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

FOR THE QUARTERLY PERIOD ENDED September 30, 2010


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

FOR THE TRANSITION PERIOD FROM TO

Commission File number 0-25033

Superior Bancorp

(Exact Name of Registrant as Specified in its Charter)


Delaware		63-1201350

(State or Other Jurisdiction of Incorporation)		(IRS Employer Identification No.)

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

(205) 327-1400

(Registrant’s Telephone Number, Including Area Code)

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

Yes þ No o

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

Yes o No o

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


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

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

Yes o No þ

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


Class		Outstanding as of November 10 , 2010

Common stock, $.001 par value		12,560,457

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		69
Item 4.	Controls and Procedures		71

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		71
Item 1A.	Risk Factors		71
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		81
Item 3.	Defaults Upon Senior Securities		81
Item 5.	Other Information		81
Item 6.	Exhibits		81

SIGNATURES			82
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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


	September 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Cash and due from banks	$	66,937		$	74,020
Interest-bearing deposits in other banks		195,212			23,714
Federal funds sold		1,946			2,036

Total cash and cash equivalents		264,095			99,770
Investment securities available-for-sale		261,002			286,310
Tax lien certificates		19,849			19,292
Mortgage loans held-for-sale		63,884			71,879
Loans, net of unearned income		2,415,862			2,472,697
Allowance for loan losses		(151,362	)		(41,884	)

Net loans		2,264,500			2,430,813
Premises and equipment, net		102,097			104,022
Accrued interest receivable		13,693			15,581
Stock in FHLB		16,907			18,212
Cash surrender value of life insurance		51,277			50,142
Core deposit and other intangible assets		13,772			16,694
Other real estate		58,766			41,618
Other assets		36,659			67,536

Total assets	$	3,166,501		$	3,221,869


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	276,473		$	257,744
Interest-bearing		2,500,357			2,398,829

Total deposits		2,776,830			2,656,573
Advances from FHLB		216,325			218,322
Security repurchase agreements		726			841
Notes payable		45,201			45,917
Subordinated debentures, net		81,518			84,170
Accrued expenses and other liabilities		30,497			24,342

Total liabilities		3,151,097			3,030,165
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.001 per share; shares authorized 5,000,000:
Series B, cumulative convertible preferred stock, 111, -0- and -0- shares issued and outstanding as of September 30, 2010 and 2009 and December 31, 2009, respectively		—			—
Series C, cumulative convertible preferred stock, 3, -0- and -0- shares issued and outstanding as of September 30, 2010 and 2009 and December 31, 2009, respectively		—			—
Common stock, par value $.001 per share; shares authorized 200,000,000, 20,000,000 and 200,000,000 at September 30, 2010 and 2009 and December 31, 2009, respectively; shares issued 12,560,457, 11,624,279 and 11,673,837, respectively; outstanding 12,560,457, 11,624,279 and 11,667,794, respectively		13			12
Surplus — preferred		12,428			—
— warrants		9,827			8,646
— common		325,158			322,043
Accumulated deficit		(329,030	)		(130,889	)
Accumulated other comprehensive loss		(2,853	)		(7,825	)
Unearned ESOP stock		(129	)		(263	)
Unearned restricted stock		(10	)		(20	)

Total stockholders’ equity		15,404			191,704

Total liabilities and stockholders’ equity	$	3,166,501		$	3,221,869

See Notes to Condensed Consolidated Financial Statements.

