UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

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

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

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o  Accelerated Filer þ  Non-Accelerated Filer o

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 June 30, 2006
Common stock, $.001 par value		20,171,497

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			31
ITEM 4. CONTROLS AND PROCEDURES			31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			32
ITEM 1A. RISK FACTORS			32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			32
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			32
ITEM 5. OTHER INFORMATION			33
ITEM 6. EXHIBITS			33
SIGNATURES			34
EX-31.01 SECTION 302 CERTIFICATION OF THE CEO
EX-31.02 SECTION 302 CERTIFICATION OF THE CFO
EX-32.01 SECTION 906 CERTIFICATION OF THE CEO
EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

		June 30,				December 31,
		2006				2005
		(UNAUDITED)
ASSETS
Cash and due from banks		$	22,712			$	35,088
Interest-bearing deposits in other banks			5,191				9,772
Federal funds sold			9,055				—
Investment securities available for sale			233,554				242,306
Tax lien certificates			6,054				289
Mortgage loans held for sale			23,142				21,355
Loans, net of unearned income			1,080,713				963,253
Less: Allowance for loan losses			(12,311	)			(12,011	)
Net loans			1,068,402				951,242
Premises and equipment, net			59,452				56,017
Accrued interest receivable			7,593				7,081
Stock in FHLB			11,847				10,966
Cash surrender value of life insurance			39,841				39,169
Goodwill and other intangibles			11,998				12,090
Other assets			32,386				30,094
TOTAL ASSETS		$	1,531,227			$	1,415,469
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	103,696			$	92,342
Interest-bearing			1,036,569				951,354
TOTAL DEPOSITS			1,140,265				1,043,696
Advances from FHLB			201,090				181,090
Federal funds borrowed and security repurchase agreements			30,975				33,406
Notes payable			3,650				3,755
Junior subordinated debentures owed to unconsolidated subsidiary trusts			31,959				31,959
Accrued expenses and other liabilities			17,358				16,498
TOTAL LIABILITIES			1,425,297				1,310,404
STOCKHOLDERS’ EQUITY
Common stock, par value $.001 per share; authorized 50,000,000 shares; shares issued 20,357,446 and 20,221,456, respectively; outstanding 20,171,497 and 19,980,261, respectively			20				20
Surplus			88,986				87,979
Retained earnings			23,618				21,494
Accumulated other comprehensive loss			(4,949	)			(2,544	)
Treasury stock, at cost			(310	)			(341	)
Unearned ESOP stock			(1,435	)			(1,543	)
TOTAL STOCKHOLDERS’ EQUITY			105,930				105,065
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,531,227			$	1,415,469

See Notes to Condensed Consolidated Financial Statements.

SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(Dollars in thousands, except per share data)
INTEREST INCOME
Interest and fees on loans		$	20,254			$	15,590			$	38,672			$	30,468
Interest on taxable securities			2,749				2,945				5,510				5,870
Interest on tax exempt securities			90				59				167				117
Interest on federal funds sold			51				109				86				191
Interest and dividends on other investments			464				254				822				497
Total interest income			23,608				18,957				45,257				37,143
INTEREST EXPENSE
Interest on deposits			9,767				6,528				18,180				12,565
Interest on other borrowed funds			2,648				1,881				5,120				3,738
Interest on subordinated debentures			780				699				1,541				1,384
Total interest expense			13,195				9,108				24,841				17,687
NET INTEREST INCOME			10,413				9,849				20,416				19,456
Provision for loan losses			700				1,500				1,300				2,250
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			9,713				8,349				19,116				17,206
NONINTEREST INCOME
Service charges and fees on deposits			1,129				1,166				2,160				2,278
Mortgage banking income			708				762				1,238				1,208
Investment securities losses			—				(68	)			—				(977	)
Change in fair value of derivatives			(33	)			933				37				703
Increase in cash surrender value of life insurance			359				391				780				742
Insurance proceeds			—				5,000				—				5,000
Other income			664				510				1,114				987
TOTAL NONINTEREST INCOME			2,827				8,694				5,329				9,941
NONINTEREST EXPENSES
Salaries and employee benefits			5,803				5,927				11,671				11,329
Occupancy, furniture and equipment expense			1,739				2,059				3,586				4,040
Management separation costs			—				2,961				—				15,338
Other operating expenses			3,118				4,536				6,208				8,098
TOTAL NONINTEREST EXPENSES			10,660				15,483				21,465				38,805
Income (loss) before income taxes			1,880				1,560				2,980				(11,658	)
INCOME TAX EXPENSE (BENEFIT)			606				412				856				(4,645	)
NET INCOME (LOSS)			1,274				1,148				2,124				(7,013	)
PREFERRED STOCK DIVIDENDS			—				305				—				305
EFFECT OF EARLY CONVERSION OF PREFFERED STOCK			—				2,006				—				2,006
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS		$	1,274			$	(1,163	)		$	2,124			$	(9,324	)
BASIC NET INCOME (LOSS) PER COMMON SHARE		$	0.06			$	(0.06	)		$	0.11			$	(0.50	)
DILUTED NET INCOME (LOSS) PER COMMON SHARE		$	0.06			$	(0.06	)		$	0.10			$	(0.50	)
Weighted average common shares outstanding			20,129				18,726				20,073				18,562
Weighted average common shares outstanding, assuming dilution			20,757				18,726				20,716				18,562

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,
		2006				2005
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		$	549			$	(20,929	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in other banks			4,581				6,642
Net (increase) decrease in federal funds sold			(9,055	)			3,405
Proceeds from sales of securities available for sale			—				57,150
Proceeds from maturities of investment securities available for sale			7,412				20,105
Purchases of investment securities available for sale			(2,887	)			(53,609	)
Purchases of tax lien certificates			(5,765	)			—
Net (increase) decrease in loans			(118,460	)			28,985
Proceeds from sales of premises and equipment			1,104				3,055
Purchases of premises and equipment			(6,049	)			(511	)
Proceeds from sale of repossessed assets			1,070				2,618
Increase in other investments			(874	)			(34	)
Net cash (used) provided by investing activities			(128,923	)			67,806
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts			97,593				(26,711	)
Net increase (decrease) in FHLB advances and other borrowed funds			17,569				(21,299	)
Payments made on notes payable			(105	)			(105	)
Proceeds from sale of common stock			941				7,705
Cash dividends paid			—				(305	)
Net cash provided (used) by financing activities			115,998				(40,715	)
Net (decrease) increase in cash and due from banks			(12,376	)			6,162
Cash and due from banks at beginning of period			35,088				23,489
CASH AND DUE FROM BANKS AT END OF PERIOD		$	22,712			$	29,651

