UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File number 0-25033

Superior Bancorp

(Exact Name of Registrant as Specified in its Charter)

Delaware		63-1201350
(State or Other Jurisdiction of Incorporation)		(IRS Employer Identification No.)

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

(205) 327-1400

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

Class		Outstanding as of August 13, 2010
Common stock, $.001 par value		12,560,457

 

 

TABLE OF CONTENTS

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements			3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			65
Item 4.		Controls and Procedures			66
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			67
Item 1A.		Risk Factors			67
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			75
Item 3.		Defaults Upon Senior Securities			76
Item 5.		Other Information			76
Item 6.		Exhibits			76
SIGNATURES					77
EX-3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in thousands, except per share data)

		June 30,				December 31,
		2010				2009
ASSETS
Cash and due from banks		$	54,648			$	74,020
Interest-bearing deposits in other banks			245,182				23,714
Federal funds sold			1,328				2,036
Total cash and cash equivalents			301,158				99,770
Investment securities available-for-sale			269,943				286,310
Tax lien certificates			18,820				19,292
Mortgage loans held-for-sale			54,823				71,879
Loans, net of unearned income			2,482,560				2,472,697
Allowance for loan losses			(79,425	)			(41,884	)
Net loans			2,403,135				2,430,813
Premises and equipment, net			102,765				104,022
Accrued interest receivable			15,168				15,581
Stock in FHLB			18,212				18,212
Cash surrender value of life insurance			50,792				50,142
Core deposit and other intangible assets			14,746				16,694
Other real estate			45,184				41,618
Other assets			63,589				67,536
Total assets		$	3,358,335			$	3,221,869
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	275,712			$	257,744
Interest-bearing			2,562,809				2,398,829
Total deposits			2,838,521				2,656,573
Advances from FHLB			216,324				218,322
Security repurchase agreements			762				841
Notes payable			45,150				45,917
Subordinated debentures, net			81,196				84,170
Accrued expenses and other liabilities			27,068				24,342
Total liabilities			3,209,021				3,030,165
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.001 per share; shares authorized 5,000,000:
Series B, cumulative convertible preferred stock, 111 and -0- shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively			—				—
Series C, cumulative convertible preferred stock, 3 and -0- shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively			—				—
Common stock, par value $.001 per share; shares authorized 200,000,000; shares issued 12,560,457 and 11,673,837, respectively; outstanding 12,560,457 and 11,667,794, respectively			13				12
Surplus — preferred			10,888				—
— warrants			9,827				8,646
— common			325,159				322,043
Accumulated deficit			(191,250	)			(130,889	)
Accumulated other comprehensive loss			(5,136	)			(7,825	)
Unearned ESOP stock			(174	)			(263	)
Unearned restricted stock			(13	)			(20	)
Total stockholders’ equity			149,314				191,704
Total liabilities and stockholders’ equity		$	3,358,335			$	3,221,869

See Notes to Condensed Consolidated Financial Statements.

SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Interest income:
Interest and fees on loans		$	36,212			$	35,959			$	72,554			$	70,911
Interest on taxable securities			2,625				3,778				5,536				7,787
Interest on tax-exempt securities			314				434				626				863
Interest on federal funds sold			2				2				3				7
Interest and dividends on other investments			393				456				765				818
Total interest income			39,546				40,629				79,484				80,386
Interest expense:
Interest on deposits			11,452				14,109				22,977				29,002
Interest on other borrowed funds			2,542				2,597				5,064				4,938
Interest on subordinated debentures			2,399				1,206				4,785				2,400
Total interest expense			16,393				17,912				32,826				36,340
Net interest income			23,153				22,717				46,658				44,046
Provision for loan losses			50,363				5,982				59,490				9,434
Net interest (loss) income after provision for loan losses			(27,210	)			16,735				(12,832	)			34,612
Noninterest income:
Service charges and fees on deposits			2,335				2,524				4,551				4,911
Mortgage banking income			2,667				2,271				4,677				3,961
Investment securities gains (losses)
Gain on sale of securities			1,858				—				1,858				—
Total other-than-temporary impairment losses (“OTTI”)			(683	)			(6,685	)			(883	)			(17,189	)
Portion of OTTI recognized in other comprehensive loss			181				904				183				5,563
Investment securities gains (losses)			1,356				(5,781	)			1,158				(11,626	)
Change in fair value of derivatives			(239	)			(67	)			(29	)			(266	)
Increase in cash surrender value of life insurance			558				540				1,126				1,055
Gain on exchange of subordinated debt for common stock			507				—				507				—
Other income			1,344				1,340				2,750				2,557
Total noninterest income			8,528				827				14,740				592
Noninterest expenses:
Salaries and employee benefits			13,840				12,304				28,040				24,613
Occupancy, furniture and equipment			4,850				4,503				9,613				8,919
Amortization of core deposit intangibles			869				985				1,739				1,971
FDIC assessments			1,853				1,932				3,233				2,389
Foreclosure losses			3,358				1,748				5,935				2,317
Other expenses			6,763				6,323				12,782				11,650
Total noninterest expenses			31,533				27,795				61,342				51,859
Loss before income taxes			(50,215	)			(10,233	)			(59,434	)			(16,655	)
Income tax expense (benefit)			3,507				(4,539	)			28				(7,387	)
Net loss			(53,722	)			(5,694	)			(59,462	)			(9,268	)
Preferred stock dividends and amortization			(899	)			(1,167	)			(899	)			(2,310	)
Net loss applicable to common stockholders		$	(54,621	)		$	(6,861	)		$	(60,361	)		$	(11,578	)
Weighted average common shares outstanding			12,305				10,071				11,977				10,062
Weighted average common shares outstanding, assuming dilution			12,305				10,071				11,977				10,062
Basic net loss per common share		$	(4.44	)		$	(0.68	)		$	(5.04	)		$	(1.15	)
Diluted net loss per common share		$	(4.44	)		$	(0.68	)		$	(5.04	)		$	(1.15	)

