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 MARCH 31, 2008

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

FOR THE TRANSITION PERIOD FROM                      TO                     

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

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, 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 þ		Non-accelerated filer o		Smaller reporting company o
	(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 March 31, 2008
	Common stock, $.001 par value		10,052,808

 

 

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			13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			29
ITEM 4. CONTROLS AND PROCEDURES			30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			31
ITEM 1A. RISK FACTORS			31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			31
ITEM 5. OTHER INFORMATION			31
ITEM 6. EXHIBITS			31
SIGNATURES			32
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)

		March 31,				December 31,
		2008				2007
		(UNAUDITED)
ASSETS
Cash and due from banks		$	67,057			$	52,983
Interest-bearing deposits in other banks			5,515				6,916
Federal funds sold			10,647				3,452
Investment securities available for sale			367,975				361,171
Tax lien certificates			12,085				15,615
Mortgage loans held for sale			41,789				33,408
Loans, net of unearned income			2,066,192				2,017,011
Less: Allowance for loan losses			(23,273	)			(22,868	)
Net loans			2,042,919				1,994,143
Premises and equipment, net			104,687				104,799
Accrued interest receivable			15,566				16,512
Stock in FHLB			19,227				14,945
Cash surrender value of life insurance			45,731				45,277
Goodwill and other intangibles			186,519				187,520
Other assets			44,182				48,684
TOTAL ASSETS		$	2,963,899			$	2,885,425
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	226,256			$	207,602
Interest-bearing			1,939,628				1,993,009
TOTAL DEPOSITS			2,165,884				2,200,611
Advances from FHLB			312,832				222,828
Federal funds purchased and security repurchase agreements			6,619				17,075
Notes payable			9,500				9,500
Junior subordinated debentures owed to unconsolidated subsidiary trusts			53,658				53,744
Accrued expenses and other liabilities			63,571				31,625
TOTAL LIABILITIES			2,612,064				2,535,383
STOCKHOLDERS’ EQUITY
Common stock, par value $.001 per share; authorized 15,000,000 shares; shares issued 10,373,556 and 10,380,658, respectively; outstanding 10,052,808 and 10,027,079, respectively			11				10
Surplus			329,008				329,232
Retained earnings			34,252				33,557
Accumulated other comprehensive income			966				174
Treasury stock, at cost - 320,749 and 347,536 shares respectively			(11,364	)			(12,309	)
Unearned ESOP stock			(582	)			(622	)
Unearned restricted stock			(456	)			—
TOTAL STOCKHOLDERS’ EQUITY			351,835				350,042
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,963,899			$	2,885,425

See Notes to Condensed Consolidated Financial Statements.

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

		Three Months Ended
		March 31,
		2008				2007
INTEREST INCOME
Interest and fees on loans		$	37,346			$	34,312
Interest on taxable securities			4,052				4,439
Interest on tax-exempt securities			430				129
Interest on federal funds sold			80				127
Interest and dividends on other investments			644				737
Total interest income			42,552				39,744
INTEREST EXPENSE
Interest on deposits			20,253				17,468
Interest on other borrowed funds			2,792				3,249
Interest on junior subordinated debentures			1,015				993
Total interest expense			24,060				21,710
NET INTEREST INCOME			18,492				18,034
Provision for loan losses			1,872				705
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			16,620				17,329
NONINTEREST INCOME
Service charges and fees on deposits			2,103				1,786
Mortgage banking income			1,266				950
Investment securities gains			402				243
Change in fair value of derivatives			1,050				(152	)
Increase in cash surrender value of life insurance			552				448
Other income			1,228				811
TOTAL NONINTEREST INCOME			6,601				4,086
NONINTEREST EXPENSES
Salaries and employee benefits			12,141				10,098
Occupancy, furniture and equipment expense			4,060				3,127
Amortization of core deposit intangibles			896				304
Merger-related costs			108				319
Other expenses			5,059				4,178
TOTAL NONINTEREST EXPENSES			22,264				18,026
Income before income taxes			957				3,389
INCOME TAX EXPENSE			262				1,091
NET INCOME		$	695			$	2,298
BASIC NET INCOME PER COMMON SHARE		$	0.07			$	0.27
DILUTED NET INCOME PER COMMON SHARE		$	0.07			$	0.26
Weighted average common shares outstanding			10,011				8,610
Weighted average common shares outstanding, assuming dilution			10,045				8,760

See Notes to Condensed Consolidated Financial Statements.

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

		Three Months Ended
		March 31,
		2008				2007
NET CASH USED BY OPERATING ACTIVITIES		$	(5,316	)		$	(3,142	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in other banks			1,401				(1,453	)
Net (increase) decrease in federal funds sold			(7,195	)			10,296
Proceeds from sales of securities available for sale			17,368				2,400
Proceeds from maturities of investment securities available for sale			71,607				16,253
Purchases of investment securities available for sale			(54,930	)			(6,326	)
Redemption of tax lien certificates			3,530				4,125
Net increase in loans			(55,890	)			(24,840	)
Purchases of premises and equipment			(4,245	)			(2,099	)
Proceeds from sale of premises and equipment			4,249				—
Proceeds from sale of repossessed assets			2,898				750
Increase in stock in FHLB			(4,281	)			(1,001	)
Other investing activities, net			—				(230	)
Net cash used by investing activities			(25,488	)			(2,125	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits			(34,641	)			(10,232	)
Net increase in FHLB advances and other borrowed funds			79,519				12,607
Payments made on notes payable			—				(4,802	)
Proceeds from notes payable			—				5,250
Net cash provided by financing activities			44,878				2,823
Net increase (decrease) in cash and due from banks			14,074				(2,444	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD			52,983				49,783
CASH AND DUE FROM BANKS AT END OF PERIOD		$	67,057			$	47,339

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, 2007. 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-month period ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The Condensed Consolidated Statement of Financial Condition at December 31, 2007, 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 14, 2008, included in the Corporation’s 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.