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 the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included. Operating results for the three- and six-month periods ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The condensed statement of financial condition at December 31, 2005, which has been derived from the financial statements audited by Carr, Riggs & Ingram, LLC, independent public accountants, as indicated in their report included in the Corporation’s Annual Report on Form 10-K, does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The Corporation amended its reports on Form 10-Q for the first, second and third quarters of 2005 in February 2006 due to inaccuracies in the original Form 10-Qs related to the Corporation’s accounting for certain derivative financial instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). In 2005 and prior years, the Corporation entered into interest rate swap agreements (“CD swaps”) to hedge the interest rate risk inherent in certain of its brokered certificates of deposit. From the inception of the hedging program, the Corporation applied a method of fair value hedge accounting under SFAS 133 to account for the CD swaps which allowed it to assume no ineffectiveness in these transactions (the so-called “short-cut” method). The Corporation concluded that the CD swaps did not qualify for this method in prior periods because the related CD broker placement fee was determined, in retrospect, to have caused the swaps not to have a fair value of zero at inception (which is required under SFAS 133 to qualify for the short-cut method). Therefore, any gains and losses attributable to the change in fair value are recognized in earnings during the period of change in fair value. The Corporation’s determination that such swaps did not qualify for hedge accounting under SFAS 133 did not have a material effect on its reported results of operations for the year ended December 31, 2004 or for prior periods, and thus the Corporation has not restated or amended such previously reported results for periods ended on or prior to December 31, 2004. (See Note 11)

Note 2 — Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 155

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”), which: (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit in the form of subordination are not embedded derivatives, and (5) amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125, to eliminate the prohibition of a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 will be applicable to the Corporation for periods beginning on or after January 1, 2007. The provisions of SFAS 155 are not expected to have a material impact on the Corporation.

Statement of Financial Accounting Standards No. 156

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”), which: (1) provides revised guidance on when a servicing asset and servicing liability should be recognized, (2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, (3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur, (4) upon initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value, and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. SFAS 156 will be applicable to the Corporation beginning January 1, 2007 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. The provisions of SFAS 156 are not expected to have a material impact on the Corporation.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective for fiscal years beginning after December 15, 2006. The Corporation is in the process of evaluating the impact, if any, the adoption of this interpretation will have on its financial statements.

Note 3 — Recent Developments

On March 6, 2006, the Corporation announced that it had signed a definitive agreement to merge with Kensington Bankshares, Inc. (“Kensington”). Kensington is the holding company for First Kensington Bank, a Florida state bank with nine branches in the Tampa Bay area. Under the terms of the merger agreement, the Corporation will issue 1.6 shares of its common stock for each share of Kensington stock and will issue additional common stock for certain outstanding Kensington stock options. Based on closing prices per share for the Corporation’s common stock for a period shortly before the merger agreement was executed, the transaction would be valued at approximately $71.2 million. The Tampa Bay area would be the Corporation’s largest market and has a higher projected population growth than any of its current banking markets. The merger is currently expected to occur during the third quarter of 2006. Completion of the merger is subject to approval by the stockholders of both corporations, to the receipt of required regulatory approvals, and to the satisfaction of usual and customary closing conditions.

On May 1, 2006, the Corporation announced that it had signed a definitive agreement to merge with Community Bancshares, Inc. (“Community”). Community is the holding company for Community Bank, an Alabama state bank with 18 branches located primarily in northeast Alabama. Under the terms of the merger agreement, the Corporation will issue 0.8974 shares of its common stock for each share of Community stock and will pay cash for certain outstanding Community stock options and warrants. Based on closing prices per share for the Corporation’s common stock for a period shortly before the merger agreement was executed, the transaction would be valued at approximately $98.0 million. The actual value at consummation will be based on the Corporation’s share price at that time. The merger is currently expected to occur during the fourth quarter of 2006. Completion of the merger is subject to approval by the stockholders of both corporations, to the receipt of required regulatory approvals, and to the satisfaction of usual and customary closing conditions.

Note 4 — Asset Sales

In May 2006, the Corporation sold two floors in its headquarters building (John Hand Building) realizing a $103,000 pre-tax gain. In June 2006, the Corporation sold two condominium units in its headquarters building, realizing a $62,000 pre-tax gain. Due to the recapture of $161,000 in tax credits realized in previous periods from the restoration of the John Hand Building, these pre-tax gains had no material impact on net income.

Note 5 — 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 region 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 to the Consolidated Financial Statements included in the Corporation’s Form 10-K for the year ended December 31, 2005. All costs have been allocated to the reportable segments. Therefore, combined amounts agree to the consolidated totals (in thousands).

		Alabama				Florida
		Region				Region				Combined
Three months ended June 30, 2006
Net interest income		$	6,536			$	3,877			$	10,413
Provision for loan losses			243				457				700
Noninterest income			2,579				248				2,827
Noninterest expense (1)			9,585				1,075				10,660
Income tax (benefit) expense			(222	)			828				606
Net (loss) income			(491	)			1,765				1,274
Total assets			1,214,545				316,682				1,531,227
Three months ended June 30, 2005
Net interest income		$	6,757			$	3,092			$	9,849
Provision for loan losses			1,379				121				1,500
Noninterest income (3)			8,365				329				8,694
Noninterest expense (1) (2)			14,456				1,027				15,483
Income tax (benefit) expense			(206	)			618				412
Net (loss) income			(507	)			1,655				1,148
Total assets			1,108,062				275,205				1,383,267
Six months ended June 30, 2006
Net interest income		$	12,895			$	7,521			$	20,416
Provision for loan losses			1,032				268				1,300
Noninterest income			4,835				494				5,329
Noninterest expense (1)			19,298				2,167				21,465
Income tax (benefit) expense			(928	)			1,784				856
Net (loss) income			(1,672	)			3,796				2,124
Six months ended June 30, 2005
Net interest income		$	13,535			$	5,921			$	19,456
Provision for loan losses			2,112				138				2,250
Noninterest income (3)			9,288				653				9,941
Noninterest expense (1) (2)			36,630				2,175				38,805
Income tax (benefit) expense			(5,845	)			1,200				(4,645	)
Net (loss) income			(10,074	)			3,061				(7,013	)

Note 6 — Net Income (Loss) per Common Share

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Numerator:
Net income (loss)		$	1,274			$	1,148			$	2,124			$	(7,013	)
Less preferred dividends			—				305				—				305
Less effect of preferred stock conversion			—				2,006				—				2,006
For basic and diluted, net income (loss)		$	1,274			$	(1,163	)		$	2,124			$	(9,324	)
Denominator:
For basic, weighted average common shares outstanding			20,129				18,726				20,073				18,562
Effect of dilutive stock options and restricted stock			628				—				643				—
Average diluted common shares outstanding			20,757				18,726				20,716				18,562
Basic net income (loss) per common share		$	.06			$	(.06	)		$	.11			$	(.50	)
Diluted net income (loss) per common share		$	.06			$	(.06	)		$	.10			$	(.50	)

Net loss applicable to common stockholders and net loss per common share for periods ended June 30, 2005 reflect the effects of the early conversion of 62,000 shares of the Corporation’s convertible preferred stock into 775,000 shares of common stock at a conversion price of $8.00 per share. Such conversion was effective June 30, 2005. As a result of such conversion, the excess of the market value of the common stock issued at the date of conversion over the aggregate issue price is reflected as a reduction in retained earnings with a corresponding increase in surplus, thereby reducing net income applicable to common stockholders for purposes of calculating earnings per common share. This non-cash charge did not affect total stockholders’ equity.

