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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC

Form 10-Q

Commission File number 0-25033

The Banc Corporation
(Exact Name of Registrant as Specified in its Charter)

17 North 20th Street, Birmingham, Alabama 35203
(Address of Principal Executive Offices)

(205) 326-2265
(Registrant’s Telephone Number, Including Area Code)

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The Banc Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Dollars In Thousands)

See Notes to Condensed Consolidated Financial Statements.

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The Banc Corporation and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(Amounts In Thousands, Except Per Share Data)

See Notes to Condensed Consolidated Financial Statements.

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The Banc Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flow (Unaudited)
(Dollars In Thousands)

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. For a summary of significant accounting policies that have been consistently followed, see Note 1 to the Consolidated Financial Statements included in Form 10-K for the year ended December 31, 2001. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included. Operating results for the three and nine-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

The condensed statement of financial condition at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Reclassification

Certain reclassifications have been made in the prior period Condensed Consolidated Financial Statement to conform to the September 30, 2002 presentation. The guaranteed preferred beneficial interests in the Corporation’s subordinated debentures (trust preferred securities) have been reclassified as long-term debt and the related distributions have been reclassified as interest expense. These trust preferred securities were previously classified as minority interest in the condensed consolidated statement of financial condition with the associated distributions classified as noninterest expense in the condensed consolidated statement of income.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENT

In July 2001, the FASB issued Statement No. 141, “Business Combinations” (Statement 141), and Statement No. 142, “Goodwill and Other Intangible Assets” (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies the criteria for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. Statement 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 requires intangible assets with definite useful lives to be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with the FASB’s Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (Statement 121).

The Corporation adopted the provisions of Statement 141 in 2001 and the provisions of Statement 142 on January 1, 2002. Any goodwill and any intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001, are not to be amortized (See Note 3) but are to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were to continue to be amortized until the adoption of Statement 142.

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Statement 141 required, upon adoption of Statement 142, that the Corporation evaluate its existing intangible assets and goodwill that were acquired in previous purchase business combinations and make any necessary reclassifications to conform to the new criteria in Statement 141. Upon adoption of Statement 142, the Corporation is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Corporation is required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

On October 3, 2001, the FASB issued Statement of Financial Accounting Statement 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (Statement 144). Statement 144 supersedes Statement 121 and provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of Statement 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. Statement 144 also supersedes the provisions of APB Opinion 30 with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred (rather than as of the measurement date as presently required by APB 30). In addition, more dispositions will qualify for discontinued operations treatment in the income statement. This statement was effective in January 2002 and did not have a material impact on the Corporation’s financial condition or results of operations.

In October of 2002, the FASB released statement, SFAS No. 147, “Acquisitions of Certain Financial Institutions” amending FASB statements No. 72 and 144 and FASB Interpretation No. 9 allowing financial institutions meeting certain criteria to reclassify unidentifiable intangible asset balances to goodwill and cease amortization beginning as of January 1, 2002. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with Statements No. 141, and No. 142. In addition, this Statement amends Statement No. 144, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used.

This Statement is effective for acquisitions which occur after September 30, 2002; the transition provisions for previously recognized unidentifiable intangibles are effective after September 30, 2002 with earlier application permitted. As such, the Corporation has reclassified to goodwill approximately $5.1 million in unidentifiable intangible assets which arose from a business combination in North Alabama. Amortization expense of $113,000, net after-tax, has been reversed from the third quarter 2002 income statement. The after-tax effect of the reversal is not considered material; therefore, the Corporation has not restated it’s previously issued financial statements.

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At September 30, 2002, the Corporation had unamortized goodwill in the amount of $10,672,000, which is subject to the provisions of Statements 141 and 142. The adoption of Statement 142 and 147 is expected to result in an annual increase in income before income taxes of approximately $562,000 and an increase in net income of approximately $393,000, or approximately $.02 per share in 2002. During the first quarter of 2002, the Corporation performed the first of the required impairment tests of goodwill and intangible assets with indefinite lives. No impairment was noted. The following table sets forth the reconciliation of net income and earnings per share excluding goodwill amortization for the nine-month period ended September 30, 2001 compared to the nine-month period ended September 30, 2002 (in thousands, except per share data):

NOTE 3 – BUSINESS COMBINATION

On February 15, 2002, the Corporation acquired one-hundred percent (100%) of the outstanding common shares of CF Bancshares, Inc. (“CF Bancshares”) in a business combination accounted for as a purchase. CF Bancshares was a unitary thrift holding company operating in the panhandle of Florida. As a result of this acquisition, the Corporation expanded its market in the panhandle of Florida and increased its assets in Florida by approximately $100,000,000.