Restatement to Reflect 1-for-4 Reverse Stock Split

All disclosures, in this quarterly report, regarding common stock and related earnings per share have been retroactively restated for all periods presented to reflect a 1-for-4 reverse stock split effective April 28, 2008 (see Note 8).

Note 2 — Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 157

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Corporation adopted SFAS 157 on January 1, 2008 and the impact of this adoption is included in Note 9.

Statement of Financial Accounting Standards No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 would allow the Corporation to make an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after November 15, 2007. The Corporation evaluated SFAS 159 and determined that the fair value option should not be elected for any financial asset or liability reported on the Corporation’s consolidated statement of financial condition as of January 1, 2008 (date of adoption), nor has the Corporation applied the provisions of FAS 159 to any financial asset or liability recognized during the quarter ended March 31, 2008.

Statement of Financial Accounting Standards No. 141(R)

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations — a replacement of FASB No. 141.” SFAS 141R replaces SFAS 141, “Business Combinations,” and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be

Note 2 — Recent Accounting Pronouncements — (Continued)

determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, “Accounting for Contingencies.” SFAS 141R is expected to have an impact on the Corporation’s accounting for business combinations, if any, closing on or after January 1, 2009. Staff Accounting Bulletin No. 109

In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB No. 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments,” and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 became effective beginning January 1, 2008 and did not have a material effect on the Corporation’s financial position, results of operations or cash flows.

Statement of Financial Accounting Standards No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133.” SFAS 161 amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for the Corporation on January 1, 2009 and is not expected to have a significant impact on the Corporation’s financial position, results of operations or cash flows.

Note 3 — Acquisitions

The Corporation completed the acquisition of 100% of the outstanding stock of People’s Community Bancshares, Inc. (“People’s”), of Sarasota, Florida on July 27, 2007 in exchange for 1,658,781 shares (restated to reflect 1-for-4 reverse stock split) of the Corporation’s common stock valued at approximately $73,982,000. The shares were valued by using the average of the closing prices of the Corporation’s stock for several days prior to and after the terms of the acquisition were agreed to and announced. The total purchase price, which includes certain direct acquisition costs, was $76,429,000. As a result of the acquisition the Corporation now operates three banking locations in Sarasota and Manatee Counties, Florida. This area is a significant addition to the Corporation’s largest market, which was expanded in 2006 by the Kensington Bankshares, Inc., Tampa, Florida acquisition.

The People’s transaction resulted in $47,389,000 of goodwill allocated to the Florida reporting unit and $9,810,000 of core deposit intangibles. The goodwill acquired is not tax-deductible. The amount allocated to the core deposit intangible was determined by an independent valuation and is being amortized over an estimated useful life of ten years based on the undiscounted cash flow.

Pro forma Results of Operations

The results of operations of People’s subsequent to its acquisition date is included in the Corporation’s consolidated statements of income. The following pro forma information for the three-months ended March 31, 2007 reflects the Corporation’s pro forma consolidated results

Note 3 — Acquisitions — (Continued)

of operations as if the acquisition of People’s occurred at January 1, 2007, unadjusted for potential cost savings.

		Three Months
		Ended
(Dollars in thousands, except per share data)		March 31, 2007
Pro forma net interest income and noninterest income		$	25,488
Pro forma net income			3,233
Pro forma earnings per common share — basic		$	0.31
Pro forma earnings per common share — diluted			0.31

Note 4 — Segment Reporting

The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama Region consists of operations located throughout Alabama. The Florida Region consists of operations located primarily in the Tampa Bay area and 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. All of the corporate administrative costs and other banking activities have been removed from the Alabama Region. Administrative and other banking activities includes the results of the Corporation’s investment portfolio, home mortgage division, brokered deposits and borrowed funds positions.

The Corporation evaluates performance and allocates resources based on profit or loss from operations. There are no material inter-segment sales or transfers. Net interest income is used as the basis for performance evaluation rather than its components, total interest income 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, 2007. All costs, except corporate administration and income taxes, have been allocated to the reportable segments. Therefore, combined amounts agree to the consolidated totals (in thousands).

