EXHIBIT 13



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2004



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 Stockholders,



We are happy to report the results of Fiscal Year 2004 for The Southern Banc Company, Inc. In our core holding, The Southern Bank Company, we have had a
successful year. Despite a flattening yield curve and an increasingly competitive marketplace, we continued to increase the number of new Southern Bank customers and the number of services per customer provided by the Bank. We have also maintained
an adequate interest rate risk profile. Please read the section in this report concerning interest rate risk if you are not familiar with it. It is an essential part of the business in which you are invested. The risks associated with lending long
and borrowing short are not new, but have been much ignored by many over the decreasing rate environment of the past decade.



We believe that reaching out to customers with value and service is the only way to create long-term strength and stable growth for our Company. Our
success depends on serving the local small businesses and individuals that want good, flexible service and fast responses to their questions or problems.



As for the best uses of our capital, we have repurchased 69,200 shares of our common stock since the beginning of our last fiscal year. Since our initial
public offering in 1995, we have repurchased over 30% of our outstanding shares and have paid a dividend in every quarter.



We hope that, as shareholders, you will also become advocates for our services. It is important that we tell everyone about the opportunities that we
offer.



Please do not hesitate to call on me if I may be of any
assistance to you or to anyone you know.



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, 2004, the Company had total consolidated assets of $106.4 million, deposits of $82.0 million and stockholders equity of $17.3 million, or 16.3% of total assets.



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



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



The Companys common stock trades in the over-the-counter market on the OTC Bulletin Board®(OTCBB) under the symbol SRNN. At June 30, 2004, there were 892,298 shares of the Common Stock outstanding and
approximately 226 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.



On January 8, 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), effective at the opening of business on January 8, 2004.



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.



Since delisting, 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.



The Board of Directors is considering terminating the Companys reports to the SEC. The Company will continue to submit annual, quarterly and other
periodic reports under the Securities Exchange Act of 1934 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 2003     |  |                 |       |                     |   |       |  |   |      
|First Quarter   |  | $               | 12.80 |                     | $ | 11.71 |  | $ | .0875
|Second Quarter  |  | $               | 15.50 |                     | $ | 11.71 |  | $ | .0875
|Third Quarter   |  | $               | 15.00 |                     | $ | 13.56 |  | $ | .0875
|Fourth Quarter  |  | $               | 15.40 |                     | $ | 13.75 |  | $ | .0875
|                |  |                 |      
|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

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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.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SELECTED CONSOLIDATED
FINANCIAL AND OTHER DATA



|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                    |  | Year Ended June 30,                   |        
|                                                    |  | 2004                                  |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |       
|                                                    |  | (In thousands, except per share data) |        
|INCOME STATEMENT DATA                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Interest income                                     |  | $                                     | 5,007   |   |      | $ | 5,890   |      |  | $ | 6,299   |   |  | $    | 6,812  |   |  | $ | 6,944  |  
|Interest expense                                    |  |                                       | 2,119   |   |      |   | 2,898   |      |  |   | 3,566   |   |  |      | 4,345  |   |  |   | 4,081  |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net interest income                                 |  |                                       | 2,888   |   |      |   | 2,992   |      |  |   | 2,733   |   |  |      | 2,467  |   |  |   | 2,863  |  
|Provision for loan losses                           |  |                                       | 12      |   |      |   | 13      |      |  |   | 27      |   |  |      | 30     |   |  |   | 17     |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net interest income after provision for loan losses |  |                                       | 2,876   |   |      |   | 2,979   |      |  |   | 2,706   |   |  |      | 2,437  |   |  |   | 2,846  |  
|Non-interest income                                 |  |                                       | 235     |   |      |   | 524     |      |  |   | 183     |   |  |      | 200    |   |  |   | 118    |  
|Non-interest expense                                |  |                                       | 2,153   |   |      |   | 2,013   |      |  |   | 1,853   |   |  |      | 1,892  |   |  |   | 1,962  |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Income before provision for income taxes            |  |                                       | 958     |   |      |   | 1,490   |      |  |   | 1,036   |   |  |      | 745    |   |  |   | 1,002  |  
|Provision for income taxes                          |  |                                       | 381     |   |      |   | 596     |      |  |   | 403     |   |  |      | 278    |   |  |   | 356    |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net income                                          |  | $                                     | 577     |   |      | $ | 894     |      |  | $ | 633     |   |  | $    | 467    |   |  | $ | 646    |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Earnings per share                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Basic                                               |  | $                                     | 0.66    |   |      | $ | 1.02    |      |  | $ | 0.69    |   |  | $    | 0.53   |   |  | $ | 0.71   |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Diluted                                             |  | $                                     | 0.63    |   |      | $ | 1.00    |      |  | $ | 0.69    |   |  | $    | 0.53   |   |  | $ | 0.71   |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                    | 
|                                                    |  | Year Ended June 30,                   |        
|                                                    |  | 2004                                  |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |       
|                                                    |  | (In thousands)                        |        
|BALANCE SHEET DATA                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total assets                                        |  | $                                     | 106,353 |   |      | $ | 111,701 |      |  | $ | 110,002 |   |  | $    | 97,164 |   |  | $ | 98,087 |  
|Loans receivable, net                               |  |                                       | 37,477  |   |      |   | 38,918  |      |  |   | 34,515  |   |  |      | 37,587 |   |  |   | 39,840 |  
|Securities:                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Available for sale                                  |  |                                       | 56,717  |   |      |   | 53,723  |      |  |   | 53,753  |   |  |      | 35,635 |   |  |   | 26,402 |  
|Held to maturity                                    |  |                                       | 4,194   |   |      |   | 7,215   |      |  |   | 11,527  |   |  |      | 17,513 |   |  |   | 23,886 |  
|Federal Home Loan Bank stock                        |  |                                       | 792     |   |      |   | 886     |      |  |   | 1,449   |   |  |      | 724    |   |  |   | 724    |  
|Deposits                                            |  |                                       | 82,005  |   |      |   | 84,357  |      |  |   | 81,557  |   |  |      | 79,843 |   |  |   | 81,437 |  
|Federal Home Loan Bank advances.                    |  |                                       | 6,917   |   |      |   | 7,750   |      |  |   | 9,583   |   |  |      | 0      |   |  |   | 0      |  
|Stockholders equity                                |  |                                       | 17,253  |   |      |   | 18,866  |      |  |   | 18,344  |   |  |      | 17,046 |   |  |   | 16,319 |  
|                                                    | 
|                                                    |  | Year Ended June 30,                   |        
|                                                    |  | 2004                                  |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |       
|KEY OPERATING DATA                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Return on average assets                            |  |                                       | 0.54    | % |      |   | 0.80    | %    |  |   | 0.58    | % |  |      | 0.48   | % |  |   | 0.66   | %
|Return on average equity                            |  |                                       | 3.25    |   |      |   | 4.68    |      |  |   | 3.48    |   |  |      | 2.74   |   |  |   | 4.03   |  
|Average equity to average assets                    |  |                                       | 16.67   |   |      |   | 7.02    |      |  |   | 16.62   |   |  |      | 17.59  |   |  |   | 16.33  |  
|Dividend payout ratio                               |  |                                       | 53.03   |   |      |   | 31.31   |      |  |   | 48.61   |   |  |      | 66.04  |   |  |   | 49.30  |  
|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 an interest-bearing account with the FHLB of Atlanta.



The Companys net income is dependent primarily on the Banks net interest income, which is the difference between interest income earned on its
loans, mortgage-backed securities and securities portfolio and interest paid on customers deposits 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, 2004 and June 30, 2003



Total assets decreased approximately $5.3 million, or 4.8%, from $111.7
million at June 30, 2003 to $106.4 million at June 30, 2004. During the year ended June 30, 2004, net loans decreased approximately $1.4 million, or 3.7%, from $38.9 million to $37.5 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, 2004, securities available for sale increased approximately $3.0 million, or 5.6%, from $53.7 million to $56.7 million. During the period ended June 30, 2004,
securities held to maturity decreased approximately $3.0 million, or 41.9%, from $7.2 million to $4.2 million. This decrease was primarily attributable to maturities of securities classified as held to maturity.



Cash and cash equivalents decreased approximately $3.7 million, or 39.4%,
from $9.4 million at June 30, 2003 to $5.7 million at June 30, 2004. This decrease was primarily attributable to decreases in deposits and FHLB advances.



Accrued interest and dividends receivable decreased approximately $44,000, or 9.1%, from $483,000 at June 30, 2003 to $440,000 at June 30, 2004. This
decrease was primarily attributable to a decrease in market interest rates. Prepaid expenses and other assets decreased approximately $13,000, or 2.5%, from $527,000 at June 30, 2003 to $514,000 at June 30, 2004.



Total deposits decreased approximately $2.4 million, or 2.8%, from $84.4
million at June 30, 2003 to $82.0 million at June 30, 2004. This decrease was primarily attributable to the competitive interest rate market. FHLB advances decreased approximately $833,000, or 10.8%, from $7.8 million at June 30, 2003 to $6.9
million at June 30, 2004. The decrease in FHLB Advances was primarily attributable to repayments based on the fixed payment schedule. Other liabilities during the fiscal year ended June 30, 2004 decreased approximately $549,000, or 75.4%, from
$728,000 at June 30, 2003 to $179,000 at June 30, 2004. The decrease in other liabilities was primarily



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attributable to a decrease in the deferred tax liability associated with the decreased unrealized gain on securities available for sale.