See Notes to Condensed Consolidated Financial Statements.

SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands)

																										Accumulated
																										Other				Unearned				Unearned				Total
		Preferred				Common				Surplus												Accumulated				Comprehensive				ESOP				Restricted				Stockholders’
		Stock				Stock				Preferred				Warrants				Common				Deficit				(Loss) Gain				Stock				Stock				Equity
Balance at December 31, 2009		$	—			$	12			$	—			$	8,646			$	322,043			$	(130,889	)		$	(7,825	)		$	(263	)		$	(20	)		$	191,704
Comprehensive loss:
Net loss			—				—				—				—				—				(59,462	)			—				—				—				(59,462	)
Other comprehensive gain, net of tax expense of $1.6 million unrealized gain on securities available for sale, arising during the period, net of reclassification adjustment			—				—				—				—				—				—				2,780				—				—				2,780
Change in accumulated loss on cash flow hedging instrument, net of tax benefit of $56			—				—				—				—				—				—				(91	)			—				—				(91	)
Comprehensive loss																																							(56,773	)
Cumulative preferred stock dividend, net of amortization			—				—				718				—				—				(899	)			—				—				—				(181	)
Exchange of trust preferred debt for 849,156 shares of common stock							1				—				—				2,883				—				—				—				—				2,884
Compensation expense related to stock options			—				—				—				—				162				—				—				—				—				162
Issuance of 111 shares Series B preferred stock and 792,859 warrants			—				—				9,887				1,164				—				—				—				—				—				11,051
Issuance of 3 shares Series C preferred stock and 21,429 warrants			—								283				17								—				—				—								300
Amortization of unearned restricted stock			—				—				—				—				—				—				—				—				7				7
Issuance of 43,507 shares related to board compensation			—				—				—				—				155				—				—				—				—				155
Release of 1,969 shares by ESOP			—				—				—				—				(84	)			—				—				89				—				5
Balance at June 30, 2010		$	—			$	13			$	10,888			$	9,827			$	325,159			$	(191,250	)		$	(5,136	)		$	(174	)		$	(13	)		$	149,314

See Notes to Condensed Consolidated Financial Statements.

SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Dollars in thousands)

		Six Months Ended
		June 30,
		2010				2009
Net cash provided by (used in) operating activities		$	30,260			$	(71,019	)
Investing activities
Proceeds from sales of investment securities available-for-sale			89,130				—
Proceeds from maturities of investment securities available-for-sale			49,458				40,602
Purchase of investment securities available-for-sale			(117,055	)			(11,683	)
Net increase in loans			(52,856	)			(110,932	)
Redemptions of tax lien certificates			9,171				18,582
Purchase of tax lien certificates			(8,699	)			(20,329	)
Purchase of premises and equipment			(2,313	)			(5,295	)
Proceeds from sale of premises and equipment			—				338
Proceeds from sale of foreclosed assets			13,962				5,673
Decrease in stock of FHLB			—				3,198
Net cash used in investing activities			(19,202	)			(79,846	)
Financing activities
Net increase in deposits			181,873				261,784
Decrease in FHLB advances			(1,998	)			(134,493	)
Proceeds from note payable			—				38,575
Principal payment on note payable			(1,000	)			—
Net decrease in other borrowed funds			(138	)			—
Proceeds from exchange of subordinated debt for common stock			193				—
Proceeds from issuance of preferred stock			11,400				—
Cash dividends paid			—				(1,534	)
Net cash provided by financing activities			190,330				164,332
Net increase in cash and cash equivalents			201,388				13,467
Cash and cash equivalents at beginning of period			99,770				89,448
Cash and cash equivalents at end of period		$	301,158			$	102,915

See Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. For a summary of significant accounting policies that have been consistently followed, see Note 1 to the Consolidated Financial Statements included in Superior Bancorp’s (the “Corporation’s”) Annual Report on Form 10-K for the year ended December 31, 2009. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included in these condensed consolidated financial statements. Operating results for the three and six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The Condensed Consolidated Statement of Financial Condition as of December 31, 2009, presented herein has been derived from the financial statements audited by Grant Thornton LLP, independent registered public accountants, as indicated in their report, dated March 11, 2010, included in our Annual Report on Form 10-K. The Condensed Consolidated Financial Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Reclassifications

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income or stockholders’ equity.

Note 2 — Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 860 - Accounting for Transfers of Financial Assets (“Topic 860”). Topic 860 is a revision to preceding guidance and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-16 — Transfers and Servicing — Accounting for Transfers of Financial Assets (“ASU 2009 -16”). ASU 2009-16 formally codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets and provides a revision for Topic 860 to require more information about transfers of financial assets. Topic 860 and ASU 2009-16 became effective for interim and annual reporting periods beginning January 1, 2010. The adoption of this statement and update did not have a material impact on the Corporation’s consolidated financial statements.

In December 2009, FASB issued ASU No. 2009-17 — Consolidation – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends the consolidation guidance applicable to variable interest entities. The amendments to the consolidation guidance affect all entities, as well as qualifying special-purpose entities that were previously excluded from previous consolidation guidance. ASU 2009-17 became effective as of the beginning of the first annual reporting period that began after November 15, 2009. The adoption of ASU 2009-17 did not have a significant impact on the Corporation’s ongoing financial position or results of operations.

In January 2010, FASB issued ASU No. 2010-06 — Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends Subtopic 820-10, Fair Value Measurements and Disclosures, that require new disclosures for transfers in and out of Levels 1 and 2, and for activity in Level 3 fair value measurements. In addition, ASU 2010-06 provides amendments that clarify existing disclosures relating to the level of disaggregation and inputs and valuation techniques. Fair value measurement disclosures should be provided for each class of assets and liabilities, and disclosures should be made about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring measurements that fall in either Level 2 or Level 3. The new disclosures and clarification of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The Corporation adopted these disclosure requirements of ASU 2010-06 as of January 1, 2010. The adoption of ASU 2010-06 did not have an impact to the Corporation’s financial position, results of operations or cash flows (see Note 11). The disclosures about purchases, sales, issuances and settlements in the roll-forward activity of activity in the Level 3 fair value measurements will become effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In June 2010, FASB issued ASU No. 2010-20 – Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”). ASU 2010-20 was issued to create greater transparency and help financial users assess an entity’s credit risk exposure and its allowance for credit losses. ASU 2010-20 requires an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. In addition, an entity will be required to disclose credit quality indicators, past due information and modifications of its financing receivables. The new disclosure requirements will become effective for periods ending on or after December 15, 2010. The adoption of ASU 2010-20 will not have an impact on the Corporation’s ongoing financial position or results of operations.

Note 3 — Investment Securities

The amortized cost and estimated fair values of investment securities as of June 30, 2010 are shown below:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
						(Dollars in thousands)
Investment securities available-for-sale
U.S. Agency securities		$	18,277			$	342			$	—			$	18,619
Mortgage-backed securities (“MBS”):
U.S. Agency pass-through			109,180				3,249				7				112,422
U.S. Agency collateralized mortgage obligation (“CMO”)			82,941				1,513				—				84,454
Private-label CMO			17,076				296				2,716				14,656
Total MBS			209,197				5,058				2,723				211,532
State, county and municipal securities			30,493				430				262				30,661
Corporate obligations:
Corporate debt			4,101				—				101				4,000
Pooled trust preferred securities			8,288				—				5,025				3,263
Single issue trust preferred securities			5,000				—				3,245				1,755
Total corporate obligations			17,389				—				8,371				9,018
Equity securities			113				—				—				113
Total investment securities available-for-sale		$	275,469			$	5,830			$	11,356			$	269,943

Investment securities with an amortized cost of $264.9 million as of June 30, 2010 were pledged to secure public funds and for other purposes as required or permitted by law.

The amortized cost and estimated fair values of investment securities as of June 30, 2010, 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.

