BANC CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER 0-25033

THE BANC CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 63-1201350
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17 NORTH 20TH STREET 35203
BIRMINGHAM, ALABAMA (Zip Code)
(Address of Principal Executive Offices)

(205) 327-3600
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Titles of Class)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent files pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the voting and nonvoting common stock held by
non-affiliates of the registrant as of June 28, 2002, the last business day of
the most recently completed second fiscal quarter, based on the last reported
sales price on the Nasdaq National Market System of Common Stock was
$118,319,000.

Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: the number of shares
outstanding as of March 28, 2003, of the registrant's only issued and
outstanding class of stock, its $.001 per share par value common stock, was
17,872,146.

DOCUMENTS INCORPORATED BY REFERENCE

The information set forth under Items 10, 11, 12 and 13 of Part III of this
Report is incorporated by reference from the registrant's definitive proxy
statement for its 2003 annual meeting of stockholders that will be filed no
later than April 30, 2003.
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PART I

ITEM 1. BUSINESS.

GENERAL

We are a Delaware-chartered financial holding company headquartered in
Birmingham, Alabama. We offer a broad range of banking and related services in
35 locations in Alabama and the Florida panhandle through The Bank, our
principal subsidiary. Seven of The Bank branches between Destin and Panama City,
Florida operate as Emerald Coast Bank, a division of The Bank. We had assets of
approximately $1.41 billion, loans of approximately $1.14 billion, deposits of
approximately $1.11 billion and stockholders' equity of approximately $76.5
million at December 31, 2002. Our principal executive offices are located at 17
North 20th Street, Birmingham, Alabama 35203, and our telephone number is (205)
327-3600.

RECENT DEVELOPMENTS

Bristol, Florida Bank Group Situation. In January of 2003, our internal
risk management function identified certain loans that had been extended upon
the authorization and direction of the now former president of our Bristol,
Florida bank group which consists of branches in Altha, Bristol and Blountstown,
Florida. These loans exceeded that former employee's loan authority and were
approved or otherwise extended in violation of The Bank's lending policies and
procedures. It also appears that these loans were deliberately hidden from The
Bank's management through direct manipulation of The Bank's loan files and other
actions of the former employee. Based on our review of the loan documentation,
including collateral and borrower financial information, we charged off
approximately $26.0 million of these loans and provided an additional $9.5
million to our allowance for loan and lease losses as a result of these loans.
We are "adequately" capitalized for regulatory purposes. (For a further
explanation of the regulatory capital requirements and our position relative to
those requirements, please see Item 7 "Management's Discussion and Analysis of
Financial Condition and Results Of Operations -- Financial
Condition -- Regulatory Capital," and Note 15 to our consolidated financial
statements set forth in Item 8 herein.)

The amount of our provision for loan losses was determined after a thorough
loan review and consultation with The Bank's federal and state regulators. We
believe that we will not need to make any additional provision related to these
loans; however, no assurance can be given that any additional classifications or
provision will not be required in the future. As a result of this review and the
acts of our former employee, we have restated our quarterly financial statements
for the periods ended June 30, 2002 and September 30, 2002. The reasons for, and
the results of, this restatement are described in Note 21 of the Consolidated
Financial Statements set forth in Item 8 herein. Although the Bristol, Florida
bank group loan problems resulted from a former employee's intentional
circumvention of our existing internal controls, and although we discovered
these problems as a result of the peer review system we implemented in the
fourth quarter of 2002, we and our independent auditors are nonetheless treating
those circumstances as reflecting material weaknesses in our internal controls
with respect to the monitoring of loan risk ratings, the timely review of the
loan portfolio by our loan review function, the monitoring of past due loans and
the monitoring of loan approval and a loan officer's ability to originate loans
in excess of authorized lending limits. These concerns are being addressed in
part by the actions we instituted during the fourth quarter of 2002. Going
forward, we intend to centralize the loan operations of all of our branch groups
in order to provide an enhanced degree of centralized supervision, monitoring
and accountability. We believe that we will have this centralization completed
within the next twelve months. We have disclosed and discussed these issues and
responses with our Audit Committee and independent auditors. For a further
discussion please see Item 14 "Controls and Procedures."

We are vigorously working with legal counsel and regulatory and federal
authorities to pursue all available remedies and avenues for collection. We
anticipate making fidelity bond claims in an undetermined amount stemming from
the unauthorized loan activity.

Roanoke Branch Sale. On March 13, 2003, The Bank sold its Roanoke branch,
including all loans and deposits, pursuant to a Branch Sale Agreement, dated
November 19, 2002, for gross proceeds of approximately $3.3 million.

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STRATEGY

Operations. The Bank targets individuals and local and regional businesses
that prefer prompt, local decision-making and personalized service. As a result,
we conduct our business on a decentralized basis with respect to deposit
gathering and most credit decisions, emphasizing local knowledge and authority
to make these decisions. We supplement this decentralized management approach
with centralized risk management, policy oversight, credit review, audit,
asset/liability management and risk management systems. We implement these
standardized administrative and operational policies at each of our locations
while retaining local management and advisory directors to capitalize on their
knowledge of the local community. We believe this strategy enables The Bank to
generate high yielding loans and to attract and retain low cost core deposits
that provide a large portion of our funding requirements. Core deposits
comprised approximately 73.5% of our total deposits at December 31, 2002.

Products and Services. We focus on commercial, consumer, residential
mortgage and real estate construction lending to customers in our local markets.
Our retail loan products include mortgage banking services, home equity lines of
credit, consumer loans, including automobile loans, and loans secured by
certificates of deposit and savings accounts. Our commercial loan products
include working capital lines of credit, term loans for both real estate and
equipment, letters of credit and SBA loans. We also offer a variety of deposit
programs to individuals and to businesses and other organizations, including a
variety of personal checking, savings, money market and NOW accounts, as well as
business checking and savings accounts, investment sweep accounts and credit
line sweep accounts. In addition, we offer individual retirement accounts and
investment services, safe deposit and night depository facilities and additional
services such as commercial cash management services, internet banking, bill
payment services and the sale of traveler's checks, money orders and cashier's
checks.

The Bank increased its brokerage, investment and insurance product business
lines during 2002 and plans to offer life, health and long-term care insurance
and annuity products during 2003.

Market Areas. Our primary markets are located throughout the northern half
of Alabama and the panhandle of Florida.

We are headquartered in Birmingham, Alabama. We also have branches in
Albertville, Andalusia, Boaz, Childersburg, Decatur, Frisco City, Gadsden,
Guntersville, Huntsville, Kinston, Madison, Monroeville, Morris, Mt. Olive, Opp,
Rainbow City, Samson, Sylacauga and Warrior, Alabama. We operate a loan
production office in Decatur, Alabama. Along Florida's gulf coast and in the
panhandle region, we have branches in Altha, Apalachicola, Blountstown, Bristol,
Carrabelle, Destin (2), Mexico Beach, Panama City, Panama City Beach (2), Port
Saint Joe, Santa Rosa Beach and Seagrove.

Growth. Since our inception, we have grown through acquisitions, internal
growth and branching. Following each of our acquisitions, we have expended
substantial managerial, operating, financial and other resources to integrate
these entities. In addition, we have typically maintained the acquired entity's
management and staff. As a result of this increase in personnel and the
corresponding investment in infrastructure and systems, our efficiency ratio has
been above average for our peer group.

Our future growth depends primarily on the expansion of the business of The
Bank through internal growth and the opening of new branch offices in new and
existing markets. We will also consider the strategic acquisition of other
financial institutions and branches with relatively high earnings or exceptional
growth potential. Our ability to increase profitability and grow internally
depends significantly on our ability to attract and retain low cost and core
deposits coupled with the continued opportunity to generate high yielding,
quality loans. Our ability to grow profitably through the opening or acquisition
of new branches will depend on, among other things, our ability to identify
profitable, growing markets and branch locations within such markets, attract
necessary deposits to operate such branches profitably and locate lending and
investment opportunities within such markets.