The total cost of the acquisition was $15,636,000, which included 16,449 shares of common stock valued at $108,563. The value of common stock issued was determined based on the average of the closing sales price for the 20 consecutive trading days ending three days prior to the special meeting of CF Bancshares shareholders held on November 28, 2001. The purchase price exceeded the fair value of the net assets of CF Bancshares by $7,445,000. Of this amount, approximately $2,900,000 consisted of a core deposit intangible which is being amortized over a ten-year period on the straight-line basis. The remaining $4,545,000 is goodwill (See Note 2). The Corporation’s consolidated financial statements include the results of operations of CF Bancshares only for the period February 15, 2002 to September 30, 2002.

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The following unaudited summary information presents the consolidated results of operations of the Corporation on a pro forma basis, as if CF Bancshares had been acquired on January 1, 2001. The pro forma summary does not necessarily reflect the results of operations that would have occurred if the acquisition had occurred as of the beginning of the period presented, or the results that may occur in the future (in thousands, except per share data).

NOTE 4 – SEGMENT REPORTING

The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama Region consists of operations located throughout the state of Alabama. The Florida Region consists of operations located in the panhandle of Florida. The Corporation’s reportable segments are managed as separate business units because they are located in different geographic areas. Both segments derive revenues from the delivery of financial services. These services include commercial loans, mortgage loans, consumer loans, deposit accounts and other financial services.

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The Corporation evaluates performance and allocates resources based on profit or loss from operations. There are no material intersegment sales or transfers. Net interest revenue is used as the basis for performance evaluation rather than its components, total interest revenue and total interest expense. The accounting policies used by each reportable segment are the same as those discussed in Note 1 to the Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2001. All costs have been allocated to the reportable segments; therefore, combined amounts agree with the consolidated totals (in thousands).

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NOTE 5 – NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):

NOTE 6 – COMPREHENSIVE INCOME

Total comprehensive income was $2,617,000 and $8,149,000, respectively, for the three and nine-month periods ended September 30, 2002, and $1,979,000 and $5,366,000, respectively, for the three and nine-month periods ended September 30, 2001. Total comprehensive income consists of net income and the unrealized gain or loss on the Corporation’s available for sale securities portfolio arising during the period.

NOTE 7 – INCOME TAXES

The primary difference between the effective tax rate and the federal statutory rate in 2002 is due to certain tax-exempt income. The primary difference between the effective tax rate and the federal statutory rate in 2001 is due to the recognition of rehabilitation tax credits generated from the restoration of the Corporation’s headquarters, the John A. Hand Building.

NOTE 8 — GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION’S SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES)

On September 7, 2000, TBC Capital Statutory Trust II (“TBC Capital II”), a Connecticut statutory trust established by the Corporation, received $15,000,000 in proceeds in exchange for $15,000,000 principal amount of TBC Capital II’s 10.6% cumulative trust preferred securities in a pooled trust preferred private placement. The proceeds were used to purchase an equal $15,000,000 principal amount of 10.6% subordinated debentures of the Corporation.

On July 16, 2001, TBC Capital Statutory Trust III (“TBC Capital III”), a Delaware business trust established by the Corporation, received $16,000,000 in proceeds in exchange for $16,000,000 principal amount of TBC Capital III’s variable rate cumulative trust preferred securities in a pooled trust preferred private placement. The proceeds were used to purchase an equal $16,000,000 principal amount of variable rate subordinated debentures of the Corporation. The stated interest rate is six-month LIBOR plus 375 basis points.

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The interest rate on the securities reprices every six months and has a 12% ceiling for the first ten years. As of the date of issuance, the interest rate on the securities was 7.57%. As of September 30, 2002, the interest rate on these securities was 5.61%.

The Corporation has fully and unconditionally guaranteed all obligations of TBC Capital II and TBC Capital III on a subordinated basis with respect to the preferred securities. Subject to certain limitations, the preferred securities qualify as Tier 1 capital and are presented in the Consolidated Statement of Financial Condition as “Guaranteed preferred beneficial interests in our subordinated debentures.” The sole assets of TBC Capital II and TBC Capital III are the subordinated debentures issued by the Corporation. The preferred securities of TBC Capital II and TBC Capital III and the subordinated debentures of the Corporation each have 30-year lives. However, the Corporation, TBC Capital II and TBC Capital III have call options, with a premium after five years through ten years and call options at par after ten years subject to regulatory approval, or earlier depending upon certain changes in tax or investment company laws, or regulatory capital requirements.