Total equity decreased approximately $1.6 million, or 8.6%, from $18.9
million at June 30, 2003 to $17.3 million at June 30, 2004. This decrease was primarily attributable to a decrease in the unrealized gains on securities available for sale, payment of common stock dividends, and treasury stock repurchases offset by
the amortization of unearned compensation and an increase in retained earnings resulting from current year earnings of $577,000.



Comparison of Results of Operations for the Fiscal Years Ended June 30, 2004 and 2003



The Company reported net income for the fiscal years ended June 30, 2004 and 2003 of approximately $577,000 and $894,000,
respectively. The decrease in net income for the fiscal year ended June 30, 2004 was primarily attributable to a decrease in the Banks net interest margin of approximately $105,000 and a decrease in gains on sales of available for sale
securities of approximately $291,000.



Net Interest
Income. Net interest income decreased approximately $105,000, or 3.5%, from $3.0 million at June 30, 2003 to $2.9 million at June 30, 2004. This decrease was primarily attributable to a decrease in interest income, primarily interest and
dividends on securities, net of a decrease in interest on deposits during a decreasing interest rate environment. Total interest income decreased approximately $883,000, or 15.0%, for the fiscal year ended June 30, 2004. The decrease in interest
income was primarily due to the decrease in average yields on interest earning assets. Total interest expense decreased approximately $778,000, or 26.8%, for the fiscal year ended June 30, 2004 compared with the fiscal year ended June 30, 2003. The
decrease in total interest expense was primarily attributable to a decrease in the average cost of interest-bearing liabilities.



Provision for Loan Losses. During the fiscal year ended June 30, 2004, the provision for loan losses decreased approximately $2,000, or 15.4%, from
$13,000 at June 30, 2003 to approximately $12,000 at June 30, 2004. 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 decreased approximately $289,000, or 55.2%, for the fiscal year ended June 30, 2004, from $524,000 for the
year ended June 30, 2003 to $235,000. The decrease in non-interest income was primarily attributable to decreases in customer service fees of approximately $32,000, or 20.4%, and gains on the sale of securities available for sale of approximately
$291,000, or 82.2%, for the fiscal year ended June 30, 2004. The decrease in customer service fees was primarily attributable to a decrease in fees of approximately $38,000 associated with secondary market loan sales.



Non-Interest Expense. Non-interest expense increased approximately
$140,000, or 7.0%, for the fiscal year ended June 30, 2004. This increase was primarily attributable to an increase in salaries and employee benefits of approximately $134,000, or 12.1%, an increase in data processing expense of approximately
$11,000, or 5.5%, and an increase in professional service expense of approximately $51,000, or 27.3%, for the fiscal year ended June 30, 2004. The increase in salaries and employee benefits were primarily attributable to salary adjustments and
increases in other benefit expenses. The increase in professional service expense was primarily attributable to legal fees associated with the delisting of the Companys common stock.



Provision for Income Taxes. During the fiscal year ended June 30,
2004, the provision for income tax expense decreased approximately $215,000, or 36.1%. This decrease was primarily attributable to an decrease in taxable net income for the year ended June 30, 2004, as compared to the year ended June 30, 2003.
Income tax expense was approximately $381,000 for the year ended June 30, 2004 compared to approximately $596,000 for the year ended June 30, 2003 resulting in effective tax rate of 40% in both years. 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.



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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 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, 2004, based on the most recent information provided by the OTS, it was estimated that the
Banks NPV would decrease 7%, 17% and 27% and increase 2% in the event of 100, 200 and 300 basis point increases and a 100 basis point decrease in market interest rates, respectively. These calculations indicate that the Banks net
portfolio value could be adversely affected by increases in interest rates. Changes in interest rates also may affect the Banks net interest income, with increases in rates expected to decrease income and decreases in rates expected to
increase income, as the Banks interest-bearing liabilities would be expected to mature or reprice more quickly than the Banks interest-earning assets.



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



The Banks
Board of Directors is responsible for reviewing the Banks asset and liability policies. On at least a quarterly basis, the Board reviews interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Banks
management is responsible for administering the policies and determinations of the



8



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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, 2004 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,   |        
|                                                                                 |  | 2004                   |         |          | 2003 |                    
|                                                                                 |  | AverageBalance         |         | Interest |      | Average Yield/ Cost |  |        | AverageBalance |  | Interest |         | Average Yield/ Cost |  
|                                                                                 |  | (Dollars in thousands) |        
|Interest-earning assets:                                                         |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Loans receivable                                                                 |  | $                      | 37,544  |          | $    | 2,243               |  | 5.97   | %              |  | $        | 38,680  |                     | $ | 2,374 |  | 6.14   | %
|Securities                                                                       |  |                        | 60,136  |          |      | 2,721               |  | 4.52   |                |  |          | 63,324  |                     |   | 3,448 |  | 5.45   |  
|Other interest-earning assets                                                    |  |                        | 4,296   |          |      | 43                  |  | 1.00   |                |  |          | 5,184   |                     |   | 68    |  | 1.31   |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total interest-earning assets                                                    |  |                        | 101,976 |          |      | 5,007               |  | 4.91   |                |  |          | 107,188 |                     |   | 5,890 |  | 5.50   |  
|Non-interest-earning assets                                                      |  |                        | 4,238   |          |      |                     |  |        |                |  |          | 5,191   |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total assets                                                                     |  | $                      | 106,214 |          |      |                     |  |        |                |  | $        | 112,379 |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Interest-bearing liabilities:                                                    |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Deposits                                                                         |  | $                      | 81,079  |          |      | 1,780               |  | 2.20   |                |  | $        | 84,611  |                     |   | 2,518 |  | 2.98   |  
|FHLB advances                                                                    |  |                        | 6,913   |          |      | 340                 |  | 4.92   |                |  |          | 7,746   |                     |   | 380   |  | 4.91   |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total interest-bearing liabilities                                               |  |                        | 87,992  |          |      | 2,120               |  | 2.41   |                |  |          | 92,357  |                     |   | 2,898 |  | 3.14   |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Non-interest-bearing liabilities                                                 |  |                        | 437     |          |      |                     |  |        |                |  |          | 896     |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total liabilities                                                                |  |                        | 88,429  |          |      |                     |  |        |                |  |          | 93,253  |                     |   |       |  |        |  
|Equity                                                                           |  |                        | 17,785  |          |      |                     |  |        |                |  |          | 19,126  |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Total liabilities and equity                                                     |  | $                      | 106,214 |          |      |                     |  |        |                |  | $        | 112,379 |                     |   |       |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Net interest income                                                              |  |                        |         |          | $    | 2,887               |  |        |                |  |          |         |                     | $ | 2,992 |  |        |  
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Interest rate spread                                                             |  |                        |         |          |      |                     |  | 2.50   | %              |  |          |         |                     |   |       |  | 2.36   | %
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Net interest margin                                                              |  |                        |         |          |      |                     |  | 2.83   | %              |  |          |         |                     |   |       |  | 2.79   | %
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                        |         |          |      |                     |  | 115.89 | %              |  |          |         |                     |   |       |  | 116.06 | %
|                                                                                 |  |                        |         |          |      |                     |  |        |                |  |          |         |                     |   |       |  |        |  



9



---

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,        |     
|                                   |  | 2004 vs. 2003              |     
|                                   |  | Increase (Decrease) Due to |     
|                                   |  | Rate                       |      |   | Volume |   |      | Total | 
|                                   |  | (In thousands)             |     
|Interest income                    |  |                            |      |   |        |   |      |       |  |   |      |  
|Loans                              |  | $                          | (61  | ) |        | $ | (70  | )     |  | $ | (131 | )
|Securities                         |  |                            | (553 | ) |        |   | (174 | )     |  |   | (727 | )
|Other interest-earning assets      |  |                            | 17   |   |        |   | (42  | )     |  |   | (25  | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Total interest-earning assets      |  |                            | (597 | ) |        |   | (286 | )     |  |   | (883 | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Interest expense                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Deposits                           |  |                            | (635 | ) |        |   | (103 | )     |  |   | (738 | )
|Interest on FHLB Advances          |  |                            | 1    |   |        |   | (41  | )     |  |   | (40  | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Total interest-bearing liabilities |  |                            | (634 | ) |        |   | (144 | )     |  |   | (778 | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  
|Change in net interest income      |  | $                          | 37   |   |        | $ | (142 | )     |  | $ | (105 | )
|                                   |  |                            |      |   |        |   |      |       |  |   |      |  



Liquidity and Capital Resources



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



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



The Bank
continues to maintain a high level of liquid assets in order to meet its funding requirements. At June 30, 2004, the Bank had approximately $5.7 million in cash on hand and interest-bearing deposits in other banks, which represented 5.4% of total
assets. The Banks average liquidity ratio well exceeded the required minimum at and during the fiscal year ended June 30, 2004. At June 30, 2004, the Banks level of liquid assets, as measured for regulatory compliance purposes, was $16.8
million, or 20.2% of total liquid assets of the Bank.



At June
30, 2004, the Bank had $16.4 million of total equity, or 15.4% of total assets. The Bank continued to exceed its regulatory capital requirement ratios at June 30, 2004. Tangible capital and core capital were each $16.5 million, which represented
15.4% of adjusted total assets, and risk-based capital was $16.6 million, which represented 44.7% of total risk-weighted assets at June 30, 2004.Such amounts exceeded the respective minimum required ratios of 1.5%, 4.0% and 8.0% by 13.9%,
11.4% and 36.7%, respectively. At June 30, 2004, 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.