We periodically evaluate business combination opportunities and conduct
discussions, due diligence activities and negotiations in connection with those
opportunities. As a result, business combination transactions involving cash,
debt or equity securities might occur from time to time. Any future business

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combination or series of business combinations that we might undertake may be
material, in terms of assets acquired or liabilities assumed, to our financial
condition. Any future acquisition is subject to approval by the appropriate bank
regulatory agencies. See "Supervision and Regulation."

LENDING ACTIVITIES

General. We offer various lending services, including real estate,
consumer and commercial loans, primarily to individuals and businesses and other
organizations that are located in or conduct a substantial portion of their
business in our market areas. Our total loans at December 31, 2002 were
approximately $1.14 billion, or 91.5% of total earning assets. The interest
rates we charge on loans vary with the risk, maturity and amount of the loan and
are subject to competitive pressures, market interest rates, availability of
funds and government regulations. We do not have any foreign loans or loans for
highly leveraged transactions.

The lending activities of The Bank are subject to the written underwriting
standards and loan origination procedures established by The Bank's board of
directors and management. Loan originations are obtained from a variety of
sources, including referrals, existing customers, walk-in customers and
advertising. Loan applications are initially processed by loan officers who have
approval authority up to designated limits.

We use generally recognized loan underwriting criteria, and attempt to
minimize loan losses through various means. In particular, on larger credits, we
generally rely on the cash flow of a debtor as the primary source of repayment
and secondarily on the value of the underlying collateral. In addition, we
attempt to utilize shorter loan terms in order to reduce the risk of a decline
in the value of such collateral. As of December 31, 2002, approximately 65% of
our loan portfolio consisted of loans that had variable interest rates or
matured within one year. Additionally, The Bank generally does not lend without
personal signatures or guarantees unless approved by the Chairman of the Board
of Directors.

We address repayment risks by adhering to internal credit policies and
procedures that include officer and customer lending limits, a multi-layered
loan approval process that includes senior management of The Bank and The Banc
Corporation for larger loans, periodic documentation examination and follow-up
procedures for any exceptions to credit policies. The level in our loan approval
process at which a loan is approved depends on the size of the borrower's
overall credit relationship with The Bank.

LOAN PORTFOLIO

Real Estate Loans. Loans secured by real estate are a significant
component of our loan portfolio, constituting $841 million, or 73.8% of total
loans at December 31, 2002. Our largest real estate loan category is
nonresidential real estate mortgage loans, typically structured with fixed or
adjustable interest rates, based on market conditions. Nonresidential mortgage
loans include commercial, industrial and raw land loans. At December 31, 2002,
$355 million, or 31.2% of our total loan portfolio consisted of these loans. Our
commercial real estate loans primarily provide financing for income producing
properties such as shopping centers, apartments and office buildings and for
owner occupied properties (primarily light industrial facilities, office
buildings and farm or timber land). These loans are underwritten with
loan-to-value ratios ranging from 65% to 85% based upon the type of property
being financed and the financial strength of the borrower. For owner-occupied
commercial buildings, we underwrite the financial capability of the owner, with
an 85% maximum loan-to-value ratio. For income producing improved real estate,
we underwrite the strength of the leases, especially those of any anchor
tenants, with minimum debt service coverage of 1.2:1 and an 85% maximum
loan-to-value ratio. While evaluation of collateral is an essential part of the
underwriting process for these loans, repayment ability is determined from
analysis of the borrower's earnings and cash flow. Terms are typically three to
five years and may have payments through the date of maturity based on a 15 to
30-year amortization schedule.

At December 31, 2002, $273 million, or 23.9% of our total loan portfolio
consisted of single family mortgage loans. Fixed rate loans usually have terms
of three to five years or less, with payments through the date of maturity based
on a 15 to 30-year amortization schedule. Adjustable rate loans generally have a
term of 15 years. We typically charge an origination fee on these loans.

We make loans to finance the construction of and improvements to
single-family and multi-family housing and commercial structures as well as
loans for land development. At December 31, 2002,

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$213 million, or 18.7% of our total portfolio consisted of these loans. Our
construction lending is divided into three general categories: owner occupied
commercial buildings; income producing improved real estate; and single-family
residential construction. For construction loans related to income producing
properties, the underwriting criteria are the same as outlined in the preceding
paragraph. For single family residential construction, we underwrite the
financial strength and reputation of the builder, factoring in the general state
of the economy and interest rates and the location of the home, with an 85%
maximum loan-to-value ratio. Construction loans usually have a term of twelve
months and generally require personal guarantees. The majority of land
development loans consist of loans to convert raw land into residential
subdivisions.

Commercial and Industrial Loans. We make loans for commercial purposes in
various lines of business. These loans are typically made on terms up to five
years at fixed or variable rates and are secured by accounts receivable,
inventory or, in the case of equipment loans, the financed equipment. We attempt
to reduce our credit risk on commercial loans by limiting the loan to value
ratio to 85% on loans secured by accounts receivable, 50% on loans secured by
inventory and 75% on loans secured by equipment. We also, from time to time,
make unsecured commercial loans. Commercial and industrial loans constituted
$213 million, or 18.7% of our loan portfolio at December 31, 2002.

Consumer Loans. Our consumer portfolio includes installment loans to
individuals in our market areas and consists primarily of loans to purchase
automobiles, recreational vehicles, mobile homes and consumer goods. Consumer
loans constituted $86 million, or 7.5% of our loan portfolio at December 31,
2002. Consumer loans are underwritten based on the borrower's income, current
debt, credit history and collateral. Terms generally range from four to five
years on automobile and mobile home loans and one to three years on other
consumer loans.

CREDIT REVIEW AND PROCEDURES

There are credit risks associated with making any loan. These include
repayment risks, risks resulting from uncertainties in the future value of
collateral, risks resulting from changes in economic and industry conditions and
risks inherent in dealing with individual borrowers. In particular, longer
maturities increase the risk that economic conditions will change and adversely
affect collectibility.

We have a loan review process designed to promote early identification of
credit quality problems. We employ a risk rating system that assigns to each
loan a rating that corresponds to the perceived credit risk. Risk ratings are
subject to independent review by a centralized loan review department, which
also performs ongoing, independent reviews of the risk management process
including underwriting, documentation and collateral control. Regular reports
are made to senior management and the Board of Directors of The Bank regarding
credit quality as measured by assigned risk ratings and other measures,
including, but not limited to, the level of past due percentages and
non-performing assets. The loan review function is centralized and independent
of the lending function. We also use a peer review system in which loans in one
of our banks are reviewed by lenders from our other banks along with loan review
and credit administration executives. Review results are reported to the Audit
Committee of our board of directors as well as to our independent auditors.

DEPOSITS

Core deposits are our principal source of funds, constituting approximately
73.5% of our total deposits as of December 31, 2002. Core deposits consist of
demand deposits, interest-bearing transaction accounts, savings deposits and
certificates of deposit (excluding certificates of deposits over $100,000).
Transaction accounts include checking, money market and NOW accounts that
provide The Bank with a source of fee income and cross-marketing opportunities,
as well as a low-cost source of funds. Time and savings accounts also provide a
relatively stable and low-cost source of funding. The largest source of funds
for The Bank is certificates of deposit. Certificates of deposit in excess of
$100,000 are held primarily by customers in our market areas.

Deposit rates are set periodically by the Asset Liability Management
Committee, which includes senior management of The Bank and The Banc
Corporation. We believe our rates are competitive with those offered

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by competing institutions in our market areas; however, we focus on customer
service, not high rates, to attract and retain deposits.

COMPETITION

The banking industry is highly competitive, and our profitability depends
principally upon our ability to compete in our market areas. In our market
areas, we face competition from both super-regional banks and smaller community
banks. We encounter strong competition both in making loans and attracting
deposits. Competition among financial institutions is based upon interest rates
offered on deposit accounts, interest rates charged on loans and other credit
and service charges. Customers also consider the quality and scope of the
services rendered, the convenience of banking facilities and, in the case of
loans to commercial borrowers, relative lending limits. Customers may also take
into account the fact that other banks offer different services. Many of the
large super-regional banks against which we compete have significantly greater
lending limits and may offer additional products; however, we believe we have
been able to compete effectively with other financial institutions, regardless
of their size, by emphasizing customer service and by providing a wide array of
services. In addition, most of our non-bank competitors are not subject to the
same extensive federal regulations that govern bank holding companies and
federally insured banks. See "Supervision and Regulation." Competition may
further intensify if additional financial services companies enter markets in
which we conduct business.