Common stock equivalents of 1,387,000 and 1,357,000 were not included in computing diluted net loss per common share for the three- and six-month periods ended June 30, 2005, respectively, because their effects were anti-dilutive.

Note 7 — Comprehensive (Loss) Income

Total comprehensive (loss) income was $(170,000) and $(281,000), respectively, for the three- and six-month periods ended June 30, 2006 and $3,059,000 and $(6,567,000), respectively, for the three- and six-month periods ended June 30, 2005. Total comprehensive (loss) income consists of net income (loss) and the unrealized gain or loss on the Corporation’s available-for-sale investment securities portfolio arising during the period.

Note 8 — Income Taxes

The difference between the effective tax rate and the federal statutory rate in 2006 and 2005 is primarily due to certain tax-exempt income. During the three-month period ended June 30, 2006, the Corporation incurred additional income tax expense of $161,000 due to the recapture of rehabilitation tax credits (see Note 4).

The Corporation’s federal and state income tax returns for the years 2000 through 2004 are open for review and examination by governmental authorities. In the normal course of these examinations, the Corporation is subject to challenges from governmental authorities regarding amounts of taxes due. The Corporation has received notices of proposed adjustments relating to state taxes due for the years 2002 and 2003, which include proposed adjustments relating to income apportionment of a subsidiary. Management believes adequate provision for income taxes has been recorded for all years open for review and intends to vigorously contest the proposed adjustments. To the extent that final resolution of the proposed adjustments results in significantly different conclusions from management’s current assessment of the proposed adjustments, the effective tax rate in any given financial reporting period may be materially different from the current effective tax rate.

Note 9 — Junior Subordinated Debentures

The Corporation has sponsored 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, 2010 and July 25, 2006, respectively.

The trust preferred securities held by the trusts qualify as Tier 1 capital for the Corporation under regulatory guidelines.

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

		June 30,				December 31,
		2006				2005
		(In thousands)
10.6% junior subordinated debentures owed to TBC Capital Statutory Trust II due September 7, 2030		$	15,464			$	15,464
6-month LIBOR plus 3.75% junior subordinated debentures owed to TBC Capital Statutory Trust III July 25, 2031			16,495				16,495
Total junior subordinated debentures owed to unconsolidated subsidiary trusts		$	31,959			$	31,959

As of June 30, 2006 and December 31, 2005, the interest rate on the $16,495,000 subordinated debentures was 8.56% and 7.67%, respectively.

Prior to the conversion of its subsidiary’s charter to a federal savings bank charter, the Corporation was required to obtain regulatory approval prior to paying any dividends on these trust preferred securities. The Federal Reserve approved the timely payment of the Corporation’s semi-annual distributions on its trust preferred securities in January, March, July and September 2005.

Note 10 — Stockholders’ Equity

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. During the second quarter of 2005, an additional 29,171 shares of this restricted stock were forfeited. On January 24, 2005, the Corporation issued 49,375 additional shares of restricted common stock to certain key employees. Under the terms of the management separation agreement entered into during 2005 (see Note 12), vesting was accelerated on 124,375 shares of restricted stock. As of June 30, 2006, 6,668 shares of unvested restricted stock issued to continuing directors remained outstanding. The outstanding shares of restricted stock 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 year ended December 31, 2005, the Corporation recognized $648,000 in restricted stock expense, primarily related to the accelerated vesting from the management separation agreements included in the amount of management separation costs. No restricted stock expense was recognized for the three- and six-month periods ended June 30, 2006. For the period ended June 30, 2005, the Corporation recognized $599,000, in restricted stock expense, of which $486,000 was related to the accelerated vesting from the management separation agreements and was included in the amount of management separation costs.

The Corporation adopted a leveraged employee stock ownership plan (the “ESOP”) effective May 15, 2002 that covers all eligible employees who are at least age 21 and have completed a year of service. As of June 30, 2006, the ESOP has been 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 by the Corporation secure the promissory note, which has been classified as a note payable on the Corporation’s statement of financial condition. As the debt is repaid, shares are released from collateral based on the proportion of debt service associated with the debt repaid. 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. 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 recognized by the Corporation with respect to the ESOP during the six-month periods ended June 30, 2006 and 2005 was $153,000 and $135,000, respectively. The ESOP shares as of June 30, 2006 were as follows:

		June 30, 2006
Allocated shares			82,028
Estimated shares committed to be released			13,350
Unreleased shares			178,022
Total ESOP shares			273,400
Fair value of unreleased shares		$	3,007,400

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion 25”). The new standard, which became effective for the Corporation in the first quarter of 2006, requires companies to recognize an expense in the statement of operations for the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation method. This expense will be recognized over the

period during which an employee is required to provide service in exchange for the award. SFAS 123R carries forward prior guidance on accounting for awards to non-employees. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately prior to the modification. The Corporation expects to recognize compensation expense for any stock awards granted after December 31, 2005. Since all of the Corporation’s stock option awards granted prior to December 31, 2005 have vested in full, no future compensation expense will be recognized on these awards. During the first quarter of 2005, the Corporation granted 1,690,937 options to the new management team. These options have exercise prices ranging from $8.17 to $9.63 per share and were granted outside of the stock incentive plan as part of the inducement package for new management. These shares are included in the tables below.

     The Corporation has established a stock incentive plan for directors and certain key employees that provides for the granting of restricted stock and incentive and nonqualified options to purchase up to 2,500,000 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 date. Some of the options granted under the plan in the past vested over a five-year period, while others vested based on certain benchmarks relating to the trading price of the Corporation’s common stock, with an outside vesting date of five years from the date of grant. More recent grants have followed this benchmark-vesting formula.

     The fair value of each option award is estimated on the date of grant based upon the Black-Scholes pricing model that uses the assumptions noted in the following table. Expected volatility has been estimated based on historical data. The expected term has been estimated based on the five-year vesting and ten-year term of the awards. During the six-month period ended June 30, 2006, no significant amounts of stock options were awarded. The Corporation used the following weighted-average assumptions for the six-month period ended June 30, 2006:

Risk-free interest rate			4.92	%
Volatility factor			.47	%
Weighted average life of options (in years)			7.00
Dividend yield			0.00	%

     A summary of stock option activity as of June 30, 2006 and changes during the six-month period then ended is set forth below:

										Weighted-
						Weighted-				Average
						Average				Remaining
						Exercise				Contractual				Aggregate
		Number				Price				Term				Intrinsic Value
Under option, beginning of period			3,031,946			$	7.81
Granted			33,500				11.34
Exercised			(140,818	)			6.35
Forfeited			(15,031	)			7.25
Under option, end of period			2,909,597			$	7.93				7.77			$	8,973,207
Exercisable at end of period			2,881,097			$	7.89				7.75			$	8,973,207
Weighted-average fair value per option of options granted during the period		$	6.29

The total intrinsic value of options exercised during the three- and six-month periods ended June 30, 2006 was $125,000 and $742,000, respectively. As of June 30, 2006, there was $163,000 of total unrecognized compensation expense related to the unvested awards. This expense will be recognized over a five-year period unless the shares vest earlier based on achievement of benchmark trading price levels. During the three- and six-month periods ended June 30, 2006, the Corporation recognized approximately $9,000 and $47,000, respectively, in compensation expense related to options granted.

