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 September 30, 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 (Do not check if a smaller reporting company)			Smaller reporting company 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 September 30, 2008
Common stock, $.001 par value		10,064,941

 

 

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			17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			41
ITEM 4. CONTROLS AND PROCEDURES			42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			42
ITEM 1A. RISK FACTORS			42
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			42
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			43
ITEM 5. OTHER INFORMATION			43
ITEM 6. EXHIBITS			43
SIGNATURES			44
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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)

		September 30,				December 31,
		2008				2007
		(UNAUDITED)
ASSETS
Cash and due from banks		$	88,035			$	52,983
Interest-bearing deposits in other banks			6,564				6,916
Federal funds sold			3,038				3,452
Investment securities available for sale			334,502				361,171
Tax lien certificates			18,877				15,615
Mortgage loans held for sale			15,292				33,408
Loans, net of unearned income			2,219,041				2,017,011
Less: Allowance for loan losses			(27,670	)			(22,868	)
Net loans			2,191,371				1,994,143
Premises and equipment, net			104,003				104,799
Accrued interest receivable			15,188				16,512
Stock in FHLB			24,965				14,945
Cash surrender value of life insurance			47,789				45,277
Goodwill and other intangibles			184,442				187,520
Other assets			69,611				48,684
TOTAL ASSETS		$	3,103,677			$	2,885,425
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	220,553			$	207,602
Interest-bearing			2,004,976				1,993,009
TOTAL DEPOSITS			2,225,529				2,200,611
Advances from FHLB			440,327				222,828
Federal funds purchased and security repurchase agreements			5,989				17,075
Note payable			10,000				9,500
Subordinated debentures			60,940				53,744
Accrued expenses and other liabilities			19,019				31,625
TOTAL LIABILITIES			2,761,804				2,535,383
STOCKHOLDERS’ EQUITY
Common stock, par value $.001 per share; authorized 15,000,000 shares; shares issued 10,391,748 and 10,380,658, respectively; outstanding 10,064,941 and 10,027,079, respectively			10				10
Surplus			331,860				329,232
Retained earnings			28,586				33,557
Accumulated other comprehensive (loss) income			(6,441	)			174
Treasury stock, at cost — 321,485 and 347,536 shares, respectively			(11,370	)			(12,309	)
Unearned ESOP stock			(487	)			(622	)
Unearned restricted stock			(285	)			—
TOTAL STOCKHOLDERS’ EQUITY			341,873				350,042
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,103,677			$	2,885,425

See Notes to Condensed Consolidated Financial Statements.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
INTEREST INCOME
Interest and fees on loans		$	36,664			$	40,486			$	110,717			$	109,783
Interest on taxable securities			4,106				4,271				12,302				12,805
Interest on tax-exempt securities			430				276				1,291				543
Interest on federal funds sold			17				91				114				373
Interest and dividends on other investments			663				875				2,039				2,304
Total interest income			41,880				45,999				126,463				125,808
INTEREST EXPENSE
Interest on deposits			16,010				21,410				52,972				57,659
Interest on other borrowed funds			3,290				3,617				9,098				9,636
Interest on subordinated debentures			954				1,066				2,887				3,062
Total interest expense			20,254				26,093				64,957				70,357
NET INTEREST INCOME			21,626				19,906				61,506				55,451
Provision for loan losses			2,305				1,179				10,143				2,884
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			19,321				18,727				51,363				52,567
NONINTEREST INCOME
Service charges and fees on deposits			2,425				2,090				6,721				5,774
Mortgage banking income			820				970				3,117				3,052
Investment securities (loss) gain			(8,541	)			—				(7,072	)			242
Change in fair value of derivatives			141				202				773				169
Increase in cash surrender value of life insurance			583				481				1,689				1,381
Gain on extinguishment of liabilities			—				—				2,918				—
Other income			1,359				1,181				4,247				2,931
TOTAL NONINTEREST INCOME			(3,213	)			4,924				12,393				13,549
NONINTEREST EXPENSES
Salaries and employee benefits			12,379				10,724				36,577				30,959
Occupancy, furniture and equipment expense			4,434				3,506				12,614				9,650
Amortization of core deposit intangibles			896				494				2,688				1,102
Loss on extinguishment of debt			—				1,469				—				1,469
Merger-related costs			—				103				118				530
Loss on termination of ESOP			—				158				—				158
Other expenses			6,199				4,836				17,449				13,504
TOTAL NONINTEREST EXPENSES			23,908				21,290				69,446				57,372
(Loss) income before income taxes			(7,800	)			2,361				(5,690	)			8,744
INCOME TAX (BENEFIT) EXPENSE			(1,292	)			911				(719	)			3,027
NET (LOSS) INCOME		$	(6,508	)		$	1,450			$	(4,971	)		$	5,717
BASIC NET (LOSS) INCOME PER COMMON SHARE		$	(0.65	)		$	0.15			$	(0.50	)		$	0.64
DILUTED NET (LOSS) INCOME PER COMMON SHARE		$	(0.65	)		$	0.15			$	(0.50	)		$	0.63
Weighted average common shares outstanding			10,023				9,693				10,017				8,975
Weighted average common shares outstanding, assuming dilution			10,023				9,770				10,017				9,092

See Notes to Condensed Consolidated Financial Statements.

