      |                              |       |        |         |   |                              |   |      
|-------------------------------------------------- |  | ------- | - | ---- | ---------------------------- | ----- | ------ | ------- | - | ---------------------------- | - | -----
|                                                   |  | 2005    |   | 2004
|                                                   |  | Shares  |   |      | Weightedaverageexerciseprice |       | Shares |         |   | Weightedaverageexerciseprice
|Outstanding at beginning of year:                  |  | 81,496  |   |      | $                            | 12.09 |        | 125,031 |   |                              | $ | 11.91
|Forfeitures                                        |  |        |   |      |                              |      |        | (12,596 | ) |                              |   | 11.69
|Exercised                                          |  | (34,516 | ) |      |                              | 11.74 |        | (30,939 | ) |                              |   | 11.53
|Granted                                            |  |        |   |      |                              |      |        |        |   |                              |   |     
|                                                   |  |         |   |      |                              |       |        |         |   |                              |   |      
|Outstanding at end of year                         |  | 46,980  |   |      | $                            | 12.35 |        | 81,496  |   |                              | $ | 12.09
|                                                   |  |         |   |      |                              |       |        |         |   |                              |   |      
|Exercisable at end of year                         |  | 46,980  |   |      | $                            | 12.35 |        | 81,206  |   |                              | $ | 12.11
|                                                   |  |         |   |     
|Weighted average fair value of the options granted |  | N/A     |   |      |                              |       |        | N/A     |   |                              |   |      



|(15) | Fair Value of Financial Instruments
|---- | -----------------------------------



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



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



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



|                                          |  |                |        |                     |        |                |        |                     |       
|----------------------------------------- |  | -------------- | ------ | ------------------- | ------ | -------------- | ------ | ------------------- | ------
|                                          |  | June 30       
|                                          |  | 2005           |        | 2004               
|                                          |  | Carryingamount |        | Estimatedfair value |        | Carryingamount |        | Estimatedfair value
|                                          |  | (in thousands) |        | (in thousands)     
|Assets:                                   |  |                |        |                     |        |                |        |                     |       
|Cash on hand and in banks                 |  | $              | 4,107  |                     | 4,107  |                | 5,734  |                     | 5,734 
|Securities  available for sale           |  |                | 59,403 |                     | 59,403 |                | 56,717 |                     | 56,717
|Securities  held to maturity             |  |                | 3,660  |                     | 3,789  |                | 4,194  |                     | 4,475 
|Federal Home Loan Bank stock              |  |                | 509    |                     | 509    |                | 792    |                     | 792   
|Loans held for sale                       |  |                |       |                     |       |                |       |                     |      
|Loans receivable, net                     |  |                | 35,531 |                     | 38,144 |                | 37,477 |                     | 38,956
|Accrued interest and dividends receivable |  |                | 441    |                     | 441    |                | 440    |                     | 440   
|                                          |  |                |        |                    
|Liabilities:                              |  |                |        |                     |        |                |        |                     |       
|Deposits                                  |  |                | 81,737 |                     | 81,403 |                | 82,005 |                     | 82,760
|Federal Home Loan Bank advances           |  |                | 6,083  |                     | 6,159  |                | 6,917  |                     | 7,123 
|Accrued interest payable                  |  |                | 36     |                     | 36     |                | 35     |                     | 35    



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



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



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



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



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



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



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



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



| | (d) | Loans Held for Sale
| | --- | -------------------



The fair value of loans held for sale is estimated using market rates, which approximate carrying values.