10



---

Contractual Obligations



The following table sets forth the contractual obligations of the Bank as of June 30, 2004.



|                           |  |                 |        |                            |   |                              |  |                |        |       |   |    |  |   |       
|-------------------------- |  | --------------- | ------ | -------------------------- | - | ---------------------------- |  | -------------- | ------ | ----- | - | -- |  | - | ------
|                           |  | One Yearor Less |        | Over OnethroughThree Years |   | Over Threethrough Five Years |  | OverFive Years |        | Total
|                           |  | (In thousands) 
|FHLB advances(1)           |  | $               | 0      |                            | $ | 3,000                        |  | $              | 3,917  |       | $ | 0  |  | $ | 6,917 
|Operating leases(2)        |  |                 | 7      |                            |   | 4                            |  |                | 0      |       |   | 0  |  |   | 11    
|Certificates of deposit(3) |  |                 | 25,329 |                            |   | 21,495                       |  |                | 13,502 |       |   | 62 |  |   | 60,388
|                           |  |                 |        |                            |   |                              |  |                |        |       |   |    |  |   |       
|Total                      |  | $               | 25,336 |                            | $ | 24,499                       |  | $              | 17,419 |       | $ | 62 |  | $ | 67,316
|                           |  |                 |        |                            |   |                              |  |                |        |       |   |    |  |   |       

---

|(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 exposures of the Bank as of June 30, 2004.



|                                           |  |                 |     |                            |   |                             |  |                |       |       |   |   |  |   |      
|------------------------------------------ |  | --------------- | --- | -------------------------- | - | --------------------------- |  | -------------- | ----- | ----- | - | - |  | - | -----
|                                           |  | One Yearor Less |     | Over OnethroughThree Years |   | Over ThreethroughFive Years |  | OverFive Years |       | Total
|                                           |  | (In thousands) 
|Lines of credit  consumer                 |  | $               | 0   |                            | $ | 0                           |  | $              | 1,092 |       | $ | 0 |  | $ | 1,092
|Lines of creditcommercial                 |  |                 | 0   |                            |   | 0                           |  |                | 52    |       |   | 0 |  |   | 52   
|Commitments to originate real estate loans |  |                 | 627 |                            |   | 0                           |  |                | 0     |       |   | 0 |  |   | 0    
|Overdraft Protection                       |  |                 | 9   |                            |   | 0                           |  |                | 0     |       |   | 0 |  |   | 9    
|                                           |  |                 |     |                            |   |                             |  |                |       |       |   |   |  |   |      
|Total                                      |  | $               | 636 |                            | $ | 0                           |  | $              | 1,144 |       | $ | 0 |  | $ | 1,780
|                                           |  |                 |     |                            |   |                             |  |                |       |       |   |   |  |   |      



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, 2004, the Bank had approximately $627,000 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).



11



---

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 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



On December 24, 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities(FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means
other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46), which was issued on January 17, 2003. FIN 46 provides consolidation
guidance for situations in which voting equity interests do not adequately reflect the controlling interests in an entity. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to operate without additional subordinated financial support from other
parties. Management is currently assessing the impact of FIN 46R, and does not expect this interpretation to have any impact to the consolidated financial statements upon adoption on December 31, 2004.



In March 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 105, Application of Accounting Principles to Loan Commitments, which summarized the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as
derivative instruments. The SAB requires that the fair value measurement of a loan commitment that is accounted for as a derivative includes only differences between the guaranteed interest rate in the loan commitment and a market interest rate,
excluding any expected cash flows related to the customer relationship or loan servicing. This SAB is effective for loan commitments entered into after March 31, 2004. The Company adopted SAB 105 on April 1, 2004, and the effect was not material.



In March 2004, the FASBs Emerging Issues Task Force
reached a consensus of EITF Issue No. 031, The Meaning of OtherThanTemporary Impairment and Its Application to Certain Investments. The guidance prescribes a threestep model for determining whether an investment is
otherthantemporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting



12



---

periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods beginning after June 15, 2004, while the
disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The Company has adopted the requirements of this EITF.



Forward-Looking Statements



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



Changes in Certifying Accountant



Effective
July 23, 2002, the Company dismissed its independent accountants, Arthur Andersen LLP (Andersen), and appointed KPMG LLP (KPMG) as its new independent accountants. This determination followed the Companys decision to
seek proposals from independent accountants to audit the Companys financial statements for the fiscal year ended June 30, 2002. The decision to dismiss Andersen and to retain KPMG was approved by the Companys Board of Directors upon the
recommendation of its Audit Committee. Andersens report on the Companys 2001 financial statements was issued in August 2001, in conjunction with the filing of the Companys Annual Report on Form 10-KSB for the fiscal year ended June
30, 2001.



During the Companys fiscal years ended June
30, 2001 and 2000, and the subsequent interim period through July 23, 2003, there were no disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to Andersens satisfaction, would have caused Andersen to make reference to the subject matter of the disagreement in connection with its reports.



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



During the Companys fiscal years ended June 30, 2001 and
2000, and the subsequent interim period through July 23, 2003, the Company did not consult with KPMG regarding any of the matters or events set forth in Item 304(a) (2)(i) and (ii) of Regulation S-B.



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



13



---

CORPORATE INFORMATION



|                                                                                                         |                                                                                                                            |                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Directors and Executive Officers:                                                                        |                                                                                                                            | Main Office:                                                                                                                                                                                                                                                  
|                                                                                                         |                                                                                                                           
|Gates Little Chairman of the Board,
President and Chief Executive Officer of the Company and of the Bank |                                                                                                                            | 221 S. 6th Street Gadsden, Alabama                                                                                                                                                                                                                            
|                                                                                                         |                                                                                                                           
|Craig G. Cantrell Retired                                                                                |                                                                                                                            | Branch Offices:                                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | 202 Sand Mountain Drive Albertville, Alabama                                                                                                                                                                                                                  
|                                                                                                         |                                                                                                                           
|Thomas F. Dowling, III Dentist                                                                           |                                                                                                                            |                                                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | 2204 Henry Street Guntersville, Alabama                                                                                                                                                                                                                       
|                                                                                                         |                                                                                                                           
|Grady Gillam Retired                                                                                     |                                                                                                                            |                                                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | 390 W. Main Street Centre, Alabama                                                                                                                                                                                                                            
|                                                                                                         |                                                                                                                           
|Rex G. Keeling, Jr. Pharmacy
Consultant and Real Estate Investor                                         |                                                                                                                            |                                                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | Independent Public Accountants:                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | KPMG LLP Birmingham, Alabama                                                                                                                                                                                                                                  
|                                                                                                         |                                                                                                                           
|James B. Little, Jr. Investment
Officer of the Bank and Vice President of the Company                    |                                                                                                                            |                                                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | General Counsel:                                                                                                                                                                                                                                              
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | Inzer, Haney & McWhorter, P.A. Gadsden, Alabama                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|James B. Little, III New Capital
Partners, LLC Founder and Partner                                       |                                                                                                                            |                                                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | Securities and Regulatory Counsel:                                                                                                                                                                                                                            
|                                                                                                         |                                                                                                                           
|                                                                                                         |                                                                                                                            | Cozen OConnor Washington, D.C.                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|Fred Taylor Owner of Taylor
Realty                                                                       |                                                                                                                            |                                                                                                                                                                                                                                                               
|                                                                                                         |                                                                                                                           
|Officers:  Rodney Rich Vice President of the Bank  Janice Stephens Comptroller of the Bank               |                                                                                                                            | Annual Stockholders Meeting:                                                                                                                                                                                                                                  
|                                                                                                         | November 10, 2004 - 5:00 p.m. The Southern Bank Company 221 S.
6thStreet Gadsden, Alabama Record Date  September 17, 2004
|                                                                                                         |                                                                                                                            |                                                                                                                                                                                                                                                               
|Teresa Elkins Vice President of the
Bank                                                                 |                                                                                                                            | A copy of the Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004 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.
|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                                                                    |                                                                                                                            |                                                                                                                                                                                                                                                               



14



---



THE SOUTHERN BANC COMPANY,
INC.



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



15



---



Report of Independent
Registered Public Accounting Firm



The Board of Directors

The Southern Banc Company, Inc.:



We have audited the accompanying consolidated statements of financial condition of The Southern Banc Company, Inc. (a Delaware corporation) and subsidiaries as of June
30, 2004 and 2003, and the related consolidated statements of income, stockholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of The Southern Banc Company, Inc. and subsidiaries as of June 30, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.



/s/ KPMG LLP



Birmingham, Alabama

August 3, 2004



16



---



THE SOUTHERN BANC COMPANY,
INC.