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

		Nine Months Ended
		September 30,
		2008				2007
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	28,439			$	1,515
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in other banks			352				3,932
Net decrease in federal funds sold			414				21,849
Proceeds from sales of securities available for sale			37,633				18,378
Proceeds from maturities of investment securities available for sale			100,906				63,345
Purchases of investment securities available for sale			(129,229	)			(47,772	)
Purchase (redemption) of tax lien certificates			(3,262	)			2,378
Net increase in loans			(233,613	)			(146,015	)
Net cash received in business combinations			—				1,231
Purchases of premises and equipment			(10,193	)			(9,839	)
Proceeds from sale of premises and equipment			7,637				5,535
Proceeds from sale of repossessed assets			5,522				2,492
Increase in stock in FHLB			(10,020	)			(3,206	)
Other investing activities, net			(1,090	)			1,455
Net cash used by investing activities			(234,943	)			(86,237	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			24,760				33,872
Net increase in FHLB advances and other borrowed funds			206,296				53,642
Payments made on notes payable			(9,500	)			(6,045	)
Proceeds from notes payable			10,000				9,268
Proceeds from issuance of subordinated debenture			10,000				22,680
Principal payment of subordinated debenture			—				(16,495	)
Purchase of treasury stock			—				(9,223	)
Proceeds from sale of common stock			—				639
Net cash provided by financing activities			241,556				88,338
Net increase in cash and due from banks			35,052				3,616
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD			52,983				49,783
CASH AND DUE FROM BANKS AT END OF PERIOD		$	88,035			$	53,399

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- and nine-month periods ended September 30, 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 9).

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 10.

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 would 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 SFAS 159 to any financial asset or liability recognized during the nine-month period ended September 30, 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”). 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 determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an

Note 2 — Recent Accounting Pronouncements — (Continued)

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 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”). SFAS 161 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) 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 will become 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 acquisition of Kensington Bankshares, Inc., in Tampa, Florida.

The People’s transaction resulted in $47,313,000 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.

Note 3 — Acquisitions — (Continued)

Pro forma Results of Operations

The results of operations of People’s subsequent to its acquisition date are included in the Corporation’s consolidated statements of operations. The following pro forma information for the nine months ended September 30, 2007 reflects the Corporation’s pro forma consolidated results of operations as if the acquisition of People’s occurred at January 1, 2007, unadjusted for potential cost savings.

		Nine Months
		Ended
(Dollars in thousands, except per share data)		September 30, 2007
Pro forma net interest income and noninterest income		$	72,585
Pro forma net income			6,226
Pro forma earnings per common share — basic		$	0.60
Pro forma earnings per common share — diluted			0.60

Note 4 — Investment Securities

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

		Available for Sale
		September 30,				December 31,				Percent
		2008				2007				Change
		(Dollars in thousands)
U.S. agencies		$	6,743			$	94,215				(92.84	)%
State and political subdivisions			39,301				40,587				(3.17	)
Mortgage-backed securities (MBS)			262,438				191,378				37.13
Corporate debt and other securities			26,020				34,991				(25.64	)
Total investment securities		$	334,502			$	361,171				(7.38	)%

		Net Unrealized Gain (Loss)
		September 30,				December 31,				Dollar
		2008				2007				Change Pre-tax
		(Dollars in thousands)
U.S. agencies		$	111			$	1,011			$	(900	)
State and political subdivisions			(2,097	)			(173	)			(1,924	)
Mortgage-backed securities (MBS)			(4,302	)			194				(4,496	)
Corporate debt and other securities			(5,003	)			(1,892	)			(3,111	)
Net unrealized loss		$	(11,291	)		$	(860	)		$	(10,431	)

At September 30, 2008, a net unrealized after-tax loss of $6,441,000 on the investment securities portfolio was reflected in net accumulated other comprehensive loss, an element of the Corporation’s capital. This compares to a net unrealized after-tax loss of $542,000 at December 31, 2007.

Changes in current market conditions, such as interest rates and the economic uncertainties in the mortgage, housing and banking industries, have severely constricted the structured securities market. The secondary market for various types of securities has been limited and has negatively impacted securities values. Quarterly, the Corporation reviews each investment security segment noted in the table below to determine the nature of the decline in the value of investment securities and evaluates if any of the underlying securities has experienced other-than-temporary impairment (“OTTI”). The following table provides further detail of the investment securities portfolio at September 30, 2008.

