Southern Banc : FY2022 Annual Report

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

THE SOUTHERN BANC COMPANY, INC.

Dear Fellow Shareholders,

In 2022, we avoided losses and increased our margins, giving us a nice return. Lower deposit interest rates, combined with success in Factoring, overcame a lack of growth in traditional lending and increased non- interest expense.

In all areas, however, our employees were excellent, giving great service with the attention to detail our customers deserve. We are fortunate to have such a good team.

We offer Community Banking in our branch markets and Factoring across the country, growing them both on a conservatively managed balance sheet. In 2023, we want to continue the progress we have made in factoring, while expanding our conventional banking business. Our team is working hard to do both.

We appreciate your support, and look forward reporting to you next year.

Sincerely,

Gates Little

President

THE SOUTHERN BANC COMPANY, INC.

The Southern Banc Company, Inc. (the "Company") was incorporated at the direction of management of The Southern Bank Company (the "Bank"), formerly First Federal Savings and Loan Association of Gadsden, Alabama (the "Original 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 Original Bank in its conversion from mutual to stock form in 1995. At June 30, 2022, the Company had total consolidated assets of approximately $115.3 million, deposits of $97.1 million and stockholders' equity of $10.6 million, or 9.2% of total consolidated assets.

The Original Bank was organized in 1936 as a federal savings association, at which time it also became a member of the Federal Home Loan Bank ("FHLB") System and obtained federal deposit insurance. On July 1, 2008, the Company announced that the Original Bank had converted its charter from a federal savings association to an Alabama state-chartered commercial bank. As a state-chartered bank, the Bank is regulated by the State of Alabama Banking Department (the "Banking Department") and the Federal Deposit Insurance Corporation ("FDIC"). As a bank holding company, the Company is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). In 1999, the Bank adopted its current corporate title.

The Bank currently operates through four full-service banking offices located in Gadsden, Albertville, Guntersville and Centre, Alabama, and one commercial finance office located in Birmingham, Alabama. 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 real estate properties located in the Bank's market area, consumer loans, commercial loans and leases, 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.

In an effort to diversify the Company's loan and lease portfolio and to increase yield in the portfolio, the Company's management team and the Board of Directors developed and approved the Commercial Finance Division ("CFD") of the Bank. This division was officially started in January 2011. The business of the CFD is to purchase accounts receivable. This business is also known as factoring. In 2022 factoring constituted a significant amount of the Company's revenue.

Accounts receivable factoring allows participating companies to access cash by selling their customers' invoices for Bank cash advances. The Bank follows up with the selling company's customers for payment of the outstanding invoice amount. After receiving payment from the customer, the Bank pays the selling company the remainder of the invoice amount, minus the Bank's fee which is a percentage of the invoice face value. The interest charge fee is calculated based on the advanced amount outstanding multiplied by an agreed-upon interest rate based on a number of considerations, primarily the creditworthiness of the selling company's customer. Although factoring is generally considered to have greater risk than commercial lending, to date the Bank has experienced approximately $45,000 of losses in CFD's factoring activities. At June 30, 2022 accounts receivable in the factoring portfolio constituted approximately $24.8 million or 21.5%, as compared to approximately $15.3 million or 13.6% at June 30, 2021, of the Company's total assets. For additional information, see Note 1 of Notes to Consolidated Financial Statements.

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 real estate loans, commercial loans, consumer loans, leases, factoring, 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.

The lending activities and other investments of the Bank must comply with various regulatory requirements, and the Banking Department and FDIC periodically examine the Bank for compliance with various regulatory