										Total								Superior
		Alabama				Florida				Alabama and				Administrative				Bancorp
		Region				Region				Florida				and Other				Combined
Three months ended March 31, 2008
Net interest income		$	6,998			$	9,621			$	16,619			$	1,873			$	18,492
Provision for loan losses			855				858				1,713				159				1,872
Noninterest income			1,862				450				2,312				4,289				6,601
Noninterest expense			7,626				5,486				13,112				9,152				22,264
Operating profit (loss)		$	379			$	3,727			$	4,106			$	(3,149	)			957
Income tax expense																			262
Net income																		$	695
Total assets		$	993,808			$	1,155,201			$	2,149,009			$	814,890			$	2,963,899
Three months ended March 31, 2007
Net interest income		$	9,424			$	8,531			$	17,955			$	79			$	18,034
Provision for loan losses			603				94				697				8				705
Noninterest income			1,737				312				2,049				2,037				4,086
Noninterest expense			6,079				3,080				9,159				8,867				18,026
Operating profit (loss)		$	4,479			$	5,669			$	10,148			$	(6,759	)			3,389
Income tax expense																			1,091
Net income																		$	2,298
Total assets		$	977,573			$	707,488			$	1,685,061			$	765,873			$	2,450,934

Note 5 — Net Income per Common Share

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

		Three Months Ended
		March 31,
		2008				2007
Numerator:
For basic and diluted, net income		$	695			$	2,298
Denominator:
For basic, weighted average common shares outstanding			10,011				8,610
Effect of dilutive stock options and restricted stock			34				150
Average diluted common shares outstanding			10,045				8,760
Basic net income per common share		$	.07			$	.27
Diluted net income per common share		$	.07			$	.26

Note 6 — Comprehensive Income

Total comprehensive income was $1,487,000 for the three-month period ended March 31, 2008, and $2,726,000 for the three-month period ended March 31, 2007. Total comprehensive income consists of net income and the net unrealized gain or loss on the Corporation’s available-for-sale investment securities portfolio arising during the period.

Note 7 — Income Taxes

The effective tax rate decreased in the three-month period ended March 31, 2008 primarily as a result of lower levels of pre-tax income. The difference in the effective tax rate in the three months ended March 31, 2008 and 2007, and the blended federal statutory rate of 34% and state tax rates of 5% and 6% is due primarily to tax-exempt income from investments and insurance policies. The Corporation adopted the provisions of FIN 48 as of January 1, 2007, the effect of which is described below.

FASB Interpretation No. 48

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards (“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 recognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation was effective for fiscal years beginning after December 15, 2006.

The Corporation adopted FIN 48 on January 1, 2007. As a result of the adoption, the Corporation recognized a charge of approximately $554,000 to the January 1, 2007 retained earnings balance. As of the adoption date, the Corporation had unrecognized tax benefits of $459,000, all of which, if recognized, would affect the effective tax rate. Also, as of the adoption date, the Corporation had accrued interest expense related to the unrecognized tax benefits of approximately $145,000. Accrued interest related to unrecognized tax benefits is recognized in income tax expense. Penalties, if incurred, will be recognized in income tax expense as well.

The Corporation and its subsidiaries are subject to U.S. federal income tax as well as to Alabama and Florida income taxes. The Corporation has concluded all U.S. federal income tax matters for years through 2002, including acquisitions.

All state income tax matters have been concluded for years through 2001. 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 anticipates that these examinations may be finalized in the foreseeable future. However, based on the status of these examinations, and the protocol of finalizing audits by the taxing authority, which could include formal legal proceedings, it is not possible to estimate the impact of any changes to the previously recorded uncertain tax positions. There have been no significant changes to the status of these examinations during the three-month period ended March 31, 2008.

Note 8 — Stockholders’ Equity

1-for-4 Reverse Stock Split

On April 28, 2008, the Corporation completed a 1-for-4 reverse split of its issued and outstanding shares of common stock, reducing the number of authorized shares of common stock from 60,000,000 to 15,000,000 and the number of common shares outstanding from 40,211,230 to 10,052,808. This action brings the Corporation’s authorized common shares and common shares outstanding more nearly in line with peer community banks. All disclosures in this quarterly report regarding common stock and related per share information have been retroactively restated for all periods presented to reflect the reverse stock split. The 1-for-4 reverse stock split was effective in the market as of the open of business April 28, 2008, and the Corporation’s temporary ticker symbol is SUPRD. The “D” will be removed from the ticker symbol as of the market’s opening on May 27, 2008.

Stock Incentive Plan

The Corporation established the Third Amended and Restated 1998 Stock Incentive Plan (the “1998 Plan”) for directors and certain key employees that provides for the granting of restricted stock and incentive and nonqualified options to purchase up to 625,000 (restated for 1-for-4 reverse stock split) shares of the Corporation’s common stock of which substantially all available shares have been granted. 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.

In April 2008, the Corporation’s stockholders approved the Superior Bancorp 2008 Incentive Compensation Plan (the “2008 Plan”) which succeeded the 1998 Plan. The purpose of the 2008 Plan is to provide additional incentive for our directors and key employees to further the growth, development and financial success of the Corporation and its subsidiaries by personally benefiting through the ownership of the Corporation’s common stock, or other rights which recognize such growth, development and financial success. The Corporation’s Board also believes the 2008 Plan will enable it to obtain and retain the services of directors and employees who are considered essential to its long-range success by offering them an opportunity to own stock and other rights that reflect the Corporation’s financial success. The maximum aggregate number of shares of common stock that may be issued or transferred pursuant to awards under the 2008 Plan is 300,000 (restated for 1-for-4 reverse stock split) shares, of which no more than 90,000 shares may be issued for “full value awards” (defined under the 2008 Plan to mean any awards permitted under the 2008 Plan that are neither stock options nor stock appreciation rights).Only those employees and directors who are selected to receive grants by the administrator may participate in the 2008 Plan.

