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

18

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

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

(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.

19

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.

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

(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.

20

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.

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

(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,
23

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

24

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.

25

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The allowance as a percentage of loans, net of unearned income, at December
31, 2003 was 2.94% compared to 2.44% as of December 31, 2002. Net charge-offs
decreased $14.2 million from $37.7 million in 2002 to $23.5 million in 2003.
During 2003, $20.0 million, or 81.6% of total charge-off loans were attributable
to four of our bank groups: the Bristol bank group contributed approximately
$12.1 million, 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. Net charge-offs of
commercial loans decreased $14.8 million from $25.1 million in 2002 to $10.3
million in 2003. Net charge-offs of real estate loans decreased $643,000 from
$10.5 million in 2002 to $9.9 million in 2003. Net charge-offs of consumer loans
increased $735,000 from $2.1 million in 2002 to $2.8 million in 2003. Net
charge-offs as a percentage of the provision for loan losses were 111.87% in
2003, up from 72.69% in 2002. Net charge-offs as a percentage of the allowance
for loan losses were 93.21% in 2003, down from 135.74% in 2002.

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.

The allowance for loan losses as a percentage of nonperforming loans
decreased to 78.59% at December 31, 2003 from 105.0% at December 31, 2002. This
decrease is due to $7.04 million in net charge-off loans incurred during the
six-month period ended June 30, 2003 on which an allowance had been previously
provided. In addition, the amount of nonperforming loans increased during this
period. The increase in nonperforming loans primarily resulted from the amount
of potential problem loans (See "Potential Problem Loans") migrating to a
nonperforming status during the first six months of 2003. This migration of
potential problem loans did not have a significant effect on the allowance for
loan losses because approximately $1.2 million of the allowance had been
allocated to these loans at December 31, 2002. Approximately $8.6 million in
allowance for loan losses has been allocated to nonperforming loans as of
December 31, 2003. As of December 31, 2003, the $32.0 million in nonperforming
loans included $19.7 million, or 61.6% in loans secured by real estate compared
to $15.2 million or 57.6% as of December 31, 2002. Of the $8.6 million in
allowance for loan losses allocated to nonperforming loans, $4.7 million is
attributable to these real estate loans with the remaining $3.9 million
allocated to remaining nonperforming loans which consist primarily of commercial
loans.(See "Nonperforming Loans").

26

The following table summarizes certain information with respect to our
allowance for loan losses and the composition of charge-offs and recoveries for
the periods indicated.

SUMMARY OF LOAN LOSS EXPERIENCE

Nonperforming Loans. Nonperforming loans increased $5.6 million to $32.0
million as of December 31, 2003 from $26.4 million as of December 31, 2002. As a
percent of net loans, nonperforming loans increased from 2.32% at December 31,
2002 to 3.74% at December 31, 2003. The increase in nonperforming loans resulted
primarily from certain potential problem loans (See "Potential Problem Loans")
reported in prior quarters migrating to a nonperforming status. In addition, two
loan relationships totaling approximately $3.4 million in Bristol were placed on
nonaccrual status during the third and fourth quarters because of bankruptcy
filings, which increased the amount of nonaccrual loans in the Bristol group to
approximately $17.1 million as of December 31, 2003. Of the $17.1 million,
approximately $9.8 million constitutes loan

27

relationships that entered Chapter 11 bankruptcy during the third and fourth
quarters. Management believes that these loans have been charged down to their
estimated net collateral values as of December 31, 2003 and that bankruptcy
proceedings are expected to conclude in 2004. The following table represents our
non-performing loans for the dates shown.

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

The following is a summary of nonperforming loans by category for the dates
shown:

A delinquent loan is placed on non-accrual status when it becomes 90 days
or more past due and management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that the collection of interest is doubtful. When a loan is
placed on non-accrual status, all interest that has been accrued on the loan but
remains unpaid is reversed and deducted from earnings as a reduction of reported
interest income or is charged against the allowance for loan losses for any
portion that is attributable to previous years. No additional interest income is
accrued on the loan balance until the collection of both principal and interest
becomes reasonably certain. When a problem loan is finally resolved, there may
ultimately be an actual write-down or charge-off of the principal balance of the
loan to the allowance for loan losses.

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 have been 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.

Impaired Loans. At December 31, 2003, our recorded investment in impaired
loans under FAS 114 totaled $25.4 million, a decrease of $962,000 from $26.4
million at December 31, 2002. A significant portion of our impaired loans at
December 31, 2003 were centered in four of our bank groups; Bristol bank
group -- $15.6 million, Albertville bank group -- $1.8 million, Andalusia bank
group -- $2.0 million and Huntsville
28

bank group -- $3.3 million. At December 31, 2002, $14.8 million of the Bristol
bank group's loans were impaired; $3.1 million of the Albertville bank's loans
were impaired and $5.0 million of the Huntsville bank's loans were impaired. At
December 31, 2003 and 2002, there were approximately $7.7 million and $9.3
million, respectively, in allowance for loan losses specifically allocated to
impaired loans.

Of the impaired loans, $11.0 million have been partially-charged down to
their estimated collateral values as of December 31, 2003. Of the $7.7 million
in specific allowance for impaired loans, $2.7 million is allocated to this
$11.0 million; the remaining $5.0 million is specifically allocated to the
remaining $14.4 million of impaired loans.

The following is a summary of impaired loans and the specifically allocated
allowance for loan losses by category as of December 31, 2003 and 2002:

Potential Problem Loans. In addition to nonperforming loans, management
has identified $2.7 million in potential problem loans as of December 31, 2003.
Potential problem loans decreased $3.7 million from $6.4 million as of December
31, 2002. Potential problem loans are loans where known information about
possible credit problems of the borrowers causes management to have doubts as to
the ability of such borrowers to comply with the present repayment terms and may
result in disclosure of such loans as nonperforming in future periods. Of the
$2.7 million in potential problem loans at December 31, 2003, $823,000 or 31% is
attributable to the loans in our North Alabama markets; $1.0 million or 37% is
in our South Alabama market and $866,000 or 32% is in our Florida market.
Overall, 51% is secured by 1-4 family residential real estate and 28% is secured
by commercial real estate. These loans will be turned over to our special assets
department for resolution if they become nonperforming. Until such time,
management will work closely with these customers in an attempt to prevent these
loans from migrating into nonperforming status. The bank has allocated $445,000
in loan loss reserve to absorb potential losses on these accounts.

Investment Securities. The investment securities portfolio comprised 13.8%
of our total interest-earning assets as of December 31, 2003. Total securities
averaged $97.6 million in 2003, compared to $63.3 million in 2002 and $90.5
million in 2001. The investment securities portfolio produced average tax
equivalent yields of 4.08%, 5.45% and 6.03% for the years ended December 31,
2003, 2002 and 2001, respectively. At December 31, 2003, our investment
securities portfolio had an amortized cost of $141.9 million and an estimated
fair value of $141.6 million.

29

The following table sets forth the amortized costs of the securities we
held at the dates indicated.

INVESTMENT PORTFOLIO

The following table shows the scheduled maturities and average yields of
securities held at December 31, 2003.

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES

Short-term liquid assets. Our short-term liquid assets (cash and due from
banks, interest-bearing deposits in other banks and federal funds sold)
decreased $22.9 million, or 34.5% to $43.5 million at December 31, 2003 from
$66.4 million at December 31, 2002. At December 31, 2003, our short-term liquid
assets comprised 3.7% of total assets compared to 4.7% at December 31, 2002. We
continually monitor our liquidity position and will increase or decrease our
short-term liquid assets as necessary.

Deposits. Noninterest-bearing deposits totaled $86.1 million at December
31, 2003, a decrease of 27.7%, or $33.0 million from $119.1 million at December
31, 2002. Exclusive of the sale of the Emerald Coast branches of The Bank,
noninterest-bearing deposits decreased $6.1 million. Noninterest-bearing
deposits comprised 9.67% of total deposits at December 31, 2003, compared to
10.8% at December 31, 2002. $65.3 million, or 75.8% of total noninterest-bearing
deposits were in our Alabama branches while $20.8 million, or 24.2% were in our
Florida branches.

Interest-bearing deposits totaled $804 million at December 31, 2003, a
decrease of 18.7%, or $185 million from $989 million at December 31, 2002.
Exclusive of the sale of the Emerald Coast branches of The Bank,
interest-bearing deposits decreased $5.9 million. Interest-bearing deposits
averaged $950.7 million in 2003 compared to $961.5 million in 2002, a decrease
of $10.8 million, or 1.1%.

The average rate paid on all interest-bearing deposits during 2003 was
2.35% compared to 3.05% in 2002. Of total interest-bearing deposits, $594.0
million, or 73.9% were in the Alabama branches while $209.8 million, or 26.1%
were in the Florida branches.