EMPLOYEES

As of December 31, 2002, we employed approximately 460 individuals,
primarily at The Bank. We believe that our employee relations have been and
continue to be good.

SUPERVISION AND REGULATION

We are a financial holding company under the Gramm-Leach-Bliley Act
("GLBA"). We are subject to the supervision, examination and reporting
requirements of the Federal Reserve Board, the Bank Holding Company Act ("BHCA")
and the GLBA. The BHCA and other federal laws subject bank holding companies to
particular restrictions on the types of activities in which they may engage and
to a range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations.

The supervision and regulation of bank holding companies and their
subsidiaries are intended primarily for the protection of depositors, the
deposit insurance funds of the Federal Deposit Insurance Corporation (the
"FDIC") and the banking system as a whole, not for the protection of bank
holding company stockholders or creditors. The banking agencies have broad
enforcement power over bank holding companies and banks, including the power to
impose substantial fines and other penalties for violation of laws and
regulations. The following description summarizes some of the laws to which we
are subject. References herein to applicable statutes and regulations are brief
summaries thereof, do not purport to be complete and are qualified in their
entirety by reference to such statutes and regulations.

The Bank, an Alabama state chartered bank and member of the Federal Reserve
System, is subject to the regulation, supervision and examination by the Federal
Reserve Board and the Alabama Banking Department.

Gramm-Leach-Bliley Act. The GLBA became law on November 12, 1999, and key
provisions affecting bank holding companies became effective March 11, 2000. The
GLBA enables bank holding companies to acquire insurance companies and
securities firms and effectively repeals depression-era laws which prohibited
the affiliation of banks and these other financial services entities under a
single holding company. Certain qualified bank holding companies and other types
of financial service entities may elect to become financial holding companies
under the new law. Financial holding companies are permitted to engage in
activities considered financial in nature, as defined in the GLBA, and may
engage in a broader range of activities than bank holding companies or banks.
The GLBA will enable financial holding companies to offer a wide variety of
financial services, or services incident to financial services, including
banking, securities underwriting, merchant banking and insurance (both
underwriting and agency services). The new financial services
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authorized by the GLBA also may be engaged in by a "financial subsidiary" of a
national or state bank, with the exception of insurance or annuity underwriting,
insurance company portfolio investments, real estate investment and development,
and merchant banking, all of which must be conducted under the financial holding
company.

To become a financial holding company, a bank holding company must provide
notice to the Federal Reserve Board of its desire to become a financial holding
company, and certify to the Federal Reserve Board that each of its bank
subsidiaries is "well-capitalized," "well-managed" and has at least a
"satisfactory" rating under the CRA. These requirements are also necessary to
maintain financial holding company status. On February 12, 2000, we filed our
election to become a financial holding company with the Federal Reserve Board.
Our election was effective as of March 13, 2000.

Regulatory Restrictions on Dividends. Various federal and state statutory
provisions limit the amount of dividends The Bank can pay to us without
regulatory approval. Approval of the Federal Reserve Board is required for
payment of any dividend by a state chartered bank that is a member of the
Federal Reserve System if the total of all dividends declared by the bank in any
calendar year would exceed the total of its net profits (as defined by
regulatory agencies) for that year combined with its retained net profits for
the preceding two years. In addition, a state member bank may not pay a dividend
in an amount greater than its net profits. State member banks may also be
subject to similar restrictions imposed by the laws of the states in which they
are chartered.

Under Alabama law, a bank may not pay a dividend in excess of 90% of its
net earnings until the bank's surplus is equal to at least 20% of its capital.
The Bank is also required by Alabama law to obtain the prior approval of the
Superintendent of the State Banking Department of Alabama for its payment of
dividends if the total of all dividends declared by The Bank in any calendar
year will exceed the total of (1) The Bank's net earnings (as defined by
statute) for that year, plus (2) its retained net earnings for the preceding two
years, less any required transfers to surplus. In addition, no dividends may be
paid from The Bank's surplus without the prior written approval of the
Superintendent.

In addition, federal bank regulatory authorities have authority to prohibit
the payment of dividends by bank holding companies if their actions constitute
unsafe or unsound practices. The Federal Reserve Board has issued a policy
statement on the payment of cash dividends by bank holding companies, which
expresses the Federal Reserve Board's view that a bank holding company
experiencing earnings weaknesses should not pay cash dividends that exceed its
net income or that could only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. Our ability and The Bank's
ability to pay dividends in the future is currently, and could be further,
affected by bank regulatory policies and capital guidelines. Currently, we must
obtain regulatory approval prior to paying dividends on our common stock or our
trust preferred securities. The Federal Reserve approved the timely payment of
our semi-annual distribution on our trust preferred securities in March 2003.

Source of Strength. Under Federal Reserve Board policy, a bank holding
company is expected to act as a source of financial strength to its banking
subsidiaries and commit resources to their support. This support may be required
by the Federal Reserve Board at times when, absent this policy, a bank holding
company may not be inclined to provide it. A bank holding company, in certain
circumstances, could be required to guarantee the capital plan of an
undercapitalized banking subsidiary. In addition, any capital loans by a bank
holding company to any of its depository institution subsidiaries are
subordinate in right of payment to deposits and to certain other indebtedness of
the banks.

Under the Federal Deposit Insurance Act ("FDIA"), an FDIC-insured
depository institution can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (1) the
default of a commonly controlled FDIC-insured depository institution or (2) any
assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of stockholders of the insured

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depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution.

Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe or unsound banking practices. The Federal Reserve Board has
broad authority to prohibit activities of bank holding companies and their
non-banking subsidiaries which represent unsafe or unsound banking practices or
which constitute violations of laws or regulations, and can assess civil money
penalties for certain activities conducted on a knowing and reckless basis, if
those activities caused a substantial loss to a depository institution. The
penalties can be as high as $1,000,000 for each day the activity continues.

Capital Adequacy Requirements. We are required to comply with the capital
adequacy standards established by the Federal Reserve Board, and The Bank is
subject to additional requirements of the FDIC and the Alabama Banking
Department. The Federal Reserve Board has adopted two basic measures of capital
adequacy for bank holding companies: a risk-based measure and a leverage
measure. All applicable capital standards must be satisfied for a bank holding
company to be in compliance.

The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.

The minimum guideline for the ratio (the "Total Risk-Based Capital Ratio")
of total capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%. At least half
of Total Capital must comprise common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves ("Tier 2 Capital").

In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less
goodwill and certain other intangible assets, of 3% for bank holding companies
that meet certain specified criteria, including having the highest regulatory
rating. All other bank holding companies generally are required to maintain a
Leverage Ratio of at least 3%, plus an additional cushion of 100 to 200 basis
points. Our Leverage Ratio was 5.67% at December 31, 2002. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve Board has indicated that it will
consider a tangible Tier 1 Capital Leverage Ratio (deducting all intangibles)
and other indicia of capital strength in evaluating proposals for expansion or
new activities.

The federal bank regulatory agencies' risk-based and leverage ratios are
minimum supervisory ratios generally applicable to banking organizations that
meet certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal and state bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.

The Bank was in compliance with the applicable minimum capital requirements
as of December 31, 2002. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Failure to meet capital guidelines could
subject The Bank to a variety of enforcement remedies by federal bank regulatory
agencies, including termination of deposit insurance by the FDIC, and to certain
restrictions on business.

As of December 31, 2002, both The Banc Corporation and The Bank were
"adequately capitalized."

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Branching. The BHCA, as amended by the interstate banking provisions of
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), repealed the prior statutory restrictions on
interstate banking so that The Banc Corporation may acquire a bank located in
any other state, and any bank holding company located outside Alabama may
lawfully acquire any Alabama-based bank regardless of state law to the contrary,
in either case subject to certain deposit-percentage minimums, aging
requirements and other restrictions. In addition, the Interstate Banking Act
generally provided that after June 1, 1997, national and state-chartered banks
may branch interstate through acquisitions of banks in other states.