Note 4 — Investment Securities — Continued

		Amortized								Unrealized Gain
(Dollars in thousands)		Cost				Fair Value				(Loss)
September 30, 2008
U.S. agency and agency MBS — AAA rated		$	244,144			$	244,004			$	(140	)
Municipal securities			41,398				39,301				(2,097	)
Non-agency MBS — AAA rated			27,574				23,521				(4,053	)
Non-agency MBS — A and B2 rated			1,656				1,656				—
Bank and pooled trust preferred securities			24,399				19,650				(4,749	)
Corporate securities			6,059				5,807				(252	)
Fannie Mae and Freddie Mac preferred stock			563				563				—
Total		$	345,793			$	334,502			$	(11,291	)

The unrealized losses associated with the U.S. agency and agency MBS securities are caused by changes in interest rates and are not considered credit-related since the contractual cash flows of these investments are backed by the full faith and credit of the U.S. government. Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these securities approach maturity.

The unrealized losses in the municipal securities portfolio are due to widening credit spreads caused by concerns about the bond insurers associated with these securities. In addition, municipal securities were adversely impacted by changes in interest rates. This portfolio segment is not experiencing any credit problems at September 30, 2008. The Corporation currently believes that all contractual cash flows will be received on this portfolio.

The non-agency MBS securities portfolio has experienced various levels of price declines during 2008. The AAA rated non-agency MBS securities have experienced price declines due to the current market environment and the currently limited secondary market for such securities. No losses are expected in this portfolio at September 30, 2008. The Corporation currently believes all contractual cash flows on these securities will be received. During the third quarter of 2008, the Corporation recognized a $314,000, net of tax, non-cash OTTI charge on a non-agency MBS which experienced a significant rating downgrade.

The bank and pooled trust preferred securities prices continue to decline due to reduced demand for these securities as their average lives have lengthened and from the increased supply due to forced liquidations from some market participants. Additionally, there has been little secondary market trading for these types of securities. At September 30, 2008, the Corporation believes that the credit quality of these securities remains adequate to absorb further economic declines, and these securities remain investment grade. As a result, the Corporation currently believes all contractual cash flows will be received on this portfolio.

The unrealized losses in the corporate securities portfolio are associated with the widening spreads in the financial sector of the corporate bond market. At September 30, 2008, all of the securities are current as to principal and interest payments, and the Corporation currently expects them to remain so in the foreseeable future.

On September 7, 2008, the U.S. Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) announced that FHFA was placing Fannie Mae and Freddie Mac under conservatorship. At September 30, 2008, the Corporation held in its available-for-sale investment portfolio preferred securities issued by Fannie Mae and Freddie Mac with a cost basis of $8,611,000. After the conservatorship, these securities currently trade at five to seven percent of par value. The Corporation does not hold any common stock or other equity securities issued by Fannie Mae or Freddie Mac. In light of the significant decline in the market value of these securities due to the takeover of Fannie Mae and Freddie Mac, and as it is unclear at this time if the value of the securities will improve, the Corporation recognized a $7,387,000, net of tax, non-cash OTTI charge on these investments during the third quarter of 2008. Under federal tax law that was in effect at September 30, 2008, the losses recognized on the Fannie Mae and Freddie Mac preferred stock were considered capital losses rather than ordinary losses (See Note 8 below). As such, only the amount of these losses that could be offset by recognized capital gains was included in the third quarter of 2008 income tax benefit.

Note 4 — Investment Securities — Continued

For further details regarding investment securities at December 31, 2007, refer to Notes 1 and 3 of the Consolidated Financial Statements in the Corporation’s Form 10-K for the year ended December 31, 2007. The Corporation will continue to evaluate the investment ratings in the securities portfolio, severity in pricing declines, market price quotes along with timing and receipt of amounts contractually due. Based upon these and other factors, the securities portfolio may experience further impairment. At September 30, 2008, management currently has the intent and ability to retain investment securities with unrealized losses until the decline in value has been recovered.

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 Alabama. The Florida Region consists of operations located primarily in the Tampa Bay area and 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. Administrative and other banking activities include the results of the Corporation’s investment portfolio, mortgage banking 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 September 30, 2008
Net interest income		$	8,726			$	9,687			$	18,413			$	3,213			$	21,626
Provision for loan losses			1,175				1,145				2,320				(15	)			2,305
Noninterest income			1,984				465				2,449				(5,662	)			(3,213	)
Noninterest expense			7,834				5,238				13,072				10,836				23,908
Operating profit (loss)		$	1,701			$	3,769			$	5,470			$	(13,270	)			(7,800	)
Income tax benefit																			(1,292	)
Net loss																		$	(6,508	)
Total assets		$	1,085,022			$	1,168,301			$	2,253,323			$	850,354			$	3,103,677
Three months ended September 30, 2007
Net interest income		$	9,614			$	10,593			$	20,207			$	(301	)		$	19,906
Provision for loan losses			1,794				837				2,631				(1,452	)			1,179
Noninterest income			1,851				490				2,341				2,583				4,924
Noninterest expense			6,116				3,962				10,078				11,212				21,290
Operating profit (loss)		$	3,555			$	6,284			$	9,839			$	(7,478	)			2,361
Income tax expense																			911
Net income																		$	1,450
Total assets		$	1,026,579			$	1,126,161			$	2,152,740			$	750,051			$	2,902,791

