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, 2003
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 filers 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. [X]

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 common stock held by
non-affiliates of the registrant as of March 8, 2004, based on a closing price
of $7.85 per share of common stock, was $116,806,799.

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 8, 2004, of the registrant's only issued and outstanding
class of stock, its $.001 per share par value common stock, was 17,707,982.

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 2004 annual meeting of stockholders that will be filed no
later than April 29, 2004.

PART I

ITEM 1. BUSINESS.

GENERAL

We are a Delaware-chartered bank holding company headquartered in
Birmingham, Alabama. We offer a broad range of banking and related services in
26 locations in Alabama and the eastern Florida panhandle through The Bank, our
principal subsidiary. We had assets of approximately $1.2 billion, loans of
approximately $857 million, deposits of approximately $890 million and
stockholders' equity of approximately $100 million at December 31, 2003. Our
principal executive offices are located at 17 North 20th Street, Birmingham,
Alabama 35203, and our telephone number is (205) 327-3600.

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 loan administration, policy oversight, credit review, audit,
asset/liability management, data processing, human resource 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
attract and retain low-cost core deposits that provide a large portion of our
funding requirements. Core deposits comprised approximately 67.7% of our total
deposits at December 31, 2003.

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. In addition to our banking services, we offer life, health and long-
term care insurance and annuity products.

Market Areas. Our primary markets are located in northern and central
Alabama and the eastern 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, Mt. Olive, Opp, Rainbow
City, Samson, Sylacauga and Warrior, Alabama. We also 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, Mexico Beach and Port St. Joe.

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. Over the past eighteen months, The Bank has centralized all loan
files and all loan processing, and we have enhanced our internal audit and loan
review staffing. As a result of the corresponding increase in personnel and the
significant investment in infrastructure and systems, our efficiency ratio has
been above average for our peer group.

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Our future growth depends primarily on the expansion of the business of our
primary wholly owned subsidiary, The Bank. That expansion will most likely
depend on internal growth and the opening of new branch offices in new and
existing markets. The Bank will also consider the strategic acquisition of other
financial institutions and branches that have relatively high earnings or that
we believe to have exceptional growth potential. Our ability to increase
profitability and grow internally depends 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 primarily on 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
combination or series of business combinations that we might undertake may be
material to our business, financial condition or results of operations in terms
of assets acquired or liabilities assumed. 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, 2003 were $857
million, or 83.6% 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, money market 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, 2003, approximately 71% 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 it is recommended by the account
officer or loan committee and 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 $660 million, or 77.0% of total
loans at December 31, 2003. At that date, $231 million, or 26.9% of our total
loan portfolio, consisted of single-family 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, 2003, $282 million, or 32.8% of our total loan portfolio,
consisted of these loans. Our commercial real estate loans primarily provide
financing for income-producing
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properties such as shopping centers, multi-family complexes and office buildings
and for owner-occupied properties (primarily light industrial facilities and
office buildings). These loans are underwritten with loan-to-value ratios
ranging, on average, 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, 2003, $231 million, or 26.9% 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 to 30 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, 2003, $148 million, or 17.2% of our
total loan portfolio, consisted of such 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, generally using an 85% maximum
loan-to-value ratio, we underwrite the financial strength and reputation of the
builder and factor in the general state of the economy, interest rates and the
location of the home. The majority of land development loans consists 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. Commercial and industrial loans
constituted $142 million, or 16.6% of our loan portfolio, at December 31, 2003.
We also, from time to time, make unsecured commercial loans.

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 $46 million, or 5.4% of our loan portfolio at December 31,
2003. Consumer loans are underwritten based on the borrower's income, current
debt, credit history and collateral. Terms generally range from one to six years
on automobile 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 and an
independent, external loan review function. Internal loan review and internal
audit also perform ongoing, independent review of the risk management process,
including underwriting, documentation and collateral control. Regular reports
are made to senior management and the Board of Directors 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.
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During the third quarter of 2003 we established a new special assets
department. This department is staffed with nine employees, and is managed by
our special assets executive who has over 18 years of experience in dealing with
special assets. With this department, we believe we can better monitor and
control our collection efforts. Segregating our problem assets into this
department will allow us to accurately monitor the performance of our individual
branches on an ongoing basis without the influences of these nonperforming and
classified relationships.