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


	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Interest income:
Interest and fees on loans	$	34,108		$	36,783		$	106,662		$	107,693
Interest on taxable securities		2,299			3,362			7,835			11,148
Interest on tax-exempt securities		302			432			928			1,295
Interest on federal funds sold		1			1			4			8
Interest and dividends on other investments		542			471			1,307			1,289

Total interest income		37,252			41,049			116,736			121,433
Interest expense:
Interest on deposits		10,843			13,315			33,821			42,317
Interest on other borrowed funds		2,505			2,619			7,568			7,558
Interest on subordinated debentures		2,384			1,202			7,169			3,602

Total interest expense		15,732			17,136			48,558			53,477

Net interest income		21,520			23,913			68,178			67,956
Provision for loan losses		102,106			5,169			161,596			14,602

Net interest (loss) income after provision for loan losses		(80,586	)		18,744			(93,418	)		53,354
Noninterest income:
Service charges and fees on deposits		2,268			2,595			6,819			7,506
Mortgage banking income		6,198			1,506			10,875			5,468
Investment securities gains (losses)
Gain on sale of securities		3			5,644			1,861			5,644
Total other-than-temporary impairment losses (“OTTI”)		(174	)		(3,478	)		(1,057	)		(20,669	)
Portion of OTTI recognized in other comprehensive loss		(135	)		(45	)		48			5,519

Investment securities gains (losses)		(306	)		2,121			852			(9,506	)
Change in fair value of derivatives		(1,481	)		435			(1,510	)		170
Increase in cash surrender value of life insurance		576			568			1,702			1,623
Gain on exchange of subordinated debt for common stock		—			—			507			—
Other income		552			1,254			3,302			3,811

Total noninterest income		7,807			8,479			22,547			9,072
Noninterest expenses:
Salaries and employee benefits		14,062			12,234			42,102			36,976
Occupancy, furniture and equipment		5,012			4,478			14,625			13,397
Amortization of core deposit intangibles		870			985			2,609			2,956
FDIC assessments		2,613			921			5,846			3,310
Foreclosure losses		6,187			1,337			12,122			3,656
Other expenses		7,398			5,687			20,180			17,207

Total noninterest expenses		36,142			25,642			97,484			77,502

Loss before income taxes		(108,921	)		1,581			(168,355	)		(15,076	)
Income tax expense (benefit)		26,972			701			27,000			(6,686	)

Net loss		(135,893	)		880			(195,355	)		(8,390	)
Preferred stock dividends and amortization		(1,887	)		(1,167	)		(2,786	)		(3,477	)

Net loss applicable to common stockholders	$	(137,780	)	$	(287	)	$	(198,141	)	$	(11,867	)

Weighted average common shares outstanding		12,531			10,984			12,164			10,373
Weighted average common shares outstanding, assuming dilution		12,531			10,984			12,164			10,373
Basic net loss per common share	$	(11.00	)	$	(0.03	)	$	(16.29	)	$	(1.14	)
Diluted net loss per common share	$	(11.00	)	$	(0.03	)	$	(16.29	)	$	(1.14	)

See Notes to Condensed Consolidated Financial Statements.

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


															Accumulated
															Other			Unearned			Unearned			Total
	Preferred		Common		Surplus							Accumulated			Comprehensive			ESOP			Restricted			Stockholders’
	Stock		Stock		Preferred		Warrants		Common			Deficit			(Loss) Gain			Stock			Stock			Equity
Balance at December 31, 2009	$	—	$	12	$	—	$	8,646	$	322,043		$	(130,889	)	$	(7,825	)	$	(263	)	$	(20	)	$	191,704
Comprehensive loss:
Net loss		—		—		—		—		—			(195,355	)		—			—			—			(195,355	)
Other comprehensive gain, net of tax expense of $2.6 million unrealized gain on securities available for sale, arising during the period, net of reclassification adjustment		—		—		—		—		—			—			4,489			—			—			4,489
Change in accumulated loss on cash flow hedging instrument, net of tax of $0.3 million		—		—		—		—		—			—			483			—			—			483