		Securities Available-for-Sale
		Amortized				Estimated
		Cost				Fair Value
		(Dollars in thousands)
Due in one year or less		$	285			$	287
Due after one year through five years			6,970				6,909
Due after five years through ten years			23,130				23,562
Due after ten years			35,887				27,652
Mortgage-backed securities			209,197				211,533
		$	275,469			$	269,943

During the three months ended June 30, 2010, the Corporation sold certain U.S. Agency securities and U.S Agency MBS with combined amortized cost and market values of $87.4 million and $89.1 million, respectively. The Corporation reinvested a portion of the proceeds into a like amount of U. S Agency MBS guaranteed by the Government National Mortgage Association (“Ginnie Mae”). This repositioning reduced the duration of the portfolio and improved risk-based capital. The Corporation realized a net gain of approximately $1.7 million. A portion of these securities had impairment losses of approximately $0.2 million, which the Corporation realized in the three months ended March 31, 2010.

The following table summarizes the investment securities with unrealized losses as of June 30, 2010 by aggregated major security type and length of time in a continuous unrealized loss position:

		Less than 12 Months								More than 12 Months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses (1)				Value				Losses (1)				Value				Losses (1)
										(Dollars in thousands)
Temporarily Impaired
Mortgage-backed securities:
U.S. Agency pass-through		$	23			$	—			$	240			$	7			$	263			$	7
Private-label CMO			—				—				6,338				1,096				6,338				1,096
Total MBS			23				—				6,578				1,103				6,601				1,103
State, county and municipal securities			5,585				116				1,602				146				7,187				262
Corporate obligations:
Corporate debt			—				—				4,000				101				4,000				101
Single issue trust preferred securities			—				—				1,755				3,245				1,755				3,245
Total corporate obligations			—				—				5,755				3,346				5,755				3,346
Total temporarily impaired securities			5,608				116				13,935				4,595				19,543				4,711
Other-than-temporarily Impaired
Mortgage-backed securities:
Private-label CMO			—				—				3,021				1,620				3,021				1,620
Corporate obligations:
Pooled trust preferred securities			—				—				3,263				5,025				3,263				5,025
Total OTTI securities			—				—				6,284				6,645				6,284				6,645
Total temporarily and other-than-temporarily impaired		$	5,608			$	116			$	20,219			$	11,240			$	25,827			$	11,356
\

The following is a summary of the total count by category of investment securities with gross unrealized losses as of June 30, 2010:

		Less than				Greater Than
		12 Months				12 Months				Total
Temporarily Impaired
Mortgage-backed securities:
U.S. Agency pass-through			1				1				2
Private-label CMO			—				5				5
Total MBS			1				6				7
State, county and municipal securities			15				6				21
Corporate obligations:
Corporate debt			—				3				3
Single issue trust preferred securities			—				1				1
Total corporate obligations			—				4				4
Total temporarily impaired securities			16				16				32
Other-than-temporarily Impaired
Mortgage-backed securities:
Private-label CMO			—				1				1
Corporate obligations:
Pooled trust preferred securities			—				4				4
Total OTTI securities			—				5				5
Total temporarily and other-than-temporarily impaired			16				21				37

Other-Than-Temporary Impairment (“OTTI”)

Management evaluates securities for OTTI at least on a quarterly basis. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into the various segments outlined in the tables above and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI according to ASC 320-10 guidance. In addition, certain purchased beneficial interests, which may include private-label MBS, asset-backed securities and collateralized debt obligations that had credit ratings of below AA at the time of purchase are evaluated using the model outlined in ASC 325-40 guidance.

In determining OTTI according to FASB guidance, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether we have the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The pooled trust preferred segment of the portfolio uses the OTTI guidance that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the model, we compare the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell, or more likely than not will be required to sell, the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized in earnings at an amount equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of June 30, 2010, our securities portfolio consisted of 204 securities, 37 of which were in an unrealized loss position. The majority of unrealized losses are related to our private-label CMOs and trust preferred securities, as discussed below.

Mortgage-backed securities

As of June 30, 2010, approximately 93% of the dollar volume of mortgage-backed securities we held were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Ginnie Mae, institutions which the government has affirmed its commitment to support, and these securities have nominal unrealized losses. Our MBS portfolio also includes 10 private-label CMOs with a market value of $14.7 million, which had net unrealized losses of approximately $2.4 million as of June 30, 2010. These private-label CMOs were rated AAA at purchase. The following is a summary of the investment grades for these securities (Dollars in thousands):

						Credit Support				Net
Rating						Coverage				Unrealized
Moody/Fitch		Count				Ratios (1)				(Loss) Gain
A1/NR			1				3.06			$	(152	)
Aaa/NR			1				4.25				—
NR/AAA			1				3.05				110
NR/AA			1				3.12				(240	)
B2/AA			1				N/A				(548	)
B2/NR			1				4.02				(92	)
NR/BBB			1				2.39				(64	)
Caa2/CCC (2)			1				0.91				(1,620	)
NR/C (2)			2				0.00-0.30				186
Total			10							$	(2,420	)