DEPOSITS

Core deposits are our principal source of funds, constituting approximately
67.7% of our total deposits as of December 31, 2003. 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.

Our other sources of funds consist primarily of advances from the Federal
Home Loan Bank ("FHLB"). These advances are secured by FHLB stock, agency
securities and a blanket lien on certain residential and commercial real estate
loans. We also have available unused federal funds lines of credit with regional
banks, subject to certain restrictions and collateral requirements.

Deposit rates are set periodically by the Asset/Liability Management
Committee, which includes certain members of senior management and two directors
of The Bank and The Banc Corporation. We believe our rates are competitive with
those offered 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, as well as non-bank financial services companies. 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, 2003, we employed approximately 376 full-time equivalent
employees, primarily at The Bank. We believe that our employee relations have
been and continue to be good.

SUPERVISION AND REGULATION

We are a bank holding company, which means that we are subject to the
supervision, examination and reporting requirements of the Federal Reserve Board
and the Bank Holding Company Act ("BHCA"). The BHCA and other federal laws
subject bank holding companies to particular restrictions on the types of

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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 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 Banc Corporation owns all the stock of its subsidiary depository
institution, The Bank, an Alabama-chartered state bank and member of the Federal
Reserve System which is subject to regulation, supervision and examination by
the Federal Reserve Board and the Alabama Banking Department. The insurance
activities of The Bank's subsidiary, TBNC Financial Management, Inc., are
subject to regulation, supervision and examination by the Alabama and Florida
Departments of Insurance.

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.

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 Alabama Banking Department 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. Our ability and The Bank's ability to pay dividends
in the future is currently, and could be further, influenced by bank regulatory
policies and capital guidelines. Currently, The Banc Corporation must obtain
regulatory approval prior to paying dividends. The Federal Reserve Board
approved the timely payment of our semi-annual distribution on our trust
preferred securities in January and March 2004 and on our preferred stock in
December 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.

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

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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%. Our Total
Risk-Based Capital Ratio is 14.07% as of December 31, 2003. 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 and lease
loss reserves ("Tier 2 Capital"). The minimum guideline for Tier 1 Capital to
risk-based assets is 4%. Our Tier 1 Capital to risk-weighted assets is 12.60% at
December 31, 2003.

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 9.72% at December 31, 2003. 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.

As of December 31, 2003, both The Banc Corporation and The Bank were "well
capitalized".

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, 2003. 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.

Restrictions on Transactions with Affiliates and Insiders. 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. In addition, the Sarbanes-Oxley Act
of 2002 prohibits us from making loans to our directors or executive officers
except those made in compliance with the restrictions described above.

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FDIC Insurance Assessments. Pursuant to the Federal Deposit Insurance
Corporation Improvement Act, 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. 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.

Our bank subsidiary was assessed a $725,000 quarterly FDIC deposit
insurance premium for the third quarter of 2003, which increased to $880,000
during the fourth quarter of 2003. We appealed this assessment and are awaiting
word from the FDIC in Washington, D.C. about that appeal. Our assessment for the
first quarter of 2004 was lowered to $417,000. We have also requested the FDIC
to rebate a portion of this premium.

Community Reinvestment Act ("CRA"). 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 when considering applications to
establish branches, merger applications, applications to engage in new
activities 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 records 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. On October 26, 2001, President Bush signed into law 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 any 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 regulations.

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 Real Estate
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.

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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.
Some 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

We maintain an Internet website at www.thebankmybank.com. We make available
free of charge through our website various reports that we file with the
Securities and Exchange Commission, including our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
these reports. These reports are made available as soon as reasonably
practicable after these reports 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.

CODE OF ETHICS

We have adopted, and are in the process of revising, a code of ethics that
applies to all of our employees, including our principal executive, financial
and accounting officers. We intend to make a copy of our code of ethics, as so
revised, available on our Internet website. We intend to disclose information
about any amendments to, or waivers from, our code of ethics that are required
to be disclosed under applicable Securities and Exchange Commission regulations
by providing appropriate information on our website. Until such time as our code
of ethics is available on our website, we will provide a copy of it to any
person free of charge upon written request.