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



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



| | (f) | Accrued Interest Receivable
| | --- | ---------------------------



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



| | (g) | Deposits
| | --- | --------



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



| | (h) | FHLB Advances
| | --- | -------------



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



| | (i) | Accrued Interest Payable
| | --- | ------------------------



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



| | (j) | OffBalanceSheet Instruments
| | --- | -----------------------------



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



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



|(16) | Parent Company Financial Statements
|---- | -----------------------------------



Separate condensed financial statements of The Southern Banc Company, Inc. (the Parent Company) as of and for the years ended June 30, 2005 and
2004 are presented below:



Statements of Financial Condition



June 30, 2005 and 2004



(Dollar amounts in thousands)



|                                           |  |      |        |   |      |        |  
|------------------------------------------ |  | ---- | ------ | - | ---- | ------ | -
|                                           |  | 2005 |        |   | 2004 |       
|Assets:                                    |  |      |        |   |      |        |  
|Cash and cash equivalents                  |  | $    | 429    |   |      | 744    |  
|Investment in subsidiary                   |  |      | 16,212 |   |      | 16,397 |  
|ESOP loan receivable                       |  |      | 20     |   |      | 126    |  
|Other assets                               |  |      | 74     |   |      | 8      |  
|                                           |  |      |        |   |      |        |  
|Total assets                               |  | $    | 16,735 |   |      | 17,275 |  
|                                           |  |      |        |   |      |        |  
|Liabilities:                               |  |      |        |   |      |        |  
|Other liabilities                          |  | $    | 32     |   |      | 22     |  
|                                           |  |     
|Stockholders equity:                      |  |      |        |   |      |        |  
|Preferred stock                            |  |      |       |   |      |       |  
|Common stock                               |  |      | 15     |   |      | 15     |  
|Additional paidin capital                 |  |      | 13,997 |   |      | 13,910 |  
|Retained earnings                          |  |      | 11,697 |   |      | 11,341 |  
|Unearned compensation                      |  |      |       |   |      | (71    | )
|Shares held in trust                       |  |      | (868   | ) |      | (495   | )
|Treasury stock                             |  |      | (7,923 | ) |      | (7,347 | )
|Accumulated other comprehensive income     |  |      | (215   | ) |      | (100   | )
|                                           |  |      |        |   |      |        |  
|Total stockholders equity                 |  |      | 16,703 |   |      | 17,253 |  
|                                           |  |      |        |   |      |        |  
|Total liabilities and stockholders equity |  | $    | 16,735 |   |      | 17,275 |  
|                                           |  |      |        |   |      |        |  



(Continued)



---

THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



Statements of Income



Years ended June 30, 2005 and 2004



(Dollar amounts in thousands)



|                                                                                     |  |      |     |   |      |      |  
|------------------------------------------------------------------------------------ |  | ---- | --- | - | ---- | ---- | -
|                                                                                     |  | 2005 |     |   | 2004 |     
|Income:                                                                              |  |      |     |   |      |      |  
|Interest                                                                             |  | $    | 8   |   |      | 19   |  
|                                                                                     |  |      |     |   |      |      |  
|                                                                                     |  |      | 8   |   |      | 19   |  
|Expense                                                                              |  |      | (77 | ) |      | (120 | )
|                                                                                     |  |      |     |   |      |      |  
|(Loss) income before income taxes and equity in undistributed income of subsidiaries |  |      | (69 | ) |      | (101 | )
|                                                                                     |  |     
|Benefit for income taxes                                                             |  |      | 27  |   |      | 39   |  
|                                                                                     |  |      |     |   |      |      |  
|(Loss) income before equity in undistributed income of subsidiaries                  |  |      | (42 | ) |      | (62  | )
|Equity in undistributed current year income of subsidiaries                          |  |      | 692 |   |      | 639  |  
|                                                                                     |  |      |     |   |      |      |  
|Net income                                                                           |  | $    | 650 |   |      | 577  |  
|                                                                                     |  |      |     |   |      |      |  



(Continued)



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THE SOUTHERN BANC COMPANY, INC.