During the first quarter of 2005, the Corporation granted 422,734 options to the new management team. These options have exercise prices ranging from $32.68 to $38.52 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 table below.

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. The risk-free interest rate is based on the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the underlying options. Expected volatility has been estimated based on historical data. The expected term has been estimated based on the five-year vesting date and change of control provisions. The Corporation used the following weighted-average assumptions for the three-month periods ended March 31, 2008 and 2007:

		2008				2007
Risk free interest rate			4.50	%			4.47	%
Volatility factor			29.11	%			29.34	%
Weighted average life of options (in years)			5.00				5.00
Dividend yield			0.00	%			0.00	%

Note 8 — Stockholders’ Equity — (Continued)

A summary of stock option activity as of March 31, 2008 and changes during the three months then ended is shown below:

										Weighted-
						Weighted-				Average
						Average				Remaining
						Exercise				Contractual				Aggregate
		Number				Price				Term				Intrinsic Value
Under option, January 1, 2008			802,048			$	32.28
Granted			2,875				18.56
Under option, March 31, 2008			804,293			$	33.03				6.46			$	—
Exercisable at end of period			694,649			$	31.76				5.21			$	—
Weighted-average fair value per option of options granted during the period		$	6.35

As of March 31, 2008, there was $828,000 of total unrecognized compensation expense related to the unvested awards. This expense will be recognized over a 25- to 30- month period unless the options vest earlier based on achievement of benchmark trading price levels. During the three-month periods ended March 31, 2008 and 2007, the Corporation recognized approximately $162,000 and $83,000, respectively, in compensation expense related to options granted.

In January 2008, members of the Corporation’s management received restricted common stock grants totaling 26,788 shares. These grants exclude certain senior executive management who received cash under the short-term management incentive plan in lieu of restricted stock. The grant date fair value of this restricted common stock is equal to $18.56 per share or $497,000 which will be recognized over a 24-month period as 50% of the stock vests on January 22, 2009 with the remaining 50% vesting on January 22, 2010. The outstanding shares of restricted common 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. If an executive’s employment terminates prior to a vesting date for any reason other than death, disability or a change in control, the unvested stock is forfeited pursuant to the terms of the restricted common stock agreement. Unvested restricted common stock becomes immediately vested upon death, disability or a change in control. Under the restricted common stock agreements, the restricted stock may not be sold or assigned in any manner during the vesting period, but the executive will have the rights of a shareholder with respect to the stock (i.e. vote, receive dividends, etc), prior to vesting.

Note 9 — Fair Value Measurements

In September 2006, the FASB issued SFAS 157 which replaces multiple existing definitions of fair value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding fair value measurements. SFAS 157 applies only to fair value measurements that already are required or permitted by other accounting standards and does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, which delayed until January 1, 2009, the effective date of SFAS 157 for nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis.

The adoption of SFAS 157 in the first quarter of 2008 did not have a material impact on the Corporation’s financial position or results of operations. The Corporation’s nonfinancial assets and liabilities that meet the deferral criteria set forth in FSP No. 157-2 include goodwill, core deposit intangibles, net property and equipment and other real estate, which primarily represents collateral that is received through troubled loans. The Corporation does not expect that the adoption of SFAS 157 for these nonfinancial assets and liabilities will have a material impact on its financial position or results of operations.

In accordance with the provisions of SFAS 157, the Corporation measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 prioritizes the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect management’s estimates about

Note 9 — Fair Value Measurements — (Continued)

the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset (in thousands).

		Assets
		Measured at				Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		March 31,				Identical Assets				Observable Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Available for sale securities		$	367,975			$	—			$	367,975			$	—
Derivative financial instruments, net			666				—				666				—
Total recurring basis measured assets		$	368,641			$	—			$	368,641			$	—

Valuation Techniques — Recurring Basis

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Corporation obtains fair value measurements from an independent pricing service. The fair value measurements consider observable market data that may include benchmark yield curves, reported trades, broker/dealer quotes, issuer spreads and credit information, among other inputs.

Derivative financial instruments. Derivative financial instruments are measured at fair value based on modeling that utilizes observable market inputs for various interest rates published by third-party leading financial news and data providers. This is observable data that represents the rates used by market participants for instruments entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.

Note 9 — Fair Value Measurements — (Continued)

Assets Recorded at Fair Value on a Nonrecurring Basis

The table below presents the assets measured at fair value on a nonrecurring basis categorized by the level of inputs used in the valuation of each asset (in thousands).

		Assets				Quoted Prices
		Measured at				in
		Fair Value				Active Markets for				Significant Other				Significant
		at				Identical				Observable				Unobservable
		March 31,				Assets				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Mortgage loans held for sale		$	41,789			$	—			$	41,789			$	—
Impaired loans, net of specific allowance			26,946				—				—				26,946
Total nonrecurring basis measured assets		$	68,735			$	—			$	41,789			$	26,946

Valuation Techniques — Nonrecurring Basis

Mortgage Loans Held for Sale. Mortgage loans held for sale are recorded at the lower of aggregate cost or fair value. Fair value is generally based on quoted market prices of similar loans and is considered to be Level 2 in the fair value hierarchy.