Alabama and other states have laws relating specifically to acquisitions of
banks, bank holding companies and other types of financial institutions. Alabama
law sets five years as the minimum age of banks which may be acquired by an out
of state institution.

Restrictions on Transactions With Affiliates and Insiders. Transactions
between The Bank and its affiliates, including The Banc Corporation, are subject
to Sections 23A and 23B of the Federal Reserve Act and, as of April 1, 2003,
Regulation W which implements Sections 23A and 23B. In general, Section 23A
imposes limits on the amount of such transactions and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of The Banc Corporation or any of its subsidiaries. Section 23B of
the Federal Reserve Act generally requires that certain transactions between a
bank and its respective affiliates be on terms substantially the same, or at
least as favorable to such bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.

The restrictions on loans to directors, executive officers, principal
stockholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
federally insured institutions and their subsidiaries and holding companies.
These restrictions include limits on loans to one borrower and conditions that
must be met before such a loan can be made. There is also an aggregate
limitation on all loans to insiders and their related interests. These loans
cannot exceed the institution's total unimpaired capital and surplus, and the
FDIC may determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions. State banking laws also have similar provisions.

FDIC Insurance Assessments. Pursuant to FDICIA, the FDIC adopted a
risk-based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities. The system assigns an institution to one of three
capital categories: (1) well capitalized; (2) adequately capitalized; and (3)
undercapitalized. These three categories are substantially similar to the prompt
corrective action categories described above, with the "undercapitalized"
category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes. An institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information which
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
insurance assessment rate is then determined based on the capital category and
supervisory category to which it is assigned. Under the risk-based assessment
system, there are nine assessment risk classifications (i.e., combinations of
capital groups and supervisory subgroups) to which different assessment rates
are applied.

Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.

Community Reinvestment Act. The Bank is subject to the CRA. The CRA and
the regulations issued thereunder are intended to encourage banks to help meet
the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area
9

when considering applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of another bank.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") requires federal banking agencies to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed by
federal banking agencies in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or thrift or to merge
with any other bank holding company. An unsatisfactory record can substantially
delay or block the transaction. The Bank has a satisfactory CRA rating from
federal banking agencies.

USA Patriot Act. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
"USA Patriot Act"). The USA Patriot Act strengthened the ability of the U.S.
government to detect and prosecute international money laundering and the
financing of terrorism. Among its provisions, the USA Patriot Act requires that
regulated financial institutions, including state member banks: (i) establish an
anti-money laundering program that includes training and audit components; (ii)
comply with regulations regarding the verification of the identity of any person
seeking to open an account; (iii) take additional required precautions with
non-U.S. owned accounts; and (iv) perform certain verification and certificate
of money laundering risk for their foreign correspondent banking relationships.
We have adopted policies, procedures and controls to address compliance with the
requirements of the USA Patriot Act under the existing regulations and will
continue to revise and update our policies, procedures and controls to reflect
changes required by the USA Patriot Act and implementing regulation.

Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, The Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Fair Housing Act, the Fair Credit Reporting Act and the Settlement
Procedures Act among others. These laws and regulations mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits, making loans to or engaging in
other types of transactions with such customers.

INSTABILITY OF REGULATORY STRUCTURE

Various bills are routinely introduced in the United States Congress and
state legislatures with respect to the regulation of financial institutions.
Certain of these proposals, if adopted, could significantly change the
regulation of banks and the financial services industry. We cannot predict
whether any of these proposals will be adopted or, if adopted, how these
proposals would affect us.

EFFECT ON ECONOMIC ENVIRONMENT

The policies of regulatory authorities, especially the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.

Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on our business and earnings cannot be predicted.

AVAILABLE INFORMATION

The Banc Corporation maintains an Internet website at
www.thebankmybank.com. The Banc Corporation makes available free of charge
through its website various reports that it files with the Securities and
Exchange Commission including its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current
10

reports on Form 8-K, and amendments to these reports. These reports are made
available as soon as reasonably practicable after they are filed with, or
furnished to the Securities and Exchange Commission. From our home page at
www.thebankmybank.com, go to and click on "Investor Relations" to access these
reports.

ITEM 2. PROPERTIES.

Our headquarters are located at 17 North 20th Street, Birmingham, Alabama.
As of December 21, 1999, The Banc Corporation and The Bank, who jointly own the
building, converted the building into condominiums known as The Bank
Condominiums. The Bank owns the Bank unit, which consists of four floors of the
building, including a branch of The Bank and our headquarters and Units 4-5 and
Units 7-14 of the Bank Condominiums. We have sold or leased six Units, and we
intend to use most of the remaining space for future expansion of The Bank. We
will relocate our operations and data processing center to the fourth and fifth
floors and centralize our risk management department on the sixth floor of our
headquarters building during 2003. We may sell or lease any remaining
condominium units for commercial or residential use.

We operate through 36 office facilities, including our current operations
center. We own 32 of these facilities, lease four facilities and have two ground
leases on facilities we own. Rental expense on the leased properties totaled
approximately $125,000 in 2002 which includes three months of rental expense on
Emerald Coast Bank, a Division of The Bank, branches purchased by The Bank in
March 2002.

ITEM 3. LEGAL PROCEEDINGS.

While we are a party to various legal proceedings arising from the ordinary
course of our business, we believe that there are no proceedings threatened or
pending against us at this time that will individually, or in the aggregate,
materially or adversely affect our business, financial condition or results of
operations. We believe that we have strong claims and defenses in each lawsuit
in which we are involved. While we believe that we will prevail in each lawsuit,
there can be no assurance that the outcome of the pending, or any future,
litigation, either individually or in the aggregate, will not have a material
adverse effect on our financial condition or our results of operations.

11

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

MARKET FOR COMMON STOCK

Our common stock trades on Nasdaq under the ticker symbol "TBNC". As of
March 27, 2003, there were approximately 934 record holders of our common stock.
The following table sets forth, for the calendar periods indicated, the range of
high and low closing sales prices:

On December 31, 2002, the last sale price for the common stock was $7.76
per share.

DIVIDENDS

Holders of our common stock are entitled to receive dividends when, as and
if declared by our board of directors. Prior to October 29, 2002, when our Board
of Directors approved a quarterly cash dividend of $.02 per share or $.08 per
share annually, we had not paid dividends. Our first quarterly dividend of $.02
per share was paid on November 25, 2002. We derive cash available to pay
dividends primarily, if not entirely, from dividends paid to us by our
subsidiaries. There are certain restrictions that limit The Bank's ability to
pay dividends to us and our ability to pay dividends. Our ability to pay
dividends to our stockholders will depend on our earnings and financial
condition, liquidity and capital requirements, the general economic and
regulatory climate, our ability to service any equity or debt obligations senior
to our common stock and other factors deemed relevant by our board of directors.
Currently, we must obtain regulatory approval prior to paying dividends on our
common stock or our trust preferred securities. The Federal Reserve approved the
timely payment of our semi-annual distribution on our trust preferred securities
in March 2003. The restrictions that may limit our ability to pay dividends are
discussed in this Report in Item 1 under the heading "Supervision and
Regulation -- Regulatory Restrictions on Dividends."

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected financial data from our
consolidated financial statements and should be read in conjunction with our
consolidated financial statements including the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected historical financial data as of December 31, 2002 and 2001 and for each
of the three years ended December 31, 2002 is derived from our audited
consolidated financial statements and related notes included in this Form 10-K.
See "Item 8. The Banc Corporation and Subsidiaries Consolidated Financial
Statements."

12

- ---------------

(1) Trust preferred securities have been reclassified as long-term debt in the
December 31, 2001 and 2000, statements of financial condition to conform to
the December 31, 2002 presentation.
(2) Distributions on the trust preferred securities have been reclassified as
interest expense in the statements of income for the periods December 31,
2001 and 2000, respectively to conform to the December 31, 2002
presentation.
(3) Net interest income divided by average earning assets.
(4) Calculated on a tax equivalent basis.
(5) Yield on average interest-earning assets less rate on average interest
bearing liabilities.
(6) Efficiency ratio is calculated by dividing noninterest expense by
noninterest income plus net interest income on a fully tax equivalent basis.