30

The following table sets forth our average deposits by category for the
periods indicated.

AVERAGE DEPOSITS

Deposits, particularly core deposits, have historically been our primary
source of funding and have enabled us to meet successfully both our short-term
and long-term liquidity needs. Our core deposits, which exclude our time
deposits greater than $100,000, represented 67.7% of our total deposits at
December 31, 2003 compared to 73.5% at December 31, 2002. We anticipate that
such deposits will continue to be our primary source of funding in the future.
Our loan-to-deposit ratio was 96.3% at December 31, 2003, compared to 102.8% at
December 31, 2002. The maturity distribution of our time deposits over $100,000
at December 31, 2003 is shown in the following table.

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE

Approximately 23.6% of our time deposits over $100,000 had scheduled
maturities within three months of December 31, 2003. We believe customers who
hold a large denomination certificate of deposit tend to be extremely sensitive
to interest rate levels, making these deposits a less reliable source of funding
for liquidity planning purposes than core deposits.

Borrowed Funds. During 2003, average borrowed funds increased $19.3
million, or 12.6% to $171.9 million, from $152.6 million during 2002, which
increased $49.0 million, or 57.1% from $85.8 million during 2001. The average
rate paid on borrowed funds during 2003, 2002 and 2001 was 5.00%, 5.65%, and
5.82%, respectively. Because of a relatively high loan-to-deposit ratio, the
existence and stability of these funding sources are important to our
maintenance of short-term and long-term liquidity.

31

Borrowed funds as of December 31, 2003 consisted primarily of advances from
the FHLB. The following is a summary, by year of contractual maturity, of
advances from the FHLB as of December 31, 2003 and 2002:

Certain advances are subject to call by the FHLB as follows: 2004, $115.8
million; 2005, $3.0 million; 2006, $250,000 and 2008 $2.0 million. The $115.8
million in FHLB advances subject to call during 2004 carry a weighted average
interest rate of 4.51% ranging from 1.16% to 6.49%. We do not expect the FHLB to
call these advances considering the current interest rate environment.

The advances are secured by FHLB stock, agency securities and a blanket
lien on certain residential and commercial real estate loans, all with a
carrying value of approximately $281.5 million at December 31, 2003. We have
remaining approximately $18.0 million in unused lines of credit with the FHLB
subject to the availability of qualified collateral.

In December 2003, we repaid $33.6 million in 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%.

As of December 31, 2003, we had borrowed $3.0 million in federal funds and
entered security repurchase agreements totaling $7.8 million (See Note 7 to
consolidated financial statements).

We have available approximately $27.0 million in unused federal funds lines
of credit with regional banks, subject to certain restrictions and collateral
requirements.

Junior subordinated debentures owed to unconsolidated subsidiary
trusts. We have formed two trusts, TBC Capital Statutory Trust II ("TBC Capital
II") and TBC Capital Statutory Trust III ("TBC Capital III"), of which 100% of
the common equity is owned by us. The trusts were formed for the purpose of
issuing corporation-obligated mandatorily redeemable trust preferred securities
to third-party investors and investing the proceeds from the sale of such trust
preferred securities solely in our junior subordinated debt securities (the
debentures). The debentures held by each trust are the sole assets of that
trust. Distributions on the trust preferred securities issued by each trust are
payable semi-annually at a rate per annum equal to the interest rate being
earned by the trust on the debentures held by that trust. The trust preferred
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the debentures. We have entered into agreements which, taken
collectively, fully and unconditionally guarantee the trust preferred securities
subject to the terms of each of the guarantees. The debentures held by the TBC
Capital II and TBC Capital III capital trusts are first redeemable, in whole or
in part, by us on September 7, 2007 and July 25, 2006, respectively.

In the fourth quarter of 2003, as a result of applying the provisions of
FIN 46, governing when an equity interest should be consolidated, we were
required to deconsolidate these subsidiary trusts from our financial statements.
The deconsolidation of the net assets and results of operations of the trusts
had virtually no impact on our financial statements or liquidity position since
we continue to be obligated to repay the debentures held

32

by the trusts, and we guarantee repayment of the trust preferred securities
issued by the trusts. The consolidated debt obligation related to the trusts
increased from $31,000,000 to $31,959,000 upon deconsolidation with the
difference representing our common ownership interest in the trusts.

Stockholders' Equity. Stockholders' equity increased $23.6 million during
2003 to $100.1 million at December 31, 2003 from $76.5 million at December 31,
2002. The increase in stockholders' equity resulted primarily from net income of
$17.5 million for the year ended December 31, 2003 and $6.2 million in proceeds
from the issuance of our Series A Convertible Preferred Stock. As of December
31, 2003, we had 18,018,202 shares of common stock issued and 17,694,595
outstanding. In September of 2000, our board of directors approved a stock
buyback plan in an amount not to exceed $10,000,000. As of December 31, 2003,
there were 78,835 shares held in treasury at a total cost of $501,000.

In May 2003, we received $6.2 million in proceeds, net of issuance costs,
from the sale of 62,000 shares of Series A Convertible Preferred Stock.
Dividends accrue on the liquidation value of $100 per share at the rate of LIBOR
plus 5.75 not to exceed 12.5%. Dividends are noncumulative and reset
semi-annually on June 1 and December 1. Each share of Series A Convertible
Preferred Stock is convertible at any time beginning June 1, 2008. Such shares
shall be convertible into the number of shares of common stock which result from
dividing the conversion price at the time of conversion into the liquidation
value. The initial conversion price is $8.00 per share. From the date of
issuance we can redeem the preferred stock at the following prices stated as a
percentage of the liquidation value: 2003 -- 105%; 2004 -- 104%; 2005 -- 103%;
2006 -- 102%; 2007, 101% -- 2008 and thereafter -- 100%. In the event of a
merger prior to June 1, 2004, the Series A Convertible Preferred Stock may be
redeemed by us at a redemption price of 106%.

On April 1, 2002, we issued 157,500 shares of restricted common stock to
certain directors and key employees pursuant to the Second Amended and Restated
1998 Stock Incentive Plan. 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 participants are eligible to receive
dividends and exercise voting privileges. The restricted stock also has a
corresponding vesting period with one-third vesting at the end of 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. During 2003, 15,000 shares of this restricted
common stock were forfeited. The number of restricted shares outstanding as of
December 31, 2003 was 142,500 and the remaining amount in the unearned
restricted stock account was $648,000. This balance is being amortized as
expense as the stock is earned during the restricted period. The amounts of
restricted shares are included in the diluted earnings per share calculation,
using the treasury stock method, until the shares vest. Once vested, the shares
become outstanding for basic earnings per share. For the periods ended December
31, 2003 and 2002, the Corporation had recognized $181,000 and $168,000,
respectively, in restricted stock expense.

We adopted a leveraged employee stock ownership plan (the "ESOP") effective
May 15, 2002 that covers all eligible employees who have attained the age of
twenty-one and have completed a year of service. As of December 31, 2003, the
ESOP has been internally leveraged with 273,400 shares of our common stock
purchased in the open market and classified as a contra-equity account,
"Unearned ESOP shares," in stockholders' equity.

On January 29, 2003, the ESOP trustees finalized a $2.1 million promissory
note to reimburse us for the funds used to leverage the ESOP. The unreleased
shares and our guarantee secure the promissory note, which has been classified
as long-term debt on our statement of financial condition. As the debt is
repaid, shares are released from collateral based on the proportion of debt
service. Principal payments on the debt are $17,500 per month for 120 months.
The interest rate is adjusted annually to the Wall Street Journal prime rate.
Interest expense incurred on the debt in 2003 totaled $78,000. Total
contributions to the plan during 2003 totaled $254,000. Released shares are
allocated to each eligible employee at the end of a plan year based on the ratio
of employee's eligible compensation to total compensation. We recognize
compensation expense during a period as the shares are earned and committed to
be 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 we report during a period
for shares earned and

33

committed to be released during the period is equal to the average fair value of
these shares during the period. Compensation expense we recognized during the
period ended December 31, 2003 and 2002 was $153,000 and $52,000, respectively.
The ESOP shares as of December 31, 2003 were as follows:

Regulatory Capital. The table below represents our and our wholly-owned
banking subsidiary's actual regulatory and minimum regulatory capital
requirements at December 31, 2003 (dollars in thousands):

IMPACT OF INFLATION

Unlike most industrial companies, our assets and liabilities are primarily
monetary in nature. Therefore, interest rates have a more significant effect on
our performance than do the effects of changes in the general rate of inflation
and changes in prices. In addition, interest rates do not necessarily move in
the same direction or in the same magnitude as the prices of goods and services.
We seek to manage the relationships between interest sensitive assets and
liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by us or on our behalf. Some of the
disclosures in this Annual Report on Form 10-K, including any statements
preceded by, followed by or which include the words "may," "could," "should,"
"will," "would," "hope," "might," "believe," "expect," "anticipate," "estimate,"
"intend," "plan," "assume" or similar expressions constitute forward-looking
statements.