Prior to January 1, 2006 the Corporation applied the disclosure-only provisions of SFAS 123, which allows an entity to continue to measure compensation costs for those plans using the intrinsic value-based method of accounting prescribed by APB Opinion 25. The Corporation elected to follow APB Opinion 25 and related interpretations in accounting for its employee stock options. Accordingly, compensation cost for fixed and variable stock-based awards is measured by the excess, if any, of the fair market price of the underlying stock over the amount the individual is required to pay. Compensation cost for fixed awards is measured at the grant date, while compensation cost for variable awards is estimated until both the number of shares an individual is entitled to receive and the exercise or purchase price are known (measurement date). No option-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro forma information below was determined as if the Corporation had accounted for its employee stock options under the fair value method of SFAS 123. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.

The Corporation’s pro forma information for the period prior to the adoption of SFAS 123R follows (in thousands, except earnings per share information):

		For the Three Months				For the Six Months
		Ended				Ended
		June 30, 2005				June 30, 2005
Net income (loss):
As reported		$	1,148			$	(7,013	)
Pro forma			(407	)			(10,729	)
Loss per common share:
As reported		$	(.06	)		$	(.50	)
Pro forma			(.15	)			(.70	)
Diluted loss per common share:
As reported		$	(.06	)		$	(.50	)
Pro forma			(.15	)			(.69	)

The fair value of the options granted was based upon the Black-Scholes pricing model. The Corporation used the following weighted average assumptions for the period ended June 30, 2005:

Risk-free interest rate			4.34	%
Volatility factor			.41	%
Weighted average life of options			7.0
Dividend yield			0.00	%

Note 11 — Derivative Instruments and Hedging Activities

The Corporation uses derivative financial instruments to assist in its interest rate risk management process. The Corporation’s derivative financial instruments include interest rate exchange contracts (“swaps”).

An interest rate swap is an agreement in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional principal amount with at least one stream based on a specified floating-rate index. The notional amount does not represent the direct credit exposure. The Corporation is exposed to credit-related losses in the event of non-performance by the counterparty on the interest rate exchange, but does not anticipate that any counterparty will fail to meet its payment obligation.

As of June 30, 2006 and December 31, 2005, the Corporation had entered into $46,500,000 notional amount of swaps (“CD swaps”) to hedge the interest rate risk inherent in certain of its brokered certificates of deposits (“brokered CDs”). The CD swaps are used to convert the fixed rate paid on the brokered CDs to a variable rate based upon three-month LIBOR. Prior to the first quarter of 2006, these transactions did not qualify for fair value hedge accounting under SFAS 133 (see Note 1). During the first quarter of 2006, the Corporation designated these CD swaps as fair value hedges. As fair value hedges, the net cash settlements from the designated swaps are

reported as part of net interest income. In addition, the Corporation will recognize in current earnings the change in fair value of both the interest rate swap and related hedged brokered CDs, with the ineffective portion of the hedge relationship reported in noninterest income. The fair value of the CD swaps is reported on the Condensed Consolidated Statements of Financial Condition in other liabilities and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. As of June 30, 2006, the amount of CD swaps designated as fair value hedges totaled $46,210,000.

Prior to the first quarter of 2006 and for the portion of CD swaps that are not designated as fair value hedges, the Corporation reported the change in the fair value of these CD swaps as a separate component of noninterest income. The fair value of the CD swaps is reported on the Condensed Consolidated Statement of Financial Condition in other liabilities.

As of June 30, 2006 and December 31, 2005, these CD swaps had a recorded negative fair value of $2,009,000 and $992,000 and a weighted average life of 8.40 and 8.89 years, respectively. The weighted average fixed rate (receiving rate) was 4.56% and the weighted average variable rate (paying rate) was 5.19% and 4.22% (LIBOR based), respectively.

The Corporation also has entered into an interest rate swap agreement with a notional amount of $15,000,000 to hedge the variability in cash flows on $15,000,000 million of FHLB borrowings. Under the terms of the interest rate swap, which matures in September 2006, the Corporation receives a floating interest rate based on LIBOR and pays a fixed rate of 4.33%. This contract, which is accounted for as a cash flow hedge, satisfies the criteria to use the “short-cut” method of accounting for hedging the variability in cash flow on FHLB borrowings due to changes in the LIBOR rate. The short-cut method allows the Corporation to assume that there is no ineffectiveness in the hedging relationship.

Note 12 — Management Separation Costs

On January 24, 2005, the Corporation entered into agreements with James A. Taylor and James A. Taylor, Jr. under which they would continue to serve as Chairman of the Board of the Corporation and as a director of the Corporation, respectively, but would cease their employment as officers and directors of the Corporation’s banking subsidiary.

Under the agreement with Mr. Taylor, in lieu of the payments to which he would have been entitled under his employment agreement, the Corporation paid Mr. Taylor $3,940,155 on January 24, 2005, and $3,152,124 in December 2005, and will pay $788,031 by January 24, 2007. The agreement also provides for the provision of certain insurance benefits to Mr. Taylor, the transfer of a “key man” life insurance policy to Mr. Taylor, and the maintenance of such policy by us for five years (with the cost of maintaining such policy included in the above amounts), in each case substantially as required by his prior employment agreement. This obligation to provide such payments and benefits to Mr. Taylor is absolute and will survive the death or disability of Mr. Taylor.

Under the agreement with Mr. Taylor, Jr., in lieu of the payments to which he would have been entitled under his employment agreement, the Corporation paid to Mr. Taylor, Jr., $1,382,872 on January 24, 2005. The agreement also provides for the provision of certain insurance benefits to Mr. Taylor, Jr. and for the immediate vesting of his unvested incentive awards and deferred compensation in each case substantially as required by his prior employment agreement. This obligation to provide such payments and benefits to Mr. Taylor, Jr. is absolute and will survive the death or disability of Mr. Taylor, Jr.

On July 21, 2005, the Corporation announced that it had bought out the employment contracts of the Chief Financial Officer and General Counsel, effective June 30, 2005. Under these agreements, in lieu of the payments to which they would have been entitled under their employment agreements, the Corporation paid a total of $2,392,343 on July 22, 2005. In addition, these officers became fully vested in stock options and restricted stock previously granted to them and in benefits under their deferred compensation agreements with the Corporation.

In connection with the above management separation transaction, the Corporation recognized pre-tax expenses of $3.0 million and $15.3 million for the three- and six- month periods ended June 30, 2005. At June 30, 2006 and

2005, the Corporation had $1.2 million and $6.7 million, respectively, of accrued liabilities related to these agreements.