Comprehensive loss																									(190,383	)
Cumulative preferred stock dividend, net of amortization		—		—		2,258		—		—			(2,786	)		—			—			—			(528	)
Exchange of trust preferred debt for 849,156 shares of common stock				1		—		—		2,883			—			—			—			—			2,884
Compensation expense related to stock options		—		—		—		—		204			—			—			—			—			204
Issuance of 111 shares Series B preferred stock and 792,859 warrants		—		—		9,887		1,164		—			—			—			—			—			11,051
Issuance of 3 shares Series C preferred stock and 21,429 warrants		—				283		17					—			—			—						300
Amortization of unearned restricted stock		—		—		—		—		—			—			—			—			10			10
Issuance of 43,507 shares related to board compensation		—		—		—		—		155			—			—			—			—			155
Release of 2,954 shares by ESOP		—		—		—		—		(127	)		—			—			134			—			7

Balance at September 30, 2010	$	—	$	13	$	12,428	$	9,827	$	325,158		$	(329,030	)	$	(2,853	)	$	(129	)	$	(10	)	$	15,404

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,
	2010			2009
Net cash provided by (used in) operating activities	$	26,141		$	(23,537	)

Investing activities
Proceeds from sales of investment securities available-for-sale		89,130			157,614
Proceeds from maturities of investment securities available-for-sale		60,577			57,334
Purchase of investment securities available-for-sale		(117,055	)		(162,586	)
Net increase in loans		(38,946	)		(164,713	)
Redemptions of tax lien certificates		14,318			29,909
Purchase of tax lien certificates		(14,875	)		(30,823	)
Purchase of premises and equipment		(3,403	)		(6,616	)
Proceeds from sale of premises and equipment		—			376
Proceeds from sale of foreclosed assets		18,661			11,149
Decrease in stock of FHLB		1,305			3,199

Net cash provided by (used in) investing activities		9,712			(105,157	)
Financing activities
Net increase in deposits		120,147			277,130
Decrease in FHLB advances		(1,997	)		(145,033	)
Proceeds from note payable		—			38,575
Principal payment on note payable		(1,067	)		—
Net decrease in other borrowed funds		(204	)		—
Proceeds from exchange of subordinated debt for common stock		193			—
Proceeds from issuance of common stock		—			3,299
Proceeds from issuance of preferred stock		11,400			—
Cash dividends paid		—			(2,395	)

Net cash provided by financing activities		128,472			171,576

Net increase in cash and cash equivalents		164,325			42,882
Cash and cash equivalents at beginning of period		99,770			89,448

Cash and cash equivalents at end of period	$	264,095		$	132,330

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

See “Note 14 – Subsequent Event” regarding the recent issuance by the Office of Thrift Supervision (the “OTS”) of an Order to Cease and Desist to the Corporation and its wholly-owned subsidiary, Superior Bank.

The Condensed Consolidated Statement of Financial Condition as of December 31, 2009, presented herein has been derived from the financial statements audited by Grant Thornton LLP, independent registered public accountants, as indicated in their report, dated March 11, 2010, included in 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.

Reclassifications

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

Note 2 — Recent Accounting Pronouncements

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

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

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

In January 2010, FASB issued ASU No. 2010-06 — Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends Subtopic 820-10, Fair Value Measurements and Disclosures, that require new disclosures for transfers in and out of Levels 1 and 2, and for activity in Level 3 fair value measurements. In addition, ASU 2010-06 provides amendments that clarify existing disclosures relating to the level of disaggregation and inputs and valuation techniques. Fair value measurement disclosures should be provided for each class of assets and liabilities, and disclosures should be made about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring measurements that fall in either Level 2 or Level 3. The new disclosures and clarification of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The Corporation adopted the disclosure requirements of ASU 2010-06 as of January 1, 2010. The adoption of ASU 2010-06 did

not have an impact to the Corporation’s financial position, results of operations or cash flows (See Note 12). The disclosures about purchases, sales, issuances and settlements in the roll-forward activity of activity in the Level 3 fair value measurements will become effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

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

Note 3 — Investment Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in thousands)
*Investment securities available-for-sale*
U.S. Agency securities	$	18,255	$	341	$	—	$	18,596
Mortgage-backed securities (“MBS”):
U.S. Agency pass-through		102,425		3,280		7		105,698
U.S. Agency collateralized mortgage obligation (“CMO”)		81,183		2,596		—		83,779
Private-label CMO		15,264		239		2,234		13,269