These forward-looking statements, implicitly and explicitly, include the
assumptions underlying the statements and other information with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, estimates,
intentions, financial condition, results of operations, future performance and
business, including our expectations and estimates with respect to our revenues,
expenses, earnings, return on equity, return on assets, efficiency ratio, asset
quality, the adequacy of our allowance for loan losses and other financial data
and capital and performance ratios.

Although we believe that the expectations reflected in our forward-looking
statements are reasonable, these statements involve risks and uncertainties
which are subject to change based on various important factors (some of which
are beyond our control). The following factors, among others, could cause our
financial

34

performance to differ materially from our goals, plans, objectives, intentions,
expectations and other forward-looking statements: (1) the strength of the
United States economy in general and the strength of the regional and local
economies in which we conduct operations; (2) the effects of, and changes in,
trade, monetary and fiscal policies and laws, including interest rate policies
of the Board of Governors of the Federal Reserve System; (3) inflation, interest
rate, market and monetary fluctuations; (4) our ability to successfully
integrate the assets, liabilities, customers, systems and management we acquire
or merge into our operations; (5) our timely development of new products and
services in a changing environment, including the features, pricing and quality
compared to the products and services of our competitors; (6) the willingness of
users to substitute competitors' products and services for our products and
services; (7) the impact of changes in financial services policies, laws and
regulations, including laws, regulations and policies concerning taxes, banking,
securities and insurance, and the application thereof by regulatory bodies; (8)
our ability to resolve any legal proceeding on acceptable terms and its effect
on our financial condition or results of operations; (9) technological changes;
(10) changes in consumer spending and savings habits; and (11) regulatory, legal
or judicial proceedings.

If one or more of the factors affecting our forward-looking information and
statements proves incorrect, then our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
forward-looking information and statements contained in this annual report.
Therefore, we caution you not to place undue reliance on our forward-looking
information and statements.

We do not intend to update our forward-looking information and statements,
whether written or oral, to reflect change. All forward-looking statements
attributable to us are expressly qualified by these cautionary statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

Please refer to "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Market Risk -- Interest Rate
Sensitivity," which is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Consolidated financial statements of The Banc Corporation meeting the
requirements of Regulation S-X are filed on the succeeding pages of this Item 8
of this Annual Report on Form 10-K.

35

THE BANC CORPORATION AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

CONTENTS

Report of Independent Auditors.............................. 37
Consolidated Statements of Financial Condition.............. 38
Consolidated Statements of Operations....................... 39
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 40
Consolidated Statements of Cash Flows....................... 41
Notes to Consolidated Financial Statements.................. 42

36

REPORT OF INDEPENDENT AUDITORS

Board of Directors
The Banc Corporation

We have audited the accompanying consolidated statements of financial
condition of The Banc Corporation and Subsidiaries (Corporation) as of December
31, 2003 and 2002, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2003. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Banc
Corporation and Subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Birmingham, Alabama
March 15, 2004

37

THE BANC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See accompanying notes.

38

THE BANC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

39

THE BANC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

See accompanying notes.
40

THE BANC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

41

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Banc Corporation ("Corporation"), through its subsidiaries, provides a
full range of banking and bank-related services to individual and corporate
customers across Alabama and the panhandle of Florida. The accounting and
reporting policies of the Corporation conform with generally accepted accounting
principles and to general practice within the banking industry. The following
summarizes the most significant of these policies.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements and notes to
consolidated financial statements include the accounts of the Corporation and
its consolidated subsidiaries. (See Recent Accounting Pronouncements concerning
FIN 46) All significant intercompany transactions or balances have been
eliminated in consolidation.

On February 15, 2002, the Corporation acquired CF Bancshares, Inc. and its
bank subsidiary Citizens Federal Savings Bank of Port Saint Joe ("CF
Bancshares") in a business combination accounted for as a purchase. As such, the
Corporation's consolidated financial statements include the results of
operations of CF Bancshares only from its date of acquisition. See Note 14 for
more disclosure regarding the Corporation's business combinations.

Certain amounts in prior year financial statements have been reclassified
to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts included in the statements of
financial condition caption "Cash and Due from Banks."

The Corporation's banking subsidiary is required to maintain minimum
average reserve balances by the Federal Reserve Bank, which is based on a
percentage of deposits. The amount of the reserves at December 31, 2003 was
approximately $26,000.

Investment Securities

Investment securities are classified at the time of purchase as either held
to maturity, available for sale or trading. The Corporation defines held to
maturity securities as debt securities which management has the positive intent
and ability to hold to maturity.

Held to maturity securities are reported at cost, adjusted for amortization
of premiums and accretion of discounts that are recognized in interest income
using the effective yield method.

Securities available for sale are reported at fair value and consist of
bonds, notes, debentures, and certain equity securities not classified as
trading securities nor as securities to be held to maturity. Unrealized holding

42

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

gains and losses, net of deferred taxes, on securities available for sale are
excluded from earnings and reported in accumulated other comprehensive (loss)
income within stockholders' equity.

Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.

Loans and Allowance for Loan Losses

Loans are stated at the amount of unpaid principal including net deferred
loan fees and costs, reduced by unearned income and an allowance for loan
losses. The Corporation defers certain nonrefundable loan origination and
commitment fees and the direct costs of originating or acquiring loans. The net
deferred amount is amortized over the estimated lives of the related loans as an
adjustment to yield. Interest income with respect to loans is accrued on the
principal amount outstanding, except for loans classified nonaccrual.

Accrual of interest is discontinued on loans which are past due greater
than ninety days unless the loan is well secured and in the process of
collection. "Well secured," means that the debt must be secured by collateral
having sufficient realizable value to discharge the debt, including accrued
interest, in full. "In the process of collection," means that collection of the
debt is proceeding in due course either through legal action or other collection
effort that is reasonably expected to result in repayment of the debt in full
within a reasonable period of time, usually within one hundred eighty days of
the date the loan became past due. Any unpaid interest previously accrued on
these loans is reversed. Interest payments received on these loans are applied
as a reduction of the loan principal balance. The Corporation determines past
due status on a loan based on the contractual payment terms.

Under the provisions of Statement of Accounting Standards ("SFAS") No. 114,
"Accounting for Creditors for Impairment of a Loan," impaired loans are
specifically reviewed loans for which it is probable that the Corporation 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. Payments received on impaired loans for which the ultimate
collectibility of principal is uncertain are generally applied first as
principal reductions. Impaired loans and other nonaccrual loans are returned to
accrual status if the loan is brought contractually current as to both principal
and interest and repayment ability is demonstrated, or if the loan is in the
process of collection and no loss is anticipated.

The allowance for loan loss has been established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is unlikely. The
allowance is the amount that management believes will be adequate to absorb
possible losses on existing loans.

Management reviews the adequacy of the allowance on a quarterly basis. The
allowance for classified loans is established based on risk ratings assigned by
loan officers. Loans are risk rated using a eight point scale, and loan officers
are responsible for the timely reporting of changes in the risk ratings. This
process, and the assigned risk ratings, are subject to review by the
Corporation's internal loan review function. Based on the assigned risk ratings,
the loan portfolio is segregated into the regulatory classifications of: Special
Mention, Substandard, Doubtful or Loss. Generally, recommended regulatory
reserve percentages are applied to these categories to estimate the amount of
loan loss unless the loan has been specifically reviewed for impairment.

43

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Reserve percentages assigned to homogeneous and non-rated loans are based on
historical charge-off experience adjusted for other risk factors.

Significant problem credits are individually reviewed by management.
Generally, these loans are commercial or real estate construction loans selected
for review based on their balance, assigned risk rating, payment history, and
other risk factors at the time of management's review. Losses are estimated on
each loan based on management's review. These individually reviewed credits are
excluded from the classified loan loss calculation discussed above.

To evaluate the overall adequacy of the allowance to absorb losses inherent
in the Corporation's loan portfolio, the Corporation considers general economic
conditions, geographic concentrations, and changes in the nature and volume of
the loan portfolio.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of cost or market,
determined on a net aggregate basis. Differences between the carrying amount of
mortgage loans held for sale and the amounts received upon sale are credited or
charged to income at the time the proceeds of the sale are collected and
reflected in the statement of operations as mortgage banking income. The fair
values are based on quoted market prices of similar loans, adjusted for
differences in loan characteristics.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated service lives of the
assets using straight-line and accelerated methods, generally using five to
forty years for premises and five to ten years for furniture and equipment.

Expenditures for maintenance and repairs are charged to operations as
incurred; expenditures for renewals and betterments are capitalized and written
off by depreciation charges. Property retired or sold is removed from the asset
and related accumulated depreciation accounts and any profit or loss resulting
there from is reflected in the statement of income.