During the first quarter of 2010, the Corporation recognized an immaterial amount of OTTI on one of the private-label CMOs. The assumptions used in the valuation model include expected future default rates, loss severity and prepayments. The model also takes into account the structure of the security, including credit support. Based on these assumptions, the model calculates and projects the timing and amount of interest and principal payments expected for the security. As of June 30, 2010, the fair values of the three private-label CMO securities with OTTI totaling $3.9 million were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. The discount rates used in the valuation model were based on a yield that the market would require for securities with maturities and risk characteristics similar to the securities being measured (See Note 12 for additional disclosure). The following table provides additional information regarding these CMO valuations as of June 30, 2010 (Dollars in thousands):

						Discount																				Year-to-Date
						Margin																Actual				OTTI
		Price				Basis								Cumulative				Average				60+ Days				Credit
Security		(%)				Points				Yield				Default				Security				Delinquent				Portion				Other				Total
CMO 1			19.13				1684				18%				51.87%				50%				7.52%			$	—			$	—			$	—
CMO 2			19.27				1586				17%				48.73%				45%				27.89%				—				—				—
CMO 4			60.41				1472				17%				29.03%				45%				16.48%				(21	)			(2	)			(23	)
																										$	(21	)		$	(2	)		$	(23	)

During the first quarter of 2010, CMO 3, which had a nominal remaining amortized cost, was completely written off. The Corporation does not expect to recover any future cash flows from CMO 3.

As of June 30, 2010, management did not intend to sell these securities, nor did management believe that it is more likely than not that the Corporation will be required to sell the securities before the entire amortized cost basis is recovered.

State, county and municipal securities

The unrealized losses in the municipal securities portfolio are primarily a reflection of changes in interest rates. This portfolio segment was not experiencing any credit problems as of June 30, 2010. We believe that all contractual cash flows will be received on this portfolio.

As of June 30, 2010, management did not intend to sell these securities, nor was it more likely than not that we will be required to sell the securities before the entire amortized cost basis is recovered since our current financial condition, including liquidity and interest rate risk, is not expected to require such action.

Trust preferred securities

The Corporation’s investment portfolio includes four collateralized debt obligations (“CDOs”), the collateral of which is pooled trust preferred securities of various financial institutions. The Corporation also owns a single issuer’s trust preferred security. The Corporation determined the fair value of the CDOs with the assistance of an external valuation firm. The valuation was accomplished by evaluating all relevant credit and structural aspects of the CDOs, determining appropriate performance assumptions and performing a discounted cash flow analysis. The valuation was structured as follows:

	•		Detailed credit and structural evaluation for each piece of collateral in the CDO;
	•		Collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities);
	•		Terms of the CDO structure, as laid out in the indenture;
	•		The cash flow waterfall (for both interest and principal);
	•		Overcollateralization and interest coverage tests;
	•		Events of default/liquidation;
	•		Mandatory auction call;
	•		Optional redemption;
	•		Hedge agreements; and
	•		Discounted cash flow modeling.

On the basis of the evaluation of collateral credit and in combination with a review of historical industry default data and current/near-term operating conditions, appropriate default and recovery probabilities are determined for each piece of collateral in the CDO; specifically, the Corporation estimates the probability that a given piece of collateral will default in any given year. Next, on the basis of credit factors like asset quality and leverage, the Corporation formulates a recovery assumption for each piece of collateral in the event of a default. For collateral that has already defaulted, the Corporation assumes no recovery. For collateral that is deferring, the Corporation assumes a recovery rate of 10%. It is also noted that there is a possibility, in some cases, that deferring collateral will become current at some point in the future. As a result, deferring issuers are evaluated on a case-by-case basis and in some instances, based on an analysis of the credit, the Corporation assigns a probability that the deferral will ultimately cure.

The base-case collateral-specific assumptions are aggregated into cumulative weighted-average default, recovery and prepayment probabilities. In light of generally weakening collateral credit performance and a challenging U.S. credit and real estate environment, our assumptions generally imply a larger amount of collateral defaults during the next three years than that which has been experienced historically and a gradual leveling off of defaults thereafter.

The discount rates used to determine fair value are intended to reflect the uncertainty inherent in the projection of each CDO’s cash flows. Therefore, spreads were chosen that are comparable to spreads observed currently in the market for similarly rated instruments, and those spreads are intended to reflect general market discounts currently applied to structured credit products. The discount rates used to determine the credit portion of the OTTI are equal to the current yield on the issuances as prescribed under ASC 325-40.