Total MBS		198,872		6,115		2,241		202,746
State, county and municipal securities		29,415		960		208		30,167
Corporate obligations:
Corporate debt		4,082		—		82		4,000
Pooled trust preferred securities		8,080		—		4,501		3,579
Single issue trust preferred securities		5,000		—		3,225		1,775

Total corporate obligations		17,162		—		7,808		9,354
Equity securities		113		26		—		139

Total investment securities available-for-sale	$	263,817	$	7,442	$	10,257	$	261,002

Investment securities with an amortized cost of $253.8 million as of September 30, 2010 were pledged to secure public funds and for other purposes as required or permitted by law.

The amortized cost and estimated fair values of investment securities as of September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Securities Available-for-Sale
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	285	$	286
Due after one year through five years		7,403		7,401
Due after five years through ten years		23,202		23,735
Due after ten years		34,055		26,834
Mortgage-backed securities		198,872		202,746

	$	263,817	$	261,002

During the second quarter, the Corporation sold certain U.S. Agency securities and U.S Agency MBS with combined amortized cost and market values of $87.4 million and $89.1 million, respectively. The Corporation reinvested a portion of the proceeds into a like amount of U. S Agency MBS guaranteed by the Government National Mortgage Association (“Ginnie Mae”). This repositioning reduced the duration of the

portfolio and improved risk-based capital. The Corporation realized a net gain of approximately $1.7 million. A portion of these securities had impairment losses of approximately $0.2 million, which the Corporation realized in the three months ended March 31, 2010.

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


	Less than 12 Months				More than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses (1)		Value		Losses (1)		Value		Losses (1)
	(Dollars in thousands)
*Temporarily Impaired*
MBS
U.S. Agency pass-through	$	74	$	—	$	239	$	7	$	313	$	7
U.S. Agency CMO		38		—		—		—		38		—
Private-label CMO		—		—		5,903		850		5,903		850

Total MBS		112		—		6,142		857		6,254		857
State, county and municipal securities		1,585		79		970		129		2,555		208
Corporate obligations:
Corporate debt		—		—		4,000		82		4,000		82
Single issue trust preferred securities		—		—		1,775		3,225		1,775		3,225

Total corporate obligations		—		—		5,775		3,307		5,775		3,307

Total temporarily impaired securities		1,697		79		12,887		4,293		14,584		4,372
*Other-than-temporarily Impaired*
MBS
Private-label CMO		—		—		3,094		1,384		3,094		1,384
Corporate obligations
Pooled trust preferred securities		—		—		3,579		4,501		3,579		4,501

Total OTTI securities		—		—		6,673		5,885		6,673		5,885

Total temporarily and other-than-temporarily impaired	$	1,697	$	79	$	19,560	$	10,178	$	21,257	$	10,257


(1)		Unrealized losses are included in other comprehensive loss, net of unrealized gains and applicable income taxes.

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


	Less than		Greater Than
	12 Months		12 Months		Total
*Temporarily Impaired*
Mortgage-backed securities:
U.S. Agency residential		2		1		3
U.S. Agency CMO		1		—		1
Private-label CMO		—		5		5

Total MBS		3		6		9
State, county and municipal securities		6		3		9
Corporate obligations:
Corporate debt		—		3		3
Single issue trust preferred securities		—		1		1

Total corporate obligations		—		4		4

Total temporarily impaired securities		9		13		22
*Other-than-temporarily Impaired*
Mortgage-backed securities:
Private-label CMO		—		1		1
Corporate obligations:
Pooled trust preferred securities		—		4		4

Total OTTI securities		—		5		5

Total temporarily and other-than-temporarily impaired		9		18		27

Other-Than-Temporary Impairment (“OTTI”)

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

In determining OTTI according to FASB guidance, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether 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.