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

GENERAL

The following is a narrative discussion and analysis of significant changes
in our results of operations and financial condition. This discussion should be
read in conjunction with the consolidated financial statements and selected
financial data included elsewhere in this document.

Our principal subsidiary is The Bank, a financial institution organized and
existing under the laws of Alabama and headquartered in Birmingham, Alabama
which operates 35 banking offices throughout Alabama and the panhandle of
Florida. Other subsidiaries include TBC Capital Statutory Trust II ("TBC Capital
II"), a Connecticut statutory trust, TBC Capital Statutory Trust III ("TBC
Capital III"), a Delaware business trust, and Morris Avenue Management Group,
Inc. ("MAMG"), an Alabama corporation, all of which are wholly owned. TBC
Capital II and TBC Capital III are consolidated special purpose entities formed
solely to issue cumulative trust preferred securities. MAMG is a real estate
management company that manages our real properties.

The acquisition of other banking organizations during 1998 and 1999
contributed significantly to our early development. During the fourth quarter of
1998, Commerce Bank of Alabama, Inc. and the banking subsidiaries of Commercial
Bancshares of Roanoke, Inc., City National Corporation and First Citizens
Bancorp, Inc. were merged with and into The Bank. Emerald Coast Bank became our
subsidiary in February 1999, as a result of our merger with Emerald Coast
Bancshares, Inc. C&L Bank became our subsidiary in June 1999 as a result of our
acquisitions of C&L Bank of Blountstown and C&L Banking Corporation and its bank
subsidiary, C&L Bank of Bristol. The banking subsidiary of BankersTrust of
Alabama, Inc., was merged into The Bank in July 1999. The Bank also acquired
three new branches in Southeast Alabama in November of 1999. In June 2000,
Emerald Coast Bank and C&L Bank merged into The Bank. During March 2002,
Citizens Federal Savings Bank of Port St. Joe, the banking subsidiary of CF
Bancshares, Inc., was merged into The Bank in connection with our acquisition of
CF Bancshares, Inc.

CRITICAL ACCOUNTING ESTIMATES

In preparing financial information, management is required to make
significant estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses for the periods shown. The accounting
principles we follow and the methods of applying these principles conform with
accounting principles generally accepted in the United States and general
banking practices. Estimates and assumptions most significant to us are related
primarily to our allowance for loan losses and are summarized in the following
discussion and notes to the consolidated financial statements.

Management's determination of the adequacy of the allowance for loan
losses, which is based on the factors and risk identification procedures
discussed in the following pages, requires the use of judgments and estimates
that may change in the future. Changes in the factors used by management to
determine the adequacy of the allowance or the availability of new information
could cause the allowance for loan losses to be increased or decreased in future
periods. In addition, bank regulatory agencies, as part of their examination
process, may require that additions be made to the allowance for loan losses
based on their judgments and estimates.

RECENT DEVELOPMENTS

Bristol, Florida Bank Group Situation. In January of 2003, our internal
risk management function identified certain loans that had been extended upon
the authorization and direction of the now former president of our Bristol,
Florida bank group which consists of branches in Altha, Bristol and Blountstown,
Florida. These loans exceeded that former employee's loan authority and were
approved or otherwise extended in violation of The Bank's lending policies and
procedures. It also appears that these loans were deliberately hidden from The
Bank's management through direct manipulation of The Bank's loan files and other
actions of the former employee. Based on our review of the loan documentation,
including collateral and borrower financial information, we charged off
approximately $26.0 million of these loans and provided an additional

14

$9.5 million to our allowance for loan and lease losses. We are "adequately"
capitalized for regulatory purposes. (For a further explanation of the
regulatory capital requirements and our position relative to those requirements,
please see Item 7 "Management's Discussion and Analysis of Financial Condition
and Results Of Operations -- Financial Condition -- Regulatory Capital," herein
and Note 15 to our consolidated financial statements set forth in Item 8
herein.)

The amount of our provision for loan losses was determined after a thorough
loan review and consultation with The Bank's federal and state regulators. We
believe that we will not need to make any additional provision related to these
loans; however, no assurance can be given that any additional classifications or
provision will not be required in the future. As a result of this review and the
acts of our former employee, we have restated our quarterly financial statements
for the periods ended June 30, 2002 and September 30, 2002. The reasons for, and
the results of, this restatement are described in Note 21 the Consolidated
Financial Statements set forth in Item 8 herein. Although the Bristol, Florida
bank group loan problems resulted from a former employee's intentional
circumvention of our existing internal controls, and although we discovered
these problems as a result of the peer review system we implemented in the
fourth quarter of 2002, we and our independent auditors are nonetheless treating
those circumstances as reflecting material weaknesses in our internal controls
with respect to the monitoring of loan risk ratings, the timely review of the
loan portfolio by our loan review function, the monitoring of past due loans and
the monitoring of loan approval and a loan officer's ability to originate loans
in excess of authorized lending limits. These concerns are being addressed in
part by the actions we instituted during the fourth quarter of 2002. Going
forward, we intend to centralize the loan operations of all of our branch groups
in order to provide an enhanced degree of centralized supervision, monitoring
and accountability. We believe that we will have this centralization completed
within the next twelve months. We have disclosed and discussed these issues and
responses with our Audit Committee and independent auditors. For a further
discussion please see Item 14 "Controls and Procedures."

We are vigorously working with legal counsel and regulatory and federal
authorities to pursue all available remedies and avenues for collection. We
anticipate making fidelity bond claims in an undetermined amount stemming from
the unauthorized loan activity.

Roanoke Branch Sale. On March 13, 2003, The Bank sold its Roanoke branch,
including all loans and deposits, pursuant to a Branch Sale Agreement, dated
November 19, 2002, for gross proceeds of approximately $3.3 million.

RESULTS OF OPERATIONS

Year Ended December 31, 2002, Compared With Year Ended December 31, 2001

During the year ended December 31, 2002, we incurred a net loss of $(18.4)
million compared to net income of $2.7 million in the year ended December 31,
2001. This loss was due to a $51.9 million provision for loan losses, of which
$36.2 million related to Bristol. Our return on average assets in 2002 was
(1.36)%, compared to 0.23% in 2001. Return on average equity was (19.89)% in
2002 compared to 3.53% in 2001. Average equity to average assets increased to
6.83% in 2002 from 6.62% in 2001.

Net interest income increased $8.2 million, or 20.6% to $48.0 million for
the year ended December 31, 2002, from $39.8 million for the year ended December
31, 2001. This was due to a decrease in interest expense of $10.1 million, or
20.0% offset by a decrease in interest income of $1.9 million, or 2.1%. This
decrease in interest expense was primarily attributable to an $11.2 million, or
27.8% decrease in interest expense on deposits. Average interest-bearing
liabilities increased $178.6 million, while the average interest rate decreased
from 5.23% in 2001 to 3.53% in 2002.

Our net interest spread and net interest margin increased to 3.70% and
3.94%, respectively, in 2002, from 3.43% and 3.83% in 2001. During 2002, the
average interest rate earned on interest-earning assets decreased due to the
decline in interest rates during the year. However, this was offset by an
increase in the volume of average loans and a decrease in interest rates paid on
interest-bearing liabilities. The ratio of average interest-earning assets to
average interest-bearing liabilities was 107.05% and 108.26% for 2002 and 2001,
respectively.

15

The average rate paid on our interest bearing liabilities was 3.53% compared to
the average yield on our loan portfolio of 7.50% during the year.