The following tables provide various information and fair value model assumptions regarding our CDOs as of June 30, 2010 (Dollars in thousands):

																						Year-to-Date
																						Other-than-temporary-impairment
		Single/				Class/				Amortized				Fair				Unrealized				Credit
Name		Pooled				Tranche				Cost				Value				Loss				Portion				Other				Total
MM Caps Funding I Ltd		Pooled				MEZ				$	2,083			$	984			$	(1,099	)		$	—			$	—			$	—
MM Community Funding Ltd		Pooled					B				2,026				720				(1,306	)			(20	)			(117	)			(137	)
Preferred Term Securities V		Pooled				MEZ					1,189				434				(755	)			(24	)			—				(24	)
Tpref Funding III Ltd		Pooled					B-2				2,990				1,125				(1,865	)			(32	)			(64	)			(96	)
Emigrant Capital Trust (1)		Single				Sole					5,000				1,755				(3,245	)			—				—				—
										$	13,288			$	5,018			$	(8,270	)		$	(76	)		$	(181	)		$	(257	)

										Original Collateral -				Performing Collateral -
										Percent of Actual				Percent of Expected
		Lowest				Performing				Deferrals and				Deferrals and				Excess
Name		Rating				Banks				Defaults				Defaults				Subordination (2)
MM Caps Funding I Ltd		Ca					21				21	%			19	%			0	%
MM Community Funding Ltd		Ca					8				21	%			43	%			0	%
Preferred Term Securities V		Ba3					2				4	%			26	%			0	%
Tpref Funding III Ltd		Ca					22				28	%			25	%			0	%
Emigrant Capital Trust (1)		NR				NA				NA				NA				NA

Fair Value

Discount Margin

Yield

Name

(Price to Par)

(Basis Points)

(Basis Points)

MM Caps Funding I Ltd

$

44.85

Swap + 1700

9.48% Fixed

MM Community Funding Ltd

14.40

LIBOR + 1500

LIBOR + 310

Preferred Term Securities V

31.52

LIBOR + 1400

LIBOR + 210

Tpref Funding III Ltd

28.14

LIBOR + 1200

LIBOR + 190

Emigrant Capital Trust (1)

35.10

LIBOR + 1312

LIBOR + 200

In April 2009, management received notification that interest payments related to New South Capital would be deferred for up to 20 quarters. In addition, New South Capital’s external auditor issued a going concern opinion on May 2, 2009. Management determined that there was not sufficient positive evidence that this issue would ever pay principal or interest. Therefore, OTTI was recognized on the full amount of the $5.0 million New South Capital Trust Preferred security during the first quarter of 2009. In December 2009, the banking subsidiary of New South Capital was closed by its regulator and placed into receivership.

In addition to the impact of interest rates, the estimated fair values of these CDOs have been and continue to be depressed due to the unusual credit conditions that the financial industry has faced since the middle of 2008 and a weakening economy, which has severely reduced the demand for these securities and rendered their trading market inactive.

As of June 30, 2010, management did not intend to sell these securities, nor did management believe it is more likely than not that the Corporation will be required to sell the securities before the entire amortized cost basis is recovered.

The following table provides a roll-forward of the amount of credit-related losses recognized in earnings for which a portion of OTTI has been recognized in other comprehensive income for the period shown:

		For the Three				For the Six
		Months Ended				Months Ended
		June 30, 2010				June 30, 2010
		(Dollars in thousands)
Balance at beginning of period		$	8,886			$	8,869
Amounts related to credit losses for which an OTTI was not previously recognized			450				604
Increases in credit loss for which an OTTI was previously recognized when the investor does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost			51				97
Reductions for securities where there is an intent to sell or requirement to sell			—				(154	)
Reductions for increases in cash flows expected to be collected			(13	)			(42	)
Balance at end of period		$	9,374			$	9,374

Management will continue to evaluate the investment ratings in the securities portfolio, severity in pricing declines, market price quotes along with timing and receipt of amounts contractually due. Based upon these and other factors, the securities portfolio may experience further impairment.

Stock in the Federal Home Loan Bank of Atlanta (“FHLB Atlanta”)

As of June 30, 2010, the Corporation has stock in FHLB Atlanta totaling $18.2 million (its par value), which is presented separately on the face of the statement of financial condition. There is no ready market for the stock and no quoted market values, as only member institutions are eligible to be shareholders and all transactions are, by charter, to take place at par with FHLB Atlanta as the only purchaser. Therefore, the Corporation accounts for this investment as a long-term asset and carries it at cost. Management reviews this stock quarterly for impairment and conducts its analysis in accordance with ASC 942-325-35-3.