Intangible Assets

At December 31, 2003 and 2002, goodwill, net of accumulated amortization,
totaled $10,336,000 and $10,672,000, respectively. The Corporation adopted
Financial Accounting Standards Board ("FASB") Statement 142 on January 1, 2002.
Statement 142 requires goodwill and intangible assets with indefinite useful
lives no longer to be amortized but instead tested for impairment at least
annually in accordance with the provisions of Statement 142.

The Corporation has determined that its reporting units for purposes of
this testing are its reportable segments: the Alabama Region and the Florida
Region. Goodwill was allocated to each reporting unit based on locations of past
acquisitions.

The first step in testing requires that the fair value of each reporting
unit be determined. If the carrying amount of any reporting unit exceeds its
fair value, goodwill impairment may be indicated.

The Corporation performed a transitional impairment test of goodwill as of
January 1, 2002 using discounted cash flow methodology to determine the fair
value of its reporting units which was compared to the carrying amount. The fair
value exceeded the carrying amount and no impairment existed.

The Corporation performs the annual impairment test as of December 31. As
of December 31, 2003 and 2002, it was determined no impairment existed.
44

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

At December 31, 2003, the Corporation also had $2,326,000 of core deposit
intangibles from the CF Bancshares acquisition, which is being amortized over
ten years. Amortization expense was $286,000 and $247,000, respectively for the
years ended December 31, 2003 and 2002.

Other Real Estate

Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair value, less estimated selling expenses,
in other assets. At the date of acquisition, any difference between the fair
value and book value of the asset is charged to the allowance for loan losses.
Subsequent gains or losses on the sale or losses from the valuation of other
real estate are included in other expense. Other real estate totaled $5,806,000
and $2,360,000 at December 31, 2003 and 2002, respectively.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are generally accounted for
as collateralized financing transactions and are recorded at the amounts at
which the securities were sold plus accrued interest. Securities, generally U.S.
government and Federal agency securities, pledged as collateral under these
financing arrangements cannot be sold or repledged by the secured party.

Income Taxes

The consolidated financial statements are prepared on the accrual basis.
The Corporation accounts for income taxes using the liability method pursuant to
SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Corporation has entered into
off-balance sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements and commercial letters of
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable.

Per Share Amounts

Earnings per share computations are based on the weighted average number of
shares outstanding during the periods presented.

Diluted earnings per share computations are based on the weighted average
number of shares outstanding during the period, plus the dilutive effect of
stock options, convertible preferred stock and restricted stock awards.

Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123)
establishes a "fair value" based method of accounting for stock-based
compensation plans and allows entities to adopt that method of accounting for
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by the Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). The
Corporation has elected to follow Opinion 25 and related interpretations in
accounting for

45

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

its employee stock options. Under Opinion 25, because the exercise price of the
Corporation's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

Statement 123 requires the disclosure of pro forma net income and earnings
per share determined as if the Corporation had accounted for its employee stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model. Option valuation models require the input of subjective assumptions.
Because these assumptions are subjective, the effects of applying Statement 123
for pro forma disclosures are not likely to be representative of the effects on
reported net income for future years (see Note 10).

Derivative Financial Instruments and Hedging Activities

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
requires companies to recognize all of its derivative instruments as either
assets or liabilities in the statement of financial position at fair value.

Derivative financial instruments that qualify under SFAS 133 in a hedging
relationship are designated, based on the exposure being hedged, as either fair
value or cash flow hedges. Fair value hedge relationships mitigate exposure to
the change in fair value of an asset, liability or firm commitment. Under the
fair value hedging model, gains or losses attributable to the change in fair
value of the derivative instrument, as well as the gains and losses attributable
to the change in fair value of the hedged item, are recognized in earnings in
the period in which the change in fair value occurs.

Cash flow hedge relationships mitigate exposure to the variability of
future cash flows or other forecasted transactions. Under the cash flow hedging
model, the effective portion of the gain or loss related to the derivative
instrument, if any, is recognized in earnings during the period of change.
Amounts recorded in other comprehensive income are amortized to earnings in the
period or periods during which the hedged item impacts earnings. For derivative
financial instruments not designated as a fair value or cash flow hedges, gains
and losses related to the change in fair value are recognized in earnings during
the period of change in fair value.

The Corporation formally documents all hedging relationships between
hedging instruments and the hedged item, as well as its risk management
objective and strategy for entering various hedge transactions. The Corporation
performs an assessment, at inception and on an ongoing basis, at least
quarterly, whether the hedging relationship has been highly effective in
offsetting changes in fair values or cash flows of hedged items and whether it
is expected to continue to be highly effective in the future.

During 2003 and 2002, the Corporation entered into interest-rate swap
agreements to manage interest-rate risk exposure. The interest-rate swap
agreements utilized by the Corporation effectively modify the Corporation's
exposure to interest risk by converting $11,000,000 fixed-rate certificates of
deposit to a LIBOR floating rate. These derivative instruments are included in
other assets or other liabilities at fair value on the statement of financial
condition. For the year ended December 31, 2003 and 2002, there was no
ineffectiveness recorded to earnings related to these fair value hedges.

Recent Accounting Pronouncements

In December 2003, the FASB revised SFAS 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This Statement retains the
disclosures required by the original SFAS 132 and requires additional
disclosures about the assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension and postretirement plans. In addition, this
Statement requires interim period disclosure of the

46

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

components of net period benefit cost and contributions if significantly
different from previously reported amounts. See Note 24 for the additional
pension and other postretirement benefit disclosures as the Corporation adopted
the provisions of this Statement as of December 31, 2003.

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. This Statement establishes standards for classifying and
measuring certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity. The provisions of SFAS
150 became effective June 1, 2003, for all financial instruments created or
modified after May 31, 2003, and otherwise became effective as of July 1, 2003.
The adoption of this standard did not have a material impact on financial
condition, the results of operations, or liquidity.

In December 2003, the FASB deferred for an indefinite period the
application of the guidance in SFAS 150 to noncontrolling interests that are
classified as equity in the financial statements of a subsidiary but would be
classified as a liability in the parent's financial statements under SFAS 150.
The deferral is limited to mandatorily redeemable noncontrolling interests
associated with finite-lived subsidiaries. Management does not believe any such
applicable entities exist as of December 31, 2003, but will continue to evaluate
the applicability of this deferral to entities which may be consolidated as a
result of FASB Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections
(Statement 145). Statement 145 rescinds Statement 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect.
Provisions of Statement 145 that related to the rescission of Statement 4 were
effective for financial statements issued by the Corporation after January 1,
2003. The adoption of Statement 145 did not have a material impact on the
Corporation's financial condition or results of operations.

On January 1, 2003, the Corporation adopted SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146
requires companies to recognize costs associated with the exit or disposal of
activities as they are incurred rather than at the date a plan of disposal or
commitment to exit is initiated. Types of costs covered by Statement 146 include
lease termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, facility closing or other exit or
disposal activity. Statement 146 will apply to all exit or disposal activities
initiated after December 31, 2002. The adoption of Statement 146 did not have a
material impact on the Corporation's financial condition or results of
operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (Interpretation 45). Interpretation 45
requires certain guarantees to be recorded at fair value. In general,
Interpretation 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability or
equity security of the guaranteed party. The initial recognition and measurement
provisions of Interpretation 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. On January 1, 2003, the
Corporation began recording a liability and an offsetting asset for the fair
value of any standby letters of credit issued by the Corporation beginning
January 1, 2003. The impact of this new accounting standard was not material to
the financial condition or results of operations of the Corporation.
Interpretation 45 also requires new disclosures, even when the likelihood of
making any payments under the guarantee is remote. These disclosure requirements
were effective for financial statements of interim or annual periods ending
after December 15, 2002.

47

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

The Corporation, as part of its ongoing business operations, issues
financial guarantees through its banking subsidiary in the form of financial and
performance standby letters of credit. Standby letters of credit are contingent
commitments issued by the Corporation generally to guarantee the performance of
a customer to a third party. A financial standby letter of credit is a
commitment by the Corporation to guarantee a customer's repayment of an
outstanding loan or debt instrument. In a performance standby letter of credit,
the Corporation guarantees a customer's performance under a contractual
nonfinancial obligation and receives a fee for this guarantee. The Corporation
has recourse against the customer for any amount it is required to pay to a
third party under a standby letter of credit. Revenues are recognized ratably
over the life of the standby letter of credit. At December 31, 2003, the
Corporation had standby letters of credit outstanding with maturities ranging
from less than one year to three years. The maximum potential amount of future
payments the Corporation could be required to make under its standby letters of
credit at December 31, 2003 was $19.1 million, which represents the
Corporation's maximum credit risk. At December 31, 2003, the Corporation had no
significant liabilities or receivables associated with standby letter of credit
agreements entered into subsequent to December 31, 2002 as a result of the
Corporation's adoption of Interpretation 45 at January 1, 2003. Standby letter
of credit agreements entered into prior to January 1, 2003, have a carrying
value of zero. The Corporation holds collateral to support standby letters of
credit when deemed necessary.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
addresses whether business enterprises must consolidate the financial statements
of entities known as "variable interest entities." A variable interest entity is
defined by Interpretation 46 to be a business entity which has one or both of
the following characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
support from other parties, which is provided through other interests that will
absorb some or all of the expected losses at the entity; and (2) the equity
investors lack one or more of the following essential characteristics of a
controlling financial interest: (a) direct or indirect ability to make decisions
about the entity's activities through voting rights or similar rights, (b) the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities, or (c) the right to
receive the expected residual returns of the entity if they occur, which is the
compensation for risk of absorbing expected losses.