NOTE 9 – STOCKHOLDERS’ EQUITY

In September of 2000, the Corporation’s board of directors approved a stock buyback plan in an amount not to exceed $10,000,000. As of September 30, 2002, there were 118,032 shares held in treasury at a cost of $669,000.

During March 2002, the Corporation received $19.3 million in proceeds, net of $1.8 million underwriting discount and other costs, from the sale of 3,450,000 shares of common stock in a secondary offering priced at $6.125 per share. The Corporation used $14.0 million of these proceeds to repay debt incurred in the acquisition of CF Bancshares.

On April 1, 2002, the Corporation issued 160,000 shares of restricted common stock to certain directors and key employees. Under the Restricted Stock Agreements, the stock may not be sold or assigned in any manner for a five-year period that began on April 1, 2002. During this restricted period, the participant is eligible to receive dividends and exercise voting privileges. The restricted stock also has a corresponding vesting period with one-third vesting in the third, fourth and fifth years. The restricted stock was issued at $7.00 per share, or $1,120,000, and classified as a contra-equity account, “Unearned restricted stock”, in stockholders’ equity. The $1,120,000 is being amortized as expense as the stock is earned during the restricted period. For the period ended September 30, 2002, the Corporation has recognized $112,000 in restricted stock expense.

The Corporation adopted a leveraged employee stock ownership plan (the “ESOP”) effective May 15, 2002 that covers all eligible employees that have attained the age of 21 and have completed a year of service. As of September 30, 2002, the ESOP has been internally leveraged with 223,000 shares of the Corporation’s common stock purchased in the open market and classified as a contra-equity account, “Unearned ESOP shares,” in stockholders’ equity.

As of September 30, 2002, the ESOP trustees were in the process of finalizing a promissory note to reimburse the Corporation for the funds used to leverage the ESOP. The unreleased shares, a guaranty of the Corporation and a guaranty of The Bank will secure the promissory note, which will be classified as long-term debt on the Corporation’s statement of financial condition. As the ESOP repays the debt, with quarterly contributions from the Corporation, shares are released from collateral based on the proportion of debt service. Released shares are allocated to eligible employees at the end of the plan year based on an employee’s eligible compensation to total compensation. The Corporation recognizes compensation expense during the period as the shares are earned and committed to be

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released. As shares are committed to be released and compensation expense is recognized, the shares become outstanding for basic and diluted earnings per share computations. The amount of compensation expense reported by the Corporation is equal to the average fair value of the shares earned and committed to be released during the period. Compensation expense that the Corporation recognized during the period ended September 30, 2002 was $21,000. The ESOP shares as of September 30, 2002 were as follows:

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Basis of Presentation

The following is a discussion and analysis of our September 30, 2002 consolidated financial condition and our results of operations for the three and nine-month periods ended September 30, 2002 and 2001. All significant intercompany accounts and transactions have been eliminated. Our accounting and reporting policies conform to generally accepted accounting principles.

This information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing in our Annual Report on Form 10-K for the year ended December 31, 2001.

Certain reclassifications have been made in our prior period condensed consolidated financial statements and financial data to conform to the September 30, 2002 presentation. The guaranteed preferred beneficial interests in our subordinated debentures (trust preferred securities) have been reclassified as long-term debt and the related distributions as interest expense. These trust preferred securities were previously classified as minority interest in the condensed consolidated statement of financial condition with the associated distributions classified as noninterest expense in the condensed consolidated statement of income.

Financial Overview

Total assets were $1.414 billion at September 30, 2002, an increase of $207 million, or 17.2% from $1.207 billion as of December 31, 2001. Total loans, net of unearned income were $1.152 billion at September 30, 2002, an increase of $153 million, or 15.3% from $999 million as of December 31, 2001. Total deposits were $1.114 billion at September 30, 2002, an increase of $162 million, or 17.0% from $952 million as of December 31, 2001. Total stockholders’ equity was $103 million at September 30, 2002, an increase of $26 million, or 34.0% from $77 million as of December 31, 2001. The acquisition of CF Bancshares, Inc., headquartered in Port St. Joe, Florida (“CF Bancshares”) on February 15, 2002 added approximately $100 million in total assets, $88 million in total loans and $77 million in total deposits.

Results of Operations

Our net income for the three-month period ended September 30, 2002 was $2.6 million compared to $1.6 million for the three-month period ended September 30, 2001, an increase of $1.0 million, or 61.9%. Our basic net income per share was $.15 for the third quarter of 2002 which represents a 36.4% increase from $.11 per share for the third quarter of 2001.

