The Southern Banc Company, Inc. 10QSB 2004 Q3 Quarterly report (small business)

FORM 10-QSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

Commission File Number: 33-93218

The Southern Banc Company, Inc.

(Exact name of small business issuer as specified in its charter)


Delaware		63-1146351
(State of incorporation)		(I.R.S. Employer Identification No.)

221 S. 6th Street, Gadsden, Alabama		35901-4102
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number, including area code: (256) 543-3860

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

As of March 31, 2004, there were 933,698 shares of the registrant’s Common Stock, par value $0.01 per share, issued and outstanding.

Transitional small business disclosure format (check one): Yes ¨ No x

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE SOUTHERN BANC COMPANY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar Amounts in Thousands)


	March 31, 2004			June 30, 2003
ASSETS

CASH AND CASH EQUIVALENTS	$	8,443		$	9,393

SECURITIES AVAILABLE FOR SALE, at fair value		54,061			53,723
SECURITIES HELD TO MATURITY, at amortized cost, fair value of $5,137 and $7,714, respectively		4,789			7,215
FEDERAL HOME LOAN BANK (FHLB) STOCK		792			886
LOANS HELD FOR SALE		0			50
LOANS RECEIVABLE, net of allowance for loan losses of $144 and $140, respectively		37,715			38,917
PREMISES AND EQUIPMENT, net		491			507
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE		386			483
PREPAID EXPENSES AND OTHER ASSETS		536			527

TOTAL ASSETS	$	107,213		$	111,701

LIABILITIES

DEPOSITS	$	80,685		$	84,357
FHLB ADVANCES		7,333			7,750
OTHER LIABILITIES		593			728

TOTAL LIABILITIES		88,611			92,835

STOCKHOLDERS’ EQUITY:
Preferred stock, par value $.01 per share 500,000 shares authorized, shares issued and outstanding—none		0			0
Common stock, par value $.01 per share, 3,500,000 authorized, 1,454,750 shares issued		15			15
Additional paid-in capital		13,851			13,818
Unearned compensation		(74	)		(157	)
Shares held in trust, at cost, 45,417 and 65,738 shares, respectively		(615	)		(852	)
Retained earnings		11,301			11,082
Treasury stock, at cost, 521,052 and 493,252 shares, respectively		(6,634	)		(6,182	)
Accumulated other comprehensive income		758			1,142

TOTAL STOCKHOLDERS’ EQUITY		18,602			18,866

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	107,213		$	111,701

The accompanying notes are an integral part of these condensed consolidated statements.

THE SOUTHERN BANC COMPANY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, except per share data)


	Three Months Ended March 31,				Nine Months Ended March 31,
	2004		2003		2004		2003
INTEREST INCOME:

Interest and fees on loans	$	542	$	585	$	1,689	$	1,772
Interest and dividends on securities available for sale		593		711		1,738		2,141
Interest and dividends on securities held to maturity		91		153		311		529
Other interest income		11		18		36		64

Total interest income		1,237		1,467		3,774		4,506

INTEREST EXPENSE:
Interest on deposits		422		605		1,352		1,980
Interest on borrowings		89		98		262		307

Total interest expense		511		703		1,614		2,287

Net interest income before provision for loan losses		726		764		2,160		2,219
Provision for loan losses		12		0		12		4

Net interest income after provision for loan losses		714		764		2,148		2,215

NON-INTEREST INCOME:
Fees and other non-interest income		50		37		144		108
Gain on sale of securities		62		158		62		316

Total non-interest income		112		195		206		424

NON-INTEREST EXPENSE:
Salaries and employee benefits		295		282		920		887
Office building and equipment expenses		102		91		275		269
Other operating expense		127		124		411		370

Total non-interest expense		524		497		1,606		1,526

Income before income taxes		302		462		748		1,113

PROVISION FOR INCOME TAXES		118		157		292		378

Net Income	$	184	$	305	$	456	$	735

EARNINGS PER SHARE:
Basic	$	0.21	$	0.35	$	0.51	$	0.84
Diluted	$	0.20	$	0.34	$	0.49	$	0.83

DIVIDENDS DECLARED PER SHARE	$	0.0875	$	0.0875	$	0.2625	$	0.2625

AVERAGE SHARES OUTSTANDING:
Basic		886,275		875,448		886,312		876,409
Diluted		917,533		895,705		921,929		890,225

The accompanying notes are an integral part of these condensed consolidated statements.