In previous financial statements, the Corporation had consolidated two
trusts through which it had issued trust preferred securities ("TPS") and
reported the TPS as "guaranteed preferred beneficial interests in the
Corporation's subordinated debentures" in the statements of condition. In
December 2003, the FASB issued a revision to FIN 46 to clarify certain
provisions which affected the accounting for TPS. As a result of the provisions
in revised FIN 46, the trusts should be deconsolidated, with the Corporation
accounting for its investment in the trusts as assets, its subordinated
debentures as debt, and the interest paid thereon as interest expense. The
Corporation had always classified the TPS as debt and the dividends as interest
but eliminated its common stock investment and dividends received from the
trust. FIN 46 permits and encourages restatement of prior period results, and
accordingly, all financial statements presented have been adjusted to give
effect to the revised provisions of FIN 46. While these changes had no effect on
previously reported net interest margin, net income or earnings per share, they
increased total interest income and interest expense, as well as total assets
and total liabilities. (See Note 9)

48

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. INVESTMENT SECURITIES

The amounts at which investment securities are carried and their
approximate fair values at December 31, 2003 are as follows:

The amounts at which investment securities are carried and their
approximate fair values at December 31, 2002 are as follows:

Securities with an amortized cost of $79,797,000 and $41,953,000 at
December 31, 2003 and 2002, respectively, were pledged to secure United States
government deposits and other public funds and for other purposes as required or
permitted by law.

The following table presents the age of gross unrealized losses and fair
value by investment category.

Management does not believe any individual unrealized loss as of December
31, 2003 represents an other-than-temporary impairment. The unrealized losses
relate primarily to twelve securities issued by FNMA

49

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. INVESTMENT SECURITIES -- (CONTINUED)

and FHLMC and one trust preferred security. These unrealized losses are
primarily attributable to changes in interest rates. The Corporation has both
the intent and ability to hold the securities contained in the previous table
for a time necessary to recover the amortized cost.

The amortized cost and estimated fair values of investment securities at
December 31, 2003, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

Gross realized gains on sales of investment securities available for sale
in 2003, 2002 and 2001 were $791,000, $629,000 and $1,461,000, respectively, and
gross realized losses for the same periods were $277,000, $2,000 and $78,000,
respectively.

In 2003, the Corporation realized a gain of $74,000 on the sale of a
security classified as held-to-maturity. The security had a net carrying value
of $1,996,000.

The transition provisions of SFAS No. 133 provide that at the date of
initial application (January 1, 2001), debt securities categorized as
held-to-maturity may be transferred into the available-for-sale category without
calling into question the Corporation's intent to hold other debt securities
until maturity. As such, on January 1, 2001, the Corporation transferred debt
securities with a carrying value of $4,389,000 and a market value of $4,317,000
to the available-for-sale category and the $72,000 unrealized loss on the
transfer was recorded in other comprehensive income.

50

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. INVESTMENT SECURITIES -- (CONTINUED)

The components of other comprehensive income for the years ended December
31, 2003, 2002 and 2001 are as follows:

3. LOANS

At December 31, 2003 and 2002 the composition of the loan portfolio was as
follows:

At December 31, 2003 and 2002 the Corporation's recorded investment in
loans considered to be impaired under SFAS No. 114 was $25,400,000 and
$26,400,000, respectively. At December 31, 2003 and 2002, there was
approximately $7,700,000 and $9,300,000, respectively, in the allowance for loan
losses specifically allocated to impaired loans. The average recorded investment
in impaired loans during 2003, 2002 and 2001 was approximately $28,318,000,
$16,175,000 and $12,500,000, respectively. Interest income recognized on loans
considered impaired totaled approximately $87,000, $575,000 and $385,000 for the
years ended December 31, 2003, 2002 and 2001, respectively. The additional
amount of interest that would have been recorded during 2003 and 2002 if these
loans had been on accrual status was approximately $1,800,000 and $600,000.

The Corporation had no commitments to loan additional funds to the
borrowers whose loans were impaired at December 31, 2003.

51

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. ALLOWANCE FOR LOAN LOSSES

A summary of the allowance for loan losses for the years ended December 31,
2003, 2002 and 2001 follows:

5. PREMISES AND EQUIPMENT

Components of premises and equipment at December 31, 2003 and 2002 are as
follows:

Depreciation expense for the years ended December 31, 2003, 2002 and 2001
was $3,519,000, $3,305,000 and $3,017,000, respectively.

Future minimum lease payments under operating leases are summarized as
follows:

Rental expense relating to operating leases amounted to approximately
$388,000, $766,000 and $918,000 for the years ended December 31, 2003, 2002 and
2001, respectively.

52

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. DEPOSITS

The following schedule details interest expense on deposits:

At December 31, 2003, the scheduled maturities of time deposits are as
follows (in thousands):

2004........................................................ $309,266
2005........................................................ 89,623
2006........................................................ 73,578
2007........................................................ 33,370
2008........................................................ 17,285
2009 and thereafter......................................... 7,917
--------
$531,039
========

7. FEDERAL FUNDS BORROWED AND SECURITY REPURCHASE AGREEMENTS

Detail of Federal funds borrowed and security repurchase agreements
follows:

53

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. ADVANCES FROM FEDERAL HOME LOAN BANK

The following is a summary, by year of maturity, of advances from the
Federal Home Loan Bank ("FHLB") as of December 31, 2003 and 2002 (in thousands):

The above schedule is by contractual maturity. Call dates for the above are
as follows: 2004, $115,840,000; 2005, $3,000,000; 2006, $250,000; and 2008
$2,000,000.

The advances are secured by a blanket lien on certain residential and
commercial real estate loans with an aggregate carrying value of approximately
$281,465,000 at December 31, 2003.

The Corporation's banking subsidiary repaid approximately $33,600,000 in
FHLB borrowings in December 2003 that carried an average interest rate of 6.33%
and incurred a prepayment penalty of $2,532,000.

9. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY TRUSTS

The Corporation has formed two trusts, TBC Capital Statutory Trust II ("TBC
Capital II") and TBC Capital Statutory Trust III ("TBC Capital III"), of which
100% of the common equity is owned by the Corporation. The trusts were formed
for the purpose of issuing Corporation-obligated mandatory redeemable trust
preferred securities to third-party investors and investing the proceeds from
the sale of such trust preferred securities solely in junior subordinated debt
securities of the Corporation (the debentures). The debentures held by each
trust are the sole assets of that trust. Distributions on the trust preferred
securities issued by each trust are payable semi-annually at a rate per annum
equal to the interest rate being earned by the trust on the debentures held by
that trust. The trust preferred securities are subject to mandatory redemption,
in whole or in part, upon repayment of the debentures. The Corporation has
entered into agreements which, taken collectively, fully and unconditionally
guarantee the trust preferred securities subject to the terms of each of the
guarantees. The debentures held by the TBC Capital II and TBC Capital III
capital trusts are first redeemable, in whole or in part, by the Corporation on
September 7, 2007 and July 25, 2006, respectively.

As a result of applying the provisions of FIN 46, governing when an equity
interest should be consolidated, the Corporation was required to deconsolidate
these subsidiary trusts from its financial statements in the fourth quarter of
2003. The deconsolidation of the net assets and results of operations of the
trusts had virtually no impact on the Corporation's financial statements or
liquidity position, since the Corporation continues to be obligated to repay the
debentures held by the trusts and guarantees repayment of the trust preferred
securities issued by the trusts. The consolidated debt obligation related to the
trusts increased from $31,000,000 to $31,959,000 upon deconsolidation, with the
difference representing the Corporation's common ownership interest in the
trusts. The trust preferred securities held by the trusts qualify

54

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY
TRUSTS -- (CONTINUED)

as Tier 1 capital for the Corporation under Federal Reserve Board guidelines. As
a result of the issuance of FIN 46, the Federal Reserve Board is currently
evaluating whether deconsolidation of the trusts will affect the qualification
of the capital securities as Tier 1 capital. If it were determined that the
capital securities no longer qualify as Tier 1 capital, the effect would be
material to the Corporation's regulatory capital levels. However, this would not
lower the Corporation's Tier I capital levels below the minimum standards to be
considered "well capitalized" under regulatory capital standards (See Note 16).