Impaired Loans. Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral typically includes real estate and/or business assets including equipment. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers approved and hired by the Corporation. The value of business equipment is based on an appraisal by qualified licensed appraisers approved and hired by the Corporation, if significant. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

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 March 31, 2008 condensed consolidated financial condition and results of operations for the three-month periods ended March 31, 2008 and 2007. All significant intercompany accounts and transactions have been eliminated. Our accounting and reporting policies conform to generally accepted accounting principles applicable to financial institutions.

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, 2007.

Recent Developments

On April 28, 2008, we completed a 1-for-4 reverse split of our issued and outstanding shares of common stock, reducing the number of authorized shares of common stock from 60,000,000 to 15,000,000 and the number of common shares outstanding from 40,211,230 to 10,052,808. This action brings our authorized common shares and common shares outstanding more nearly in line with peer community banks. All disclosures in this quarterly report regarding common stock and related per share information have been retroactively restated for all periods presented to reflect the reverse stock split. The 1-for-4 reverse stock split is effective in the market as of the open of business April 28, 2008, and our temporary ticker symbol is SUPRD. The “D” will be removed from the ticker symbol as of the market’s opening on May 27, 2008.

Overview

The entire banking industry is operating in an adverse environment relative to maximizing short-term performance. Factors such as the challenging credit cycle, housing softness, gloomy media coverage, weakened consumer confidence and dramatic Federal Reserve rate reductions provide a stiff headwind in 2008. Our management continues to adapt to these factors while remaining focused on taking the actions that management believes will ultimately result in enhanced shareholder value.

Our principal subsidiary is Superior Bank (“Bank”), a federal savings bank headquartered in Birmingham, Alabama, which operates 74 banking offices from Huntsville, Alabama to Venice, Florida and 22 consumer finance company offices in Alabama. Our Florida franchise currently has 31 branches. The Bank continues its de novo branch strategy with 18 of 20 planned branches opened in key Alabama and Florida market’s. Upon completion, the Bank will have invested approximately $25 to $30 million toward its de novo expansion program.

First quarter 2008 net income was $695,000, or $.07 per share, compared to $1.9 million for the fourth quarter of 2007 and $2.3 million for the first quarter of 2007. First quarter 2008 net income includes the effect of $1.4 million, net of tax effect, in new branch overhead expense and $564,000, net of tax effect, in core deposit intangible amortization compared to first quarter 2007 core deposit amortization of $192,000, net of tax effect. First quarter 2007 results do not include the effect of our acquisition of People’s, which was completed on July 27, 2007.

Our total assets were $2.964 billion at March 31, 2008, an increase of $79 million, or 2.72%, from $2.885 billion as of December 31, 2007. Our total deposits, excluding brokered certificates of deposit, at March 31, 2008, increased 1.2% (4.9% annualized) to $2.1 billion from December 31, 2007 and increased 24% from March 31, 2007. The acquisition of People’s accounted for approximately 16% of the deposit growth since March 31, 2007. As of March 31, 2008, our de novo branches accounted for approximately $208 million of core deposits, predominantly from new customer relationships. Customer dislocation resulting from recent merger activities of certain other financial institutions in our markets also contributed to the deposit performance. Loans increased to $2.1 billion at March 31, 2008, an increase of 2.4% (9.6% annualized) from December 31, 2007 and 23.3% from March 31, 2007.

With regard to credit quality at March 31, 2008, nonperforming assets (“NPAs”) were 1.81% of total loans plus NPAs compared to 1.47% at December 31, 2007, which is in line with management’s expectations. The $7.9 million NPA increase during the first quarter of 2008 was

predominantly located in our Florida segment, with the largest exposure being one relationship of approximately $1.3 million and several smaller real estate credits. The increase also included one real estate relationship in the Alabama segment of about $2.7 million in addition to several smaller credits.

Nonperforming loans (“NPLs”) to total loans increased to 1.49% at March 31, 2008 from 1.26% at December 31, 2007, with the increase primarily related to the construction and single-family residential portfolios, which collectively accounted for approximately 86% of the total increase. Allowance for loan losses to NPLs decreased to 75.42% at March 31, 2008 from 90.31% at December 31, 2007.

Overall past due loans declined during the first quarter with the 90 days past due (DPD) and still accruing category moving to 0.00% from 0.10% as a percentage of total loans at December 31, 2007. Loans in the 30-89 DPD category increased to 1.25% from 1.13% as a percentage of total loans at December 31, 2007.

Net loan charge-offs as a percentage of average loans were 0.29% during the first quarter of 2008, compared to 0.33% and 0.24% during the fourth quarter of 2007 and the year ended December 31, 2007, respectively. Of the $1.5 million net charge-offs in the first quarter of 2008, approximately 40% were 1-4 family mortgage-related, 24% were commercial real estate-related and 27% were in the consumer finance subsidiaries.

The provision for loan losses increased to $1.9 million in the first quarter of 2008, compared to $1.7 million in the fourth quarter of 2007 and $705,000 in the first quarter of 2007. This increase in the provision maintained the allowance for loan losses at 1.13% of net loans, or $23.3 million, at March 31, 2008, compared to 1.13% of net loans or $22.9 million, at December 31, 2007. Our management believes the allowance for loan losses at March 31, 2008 is appropriate to absorb any possible losses in the loan portfolio. Management’s assessment of our credit quality is based on various internal and external factors that affect the collectability of loans. Management is constantly monitoring and assessing these factors through a consistent methodology of estimating the allowance for loan losses.