The provision for loan losses represents the amount determined by
management necessary to maintain the allowance for loan losses at a level
capable of absorbing inherent losses in the loan portfolio. Management reviews
the adequacy of the allowance for loan losses on a quarterly basis. The
allowance for loan losses is established based on risk ratings assigned by loan
officers. Loans are risk rated using a seven point scale, and loan officers are
responsible for the timely reporting of changes in the risk ratings. This
process and the assigned risk ratings are subject to review by our internal Loan
Review Department. Based on the assigned risk ratings, the loan portfolio is
segregated into the regulatory classifications of: Special Mention, Substandard,
Doubtful or Loss. Generally, recommended regulatory reserve percentages are
applied to these categories to estimate the amount of loan loss allowance
required. Impaired loans are reviewed specifically and separately under
Statement of Financial Accounting Standards ("SFAS") Statement No. 114 to
determine the appropriate reserve allocation. Management compares the investment
in an impaired loan against the present value of expected future cash flow
discounted at the loan's effective interest rate, the loan's observable market
price or the fair value of the collateral, if the loan is collateral dependent,
to determine the appropriate reserve allowance. Reserve percentages assigned to
non-rated loans are based on historical charge-off experience adjusted for other
risk factors. To evaluate the overall adequacy of the allowance to absorb losses
inherent in our loan portfolio, management considers historical loss experience
based on volume and types of loans, trends in classifications, volume and trends
in delinquencies and non-accruals, economic conditions and other pertinent
information. Based on future evaluations, additional provisions for loan losses
may be necessary to maintain the allowance for loan losses at an appropriate
level. See "Financial Condition -- Allowance for Loan Losses" for additional
discussion.

The provision for loan losses was $51.9 million for the year ended December
31, 2002 compared to $7.5 million in 2001. During 2002, the Bristol bank group's
provision for loan loss was $36.2 million; the Albertville bank's provision for
loan losses was $3.4 million and the Huntsville bank's provision for loan losses
was $7.2 million. Net charge-offs increased $33.8 million from $3.9 million in
2001 to $37.7 million in 2002. Net charge-offs, as a percentage of the provision
for loan losses, were 72.7% in 2002, compared to 51.9% in 2001. The Bristol bank
group contributed approximately $26.2 million to total charge-offs during 2002;
the Albertville bank contributed approximately $2.3 million and the Huntsville
bank contributed approximately $5.1 million. After provisions and charge-offs
the allowance for loan losses was 2.44% of loans, net of unearned income, at
December 31, 2002 compared to 1.26% at December 31, 2001. See "Financial
Condition -- Allowance for Loan Losses" for additional discussion.

Noninterest income increased $5.3 million, or 54.7% to $15.1 million in
2002, from $9.8 million in 2001. Income from mortgage banking operations for the
year ended December 31, 2002 increased $1.6 million, or 92.2% to $3.3 million in
2002, from $1.7 million in 2001. Income from customer service charges and fees
increased $1.7 million, or 42.6% to $5.8 million from $4.1 million in 2001. We
also received $1.1 million related to the settlement of litigation. Other
noninterest income was $4.3 million, an increase of $1.7 million, or 66.1% from
$2.6 million in 2001. The increase in other noninterest income was primarily due
to an increase of $565,000 in the cash surrender value of life insurance
policies and gains on the sale of loans of $321,000.

Noninterest expense increased $4.2 million, or 10.8% to $42.7 million in
2002 from $38.5 million in 2001. Salaries and employee benefits increased $4.0
million, or 20.8% to $23.5 million in 2002 compared to $19.5 million in 2001.
The increase in salaries and benefits primarily resulted from the increased
salary expense associated with the acquisition of CF Bancshares, Inc. and the
addition of personnel in the administration and operation areas, specifically,
loan review, risk management, internal audit and credit administration. All
other noninterest expenses increased $128,000, or 0.7% to $19.2 million,
compared to $19.1 million in 2001. This increase in other noninterest expenses
consists primarily of a $396,000 increase in occupancy and equipment expenses
offset by a $268,000 decrease in other operating expenses. Occupancy expenses
increased during 2002 as a result of increased depreciation and maintenance
related to our acquisition of CF Bancshares, Inc. During 2001, other operating
expenses included goodwill amortization of $562,000. In accordance with FASB
Statement No. 142, "Goodwill and Other Intangible Assets," no amortization of
goodwill was recorded in 2002.
16

Our income tax benefit was $(13.0) million in 2002 and our income tax
expense was $966,000 in 2001, resulting in effective tax rates of (41.3%) and
26.4%, respectively. The primary difference in the effective tax rate and the
federal statutory rate of 34% for 2002 is due primarily to certain tax-exempt
income and for 2001 from the recognition of a rehabilitation tax credit of
$522,000, respectively, generated from the restoration of our headquarters, the
John A. Hand building.

Our determination of the realization of deferred tax assets is based
partially on taxable income in prior carryback years and upon management's
judgment of various future events and uncertainties, including future reversals
of existing taxable temporary differences, the timing and amount of future
income earned by our subsidiaries and the implementation of various tax planning
strategies to maximize realization of the deferred tax assets. A portion of the
amount of the deferred tax asset that can be realized in any year is subject to
certain statutory federal income tax limitations. We believe that our
subsidiaries will be able to generate sufficient operating earnings to realize
the deferred tax benefits. We evaluate quarterly the realizability of the
deferred tax assets and, if necessary, adjust any valuation allowance
accordingly.

Year Ended December 31, 2001, Compared With Year Ended December 31, 2000

Our net income decreased $1.7 million, or 38.3% to $ 2.7 million in the
year ended December 31, 2001, from $4.4 million in the year ended December 31,
2000. This decrease was due primarily to increases in our provision for loan
losses and noninterest expenses which were offset by increases in net interest
income and noninterest income. Our return on average assets in 2001 was 0.23%,
compared to 0.48% in 2000. Return on average equity was 3.53% in 2001 compared
to 6.03% in 2000. Average equity to average assets was 6.62% in 2001 compared to
7.92% in 2000.

Net interest income increased $5.2 million, or 15.1% to $39.8 million for
the year ended December 31, 2001, from $34.6 million for the year ended December
31, 2000 due to an increase in interest income of $15.3 million, or 20.4%,
offset by an increase in interest expense of $10.1 million, or 25.0%. These
increases in net interest income and interest income were primarily attributable
to a $203.6 million, or 28.7% increase in average loans to $914.0 million during
2001, from $710.4 million during 2000. The growth in the loan portfolio was
primarily attributable to increases in real estate construction and mortgage
loans generated in the Birmingham, Alabama and Florida markets. This increase
was offset by a $224.3 million, or 30.2% increase in average interest-bearing
liabilities to $966.5 million during 2001, from $742.2 million during 2000.

Our net interest spread and net interest margin were 3.43% and 3.83%,
respectively, in 2001, compared to 3.80% and 4.29% in 2000. During 2001, the
average interest rate earned on interest-earning assets decreased due to the
decline in interest rates during the year. This, combined with an increase in
the volume of higher cost sources of funds, such as certificates of deposit and
Federal Home Loan Bank ("FHLB") borrowings, resulted in the decrease in our net
interest margin and spread during the year. These funds were utilized to meet
strong loan demand, which accounted for the increase in average interest-earning
assets during 2001. The ratio of average interest-earning assets to average
interest-bearing liabilities was 108.26% and 109.80% for 2001 and 2000,
respectively. The average rate paid on time deposits and FHLB advances were
5.91% and 5.82%, respectively, during the year which was higher than interest
rates paid on other sources of deposit funding; however, these funds were
utilized to meet increased loan demand. The average yield of our loan portfolio
was 9.10% during the year.

The provision for loan losses was $7.5 million for the year ended December
31, 2001 compared to $5.0 million in 2000. Net charge-offs decreased $200,000,
or 4.9% from $4.1 million in 2000 to $3.9 million in 2001. The ratio of net
charge-offs to average loans averaged 0.60% for the five year period ended
December 31, 2001, with a ratio of 0.42% in 2001 and 0.57% in 2000. Net
charge-offs, as a percentage of the provision for loan losses, were 51.88% in
2001, compared to 81.98% in 2000. After provisions and charge-offs the allowance
for loan losses was 1.26% of loans, net of unearned income at December 31, 2001,
compared to 1.11% at December 31, 2000. The allowance for loan losses was
increased based on management's assessment of historical loss experience, volume
and types of loans, trends in classifications, volume and trends in
delinquencies and non-accruals, national and local economic conditions and other
pertinent information. See "Financial Condition -- Allowance for Loan Losses"
for additional discussion.