Consolidated Statements of Financial Condition



June 30, 2004 and 2003



|                                                                                                               |  |      |             |   |      |             |  
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | ----------- | -
|                                                                                                               |  | 2004 |             |   | 2003 |            
|Assets                                                                                                         |  |      |             |   |      |             |  
|                                                                                                               |  |     
|Cash and cash equivalents:                                                                                     |  |      |             |   |      |             |  
|Cash on hand and in other banks                                                                                |  | $    | 3,169,215   |   |      | 4,052,175   |  
|Interestbearing deposits in other banks                                                                       |  |      | 2,564,790   |   |      | 5,340,770   |  
|                                                                                                               |  |      |             |   |      |             |  
|Total cash and cash equivalents                                                                                |  |      | 5,734,005   |   |      | 9,392,945   |  
|                                                                                                               |  |     
|Securities available for sale, at fair value                                                                   |  |      | 56,717,031  |   |      | 53,722,625  |  
|Securities held to maturity (fair value of $4,474,510 and $7,714,264, respectively)                            |  |      | 4,194,141   |   |      | 7,214,938   |  
|Federal Home Loan Bank stock                                                                                   |  |      | 792,300     |   |      | 886,000     |  
|Loans held for sale                                                                                            |  |      |            |   |      | 50,000      |  
|Loans receivable, net of allowance for loan losses of $144,298 and $139,573, respectively                      |  |      | 37,476,587  |   |      | 38,917,607  |  
|Accrued interest and dividends receivable                                                                      |  |      | 439,616     |   |      | 482,959     |  
|Premises and equipment, net                                                                                    |  |      | 485,565     |   |      | 506,776     |  
|Prepaid expenses and other assets                                                                              |  |      | 514,140     |   |      | 526,985     |  
|                                                                                                               |  |      |             |   |      |             |  
|Total assets                                                                                                   |  | $    | 106,353,385 |   |      | 111,700,835 |  
|                                                                                                               |  |      |             |   |      |             |  
|                                                                                                               |  |     
|Liabilities and Stockholders Equity                                                                           |  |      |             |   |      |             |  
|Deposits                                                                                                       |  | $    | 82,005,081  |   |      | 84,357,309  |  
|Federal Home Loan Bank advances                                                                                |  |      | 6,916,667   |   |      | 7,750,000   |  
|Other liabilities                                                                                              |  |      | 178,970     |   |      | 727,748     |  
|                                                                                                               |  |      |             |   |      |             |  
|Total liabilities                                                                                              |  |      | 89,100,718  |   |      | 92,835,057  |  
|                                                                                                               |  |      |             |   |      |             |  
|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 2004 and 2003 |  |      | 14,548      |   |      | 14,548      |  
|Additional paid-in capital                                                                                     |  |      | 13,910,384  |   |      | 13,818,230  |  
|Retained earnings                                                                                              |  |      | 11,340,830  |   |      | 11,082,024  |  
|Unearned compensation                                                                                          |  |      | (70,715     | ) |      | (156,495    | )
|Shares held in trust, at cost, 34,799 and 65,738 shares in 2004 and 2003, respectively                         |  |      | (495,412    | ) |      | (852,141    | )
|Treasury stock, at cost, 562,452 and 493,252 shares in 2004 and 2003, respectively                             |  |      | (7,346,782  | ) |      | (6,182,391  | )
|Accumulated other comprehensive income (loss)                                                                  |  |      | (100,186    | ) |      | 1,142,003   |  
|                                                                                                               |  |      |             |   |      |             |  
|Total stockholders equity                                                                                     |  |      | 17,252,667  |   |      | 18,865,778  |  
|                                                                                                               |  |      |             |   |      |             |  
|Total liabilities and stockholders equity                                                                     |  | $    | 106,353,385 |   |      | 111,700,835 |  
|                                                                                                               |  |      |             |   |      |             |  



See accompanying notes to consolidated
financial statements.



17



---



THE SOUTHERN BANC COMPANY,
INC.



Consolidated Statements of Income



Years ended June 30, 2004 and 2003



|                                                        |  |      |           |      |          
|------------------------------------------------------- |  | ---- | --------- | ---- | ---------
|                                                        |  | 2004 |           | 2003
|Interest income:                                        |  |      |           |      |          
|Interest and fees on loans                              |  | $    | 2,242,975 |      | 2,373,829
|Interest and dividends on securities available for sale |  |      | 2,329,473 |      | 2,791,547
|Interest and dividends on securities held to maturity   |  |      | 391,719   |      | 657,143  
|Other interest income                                   |  |      | 43,145    |      | 67,967   
|                                                        |  |      |           |      |          
|Total interest income                                   |  |      | 5,007,312 |      | 5,890,486
|                                                        |  |     
|Interest expense:                                       |  |      |           |      |          
|Interest on deposits                                    |  |      | 1,779,908 |      | 2,518,249
|Interest on borrowed funds                              |  |      | 339,687   |      | 380,404  
|                                                        |  |      |           |      |          
|Total interest expense                                  |  |      | 2,119,595 |      | 2,898,653
|                                                        |  |      |           |      |          
|Net interest income before provision for loan losses    |  |      | 2,887,717 |      | 2,991,833
|                                                        |  |     
|Provision for loan losses                               |  |      | 11,600    |      | 13,000   
|                                                        |  |      |           |      |          
|Net interest income after provision for loan losses     |  |      | 2,876,117 |      | 2,978,833
|                                                        |  |      |           |      |          
|Noninterest income:                                     |  |      |           |      |          
|Customer service fees                                   |  |      | 124,937   |      | 156,651  
|Gain on sale of available for sale securities           |  |      | 62,490    |      | 353,929  
|Other income                                            |  |      | 47,358    |      | 13,154   
|                                                        |  |      |           |      |          
|Total noninterest income                                |  |      | 234,785   |      | 523,734  
|                                                        |  |      |           |      |          
|Noninterest expense:                                    |  |      |           |      |          
|Salaries and employee benefits                          |  |      | 1,243,546 |      | 1,109,806
|Data processing expense                                 |  |      | 213,312   |      | 201,782  
|Professional service expense                            |  |      | 238,105   |      | 186,650  
|Office building and equipment expense                   |  |      | 81,103    |      | 93,454   
|Other expense                                           |  |      | 376,599   |      | 420,626  
|                                                        |  |      |           |      |          
|Total noninterest expense                               |  |      | 2,152,665 |      | 2,012,318
|                                                        |  |      |           |      |          
|Income before provision for income taxes                |  |      | 958,237   |      | 1,490,249
|                                                        |  |     
|Provision for income taxes                              |  |      | 380,883   |      | 595,787  
|                                                        |  |      |           |      |          
|Net income                                              |  | $    | 577,354   |      | 894,462  
|                                                        |  |      |           |      |          
|Earnings per share:                                     |  |      |           |      |          
|Basic                                                   |  | $    | 0.66      |      | 1.02     
|Diluted                                                 |  |      | 0.63      |      | 1.00     
|                                                        |  |     
|Average shares outstanding  basic                      |  |      | 878,391   |      | 876,172  
|Average shares outstanding  diluted                    |  |      | 912,704   |      | 894,421  



See accompanying notes to consolidated
financial statements.



18



---



THE SOUTHERN BANC COMPANY,
INC.



Consolidated Statements of Stockholders Equity



Years ended June 30, 2004 and 2003



|                                                                       |  |              |        |                            |            |                   |            |   |                       |          |   |                      |          |   |                |            |   |                                              |            |   |       |            |  
|---------------------------------------------------------------------- |  | ------------ | ------ | -------------------------- | ---------- | ----------------- | ---------- | - | --------------------- | -------- | - | -------------------- | -------- | - | -------------- | ---------- | - | -------------------------------------------- | ---------- | - | ----- | ---------- | -
|                                                                       |  | Common stock |        | Additional paid-in capital |            | Retained earnings |            |   | Unearned compensation |          |   | Shares held in trust |          |   | Treasury stock |            |   | Accumulatedother comprehensive income (loss) |            |   | Total |           
|Balance, June 30, 2002                                                 |  | $            | 14,548 |                            | 13,761,758 |                   | 10,497,569 |   |                       | (245,469 | ) |                      | (852,141 | ) |                | (5,642,391 | ) |                                              | 810,029    |   |       | 18,343,903 |  
|                                                                       |  |              |        |                            |            |                   |            |  
|Net income                                                             |  |              |       |                            |           |                   | 894,462    |   |                       |         |   |                      |         |   |                |           |   |                                              |           |   |       | 894,462    |  
|Change in unrealized gain on securities available for sale, net of tax |  |              |       |                            |           |                   |           |   |                       |         |   |                      |         |   |                |           |   |                                              | 331,974    |   |       | 331,974    |  
|                                                                       |  |              |        |                            |            |                   |            |   |                       |          |   |                      |          |   |                |            |   |                                              |            |   |       |            |  
|Comprehensive income                                                   |  |              |        |                            |            |                   |            |   |                       |          |   |                      |          |   |                |            |   |                                              |            |   |       | 1,226,436  |  
|                                                                       |  |              |        |                            |            |                   |            |  
|Amortization of unearned compensation                                  |  |              |       |                            | 56,472     |                   |           |   |                       | 88,974   |   |                      |         |   |                |           |   |                                              |           |   |       | 145,446    |  
|Purchase of 45,000 shares of treasury stock                            |  |              |       |                            |           |                   |           |   |                       |         |   |                      |         |   |                | (540,000   | ) |                                              |           |   |       | (540,000   | )
|Dividends paid ($0.35 per share)                                       |  |              |       |                            |           |                   | (310,007   | ) |                       |         |   |                      |         |   |                |           |   |                                              |           |   |       | (310,007   | )
|                                                                       |  |              |        |                            |            |                   |            |   |                       |          |   |                      |          |   |                |            |   |                                              |            |   |       |            |  
|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 |  
|                                                                       |  |              |        |                            |            |                   |            |   |                       |          |   |                      |          |   |                |            |   |                                              |            |   |       |            |  



See
accompanying notes to consolidated financial statements.



19



---



THE SOUTHERN BANC COMPANY,
INC.