Note 13 – Tax Lien Certificates

During the first six months of 2006, the Corporation purchased $5.8 million in tax lien certificates from various municipalities in Alabama, Illinois, New Jersey, and South Carolina. Tax lien certificates represent a priority lien against real property for which assessed real estate taxes are delinquent. Tax lien certificates are classified as nonmarketable investment securities and are carried at cost, which approximates realizable value.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Basis of Presentation

The following is a discussion and analysis of our June 30, 2006 consolidated financial condition and results of operations for the three- and six-month periods ended June 30, 2006 and 2005. All significant intercompany accounts and transactions have been eliminated. Our accounting and reporting policies conform to generally accepted accounting principles.

This information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in our Annual Report on Form 10-K for the year ended December 31, 2005.

Recent Developments

On March 6, 2006, we announced that we had signed a definitive agreement to merge with Kensington Bankshares, Inc. (“Kensington”). Kensington is the holding company for First Kensington Bank, a Florida state bank with nine branches in the Tampa Bay area. Under the terms of the merger agreement, we will issue 1.6 shares of our common stock for each share of Kensington stock and will issue additional common stock for certain outstanding Kensington stock options. Based on closing prices per share for our common stock for a period shortly before the merger agreement was executed, the transaction would be valued at approximately $71.2 million. The Tampa Bay area would be our largest market and has a higher projected population growth than any of our current banking markets. The merger is expected to be accretive to our earnings per share immediately upon completion, and is currently expected to occur in the third quarter of 2006. Completion of the merger is subject to approval by the stockholders of both corporations, to the receipt of required regulatory approvals, and to the satisfaction of usual and customary closing conditions.

On May 1, 2006, we announced that we had signed a definitive agreement to merge with Community Bancshares, Inc. (“Community”). Community is the holding company for Community Bank, an Alabama state bank with 18 branches located primarily in northeast Alabama. Under the terms of the merger agreement, we will issue 0.8974 shares of its common stock for each share of Community stock and will pay cash for certain outstanding Community stock options and warrants. Based on closing prices per share for our common stock for a period shortly before the merger agreement was executed, the transaction would be valued at approximately $98.0 million. The actual value at consummation will be based on our share price at that time. The merger is expected to be accretive to our earnings per share immediately upon completion, which is currently expected to occur in the fourth quarter of 2006. Completion of the merger is subject to approval by the stockholders of both corporations, to the receipt of required regulatory approvals, and to the satisfaction of usual and customary closing conditions.

Overview

Our principal subsidiary is Superior Bank, a federal savings bank headquartered in Birmingham, Alabama, which operates 26 banking offices in Alabama and the panhandle of Florida. Other subsidiaries include TBC Capital Statutory Trust II (“TBC Capital II”), a Connecticut statutory trust, TBC Capital Statutory Trust III (“TBC Capital III”), a Delaware business trust, and Morris Avenue Management Group, Inc. (“MAMG”), an Alabama corporation, all of which are wholly owned. TBC Capital II and TBC Capital III are 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 Superior Bank.

Our total assets were $1.531 billion at June 30, 2006, an increase of $115.8 million, or 8.2%, from $1.415 billion as of December 31, 2005. Our total loans, net of unearned income, were $1.081 billion at June 30, 2006, an increase of $117.5 million, or 12.2%, from $963.3 million as of December 31, 2005. Our total deposits were $1.140 billion at June 30, 2006, an increase of $96.6 million, or 9.3%, from $1.044 billion as of December 31, 2005. Our total stockholders’ equity was $105.9 million at June 30, 2006, an increase of $865,000, or 0.8%, from $105.1 million as of December 31, 2005.

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.

Management reviews the adequacy of the allowance for loan losses on a quarterly basis. The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. 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, our 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.

Results of Operations

Net income was $1.3 million for the three-month period ended June 30, 2006 (second quarter of 2006), compared to $1.1 million for the three-month period ended June 30, 2005 (second quarter of 2005). Basic and diluted net income (loss) per common share was $.06 and $(.06), respectively, for the second quarters of 2006 and 2005, based on weighted average common shares outstanding for the respective periods. The net loss per common share for the second quarter of 2005 reflects a $2.0 million effect from the early conversion of our convertible preferred stock (see Note 6 to the condensed consolidated financial statements). Return on average assets, on an annualized basis, was ..35% for the second quarter of 2006, compared to .33% for the second quarter of 2005. Return on average stockholders’ equity, on an annualized basis, was 4.84% for the second quarter of 2006, compared to 4.57% for the second quarter of 2005. Book value per share at June 30, 2006, was $5.25, compared to $5.26 at December 31, 2005. Tangible book value per share at June 30, 2006 was $4.66, compared to $4.65 at December 31, 2005.

The increase in our net income during the second quarter of 2006 compared to the second quarter of 2005 is primarily the result of an increase in net interest income and a decline in the provision for loan losses, offset slightly by a net decrease in noninterest income and noninterest expenses. Noninterest income for the second quarter of 2005 includes an increase in the fair value of derivatives of $933,000, compared to a decline in the fair value of derivatives of $33,000 in the second quarter of 2006, and also includes the receipt of insurance proceeds of $5.0 million, which was partially offset by the payment of certain expenses related to the management changes which occurred in the first quarter of 2005 and the write-down of certain other real estate (see Note 12 to the condensed consolidated financial statements and the information under the captions “Noninterest income” and “Noninterest expenses” below).

Net income was $2.1 million for the six-month period ended June 30, 2006 (first six months of 2006), compared to a $7.01 million net loss for the six-month period ended June 30, 2005 (first six months of 2005). Basic and diluted net income (loss) per common share was $.11 and $.10, respectively, for the first six months of 2006 and $(.50) for the first six months of 2005, based on weighted average common shares outstanding for the respective periods. The net loss per common share for the first six months of 2005 reflects $15.3 million in management separation costs (see Note 12 to the condensed consolidated financial statements) and the $2.0 million effect from the early conversion of our convertible preferred stock (see Note 6). Return on average assets, on an annualized basis, was .30% for the first six months of 2006 compared to (1.00%) for the first six months of 2005. Return on average stockholders’ equity, on an annualized basis, was 4.06% for the first six months of 2006 compared to (14.04%) for the first six months of 2005.

Other than the specific items previously mentioned that were recognized in the first six months of 2005, the increase in our net income for the first six months of 2006 compared to the first six months of 2005 is primarily the result of an increase in net interest income and a decline in the provision for loan losses, offset by a net decrease in noninterest income and noninterest expenses.

Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. Net interest income increased $564,000, or 5.7%, to $10.4 million for the second quarter of 2006 compared to $9.8 million for the second quarter of 2005. Net interest income increased primarily due to a $4.7 million increase in total interest income offset by a $4.1 million increase in total interest expense. The increase in total interest income is primarily due to a 114-basis point increase in the average interest rate on loans and a $102.4 million increase in the average volume of loans.

The increase in total interest expense is attributable to a 115-basis point increase in the average interest rate paid on interest-bearing liabilities and a $64.4 million increase in the volume of average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 4.22% for the second quarter of 2006, compared to 3.07% for the second quarter of 2005. Our net interest spread and net interest margin were 2.97% and 3.18%, respectively, for the second quarter of 2006, compared to 3.07% and 3.19% for the second quarter of 2005.

Average interest-earning assets for the second quarter of 2006 increased $77.9 million, or 6.3%, to $1.319 billion from $1.241 billion in the second quarter of 2005. Average interest-bearing liabilities increased by $64.4 million, or 5.4%, to $1.255 billion for the second quarter of 2006 from $1.191 billion for the second quarter of 2005. The ratio of average interest-earning assets to average interest-bearing liabilities was 105.2% and 104.3% for the second quarters of 2006 and 2005, respectively. Average interest-bearing assets produced a taxable equivalent yield of 7.19% for the second quarter of 2006, compared to 6.14% for the second quarter of 2005.

Net interest income increased $960,000, or 4.9%, to $20.4 million for the first six months of 2006 compared to $19.5 million for the first six months of 2005. Net interest income increased primarily due to an $8.1 million increase in total interest income offset by a $7.1 million increase in total interest expense. The increase in total interest income is primarily due to a 116-basis point increase in the average interest rate on loans and a $72.6 million increase in the average volume of loans.

The increase in total interest expense is attributable to a 112-basis point increase in the average interest rate paid on interest-bearing liabilities and a $24.9 million increase in the volume of average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 4.07% for the first six months of 2006, compared to 2.95% for the first six months of 2005. Our net interest spread and net interest margin were 2.99% and 3.19%, respectively, for the first six months of 2006, compared to 3.01% and 3.13% for the first six months of 2005.

Average interest-earning assets for the first six months of 2006 increased $35.8 million, or 2.8%, to $1.295 billion from $1.259 billion in the first six months of 2005. Average interest-bearing liabilities increased by $24.9 million, or 2.1%, to $1.232 billion for the first six months of 2006 from $1.207 billion for the first six months of 2005. The ratio of average interest-earning assets to average interest-bearing liabilities was 105.1% and 104.3% for the first six months of 2006 and 2005, respectively. Average interest-bearing assets produced a taxable equivalent yield of 7.06% for the first six months of 2006, compared to 5.96% for the first six months of 2005.

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

		Three Months Ended June 30,
		2006												2005
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
		(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)		$	1,047,829			$	20,254				7.75	%		$	945,407			$	15,590				6.61	%
Investment securities
Taxable			238,826				2,749				4.62				251,876				2,945				4.69
Tax-exempt (2)			9,322				136				5.87				6,616				89				5.40
Total investment securities			248,148				2,885				4.66				258,492				3,034				4.71
Federal funds sold			4,028				51				5.08				15,851				109				2.76
Other investments			19,208				464				9.69				21,571				254				4.72
Total interest-earning assets			1,319,213				23,654				7.19				1,241,321				18,987				6.14
Noninterest-earning assets:
Cash and due from banks			25,828												29,032
Premises and equipment			57,465												57,211
Accrued interest and other assets			78,501												87,290
Allowance for loan losses			(12,232	)											(12,783	)
Total assets		$	1,468,775											$	1,402,071
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	308,459			$	2,188				2.85			$	335,803			$	1,645				1.96
Savings deposits			19,882				10				0.20				27,078				10				0.15
Time deposits			682,352				7,569				4.45				605,584				4,873				3.23
Other borrowings			212,278				2,648				5.00				190,113				1,881				3.97
Subordinated debentures			31,959				780				9.79				31,959				699				8.77
Total interest-bearing liabilities			1,254,930				13,195				4.22				1,190,537				9,108				3.07
Noninterest-bearing liabilities:
Demand deposits			93,705												92,120
Accrued interest and other liabilities			14,663												18,356
Stockholders’ equity			105,477												101,058
Total liabilities and stockholders’ equity		$	1,468,775											$	1,402,071
Net interest income/net interest spread							10,459				2.97	%							9,879				3.07	%
Net yield on earning assets											3.18	%											3.19	%
Taxable equivalent adjustment:
Investment securities(2)							46												30
Net interest income						$	10,413											$	9,849

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 three months ended June 30, 2006 and 2005.

		Three Months Ended June 30, (1)
		2006 vs. 2005
		Increase				Changes Due To
		(Decrease)				Rate				Volume
		(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans		$	4,664			$	2,865			$	1,799
Interest on securities:
Taxable			(196	)			(44	)			(152	)
Tax-exempt			47				8				39
Interest on federal funds			(58	)			55				(113	)
Interest on other investments			210				241				(31	)
Total interest income			4,667				3,125				1,542
Expense from interest-bearing liabilities:
Interest on demand deposits			543				687				(144	)
Interest on savings deposits			—				3				(3	)
Interest on time deposits			2,696				2,019				678
Interest on other borrowings			767				529				238
Interest on subordinated debentures			81				81				—
Total interest expense			4,087				3,319				769
Net interest income		$	580			$	(194	)		$	773

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

		Six Months Ended June 30,
		2006												2005
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
		(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)		$	1,022,238			$	38,672				7.63	%		$	949,626			$	30,468				6.47	%
Investment securities
Taxable			241,353				5,509				4.60				264,178				5,870				4.48
Tax-exempt (2)			8,889				253				5.74				6,624				177				5.39
Total investment securities			250,242				5,762				4.64				270,802				6,047				4.50
Federal funds sold			3,520				86				4.93				14,726				191				2.62
Other investments			18,932				822				8.76				23,962				497				4.18
Total interest-earning assets			1,294,932				45,342				7.06				1,259,116				37,203				5.96
Noninterest-earning assets:
Cash and due from banks			27,241												30,748
Premises and equipment			56,850												58,076
Accrued interest and other assets			77,683												83,525
Allowance for loan losses			(12,169	)											(12,792	)
Total assets		$	1,444,537											$	1,418,673
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	318,406			$	4,338				2.75			$	319,371			$	2,755				1.74
Savings deposits			20,474				18				0.18				27,643				21				0.15
Time deposits			648,984				13,824				4.30				631,728				9,789				3.12
Other borrowings			212,137				5,119				4.87				196,323				3,738				3.84
Subordinated debentures			31,959				1,541				9.72				31,959				1,384				8.73
Total interest-bearing liabilities			1,231,960				24,840				4.07				1,207,024				17,687				2.95
Noninterest-bearing liabilities:
Demand deposits			92,583												93,792
Accrued interest and other liabilities			14,576												16,870
Stockholders’ equity			105,418												100,987
Total liabilities and stockholders’ equity		$	1,444,537											$	1,418,673
Net interest income/net interest spread							20,502				2.99	%							19,516				3.01	%
Net yield on earning assets											3.19	%											3.13	%
Taxable equivalent adjustment:
Investment securities(2)							86												60
Net interest income						$	20,416											$	19,456

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 six months ended June 30, 2006 and 2005.