Note 5 — Segment Reporting — (Continued)

										Total								Superior
		Alabama				Florida				Alabama and				Administrative				Bancorp
		Region				Region				Florida				and Other				Combined
Nine Months ended September 30, 2008
Net interest income		$	24,353			$	28,415			$	52,768			$	8,738			$	61,506
Provision for loan losses			2,977				2,663				5,640				4,503				10,143
Noninterest income			5,587				1,405				6,992				5,401				12,393
Noninterest expense			22,928				16,129				39,057				30,389				69,446
Operating profit (loss)		$	4,035			$	11,028			$	15,063			$	(20,753	)			(5,690	)
Income tax benefit																			(719	)
Net loss																		$	(4,971	)
Nine Months ended September 30, 2007
Net interest income		$	28,010			$	27,145			$	55,155			$	296			$	55,451
Provision for loan losses			2,832				1,187				4,019				(1,135	)			2,884
Noninterest income			5,262				1,152				6,414				7,135				13,549
Noninterest expense			18,483				10,060				28,543				28,829				57,372
Operating profit (loss)		$	11,957			$	17,050			$	29,007			$	(20,263	)			8,744
Income tax expense																			3,027
Net income																		$	5,717

Note 6 —Net (Loss) Income per Common Share

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Numerator:
For basic and diluted, net (loss) income		$	(6,508	)		$	1,450			$	(4,971	)		$	5,717
Denominator:
For basic, weighted average common shares outstanding			10,023				9,693				10,017				8,975
Effect of dilutive stock options and restricted stock			—				77				—				117
Average diluted common shares outstanding			10,023				9,770				10,017				9,092
Basic net (loss) income per common share		$	(.65	)		$	.15			$	(.50	)		$	.64
Diluted net (loss) income per common share		$	(.65	)		$	.15			$	(.50	)		$	.63

Diluted net income per common share takes into consideration the pro forma dilution assuming certain outstanding unvested restricted stock, unexercised stock option awards and warrants were exercised into common shares. For the three- and nine-month periods ending September 30, 2008, these common stock equivalents totaling 92,086 and 55,494 shares, respectively, were not included in computing diluted earnings per share, because their effects were antidilutive.

Note 7 — Comprehensive (Loss) Income

Total comprehensive (loss) income was $(9,811,000) and $(11,586,000) for the three- and nine-month periods ended September 30, 2008, respectively, and $3,358,000 and $6,201,000 for the three- and nine-month periods ended September 30, 2007, respectively. Total comprehensive (loss) income consists of net (loss) income 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 effective tax rate decreased in the three- and nine-month periods ended September 30, 2008 primarily as a result of lower levels of pre-tax income. The difference in the effective tax rate in the three- and nine-month periods ended September 30, 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. In addition, under federal tax law that was in effect at September 30, 2008 the losses recognized on the Fannie Mae and Freddie Mac preferred stock (discussed in Note 4 above) were considered capital losses. As such, only the amount of this loss that could be offset by recognized capital gains was included in the third quarter 2008 as a deferred tax benefit, with the remaining deferred tax benefit offset by a valuation allowance. As enacted on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) included a section which changed these losses from capital to ordinary for federal income tax purposes. This change will allow Superior Bank to recognize approximately $2,300,000 in deferred tax benefit in the fourth quarter of 2008.

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 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 2004, 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 nine-month period ended September 30, 2008.

Note 9 — Stockholders’ Equity

1-for-4 Reverse Stock Split

On April 28, 2008, the Corporation completed a 1-for-4 reverse split of its 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 opening of trading on April 28, 2008.

Note 9 — Stockholders’ Equity — (Continued)

Issuance of Subordinated Debt and Related Warrant

On September 17, 2008, the Corporation’s subsidiary, Superior Bank, entered into an Agreement to Purchase Subordinated Notes (the “Agreement”) with Durden Enterprises, LLC (the “Purchaser”). Pursuant to the terms of the Agreement, Superior Bank issued to the Purchaser a $10,000,000 principal amount 9.5% Subordinated Note due September 15, 2018 (the “Note”), and the Corporation issued to the Purchaser a warrant (the “Warrant”) to purchase up to 1,000,000 shares of the Corporation’s common stock, $.001 par value per share, at a price of $7.53 per share. The exercise price for the Warrant was based on the average of the closing prices of the Corporation’s common stock for the ten trading days immediately preceding September 17, 2008. Interest on the Note is payable quarterly. The Purchaser may, subject to regulatory approval, accelerate the payment of principal and interest if there is an event of default under the terms of the Note. Events of default are limited to the commencement of voluntary or involuntary bankruptcy or similar proceedings with respect to Superior Bank. Beginning on September 15, 2013, Superior Bank may redeem all or a portion of the Note on any interest payment date at a price equal to 100% of the principal amount of the redeemed portion of the Note plus accrued but unpaid interest.