Notes to Consolidated Financial Statements



June 30, 2005 and 2004



Statements of Cash Flows



Years ended June 30, 2005 and 2004



(Dollar amounts in thousands)



|                                                                                            |  |      |       |   |      |        |  
|------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | ------ | -
|                                                                                            |  | 2005 |       |   | 2004 |       
|Cash flows from operating activities:                                                       |  |      |       |   |      |        |  
|Net income                                                                                  |  | $    | 650   |   |      | 577    |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |      |       |   |      |        |  
|Equity in undistributed current years earnings of subsidiaries                              |  |      | (692  | ) |      | (639   | )
|(Increase) decrease in other assets                                                         |  |      | (66   | ) |      | 3      |  
|Increase in other liabilities                                                               |  |      | 10    |   |      |       |  
|                                                                                            |  |      |       |   |      |        |  
|Net cash (used in) provided by operating activities                                         |  |      | (98   | ) |      | (59    | )
|Cash flows from financing activities:                                                       |  |      |       |   |      |        |  
|Payments received on ESOP loan                                                              |  |      | 112   |   |      | 106    |  
|Purchase of treasury stock                                                                  |  |      | (576  | ) |      | (1,164 | )
|Dividends received from subsidiary                                                          |  |      | 1,000 |   |      |       |  
|Cash dividends paid to shareholders                                                         |  |      | (294  | ) |      |       |  
|Purchase of shares to fund option trust                                                     |  |      | (864  | ) |      |       |  
|Proceeds from stock options exercised                                                       |  |      | 405   |   |      | (357   | )
|                                                                                            |  |      |       |   |      |        |  
|Net cash used in financing activities                                                       |  |      | (217  | ) |      | (1,415 | )
|                                                                                            |  |      |       |   |      |        |  
|Decrease in cash and cash equivalents                                                       |  |      | (315  | ) |      | (1,474 | )
|                                                                                            |  |     
|Cash and cash equivalents, beginning of year                                                |  |      | 744   |   |      | 2,218  |  
|                                                                                            |  |      |       |   |      |        |  
|Cash and cash equivalents, end of year                                                      |  | $    | 429   |   |      | 744    |  
|                                                                                            |  |      |       |   |      |        |  



---

CORPORATE INFORMATION



Directors and Executive Officers:



Gates Little

Chairman of the Board, President and Chief
Executive Officer of the Company and of the Bank



Craig G. Cantrell

Retired



Thomas F. Dowling, III

Dentist



Grady Gillam

Retired



Rex G. Keeling, Jr.

Pharmacy Consultant and Real Estate Investor



James B. Little, Jr.

Investment Officer of the Bank and Vice
President of the Company



James B. Little, III

New Capital Partners, LLC

Founder and
Partner



Fred Taylor

Owner of Taylor Realty



Officers:



Rodney Rich

Vice President of the Bank



Janice Stephens

Comptroller of
the Bank



Teresa Elkins

Vice President of the Bank



Peggy Smith

Secretary-Treasurer of the Company and of the
Bank



Martha Garrett

Vice President of the Bank



Annette Espy

Vice President of the Bank



Judy Cater

Vice President of the Bank



Main Office:



221 S. 6th Street

Gadsden, Alabama



Branch Offices:



202 Sand Mountain Drive

Albertville, Alabama



2204 Henry Street

Guntersville, Alabama



390 W. Main Street

Centre, Alabama



Independent Registered Public Accountants:



Barfield Murphy Shank & Smith PC

Birmingham, Alabama



General Counsel:



Inzer, Haney & McWhorter, P.A.

Gadsden, Alabama



Securities and Regulatory Counsel:



Jones, Walker, Waechter, Poitevent,
Carrere & Denegre, L.L.P.

Washington, D.C.



Annual Stockholders Meeting:



November 9, 2005 - 5:00 p.m.

The
Southern Bank Company

221 S. 6thStreet

Gadsden, Alabama

Record Date  September 16, 2005



A copy of the Annual Report on Form 10-KSB for the fiscal year ended June 30, 2005 as filed with the SEC will be furnished to stockholders as of the Record Date upon written request to the Secretary of the Company, 221 South 6thStreet, Gadsden, AL 35901.



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THE SOUTHERN BANC COMPANY, INC.



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