		Six Months Ended June 30, (1)
		2006 vs. 2005
		Increase				Changes Due To
		(Decrease)				Rate				Volume
		(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans		$	8,204			$	5,751			$	2,453
Interest on securities:
Taxable			(361	)			155				(516	)
Tax-exempt			76				11				65
Interest on federal funds			(105	)			100				(205	)
Interest on other investments			325				448				(123	)
Total interest income			8,139				6,465				1,674
Expense from interest-bearing liabilities:
Interest on demand deposits			1,583				1,591				(8	)
Interest on savings deposits			(3	)			3				(6	)
Interest on time deposits			4,035				3,763				272
Interest on other borrowings			1,381				1,062				319
Interest on subordinated debentures			157				157				—
Total interest expense			7,153				6,576				577
Net interest income		$	986			$	(111	)		$	1,097

Noninterest income. Noninterest income decreased $5.9 million, or 67.5%, to $2.8 million for the second quarter of 2006 from $8.7 million for the second quarter of 2005, primarily due to the $5.0 million in insurance proceeds we received in the second quarter of 2005 and the $933,000 increase in the fair value of our interest rate swaps in the second quarter of 2005. The fair value adjustment for the second quarter of 2006 was ($33,000) (see Note 11). Service charges and fees on deposits decreased $37,000, or 3.2%, to $1.13 million in the second quarter of 2006 from $1.17 million in the second quarter of 2005. Service charges and fees on deposits increased $98,000 from the first quarter of 2006. Management is currently pursuing new accounts and customers through direct marketing and other promotional efforts to increase this source of revenue. Mortgage banking income decreased $54,000, or 7.1%, to $708,000 in the second quarter of 2006 from $762,000 in the second quarter of 2005, primarily due to more wholesale versus retail loan originations in 2006 as compared to 2005. Mortgage banking income for the second quarter of 2006 increased $177,000 from the first quarter of 2006.

Noninterest income decreased $4.6 million, or 46.4%, to $5.3 million for the first six months of 2006 from $9.9 million for the first six months of 2005, primarily due to the $5.0 million in insurance proceeds we received in the second quarter of 2005 and the $703,000 increase in the fair value of our interest rate swaps during the first six months of 2005, compared to an increase of only $37,000 in the first six months of 2006. These decreases from 2005 were offset slightly by the loss on the sale of securities in the first six months of 2005 of $(977,000). The investment portfolio losses were realized as a result of a $50 million sale of bonds in the investment portfolio that closed in April 2005. We reinvested the proceeds in bonds intended to enhance the yield and cash flows of our investment securities portfolio. The new investment securities were classified as available for sale. Service charges and fees on deposits decreased $118,000, or 5.2%, to $2.2 million in the first six months of 2006 from $2.3 million in the first six months of 2005. Mortgage banking income increased slightly by $30,000, or 2.5%, to $1.24 million in the first six months of 2006 from $1.21 million in the first six months of 2005.

Noninterest expenses. Noninterest expenses decreased $4.8 million, or 31.1%, to $10.6 million for the second quarter of 2006 from $15.5 million for the second quarter of 2005. This decrease is primarily due to $3.0 million in

management separation costs and $1.0 million in write-downs and losses on other real estate realized in the second quarter of 2005. The management separation costs primarily included severance payments, accelerated vesting of restricted stock and professional fees (see Note 12 to the condensed consolidated financial statements). Salaries and benefits decreased $124,000, or 2.1%, to $5.8 million for the second quarter of 2006 from $5.9 million for the second quarter of 2005. Occupancy and equipment expenses decreased $354,000, or 17.2%, to $1.7 million for the second quarter of 2006 from $2.1 million for the second quarter of 2005. Other operating expenses decreased $1.4 million in the second quarter of 2006 primarily due to the $1.0 million write-down on other real estate in the second quarter of 2005 described above.

Noninterest expenses decreased $17.3 million, or 44.7%, to $21.5 million for the first six months of 2006 from $38.8 million for the first six months of 2005. This decrease is primarily due to the management separation costs of $15.3 million incurred in the first six months of 2005. The management separation costs primarily included severance payments, accelerated vesting of restricted stock and professional fees (see Note 12 to the condensed consolidated financial statements). Salaries and benefits increased $342,000, or 3.0%, to $11.7 million for the first six months of 2006 from $11.3 million for the first six months of 2005. Occupancy and equipment expenses decreased $454,000, or 11.2%, to $3.6 million for the first six months of 2006 from $4.0 million for the first six months of 2005. This decline is primarily due to a reduction in depreciation expense attributable to assets being sold or becoming fully depreciated and the effect of budget initiatives implemented by management. Other operating expenses decreased $1.9 million primarily due to the $1.0 million write-down of other real estate previously mentioned and the $355,000 loss on the sale of our corporate aircraft in the first quarter of 2005.

Income tax expense. We recognized income tax expense of $606,000 for the second quarter of 2006, compared to $412,000 for the second quarter of 2005. The primary reason for the increase in our income tax expense for the quarter was due to the $161,000 tax credit recapture related to the sale of condominium units in our corporate headquarters building in the second quarter of 2006 (See Note 4 to the condensed consolidated financial statements). We recognized $856,000 in income tax expense for the first six months of 2006, compared to an income tax benefit of $4.6 million for the first six months of 2005 based on a pre-tax loss of $11.7 million. The difference in the effective tax rate and the federal statutory rate of 34% for the three- and six-month periods ended June 30, 2006 and 2005 is due primarily to certain tax-exempt income from investments and insurance policies.

Our federal and state income tax returns for the years 2000 through 2004 are open for review and examination by governmental authorities. In the normal course of these examinations, we are subject to challenges from governmental authorities regarding amounts of taxes due. We have received notices of proposed adjustments relating to state taxes due for the years 2002 and 2003, which include proposed adjustments relating to income apportionment of a subsidiary. Management believes adequate provision for income taxes has been recorded for all years open for review and intends to vigorously contest the proposed adjustments. To the extent that final resolution of the proposed adjustments results in significantly different conclusions from management’s current assessment of the proposed adjustments, the effective tax rate in any given financial reporting period may be materially different from the current effective tax rate.

Provision for Loan Losses. The provision for loan losses represents the amount determined by management to be 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 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 chief credit officer. 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”) No. 114 to determine the appropriate reserve allocation. Management compares the investment in an impaired loan with the present value of expected future cash flows 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 $700,000 for the second quarter of 2006, a decrease of $800,000, or 53.3%, from $1.5 million in the second quarter of 2005. The decrease from 2005 is due to the identification of approximately $3.2 million in classified loans in the second quarter of 2005 and charge-offs in the second quarter of 2005 related to the reassessment of collateral values on certain nonperforming commercial credits and the settlement of a disputed collateral lien. The provision for loan losses was $1.3 million for the first six months of 2006, a decrease of $950,000, or 42.2%, from $2.3 million in the first six months of 2005.