Consolidated Statements of Cash Flows



Years ended June 30, 2004 and 2003



|                                                                                  |  |      |             |   |      |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | ----------- | -
|                                                                                  |  | 2004 |             |   | 2003 |            
|Cash flows from operating activities:                                             |  |      |             |   |      |             |  
|Net income                                                                        |  | $    | 577,354     |   |      | 894,462     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |             |  
|Depreciation                                                                      |  |      | 44,989      |   |      | 58,143      |  
|Amortization of premiums on securities, net                                       |  |      | 253,465     |   |      | 190,420     |  
|Amortization of intangible asset                                                  |  |      | 12,115      |   |      | 18,419      |  
|Amortization of unearned compensation                                             |  |      | 177,934     |   |      | 145,446     |  
|Provision for loan losses                                                         |  |      | 11,600      |   |      | 13,000      |  
|Deferred income tax provision                                                     |  |      | 1,230       |   |      | 64,816      |  
|Gain on loans held for sale                                                       |  |      | (18,953     | ) |      | (53,248     | )
|Proceeds from sale of loans held for sale                                         |  |      | 1,265,653   |   |      | 3,371,925   |  
|Loans originated for sale                                                         |  |      | (1,196,700  | ) |      | (3,368,677  | )
|Gain on sale of available for sale securities                                     |  |      | (62,490     | ) |      | (353,929    | )
|Change in assets and liabilities:                                                 |  |      |             |   |      |             |  
|Decrease in accrued interest and dividends receivable                             |  |      | 43,343      |   |      | 102,591     |  
|Decrease (increase) in prepaid expenses and other assets                          |  |      | 730         |   |      | (432,450    | )
|Increase (decrease) in other liabilities                                          |  |      | 977         |   |      | (25,383     | )
|                                                                                  |  |      |             |   |      |             |  
|Net cash provided by operating activities                                         |  |      | 1,111,247   |   |      | 625,535     |  
|                                                                                  |  |      |             |   |      |             |  
|                                                                                  |  |     
|Cash flows from investing activities:                                             |  |      |             |   |      |             |  
|Purchase of securities available for sale                                         |  |      | (29,144,626 | ) |      | (33,154,397 | )
|Proceeds from maturities and principal payments on securities available for sale  |  |      | 21,172,190  |   |      | 22,872,040  |  
|Proceeds from sales of securities available for sale                              |  |      | 2,983,710   |   |      | 10,965,222  |  
|Proceeds from maturities and principal payments on securities held to maturity    |  |      | 3,030,968   |   |      | 4,326,508   |  
|Sale of Federal Home Loan Bank stock                                              |  |      | 93,700      |   |      | 562,800     |  
|Loan (originations) repayments, net                                               |  |      | 1,429,420   |   |      | (4,416,044  | )
|Capital expenditures, net                                                         |  |      | (23,778     | ) |      | (34,897     | )
|                                                                                  |  |      |             |   |      |             |  
|Net cash (used in) provided by investing activities                               |  |      | (458,416    | ) |      | 1,121,232   |  
|                                                                                  |  |      |             |   |      |             |  
|                                                                                  |  |     
|Cash flows from financing activities:                                             |  |      |             |   |      |             |  
|Purchase of treasury stock                                                        |  |      | (1,164,391  | ) |      | (540,000    | )
|Federal Home Loan Bank (repayments) advances                                      |  |      | (833,333    | ) |      | (1,833,333  | )
|Cash dividends paid                                                               |  |      | (318,548    | ) |      | (310,007    | )
|(Decrease) increase in deposits, net                                              |  |      | (2,352,228  | ) |      | 2,800,149   |  
|Proceeds from exercise of stock options                                           |  |      | 356,729     |   |      |            |  
|                                                                                  |  |      |             |   |      |             |  
|Net cash (used in) provided by financing activities                               |  |      | (4,311,771  | ) |      | 116,809     |  
|                                                                                  |  |      |             |   |      |             |  
|Net (decrease) increase in cash and cash equivalents                              |  |      | (3,658,940  | ) |      | 1,863,576   |  
|                                                                                  |  |     
|Cash and cash equivalents, beginning of year                                      |  |      | 9,392,945   |   |      | 7,529,369   |  
|                                                                                  |  |      |             |   |      |             |  
|Cash and cash equivalents, end of year                                            |  | $    | 5,734,005   |   |      | 9,392,945   |  
|                                                                                  |  |      |             |   |      |             |  
|Supplemental cash flow information:                                               |  |      |             |   |      |             |  
|Cash paid during the year for:                                                    |  |      |             |   |      |             |  
|Income taxes, net of refund received                                              |  | $    | 357,785     |   |      | 554,524     |  
|Interest                                                                          |  |      | 2,124,322   |   |      | 2,915,506   |  



See accompanying notes to consolidated
financial statements.



20



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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



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



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



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



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



The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles
generally accepted in the United States of America (GAAP) and with general practices within the 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)



21



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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. Loans held for sale at June 30, 2004 and 2003 were $0 and $50,000, respectively.



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, 2004 or 2003.



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)



22



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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, 2004 and 2003, core deposit premiums were $0 and $12,115, respectively, net of accumulated amortization of $344,341 and $332,226,
respectively. Core deposit premiums were being amortized over a period of ten years using an accelerated method. Amortization of core deposit premiums was $12,115 and $18,419 in fiscal years 2004 and 2003, 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)



23



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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 been reduced to the pro forma amounts indicated below:



|                                      |  |      |         |      |         |  
|------------------------------------- |  | ---- | ------- | ---- | ------- | -
|                                      |  | 2004 |         | 2003 |        
|Net income:                           |  |      |         |      |         |  
|As reported                           |  | $    | 577,354 |      | 894,462 |  
|Less stock based compensation expense |  |      |        |      | (1,378  | )
|                                      |  |      |         |      |         |  
|Pro forma                             |  | $    | 577,354 |      | 893,084 |  
|                                      |  |      |         |      |         |  
|Earnings per share:                   |  |      |         |      |         |  
|As reported:                          |  |      |         |      |         |  
|Basic                                 |  | $    | 0.66    |      | 1.02    |  
|Diluted                               |  |      | 0.63    |      | 1.00    |  
|Pro forma:                            |  |      |         |      |         |  
|Basic                                 |  |      | 0.66    |      | 1.02    |  
|Diluted                               |  |      | 0.63    |      | 1.00    |  



| | (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
| | --- | --------------------------------



On December 24, 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities(FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46), which was issued on January 17, 2003. FIN 46 provides consolidation guidance for situations in which voting equity interests do not adequately
reflect the controlling interests in an entity. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to operate without additional subordinated financial support from other parties. Management is currently assessing the impact of FIN 46R, and
does not expect this interpretation to have any impact to the consolidated financial statements upon adoption on December 31, 2004.



In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 105, Application of Accounting Principles to Loan
Commitments, which summarized the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The SAB requires that the fair value measurement of a loan
commitment that is accounted for as a derivative includes only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected cash flows related to the customer relationship or loan
servicing. This SAB is effective for loan commitments entered into after March 31, 2004. The Company adopted SAB 105 on April 1, 2004, and the effect was not material.



(Continued)



24



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



In March 2004, the FASBs Emerging Issues Task Force reached a consensus
of EITF Issue No. 031, The Meaning of OtherThanTemporary Impairment and Its Application to Certain Investments. The guidance prescribes a threestep model for determining whether an investment is
otherthantemporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for
annual reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The Company has adopted the requirements of this EITF.



|(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, 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
|                                  |  |               |            |                     |           |                       |          |   |            |           
|                                  | 
|                                  |  | June 30, 2003
|                                  |  | Amortizedcost |            | Grossunrealizedgain |           | Grossunrealized(loss) |          |   | Fair value
|U.S. Government agency securities |  | $             | 4,415,929  |                     | 255,911   |                       |         |   |            | 4,671,840 
|Mortgagebacked securities        |  |               | 47,706,152 |                     | 1,328,937 |                       | (1,020   | ) |            | 49,034,069
|Other                             |  |               | 16,716     |                     |          |                       |         |   |            | 16,716    
|                                  |  |               |            |                     |           |                       |          |   |            |           
|                                  |  | $             | 52,138,797 |                     | 1,584,848 |                       | (1,020   | ) |            | 53,722,625
|                                  |  |               |            |                     |           |                       |          |   |            |           



(Continued)



25



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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, 2004 
|                                       |  | Amortized cost |            | Fair value
|Due in one year or less                |  | $              |           |            |          
|Due after one year through five years  |  |                | 804,515    |            | 832,364   
|Due after five years through ten years |  |                | 5,501,658  |            | 5,521,746 
|Due after ten years                    |  |                | 604,913    |            | 652,061   
|                                       |  |                |            |            |           
|                                       |  |                | 6,911,086  |            | 7,006,171 
|Mortgage-backed securities             |  |                | 47,210,716 |            | 46,942,345
|Other                                  |  |                | 2,805,831  |            | 2,768,515 
|                                       |  |                |            |            |           
|                                       |  | $              | 56,927,633 |            | 56,717,031
|                                       |  |                |            |            |           



Proceeds from sales
of available for sale securities were $2,983,710 and $10,965,222 in 2004 and 2003, respectively. Gross gains of $62,490 and $353,929 were realized on these sales in 2004 and 2003, respectively. There were no gross losses realized on these sales in
2004 or 2003.



Securities designated as available for sale
with carrying values (fair values) of $2,258,632 have been pledged as collateral for certain large deposits (public funds) with an aggregate balance of $1,325,000 at June 30, 2004.