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 eight floors of the
building, including a branch of The Bank and our headquarters. We have sold or
leased four Units. We intend to use the remaining space for future expansion of
The Bank. We relocated our operations and data processing center to the fourth
and fifth floors and centralized our risk management department on the sixth
floor of our headquarters building during 2003.

We operate through facilities at 26 locations. We own 24 of these
facilities, lease two of these facilities and have two ground leases on
facilities we own. Rental expense on the leased properties totaled approximately
$160,000 in 2003. In the third quarter of 2003, we disposed of seven facilities
(including one leased facility) in the Florida panhandle as part of the sale of
the Emerald Coast branches of The Bank.

9

ITEM 3. LEGAL PROCEEDINGS.

While we are a party to various legal proceedings arising in 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 and 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 business, our financial condition or our results of
operations.

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 8, 2004, there were approximately 907 record holders of our common stock.
The following table sets forth, for the calendar periods indicated, the range of
high and low sales prices:

On March 8, 2004, the last sale price for the common stock was $7.85 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. No dividends have been paid on our
common stock since that time. 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, in turn, 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, our preferred
stock or our trust preferred securities. The Federal Reserve approved the timely
payment of our semi-annual distribution on our trust preferred securities in
January and March 2004 and on our preferred stock in December 2003. The
restrictions that may limit The Banc Corporation's ability to pay dividends are
discussed in this Report in Item 1 under the heading "Supervision and
Regulation -- Regulatory Restrictions on Dividends."

10

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, 2003 and 2002 and for each
of the three years ended December 31, 2003 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."

11

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

(1)- See Note 9 to consolidated financial statements.
(2)- Earnings per share for the year 2003 has been calculated on net income
adjusted for the $219,000 preferred stock dividend.
(3)- Common stock equivalents of 287,000 shares were not included in computing
diluted earnings per share for the year ended December 31, 2002 because
their effects were antidilutive.
(4)- Net interest income divided by average earning assets.
(5)- Calculated on a tax equivalent basis.
(6)- Yield on average interest earning assets less rate on average interest
bearing liabilities.
(7)- Efficiency ratio is calculated by dividing noninterest expense, adjusted
for FHLB prepayment penalties in 2003, by noninterest income, adjusted for
gain on sale of branches in 2003, plus net interest income on a fully tax
equivalent basis.

12

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.

OVERVIEW

Our principal subsidiary is The Bank, an Alabama-chartered financial
institution headquartered in Birmingham, Alabama which operates 26 banking
offices in Alabama and the eastern 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 unconsolidated special purpose entities formed solely to issue cumulative
trust preferred securities. MAMG is a real estate management company that
manages our headquarters, our branch facilities and certain other real estate
owned by The Bank.

During 1998 and 1999, we acquired several banking organizations which
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 February 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.

In March 2003, we sold our branch in Roanoke, Alabama which had assets of
approximately $9.8 million and liabilities of $44.7 million. We realized a $2.3
million gain on the sale. In August 2003, we sold seven branches of The Bank,
known as the Emerald Coast branches, serving the markets from Destin to Panama
City, Florida for a $46.8 million deposit premium. These branches had assets of
approximately $234 million and liabilities of $209 million. We realized a $46.0
million gain on the sale.

The primary source of our revenue is net interest income, which is the
difference between income earned on interest-earning assets, such as loans and
investments, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. Our results of operations are also affected by the provision for
loan losses and other noninterest expenses such as salaries and benefits,
occupancy expenses and provision for income taxes. The effects of these
noninterest expenses are partially offset by noninterest sources of revenue such
as service charges and fees on deposit accounts and mortgage banking income. Our
volume of business is influenced by competition in our markets and overall
economic conditions including such factors as market interest rates, business
spending and consumer confidence.

During 2003, our net interest income decreased by 11.1% primarily due to a
decline in the yield on our loan portfolio. This decline was due in large part
to falling market interest rates, significant charged-off loans and a high level
of nonperforming loans. The decline in loan yield was partially offset by a
decline in market interest rates on borrowings and deposits, which is reflected
in lower interest costs to us.