Fair Value Measurements

In September 2006, the FASB issued SFAS 157 which replaces multiple existing definitions of fair value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding fair value measurements. SFAS 157 applies only to fair value measurements that already are required or permitted by other accounting standards and does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, which delayed until January 1, 2009, the effective date of SFAS 157 for nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis.

The adoption of SFAS 157 in the first quarter of 2008 did not have a material impact on our financial position or results of operations. Our nonfinancial assets and liabilities that meet the deferral criteria set forth in FSP No. 157-2 include goodwill, core deposit intangibles, net property and equipment and other real estate, which primarily represents collateral that is received in satisfaction of troubled loans. We do not expect that the adoption of SFAS 157 for these nonfinancial assets and liabilities will have a material impact on its financial position or results of operations.

In accordance with the provisions of SFAS 157, we measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 prioritizes the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect the management’s estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset (in thousands).

		Assets
		Measured at				Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		March 31,				Identical Assets				Observable Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Available for sale securities		$	367,975			$	—			$	367,975			$	—
Derivative financial instruments, net		666				—				666				—
Total recurring basis measured assets		$	368,641			$	—			$	368,641			$	—

Valuation Techniques — Recurring Basis

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable market data that may include benchmark yield curves, reported trades, broker/dealer quotes, issuer spreads and credit information, among other inputs.

Derivative financial instruments. Derivative financial instruments are measured at fair value based on modeling that utilizes observable market inputs for various interest rates published by third-party leading financial news and data providers. This is observable data that represents the rates used by market participants for instruments entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.

Assets Recorded at Fair Value on a Nonrecurring Basis

The table below presents the assets measured at fair value on a nonrecurring basis categorized by the level of inputs used in the valuation of each asset (in thousands).

						Quoted
		Assets				Prices in
		Measured at				Active Markets for				Significant Other				Significant
		Fair Value at				Identical				Observable				Unobservable
		March 31,				Assets				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Mortgage loans held for sale		$	41,789			$	—			$	41,789			$	—
Impaired loans			26,946				—				—				26,946
Total nonrecurring basis measured assets		$	68,735			$	—			$	41,789			$	26,946

Valuation Techniques — Nonrecurring Basis

Mortgage Loans Held for Sale. Mortgage loans held for sale are recorded at the lower of aggregate cost or fair value. Fair value is generally based on quoted market prices of similar loans and is considered to be Level 2 in the fair value hierarchy.

Impaired Loans. Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral typically includes real estate and/or business assets including equipment. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by our management. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by our management, if significant. Appraised and reported values may be discounted based on our management’s historical knowledge, changes in market conditions from the time of valuation, and/or our management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Results of Operations

Net income decreased $1.603 million, or 69.8%, to $695,000 for the three months ended March 31, 2008 (first quarter of 2008), from $2.298 million for the three months ended March 31, 2007 (first quarter of 2007). The following table presents key earnings data for the periods indicated:

		Three Months
		Ended March 31,
		2008				2007
		(Dollars in thousands, except per share data)
Superior Bancorp and Subsidiaries
Net income		$	695			$	2,298
Net income per common share (diluted)			0.07				0.26
Net interest margin			3.04	%			3.53	%
Net interest spread			2.76				3.22
Return on average assets			0.10				0.38
Return on average tangible assets			0.10				0.41
Return on average stockholders’ equity			0.80				3.37
Return on average tangible equity			1.70				6.33
Book value per share		$	35.14			$	32.14
Tangible book value per share			16.51				17.29
Banking Subsidiary, Superior Bank
Net income		$	1,677			$	3,283
Return on average assets			0.23	%			0.56	%
Return on average stockholders’ equity			1.71				4.34
Return on tangible equity			3.24				7.48

The decrease in our net income during the first quarter of 2008 compared to the first quarter of 2007 is primarily the result of increases in the provision for loan losses and noninterest expenses. The increase in provision for loan losses is the result of increased loan volume and charge-offs. The increase in noninterest expenses is the result of branch expansion and the People’s acquisition.

Net Interest Income.Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. The following table summarizes the changes in the components of net interest income for the periods indicated:

		Increase (Decrease) in
		First Quarter 2008 vs 2007
		Average				Income/				Yield/
		Balance				Expense				Rate
		(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income		$	402,918			$	3,034				(1.09	)%
Investment securities
Taxable			(32,878	)			(387	)			0.02
Tax-exempt			27,256				457				0.35
Total investment securities			(5,622	)			70				0.12
Federal funds sold			653				(47	)			(2.40	)
Other investments			(2,419	)			(93	)			(0.54	)
Total interest -earning assets		$	395,530				2,964				(0.81	)

		Increase (Decrease) in
		First Quarter 2008 vs 2007
		Average				Income/				Yield/
		Balance				Expense				Rate
		(Dollars in Thousands)
Interest-bearing liabilities:
Demand deposits		$	159,977				574				(0.52	)
Savings deposits			13,983				128				0.65
Time deposits			159,754				2,083				0.02
Other borrowings			26,664				(457	)			(1.27	)
Subordinated debentures			9,771				22				(1.57	)
Total interest-bearing liabilities		$	370,149				2,350				(0.35	)
Net interest income/net interest spread							614				(0.46	)%
Net yield on earning assets											(0.49	)%
Taxable equivalent adjustment:
Investment securities							156
Net interest income						$	458