The fair value of the Warrant of $2,553,000 was determined using the Black-Scholes option-pricing model. The value of the Warrant is being amortized into interest expense over the term of the Agreement. The Warrant is exercisable at any time prior to the close of business on September 15, 2013. The Corporation agreed to register with the Securities and Exchange Commission the stock that would be issued to the Purchaser upon the exercise of the Warrant. Superior Bank also granted to the Purchaser an option to purchase up to $10,000,000 in additional subordinated notes and receive additional warrants in the future on similar terms and conditions with such changes as are necessary to reflect market conditions at that time. K. Earl Durden, the managing member of the Purchaser, is a retired director of the Corporation and Superior Bank.

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.

Note 9 — Stockholders’ Equity — (Continued)

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 nine-month periods ended September 30, 2008 and 2007:

		2008				2007
Risk free interest rate			3.62	%			4.49	%
Volatility factor			34.77	%			29.11	%
Weighted average life of options (in years)			5.00				5.00
Dividend yield			0.00	%			0.00	%

A summary of stock option activity as of September 30, 2008 and changes during the nine 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			84,875				10.88
Forfeited			(15,375	)			32.52
Under option, September 30, 2008			871,548			$	30.93				6.34			$	—
Exercisable at end of period			678,528			$	31.78				4.34			$	—
Weighted-average fair value per option of options granted during the period		$	3.94

As of September 30, 2008, there was $806,000 of total unrecognized compensation expense related to the unvested awards. This expense will be recognized over the next two-to 33-month period unless the options vest earlier based on achievement of benchmark trading price levels. During the three-and nine-month periods ended September 30, 2008, the Corporation recognized approximately $170,000 and $491,000, respectively, in compensation expense related to options granted. During the three- and nine-month periods ended September 30, 2007, the Corporation recognized approximately $164,000 and $308,000, 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 in the aggregate, 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. During the three- and nine-month periods ended September 30, 2008, the Corporation recognized approximately $87,000 and $212,000, respectively, in compensation expense related to restricted stock. 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. the right to vote, receive dividends, etc), prior to vesting.

Note 10 — Fair Value Measurements

In September 2006, the FASB issued SFAS 157 (see Note 2 above) 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

Note 10 — Fair Value Measurements — (Continued)

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 No. 157-2 (“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.

On October 10, 2008, the FASB issued FSP No. 157-3 with the objective of clarifying the application of SFAS 157 in a market that is not active and to provide an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Effective immediately for the Corporation’s interim financial statements as of September 30, 2008, the implementation of FSP No. 157-3 did not have a material impact on 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 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 and Liabilities Recorded at Fair Value on a Recurring Basis

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

						Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		September 30,				Identical Assets				Observable Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Available for sale securities		$	334,502			$	563			$	312,420			$	21,519
Derivative assets			199				—				199				—
Total recurring basis measured assets		$	334,701			$	563			$	312,619			$	21,519
Derivative liabilities		$	139			$	—			$	139			$	—
Total recurring basis measured liabilities		$	139			$	—			$	139			$	—

Valuation Techniques — Recurring Basis

Securities Available for Sale. When quoted prices are available in an active market, securities are classified as Level 1. These securities include investments in Fannie Mae and Freddie Mac preferred stock. For securities reported at fair value utilizing Level 2 inputs the Corporation obtains fair value measurements from an independent pricing service. These 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. In certain cases where there is limited activity, securities are classified as Level 3 within the valuation hierarchy. These securities include primarily bank and pooled trust preferred securities.

Note 10 — Fair Value Measurements — (Continued)

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 leading third-party 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.

Changes in Level 3 fair value measurements

The tables below include a roll-forward of the Condensed Consolidated Statement of Financial Condition amounts for the nine months ended September 30, 2008, including changes in fair value for financial instruments within Level 3 of the valuation hierarchy. Level 3 financial instruments typically include unobservable components, but may also include some observable components that may be validated to external sources. The gains or (losses) in the following table may include changes to fair value due in part to observable factors that may be part of the valuation methodology.

Level 3 assets measured at fair value on a recurring basis

		Available for
(in thousands)		Sale Securities
Balance at January 1, 2008 (date of adoption)		$	—
Transfer into Level 3 during third quarter 2008			25,956
Total net losses for the year-to-date included in other comprehensive loss			(4,437	)
Balance at September 30, 2008		$	21,519
Net realized losses included in net loss for the year-to-date relating to Level 3 assets held at September 30, 2008		$	—

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 Prices
						in
		Fair Value				Active Markets for				Significant Other				Significant
		at				Identical				Observable				Unobservable
		September 30,				Assets				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Mortgage loans held for sale		$	15,292			$	—			$	15,292			$	—
Impaired loans, net of specific allowance			43,071				—				—				43,071
Total nonrecurring basis measured assets		$	58,363			$	—			$	15,292			$	43,071

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 determined based on appraisals 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.