The level of nonperforming and charged-off loans in 2003 also resulted in a
significant provision for loan losses. Our high levels of nonperforming loans
and charged-off loans were primarily concentrated in four locations: Bristol,
Albertville, Huntsville and Andalusia. The management teams and lending staffs
in these markets have been replaced within the last twelve months. Our highest
concentration of nonperforming and charged-off loans was in our Bristol, Florida
bank group. In January of 2003, our internal risk management function identified
certain loans that had been extended upon the authorization and direction of the
now
13

former president of our Bristol bank group in violation of our lending policies.
We realized significant losses during 2002 and 2003 related to these loans.

During 2003, we initiated several operational and organizational changes.
First, we assigned reputable management personnel, with proven abilities, to
these locations. Second, we established a centralized process to monitor and
enforce our policies with respect to authorized lending limits and approval of
loans. In addition, all loan files have been, and loan operations are in the
final stages of being, centralized in our Birmingham headquarters.

In order to enhance performance in future periods we plan to increase the
volume of our interest-earning assets, decrease our nonperforming assets and
improve our efficiency ratio. We have initiated several strategies to accomplish
these objectives.

In January of 2004, we transferred substantially all of our nonperforming
loans and approximately $7 million of other problem loans to our special assets
department. Approximately $39.0 million in loans were transferred along with the
related allowance for loan loss of $9.8 million. This department is staffed with
nine employees, and is managed by our special assets executive, who has over 18
years of experience in dealing with special assets. By segregating these
relationships, we believe we can better monitor and control our collection
efforts. Segregating these relationships also allows us to accurately monitor
the performance of our individual branches on an ongoing basis without the
influence of these nonperforming and problem relationships. Management is
vigorously pursuing appropriate collection efforts and expects the nonperforming
and problem relationships to decline over the next twelve months.

During 2003, we relocated our operations center to our Birmingham
headquarters and reduced the number of personnel assigned to the operations
center. We also reduced personnel in other locations throughout our system. We
opened a new headquarters for our North Alabama market in Huntsville, Alabama
and completed construction of our new Florida headquarters in Port St. Joe,
Florida. We also completed an internal business optimization analysis conducted
with the assistance of Sheshunoff Management Services. Most of the procedural
enhancements suggested by that analysis were implemented during the third and
fourth quarters of 2003. As previously stated, we also sold branches in our
Emerald Coast, Florida and Roanoke, Alabama markets.

In December 2003, we repaid $33.6 million in Federal Home Loan Bank
("FHLB") borrowings that carried an average interest rate of 6.33% and incurred
a prepayment penalty of approximately $2.5 million. Overall, we reduced FHLB
borrowings during 2003 by approximately $52.7 million with an average rate of
5.83%. An additional $25 million in FHLB borrowings will mature in April of 2004
with an average rate of 5.21%.

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 to
accounting principles generally accepted in the United States and to 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 in the 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 or reductions be made to the allowance for
loan losses based on their judgments and estimates.

14

RECENT DEVELOPMENTS

Morris Branch Sale. On February 6, 2004, The Bank sold its Morris branch,
which had assets of $1.0 million and liabilities of $8.2 million, for an
after-tax gain of $465,000.

RESULTS OF OPERATIONS

Year Ended December 31, 2003, Compared with year ended December 31, 2002

Our net income for the year ended December 31, 2003 was $17.5 million
compared to a net loss of $(18.4) million for the year ended December 31, 2002.
Our basic net income per share was $.99 and diluted net income per share was
$.95 for the year ended December, 31 2003 compared to a net loss per share of
$(1.09) per share for the year ended December 31, 2002. Our return on average
assets was 1.29% in 2003 compared to (1.36)% in 2002. Our return on average
stockholders' equity increased to 19.08% in 2003 from (19.89)% in 2002. Our book
value per common share at December 31, 2003 increased to $5.31 from $4.35 as of
December 31, 2002, and our tangible book value per common share at December 31,
2003 increased to $4.59 from $3.59 as of December 31, 2002. Average equity to
average assets decreased to 6.74% in 2003 from 6.83% in 2002.