Management’s determination as to whether this investment is impaired is based on management’s assessment of the ultimate recoverability of its par value (cost) rather than recognizing temporary declines in its value. The determination of whether the decline affects the ultimate recoverability of our investment is influenced by available information regarding criteria such as:

	•		the significance of the decline in net assets of FHLB Atlanta as compared to the capital stock amount for FHLB Atlanta and the length of time this decline has persisted;
	•		commitments by FHLB Atlanta to make payments required by law or regulation and the level of such payments in relation to the operating performance of FHLB Atlanta;
	•		the impact of legislative and regulatory changes on financial institutions and, accordingly, on the customer base of FHLB Atlanta; and
	•		the liquidity position of FHLB Atlanta.

Management has reviewed publicly available information regarding the financial condition of FHLB Atlanta and concluded that no impairment existed based on its assessment of the ultimate recoverability of the par value of the investment. FHLB Atlanta reported net income of $48 million for the first quarter of 2010, an increase of approximately $50 million from a net loss of approximately $2 million for the first quarter of 2009. On May 11, 2010, FHLB Atlanta announced the approval of an annualized dividend rate for the first quarter of 2010 of 0.26% compared to no dividends in the first quarter of 2009. During the second quarter of 2009, FHLB Atlanta reinstated its dividend at rates of 0.84%, 0.41% and 0.27%, for the second, third and fourth quarters of 2009, respectively, resulting in an annualized dividend rate of 0.38%. The Board of FHLB Atlanta made a decision to retain a larger portion of earnings and significantly higher capital ratios than in previous years. On the basis of a review of the financial condition, cash flow, liquidity and asset quality indicators of FHLB Atlanta as of the end of the first quarter of 2010, management has concluded that no impairment exists on the Corporation’s investment in the stock of FHLB Atlanta. This is a long-term investment that serves a business purpose of enabling us to enhance the liquidity of the Corporation’s subsidiary, Superior Bank, through access to the lending facilities of FHLB Atlanta. For the foregoing reasons, management believes that FHLB Atlanta’s current position does not indicate that the Corporation’s investment will not be recoverable at par, the cost, and thus the investment was not impaired as of June 30, 2010.

Note 4 — Allowance For Loan Losses

The following tables show the provision for loan losses, gross and net charge-offs, and the level of allowance for loan losses that resulted from our ongoing assessment of the loan portfolio for the periods indicated:

Fair Value Hedges

As of June 30, 2010 and December 31, 2009, the Corporation had $2.8 million in notional amount of CD swaps designated and qualified as fair value hedges. These CD swaps were designated as hedging instruments to hedge the risk of changes in the fair value of the underlying brokered CD due to changes in interest rates. As of June 30, 2010 and December 31, 2009, the amount of CD swaps designated as hedging instruments had a recorded fair value of $0.3 million and $0.2 million, respectively, and a weighted average life of 2.2 years and 2.5 years, respectively. The weighted average fixed rate (receiving rate) was 4.70% and the weighted average variable rate (paying rate) was 0.46% (LIBOR-based).

Cash Flow Hedges

The Corporation has entered into interest rate swap agreements designated and qualified as a hedge with notional amounts of $18.5 million to hedge the variability in cash flows on $18.5 million of junior subordinated debentures. During the second quarter, the Corporation settled $3.5 million of notional amount of interest rate swap agreements related to certain subordinated debt that was exchanged for common stock and incurred a loss of $0.1 million (see Note 13 for additional disclosure). Under the terms of the interest rate swaps, which mature September 15, 2012, the Corporation receives a floating rate based on 3-month LIBOR plus 1.33% (1.87% as of June 30, 2010) and pays a weighted average fixed rate of 4.42%. As of June 30, 2010 and December 31, 2009, these interest rate swap agreements are recorded as liabilities in the amount of $0.9 million and $0.8 million, respectively.

Interest Rate Lock Commitments

In the ordinary course of business, the Corporation enters into certain commitments with customers in connection with residential mortgage loan applications. Such commitments are considered derivatives under FASB guidance and are required to be recorded at fair value. The aggregate amount of these mortgage loan origination commitments was $50.2 million and $41.0 million as of June 30, 2010 and December 31, 2009, respectively. The fair value of the origination commitments was $0.6 million and $(0.4) million as of June 30, 2010 and December 31, 2009, respectively.

Forward Sales Commitments

To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to customers, the Corporation enters into forward sales commitments of MBS. During the period from commitment date to closing date, the Corporation is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans, resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which the Corporation agrees to deliver certain MBS, are established. These commitments are non-hedging derivatives in accordance with FASB guidance and recorded at fair value. The aggregate amount of forward commitments was $72.3 million as of June 30, 2010. The fair value of the commitments was $(1.3) million as of June 30, 2010.