Note 11 — Gain on Extinguishment of Liabilities

During the second quarter of 2008, the Corporation recognized two separate gains from the extinguishment of approximately $5,800,000 in liabilities. The first gain related to a settlement of a retirement agreement with a previous executive officer under which the Corporation had a remaining unfunded obligation to pay approximately $6,200,000 in benefits over a 17-year period. This obligation was settled through a cash settlement payment of $3,000,000 with a recognized pre-tax gain of $574,000. The second gain related to a forfeiture of benefits owed to a former executive officer under the Community Bancshares, Inc. Benefit Restoration Plan (see Note 20 to the Consolidated Financial Statements included in the Corporation’s 2007 Form 10-K) that resulted in a pre-tax gain of $2,344,000.

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

Basis of Presentation

The following is a discussion and analysis of our September 30, 2008 condensed consolidated financial condition and results of operations for the three- and nine-month periods ended September 30, 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

During October 2008, the U. S. Treasury unveiled its TARP voluntary Capital Purchase Program. We believe we are eligible for participation in this program, and have filed an application for approximately $70 million. This program is targeted at healthy banks and is designed to support economic recovery by encouraging both prudent lending and consolidation within the banking industry.

On April 28, 2008, we completed a 1-for-4 reverse split of our 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 (10,064,941 at September 30, 2008). 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 was effective in the market as of the opening of trading on April 28, 2008.

Overview

The banking environment in 2008 is as difficult as any our management has seen in their banking careers. Our management believes that the likelihood of a protracted recession at the national level has increased dramatically, particularly due to the frozen credit markets of the past quarter. Management has been encouraged by the passage of the legislation designed to “unfreeze” the credit markets, is pleased at the initial response of the credit markets to these measures and hopes that the national and international markets will continue to improve on the path toward greater stability and normality in coming months. In the meantime, we are able to support our customers in Alabama and Florida, to fund loans and finance growth for financially viable customers and projects, and to serve the needs of our customers.

Our principal subsidiary is Superior Bank (the“Bank”), a federal savings bank headquartered in Birmingham, Alabama, which operates 76 banking offices from Huntsville, Alabama to Venice, Florida and 22 consumer finance company offices in Alabama. Our Florida franchise currently has 32 branches. The Bank has completed its de novo branch strategy with 20 planned branches opened in key Alabama and Florida markets since September 2006. The Bank invested approximately $25 to $30 million toward its de novo expansion program.

Our third quarter 2008 net loss was $(6.5 million), or $(0.65) per share, compared to net income of $841,000 for the second quarter of 2008 and $1.45 million for the third quarter of 2007. Third quarter 2008 net loss includes the effect of $7.7 million, net of tax, or $0.77 per share, in investment security impairment losses (See Note 4 to the Condensed Consolidated Financial Statements).

Our third quarter 2008 net interest income increased to $21.6 million, or 1.0%, from $21.4 million for the second quarter 2008 and increased by 8.7% from $19.9 million for the third quarter of 2007. Net interest margin declined to 3.33% compared to 3.39% for the second quarter of 2008.

Our total assets were $3.1 billion at September 30, 2008, an increase of $218 million, or 7.6%, from $2.9 billion as of December 31, 2007. Our total deposits at September 30, 2008 remained level at $2.2 billion from June 30, 2008 and December 31, 2007, which reflects management’s decision to reduce our levels of customer time deposits as a result of significant market pressure on rates (See “ Financial Condition — Deposits” for additional information on deposits). Total deposits increased 3.5% from September 30, 2007.

Loans increased to $2.2 billion at September 30, 2008, an increase of 10.0% from December 31, 2007 and 8.8% from September 30, 2007. Loan growth occurred across all of our Alabama and Florida markets, with the primary expansion occurring in the commercial, mortgage and commercial real estate sectors of our loan portfolio. In addition, we purchased a pool of seasoned residential mortgage loans with a balance of approximately $52 million during the second quarter of 2008.

At September 30, 2008, non-performing loans (“NPLs”) were 2.77% of total loans compared to 1.83% at June 30, 2008 and 1.26% at December 31, 2007, which is in line with management’s expectations. The $22.2 million NPL increase during the third quarter of 2008 from the second quarter of 2008 was predominantly located in Florida and includes real estate relationships primarily secured by residential properties in various stages of development. Of total NPLs, $15.8 million is in Alabama and $45.2 million is in Florida.

Loans in the 30-89 days past due (DPD) category decreased to 0.89% of total loans at September 30, 2008 from 2.05% of total loans at June 30, 2008. Past-due loans that were 90 DPD and still accruing increased during the third quarter, moving to 0.37% at September 30, 2008 from 0.09% as of June 30, 2008 (loans in this category are included in NPLs).

Net loan charge-offs decreased to 0.34% as a percentage of average loans during the third quarter of 2008, compared to 0.38% during the second quarter of 2008. Of the $1.9 million net charge-offs in the third quarter of 2008, the Bank’s charge-offs were $1.5 million, or 0.26% of consolidated average loans, and the consumer finance company charge-offs were $425,000, or 0.08% of consolidated average loans. Of the Bank’s charge-offs, 37.4% related to 1-4 family mortgages and 46.3% related to real estate construction.