The growth in our net income for the year ended December 31, 2003 compared
to the year ended December 31, 2002 is the result of a $48.3 million gain on the
sale of branches and a decrease in loan loss provision, which was partially
offset by an increase in noninterest expenses. Provision for loan losses
decreased $30.9 million, or 59.6% from $51.9 million for the year ended December
31, 2002 to $21.0 million for the year ended December 31, 2003. Noninterest
income, exclusive of the branch sales and litigation settlement, increased
$551,000, or 3.9% from $14.0 million for the year ended December 31, 2002 to
$14.6 million for the year ended December 31, 2003. Noninterest expense,
exclusive of prepayment penalty on FHLB advances, increased $12.7 million, or
29.8% from $42.7 million for the year ended December 31, 2002 to $55.4 million
for the year ended December 31, 2003.

Net interest income is the difference between the income earned on
interest-earning assets and interest paid on interest-bearing liabilities used
to support such assets. Net interest income decreased $5.3 million, or 11.1% to
$42.7 million for the year ended December 31, 2003, from $48.0 million for the
year ended December 31, 2002. This was due to a decrease in total interest
income of $12.3 million, or 13.9% offset by a decrease in total interest expense
of $7.0 million, or 17.3%. This decrease in total interest income was primarily
attributable to a $13.0 million, or 15.4% decrease in interest income on loans
which is the result of declining market interest rates, significant charged-off
loans and a high level of nonperforming loans.

The decline in total interest expense is primarily attributable to a
63-basis point decline in the average interest rates paid on interest-bearing
liabilities. The average rate paid on interest-bearing liabilities was 2.90% for
the year ended December 31, 2003 compared to 3.53% for the year ended December
2002. Our net interest spread and net interest margin were 3.35% and 3.50%,
respectively, for the year ended December 31, 2003, compared to 3.70% and 3.93%,
respectively, for the year ended December 31, 2002.

Our average interest-earning assets for the year ended December 31, 2003
decreased $5.0 million, or 0.4% to $1.222 billion from $1.227 billion for the
year ended December 31, 2002. This decline in our average interest-earning
assets was due to the sale of our Emerald Coast branches in the third quarter of
2003. The ratio of our average interest-earning assets to average
interest-bearing liabilities was 105.8% and 107.0% for the year ended December
31, 2003 and 2002, respectively. Our average interest-bearing assets produced a
tax equivalent yield of 6.25% for the year ended December 31, 2003 compared to
7.23% for the year ended December 31, 2002. The 98-basis point decline in the
yield was partially offset by a 63-basis point decline in the average rate paid
on interest-bearing liabilities.

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 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

15

which management perceives there is a minimal risk of loss. Loans are rated
using an eight point scale with loan officers 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 function and senior management. Based on the
assigned risk ratings, the criticized and classified loans in the portfolio are
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. 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 specific 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 $21.0 million for the year ended December
31, 2003 compared to $51.9 million in 2002. During 2003, $16.4 million, or 78.1%
of the provision for loan losses was attributable to four of our bank groups:
the Bristol bank group's provision was $8.2 million; the Albertville bank
group's provision was $2.1 million; the Andalusia bank group's provision was
$4.3 million and the Huntsville bank group's provision was $1.8 million. In the
third and fourth quarters of 2003, approximately $13.2 million (before
writedowns) in Bristol loan relationships filed Chapter 11 bankruptcy. This
resulted in increased charge-offs and additional provision for loan losses in
these quarters. Net charge-offs decreased $14.2 million from $37.7 million in
2002 to $23.5 million in 2003. Net charge-offs, as a percentage of the provision
for loan losses, were 111.9% in 2003, compared to 72.7% in 2002. During 2003,
$20.0 million or 81.6% of total charged-off loans were attributable to the same
four bank groups: the Bristol bank group contributed approximately $12.1 million
to total charge-offs during 2003; the Albertville bank group contributed
approximately $3.2 million; the Andalusia bank group contributed approximately
$2.1 million; and the Huntsville bank group contributed approximately $2.6
million. After provisions and charge-offs, the allowance for loan losses was
2.94% of loans, net of unearned income, at December 31, 2003 compared to 2.44%
at December 31, 2002. See "Financial Condition -- Allowance for Loan Losses" for
additional discussion.