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, 2004:



|                                  |  |                     |            |                        |                     |   |           |         |                        |        |   |            |            |                       |          |  
|--------------------------------- |  | ------------------- | ---------- | ---------------------- | ------------------- | - | --------- | ------- | ---------------------- | ------ | - | ---------- | ---------- | --------------------- | -------- | -
|                                  |  | Less than 12 months |            |                        | More than 12 months |   |           | Total   |                       
|                                  |  | Fair value          |            | Unrealized grosslosses |                     |   | Fairvalue |         | Unrealized grosslosses |        |   | Fair value |            | Unrealizedgrosslosses |         
|U.S. Government agency securities |  | $                   | 3,136,575  |                        | (28,839             | ) |           |        |                        |       |   |            | 3,136,575  |                       | (28,839  | )
|Mortgagebacked securities        |  |                     | 32,072,269 |                        | (628,361            | ) |           | 599,567 |                        | (9,053 | ) |            | 32,671,836 |                       | (637,414 | )
|Other                             |  |                     | 1,863,311  |                        | (37,430             | ) |           |        |                        |       |   |            | 1,863,311  |                       | (37,430  | )
|                                  |  |                     |            |                        |                     |   |           |         |                        |        |   |            |            |                       |          |  
|                                  |  | $                   | 37,072,155 |                        | (694,630            | ) |           | 599,567 |                        | (9,053 | ) |            | 37,671,722 |                       | (703,683 | )
|                                  |  |                     |            |                        |                     |   |           |         |                        |        |   |            |            |                       |          |  



At June 30, 2004, the
Company has 66 individual availableforsale securities that were in an unrealized loss position. Only one of these investment securities had been in an unrealized loss position for longer than 12 months. 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. The Company does not expect any permanent impairment to develop related to these securities.



(Continued)



26



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



|(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, 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
|                                  |  |               |           |                     |         |                       |   |            |          
|                                  | 
|                                  |  | June 30, 2003
|                                  |  | Amortizedcost |           | Grossunrealizedgain |         | Grossunrealized(loss) |   | Fair value
|U.S. Government agency securities |  | $             | 101,110   |                     | 7,204   |                       |  |            | 108,314  
|Mortgage backed securities       |  |               | 7,113,828 |                     | 492,122 |                       |  |            | 7,605,950
|                                  |  |               |           |                     |         |                       |   |            |          
|                                  |  | $             | 7,214,938 |                     | 499,326 |                       |  |            | 7,714,264
|                                  |  |               |           |                     |         |                       |   |            |          



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, 2004 
|                                       |  | Amortized cost |           | Fair value
|Due in one year or less                |  | $              | 61,459    |            | 63,572   
|Due after one year through five years  |  |                |          |            |         
|Due after five years through ten years |  |                |          |            |         
|Due after ten years                    |  |                |          |            |         
|                                       |  |                |           |            |          
|                                       |  |                | 61,459    |            | 63,572   
|Mortgage backed securities            |  |                | 4,132,682 |            | 4,410,938
|                                       |  |                |           |            |          
|                                       |  | $              | 4,194,141 |            | 4,474,510
|                                       |  |                |           |            |          



(Continued)



27



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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



Loans receivable are summarized as follows:



|                                                     |  |         |            |      |            |  
|---------------------------------------------------- |  | ------- | ---------- | ---- | ---------- | -
|                                                     |  | June 30 |           
|                                                     |  | 2004    |            | 2003 |           
|Mortgage loans:                                      |  |         |            |      |            |  
|Secured by onetofour family residential properties |  | $       | 27,541,741 |      | 30,680,390 |  
|Secured by nonresidential properties                 |  |         | 1,164,000  |      | 451,000    |  
|Consumer loans                                       |  |         | 8,054,443  |      | 7,260,937  |  
|Savings account loans                                |  |         | 714,397    |      | 812,500    |  
|Commercial loans                                     |  |         | 413,453    |      | 179,384    |  
|                                                     |  |         |            |      |            |  
|                                                     |  |         | 37,888,034 |      | 39,384,211 |  
|Less:                                                |  |         |            |      |            |  
|Unearned interest income                             |  |         | 246,342    |      | 359,599    |  
|Deferred loan costs, net                             |  |         | 20,807     |      | (32,568    | )
|Allowance for loan losses                            |  |         | 144,298    |      | 139,573    |  
|                                                     |  |         |            |      |            |  
|Loans receivable, net                                |  | $       | 37,476,587 |      | 38,917,607 |  
|                                                     |  |         |            |      |            |  



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, 2004 and 2003, $319,628 and $303,207,
respectively, of these loans were outstanding. The change from June 30, 2003 to June 30, 2004 reflects payments amounting to $102,531 and advances of $118,952 made during the year.



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



|                           |  |                     |         |   |      |         |  
|-------------------------- |  | ------------------- | ------- | - | ---- | ------- | -
|                           |  | Years ended June 30 |        
|                           |  | 2004                |         |   | 2003 |        
|Balance, beginning of year |  | $                   | 139,573 |   |      | 133,233 |  
|Provision for loan losses  |  |                     | 11,600  |   |      | 13,000  |  
|Chargeoffs                |  |                     | (6,875  | ) |      | (6,660  | )
|                           |  |                     |         |   |      |         |  
|Balance, end of year       |  | $                   | 144,298 |   |      | 139,573 |  
|                           |  |                     |         |   |      |         |  



(Continued)



28



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



At June 30, 2004 and 2003, nonaccrual loans totaled $143,445 and $100,601,
respectively. Neither cash income recognized nor interest income foregone on nonaccrual loans was significant for fiscal years 2004 and 2003, respectively.



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



Accrued interest and dividends receivable is summarized as follows:



|                              |  |         |         |      |        
|----------------------------- |  | ------- | ------- | ---- | -------
|                              |  | June 30
|                              |  | 2004    |         | 2003
|Securities available for sale |  | $       | 285,703 |      | 290,416
|Securities held to maturity   |  |         | 24,953  |      | 42,854 
|Loans receivable, net         |  |         | 122,065 |      | 140,252
|Federal Home Loan Bank stock  |  |         | 6,895   |      | 9,437  
|                              |  |         |         |      |        
|                              |  | $       | 439,616 |      | 482,959
|                              |  |         |         |      |        



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



Premises and equipment are summarized as follows:



|                                                         |  |         |           |   |      |           |  
|-------------------------------------------------------- |  | ------- | --------- | - | ---- | --------- | -
|                                                         |  | June 30 |          
|                                                         |  | 2004    |           |   | 2003 |          
|Land                                                     |  | $       | 340,486   |   |      | 340,486   |  
|Building and improvements                                |  |         | 468,059   |   |      | 465,752   |  
|Leasehold improvements                                   |  |         | 11,390    |   |      | 11,390    |  
|Furniture, fixtures, and equipment                       |  |         | 295,629   |   |      | 377,040   |  
|                                                         |  |         |           |   |      |           |  
|                                                         |  |         | 1,115,564 |   |      | 1,194,668 |  
|Less accumulated depreciation and leasehold amortization |  |         | (629,999  | ) |      | (687,892  | )
|                                                         |  |         |           |   |      |           |  
|                                                         |  | $       | 485,565   |   |      | 506,776   |  
|                                                         |  |         |           |   |      |           |  



Depreciation and
leasehold amortization expense charged to office building and equipment expense in 2004 and 2003 totaled approximately $44,989 and $58,143, respectively.



(Continued)



29



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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



Deposits are summarized as follows:



|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ------- | ------------- | - | ------ | ---------- | ------- | ------ | -
|                                                                                                                                                |  | June 30, 2004 |            |         | June 30, 2003 |  
|                                                                                                                                                |  | Amount        |            | Percent |               |   | Amount |            | Percent |       
|Demand, NOW, and money market accounts, including noninterest bearing deposits of $548,415 and $395,568 at June 30, 2004 and 2003
respectively |  | $             | 14,735,265 |         | 17.97         | % |        | 9,430,503  |         | 11.18  | %
|Passbook savings                                                                                                                                |  |               | 6,881,697  |         | 8.39          | % |        | 9,247,684  |         | 10.96  | %
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|                                                                                                                                                |  |               | 21,616,962 |         | 26.36         | % |        | 18,678,187 |         | 22.14  | %
|Certificates of deposit:                                                                                                                        |  |               |            |         |               |   |        |            |         |        |  
|0.01  2.00% interest rate                                                                                                                      |  |               | 20,525,383 |         | 25.03         | % |        | 13,949,297 |         | 16.54  | %
|2.01  4.00% interest rate                                                                                                                      |  |               | 36,404,409 |         | 44.39         | % |        | 42,475,925 |         | 50.35  | %
|4.01  6.00% interest rate                                                                                                                      |  |               | 3,458,327  |         | 4.22          | % |        | 8,574,471  |         | 10.16  | %
|6.01  8.00% interest rate                                                                                                                      |  |               |           |         |              |   |        | 679,429    |         | 0.81   | %
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|                                                                                                                                                |  |               | 60,388,119 |         | 73.64         | % |        | 65,679,122 |         | 77.86  | %
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  
|                                                                                                                                                |  | $             | 82,005,081 |         | 100.00        | % |        | 84,357,309 |         | 100.00 | %
|                                                                                                                                                |  |               |            |         |               |   |        |            |         |        |  



The aggregate amount
of jumbo certificates of deposit with a minimum denomination of $100,000 was $13,441,055 and $13,414,360 at June 30, 2004 and 2003, respectively.