17

Noninterest income increased $2.0 million, or 24.9% to $9.8 million in
2001, from $7.8 million in 2000, primarily as the result of investment
securities gains which totaled $1.4 million in 2001 compared to $131,000 in
2000. During the third quarter of 2001, we entered into and settled an interest
rate swap that was not designated as a hedging instrument. A gain of
approximately $610,000 was realized and recognized currently in earnings as
investment securities gains. We did not enter into any other derivative
transactions during the year. Income from mortgage banking operations for the
year ended December 31, 2001 remained level compared to 2000 at $1.7 million.
Income from customer service charges and fees increased to $4.1 million from
$4.0 million in 2000. Other noninterest income was $2.6 million, an increase of
$545,000, or 26.6% from $2.1 million in 2000. The increase in other noninterest
income was primarily due to an increase in rental income of $180,000 and gains
on the sale of real estate of $141,000.

Noninterest expense increased $6.4 million, or 19.9% to $38.5 million in
2001 from $32.1 million in 2000. Salaries and employee benefits increased $3.4
million, or 20.8% to $19.5 million in 2001 compared to $16.1 million in 2000.
The increase in salaries and benefits primarily resulted from the addition of
personnel in the administration and operation areas, specifically, loan review,
internal audit and credit administration. All other noninterest expenses
increased $3.0 million, or 18.9% to $19.0 million, compared to $16.0 million in
2000. This increase in other noninterest expenses consists primarily of a
$971,000 increase in occupancy and equipment expenses, a $936,000 charge related
to fraud and litigation settlement, a $295,000 charge related to the data
processing conversion of the Florida operations and a $474,000 charge related to
obsolete furniture and equipment. Occupancy expenses increased during 2001 as a
result of increased depreciation and maintenance related to our headquarters and
The Bank's operations center. During 2001 and 2000, other operating expenses
included goodwill amortization of $562,000 per year. In accordance with SFAS
Statement No. 142, "Goodwill and Other Intangible Assets," no amortization of
goodwill will be recorded in future periods.

Our income tax expense was $966,000 and $996,000 in 2001 and 2000,
respectively, resulting in effective tax rates of 26.4% and 18.6%, respectively.
The primary difference in the effective tax rate and the federal statutory rate
(34%) for 2001 and 2000 arose from the recognition of a rehabilitation tax
credit of $522,000 and $1.3 million, respectively, generated from the
restoration of our headquarters, the John A. Hand building.

NET INTEREST INCOME

The largest component of our net income is net interest income, which is
the difference between the income earned on interest-earning assets and interest
paid on deposits and borrowings. Net interest income is determined by the rates
earned on our interest earning assets, rates paid on our interest-bearing
liabilities, the relative amounts of interest-earning assets and
interest-bearing liabilities, the degree of mismatch and the maturity and
repricing characteristics of our interest-earning assets and interest-bearing
liabilities. Net interest income divided by average interest-earning assets
represents our net interest margin.

Average Balances, Income, Expenses and Rates. The following tables depict,
on a tax-equivalent basis for the periods indicated, certain information related
to our average balance sheet and our average yields on

18

assets and average costs of liabilities. Such yields are derived by dividing
income or expense by the average balance of the corresponding assets or
liabilities. Average balances have been derived from daily averages.

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(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent basis
using a tax rate of 34 percent.

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Analysis of Changes in Net Interest Income. The following table sets
forth, on a taxable equivalent basis, the effect which the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable
rates have had on changes in net interest income for the years ended December
31, 2002 and 2001.

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(1) The changes in net interest income due to both rate and volume have been
allocated to rate and volume changes in proportion to the relationship of
the absolute dollar amounts of the changes in each.

MARKET RISK -- INTEREST RATE SENSITIVITY

Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to a change in interest rates, exchange rates
and equity prices. Our primary market risk is interest rate risk.

We evaluate interest rate sensitivity risk and then formulate guidelines
regarding asset generation and repricing, funding sources and pricing and
off-balance sheet commitments in order to decrease interest rate sensitivity
risk. We use computer simulations to measure the net interest income effect of
various interest rate scenarios. The modeling reflects interest rate changes and
the related impact on net interest income over specified periods of time.

The primary objective of asset/liability management is to manage interest
rate risk and achieve reasonable stability in net interest income throughout
interest rate cycles. This is achieved by maintaining the proper balance of
interest rate sensitive earning assets and interest rate sensitive liabilities.
In general, management's strategy is to match asset and liability balances
within maturity categories to limit our exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. Our asset and liability management strategy is formulated and monitored by
our Asset/Liability Management Committee, which is comprised of our head of
asset/liability management, other senior officers and certain directors, in
accordance with policies approved by the board of directors. Our internal
Asset/Liability Committee meets weekly to review, among other things, the
sensitivity of our assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses, including
those attributable to purchase and sale activity, and maturities of investments
and borrowings. The committee also approves and establishes pricing and funding
decisions with respect to overall asset and liability composition and reports
regularly to the full board of directors of The Bank.

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One of the primary goals of the committee is to effectively manage the
duration of our assets and liabilities so that the respective durations are
matched as closely as possible. This duration adjustment can be accomplished
either internally by restructuring our balance sheet, or externally by adjusting
the duration of our assets or liabilities through the use of interest rate
contracts, such as interest rate swaps, corridors, caps and floors. Our current
strategy is to hedge internally through the use of core deposit accounts, which
are not as rate sensitive as other deposit instruments, and FHLB advances,
together with an emphasis on investing in shorter-term or adjustable rate assets
which are more responsive to changes in interest rates, such as adjustable rate
U.S. Government agency mortgage-backed securities, short-term U.S. Government
agency securities and commercial business, real estate and consumer loans.

During the next twelve months, approximately $4.8 million more
interest-bearing assets than interest-earning liabilities can be repriced to
current market rates. As a result, the one-year cumulative gap (the ratio of
rate sensitive assets to rate sensitive liabilities) at December 31, 2002, was
100.55%, indicating an asset sensitive position. For the period ending December
31, 2003, our interest rate risk model, which relies on management's growth
assumptions, indicates that projected net interest income will increase on an
annual basis by 5.64%, or approximately $3.09 million, assuming an instantaneous
increase in interest rates of 200 basis points. Assuming an instantaneous
decrease of 200 basis points, projected net interest income is expected to
decrease on an annual basis by 5.44%, or approximately $2.97 million. The effect
on net interest income produced by these scenarios is within our asset and
liability management policy, which allows the level of interest rate sensitivity
to affect net interest income plus or minus 10 percent (+/-10%).

Our board has authorized the Asset/Liability Management Committee to
utilize financial futures, forward sales, options and interest rate swaps, caps
and floors, and other instruments, to the extent necessary, in accordance with
Federal Reserve Board regulations and our internal policy. It is expected that
financial futures, forward sales and options will be primarily used in hedging
mortgage banking products, and interest rate swaps, caps and floors will be used
as macro hedges against our securities, loan portfolios and our liabilities.

We recognize that positions for hedging purposes are primarily a function
of three main areas of risk exposure: (1) mismatches between assets and
liabilities; (2) prepayment and other option-type risks embedded in our assets,
liabilities and off-balance sheet instruments; and (3) the mismatched
commitments for mortgages and funding sources. We will engage in only the
following types of hedges: (1) those which synthetically alter the maturities or
repricing characteristics of assets or liabilities to reduce imbalances; (2)
those which enable us to transfer the interest rate risk exposure involved in
our daily business activities; and (3) those which serve to alter the market
risk inherent in our investment portfolio or liabilities and thus matching the
effective maturities of the assets and liabilities.

The primary derivative instrument used by us to manage interest rate risk
is the interest rate swap. An interest rate swap allows one party to swap a
fixed rate for a floating rate or vice-versa. The amount of the swap is based on
a "notional amount." We most commonly use swap transactions involving callable
certificate of deposit issuance, in which we enter into a swap along the same
terms as a certificate of deposit ("CD"). These transactions, in some cases, are
more beneficial than single maturity issuance, because they allow us to obtain a
liquidity hedge (by retaining the right to call the CD), as well as to obtain
relatively low-rate funding. We can enter into callable interest rate swaps in
conjunction with callable CD issuance, provided the terms of the swap are
substantially the same as the terms of the CD.