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 March 31,
		2008												2007
		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)		$	2,070,312			$	37,346				7.26	%		$	1,667,394			$	34,312				8.35	%
Investment securities
Taxable			307,195				4,052				5.31				340,073				4,439				5.29
Tax-exempt (2)			39,972				652				6.56				12,716				195				6.21
Total investment securities			347,167				4,704				5.45				352,789				4,634				5.33
Federal funds sold			9,541				80				3.37				8,888				127				5.77
Other investments			45,669				644				5.67				48,088				737				6.21
Total interest-earning assets			2,472,689				42,774				6.96				2,077,159				39,810				7.77
Noninterest-earning assets:
Cash and due from banks			56,657												43,319
Premises and equipment			103,624												95,137
Accrued interest and other assets			287,435												226,006
Allowance for loan losses			(22,814	)											(18,900	)
Total assets		$	2,897,591											$	2,422,721

		Three Months Ended March 31,
		2008												2007
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
		(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	676,148			$	5,076				3.02	%		$	516,171			$	4,502				3.54	%
Savings deposits			57,393				233				1.63				43,410				105				0.98
Time deposits			1,249,440				14,944				4.81				1,089,686				12,861				4.79
Other borrowings			267,866				2,792				4.20				241,202				3,249				5.46
Subordinated debentures			53,707				1,015				7.60				43,936				993				9.17
Total interest-bearing liabilities			2,304,554				24,060				4.20				1,934,405				21,710				4.55
Noninterest-bearing liabilities:
Demand deposits			216,745												179,567
Accrued interest and other liabilities			24,942												32,330
Stockholders’ equity			351,350												276,419
Total liabilities and stockholders’ equity		$	2,897,591											$	2,422,721
Net interest income/net interest spread							18,714				2.76	%							18,100				3.22	%
Net yield on earning assets											3.04	%											3.53	%
Taxable equivalent adjustment:
Investment securities (2)							222												66
Net interest income						$	18,492											$	18,034

The following table sets forth, on a taxable equivalent basis, the effect that 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-month periods ended March 31, 2008 and 2007.

		Three Months Ended March 31,
		2008 vs. 2007 (1)
		Increase				Changes Due To
		(Decrease)				Rate				Volume
		(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans		$	3,034			$	(4,820	)		$	7,854
Interest on securities:
Taxable			(387	)			18				(405	)
Tax-exempt			457				11				446
Interest on federal funds			(47	)			(56	)			9
Interest on other investments			(93	)			(59	)			(34	)
Total interest income			2,964				(4,906	)			7,870
Expense from interest-bearing liabilities:
Interest on demand deposits			574				(723	)			1,297
Interest on savings deposits			128				86				42
Interest on time deposits			2,083				58				2,025
Interest on other borrowings			(457	)			(802	)			345
Interest on subordinated debentures			22				(185	)			207
Total interest expense			2,350				(1,566	)			3,916
Net interest income		$	614			$	(3,340	)		$	3,954

Noninterest income. Noninterest income increased $2.5 million, or 61.6%, to $6.6 million for the first quarter of 2008, from $4.1 million in the first quarter of 2007. The components of noninterest income for the first quarter of 2008 and 2007 consisted of the following:

		Three Months Ended March 31,
		2008				2007				% Change
		(Dollars in thousands)
Service charges and fees on deposits		$	2,103			$	1,786				17.75	%
Mortgage banking income			1,266				950				33.26
Investment securities gains			402				243				65.43
Change in fair value of derivatives			1,050				(152	)			790.79
Increase in cash surrender value of life insurance			552				448				23.21
Other noninterest income			1,228				811				51.42
Total		$	6,601			$	4,086				61.55	%

The increases in service charges on deposits and fees are primarily attributable to an increased customer base resulting from our acquisitions. The increase in mortgage banking income is the result of an increase in the volume of originations. The increase in other noninterest income is primarily due to increases in brokerage commissions and ATM network fees. The increase in brokerage commissions is the result of increased volume in our investment subsidiary, and the increase in ATM network fees is the result of increased volume related to new customers and additional ATM locations, acquired through acquisitions or new branch locations.

Noninterest expenses. Noninterest expenses increased $4.2 million, or 23.51%, to $22.2 million for the first quarter of 2008 from $18.0 million for the first quarter of 2007. This increase is primarily due to the People’s acquisition, and the opening of new branch locations. Our new branch locations added approximately $2.3 million to noninterest expenses during the first quarter of 2008. However, increases in the volume of net interest income and noninterest income are expected to begin offsetting these costs. Noninterest expenses included the following for the first quarters of 2008 and 2007:

		Three Months Ended March 31,
		2008				2007				% Change
		(Dollars in thousands)
Noninterest Expenses
Salaries and employee benefits		$	12,141			$	10,098				20.23	%
Occupancy, furniture and equipment expense			4,060				3,127				29.84
Amortization of core deposit intangibles			896				304				194.74
Merger-related costs			108				319				(66.14	)
Professional fees			436				461				(5.39	)
Insurance expense			640				364				75.91
Postage, stationery and supplies			602				626				(3.94	)
Communications expense			494				520				(4.92	)
Advertising expense			590				655				(10.02	)
Other operating expense			2,297				1,551				48.06
Total		$	22,264			$	18,026				23.51	%
Selected Key Ratios
Noninterest expense to average assets (1)			2.95	%			2.91	%
Efficiency ratio (1)			88.92				78.79

Income tax expense. We recognized income tax expense of $262,000 for the first quarter of 2008, compared to $1.1 million for the first quarter of 2007. Our effective tax rate decreased in 2008 compared to 2007 due to lower levels of income. The difference in the effective tax rates in the first quarter of 2008 and 2007 and the blended federal statutory rate of 34% and state tax rates between 5% and 6%, is primarily due to certain tax-exempt income from investments and insurance policies.