At June 30, 2004, the scheduled maturities of time deposits are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2005       |  | $ | 25,329,374
|2006       |  |   | 14,380,527
|2007       |  |   | 7,114,198 
|2008       |  |   | 4,459,919 
|2009       |  |   | 9,042,287 
|Thereafter |  |   | 61,814    
|           |  |   |           
|Total      |  | $ | 60,388,119
|           |  |   |           



(Continued)



30



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



Interest expense on deposits consisted of the following:



|                              |  |                     |           |      |          
|----------------------------- |  | ------------------- | --------- | ---- | ---------
|                              |  | Years ended June 30
|                              |  | 2004                |           | 2003
|Passbook savings              |  | $                   | 42,834    |      | 105,361  
|NOW and money market accounts |  |                     | 91,330    |      | 131,846  
|Certificates of deposit       |  |                     | 1,645,744 |      | 2,281,042
|                              |  |                     |           |      |          
|                              |  | $                   | 1,779,908 |      | 2,518,249
|                              |  |                     |           |      |          



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



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



|                   |  |                     |         |      |        
|------------------ |  | ------------------- | ------- | ---- | -------
|                   |  | Years ended June 30
|                   |  | 2004                |         | 2003
|Current provision: |  |                     |         |      |        
|Federal            |  | $                   | 335,143 |      | 469,184
|State              |  |                     | 44,510  |      | 61,787 
|                   |  |                     |         |      |        
|                   |  |                     | 379,653 |      | 530,971
|Deferred provision |  |                     | 1,230   |      | 64,816 
|                   |  |                     |         |      |        
|                   |  | $                   | 380,883 |      | 595,787
|                   |  |                     |         |      |        



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 |        
|                                             |  | 2004                |         |   | 2003 |        
|Pretax income at statutory rates             |  | $                   | 325,800 |   |      | 506,685 |  
|Add:                                         |  |                     |         |   |      |         |  
|State income tax, net of federal tax benefit |  |                     | 29,505  |   |      | 45,283  |  
|Other, net                                   |  |                     | 25,578  |   |      | 43,819  |  
|                                             |  |                     |         |   |      |         |  
|                                             |  | $                   | 380,883 |   |      | 595,787 |  
|                                             |  |                     |         |   |      |         |  
|Effective tax rate                           |  |                     | 40      | % |      | 40      | %



(Continued)



31



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



The components of the net deferred tax asset or liability at June 30, 2004
and 2003 were as follows:



|                                                     |  |         |          |   |      |          |  
|---------------------------------------------------- |  | ------- | -------- | - | ---- | -------- | -
|                                                     |  | June 30 |         
|                                                     |  | 2004    |          |   | 2003 |         
|Accumulated amortization of intangibles              |  | $       | 41,954   |   |      | 74,665   |  
|Allowance for loan losses, net                       |  |         | 27,144   |   |      | 68,415   |  
|Accruals for employee benefit plans                  |  |         | 124,388  |   |      | 89,457   |  
|Unrealized net loss on securities available for sale |  |         | 80,169   |   |      |         |  
|Other                                                |  |         | 16,833   |   |      |         |  
|                                                     |  |         |          |   |      |          |  
|Deferred tax asset                                   |  |         | 290,488  |   |      | 232,537  |  
|                                                     |  |         |          |   |      |          |  
|Federal Home Loan Bank stock dividend                |  |         | (31,373  | ) |      | (57,369  | )
|Accretion of discount on securities                  |  |         | (226,602 | ) |      | (221,388 | )
|Deferred loan fees and costs, net                    |  |         | (134,415 | ) |      | (117,054 | )
|Other                                                |  |         |         |   |      | (17,567  | )
|Unrealized net gain on securities available for sale |  |         |         |   |      | (472,072 | )
|                                                     |  |         |          |   |      |          |  
|Deferred tax liability                               |  |         | (392,390 | ) |      | (885,450 | )
|                                                     |  |         |          |   |      |          |  
|Net deferred tax liability                           |  | $       | (101,902 | ) |      | (652,913 | )
|                                                     |  |         |          |   |      |          |  



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, 2004 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 |  |   | 1,346,583
|4.16% note payable, due October 17, 2007 |  |   | 1,570,084
|5.72% note payable, due March 19, 2008   |  |   | 1,000,000
|                                         |  |   |          
|                                         |  | $ | 6,916,667
|                                         |  |   |          



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 $792,300, as well as a pledge of certain securities with a carrying value of $19,557,883
at June 30, 2004. 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)



32



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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



|     |  |   |          
|---- |  | - | ---------
|2005 |  | $ |         
|2006 |  |   | 2,000,000
|2007 |  |   | 1,000,000
|2008 |  |   | 3,916,667
|     |  |   |          
|     |  | $ | 6,916,667
|     |  |   |          



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



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



The Company has operating lease agreements for its branch offices. Rental expense under these leases aggregated $7,364 for fiscal years 2004 and 2003. The
aggregate annual minimum rental commitments under the terms of all noncancelable leases at June 30, 2004 are as follows:



|             |  |        |       
|------------ |  | ------ | ------
|             |  | Amount
|Fiscal year: |  |        |       
|2005         |  | $      | 7,337 
|2006         |  |        | 3,682 
|2007         |  |        |      
|             |  |        |       
|             |  | $      | 11,019
|             |  |        |       



| | (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, 2004, the Company had $627,000 in outstanding commitments to originate residential
real estate loans. Additionally, at June 30, 2004, the Bank had provided approximately $1,144,127 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)



33



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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, 2004 and 2003, that the Bank meets all capital adequacy requirements to which it is subject.



As of June 30, 2004 and 2003, 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 30,2004:                                     |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|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  |  
|                                                  |  |                        |        |       |                              |  
|June 30,2003:                                     |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Total capital (to risk weighted assets):          |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  | $                      | 17,852 |       | 52.3                         | % |        | $                                                              | 2,729 |  | 8.0 | %      |  | $     | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,400 |       | 45.2                         | % |        |                                                                | 2,729 |  | 8.0 | %      |  |       | 3,411 |  | 10.0 | %
|Tier 1 (core) capital (to risk weighted assets):  |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 17,712 |       | 51.9                         | % |        |                                                                | 1,364 |  | 4.0 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,260 |       | 44.7                         | % |        |                                                                | 1,364 |  | 4.0 | %      |  |       | 2,046 |  | 6.0  | %
|Tier 1 (core) capital (to adjusted total assets): |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 17,712 |       | 16.0                         | % |        |                                                                | 4,426 |  | 4.0 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,260 |       | 13.8                         | % |        |                                                                | 4,426 |  | 4.0 | %      |  |       | 5,532 |  | 5.0  | %
|Tangible capital (to adjusted total assets):      |  |                        |        |       |                              |   |        |                                                                |       |  |     |        |  |       |       |  |      |  
|Consolidated                                      |  |                        | 17,712 |       | 16.0                         | % |        |                                                                | 1,660 |  | 1.5 | %      |  |       | N/A   |  | N/A  |  
|Southern Bank Company                             |  |                        | 15,260 |       | 13.8                         | % |        |                                                                | 1,660 |  | 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)



34



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



(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, 2004, 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:



|                                                                    |  |                  |            |   |            |          |   |                 |            |  
|------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------- | -------- | - | --------------- | ---------- | -
|                                                                    |  | 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 | )
|                                                                    |  |                  |            |   |            |          |   |                 |            |  
|                                                                    | 
|                                                                    |  | 2003             |           
|                                                                    |  | Before taxamount |            |   | Tax effect |          |   | After taxamount |           
|Unrealized gains arising during the year                            |  | $                | 856,920    |   |            | (290,768 | ) |                 | 566,152    |  
|Reclassification for adjustments for gains included in net earnings |  |                  | (353,929   | ) |            | 119,751  |   |                 | (234,178   | )
|                                                                    |  |                  |            |   |            |          |   |                 |            |  
|Net change in unrealized gains on securities                        |  | $                | 502,991    |   |            | (171,017 | ) |                 | 331,974    |  
|                                                                    |  |                  |            |   |            |          |   |                 |            |  



(Continued)



35



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



|(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, 2004 and 2003. 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,
2004 and 2003 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, 2004 and 2003:



|                                   |  |        |         |        |         |                 |   |     
|---------------------------------- |  | ------ | ------- | ------ | ------- | --------------- | - | ----
|                                   |  | Income |         | Shares |         | Per shareamount
|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
|                                   |  |        |         |        |         |                 |   |     
|2004:                              |  |        |         |        |         |                 |   |     
|Basic earnings per share           |  | $      | 894,462 |        | 876,172 |                 | $ | 1.02
|Dilutive securities:               |  |        |         |        |         |                 |   |     
|Incentive stock option plan shares |  |        |        |        | 18,249  |                 |   |     
|                                   |  |        |         |        |         |                 |   |     
|Dilutive earnings per share        |  | $      | 894,462 |        | 894,421 |                 |   | 1.00
|                                   |  |        |         |        |         |                 |   |     



Options to purchase
11,800 shares of common stock at $14.56 per share were outstanding during all four quarters of 2004 and 2003. During 2004, these options were included in the computation of diluted EPS because the options exercise price was less than the
average market price of the common shares. During 2003, these options were not included in the computation of diluted EPS because the options exercise price was greater than the average market price of the common shares.



|(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.



(Continued)



36



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



Expense related to the ESOP was approximately $147,000 and $116,000 for 2004
and 2003. Unearned compensation related to the ESOP was $70,715 and $156,495 at June 30, 2004 and 2003, respectively, and is shown as a reduction of stockholders equity in the accompanying consolidated statements of financial condition.



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



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



During fiscal 1996, the Bank established an MRP which purchased 58,190 shares of the Companys common stock on the open market. The MRP provides for
awards of common stock to directors and officers of the Bank. As of June 30, 2004, all awarded shares related to the MRP were allocated to directors and officers of the Bank.



Shares held in trust related to the MRP totaled 14,430 at June 30, 2004 and 2003, respectively. These shares, which were
purchased for an average price per share of $12.84, amounted to $185,234 at June 30, 2004 and 2003, respectively, and are shown as a reduction of stockholders equity in the accompanying consolidated statements of financial condition.