Noninterest income increased $47.7 million, or 315.6% to $62.8 million in
2003, from $15.1 million in 2002. This increase includes gains on sales of
branches of $48.3 million in 2003. Income from mortgage banking operations for
the year ended December 31, 2003 increased $781,000, or 24% to $4.0 million in
2003, from $3.3 million in 2002. Income from customer service charges and fees
remained constant at $5.8 million in 2003 and 2002. Other non-interest income
was $4.2 million, a decrease of $157,000, or 3.6% from $4.3 million in 2002.

Noninterest expense increased $15.2 million, or 35.8% to $57.9 million in
2003 from $42.7 million in 2002. Salaries and employee benefits increased $6.0
million, or 25.4% to $29.5 million in 2003 compared to $23.5 million in 2002. In
addition to normal merit raises, the increase in salaries and benefits relates
primarily to the accrual of employee bonuses of $1.9 million and a $1.9 million
liability adjustment related to certain deferred compensation plans (See Note 11
to the consolidated financial statements).

All other noninterest expenses increased $9.3 million, or 48% to $28.5
million from $19.2 million in 2002. Other noninterest expenses increased during
2003 primarily as a result of a prepayment penalty on FHLB advances, an increase
in our FDIC premiums, a loss on the sale of our former Huntsville and Port St.
Joe branch buildings, one-time expenses related to the relocation of our data
processing center to our corporate headquarters, an increase in professional
fees and losses on other real estate. Our bank subsidiary was assessed a
$725,000 quarterly FDIC deposit insurance premium for the third quarter of 2003
which increased to $880,000 during the fourth quarter of 2003. We appealed this
assessment and are awaiting word from the
16

FDIC in Washington, D.C. about that appeal. Our assessment for the first quarter
of 2004 was lowered to $417,000. We have also requested the FDIC to rebate a
portion of this premium.

In connection with the sale of the Emerald Coast branches of The Bank, our
full-time equivalent ("FTE") employee count went down by approximately 66. We
instituted other staff reductions of approximately 50 FTE employees that were
completed during the fourth quarter of 2003, reducing the overall staff to 376
FTE employees as of December 31, 2003. The staff reductions were in the areas of
tellers, processors and other administrative support. During this same period,
we increased staff in the centralized risk management areas of Loan
Administration Services, Internal Audit, Special Assets, Compliance and
Security. We expect the reductions in staff will reduce our salary and benefit
expenses between $1.0 million and $1.5 million in 2004.

Our income tax expense was $9.2 million in 2003 and our income tax benefit
was $(13.0) million in 2002, resulting in effective tax rates of 34.4% and
(41.3)%, respectively. The difference in the effective tax rate and the federal
statutory rate of 35% for 2003 is due primarily to certain tax-exempt income and
the recognition of a rehabilitation tax credit of $960,000 generated from the
restoration of our headquarters, the John A. Hand Building. The difference in
the effective tax rate and the federal statutory rate of 34% for 2002 is due
primarily to certain tax-exempt income.

Our determination of the realization of deferred tax assets is based
partially on taxable income in prior carry back 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, 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 the Bristol bank group. 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 on these
liabilities decreased from 5.23% in 2001 to 3.53% in 2002.

Our net interest spread and net interest margin increased to 3.70% and
3.93%, 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 2003 and 2002,
respectively.

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 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
17

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 non-interest 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.

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 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.

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

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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, 2003 and 2002.

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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, funding sources, 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, comprised of certain members of senior management,
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. This
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 Asset/Liability committee is to effectively
manage the duration of our assets and liabilities so that the respective
durations are matched as closely as possible. These duration adjustments 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, caps and floors. Our
current strategy is primarily 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 $56.2 million more
interest-earning assets than interest-bearing 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, 2003, was
108.9%, 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 12.9%, or approximately $5.52 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 18.2%, or approximately $7.8 million. The effect
on net interest income produced by these scenarios is within our asset and
liability management policy in the rising rate scenario, but outside our asset
liability policy in the falling rate scenario. Our policy allows the level of
interest rate sensitivity to affect net interest income plus or minus 10 percent
(+/-10%). However, we do not expect rates to decline 200 basis points in the
next twelve months.