The provision for loan losses was $2.3 million in the third quarter of 2008, maintaining the allowance for loan losses at 1.25% of net loans, or $27.7 million, at September 30, 2008, compared to 1.27% of net loans, or $27.2 million, at June 30, 2008. Most of the increases in NPL and other real estate that occurred in the third quarter came from previously identified problem loans, which is potentially indicative of a slowing of deterioration of credit quality among our customer base. Management has taken a proactive approach to monitor these loans and will continue to maintain an active role in the management of these credits to minimize loss.

During the third quarter of 2008, the Bank raised $10 million in additional capital through a private placement of a subordinated note with detached warrant to purchase our common stock. This financing has allowed us to continue growth in our markets, including that attributable to dislocations associated with merger activities among major competitors.

The Bank continues to be well-capitalized under regulatory guidelines, with a total risk-based capital ratio of 10.10%, a Tier I core capital ratio of 7.20% and a Tier I risk based capital ratio of 8.70% as of September 30, 2008.

Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) increased $34.3 million, or 54.1%, to $97.6 million at September 30, 2008 from $63.3 million at December 31, 2007. At September 30, 2008, short-term liquid assets comprised 3.2% of total assets, compared to 2.2% at December 31, 2007. Management continually monitors our liquidity position and will increase or decrease short-term liquid assets as necessary. Our principal sources of funds are deposits, principal and interest payments on loans, federal funds sold and maturities and sales of investment securities. In addition to these sources of liquidity, we have access to a minimum of $250 million in additional funding from traditional sources. Management believes it has established sufficient sources of funds to meet its anticipated liquidity needs.

Fair Value Measurements

In September 2006, the FASB issued SFAS 157 (see Note 2 to the Condensed Consolidated Financial Statements), 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 No. 157-2 (“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.

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.

On October 10, 2008, the FASB issued FSP No. 157-3 with the objective of clarifying the application of SFAS 157 in a market that is not active and to provide an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Effective immediately for our interim financial statements as of September 30, 2008, the implementation of FSP No. 157-3 did not have a material impact on our 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 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.

At September 30, 2008 we had $64.6 million, or 16.4% of total assets valued at fair value that are considered Level 3 valuations using unobservable inputs. As shown below, available-for-sale securities with a carrying value of $26 million at January 1, 2008 were transferred during the third quarter of 2008 from the Level 2 classification into the Level 3 assets category measured at fair value on a recurring basis. These securities consist primarily of bank and pooled trust preferred securities and have a fair value of $21.5 million at September 30, 2008. As the market for these securities became less active and pricing less reliable, management determined that these securities should be transferred to the Level 3 category. The remaining Level 3 assets totaling $43.1 are loans which have been impaired under SFAS 114 and are valued on a nonrecurring basis based on the underlying collateral.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

						Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		September 30,				Identical Assets				Observable Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Available for sale securities		$	334,502			$	563			$	312,420			$	21,519
Derivative assets			199				—				199				—
Total recurring basis measured assets		$	334,701			$	563			$	312,619			$	21,519
Derivative liabilities		$	139			$	—			$	139			$	—
Total recurring basis measured liabilities		$	139			$	—			$	139			$	—

Securities Available for Sale. When quoted prices are available in an active market, securities are classified as Level 1. These securities include investments in Fannie Mae and Freddie Mac preferred stock. For securities reported at fair value utilizing Level 2 inputs we obtained fair value measurements from an independent pricing service. These 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. In certain cases where there is limited activity, securities are classified as Level 3 within the valuation hierarchy. These securities include primarily bank and pooled trust preferred securities.

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 leading third-party 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.

Changes in Level 3 fair value measurements

The tables below include a roll forward of the Condensed Consolidated Statement of Financial Condition amounts for the nine months ended September 30, 2008, including changes in fair value for financial instruments within Level 3 of the valuation hierarchy. Level 3 financial instruments typically include unobservable components, but may also include some observable components that may be validated to external sources. The gains or (losses) in the following table may include changes to fair value due in part to observable factors that may be part of the valuation methodology.