Consolidated debt obligations related to subsidiary trusts holding solely
debentures of the Corporation follows:

As of December 31, 2003 and 2002, the interest rate on the $16,495,000
subordinated debentures was 4.90% and 5.61%, respectively.

Currently, the Corporation must obtain regulatory approval prior to paying
any dividends or making any distributions on these trust preferred securities.
The Federal Reserve approved the timely payment of our semi-annual distributions
on our trust preferred securities in January and March, 2004.

10. CASH AND STOCK INCENTIVE PLANS

The Corporation has established a stock incentive plan for directors and
certain key employees that provide for the granting of restricted stock and
incentive and nonqualified options to purchase up to 1,500,000 shares of the
Corporation's common stock. The compensation committee of the Board of Directors
determines the terms of the restricted stock and options granted.

All options granted have a maximum term of ten years from the grant date,
and the option price per share of options granted cannot be less than the fair
market value of the Corporation's common stock on the grant

55

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. CASH AND STOCK INCENTIVE PLANS -- (CONTINUED)

date. All options granted under this plan vest 20% on the grant date and an
additional 20% annually on the anniversary of the grant date.

On December 31, 2001, the Corporation cancelled previously issued stock
options covering 566,000 shares. The most recent option grant date prior to the
cancellation was June 19, 2001, consistent with the Corporation's normal timing
for grants.

A further summary about options outstanding at December 31, 2003 is as
follows:

As of December 31, 2003 there were approximately 136,000 shares of the
Corporation's common stock available for future grants.

The Corporation recognizes compensation cost for stock-based employee
compensation awards in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees. The Corporation

56

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. CASH AND STOCK INCENTIVE PLANS -- (CONTINUED)

recognized no compensation cost for stock-based employee compensation awards for
the years ended December 31, 2003, 2002 and 2001. If the Corporation had
recognized compensation cost in accordance with SFAS No. 123, net income and
earnings per share would have been reduced as follows (amounts in thousands,
except per share data):

The fair value of the options granted was based upon the Black-Scholes
pricing model. The Corporation used the following weighted-average assumptions
for:

On April 1, 2002, the Corporation issued 157,500 shares of restricted
common stock to certain directors and key employees pursuant to the Second
Amended and Restated 1998 Stock Incentive Plan. 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
at the end of each of 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. During 2003,
15,000 shares of this restricted common stock were forfeited. Restricted shares
outstanding as of December 31, 2003 were 142,500 and the remaining amount in the
unearned restricted stock account is $648,000. This balance is being amortized
as expense as the stock is earned during the restricted period. The amounts of
restricted shares are included in the diluted earnings per share calculation,
using the treasury stock method, until the shares vest. Once vested, the shares
become outstanding for basic earnings per share. For the period ended December
31, 2003 and 2002, the Corporation has recognized $181,000 and $168,000,
respectively, 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 twenty-one and have completed a year of service. As of
December 31, 2003, the ESOP has been internally leveraged with 273,400 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.

On January 29, 2003, the ESOP trustees finalized a $2,100,000 promissory
note to reimburse the Corporation for the funds used to leverage the ESOP. The
unreleased shares and a guarantee of the Corporation secure the promissory note,
which has been classified as long-term debt on the Corporation's

57

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. CASH AND STOCK INCENTIVE PLANS -- (CONTINUED)

statement of financial condition. As the debt is repaid, shares are released
from collateral based on the proportion of debt service. Principal payments on
the debt are $17,500 per month for 120 months. The interest rate is adjusted
annually to the Wall Street Journal prime rate. Interest expense incurred on the
debt in 2003 totaled $78,000. Total contributions to the plan during 2003
totaled $254,000. Released shares are allocated to eligible employees at the end
of the plan year based on the employee's eligible compensation to total
compensation. The Corporation recognizes compensation expense during the period
as the shares are earned and committed to be 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
December 31, 2003 and 2002 was $153,000 and $52,000, respectively. The ESOP
shares as of December 31, 2003 and 2002 were as follows:

11. RETIREMENT PLANS

The Corporation sponsors a profit-sharing plan that permits participants to
make contributions by salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. This plan covers substantially all employees who meet
certain age and length of service requirements. The Corporation matches
contributions at its discretion. The Corporation's contributions to the plan
were $347,000, $255,000 and $243,000 in 2003, 2002 and 2001, respectively.

In September 2003, the federal bank regulatory agencies published a formal
position regarding the accounting treatment for certain indexed retirement plans
sponsored by banks. The Corporation has such plans that were established for the
benefit of certain directors and executive officers by the Corporation in the
years 1998, 1999 and 2002. Generally, the plans provide a retirement benefit
that is divided into a primary and secondary benefit. The primary benefit
represents the cumulative amount of excess earnings over the amount of estimated
opportunity cost from a related life insurance asset through the participants'
retirement date. This amount will be paid to the participant in equal
installments ranging from 10 - 15 years. The secondary benefit results from the
continuing excess earnings on the life insurance assets, if any, over the
opportunity cost and will be paid to the participant after retirement for
periods ranging from 10 years to life.

In accordance with APB opinion No. 12, as amended by FASB Statement No.
106, the secondary benefit represents a postretirement benefit that should be
estimated and accrued over the participant's service period until the
participant reaches full eligibility. In prior periods, the Corporation has only
accrued the estimated primary benefit liability in its financial statements. The
secondary benefit was not accrued because the benefit is not guaranteed and
there is a high degree of uncertainty regarding the ultimate health of the
participant, future performance of the insurance policies and the Corporation's
opportunity rates.

The Corporation has estimated and accrued the present value of the future
benefits that are expected to be paid. As of September 30, 2003, and for the
three month period then ended, the Corporation accrued an additional deferred
compensation liability of approximately $1.9 million before tax and $1.2 million
after tax

58

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. RETIREMENT PLANS -- (CONTINUED)

related to the fiscal years 1998 through 2002. This amount was considered by
management and the Corporation's audit committee to be immaterial to the current
and prior period financial statements; therefore, no restatement of prior
periods was necessary.

In connection with the plans, the Corporation has purchased single premium
life insurance policies with cash surrender values of approximately $13,900,000
and $13,450,000 at December 31, 2003 and 2002, respectively. Compensation
expense related to these plans totaled $3,502,000, $669,000 and $378,000 for
2003, 2002 and 2001, respectively.

12. INCOME TAXES

The components of the income tax expense (benefit) are as follows:

Significant components of the Corporation's deferred tax assets and
liabilities as of December 31, 2003 and 2002 are as follows:

59

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. INCOME TAXES -- (CONTINUED)

The effective tax rate differs from the expected tax using statutory rate.
Reconciliation between the expected tax and the actual income tax expense
(benefit) follows:

The federal statutory rate for the Corporation was 35% in 2003 and 34% in
2002 and 2001.

The Corporation has net operating loss carryforwards of approximately
$2,500,000 for Florida state tax purposes which can be carried forward nineteen
years.

The Corporation has available at December 31, 2003 unused rehabilitation
tax credits that can be carried forward and utilized against future Federal
income tax liability. Unused credits and expiration dates are as follows:

This credit was established as a result of the restoration and enhancement
of the John A. Hand Building, which is designated as an historical structure and
serves as the corporate headquarters for the Corporation. This credit is equal
to 20% of certain qualified expenditures incurred by the Corporation prior to
December 31, 2003. The Corporation is required to reduce its tax basis in the
John A. Hand Building by the amount of the credit.

Applicable income tax expense of $217,000, $232,000 and $525,000 on
securities gains for the years ended December 31, 2003, 2002 and 2001,
respectively, is included in income taxes.

13. RELATED PARTY TRANSACTIONS

The Corporation has entered into transactions with its directors, executive
officers, significant stockholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. The aggregate amount of loans to

60

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. RELATED PARTY TRANSACTIONS -- (CONTINUED)

such related parties at December 31, 2003 and 2002 was $14,446,000 and
$12,739,000, respectively. Activity during the year ended December 31, 2003 is
summarized as follows (in thousands):

At December 31, 2003, the deposits of such related parties in the
subsidiary banks amounted to approximately $5,972,000.

In July 1998, prior to its acquisition by the Corporation, Emerald Coast
Bancshares, Inc. sold the land and building of its main office building and two
branch offices to an entity under the control of certain members of Emerald
Coast Bancshares' Board of Directors for their fair value of approximately
$3,794,700. The sales were accounted for under a sale-leaseback arrangement.
Rental expense under these operating leases amounted to approximately $175,000
in 2002 and $473,000 in 2001, respectively.