THE SOUTHERN BANC COMPANY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)


	For The Nine Months Ended March 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	456		$	735
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		34			42
Amortization, net		186			106
Amortization of unearned compensation		116			109
Provision for loan losses		12			4
Net gain on sale of secondary market loans		(14	)		(30	)
Gain on sale of securities		(62	)		(316	)
Proceeds from sale of secondary market loans		811			2,368
Loans originated for secondary market		(747	)		(2,721	)
Change in assets and liabilities:
Decrease in accrued interest & dividends receivable		97			118
Increase (decrease) in other assets		(9	)		4
Increase (decrease) in other liabilities		14			(16	)

Net cash provided by operating activities		894			403

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(20,653	)		(29,007	)
Proceeds from maturities, principal payments, and sales of securities available for sale		19,651			26,501
Proceeds from maturities and principal payments on securities held to maturity		2,434			3,537
Proceeds from sale of FHLB stock		94			470
Net loan repayments (originations)		1,190			(2,351	)
Capital expenditures, net		(18	)		(26	)

Net cash provided by (used in) investing activities		2,698			(876	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net		(3,672	)		3,225
Decrease in advance payments by borrowers for taxes and insurance		(1	)		0
Dividends paid		(237	)		(223	)
Proceeds from exercise of stock options		237			0
Purchase of treasury stock		(452	)		(540	)
Decrease in FHLB advances, net		(417	)		(1,416	)

Net cash (used in) provided by financing activities		(4,542	)		1,046

Net (decrease) increase in cash and cash equivalents		(950	)		573

CASH AND CASH EQUIVALENTS, beginning of period		9,393			7,529

CASH AND CASH EQUIVALENTS, end of period	$	8,443		$	8,102

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes	$	248		$	325

Interest	$	1,614		$	2,295

The accompanying notes are an integral part of these condensed consolidated statements.

THE SOUTHERN BANC COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements as of March 31, 2004 and June 30, 2003, and for the three and nine month periods ended March 31, 2004 and 2003, include the accounts of The Southern Banc Company, Inc. (the “Company”), and its wholly owned subsidiaries: The Southern Bank Company (the “Bank”) and First Service Corporation of Gadsden. All significant intercompany transactions and accounts have been eliminated in consolidation.

The condensed consolidated financial statements were prepared by the Company without an audit, but in the opinion of management, reflect all adjustments (none of which are other than normal recurring accruals) necessary for the fair presentation of the financial position and the results of operations for the three and nine month periods ended March 31, 2004 and 2003. The results of operations for the current interim period are not necessarily indicative of results expected for the entire fiscal year.

While certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, management believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2003. The accounting policies followed by the Company are set forth in the summary of significant accounting policies in the Company’s June 30, 2003 consolidated financial statements.

2. RETIREMENT AND SAVINGS PLANS

Employee Stock Ownership Plan (“ESOP”)

The Bank has 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 from the Bank and secured by the Common Stock owned by the ESOP. Unearned compensation for the ESOP was charged to stockholders’ equity and is reduced ratably in connection with principal payments under the terms of the plan. Unearned compensation is reduced when compensation expense is recognized based on employee services rendered in relation to shares which are committed to be released. The compensation expenses recognized related to the ESOP were approximately $28,000 and $31,000 for the three month period and $93,000 and $96,000 for the nine month period ended March 31, 2004 and 2003, respectively. Unearned compensation related to the ESOP was approximately $74,000 and $157,000 at March 31, 2004 and June 30, 2003, respectively, and is shown as a reduction of stockholders’ equity in the accompanying consolidated statements of financial condition. The ESOP had 95,852 shares allocated and 11,485 shares unallocated at March 31, 2004 and 87,493 shares allocated and 20,312 shares unallocated at June 30, 2003.