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

As of September 30, 2010, the Corporation’s securities portfolio consisted of 198 securities, 27 of which were in an unrealized loss position. The majority of unrealized losses are related to the Corporation’s private-label CMOs and trust preferred securities, as discussed below.

Mortgage-backed securities

As of September 30, 2010, approximately 93% of the dollar volume of MBS the Corporation held were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Ginnie Mae, institutions which the government has affirmed its commitment to support, and these securities have nominal unrealized losses. The Corporation’s MBS portfolio also includes 10 private-label CMOs with a market value of $13.3 million, which had net unrealized losses of approximately $2.0 million as of September 30, 2010. These private-label CMOs were rated AAA at purchase. The following is a summary of the investment grades for these securities (dollars in thousands):


		Credit Support	Net
Rating		Coverage	Unrealized
Moody/Fitch	Count	Ratios (1)	(Loss) Gain
A1/NR	1	2.61	$	(162	)
Aaa/NR	1	4.73		—
NR/AAA	1	3.08		111
NR/AA	1	3.26		(143	)
B2/AA	1	N/A		(452	)
B2/NR	1	3.99		(56	)
NR/BBB	1	2.17		(37	)
Caa2/CCC (2)	1	0.75		(1,384	)
NR/C (2)	2	0.00-0.25		128

Total	10		$	(1,995	)


(1)		The Credit Support Coverage Ratio determines the multiple of credit support, and it is based on assumptions for the performance of the loans within the delinquency pipeline. The assumptions used are: Current Collateral Support/ ((60 day delinquencies x.60) + (90 day delinquencies x.70) + (foreclosures x 1.00) + (other real estate x 1.00)) x .40 for loss severity.

(2)		Includes all private-label CMOs that have OTTI (see discussion below).

During the first and third quarters of 2010, the Corporation recognized an immaterial amount of OTTI on two of the private-label CMOs. The assumptions used in the valuation model include expected future default rates, loss severity and prepayments. The model also takes into account the structure of the security, including credit support. Based on these assumptions, the model calculates and projects the timing and amount of interest and principal payments expected for the security. As of September 30, 2010, the fair values of the three private-label CMO securities with OTTI totaled $3.7 million and were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. The discount rates used in the valuation model were based on a yield that the market would require for securities with maturities and risk characteristics similar to the securities being measured (see Note 12). The following table provides additional information regarding these CMO valuations as of September 30, 2010 (dollars in thousands):


			Discount										Year-to-Date
			Margin								Actual		OTTI
	Price		Basis				Cumulative		Average		60+ Days		Credit
Security	(%)		Points		Yield		Default		Security		Delinquent		Portion			Other			Total
CMO 1		10.76		1756		18%		55.09%		50%		16.27%	$	(54	)	$	(85	)	$	(139	)
CMO 2		17.57		1629		17%		49.04%		45%		27.72%		—			—			—
CMO 4		63.01		1440		16%		29.38%		45%		16.67%		(97	)		74			(23	)

													$	(151	)	$	(11	)	$	(162	)

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

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

State, county and municipal securities

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

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

Trust preferred securities

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

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

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

	•		terms of the CDO structure, as laid out in the indenture;

	•		the cash flow waterfall (for both interest and principal);

	•		overcollateralization and interest coverage tests;

	•		events of default/liquidation;

	•		mandatory auction call;

	•		optional redemption;

	•		hedge agreements; and

	•		discounted cash flow modeling.

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

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

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

The following tables provide various information and fair value model assumptions regarding the Corporation’s CDOs as of September 30, 2010 (dollars in thousands):


										Year-to-Date
										Other-than-temporary-impairment
	Single/	Class/	Amortized		Fair		Unrealized			Credit
Name	Pooled	Tranche	Cost		Value		Loss			Portion			Other			Total
MM Caps Funding I Ltd	Pooled	MEZ	$	2,135	$	896	$	(1,239	)	$	—		$	—		$	—
MM Community Funding Ltd	Pooled	B		1,957		789		(1,168	)		(20	)		(117	)		(137	)
Preferred Term Securities V	Pooled	MEZ		1,145		808		(337	)		(61	)		37			(24	)
Tpref Funding III Ltd	Pooled	B-2		2,843		1,086		(1,757	)		(174	)		43			(131	)
Emigrant Capital Trust (1)	Single	Sole		5,000		1,775		(3,225	)		—			—			—

			$	13,080	$	5,354	$	(7,726	)	$	(255	)	$	(37	)	$	(292	)


				Original Collateral -			Performing Collateral -
				Percent of Actual			Percent of Expected
	Lowest	Performing		Deferrals and			Deferrals and			Excess
Name	Rating	Banks		Defaults			Defaults			Subordination (2)
MM Caps Funding I Ltd	C		21		21	%		18	%		0	%
MM Community Funding Ltd	C		7		25	%		29	%		0	%
Preferred Term Securities V	CCC		2		5	%		36	%		0	%
Tpref Funding III Ltd	C		22		28	%		20	%		0	%
Emigrant Capital Trust (1)	NR	NA		NA			NA			NA


	Fair Value		Discount Margin	Yield
Name	(Price to Par)		(Basis Points)	(Basis Points)
MM Caps Funding I Ltd	$	44.79	Swap + 1800	9.48% Fixed
MM Community Funding Ltd		15.77	LIBOR + 1500	LIBOR + 310
Preferred Term Securities V		58.85	LIBOR + 1600	LIBOR + 210
Tpref Funding III Ltd		27.16	LIBOR + 1200	LIBOR + 190
Emigrant Capital Trust (1)		35.50	LIBOR + 1162	LIBOR + 200


(1)		There has been no notification of deferral or default on this issue. An analysis of the company, including discussion with its management, indicates there is adequate capital and liquidity to service the debt. The discount margin of 1162 basis points was derived from implied credit spreads from certain publicly traded trust preferred securities within the issuer’s peer group.

(2)		Excess subordination represents the additional defaults in excess of both the current and projected defaults the issue can absorb before the security experiences any credit impairment. Excess subordination is calculated by determining what level of defaults an issue can experience before the security has any credit impairment and then subtracting both the current and projected future defaults.

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

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

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

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


	For the Three			For the Nine
	Months Ended			Months Ended
	September 30, 2010			September 30, 2010
	(Dollars in thousands)
Balance at beginning of period	$	8,924		$	8,869
Amounts related to credit losses for which an OTTI was not previously recognized		—			154
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		309			405
Reductions for securities where there is an intent to sell or requirement to sell		—			(154	)
Reductions for securities that are in total default		(1,434	)		(1,434	)
Reductions for increases in cash flows expected to be collected		(447	)		(488	)

Balance at end of period	$	7,352		$	7,352

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

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

As of September 30, 2010, the Corporation has stock in FHLB Atlanta totaling $16.9 million (its par value), which is presented separately on the face of the statement of financial condition. There is no ready market for the stock and no quoted market values, as only member institutions are eligible to be shareholders and all transactions are, by charter, to take place at par with FHLB Atlanta as the only purchaser. Therefore, the Corporation accounts for this investment as a long-term asset and carries it at cost. Management reviews this stock quarterly for impairment and conducts its analysis in accordance with ASC 942-325-35-3.

Management’s determination as to whether this investment is impaired is based on management’s assessment of the ultimate recoverability of its par value (cost) rather than recognizing temporary declines in its value. Management has reviewed publicly available information regarding the financial condition of FHLB Atlanta and concluded that no impairment existed based on its assessment of the ultimate recoverability of the par value of the investment.