In June 2002, The Bank purchased these properties for their fair value of
$3,892,200.

The Corporation sold commercial real estate to certain directors realizing
gains of $305,000 in 2001. The Corporation received consideration of $650,000 in
2001 for the commercial real estate sales.

During 2003 and 2002, the Corporation received from an affiliated company
$180,000 in rental income and, through its real estate management subsidiary,
$128,000 and $105,000, respectively, in personnel and management related fees.
As of December 31, 2003 and 2002, approximately $59,000 and $156,000,
respectively, in receivables were due from the affiliated company. These
respective receivables have been paid in full subsequent to December 31, 2003
and 2002 in the normal course of business.

On September 27, 2002, The Bank sold an undivided 87.5% ownership interest
in a $4 million loan that was held in our portfolio to an entity controlled by a
director of the Corporation for $3.5 million. The sale was nonrecourse and no
gain or loss was recognized.

An insurance agency owned by one of the Corporation's directors received
commissions of approximately $92,315 and $138,981 from the sale of insurance to
The Banc Corporation during 2002 and 2003, respectively.

The Corporation believes that all of the foregoing transactions were made
on terms and conditions reflective of arms' length transactions.

14. COMMITMENTS AND CONTINGENCIES

The consolidated financial statements do not reflect the Corporation's
various commitments and contingent liabilities which arise in the normal course
of business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit. The following is a summary of the
Corporation's maximum exposure to credit loss for loan commitments and standby
letters of credit:

Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance by the customer. The
Corporation's credit policies and procedures for credit

61

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

commitments and financial guarantees are the same as those for extension of
credit that are recorded in the consolidated statement of financial condition.
Because these instruments have fixed maturity dates, and because many of them
expire without being drawn upon, they do not generally present any significant
liquidity risk to the Corporation.

During 2001, 2002 and 2003, the Corporation settled various litigation
matters. Additionally, Preston Peete v. The Bank et al., Case No. CV-00-804,
Circuit Court of Morgan County, Alabama, was tried to a jury verdict on November
16, 2001, resulting in a judgment against The Bank for approximately $211,000 in
compensatory damages and $422,000 in punitive damages and a judgment in favor of
The Bank against Mr. Peete in the amount of $105,000. The net amount awarded to
Mr. Peete totaled approximately $528,000. The Corporation adequately provided
for estimated loss exposure from these settlements and judgments in the 2001
consolidated financial statements.

The Corporation is also a defendant or co-defendant in various lawsuits
incidental to the banking business. Management, after consultation with legal
counsel, believes that liabilities, if any, arising from such litigation and
claims will not result in a material adverse effect on the consolidated
financial statements of the Corporation.

On December 22, 2003 the Corporation's subsidiary initiated an investment
security trade and is committed to purchase a $10,000,000 par value government
agency security for $9,995,000 to settle on January 15, 2004, the security's
original issue date.

15. BUSINESS COMBINATIONS AND BRANCH SALES

On August 29, 2003, the Corporation's banking subsidiary sold seven
branches of the Bank, known as the Emerald Coast branches of The Bank, serving
the markets from Destin to Panama City, Florida for a $46,800,000 deposit
premium. These branches had assets of approximately $234,000,000 and liabilities
of $209,000,000. The Corporation realized a $46,018,000 pre-tax gain on the
sale.

On March 13, 2003, the Corporation's banking subsidiary sold its Roanoke,
Alabama branch, which had assets of approximately $9,800,000 and liabilities of
$44,672,000. The Corporation realized a $2,246,000 pre-tax gain on the sale.

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 from Mexico Beach
to Apalachicola. As a result of this acquisition, the Corporation expanded its
market in the panhandle of Florida and increased its assets in Florida
approximately $100,000,000.

The total cost of the CF Bancshares acquisition was $15,636,000, which
exceeded the fair value of the net assets of CF Bancshares by $7,445,000. The
total costs included 16,449 shares of Corporation common stock valued at
$108,563. The value of common stock issued was determined based on the average
of the last sales price for the twenty (20) consecutive trading days ending
three days prior to the special meeting of CF Bancshares shareholders held on
November 28, 2001. 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 consists of goodwill. The
Corporation's consolidated financial statements for the year ended December 31,
2002 include the results of operations of CF Bancshares only for the period
February 15, 2002 to December 31, 2002.

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

62

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. BUSINESS COMBINATIONS AND BRANCH SALES -- (CONTINUED)

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.

16. REGULATORY RESTRICTIONS

A source of funds available to the Corporation is the payment of dividends
by its subsidiary. Currently, the Corporation and its subsidiary must obtain
regulatory approval prior to paying any dividends or distributions on the
Corporation's or its subsidiary's common stock, preferred stock or our trust
preferred securities.

The Corporation and its subsidiary are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its subsidiary must meet specific capital guidelines
that involve quantitative measures of the Corporation's and its subsidiary's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Corporation's and its subsidiary's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiary to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003 and 2002, that the Corporation and its subsidiary met all capital adequacy
requirements to which they are subject.

As of December 31, 2002, the subsidiary's primary regulators categorized
the subsidiary as "adequately capitalized" under the regulatory framework for
prompt corrective action. This notification was received in the first quarter of
2003; the Corporation received a current notification in the first quarter of
2004, stating that the Corporation exceeded the minimum guidelines to be "well
capitalized." At December 31, 2003, the Corporation and its banking subsidiary
exceeded the minimum standards to be considered "well capitalized"

63

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. REGULATORY RESTRICTIONS -- (CONTINUED)

under regulatory guidelines. The table below represents the Corporation's and
its subsidiary's regulatory and minimum regulatory capital requirements at
December 31, 2003 and 2002:

17. FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Corporation in
estimating fair values of financial instruments as disclosed herein:

Cash and short-term instruments. The carrying amounts of cash and
short-term instruments, including interest bearing deposits in other banks,
federal funds sold and short-term commercial paper, approximate their fair
value.

Securities available for sale and securities held to maturity. Fair values
for securities are based on quoted market prices. The carrying values of stock
in FHLB and Federal Reserve Bank approximate fair values.

Mortgage loans held for sale. The carrying amounts of mortgage loans held
for sale approximate their fair value.

Net loans. Fair values for variable-rate loans that reprice frequently and
have no significant change in credit risk are based on carrying values. Fair
values for all other loans are estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.

64

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)

Accrued interest receivable. The carrying amounts of accrued interest
receivable approximate their fair values.

Deposits. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit ("CDs") approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.

Advances from FHLB. Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.

Federal funds borrowed and security repurchase agreements. The carrying
amount of federal funds borrowed and security repurchase agreements approximate
their fair values.

Long-term debt. The carrying amount of long-term debt approximates its
fair values.

Subordinated debentures. Rates currently available to the Corporation for
preferred offerings with similar terms and maturities are used to estimate fair
value.

Interest rate swaps. Fair values for interest rate swaps are based on
quoted market prices.

Limitations. Fair value estimates are made at a specific point of time and
are based on relevant market information which is continuously changing. Because
no quoted market prices exist for a significant portion of the Corporation's
financial instruments, fair values for such instruments are based on
management's assumptions with respect to future economic conditions, estimated
discount rates, estimates of the amount and timing of future cash flows,
expected loss experience, and other factors. These estimates are subjective in
nature involving uncertainties and matters of significant judgment; therefore,
they cannot be determined with precision. Changes in the assumptions could
significantly affect the estimates.

65

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)

The estimated fair values of the Corporation's financial instruments are as
follows:

18. OTHER NONINTEREST EXPENSE

Other noninterest expense consisted of the following:

19. CONCENTRATIONS OF CREDIT RISK

All of the Corporation's loans, commitments and standby letters of credit
have been granted to customers in the Corporation's market area. The
concentrations of credit by type of loan or commitment are set forth in Notes 3
and 14, respectively.

66

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. CONCENTRATIONS OF CREDIT RISK -- (CONTINUED)

The Corporation maintains cash balances and federal funds sold at several
financial institutions. Cash balances at each institution are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to $100,000. At various
times throughout the year cash balances held at these institutions will exceed
federally insured limits. The Bank's management monitors these institutions on a
quarterly basis in order to determine that the institutions meet
"well-capitalized" guidelines as established by the FDIC.

20. NET INCOME (LOSS) PER COMMON SHARE

The following table sets forth the computation of basic net income(loss)
per common share and diluted net income(loss) per common share:

Basic net income per common share is calculated by dividing net income,
less dividend requirements on outstanding convertible preferred stock, by the
weighted average number of common shares outstanding for the period.

Diluted net income per common share takes into consideration the pro forma
dilution assuming outstanding convertible preferred stock and certain unvested
restricted stock and unexercised stock option awards were converted or exercised
into common shares. Options on 248,000 shares of common stock were not included
in computing diluted net income per share for the year ended December 31, 2002
because their effects were antidilutive.