Forward Purchase Commitments

If the Corporation determines that the amount of its forward sales commitments exceeds the amount necessary to mitigate the interest rate risk in the rate lock commitments, it will enter into forward purchase commitments to purchase MBS on an agreed-upon date and price similar to the terms of forward sales commitments. These commitments are non-hedging derivatives in accordance with FASB guidance and recorded at fair value. The aggregate amount of forward loan purchase commitments was $39.3 million as of June 30, 2010. The fair value of the commitments was $0.2 million as of June 30, 2010.

The Corporation obtains dealer quotations to value its interest rate derivative contracts designated as hedges of cash flows, while the fair values of other derivative contracts are estimated utilizing internal valuation models with observable market data inputs. The estimated fair values of the Corporation’s derivatives are included in the Assets and Liabilities Recorded at Fair Value on a Recurring Basis table of Note 12 to the condensed consolidated financial statements.

The following table includes the notional amounts and estimated fair values of the Corporation’s derivative contracts outstanding as of the periods presented:

		June 30, 2010								December 31, 2009
						Estimated								Estimated
		Notional				Fair				Notional				Fair
		Amount				Value				Amount				Value
						(Dollars in thousands)
Interest rate derivatives designated as hedges of fair value:
Interest rate swap on brokered certificates of deposit		$	2,777			$	325			$	2,777			$	228
Interest rate derivatives designated as hedges of cash flows:
Interest rate swaps on subordinated debenture			18,500				(900	)			22,000				(766	)
Non-hedging derivatives:
Brokered certificates of deposit interest rate swap			723				85				723				59
Mortgage loan held for sale interest rate lock commitment			50,194				630				41,038				(370	)
Mortgage loan forward sales commitments			72,329				(1,261	)			—				—
Mortgage loan forward purchase commitments			39,306				209				—				—
Commercial loan interest rate swap with loan customer			3,716				388				3,766				323
Commercial loan interest rate swap with financial institution			3,716				(388	)			3,766				(323	)

The weighted-average rates paid and received for interest rate swaps outstanding as of June 30, 2010 were as follows:

		Weighted-Average
		Interest				Interest
		Rate				Rate
		Paid				Received
Interest rate swaps:
Fair value hedge on brokered certificates of deposit interest rate swap			0.46	%			4.70	%
Cash flow hedge interest rate swaps on subordinated debentures			4.42				1.87
Non-hedging interest rate swap on commercial loan			6.73				6.73

Gains, Losses and Derivative Cash Flows

For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in noninterest income to the extent that such changes in fair value do not offset hedge ineffectiveness. For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive loss, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in noninterest income. Net cash flows from the interest rate swap on subordinated debentures designated as a hedging instrument in an effective hedge of cash flows are included in interest expense on subordinated debentures. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other noninterest income.

Amounts included in the condensed consolidated statements of operations related to interest rate derivatives designated as hedges of fair value are as follows:

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(Dollars in thousands)
Interest rate swap on brokered certificates of deposit:
Amount of gain included in interest expense on deposits		$	29			$	26			$	59			$	49
Amount of gain (loss) included in other noninterest income			—				(51	)			1				(481	)

Amounts included in the condensed consolidated statements of operations and in other comprehensive loss for the period related to interest rate derivatives designated as hedges of cash flows are as follows:

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(Dollars in thousands)
Interest rate swap on subordinated debenture:
Net loss included in interest expense on subordinated debt		$	(159	)		$	(104	)		$	(315	)		$	(159	)
Amount of (loss) gain recognized in other comprehensive income			(92	)			223				(191	)			205

An immaterial amount of ineffectiveness related to interest rate derivatives designated as hedges of cash flows was recognized in the condensed consolidated statements of operations during the reported periods. The accumulated net after-tax loss related to effective cash flow hedge included in accumulated other comprehensive income was $0.6 million as of June 30, 2010 and 2009.

Amounts included in the condensed consolidated statements of operations related to non-hedging interest rate swaps on commercial loans were not significant during any of the reported periods. As stated above, the Corporation enters into non-hedge-related derivative positions primarily to accommodate the business needs of its customers. Upon the origination of a derivative contract with a customer, the Corporation simultaneously enters into an offsetting derivative contract with a third party. The Corporation recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party. Because the Corporation acts only as an intermediary for its customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Corporation’s results of operations.

Gain (loss) included in noninterest income in the condensed consolidated statements of operations related to non-hedging derivative instruments are as follows:

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(Dollars in thousands)
Non-hedging derivatives:
Brokered certificates of deposit interest rate swap		$	25			$	(27	)		$	41			$	(72	)
Mortgage loan held for sale interest rate lock commitment			807				12				1,000				288
Mortgage loan forward sales commitments			(1,261	)			—				(1,261	)			—
Mortgage loan forward purchase commitments			209				—				209				—