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



The Company established a Simplified Employee Pension Plan (SEP) for all employees who have completed one year of service, pursuant to Section 408(k) of
the Internal Revenue Code of 1986. The Company can make a discretionary contribution to the SEP each year. The cost to the Company under the SEP was $43,583 and $41,633 for fiscal years 2004 and 2003, respectively.



| | (d) | Employment Agreements
| | --- | ---------------------



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



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



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



(Continued)



37



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



Under the Option Plan, the Company may grant options up to 145,745 shares and
has granted options outstanding of 81,496 shares through June 30, 2004. 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 2004 and 2003, the Company did not purchase any shares to be used for the exercise of options. The
total number of shares held in trust related to the Option Plan was 20,369 and 51,308 and amounted to $310,178 and $666,907 at June 30, 2004 and 2003, respectively.



A summary of the status of the Companys Option Plan at June 30, 2004 and 2003 and the changes during the years then
ended is as follows:



|                                                   |  |         |   |      |                              |       |        |         |                              |   |      
|-------------------------------------------------- |  | ------- | - | ---- | ---------------------------- | ----- | ------ | ------- | ---------------------------- | - | -----
|                                                   |  | 2004    |   | 2003
|                                                   |  | Shares  |   |      | Weightedaverageexerciseprice |       | Shares |         | Weightedaverageexerciseprice
|Outstanding at beginning of year:                  |  | 125,031 |   |      | $                            | 11.91 |        | 125,031 |                              | $ | 11.91
|Forfeitures                                        |  | (12,596 | ) |      |                              | 11.69 |        |        |                              |   |     
|Exercised                                          |  | (30,939 | ) |      |                              | 11.53 |        |        |                              |   |     
|Granted                                            |  |        |   |      |                              |      |        |        |                              |   |     
|                                                   |  |         |   |      |                              |       |        |         |                              |   |      
|Outstanding at end of year                         |  | 81,496  |   |      | $                            | 12.09 |        | 125,031 |                              | $ | 11.91
|                                                   |  |         |   |      |                              |       |        |         |                              |   |      
|Exercisable at end of year                         |  | 81,206  |   |      | $                            | 12.11 |        | 124,449 |                              | $ | 11.93
|                                                   |  |         |   |     
|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)



38



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



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



|                                          |  |                 |        |                     |        |                |        |                     |       
|----------------------------------------- |  | --------------- | ------ | ------------------- | ------ | -------------- | ------ | ------------------- | ------
|                                          |  | June 30        
|                                          |  | 2004            |        | 2003               
|                                          |  | Carryingamount  |        | Estimatedfair value |        | Carryingamount |        | Estimatedfair value
|                                          |  | (in thousands ) |        | (in thousands)     
|Assets:                                   |  |                 |        |                     |        |                |        |                     |       
|Cash on hand and in banks                 |  | $               | 5,734  |                     | 5,734  |                | 9,393  |                     | 9,393 
|Securities  available for sale           |  |                 | 56,717 |                     | 56,717 |                | 53,723 |                     | 53,723
|Securities  held to maturity             |  |                 | 4,194  |                     | 4,475  |                | 7,215  |                     | 7,714 
|Federal Home Loan Bank stock              |  |                 | 792    |                     | 792    |                | 886    |                     | 886   
|Loans held for sale                       |  |                 |       |                     |       |                | 50     |                     | 50    
|Loans receivable, net                     |  |                 | 37,477 |                     | 38,956 |                | 38,918 |                     | 42,722
|Accrued interest and dividends receivable |  |                 | 440    |                     | 440    |                | 483    |                     | 483   
|                                          |  |                 |        |                    
|Liabilities:                              |  |                 |        |                     |        |                |        |                     |       
|Deposits                                  |  |                 | 82,005 |                     | 82,760 |                | 84,357 |                     | 85,279
|Federal Home Loan Bank advances           |  |                 | 6,917  |                     | 7,123  |                | 7,750  |                     | 7,972 
|Accrued interest payable                  |  |                 | 35     |                     | 35     |                | 39     |                     | 39    



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)



39



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



| | (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)



40



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



|(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, 2004 and 2003 are
presented below:



Statements of Financial Condition



June 30, 2004 and 2003



(Dollar amounts in thousands)



|                                           |  |      |        |   |      |        |  
|------------------------------------------ |  | ---- | ------ | - | ---- | ------ | -
|                                           |  | 2004 |        |   | 2003 |       
|Assets:                                    |  |      |        |   |      |        |  
|Cash and cash equivalents                  |  | $    | 744    |   |      | 2,218  |  
|Investment in subsidiary                   |  |      | 16,397 |   |      | 16,415 |  
|ESOP loan receivable                       |  |      | 126    |   |      | 232    |  
|Other assets                               |  |      | 8      |   |      | 11     |  
|                                           |  |      |        |   |      |        |  
|Total assets                               |  | $    | 17,275 |   |      | 18,876 |  
|                                           |  |      |        |   |      |        |  
|Liabilities:                               |  |      |        |   |      |        |  
|Other liabilities                          |  | $    | 22     |   |      | 10     |  
|                                           |  |     
|Stockholders equity:                      |  |      |        |   |      |        |  
|Preferred stock                            |  |      |       |   |      |       |  
|Common stock                               |  |      | 15     |   |      | 15     |  
|Additional paidin capital                 |  |      | 13,910 |   |      | 13,818 |  
|Retained earnings                          |  |      | 11,341 |   |      | 11,082 |  
|Unearned compensation                      |  |      | (71    | ) |      | (157   | )
|Shares held in trust                       |  |      | (495   | ) |      | (852   | )
|Treasury stock                             |  |      | (7,347 | ) |      | (6,182 | )
|Accumulated other comprehensive income     |  |      | (100   | ) |      | 1,142  |  
|                                           |  |      |        |   |      |        |  
|Total stockholders equity                 |  |      | 17,253 |   |      | 18,866 |  
|                                           |  |      |        |   |      |        |  
|Total liabilities and stockholders equity |  | $    | 17,275 |   |      | 18,876 |  
|                                           |  |      |        |   |      |        |  



(Continued)



41



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



Statements of Income



Years ended June 30, 2004 and 2003



(Dollar amounts in thousands)



|                                                                                     |  |      |      |   |      |        |  
|------------------------------------------------------------------------------------ |  | ---- | ---- | - | ---- | ------ | -
|                                                                                     |  | 2004 |      |   | 2003 |       
|Income:                                                                              |  |      |      |   |      |        |  
|Dividends                                                                            |  | $    |     |   |      | 2,000  |  
|Interest                                                                             |  |      | 19   |   |      | 24     |  
|                                                                                     |  |      |      |   |      |        |  
|                                                                                     |  |      | 19   |   |      | 2,024  |  
|Expense                                                                              |  |      | (120 | ) |      | (117   | )
|                                                                                     |  |      |      |   |      |        |  
|(Loss) income before income taxes and equity in undistributed income of subsidiaries |  |      | (101 | ) |      | 1,907  |  
|                                                                                     |  |     
|Benefit for income taxes                                                             |  |      | 39   |   |      | 32     |  
|                                                                                     |  |      |      |   |      |        |  
|(Loss) income before equity in undistributed income of subsidiaries                  |  |      | (62  | ) |      | 1,939  |  
|                                                                                     |  |     
|Distribution in excess of current year income of subsidiaries                        |  |      |     |   |      | (1,045 | )
|Equity in undistributed current year income of subsidiaries                          |  |      | 639  |   |      |       |  
|                                                                                     |  |      |      |   |      |        |  
|Net income                                                                           |  | $    | 577  |   |      | 894    |  
|                                                                                     |  |      |      |   |      |        |  



(Continued)



42



---



THE SOUTHERN BANC COMPANY,
INC.



Notes to Consolidated Financial Statements



June 30, 2004 and 2003



Statements of Cash Flows



Years ended June 30, 2004 and 2003



(Dollar amounts in thousands)



|                                                                                            |  |      |        |   |      |       |  
|------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | ----- | -
|                                                                                            |  | 2004 |        |   | 2003 |      
|Cash flows from operating activities:                                                       |  |      |        |   |      |       |  
|Net income                                                                                  |  | $    | 577    |   |      | 894   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |      |        |   |      |       |  
|Distribution in excess of (equity in undistributed) current year earnings of subsidiaries  |  |      | (639   | ) |      | 1,045 |  
|Decrease in other assets                                                                    |  |      | 3      |   |      | 12    |  
|Decrease in other liabilities                                                               |  |      |       |   |      | (30   | )
|                                                                                            |  |      |        |   |      |       |  
|Net cash (used in) provided by operating activities                                         |  |      | (59    | ) |      | 1,921 |  
|                                                                                            |  |     
|Cash flows from financing activities:                                                       |  |      |        |   |      |       |  
|Payments received on ESOP loan                                                              |  |      | 106    |   |      | 105   |  
|Purchase of treasury stock                                                                  |  |      | (1,164 | ) |      | (540  | )
|Cash dividends paid                                                                         |  |      |       |   |      | (310  | )
|Proceeds from stock options exercised                                                       |  |      | (357   | ) |      |      |  
|                                                                                            |  |      |        |   |      |       |  
|Net cash used in financing activities                                                       |  |      | (1,415 | ) |      | (745  | )
|                                                                                            |  |      |        |   |      |       |  
|(Decrease) increase in cash and cash equivalents                                            |  |      | (1,474 | ) |      | 1,176 |  
|                                                                                            |  |     
|Cash and cash equivalents, beginning of year                                                |  |      | 2,218  |   |      | 1,042 |  
|                                                                                            |  |      |        |   |      |       |  
|Cash and cash equivalents, end of year                                                      |  | $    | 744    |   |      | 2,218 |  
|                                                                                            |  |      |        |   |      |       |  



43