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 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, 2003, we had outstanding interest rate swaps with a
notional amount of $11 million. This was composed of three 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
21

are typically not related directly to market interest rates, and management
exercises some discretion in 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 the 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, 2003:

The above table is based on our 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 and federal funds lines. 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.

22

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 8 to the Consolidated Financial Statements.
(2) See Note 5 to the Consolidated Financial Statements.
(3) See Note 10 to the Consolidated Financial Statements.
(4) See Note 7 to the Consolidated Financial Statements.
(5) See Note 9 to the Consolidated Financial Statements.

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(1) See Note 14 to the Consolidated Financial Statements.

FINANCIAL CONDITION

Our total assets were $1.17 billion at December 31, 2003, a decrease of
$235.2 million, or 16.7% from $1.41 billion as of December 31, 2002. Our average
total assets for 2003 were $1.361 billion, which was supported by average total
liabilities of $1.269 billion and average total stockholders' equity of $92
million. In March 2003, we sold our branch in Roanoke, Alabama which had assets,
primarily loans, of approximately $9.8 million and liabilities, primarily
deposits, of $44.7 million; we realized a $2.3 million gain on the sale and an
after-tax gain of $1.5 million. On August 29, 2003, we sold seven branches,
known as the Emerald Coast Division, serving the markets from Destin to Panama
City, Florida for a $46.8 million deposit premium. Our Emerald Coast division
had assets, primarily loans, of approximately $234 million and liabilities,
primarily deposits, of $209 million; we realized a pretax gain of $46 million
and after-tax gain of $30 million on the sale.

Loans, net of unearned income. Our loans, net of unearned income, totaled
$857 million at December 31, 2003, a decrease of 24.7%, or $282 million from
$1.139 billion at December 31, 2002. This decrease is due primarily to the sale
of the Emerald Coast branches in the third quarter of 2003. Mortgage loans held
for sale totaled $6.4 million at December 31, 2003, an increase of $5.6 million
from $764,000 at December 31,
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2002. Average loans, including mortgage loans held for sale, totaled $1.063
billion for 2003 compared to $1.125 billion for 2002. Loans, net of unearned
income, comprised 83.6% of interest-earning assets at December 31, 2003,
compared to 91.5% at December 31, 2002. Mortgage loans held for sale comprised
..62% of interest-earning assets at December 31, 2003, compared to .06% at
December 31, 2002. The average yield of the loan portfolio was 6.71%, 7.50% and
9.10% for the years ended December 31, 2003, 2002 and 2001, respectively. The
following table details the distribution of our loan portfolio by category for
the periods presented:

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, 2003. 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

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Allowance for Loan Losses. We maintain an allowance for loan losses within
a range 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 on volume and types
of loans, trends in classifications, volume and trends in delinquencies and
non-accruals, 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 and approval procedures, sets limits on credit
concentration and enforces regulatory requirements. In addition, we have engaged
Credit Risk Management, LLC, an independent loan review firm, to supplement our
existing internal loan review function.

Loan portfolio concentration risk is reduced through concentration limits
for borrowers, collateral types and geographic 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 an eight-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 function and senior
management. Based on the assigned risk ratings, the criticized and classified
loans in the portfolio are segregated into the following regulatory
classifications: Special Mention, Substandard, Doubtful or Loss. Generally,
regulatory reserve percentages (5%, Special Mention; 15%, Substandard; 50%,
Doubtful; 100%, Loss) are applied to these categories to estimate the amount of
loan loss allowance required, adjusted for previously mentioned risk factors.

Pursuant to SFAS Statement No. 114, impaired loans are specifically
reviewed loans for which it is probable that 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 internal
loan review, which also performs ongoing, independent review of the risk
management process. The risk management process includes underwriting,
documentation and collateral control. Loan review 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 our
entire bank. This department will provide standardized oversight for compliance
with loan approval authorities and bank lending policies and procedures as well
as centralized supervision, monitoring and accessibility.

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

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ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES