The Southern Banc Company, Inc. 10QSB 2005 Q2 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 December 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 December 31, 2004, there were 892,298 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)


	December 31, 2004			June 30, 2004
ASSETS

CASH AND CASH EQUIVALENTS	$	8,447		$	5,734

SECURITIES AVAILABLE FOR SALE, at fair value		58,519			56,717
SECURITIES HELD TO MATURITY, at amortized cost, fair value of $3,562 and $4,475, respectively		3,352			4,194
FEDERAL HOME LOAN BANK (FHLB) STOCK		511			792
LOANS HELD FOR SALE		169			0
LOANS RECEIVABLE, net of allowance for loan losses of $130 and $144, respectively		35,480			37,477
PREMISES AND EQUIPMENT, net		473			486
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE		449			439
PREPAID EXPENSES AND OTHER ASSETS		600			514

TOTAL ASSETS	$	108,000		$	106,353

LIABILITIES

DEPOSITS	$	83,776		$	82,005
FHLB ADVANCES		6,500			6,916
OTHER LIABILITIES		413			179

TOTAL LIABILITIES		90,689			89,100

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		13,934			13,910
Unearned compensation		(18	)		(71	)
Shares held in trust, at cost, 56,646 and 34,799 shares, respectively		(954	)		(495	)
Retained earnings		11,446			11,341
Treasury stock, at cost, 562,452 shares		(7,347	)		(7,347	)
Accumulated other comprehensive income (loss), net		235			(100	)

TOTAL STOCKHOLDERS’ EQUITY		17,311			17,253

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	108,000		$	106,353

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 December 31,				Six Months Ended December 31,
	2004		2003		2004		2003
INTEREST INCOME:

Interest and fees on loans	$	516	$	563	$	1,036	$	1,148
Interest and dividends on securities available for sale		645		592		1,299		1,145
Interest and dividends on securities held to maturity		70		100		141		220
Other interest income		12		11		22		25

Total interest income		1,243		1,266		2,498		2,538

INTEREST EXPENSE:
Interest on deposits		478		446		933		930
Interest on borrowings		75		86		154		174

Total interest expense		553		532		1,087		1,104

Net interest income before provision for loan losses		690		734		1,411		1,434
Provision for loan losses		5		0		5		0

Net interest income after provision for loan losses		685		734		1,406		1,434

NON-INTEREST INCOME:
Fees and other non-interest income		42		49		81		94
Gain on sale of securities		33		0		33		0

Total non-interest income		75		49		114		94

NON-INTEREST EXPENSE:
Salaries and employee benefits		342		340		647		625
Office building and equipment expenses		39		34		80		68
Other operating expense		194		206		380		389

Total non-interest expense		575		580		1,107		1,082

Income before income taxes		185		203		413		446

PROVISION FOR INCOME TAXES		72		79		161		174

Net Income	$	113	$	124	$	252	$	272

EARNINGS PER SHARE:
Basic	$	0.14	$	0.14	$	0.30	$	0.31
Diluted	$	0.13	$	0.13	$	0.29	$	0.29

DIVIDENDS DECLARED PER SHARE	$	0.0875	$	0.0875	$	0.1750	$	0.1750

AVERAGE SHARES OUTSTANDING:
Basic		823,273		892,308		838,767		886,330
Diluted		845,150		926,618		860,639		924,121

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 Six Months Ended December 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	252		$	272
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		19			22
Amortization (accretion), net		40			148
Amortization of unearned compensation		77			81
Provision for loan losses		5			0
Net gain on sale of secondary market loans		5			(10	)
Gain on sale of securities		(33	)		0
Proceeds from sale of secondary market loans		551			527
Loans originated for secondary market		(556	)		(467	)
Change in assets and liabilities:
Decrease (increase) in accrued interest & dividends receivable		(10	)		53
Increase in other assets		(86	)		(11	)
Increase (decrease) in other liabilities		33			(114	)

Net cash provided by operating activities		297			501

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(11,263	)		(13,109	)
Proceeds from maturities, principal payments, and sales of securities available for sale		9,910			13,367
Proceeds from maturities and principal payments on securities held to maturity		846			1,895
Proceeds from sale of FHLB stock		281			0
Net loan repayments		1,992			743
Capital expenditures, net		(6	)		(9	)

Net cash provided by (used in) investing activities		1,760			2,887

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net		1,771			(2,736	)
Decrease in advance payments by borrowers for taxes and insurance		(7	)		(12	)
Dividends paid		(147	)		(158	)
Proceeds from exercise of stock options		320			217
Purchase of options to fund trust		(864	)		0
Increase (decrease) in FHLB advances, net		(417	)		583

Net cash provided by (used in) financing activities		656			(2,106	)

Net increase in cash and cash equivalents		2,713			1,282

CASH AND CASH EQUIVALENTS, beginning of period		5,734			9,393

CASH AND CASH EQUIVALENTS, end of period	$	8,447		$	10,675

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes	$	50		$	198

Interest	$	1,090		$	1,120

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 December 31, 2004 and June 30, 2004, and for the three and six month periods ended December 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 six month periods ended December 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, 2004. The accounting policies followed by the Company are set forth in the summary of significant accounting policies in the Company’s June 30, 2004 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 ESOP had 95,354 shares allocated and 11,485 shares unallocated at December 31, 2004 and 95,852 shares allocated and 11,485 shares unallocated at June 30, 2004. Expenses related to the ESOP were approximately $60,000 for the six month period ended December 31, 2004 and $65,000 for the six month period ended December 31, 2003. Unearned compensation related to the ESOP was approximately $18,000 and $71,000 at December 31, 2004 and June 30, 2004, respectively, and is shown as a reduction of stockholders’ equity in the accompanying consolidated statement’s of financial condition.

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 December 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 June 30, 2004. During the regular meeting of the Board of Directors held July 15, 2004, the Board voted to transfer the 14,430 unallocated shares from the Management Recognition Plan to the Stock Option and Incentive Plan.

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 held 56,646 shares at December 31, 2004 and 34,799 shares at June 30, 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 six month periods ended December 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 six month periods ended December 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 six month periods ended December 31, 2004 and 2003:


For the Three Months Ended December 31, 2004:	Income		Shares	Earnings Per Share
Basic Earnings	$	113,000	823,273	$	0.14

Dilutive Securities:
Stock Option Plan shares			21,877

Dilutive Earnings	$	113,000	845,150	$	0.13


For the Three Months Ended December 31, 2003:
Basic Earnings	$	124,000	892,308	$	0.14

Dilutive Securities:
Stock Option Plan shares			34,310

Dilutive Earnings	$	124,000	926,618	$	0.13


For the Six Months Ended December 31, 2004:	Income		Shares	Earnings Per Share
Basic Earnings	$	252,000	838,767	$	0.30

Dilutive Securities:
Incentive Stock Option Plan shares			21,871

Dilutive Earnings	$	252,000	860,638	$	0.29

For the Six Months Ended December 31, 2003:
Basic Earnings	$	272,000	886,330	$	0.31

Dilutive Securities:
Incentive Stock Option Plan shares			37,791

Dilutive Earnings	$	272,000	924,121	$	0.29

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 six month periods ended December 31, 2004 and 2003:


	Six Months Ended December 31,
	2004			2003
Net income	$	252,000		$	272,000
Other comprehensive income, before taxes:
Unrealized holding gains (losses) on securities available for sale		580,000			(864,000	)
Less: Reclassification adjustment for realized gains on investment securities available for sale		33,000			0

Total other comprehensive income (loss) before taxes		799,000			(592,000	)

Total income tax (expense) benefit related to other comprehensive income		(214,000	)		275,000

Total comprehensive income (loss)	$	585,000		$	(317,000	)

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 effect on the Company’s net income would not have been material.

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 January 20, 2005, The Southern Banc Company, Inc. declared a dividend in the amount of $.0875 per share payable on March 21, 2005 to stockholders of record at the close of business on February 25, 2005.

8. RECENT ACCOUNTING PRONOUNCEMENTS

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

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 December 31 and June 30, 2004.

Total assets increased approximately $1.6 million, or 1.55%, from $106.4 million at June 30, 2004 to $108.0 million at December 31, 2004. During the period ended December 31, 2004, net loans decreased approximately $2.0 million or 5.33%. The decrease in net loans was primarily attributable to loan repayments.

During the period ended December 31, 2004, securities available for sale increased approximately $1.8 million, or 3.18%, and securities held to maturity decreased approximately $842,000 or 20.08%. The net increase of approximately $960,000 in investment securities was primarily attributable to normal maturities of securities held to maturity and reinvested through purchases of securities available for sale.

Cash and cash equivalents increased approximately $2.7 million, or 47.31%, from $5.7 million to $8.4 million at December 31, 2004. The change in cash and cash equivalents was primarily attributable to the maturity and repayment of investment securities and the rapid repayment of loans.

The allowance for loan losses decreased approximately $14,000 during the six month period ended December 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, past loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors.

Accrued interest and dividends receivable increased approximately $10,000, or 2.28%, from $439,000 at June 30, 2004 to $449,000 at December 31, 2004. Prepaid expenses and other assets increased approximately $86,000, or 16.73%, from $514,000 at June 30, 2004 to $600,000 at December 31, 2004. This increase was primarily attributable to an increase in loans held for sale in the secondary market.

Total deposits increased approximately $1.8 million, or 2.16%, from $82.0 million at June 30, 2004 to $83.8 million at December 31, 2004. During the period ended December 31, 2004, FHLB advances decreased approximately $416,000, or 6.02%. The Company uses FHLB Advances from time to time to purchase investment securities or fund lending activities. During the period ended December 31, 2004, other liabilities increased approximately $234,000, or 130.73%, from $179,000 at June 30, 2004 to $413,000 at December 31, 2004. The increase in other liabilities was primarily attributable to an increase in accrued expenses for federal and state income taxes.

Total equity increased approximately $58,000, or 0.34%, from $17.2 million at June 30, 2004 to $17.3 million at December 31, 2004. This change was primarily attributable to an increase in retained earnings, offset by amortization of unearned compensation, the payment of common stock dividends, and an increase in accumulated other comprehensive income. The increase in accumulated other comprehensive income was a result of mark-to-market adjustments in a rising rate environment and an increase in the securities available for sale portfolio.

Comparison of Results of Operations for the Three and Six Months Ended December 31, 2004 and 2003.

The Company reported net income for the three and six month periods ended December 31, 2004 of $113,000 and $252,000, respectively. Net income for the three month period decreased approximately $11,000, or 8.87%, from $124,000 at December 31, 2003 to $113,000 at December 31, 2004. For the six month period, net income decreased approximately $20,000, or 7.35%, from $272,000 at December 31, 2003 to $252,000 at December 31, 2004. The decrease in net income for the six month period was primarily attributable to a decrease in net interest income after provision for loan losses of approximately $28,000 and an increase in the gain on the sale of securities available for sale of approximately $33,000, as compared to the same period in 2003.

Net Interest Income. Net interest income for the three month period ended December 31, 2004 decreased approximately $44,000, or 5.99%, as compared to the three month period ended December 31, 2003. For the six month period ended December 31, 2004, net interest income decreased approximately $23,000 or 1.60%, as compared to the six month period ended December 31, 2003. The change in net interest income for the three and six month periods was primarily attributable to a decrease in interest income, primarily interest and fees on loans, offset in part by an increase in interest on deposits during a period of increasing interest rates. Total interest income decreased approximately $23,000, or 1.82%, and $40,000, or 1.58%, for the three and six month periods ended December 31, 2004, respectively, as compared to the same period in 2003.

Provision for Loan Losses.For the six month period ended December 31, 2004, the provision for loan losses increased approximately $5,000, or 100.00%, as compared to the six month period ended December 31, 2003. No provision for loan losses was recorded for the three and six month periods ended December 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, past loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors.

Non-interest Income. Non-interest income increased approximately $26,000, or 53.06%, from $49,000 to $75,000 for the three month period ended December 31, 2004, as compared to the three month period ended December 31, 2003. For the six month period ended December 31, 2004, non-interest income increased approximately $20,000, or 21.28%, from $94,000 to $114,000. The increase in non-interest income for the six month period ended December 31, 2004 was primarily attributable to an increase in gain on sale of securities of approximately $33,000.

Non-interest Expense. Non-interest expense decreased approximately $5,000, or 0.86%, from $580,000 to $575,000 for the three month periods ended December 31, 2003 and 2004, respectively. For the six month period ended December 31, 2004, non-interest expense increased approximately $25,000, or 2.31%, from $1.0 million to $1.1 million for the six month periods ended December 31, 2003 and 2004, respectively. Salaries and employee benefits increased approximately $2,000, or 0.59%, for the three month period ended December 31, 2004, as compared with the three month period ended December 31, 2003. For the six month period ended December 31, 2004, salaries and benefits increased approximately $22,000, or 3.52%, as compared with the six month period ended December 31, 2003. The increases in salaries and employee benefits for the three and six month periods ended December 31, 2004 were primarily attributable to salary adjustments and other increases in benefit expenses. Office building and equipment expenses increased by approximately $5,000, or 14.71%, and $12,000, or 17.65%, for the three and six month periods ended December 31, 2004 and 2003, respectively. Other operating expenses decreased by $12,000, or 5.83%, and $9,000, or 2.31%, for the three and six month periods ended December 31, 2004 and 2003, respectively. The decreases in other operating expenses for the three and six month periods ended December 31, 2004 were primarily attributable to a decrease in legal fees associated with the common stock delisting from the AMEX.

Provision for Income Taxes. Income tax expense was $72,000 for the three month period ended December 31, 2004 compared to $79,000 for the three month period ended December 31, 2003. For the six month period ended December 31, 2004, income tax expense was $161,000, as compared to $174,000 for the six month period ended December 31, 2003, resulting in an effective tax rate of approximately 39% 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. 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 six month periods ended December 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 December 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 December 31, 2004, the Bank had $35,906 of assets classified as substandard and $206,592 of assets designated as special mention. There were no assets designated as doubtful or loss at December 31, 2004.

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


	Six Months Ended December 31,
	2004			2003
	(Dollar Amounts in Thousands)
Balance at beginning of period	$	144		$	140
Charge-offs		(20	)		(6	)
Recoveries		1			0
Provision for loan losses		5			0

Balance at end of period	$	130		$	134

Ratio of net charge-offs during the period to average loans outstanding during the period		0.06	%		0.02	%

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


	At December 31,
	2004			2003
	(Dollar Amounts in Thousands)
Loans accounted for on a non-accrual basis:⁽¹⁾
Real estate loans:
One-to-four-family residential	$	16		$	54
Non-residential		—			—
Consumer, commercial and savings account loans		15			25
Other loans		—			—

Total	$	31		$	79

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	$	31		$	79

Percentage of total loans		0.09	%		0.21	%

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

Percentage of total assets		0.03	%		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. The loan is returned to accrual status, when in management’s judgment, the borrower’s ability to make periodic interest and principal payments have been determined.

(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. Etowah and Marshall Counties have a highly diversified industry base with some 340 manufacturing and service companies. The largest employer in Etowah County is Goodyear Tire and Rubber Company, presently employing around 1,300 workers. In Talladega County, 17 miles from Etowah County, Honda Motor Company presently employs around 3,300 workers and plans to employ 4,300 at full capacity. Honda officials estimate that approximately 18% of the plant’s work forces are residents of Etowah County with approximately 10% 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 December 2004 in Etowah, Cherokee, and Marshall Counties were 6.0%, 4.3% and 4.0%, respectively, compared to 5.4% 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 December 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 Securities and Exchange Commission (“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 cost-effective control system can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

Effective as of June 30, 2006, the Company will become subject to Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management to assess and report on the effectiveness of the Company’s internal controls over financial reporting. Additionally, it requires the Company’s independent registered public accounting firm to report on management’s assessment as well as report on its own assessment of the effectiveness of the Company’s internal controls over financial reporting. Management is currently establishing policies and procedures to assess and report on internal controls, and will retain an outside firm to assist it in determining the effectiveness of the Company’s internal controls over financial reporting. It is anticipated that the additional cost of such compliance activities in 2006 will be approximately $50,000. There can be no assurance as to the successful completion of such assessment and as to the reported results offered by management and the independent registered public accounting firm. Inability to complete the assessment and unfavorable reports could have an adverse affect on the Company.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

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 February 8, 2005 announcing results of operations for quarter ended December 31, 2004.

(b)

Reports on Form 8-K - Current Report on Form 8-K dated December 3, 2004, reporting under Item 4.01 (“Changes in Registrant’s Certifying Accountant”) change in certifying accountant and under Item 9.01 (“Financial Statements and Exhibits”) letter of KPMG LLP relating to such change.

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: February 14, 2005	By:	/s/ Gates Little
		Gates Little
		President and Chief Executive Officer
		(Principal Executive and Financial Officer)

The Southern Banc Company, Inc. (SRNN) Inactive 10QSB2005 Q2 Quarterly report (small business)