67

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

21. PARENT COMPANY

The condensed financial information for The Banc Corporation (Parent
Company only) is presented as follows:

68

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

21. PARENT COMPANY -- (CONTINUED)

22. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

On February 6, 2003, the Corporation announced it had identified certain
loans extended upon the authorization of the now former president of The Bank's
Bristol, Florida bank group. These loans exceeded the former employee's loan
authority and were approved or otherwise extended in violation of The Bank's
lending policies and procedures. Upon discovering these violations, the
Corporation, assisted by outside counsel, along with federal and state banking
regulators conducted an extensive review of the loan portfolio at the Bristol
bank group.

69

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

22. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) -- (CONTINUED)

Based on this review, it was determined that certain loan documents had
been improperly executed during the second quarter of 2002. It was also
determined that certain problem loans had been sold during the second and third
quarters of 2002 by the former employee, and simultaneously a full recourse
agreement was executed that was concealed from any other members of the
Corporation's management. The loans were sold for their carrying value and no
gain or loss was recorded. In addition, loan payments had been made through
additional extensions of credit in order to conceal problems that existed in the
loan portfolio as of that time. As a result, the Corporation has restated its
quarterly financial statements for the three and six-month periods ended June
30, 2002 and for the three and nine-month periods ended September 30, 2002.

The loans for which documents were improperly executed have been reflected
as charge-offs as of the date they were executed, and all interest which accrued
on them has been reversed and additional provision for loan losses has been made
for the amounts charged off. The loans which were erroneously reported as sold
have been recorded on the condensed consolidated statements of condition as of
June 30 and September 30, 2002 and additional provision for loan losses has been
made for these loans based on the risk ratings assigned as of these dates. Loans
for which material payments had been made through additional extensions of
credit have been risk rated appropriately and additional provision for loan
losses has been made for these loans on the risk ratings assigned. In addition,
any interest capitalized into principal through extensions of credit to
borrowers determined not to be creditworthy has been reversed.

As a result of the restatement, the Corporation had a net loss for the
three months ended June 30, 2002 of $(5,807,000) of $(.33) per share compared to
net income of $2,502,000 or $.14 per share as previously reported and net income
for the three months ended September 30, 2002 of $2,073,000, or $.12 per share,
compared to net income of $2,550,000, or $.15 per share, as previously reported.

A summary of the effects of the restatement on the Corporation's
consolidated statement of condition and statements of operations follows:

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THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

22. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) -- (CONTINUED)

A summary of the unaudited results of operations for each quarter of 2003
and 2002 follows:

23. SUBSEQUENT EVENT

On February 6, 2004, the Corporation's banking subsidiary sold its Morris
branch, which had assets of $1,037,000 and liabilities of $8,200,000, for an
after-tax gain of approximately $465,000.

24. 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.

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. All costs have been allocated to the reportable segments.
Therefore, combined segment amounts agree to the consolidated totals.

71

THE BANC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

24. SEGMENT REPORTING -- (CONTINUED)

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

(1) Noninterest expense for the Alabama region includes all expenses for the
holding company, which have not been prorated to the Florida region.

25. PREFERRED STOCK

In May 2003, the Corporation received $6,193,000 in proceeds, net of
issuance costs, from the sale of 62,000 shares of Series A Convertible Preferred
Stock. Dividends will accrue on the liquidation value of $100 per share at the
rate of LIBOR plus 5.75% not to exceed 12.5%. Dividends are noncumulative and
reset semi-annually on June 1 and December 1. Each share of Series A Convertible
Preferred Stock is convertible at any time beginning June 1, 2008. Such shares
shall be convertible into the number of shares of common stock which result from
dividing the conversion price at the time of conversion into the liquidation
value. The initial conversion price is $8.00 per share. From the date of
issuance the Corporation can redeem the preferred stock at the following prices
stated as a percentage of the liquidation value: 2003 -- 105%; 2004 -- 104%;
2005 -- 103%; 2006 -- 102%; 2007, 101% -- 2008 and thereafter -- 100%. In the
event of a merger prior to June 1, 2004, the Series A Convertible Preferred
Stock may be redeemed by the Corporation at a redemption price of 106%.

72

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.

The information set forth under the captions "Incumbent Directors and
Executive Officers," "Election of Directors," "Certain Information Concerning
the Board of Directors and Its Committees," "Director Attendance," "Director
Compensation," "Executive Compensation and Other Information," "Security
Ownership of Certain Beneficial Owners and Management," and "Certain
Transactions and Relationships" included in The Banc Corporation's definitive
proxy statement to be filed no later than April 29, 2004, in connection with The
Banc Corporation's 2004 Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM 14. CONTROLS AND PROCEDURES.

CEO AND CFO CERTIFICATION

Appearing as Exhibit (31)-1 to this report are Certifications of our Chief
Executive Officer ("CEO") and our Chief Financial Officer ("CFO"). The
Certifications are required to be made by Rule 13a-14 of the Securities Exchange
Act of 1934, as amended. This Item contains the information about the evaluation
that is referred to in the Certifications, and the information set forth below
in this Item 14 should be read in conjunction with the Certifications for a more
complete understanding of the Certifications.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.

Within 90 days prior to the filing of this annual report, we conducted an
evaluation (the "Evaluation") of the effectiveness of the design and operation
of our disclosure controls and procedures under the supervision and with the
participation of our management, including our CEO and CFO. Based upon the
Evaluation, our CEO and CFO have concluded that, subject to the limitations
noted below, our disclosure controls and procedures are effective to ensure that
material information relating to The Banc Corporation and its subsidiaries is
made known to management, including the CEO and CFO, particularly during the
period when our periodic reports are being prepared.

73

CHANGES IN INTERNAL CONTROLS

Prior to the discovery of the Bristol, Florida bank group situation, which
ultimately caused us to restate our financial statements for the second and
third quarters of 2002, we were in the process of enhancing our internal
controls for financial reporting. During 2003, we outsourced a portion of our
loan review function, and we completed the implementation of a centralized loan
administration services department to serve all of our bank locations. This
department provides standardized oversight for compliance with loan approval
authorities and bank lending policies and procedures. We also hired additional
personnel for our credit risk management department. This has centralized the
loan operations of all of our branch groups in order to provide an enhanced
degree of centralized supervision monitoring and accountability. We have
disclosed and discussed these issues and responses with our Audit Committee and
independent auditors.

74

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Financial Statements, Financial Schedules and Exhibits.

(l) The consolidated financial statements of The Banc Corporation and its
subsidiaries filed as a part of this Annual Report on Form l0-K are
listed in Item 8 of this Annual Report on Form l0-K, which is hereby
incorporated by reference herein.

(2) All schedules to the consolidated financial statements of The Banc
Corporation and its subsidiaries have been omitted because they are not
required under the related instructions or are inapplicable, or because
the required information has been provided in the consolidated
financial statements or the notes thereto.

(3) The exhibits required by Regulation S-K are set forth in the following
list and are filed either by incorporation by reference from previous
filings with the Securities and Exchange Commission or by attachment to
this Annual Report on Form 10-K as indicated below.

(b) Reports on Form 8-K.

(i) We filed a Current Report on Form 8-K dated November 3, 2003,
furnishing under Item 12 the text of our press release announcing our
operating results for the quarter ended September 30, 2003.

(ii) We filed a Current Report on Form 8-K dated November 13, 2003,
furnishing under Item 9 the text of slides used in presentations at an
investor conference.

(c) Exhibits.

The exhibits required to be filed with this Annual Report on Form 10-K
pursuant to Item 601, of Regulation S-K are listed under "Exhibits" in Part IV,
Item 15(a) (3) of this Annual Report on Form 10-K, and are incorporated herein
by reference.

(d) Financial Statement Schedules.

The Financial Statement Schedules required to be filed with this Annual
Report on Form 10-K are listed under "Financial Statement Schedules" in Part IV,
Item 15(a) (2) of this Annual Report on Form 10-K, and are incorporated herein
by reference.

77

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

THE BANC CORPORATION

By /s/ James A. Taylor
------------------------------------
James A. Taylor
Chairman of the Board and
Chief Executive Officer

March 15, 2004

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James A. Taylor, Jr. and David R. Carter, and
each of them, the true and lawful agents and his attorneys-in-fact with full
power and authority in either of said agents and attorneys-in-fact, acting
singly, to sign for the undersigned as Director or an officer of the
Corporation, or as both, the Corporation's 2003 Annual Report on Form 10-K to be
filed with the Securities and Exchange Commission, Washington, D.C. under the
Securities Exchange Act of 1934, and to sign any amendment or amendments to such
Annual Report, including an Annual Report pursuant to 11-K to be filed as an
amendment to the Form 10-K; hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact as herein authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

79

EXHIBIT INDEX