As of December 31, 2002, we had outstanding interest rate swaps with a
notional amount of $10 million. This was comprised of two interest rate swaps to
hedge the fair value of fixed-rate consumer certificates of deposits. These
hedges were deemed to be structured as a perfect hedge by our management and as
such were treated with the short-cut method of accounting under SFAS Statement
No. 133.

We attempt to manage the one-year gap position as close to even as
possible. This ensures us of avoiding wide variances in case of a rapid change
in our interest rate environment. Also, certain products that are classified as
being rate sensitive do not reprice on a contractual basis. These products
include regular savings, interest-bearing transaction accounts, money market and
NOW accounts. The rates paid on these accounts are typically not related
directly to market interest rates, and management exercises some discretion in
21

adjusting these rates as market rates change. In the event of a rapid shift in
interest rates, management would attempt to take certain actions to mitigate the
negative impact to net interest income. These actions include but are not
limited to, restructuring of interest-earning assets, seeking alternative
funding sources and entering into interest rate swap agreements.

Although interest rate sensitivity gap is a useful measurement that
contributes to effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the committee also regularly reviews interest rate risk by forecasting
the impact of alternative interest rate environments on our economic value of
equity ("EVE"). EVE is defined as the net present value of our balance sheet's
cash flows or the residual value of future cash flows. While EVE does not
represent actual market liquidation or replacement value, it is a useful tool
for estimating our balance sheet's existing earning capacity. The greater the
EVE, the greater our earnings capacity. The following table sets forth our EVE
as of December 31, 2002:

The above table is based on a prime rate of 4.25% and assumes an
instantaneous uniform change in interest rates at all maturities.

LIQUIDITY

The goal of liquidity management is to provide adequate funds to meet
changes in loan demand or any potential unexpected deposit withdrawals.
Additionally, management strives to maximize our earnings by investing our
excess funds in securities and other securitized loan assets with maturities
matching our offsetting liabilities. See the "Selected Loan Maturity and
Interest Rate Sensitivity" and "Maturity Distribution of Investment Securities".

Historically, we have maintained a high loan-to-deposit ratio. To meet our
short-term liquidity needs, we maintain core deposits and have borrowing
capacity through the FHLB, federal funds lines and a line of credit with a
regional bank. Long-term liquidity needs are met primarily through these
sources, the repayment of loans, sales of loans and the maturity or sale of
investment securities, including short-term investments.

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We have entered into certain contractual obligations and commercial
commitments which arise in the normal course of business and involve elements of
credit risk, interest rate risk and liquidity risk. The following tables
summarize these relationships by contractual cash obligations and commercial
commitments:

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(1) See Note 7 to the Consolidated Financial Statements.
(2) See Note 5 to the Consolidated Financial Statements.
(3) See Note 8 to the Consolidated Financial Statements.

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(1) See Note 13 to the Consolidated Financial Statements.

FINANCIAL CONDITION

Our total assets were $1.41 billion at December 31, 2002, an increase of
$199 million, or 16.5% from $1.21 billion as of December 31, 2001. The increase
in total assets primarily related to an increase in net loans of $139 million,
cash surrender value of life insurance of $16.1 million, deferred tax benefit of
$9.1 million and premises and equipment of $14.0 million. The increase in total
assets was funded primarily by an increase in customer deposits and borrowings
from the FHLB. The acquisition of CF Bancshares, Inc. on February 15, 2002 added
approximately $100 million in total assets, approximately $88 million in total
loans and approximately $77 million in total deposits.

Loans. Loans are the largest category of interest-earning assets and
typically provide higher yields than other types of interest-earning assets.
Loans involve inherent credit and liquidity risks which management attempts to
control and mitigate. At December 31, 2002, total loans net of unearned income
were $1.14 billion, an increase of $139.4 million from $999.2 million at
December 31, 2001. This compares to increases of $191.0 million during 2001 from
$808.2 million at December 31, 2000 and $175.4 million during

23

2000 from $632.8 million at December 31, 1999. The average yield of the loan
portfolio was 7.50%, 9.10% and 9.64% for the years ended December 31, 2002, 2001
and 2000, respectively.

DISTRIBUTION OF LOANS BY CATEGORY

The repayment of loans as they mature is a source of liquidity for us. The
following table sets forth our loans by category maturing within specified
intervals at December 31, 2002. The information presented is based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity. Consequently, management believes this treatment presents fairly
the maturity and repricing of the loan portfolio.

SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

Allowance for Loan Losses. We maintain an allowance for loan losses at a
level we believe is adequate to absorb estimated losses inherent in the loan
portfolio. We prepare a quarterly analysis to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses.
Generally, we estimate the allowance using specific reserves for impaired loans,
and other factors, such as historical loss experience based

24

on volume and types of loans, trends in classifications, volume and trends in
delinquencies and non-accruals, national and local economic conditions and other
pertinent information. The level of allowance for loan losses to net loans will
vary depending on the quarterly analysis.

We manage and control risk in the loan portfolio through adherence to
credit standards established by the board of directors and implemented by senior
management. These standards are set forth in a formal loan policy, which
establishes loan underwriting/approval procedures, sets limits on credit
concentration and enforces regulatory requirements. In addition, we have
implemented a peer review system to supplement our existing independent loan
review function. We believe that this system will help us to improve our timely
review of the loan portfolio.

Loan portfolio concentration risk is reduced through concentration limits
for borrowers and collateral types and through geographical diversification.
Concentration risk is measured and reported to senior management and the board
of directors on a regular basis.

The allowance for loan loss calculation is segregated into various segments
that include classified loans, loans with specific allocations and pass rated
loans. A pass rated loan is generally characterized by a very low to average
risk of default and in which management perceives there is a minimal risk of
loss. Loans are rated using a seven point scale with the loan officer having the
primary responsibility for assigning risk ratings and for the timely reporting
of changes in the risk ratings. These processes, and the assigned risk ratings,
are subject to review by our internal Loan Review Department and senior
management. Based on the assigned risk ratings, the loan portfolio is segregated
into the following regulatory classifications: Special Mention, Substandard,
Doubtful or Loss. Generally, regulatory reserve percentages are applied to these
categories to estimate the amount of loan loss allowance, adjusted for
previously mentioned risk factors.

Pursuant to SFAS Statement No. 114, impaired loans are specifically
reviewed loans for which it is probable that the we will be unable to collect
all amounts due according to the terms of the loan agreement. Impairment is
measured by comparing the recorded investment in the loan with the present value
of expected future cash flows discounted at the loan's effective interest rate,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. A valuation allowance is provided to the extent
that the measure of the impaired loans is less than the recorded investment. A
loan is not considered impaired during a period of delay in payment if the
ultimate collectibility of all amounts due is expected. Larger groups of
homogenous loans such as consumer installment and residential real estate
mortgage loans are collectively evaluated for impairment.

Reserve percentages assigned to pass rated homogeneous loans are based on
historical charge-off experience adjusted for current trends in the portfolio
and other risk factors.

As stated above, risk ratings are subject to independent review by the Loan
Review Department, which also performs ongoing, independent review of the risk
management process, which includes underwriting, documentation and collateral
control. The Loan Review Department is centralized and independent of the
lending function. The loan review results are reported to the Audit Committee of
the board of directors and senior management. We have also established a
centralized loan administration services department to serve all of our bank
locations, thereby providing standardized oversight for compliance approval
authorities and bank lending policies and procedures as well as centralized
supervision, monitoring and accessibility. In addition, this department will
enhance the monitoring of loan risk ratings as well as the monitoring of a loan
officer's ability to originate loans.

We historically have allocated our allowance for loan losses to specific
loan categories. Although the allowance is allocated, it is available to absorb
losses in the entire loan portfolio. This allocation is made for

25

estimation purposes only and is not necessarily indicative of the allocation
between categories in which future losses may occur.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES