UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

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

Commission File number 0-25033

Superior Bancorp

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

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

(205) 327-1400

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

Yes þ No o

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

Yes o No o

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

Large accelerated filer o		Accelerated filer 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, 2009
Common stock, $.001 par value		11,624,279

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			55
ITEM 4. CONTROLS AND PROCEDURES			56
PART II. OTHER INFORMATION			56
ITEM 1. LEGAL PROCEEDINGS			56
ITEM 1A. RISK FACTORS			57
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			57
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			57
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			58
ITEM 5. OTHER INFORMATION			58
ITEM 6. EXHIBITS			58
SIGNATURES			59
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,
		2009				2008
		(UNAUDITED)
ASSETS
Cash and due from banks		$	57,364			$	74,237
Interest-bearing deposits in other banks			73,976				10,042
Federal funds sold			990				5,169
Total cash and cash equivalents			132,330				89,448
Investment securities available for sale			296,882				347,142
Tax lien certificates			24,700				23,786
Mortgage loans held for sale			58,704				22,040
Loans, net of unearned income			2,434,534				2,314,921
Allowance for loan losses			(34,336	)			(28,850	)
Net loans			2,400,198				2,286,071
Premises and equipment, net			104,764				104,085
Accrued interest receivable			15,540				14,794
Stock in FHLB			18,212				21,410
Cash surrender value of life insurance			49,655				48,291
Core deposit and other intangible assets			17,784				21,052
Other real estate			42,259				19,971
Other assets			65,542				54,611
Total assets		$	3,226,570			$	3,052,701
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	255,196			$	212,732
Interest-bearing			2,364,765				2,130,256
Total deposits			2,619,961				2,342,988
Advances from FHLB			218,321				361,324
Security repurchase agreements			1,652				3,563
Notes payable			45,801				7,000
Subordinated debentures, net			60,720				60,884
Accrued expenses and other liabilities			35,385				25,703
Total liabilities			2,981,840				2,801,462
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.001 per share; shares authorized 5,000,000:
Series A, fixed rate cumulative perpetual preferred stock, 69,000 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			—				—
Common stock, par value $.001 per share; shares authorized 20,000,000; shares issued 11,624,279 and 10,403,087 respectively; outstanding 11,624,279 and 10,074,999 respectively			12				10
Surplus — preferred			63,868				62,978
— warrants			8,646				8,646
— common			321,840				329,461
Accumulated deficit			(141,770	)			(129,904	)
Accumulated other comprehensive loss			(7,501	)			(7,925	)
Treasury stock, at cost — -0- and 321,485 shares, respectively			—				(11,373	)
Unearned ESOP stock			(308	)			(443	)
Unearned restricted stock			(57	)			(211	)
Total stockholders’ equity			244,730				251,239
Total liabilities and stockholders’ equity		$	3,226,570			$	3,052,701

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,
		2009				2008
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES		$	(23,537	)		$	28,439
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale			157,614				37,633
Proceeds from maturities of investment securities available for sale			57,334				100,906
Purchases of investment securities available for sale			(162,586	)			(129,229	)
Redemption of tax lien certificates			29,909				17,523
Purchase of tax lien certificates			(30,823	)			(20,785	)
Net increase in loans			(164,713	)			(233,613	)
Purchases of premises and equipment			(6,616	)			(10,193	)
Proceeds from sale of premises and equipment			376				7,637
Proceeds from sale of repossessed assets			11,149				5,522
Decrease (increase) in stock in FHLB			3,199				(10,020	)
Other investing activities, net			—				(324	)
Net cash used by investing activities			(105,157	)			(234,943	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			277,130				24,760
Net (decrease) increase in FHLB advances and other borrowed funds			(145,033	)			206,296
Payments on notes payable			—				(9,500	)
Proceeds from notes payable			38,575				10,000
Proceeds from issuance of subordinated debenture			—				10,000
Proceeds from issuance of common stock			3,299				—
Preferred cash dividend paid			(2,395	)			—
Net cash provided by financing activities			171,576				241,556
Net increase in cash and cash equivalents			42,882				35,052
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			89,448				52,983
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	132,330			$	88,035

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, 2008. 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, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. Management has evaluated subsequent events for disclosure or recognition up to the time of filing these financial statements with the Securities and Exchange Commission on November 9, 2009.

The Condensed Consolidated Statement of Financial Condition at December 31, 2008, 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 16, 2009, included in our Annual Report on Form 10-K. The Condensed Consolidated Financial Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Note 2 — Recent Accounting Pronouncements

On April 9, 2009, the Financial Accounting Standards Board (“FASB”) finalized certain guidance regarding the accounting treatment for investments including mortgage-backed securities which included revising the method for determining if an other-than-temporary impairment (“OTTI”) exists and the amount of OTTI to be recorded through an entity’s income statement. These revisions provide greater clarity and reflect a more accurate representation of the credit and noncredit components of an OTTI event and are summarized as follows:

•

Accounting Standards Codification (“ASC”) 820-10, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“ASC 820-10") provides guidelines for making fair value measurements more consistent by emphasizing that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique used, the objective of a fair value measurement remains the same. Fair value is the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale), between market participants at the measurement date under current market conditions.

•

ASC 320-10, Recognition and Presentation of Other-than-temporary impairments (“ASC 320-10”) provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. It amends OTTI impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to OTTI of equity securities.

•

ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value of Financial Instruments (“ASC 825-10 and ASC 270-10”) enhances consistency in financial reporting by increasing the frequency of fair value disclosures.

This guidance became effective for financial statements issued for periods ending after June 15, 2009, with early application possible for the first quarter of 2009. The Corporation elected to adopt ASC 820-10 and ASC 320-10 as of March 31, 2009, while deferring the election of ASC 825-10 and ASC 270-10 until June 30, 2009. The adoption of this guidance did not have a significant impact on the Corporation’s financial condition, results of operations or cash flow other than requiring additional disclosures (See Note 11). The effect of the adoption of ASC 320-10 resulted in the portion of OTTI determined to be credit-related ($15,150,000, pre-tax) being recognized in current earnings, while the portion of OTTI related to other factors ($5,519,000, pre-tax) was recognized in other comprehensive loss (see Notes 3 and 8).

ASC 815-10, Disclosures About Derivative Instruments and Hedging Activities (“ASC 815-10”), amends and expands the disclosure requirements to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative

instruments and related hedge items are accounted, 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, the guidance 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. ASC 815-10 became effective for the Corporation on January 1, 2009 and did not have a significant impact on the Corporation’s financial position, results of operations or cash flows (see Note 5).

ASC 855-10, Subsequent Events (“ASC 855-10”), establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It also defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. In addition, this guidance requires entities to disclose the date through which subsequent events have been evaluated and the nature and estimated financial effects of certain subsequent events. ASC 855-10 became effective for the Corporation’s financial statements for periods ending after June 15, 2009 and did not have a significant impact on the Corporation’s financial statements.

Topic 860, Accounting for Transfers of Financial Assets, an Amendment of ASC 860-10, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“Topic 860”) enhances reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. It also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. Topic 860 will become effective January 1, 2010 and is not expected to have a significant impact on the Corporation’s financial statements.

FASB issued guidance related to the consolidation of Variable Interest Entities to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. This guidance will become effective January 1, 2010 and is not expected to have a significant impact on the Corporation’s financial statements.

ASC 105-10,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“ASC 105-10”) establishes the FASB Accounting Standards Codification (the “Codification”) as the Corporation’s source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also the Corporation’s source of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. ASC 105-10 became effective for the Corporation’s financial statements for periods ending after September 15, 2009. ASC 105-10 did not have a significant impact on the Corporation’s financial statements other than revisions to any reference to the FASB guidance.

Note 3 — Investment Securities

The amounts at which investment securities are carried and their approximate fair values at September 30, 2009 are as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
						(In Thousands)
Investment securities available for sale:
U.S. agency securities		$	54,199			$	1,009			$	1,072			$	54,136
Mortgage-backed securities (MBS):
U.S. Agency MBS — residential			167,096				2,914				19				169,991
U.S. Agency MBS — collateralized mortgage obligation (CMO)			13,230				18				63				13,185
Private-label — CMO			20,968				110				3,899				17,179
Total MBS			201,294				3,042				3,981				200,355
State, county and municipal securities			31,681				1,209				89				32,801
Corporate obligations:
Corporate debt			4,156				—				156				4,000
Pooled trust preferred securities			8,714				—				4,900				3,814
Single issue trust preferred security			5,000				—				3,764				1,236
Total corporate obligations			17,870				—				8,820				9,050
Equity securities			563				38				61				540
Total investment securities available for sale		$	305,607			$	5,298			$	14,023			$	296,882

Investment securities with an amortized cost of $201,115,000 at September 30, 2009, were pledged to secure public funds and for other purposes as required or permitted by law.

The amortized cost and estimated fair values of investment securities at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Securities Available
		For Sale
		Amortized				Estimated
		Cost				Fair Value
		(In Thousands)
Due in one year or less		$	530			$	532
Due after one year through five years			7,185				7,138
Due after five years through ten years			39,586				39,653
Due after ten years			57,012				49,204
Mortgage-backed securities			201,294				200,355
		$	305,607			$	296,882

Gross realized gains on sales of investment securities available for sale for the nine-month periods ended September 30, 2009 and 2008 were $5,644,000 and $1,477,000, respectively, and gross realized losses for the same periods were $-0- and $2,000. During the third quarter of 2009 management sold approximately 63 securities with combined amortized cost and market values of $151,970,000 and $157,620,000, respectively. Nearly all of the sale proceeds were reinvested in 30 federal agency securities (direct and MBS) and classified in the portfolio as available-for-sale.

The following table summarizes the investment securities with unrealized losses at September 30, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:

		September 30, 2009
		Less Than 12 Months								More Than 12 Months								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses (1)				Fair Value				Losses (1)				Fair Value				Losses (1)
		(In thousands)
Temporarily Impaired
U.S. Agency securities		$	39,367			$	1,072			$	—			$	—			$	39,367			$	1,072
Mortgage-backed securities:
U.S. Agency MBS — residential			6,301				12				243				7				6,544				19
U.S. Agency MBS — CMO			6,132				63				—				—				6,132				63
Private-label — CMO			132				4				12,804				2,063				12,936				2,067
Total MBS			12,565				79				13,047				2,070				25,612				2,149
State, county and municipal securities			613				16				1,368				73				1,981				89
Corporate obligations:
Corporate debt			—				—				4,000				156				4,000				156
Pooled trust preferred securities			—				—				1,046				1,103				1,046				1,103
Single issue trust preferred securities			—				—				1,236				3,764				1,236				3,764
Total corporate obligations			—				—				6,282				5,023				6,282				5,023
Equity securities			—				—				223				61				223				61
Total temporarily impaired securities			52,545				1,167				20,920				7,227				73,465				8,394
Other-than-temporarily Impaired
Mortgage-backed securities:
Private-label — CMO			—				—				3,775				1,832				3,775				1,832
Corporate obligations:
Pooled trust preferred securities			—				—				2,768				3,797				2,768				3,797
Total OTTI securities			—				—				6,543				5,629				6,543				5,629
Total temporarily and other-than-temporarily impaired		$	52,545			$	1,167			$	27,463			$	12,856			$	80,008			$	14,023

     The following is a summary of the total count by category of investment securities with gross unrealized losses:

		September 30, 2009
		Total Number of Securities
		Less Than 12				Greater Than
		Months				12 Months				Total
Temporarily Impaired
U.S. Agency securities			8				—				8
Mortgage-backed securities:
U.S. Agency MBS — residential			2				1				3
U.S. Agency MBS — CMO			1				—				1
Private-label — CMO			1				7				8
Total MBS			4				8				12
State, county and municipal securities			2				5				7
Corporate obligations:
Corporate debt			—				3				3
Pooled trust preferred securities			—				1				1
Single issue trust preferred security			—				1				1
Total corporate obligations			—				5				5
Equity securities			—				1				1
Total temporarily impaired securities			14				19				33
Other-than-temporarily Impaired
Mortgage-backed securities:
Private-label — CMO			—				4				4
Corporate obligations:
Pooled trust preferred securities			—				4				4
Total OTTI securities			—				8				8
Total temporarily and other-than-temporarily impaired			14				27				41

Other-Than-Temporary-Impairment

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

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

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

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized in earnings at an amount equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that

the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of September 30, 2009, the Corporation’s securities portfolio consisted of 231 securities, 41 of which were in an unrealized loss position. The majority of unrealized losses are related to the Corporation’s private-label collateralized mortgage obligations (“CMOs”) and trust preferred securities, as discussed below:

Mortgage-backed Securities

At September 30, 2009, approximately 91% of the dollar volume of mortgage-backed securities held by the Corporation was issued by U.S. government-sponsored entities and agencies, primarily GNMA, Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support and these securities have nominal unrealized losses. The Corporation’s mortgage-backed securities portfolio also includes 12 private-label CMOs with a market value of $17,179,000 which had unrealized losses of approximately $3,789,000 at September 30, 2009. These private-label CMOs were rated AAA at purchase. The following is a summary of the investment grades for these securities (Dollars in Thousands):

				Credit Support
Rating				Coverage		Unrealized
Moody/Fitch		Count		Ratios (1)		Loss (Gain)
A1/NR		1		3.47		$	(105	)
Aaa/NR		1		4.45			(22	)
Aaa/NR		1		8.64			(4	)
NR/AAA		1		8.86			(441	)
NR/AA		1		2.78			(468	)
NR/BBB		1		3.58			(143	)
Baa2/AA		1		N/A			(688	)
B2/NR		1		4.16			(196	)
Caa1/CCC(2)		1		1.63			(1,762	)
CA/NR (2)		1		0			(17	)
NR/C (2)		2		0.38 — 0.60			57
Total		12				$	(3,789	)

During the third and fourth quarters of 2008, the Corporation recognized a $1,894,000, pre-tax non-cash OTTI charge on three private-label CMOs which experienced significant rating downgrades in those respective quarters. These downgrades continued in the second and third quarters of 2009 and resulted in a total OTTI of $4,176,000 on the CMO’s, including a credit portion of $4,045,000 recognized in current earnings during the second quarter and a total OTTI of $2,005,000, including a credit portion of $416,000 recognized in current earnings during the third quarter. The assumptions used in the valuation model include expected future default rates, loss severity and prepayments. The model also takes into account the structure of the security, including credit support. Based on these assumptions, the model calculates and projects the timing and amount of interest and principal payments expected for the security. At September 30, 2009, the fair values of these four securities totaling $4,243,000 were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. These securities were previously measured using Level 2 inputs. The discount rates used in the valuation model were based on a yield that the market would require for such securities with maturities and risk characteristics similar to the securities being measured (See Note 11 for additional disclosure). The following table provides additional information regarding these CMO valuations as of September 30, 2009 (Dollars in Thousands):

																										Life-to-Date
																										Other-than-temporary Impairment (OTTI)
						Discount																Actual				Credit Portion
						Margin								Cumulative				Average				60+ Days
Security		Price (%)				(Basis Points)				Yield				Default				Severity				Delinquent				2008				2009				Other				Total
CMO 1			21.60				1673				18.00	%			56.56	%			50.00	%			28.01	%		$	(599	)		$	(1,231	)		$	110			$	(1,720	)
CMO 2			4.54				1772				18.00	%			57.38	%			60.00	%			29.80	%			(492	)			(1,382	)			(17	)			(1,891	)
CMO 3			23.42				1573				17.00	%			45.27	%			45.00	%			20.42	%			(803	)			(1,558	)			(53	)			(2,414	)
CMO 4			58.96				1393				17.00	%			26.60	%			45.00	%			13.81	%			—				(290	)			(1,762	)			(2,052	)
																										$	(1,894	)		$	(4,461	)		$	(1,722	)		$	(8,077	)

As of September 30, 2009, the Corporation’s management does not intend to sell these securities, nor is it more likely than not that the Corporation will be required to sell the securities before the entire amortized cost basis is recovered since the current financial condition of the Corporation, including liquidity and interest rate risk, will not require such action.

State, county and municipal securities

The unrealized losses in the municipal securities portfolio are primarily impacted by changes in interest rates. This portfolio segment is not experiencing any credit problems at September 30, 2009. We believe that all contractual cash flows will be received on this portfolio.

Trust Preferred Securities

The Corporation’s investment portfolio includes five pooled trust preferred securities (“CDO”) and two single-issue securities. The determination of fair value of the CDO’s was determined with the assistance of an external valuation firm. The valuation was accomplished by evaluating all relevant credit and structural aspects of the CDOs, determining appropriate performance assumptions and performing a discounted cash flow analysis. The valuation was structured as follows:

•

Detailed credit and structural evaluation for each piece of collateral in the CDO;

•

Collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities);

•

Terms of the CDO structure, as laid out in the indenture:

•

The cash flow waterfall (for both interest and principal);

•

Overcollateralization and interest coverage tests;

•

Events of default/liquidation;

•

Mandatory auction call;

•

Optional redemption; and

•

Hedge agreements; and discounted cash flow modeling.

On the basis of the evaluation of collateral credit, and in combination with a review of historical industry default data and current/near-term operating conditions, appropriate default and recovery probabilities are determined for each piece of collateral in the CDO. Specifically, an estimate of the probability that a given piece of collateral will default in any given year. Next, on the basis of credit factors like asset quality

and leverage, a recovery assumption is formulated for each piece of collateral in the event of a default. For collateral that has already defaulted, we assume no recovery. For collateral that is deferring we assume a recovery rate of 10%. It is also noted that there is a possibility, in some cases, that deferring collateral will become current at some point in the future. As a result, deferring issuers are evaluated on a case-by-case basis and in some instances, based on an analysis of the credit, a probability is assigned that the deferral will ultimately cure.

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

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

The following tables provide various information and fair value model assumptions regarding the Corporation’s CDO’s as of September 30, 2009 (dollars in thousands):

																		YTD
																		Other-than-temporary Impairment
																		(OTTI)
		Single/		Class/		Amortized				Fair				Unrealized				Credit
Name		Pooled		Tranche		Cost				Value				Loss				Portion				Other				Total
MM Caps Funding I Ltd		Pooled		M		$	2,150			$	1,046			$	(1,104	)		$	—			$	—			$	—
MM Community Funding Ltd		Pooled		B			2,175				1,152				(1,023	)			(2,826	)			(1,023	)			(3,849	)
Preferred Term Securities V		Pooled		M			1,323				473				(850	)			(54	)			(850	)			(904	)
Tpref Funding III Ltd		Pooled		B-2			3,051				1,143				(1,908	)			(949	)			(1,908	)			(2,857	)
Trapeza 2007—13A LLC		Pooled		D			15				—				(15	)			(1,861	)			(15	)			(1,876	)
New South Capital Corp	(1)	Single		Sole			—				—				—				(5,000	)			—				(5,000	)
Emigrant Capital Trust	(2)	Single		Sole			5,000				1,236				(3,764	)			—				—				—
						$	13,714			$	5,050			$	(8,664	)		$	(10,690	)		$	(3,796	)		$	(14,486	)

Original Collateral

Performing Collateral

Percent of Actual

Percent of Expected

(3)

Lowest

Performing

Deferrals and

Deferrals and

Excess

Name

Rating

Banks

Defaults

Defaults

Subordination

MM Caps Funding I Ltd

Ca

26

9%

19%

4%

MM Community Funding Ltd

Ca

10

15%

51%

0%

Preferred Term Securities V

Ba3

1

5%

52%

0%

Tpref Funding III Ltd

Ca

25

23%

23%

0%

Trapeza 2007—13A LLC

C

40

25%

26%

0%

New South Capital Corp

(1)

NR

NA

NA

NA

NA

Emigrant Capital Trust

(2)

CC

NA

NA

NA

NA

Fair Value (Price

Discount Margin

Current Yield

Name

to Par)

(Basis Points)

(Basis Points)

MM Caps Funding I Ltd

$

52.30

Swap + 1500

9.48% Fixed

MM Community Funding Ltd

23.03

LIBOR + 1400

LIBOR + 310

Preferred Term Securities V

34.35

LIBOR + 1500

LIBOR + 210

Tpref Funding III Ltd

28.57

LIBOR + 1300

LIBOR + 190

Trapeza 2007-13A LLC

0.01

LIBOR + 1800

LIBOR + 120

Emigrant Capital Trust

(2)

24.72

LIBOR + 1806

LIBOR + 200

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

As of September 30, 2009, the Corporation’s management does not intend to sell these securities, nor is it more likely than not that the Corporation will be required to sell the securities before the entire amortized cost basis is recovered since the current financial condition of the Corporation, including liquidity and interest rate risk, will not require such action.

The following table provides a rollforward of the amount of credit-related losses recognized in earnings for which a portion of OTTI has been recognized in other comprehensive income through September 30, 2009 (in thousands):

		For the Three-				For the Nine-
		Months Ended				Months Ended
		September 30, 2009				September 30, 2009
Balance at beginning of period		$	11,626			$	—
Amounts related to credit losses for which an OTTI was not previously recognized			344				10,980
Reductions for securities sold during the period			—				—
Increases in credit loss for which an OTTI was previously recognized when the investor does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost			3,180				4,170
Reductions for securities where there is an intent to sale or requirement to sale			—				—
Reductions for increases in cash flows expected to be collected			—				—
Balance at end of period		$	15,150			$	15,150

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

Stock in the FHLB Atlanta

As of September 30, 2009, the Corporation has stock in the Federal Home Loan Bank of Atlanta (“FHLB Atlanta”) totaling $18,212,000 (its par value), which is presented separately on the face of the Corporation’s statement of financial condition. There is no ready market for the FHLB stock and no quoted market values, as only member institutions are eligible to be shareholders and all transactions are, by charter, to take place at par with FHLB Atlanta as the only purchaser. Therefore, the Corporation accounts for this investment as a long-term asset and carries it at cost. Management reviews this stock quarterly for impairment and conducts its analysis in accordance with ASC 942-325-35-3.

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

•

The significance of the decline in net assets of FHLB Atlanta as compared to the capital stock amount for FHLB Atlanta and the length of time this decline has persisted;

	•		Commitments by FHLB Atlanta to make payments required by law or regulation and the level of such payments in relation to the operating performance of FHLB Atlanta;
	•		The impact of legislative and regulatory changes on financial institutions and, accordingly, on the customer base of FHLB Atlanta; and
	•		The liquidity position of FHLB Atlanta.

Management has reviewed publicly available information regarding the financial condition of FHLB Atlanta in preparing the Corporation’s Form 10-Q for the quarter ended September 30, 2009 and concluded that no impairment existed based on its assessment of the ultimate recoverability of the par value of the investment. Management noted that FHLB Atlanta recorded a loss from operations of $1.5 million for the first quarter of 2009 and had suspended its dividend. During the second quarter of 2009, FHLB Atlanta reported operating income of $191.7 million. In addition, during the second quarter of 2009, FHLB Atlanta reinstated its dividend, at a rate of 0.84%, and 0.41%, for second and third quarters of 2009, respectively, compared to a prior rate of 2.89% for the last dividend paid, in the third quarter, 2008, prior to its dividend suspension. On the basis of a review of the financial condition, cash flow, liquidity, and asset quality indicators of the FHLB Atlanta as of the end of its second quarter, 2009, as well as the decision of FHLB Atlanta to reinstate the dividend announced in the third quarter, management has concluded that no impairment exists on our investment in the stock of FHLB Atlanta. This is a long-term investment that serves a business purpose of enabling us to enhance the liquidity of the Bank through access to the lending facilities of FHLB Atlanta. For the foregoing reasons, management believes that FHLB Atlanta’s current position does not indicate that the Corporation’s investment will not be recoverable at par, the Corporation’s cost, and thus the investment is not impaired as of September 30, 2009.

Note 4 — Notes Payable

The following is a summary of notes payable as of September 30, 2009 (in thousands):

Note payable to bank, borrowed under $7,000,000 line of credit, due September 3, 2010; interest is based on Wall Street prime plus 1.25 but not less than 4.5%, secured by 100% of the outstanding Superior Bank stock		$	7,000
Senior note guaranteed under the TLGP, due March 30, 2012, 2.625% fixed rate due semi-annually			40,000
Less: Discount, FDIC guarantee premium and other issuance costs			(1,199	)
Total notes payable		$	45,801

On March 31, 2009, Superior Bank (the “Bank”), completed an offering of a $40,000,000 aggregate principal amount 2.625% Senior Note due 2012 (the “Note”). The Note is guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) under its Temporary Liquidity Guarantee Program (the “TLGP”) and is backed by the full faith and credit of the United States. The Note is a direct, unsecured general obligation of the Bank and it is not subject to redemption prior to maturity. The Note is solely the obligation of the Bank and is not guaranteed by the Corporation. The Bank received net proceeds, after discount, FDIC guarantee premium and other issuance costs, of approximately $38,575,000, which will be used by the Bank for general corporate purposes. The debt will yield an effective interest rate, including amortization, of 3.89%.

In connection with the TLGP, the Bank entered into a Master Agreement with the FDIC. The Master Agreement contains certain terms and conditions that must be included in the governing documents for any senior debt securities issued by the Bank that are guaranteed pursuant to the TLGP.

Note 5 — Derivative Financial Instruments

The fair value of derivative positions outstanding is included in other assets and other liabilities in the accompanying condensed consolidated statement of financial condition and in the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows.

The Corporation utilizes interest rate swaps, caps and floors to mitigate exposure to interest rate risk and to facilitate the needs of its customers. The Corporation’s objectives for utilizing these derivative instruments are described below:

Interest Rate Swaps

The Corporation has entered interest rate swaps (“CD swaps”) to convert the fixed rate paid on brokered certificates of deposit (“CDs”) to a variable rate based upon three-month LIBOR. As of September 30, 2009 and December 31, 2008, the Corporation had $723,000 and $1,166,000, respectively, in notional amount of CD swaps which had not been designated as hedges. These CD swaps had not been designated as hedges because they represent the portion of the interest rate swaps that are over-hedged due to principal reductions on the brokered CDs.

The Corporation has entered into certain interest rate swaps on commercial loans that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Corporation enters into an interest rate swap with a loan customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Corporation agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Corporation’s customer to effectively convert a variable rate loan to a fixed rate. Because the Corporation acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Corporation’s results of operations.

Fair Value Hedges

As of September 30, 2009 and December 31, 2008, the Corporation had $2,777,000 and $5,334,000, respectively, in notional amount of CD swaps designated and qualified as fair value hedges. These CD swaps were designated as hedging instruments to hedge the risk of changes in the fair value of the underlying brokered CD due to changes in interest rates. As of September 30, 2009 and December 31, 2008, the amount of CD swaps designated as hedging instruments had a recorded fair value of $279,000 and $799,000, respectively, and a weighted average life of 2.6 and 6.8 years, respectively. The weighted average fixed rate (receiving rate) was 4.70% and the weighted average variable rate (paying rate) was 0.52% (LIBOR based).

Cash Flow Hedges

The Corporation has entered into interest rate swap agreements designated and qualified as a hedge with notional amounts of $22,000,000 to hedge the variability in cash flows on $22,000,000 of junior subordinated debentures. Under the terms of the interest rate swaps, which mature September 15, 2012, the Corporation receives a floating rate based on 3-month LIBOR plus 1.33% (1. 63% as of September 30, 2009) and pays a weighted average fixed rate of 4.42%. As of September 30, 2009 and December 31, 2008, these interest rate swap agreements are recorded as liabilities in the amount of $849,000 and $954,000, respectively.

Interest Rate Lock Commitments

In the ordinary course of business, the Corporation enters into certain commitments with customers in connection with residential mortgage loan applications. Such commitments are considered derivatives under FASB guidance and are required to be recorded at fair value. The aggregate amount of these mortgage loan origination commitments was $85,105,000 and $92,721,000 at September 30, 2009 and December 31, 2008, respectively. The fair value of the origination commitments was $598,000 and $(117,000) at September 30, 2009 and December 31, 2008, respectively.

The notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2009 and December 31, 2008 are presented in the following table. The Corporation obtains dealer quotations to value its interest rate derivative contracts designated as hedges of cash flows, while the fair values of other interest rate derivative contracts are estimated utilizing internal valuation models with observable market data inputs (in thousands).

		September 30, 2009								December 31, 2008
		Notional				Estimated				Notional				Estimated
		Amount				Fair Value				Amount				Fair Value
Interest rate derivatives designated as hedges of fair value:
Interest rate swap on brokered certificates of deposit		$	2,777			$	279			$	5,334			$	799
Interest rate derivatives designated as hedges of cash flows:
Interest rate swaps on subordinated debenture			22,000				(849	)			22,000				(954	)
Non-hedging interest rate derivatives:
Brokered certificates of deposit interest rate swap			723				70				1,166				164
Mortgage loan held for sale interest rate lock commitment			85,105				598				92,721				(117	)
Commercial loan interest rate swap			3,791				359				3,861				462
Commercial loan interest rate swap			3,791				(359	)			3,861				(462	)

The weighted-average rates paid and received for interest rate swaps outstanding at September 30, 2009 were as follows:

		Weighted-Average
		Interest				Interest
		Rate				Rate
		Paid				Received
Interest rate swaps:
Fair value hedge on brokered certificates of deposit interest rate swap			0.52	%			4.70	%
Cash flow hedge interest rate swaps on subordinated debentures			4.42				1.63
Non-hedging interest rate swap on commercial loan			6.73				6.73

Gains, Losses and Derivative Cash Flows

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

instrument in an effective hedge of cash flows are included in interest expense on subordinated debentures. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other noninterest income.

Amounts included in the consolidated statements of operations related to interest rate derivatives designated as hedges of fair value were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Interest rate swap on brokered certificates of deposit:
Amount of gain (loss) included in interest expense on deposits		$	29			$	—			$	79			$	27
Amount of gain (loss) included in other noninterest income			(12	)			—				(492	)			(5	)

Amounts included in the consolidated statements of operations and in other comprehensive income (loss) for the period related to interest rate derivatives designated as hedges of cash flows were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Interest rate swap on subordinated debenture:
Net gain (loss) included in interest expense on subordinated debt		$	(142	)		$	—			$	(301	)		$	—
Amount of gain (loss) recognized in other comprehensive income			(138	)			—				66				—

No ineffectiveness related to interest rate derivatives designated as hedges of cash flows was recognized in the condensed consolidated statements of operations during the reported periods. The accumulated net after-tax loss related to effective cash flow hedge included in accumulated other comprehensive income totaled $535,000 at September 30, 2009 and $602,000 at December 31, 2008.

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

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Non-hedging interest rate derivatives:
Brokered certificates of deposit interest rate swap		$	19			$	95			$	(53	)		$	132
Mortgage loan held for sale interest rate lock commitment			428				46				715				(65	)
Interest rate floors			—				—				—				678
Commercial loan interest rate swap			—				—				—				34

Counterparty Credit Risk

Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by the Corporation’s Asset/Liability Management Committee. The Corporation’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Corporation’s derivative contracts.

The aggregate cash collateral posted with the counterparties as collateral by the Corporation related to derivative contracts totaled approximately $3,239,048 at September 30, 2009.

Note 6 — 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 its 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, 2008. 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, 2009
Net interest income		$	9,247			$	9,828			$	19,075			$	4,838			$	23,913
Provision for loan losses			1,398				3,536				4,934				235				5,169
Noninterest income			2,241				483				2,724				5,755				8,479
Noninterest expense			8,737				5,911				14,648				10,994				25,642
Operating profit (loss)		$	1,353			$	864			$	2,217			$	(636	)			1,581
Income tax expense																			701
Net income																		$	880
Total assets		$	1,019,416			$	1,222,358			$	2,241,774			$	984,796			$	3,226,570
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
Nine Months ended September 30, 2009
Net interest income		$	25,122			$	28,294			$	53,416			$	14,540			$	67,956
Provision for loan losses			4,434				6,499				10,933				3,669				14,602
Noninterest income			6,518				1,512				8,030				1,042				9,072
Noninterest expense			26,162				17,479				43,641				33,861				77,502
Operating profit (loss)		$	1,044			$	5,828			$	6,872			$	(21,948	)			(15,076	)
Income tax benefit																			(6,686	)
Net loss																		$	(8,390	)
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	)