Our net income for the nine-month period ended September 30, 2002 was $7.2 million compared to $4.5 million for the nine-month period ended September 30, 2001, an increase of $2.7 million, or 59.1%. Our basic net income per share was $.44 for the first nine months of 2002, which represents a 37.5% increase from $.32 per share for the first nine months of 2001. Our return on average assets, on an annualized basis, was .72% for the first nine months of 2002 compared to .54% for the first nine months of 2001. Our return on average stockholders’ equity, on an annualized basis, was 10.34% for the first nine months of 2002 compared to 7.87% for the first nine months of 2001. Our book value per share at September 30, 2002 was $5.83 compared to $5.60 as of December 31, 2001, and our tangible book value per share at September 30, 2002 was $5.07 compared to $5.16 as of December 31, 2001.

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The growth in our net income during the third quarter of 2002 compared with the third quarter of 2001 is primarily the result of an increase in net interest income. 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 increased $2.7 million, or 25.8% to $12.9 million for the third quarter of 2002 from $10.3 million for the third quarter of 2001. The increase in net interest income was primarily due to a $2.3 million, or 18.2% decrease in total interest expense. The decline in total interest expense is primarily attributable to a 159 basis point decline in the average interest rate paid on interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 3.44% for the third quarter of 2002 compared to 5.03% for the third quarter of 2001. Our net interest spread and net interest margin were 3.85% and 4.07%, respectively, for the third quarter of 2002, compared to 3.49% and 3.85% for the third quarter of 2001.

Our average interest-earning assets for the third quarter of 2002 increased $200 million, or 18.8% to $1.265 billion from $1.065 billion in the third quarter of 2001. Our average loans increased $209 million to $1.152 billion for the third quarter of 2002 from $943 million for the third quarter of 2001. Approximately $84 million of this loan growth is attributable to the CF Bancshares acquisition. The growth in our average interest-earning assets was primarily funded by a $195 million, or 19.7% increase in our average interest-bearing liabilities to $1.184 billion for the third quarter of 2002 from $989 million for the third quarter of 2001. Our ratio of average interest-earning assets to average interest-bearing liabilities was 106.9% and 107.6% for the third quarters of 2002 and 2001, respectively. Our average interest-bearing assets produced a tax equivalent yield of 7.29% for the third quarter of 2002 compared to 8.52% for the third quarter of 2001. The 123 basis point decline in the yield was offset by both a 159 basis point decline in the average rate paid on interest-bearing liabilities and a $209 million, or 22.2 % increase in the average volume of loans from $943 million in the third quarter of 2001 to $1.152 billion in the third quarter of 2002.

The growth in our net income during the first nine months of 2002 compared with the first nine months of 2001 is primarily the result of an increase in net interest income. Net interest income increased $8.0 million, or 27.3% to $37.5 million for the first nine months of 2002 from $29.5 million for the first nine months of 2001. The increase in net interest income was primarily due to an $8.3 million, or 21.4% decrease in total interest expense. The decline in total interest expense is primarily attributable to a 189-basis point decline in the average interest rate paid on interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 3.62% for the first nine months of 2002 compared to 5.51% for the first nine months of 2001. Our net interest spread and net interest margin were 3.88% and 4.13%, respectively, for the first nine months of 2002, compared to 3.42% and 3.86% for the first nine months of 2001.

Our average interest-earning assets for the first nine months of 2002 increased $191 million, or 18.6% to $1.218 billion from $1.027 billion in the first nine months of 2001. Our average loans increased $233 million to $1.120 billion for the first nine months of 2002 from $887 million for the first nine months of 2001. Approximately $70 million of this loan growth is attributable to the CF Bancshares acquisition. The growth in our average interest-earning assets was primarily funded by a $186 million, or 19.7 % increase in our average interest bearing liabilities to $1.133 billion for the first nine months of 2002 from $947 million for the first nine months of 2001. The ratio of our average interest-earning assets to average interest-bearing liabilities was 107.5% and 108.5% for the first nine months of 2002 and 2001, respectively. Our average interest-bearing assets produced a tax equivalent yield of 7.50% for the first nine months of 2002 compared to 8.93% for the first nine months of 2001. The 143-basis point decline in the yield was offset by both a 189-basis point decline in the average rate paid on interest-bearing liabilities and a $233 million, or 26.3 % increase in the average volume of loans from $887 million in the first nine months of 2001 to $1.120 billion in the first nine months of 2002.

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Average Balances, Income, Expense and Rates. The following table depicts, on a tax-equivalent basis for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Average yields are calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been calculated on a daily basis.