Management Recognition Plan (“MRP”)

The Bank’s MRP provides for awards of common stock to directors and officers of the Bank. A trust was formed for the purpose of purchasing shares of stock in the open market for future awards of stock under the MRP. The aggregate fair market value of the shares purchased by the MRP is considered unearned compensation at the time of purchase and compensation is earned ratably over the stipulated vesting period. Unearned compensation related to the MRP is shown as a reduction to shareholders’ equity in the accompanying consolidated statements of condition. As of March 31, 2004, all awarded shares related to the MRP had been allocated to directors and officers of the Bank. The MRP held 14,430 unallocated shares at March 31, 2004 and June 30, 2003.

Stock Option and Incentive Plan (“Option 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 non-incentive stock options (non-ISO’s) to non-employee directors. The exercise price is based on the market price of the common stock on the date of grant. A trust was formed for the purpose of purchasing shares of stock in the open market for issuance upon future exercises of stock options under the Option Plan. The Option Plan trust held 30,987 shares at March 31, 2004 and 51,308 shares at June 30, 2003. The Company awarded 139,630 options pursuant to the Option Plan. Under the Option Plan, 29,464 options have been exercised and 18,051 options have been forfeited as of March 31, 2004.

Simplified Employee Pension Plan (“SEP”)

The Company established a 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 makes a discretionary contribution to the SEP on an annual basis.

3. 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 three and nine month periods ended March 31, 2004 and 2003. Common stock outstanding consists of issued shares less treasury stock, unallocated ESOP shares, and shares owned by the MRP and Stock Option plan trusts. Diluted earnings per share for the three and nine month periods ended March 31, 2004 and 2003, were computed by dividing net income by the weighted average number of shares of common stock and the dilutive effects of the shares awarded under the MRP and the Stock Option plans, 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 three and nine month periods ended March 31, 2004 and 2003:


	Income		Shares	Earnings Per Share
For the Three Months Ended March 31, 2004:

Basic Earnings	$	184,000	886,275	$	0.21

Dilutive Securities:
Incentive Stock Option Plan shares			31,258

Dilutive Earnings	$	184,000	917,533	$	0.20

For the Three Months Ended March 31, 2003:

Basic Earnings	$	305,000	875,448	$	0.35

Dilutive Securities:
Incentive Stock Option Plan shares			20,257

Dilutive Earnings	$	305,000	895,705	$	0.34


	Income		Shares	Earnings Per Share
For the Nine Months Ended March 31, 2004:

Basic Earnings	$	456,000	886,312	$	0.51

Dilutive Securities:
Incentive Stock Option Plan shares			35,617

Dilutive Earnings	$	456,000	921,929	$	0.49

For the Nine Months Ended March 31, 2003:

Basic Earnings	$	735,000	876,409	$	0.84

Dilutive Securities:
Incentive Stock Option Plan shares			13,816

Dilutive Earnings	$	735,000	890,225	$	0.83

For the three and nine month periods ended March 31, 2003, there were approximately 12,000 shares under option that were excluded from the earnings per share calculation because these shares would have been anti-dilutive.

4. COMPREHENSIVE INCOME

Comprehensive income is a measure of all non-owner changes in equity of an enterprise that result from transactions and other economic events of the period. This change in unrealized gain or loss serves to increase or decrease comprehensive income. The following table represents comprehensive income for the nine month periods ended March 31, 2004 and 2003:


	Nine Months Ended March 31,
	2004			2003
Net income	$	456,000		$	735,000

Other comprehensive income (loss), before taxes:
Unrealized holding gains (losses) on securities available for sale		(466,000	)		674,000
Less: Reclassification adjustment for realized gains on investment securities available for sale		62,000			316,000

Total other comprehensive income (loss) before taxes		(404,000	)		358,000
Total income tax (provision) benefit related to other comprehensive income		144,000			(121,000	)

Total other comprehensive income (loss)		(260,000	)		237,000

Total comprehensive income (loss)	$	196,000		$	972,000

5. STOCK-BASED COMPENSATION

In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, the Company has elected to continue to record compensation cost under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and accordingly does not recognize compensation cost due to the fact that all options granted were priced at the fair market value of the underlying stock on the date of grant. Had compensation cost been determined, consistent with SFAS No. 123, the Company’s net income would have reflected the following pro forma amounts:


	Nine months ended March 31,
	2004			2003
Net Income- as reported	$	456,000		$	735,000
Stock-based compensation expense		(0	)		(1,000	)
Net Income- pro forma	$	456,000		$	734,000

Basic earnings per share- as reported	$	0.51		$	0.84
Basic earnings per share- pro forma	$	0.51		$	0.84

Diluted earnings per share- as reported	$	0.49		$	0.83
Diluted earnings per share- pro forma	$	0.49		$	0.83

6. LITIGATION

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

7. SUBSEQUENT EVENT

On April 15, 2004, The Southern Bank Company, Inc. announced the declaration of a cash dividend of $.0875 per share payable on June 14, 2004 to stockholders of record on May 14, 2004.

8. 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. The Interpretation replaces FASB Interpretation No. 46,Consolidation of Variable Interest Entities (FIN 46), which was issued on January 17, 2003. FIN 46R 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 summarizes 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 future 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 does not expect this Bulletin to have a material impact on the consolidated financial statements.

Item 2. Management’s Discussion and Analysis or Plan of Operation

Critical Accounting Policies

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

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

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

Comparison of Financial Condition at March 31, 2004 and June 30, 2003.

Total assets decreased approximately $4.5 million, or 4.02%, from $111.7 million at June 30, 2003 to $107.2 million at March 31, 2004. During the period ended March 31, 2004, net loans decreased approximately $1.2 million, or 3.09%. The decrease in net loans was primarily attributable to loan repayments.

During the period ended March 31, 2004, securities available for sale increased approximately $338,000, or 0.63%, and securities held to maturity decreased approximately $2.4 million, or 33.62%. The net decrease of approximately $2.1 million in investment securities was primarily attributable to normal maturities of securities held to maturity and maturities and principal repayments of available for sale securities exceeding purchases.

Cash and cash equivalents decreased approximately $950,000, or 10.11%, from $9.4 million at June 30, 2003 to $8.4 million at March 31, 2004. The change in cash and cash equivalents was primarily attributable to decreases in deposit accounts offset by maturities and repayments of investment securities and the repayment of loans.

The allowance for loan losses increased approximately $4,000 during the nine month period ended March 31, 2004. The allowance for loan losses is based on management’s evaluation of 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.

Accrued interest and dividends receivable decreased approximately $97,000, or 20.08%, from $483,000 at June 30, 2003 to $386,000 at March 31, 2004 as a result of a decline in market rates and volume of underlying assets. Prepaid expenses and other assets increased approximately $9,000, or 1.71%, from $527,000 at June 30, 2003 to $536,000 at March 31, 2004.

Total deposits decreased approximately $3.7 million, or 4.35%, from $84.4 million at June 30, 2003 to $80.7 million at March 31, 2004. This decrease was primarily attributable to the competitive interest rate market. During the period ended March 31, 2004, Federal Home Loan Bank (“FHLB”) advances decreased approximately $417,000, or 5.38%. The Company uses FHLB advances from time to time to purchase investment securities or fund lending activities. During the period ended March 31, 2004, other liabilities decreased approximately $135,000, or 18.54%, from $728,000 at June 30, 2003 to $593,000 at March 31, 2004. The decrease in other liabilities was primarily attributable to a decrease in the deferred tax liability associated with the decreased unrealized gain on securities available for sale.

Total equity decreased approximately $264,000, or 1.40%, from $18.9 million at June 30, 2003 to $18.6 million at March 31, 2004. This change was primarily attributable to an increase in retained earnings, amortization of unearned compensation and stock option exercises, offset by the payment of common stock dividends, and a decrease in accumulated other comprehensive income due to a decrease in unrealized gains on securities available for sale.

Comparison of Results of Operations for the Three and Nine Months Ended March 31, 2004 and 2003.

The Company reported net income for the three and nine month periods ended March 31, 2004 of $184,000 and $456,000, respectively. Net income for the three month period decreased approximately $121,000, or 39.67%, from $305,000 at March 31, 2003 to $184,000 at March 31, 2004. For the nine month period, net income decreased approximately $279,000, or 37.96%, from $735,000 at March 31, 2003 to $456,000 at March 31, 2004. The decrease in net income for the nine month period was primarily attributable to a decrease in net interest income after provision for loan losses of approximately $67,000 and a decrease in the gain on the sale of securities available for sale of approximately $254,000.