Level 3 assets measured at fair value on a recurring basis

		Available for
(in thousands)		Sale Securities
Balance at January 1, 2008 (date of adoption)		$	—
Transfer into Level 3 during third quarter 2008			25,956
Total net losses for the year-to-date included in other comprehensive loss			(4,437	)
Balance at September 30, 2008		$	21,519
Net realized losses included in net loss for the year-to-date relating to level 3 assets held at September 30, 2008		$	—

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
		September 30,				Assets				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Mortgage loans held for sale		$	15,292			$	—			$	15,292			$	—
Impaired loans, net of specific allowance			43,071				—				—				43,071
Total nonrecurring basis measured assets		$	58,363			$	—			$	15,292			$	43,071

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

The following table sets forth key earnings data for the periods indicated:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
		(Dollars in thousands, except per share data)
Net (loss) income		$	(6,508	)		$	1,450			$	(4,971	)		$	5,717
Net (loss) income per common share (diluted)			(0.65	)			0.15				(0.50	)			0.63
Net interest margin			3.33	%			3.38	%			3.26	%			3.43	%
Net interest spread			3.16	%			3.03	%			3.03	%			3.10	%
Return on average assets			(0.85	)%			0.21	%			(0.22	)%			0.30	%
Return on average tangible assets			(0.90	)%			0.22	%			(0.24	)%			0.32	%
Return on average stockholders’ equity			(7.44	)%			1.75	%			(1.90	)%			2.60	%
Return on average tangible equity			(15.88	)%			3.58	%			(4.04	)%			5.00	%
Book value per share		$	33.97			$	34.49			$	33.97			$	34.49
Tangible book value per share			15.64				15.89				15.64				15.89

The decrease in our net income during the third quarter and first nine months of 2008 compared to the third quarter and first nine months of 2007 is primarily the result of investment security impairment losses and increases in the provision for loan losses. See “Financial Condition — Investment Securities” for more information on security impairment losses. The increase in provision for loan losses reflects the effect of the current credit cycle and the overall economic environment. See “Financial Condition — Allowance for Loan Losses” for additional discussion.

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
		Third Quarter 2008 vs 2007												First Nine Months of 2008 vs 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		$	257,467			$	(3,822	)			(1.64	)%		$	372,911			$	934				(1.40	)%
Investment securities
Taxable			(17,384	)			(165	)			0.09				(18,043	)			(503	)			0.08
Tax-exempt			13,944				233				0.15				22,915				1,134				0.22
Total investment securities			(3,440	)			68				0.14				4,872				631				0.16
Federal funds sold			(3,784	)			(74	)			(3.04	)			(3,836	)			(259	)			(2.60	)
Other investments			7,681				(212	)			(2.50	)			3,241				(266	)			(1.13	)
Total interest-earning assets		$	257,924				(4,040	)			(1.36	)		$	377,161				1,040				(1.10	)
Interest-bearing liabilities:
Demand deposits		$	11,764				(2,511	)			(1.70	)		$	104,617				(2.988	)			(1.21	)
Savings deposits			106,968				735				0.54				54,703				1,114				0.69
Time deposits			45,941				(3,624	)			(1.33	)			106,818				(2,813	)			(0.74	)
Other borrowings			122,916				(327	)			(1.95	)			100,088				(538	)			(1.77	)
Subordinated debentures			2,145				(112	)			(1.11	)			7,206				(175	)			(1.61	)
Total interest-bearing liabilities		$	289,735				(5,839	)			(1.49	)		$	373,432				(5,400	)			(1.03	)
Net interest income/net interest spread							1,799				0.13	%							6,440				(0.07	)%
Net yield on earning assets											(0.05	)%											(0.17	)%
Taxable equivalent adjustment:
Investment securities							79												385
Net interest income						$	1,720											$	6,055

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 September 30,
		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)		$	2,201,719			$	36,664				6.62	%		$	1,944,252			$	40,486				8.26	%
Investment securities
Taxable			309,201				4,106				5.28				326,585				4,271				5.19
Tax-exempt (2)			40,582				651				6.38				26,638				418				6.23
Total investment securities			349,783				4,757				5.41				353,223				4,689				5.27
Federal funds sold			3,008				17				2.25				6,792				91				5.29
Other investments			55,617				663				4.74				47,936				875				7.24
Total interest-earning assets			2,610,127				42,101				6.42				2,352,203				46,141				7.78
Noninterest-earning assets:
Cash and due from banks			64,435												44,921
Premises and equipment			104,032												91,727
Accrued interest and other assets			301,776												272,138
Allowance for loan losses			(27,302	)											(21,813	)
Total assets		$	3,053,068											$	2,739,176
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	611,420			$	3,290				2.14	%		$	599,656			$	5,801				3.84	%
Savings deposits			161,780				1,000				2.46				54,812				265				1.92
Time deposits			1,245,947				11,720				3.74				1,200,005				15,344				5.07
Other borrowings			396,495				3,290				3.30				273,579				3,617				5.25
Subordinated debentures			54,660				954				6.94				52,515				1,066				8.05
Total interest-bearing liabilities			2,470,302				20,254				3.26				2,180,567				26,093				4.75
Noninterest-bearing liabilities:
Demand deposits			218,861												197,977
Accrued interest and other liabilities			15,945												32,723
Stockholders’ equity			347,960												327,909
Total liabilities and stockholders’ equity		$	3,053,068											$	2,739,176
Net interest income/net interest spread							21,847				3.16	%							20,048				3.03	%
Net yield on earning assets											3.33	%											3.38	%
Taxable equivalent adjustment:
Investment securities (2)							221												142
Net interest income						$	21,626											$	19,906