During the second quarter of 2006, we had net charged-off loans totaling $388,000, compared to net charged-off loans of $2.2 million in the second quarter of 2005. The annualized ratio of net charged-off loans to average loans was 0.15% and 0.20% for the three- and six-month periods ended June 30, 2006, compared to 0.93% and 0.54 % for the three and six-month periods ended June 30, 2005. The allowance for loan losses totaled $12.3 million, or 1.14% of loans, net of unearned income at June 30, 2006, compared to $12.0 million, or 1.25% of loans, net of unearned income, at December 31, 2005. See “Financial Condition — Allowance for Loan Losses” for additional discussion.

Financial Condition

Total assets were $1.531 billion at June 30, 2006, an increase of $115.8 million, or 8.2%, from $1.415 billion as of December 31, 2005. Average total assets for the first six months of 2006 were $1.445 billion, which was supported by average total liabilities of $1.339 billion and average total stockholders’ equity of $105.4 million.

Short-term liquid assets. Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) decreased $7.9 million, or 17.6%, to $37.0 million at June 30, 2006 from $44.9 million at December 31, 2005. At June 30, 2006, short-term liquid assets comprised 2.4% of total assets, compared to 3.2% at December 31, 2005. We continually monitor our liquidity position and will increase or decrease our short-term liquid assets as we deem necessary.

Investment Securities. Total investment securities decreased $8.7 million, or 3.6%, to $233.6 million at June 30, 2006, from $242.3 million at December 31, 2005. Mortgage-backed securities, which comprised 36.1% of the total investment portfolio at June 30, 2006, decreased $7.4 million, or 8.0%, to $84.4 million from $91.8 million at December 31, 2005. Investments in U.S. agency securities, which comprised 41.0% of the total investment portfolio at June 30, 2006, decreased $1.7 million, or 1.8 %, to $95.8 million from $97.5 million at December 31, 2005. During the first six months of 2005, we had a $50 million sale of bonds in the investment portfolio that closed in April 2005. We reinvested the proceeds in bonds intended to enhance the yield and cash flows of our investment securities portfolio. The new investment securities were classified as available for sale. The total investment portfolio at June 30, 2006 comprised 17.1% of all interest-earning assets compared to 19.4% at December 31, 2005, and produced an average taxable equivalent yield of 4.64 % for the first six months of 2006 and 4.50% for the first six months of 2005.

Tax lien certificates. During the first six months of 2006, we purchased $5.8 million in tax certificates from various municipalities in Alabama, Illinois, New Jersey, and South Carolina. Tax lien certificates represent a priority lien against real property for which assessed real estate taxes are delinquent. Tax lien certificates are classified as nonmarketable investment securities and are carried at cost, which approximates realizable value.

Loans. Loans, net of unearned income, totaled $1.1 billion at June 30, 2006, an increase of 12.2%, or $117.5 million, from $963.3 million at December 31, 2005. Mortgage loans held for sale totaled $23.1 million at June 30, 2006, an increase of $1.8 million from $21.3 million at December 31, 2005. Average loans, including mortgage loans held for sale, totaled $1.022 billion for the first six months of 2006 compared to $949.6 million for the first six months of 2005. Loans, net of unearned income, comprised 78.9% of interest-earning assets at June 30, 2006, compared to

77.2% at December 31, 2005. Mortgage loans held for sale comprised 1.7% of interest-earning assets at June 30, 2006 and at December 31, 2005. The loan portfolio produced an average yield of 7.63% for the first six months of 2006, compared to 6.47% for the first six months of 2005.

The following table details the distribution of the loan portfolio by category as of June 30, 2006 and December 31, 2005:

DISTRIBUTION OF LOANS BY CATEGORY
(Dollars in thousands)

		June 30, 2006								December 31, 2005
						Percent of								Percent of
		Amount				Total				Amount				Total
Commercial and industrial		$	135,395				12.5	%		$	135,454				14.0	%
Real estate — construction and land development			410,058				37.9				326,418				33.8
Real estate — mortgage
Single-family			279,410				25.8				243,183				25.2
Commercial			207,665				19.2				210,611				21.8
Other			28,722				2.6				27,503				2.9
Consumer			20,431				1.9				21,122				2.2
Other			641				.1				498				.1
Total loans			1,082,322				100.0	%			964,789				100.0	%
Unearned income			(1,609	)							(1,536	)
Allowance for loan losses			(12,311	)							(12,011	)
Net loans		$	1,068,402							$	951,242

Premises and Equipment, net. Premises and equipment totaled $59.5 million at June 30, 2006, an increase of 6.1%, or $3.4 million, from $56.0 million at December 31, 2005. The increase is due to asset purchases of $6.0 million, primarily attributable to two parcels of land to build two new branches ($2.7 million), purchase of a former branch bank building for a new branch bank ($1.8 million), and other equipment, offset by depreciation ($1.5 million) and the sale of assets ($1.1 million) (see Note 4 to the condensed consolidated financial statements).

Deposits. Noninterest-bearing deposits totaled $103.7 million at June 30, 2006, an increase of 12.3%, or $11.4 million, from $92.3 million at December 31, 2005. Noninterest-bearing deposits comprised 9.1% of total deposits at June 30, 2006, compared to 8.8% at December 31, 2005. Of total noninterest-bearing deposits, $78.3 million, or 75.6%, were in the Alabama branches, while $25.3 million, or 24.4%, were in the Florida branches.

Interest-bearing deposits totaled $1.037 billion at June 30, 2006, an increase of 9.0%, or $85.2 million, from $951.4 million at December 31, 2005. Interest-bearing deposits averaged $987.9 million for the first six months of 2006 compared to $978.7 million for the first six months of 2005. The average rate paid on all interest-bearing deposits during the first six months of 2006 was 3.71%, compared to 2.59% for the first six months of 2005. Of total interest-bearing deposits, $840.0 million, or 81.0%, were in the Alabama branches, while $196.6 million, or 19.0%, were in the Florida branches.

Borrowings. Advances from the Federal Home Loan Bank (“FHLB”) totaled $201.1 million at June 30, 2006 and $181.1 million at December 31, 2005. Borrowings from the FHLB were used primarily to fund growth in the loan portfolio and have a weighted average interest rate of approximately 5.14% at June 30, 2006. The advances are secured by FHLB stock, agency securities and a blanket lien on certain residential real estate loans and commercial loans.

Junior Subordinated Debentures. We have sponsored two trusts, TBC Capital Statutory Trust II (“TBC Capital II”) and TBC Capital Statutory Trust III (“TBC Capital III”), of which we own 100% of the common stock. The trusts were formed for the purpose of issuing mandatory 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, 2010 and July 25, 2006, respectively.

The trust preferred securities held by the trusts qualify as Tier 1 capital under regulatory guidelines.

Consolidated debt obligations related to subsidiary trusts holding solely our debentures follow:

		June 30, 2006				December 31, 2005
		(In thousands)
10.6% junior subordinated debentures owed to TBC Capital Statutory Trust II due September 7, 2030		$	15,464			$	15,464
6-month LIBOR plus 3.75% junior subordinated debentures owed to TBC Capital Statutory Trust III due July 25, 2031			16,495				16,495
Total junior subordinated debentures owed to unconsolidated subsidiary trusts		$	31,959			$	31,959