Net Interest Income. Net interest income for the three month period ended March 31, 2004 decreased approximately $38,000, or 4.97%, as compared to the three month period ended March 31, 2003. For the nine month period ended March 31, 2004, net interest income decreased approximately $59,000, or 2.66%, as compared to the nine month period ended March 31, 2003. The change in net interest income

for the three and nine month periods 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 period of decreasing interest rates. Total interest income decreased approximately $230,000, or 15.68%, and $732,000, or 16.25%, for the three and nine month periods ended March 31, 2004, respectively, as compared to the same period in 2003.

Provision for Loan Losses.For the nine month period ended March 31, 2004, the provision for loan losses increased approximately $8,000, or 200.00%, as compared to the nine month period ended March 31, 2003. For the three month period ended March 31, 2004, the provision for loan losses increased approximately $12,000. No provision for loan losses was recorded for the three month period ended March 31, 2003. The allowance for loan losses is based on management’s evaluation of 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 $83,000, or 42.56%, from $195,000 for the three month period ended March 31, 2003 to $112,000 for the three month period ended March 31, 2004. For the nine month period ended March 31, 2004, non-interest income decreased approximately $218,000, or 51.42%, from $424,000 for the nine month period ended March 31, 2003 to $206,000. The decrease in non-interest income for the nine month period ended March 31, 2004 was primarily attributable to a decrease in the gain on sale of securities available for sale of approximately $254,000.

Non-interest Expense. Non-interest expense increased approximately $27,000, or 5.43%, from $497,000 for the three month period ended March 31, 2003 to $524,000 for the three month period ended March 31, 2004. For the nine month period ended March 31, 2004, non-interest expense increased approximately $80,000, or 5.24%, from $1.5 million for the nine month period ended March 31, 2003 to $1.6 million for the nine month period ended March 31, 2004. Salaries and employee benefits increased approximately $13,000, or 4.61%, for the three month period ended March 31, 2004, as compared with the three month period ended March 31, 2003. For the nine month period ended March 31, 2004, salaries and benefits increased approximately $33,000, or 3.72%, as compared with the nine month period ended March 31, 2003. The increases in salaries and employee benefits for the three and nine month periods ended March 31, 2004 were primarily attributable to salary adjustments and other increases in benefit expenses. Other operating expenses increased by $3,000, or 2.42%, and $41,000, or 11.08%, for the three and nine month periods ended March 31, 2004 and 2003, respectively. The increases in other operating expenses were primarily attributable to an increase in professional fees relating to the implementation of an integrated sales program.

Provision for Income Taxes. Income tax expense was $118,000 for the three month period ended March 31, 2004 compared to $157,000 for the three month period ended March 31, 2003. For the nine month period ended March 31, 2004, income tax expense was $292,000, as compared to $378,000 for the nine month period ended March 31, 2003, resulting in effective tax rates of approximately 39% and 34% for 2004 and 2003, respectively.

Liquidity and Capital Resources. As a holding company, the Company conducts its business through its subsidiary, the Bank. The Bank is required to maintain minimum levels of liquid assets as defined by regulations of the Office of Thrift Supervision (“OTS”). This 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’s average liquidity ratio well exceeded the required maximums at and during the three and nine month periods ended March 31, 2004. The Bank adjusts its liquidity levels in order to meet the funding needs of deposit outflows and 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, FHLB advances, payment of loans, principal payments, maturities and sales of investment securities, and sales of certain secondary market loans. 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 is required to maintain certain levels of regulatory capital. At March 31, 2004, the Bank exceeded all minimum regulatory capital requirements.

Asset Classification, Allowances for Losses and Non-performing Assets. Federal regulations require savings institutions to classify their assets on the basis of quality periodically. An asset is classified as substandard if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or of the market value of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but possess credit deficiencies or potential weaknesses. Assets classified as substandard or doubtful require an institution to establish general allowances for loan losses. If an asset or portion thereof is classified as a loss, an institution must either establish a specific allowance for the loss in the amount of the portion of the asset classified as such, or charge off that amount. Federal examiners may disagree with an institution’s classifications. If an institution does not agree with an examiner’s classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any assets require classification or re-classification. The Board of Directors of the Bank reviews and approves all classifications on a monthly basis. At March 31, 2004, the Bank had $89,179 of assets classified as substandard and $531,544 of assets designated as special mention. There were no assets designated as doubtful or loss at March 31, 2004.