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. 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. 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 $1.9 million for the first quarter of 2008, an increase of $1.2 million or 165.5%, from $705,000 in the first quarter of 2007. During the first quarter of 2008, we had net charged-off loans totaling $1.5 million, compared to net charged-off loans of $620,000 in the first quarter of 2007. The annualized ratio of net charged-off loans to average loans was 0.29% the first quarter of 2008, compared to .15% for the first quarter of 2007, and .24% for the year ended December 31, 2007. The allowance for loan losses totaled $23.3 million, or 1.13% of loans, net of unearned income, at March 31, 2008, compared to $22.9 million, or 1.13% of loans, net of unearned income, at December 31, 2007. See “Financial Condition — Allowance for Loan Losses” for additional discussion.

Financial Condition

Total assets were $2.964 billion at March 31, 2008, an increase of $79 million, or 2.72%, from $2.885 billion as of December 31, 2007. Average total assets for the first quarter of 2008 were $2.898 billion, which was supported by average total liabilities of $2.546 billion and average total stockholders’ equity of $351 million.

Short-term liquid assets. Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) increased $19.9 million, or 31.4%, to $83.2 million at March 31, 2008 from $63.3 million at December 31, 2007. At March 31, 2008, short-term liquid assets comprised 2.81% of total assets, compared to 2.2% at December 31, 2007. 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 increased $6.8 million, or 1.88%, to $368.0 million at March 31, 2008, from $361.2 million at December 31, 2007. Average investment securities totaled $347.2 million for the first quarter of 2008 compared to $352.8 million for the first quarter of 2007. Investment securities were 14.6% of interest-earning assets at March 31, 2008, compared to 14.7% at December 31, 2007. The investment portfolio produced an average tax-equivalent yield of 5.45% for the first quarter of 2008, compared to 5.33% for the first quarter of 2007.

The following table presents the carrying value of the securities we held at the dates indicated.

Investment Portfolio

		Available for Sale
		March 31,				December 31,				Percent
		2008				2007				Change
		(Dollars in thousands)
U.S. agencies		$	34,338			$	94,215				(63.55	)%
State and political subdivisions			40,897				40,587				0.76
Mortgage-backed securities			254,705				191,378				33.09
Corporate debt & other securities			38,035				34,991				8.71
Total investment securities		$	367,975			$	361,171				1.88	%

Loans. Loans, net of unearned income, totaled $2.066 billion at March 31, 2008, an increase of 2.44%, or $49.0 million, from $2.017 billion at December 31, 2007. Mortgage loans held for sale totaled $41.8 million at March 31, 2008, an increase of $8.4 million from $33.4 million at December 31, 2007. Average loans, including mortgage loans held for sale, totaled $2.070 billion for the first quarter of 2008 compared to $1.668 billion for the first quarter of 2007. Loans, net of unearned income, were 81.9% of interest-earning assets at March 31, 2008, compared to 82.2% at December 31, 2007. The loan portfolio produced an average yield of 7.26% for the first quarter of 2008, compared to 8.35% for the first quarter of 2007.

The following table details the distribution of the loan portfolio by category as of March 31, 2008 and December 31, 2007:

DISTRIBUTION OF LOANS BY CATEGORY
(Dollars in thousands)

		March 31, 2008								December 31, 2007
						Percent of								Percent of
		Amount				Total				Amount				Total
Commercial and industrial		$	197,721				9.56	%		$	183,013				9.07	%
Real estate — construction and land development (1)			688,926				33.32				665,303				32.96
Real estate — mortgage
Single-family			534,893				25.87				540,277				26.77
Commercial			549,683				26.59				533,611				26.44
Other			43,296				2.09				41,535				2.06
Consumer			51,244				2.48				53,377				2.64
Other			1,857				.09				1,235				.06
Total loans			2,067,620				100.0	%			2,018,351				100.0	%
Unearned income			(1,428	)							(1,340	)
Allowance for loan losses			(23,273	)							(22,868	)
Net loans		$	2,042,919							$	1,994,143

		Residential				Commercial
		Development				Development				Other				Total
						(Dollars in thousands)
As of March 31, 2008
Alabama segment		$	187,253			$	70,053			$	17,850			$	275,156
Florida segment			182,972				184,378				25,127				392,477
Other			8,101				13,109				83				21,293
Total		$	378,326			$	267,540			$	43,060			$	688,926
As of December 31, 2007
Alabama segment		$	192,133			$	60,407			$	16,003			$	268,543
Florida segment			195,460				162,286				18,564				376,310
Other			7,929				12,521				—				20,450
Total		$	395,522			$	235,214			$	34,567			$	665,303