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


	Nine Months Ended March 31,
	(Dollar Amounts in Thousands)
	2004			2003
Balance at beginning of period	$	140		$	133

Charge-offs		(8	)		(6	)

Recoveries		0			1

Provision for loan losses		12			4

Balance at end of period	$	144		$	132

Ratio of net charge-offs during the period to average loans outstanding during the period		0.02	%		0.02	%

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


	At March 31,
	2004			2003
	(Dollar Amounts in Thousands)
Loans accounted for on a non-accrual basis:⁽¹⁾
Real estate loans:
One-to-four-family residential	$	72		$	55
Non-residential		—			—
Consumer, commercial and savings account loans		42			27
Other loans		—			—

Total	$	114		$	82

Accruing loans which are contractually past due 90 days or more:
Real Estate loans:
One-to-four-family residential	$	—		$	—
Non-residential		—			—
Consumer, commercial and savings account loans		—			—
Other loans		—			—

Total	$	—		$	—

Total of non-accrual and accruing loans 90 days past due loans	$	114		$	82

Percentage of total loans		0.30	%		0.22	%

Other non-performing assets⁽²⁾	$	—		$	—

Percentage of total assets		0.11	%		0.07	%

(1)

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

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

Market Area

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

The economy in the Bank’s market area includes a mixture of manufacturing and agriculture. The largest employer in Etowah County is Goodyear Tire and Rubber Company, presently employing around 1,400 workers. In Talladega County, 17 miles from Etowah County, Honda Motor Company began automobile and engine production in November 2001. Approximately 900 jobs were awarded to Etowah county residents as a result of the Honda Plant, suppliers, and economic opportunities for local businesses. In July 2002, Honda Motor Company announced a second expansion to the manufacturing plant that began production in April 2004. The second expansion doubled production and increased the work force of the

plant from 2,400 to 3,700 jobs. Honda officials estimate that approximately 20% of the plant’s work force are residents of Etowah County with approximately 9% coming from Marshall and Cherokee Counties. Through the current date, 18 Honda suppliers have located in Alabama, creating another 2000 jobs. Several other new projects and industries have been announced in the past year which could boost the economy in the Bank’s primary market area. According to the Alabama Department of Industrial Relations, the unemployment rates for February 2004 in Etowah, Cherokee, and Marshall Counties were 5.8%, 4.5% and 5.0%, respectively, compared to 5.6% for the state of Alabama.

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.

Item 3. Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2004. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

In addition, the Company reviewed its internal controls. There has been no change in the Company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 5. Other Information

On January 8, 2004, the Company announced that its application to voluntarily delist its common shares from trading on the American Stock Exchange had been approved by the 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.

On April 15, 2004, the Company announced the declaration of a cash dividend of $.0875 per share payable on June 14, 2004 to stockholders of record on May 14, 2004.

On May 11, 2004, the Company announced its results of operations for the quarter ended March 31, 2004. A copy of the related press release is attached as Exhibit 99.1 to this Quarterly Report on Form 10-QSB and is incorporated herein by reference.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits



Exhibit 31.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 99.1		Press Release dated May 11, 2004 announcing third quarter earnings.

(b)

Reports on Form 8-K - Current Report on Form 8-K dated January 8, 2004, furnishing an announcement that the SEC had ordered that the Company’s application to withdraw its common stock from listing on the American Stock Exchange be granted, effective on January 8, 2004 and that the Company will continue to voluntarily submit reports under Section 13 of the Securities Exchange Act of 1934 until the Board of Directors determines whether to terminate the Company’s filings.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		THE SOUTHERN BANC COMPANY

Date: May 17, 2004	By:	/s/ Gates Little
		Gates Little
		President and Chief Executive Officer
		(Principal Executive and Financial Officer)

The Southern Banc Company, Inc. (SRNN) Inactive 10QSB2004 Q3 Quarterly report (small business)