Note 4 – Allowance for Loan Losses

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


	For The Three Months Ended						For The Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning allowance for loan losses	$	79,425		$	33,504		$	41,884		$	28,850
Provision for loan losses		102,106			5,169			161,596			14,602
Total charge-offs		30,422			4,546			52,837			9,868
Total recoveries		(253	)		(209	)		(719	)		(752	)

Net charge-offs		30,169			4,337			52,118			9,116

Ending allowance for loan losses	$	151,362		$	34,336		$	151,362		$	34,336

Total loans, net of unearned income	$	2,415,862		$	2,434,534

Allowance for loan losses to total loans, net of unearned income		6.27	%		1.41	%

The overall level of allowance for loan losses increased significantly over the course of 2010 with the largest increase occurring during the third quarter of 2010. Specific allowance levels and historical loss ratios were the drivers of this increase with the level of specific allocation required relative to impaired loans being the most significant. In comparison to the second quarter of 2010, historical loss ratios continued to increase as the Corporation continued to realize losses in all major loan categories with the majority of loss experience in construction loans secured by undeveloped or partially-developed land.

Note 5 — Debt

On September 3, 2010, the Corporation entered into a second modification and limited waiver agreement (the “Agreement”) related to the $5.9 million outstanding on its line of credit with a regional bank. The Agreement extends the maturity date to November 3, 2010 and provides a limited waiver of certain rights and covenants under the original loan agreement.

In addition, the Corporation has deferred regularly scheduled interest payments on all issues of its junior subordinated debentures relating to its five different issues of trust preferred securities aggregating approximately $118 million in principal amount currently outstanding. During the deferral period, the respective trusts will likewise suspend the declaration and payment of dividends on the trust preferred securities. The terms of the junior subordinated debentures and the related documents governing the respective issues of trust preferred securities contemplate the possibility of such deferrals and allow the Corporation to defer payments without default or penalty. The deferrals are for up to five years.

So long as interest is deferred on the junior subordinated debentures and corresponding distributions are deferred on the trust preferred securities, interest will continue to accrue on the junior subordinated notes, and that deferred interest will also accrue interest. The Corporation may terminate the deferrals and resume payments at any time. Upon the termination or expiration of the deferrals, all accrued and unpaid interest will be due and payable on the junior subordinated notes, and a corresponding amount of distributions will be payable on the trust preferred securities.

The Corporation must seek OTS approval before incurring any new debt or renewing any existing debt (See Note 14).

Note 6 — 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, forward commitments, 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 into 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 London Interbank Offered Rate (“LIBOR”). As of September 30, 2010 and December 31, 2009, the Corporation had $0.7 million 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 offset each other, for the most part, and do not significantly impact the Corporation’s results of operations.

Fair Value Hedges

As of September 30, 2010 and December 31, 2009, the Corporation had $2.8 million in notional amount of CD swaps designated and qualified as fair value hedges. These CD swaps were designated as hedging instruments to hedge the risk of changes in the fair value of the underlying brokered CD due to changes in interest rates. As of September 30, 2010 and December 31, 2009, the amount of CD swaps designated as hedging instruments had a recorded fair value of $0.4 million and $0.2 million, respectively, and a weighted average life of 2.1 years and 2.5 years, respectively. The weighted average fixed rate (receiving rate) was 4.70% and the weighted average variable rate (paying rate) was 0.40% (LIBOR-based).

Cash Flow Hedges

During the second quarter, the Corporation settled $3.5 million of notional amount of interest rate swap agreements related to certain subordinated debt that was exchanged for common stock and incurred a loss of $0.1 million (see Note 13 for additional disclosure). During the third quarter, the Corporation settled the remaining $18.5 million of notional amount of interest rate swap agreements related to certain subordinated debt and incurred a loss of $1.0 million.

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 $90.3 million and $41.0 million as of September 30, 2010 and December 31, 2009, respectively. The fair value of the origination commitments was $0.8 million and $(0.4) million as of September 30, 2010 and December 31, 2009, respectively.

Forward Sales Commitments

To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to customers, the Corporation enters into forward sales commitments of MBS. During the period from commitment date to closing date, the Corporation is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans, resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which the Corporation agrees to deliver certain MBS, are established. These commitments are non-hedging derivatives in accordance with FASB guidance and recorded at fair value. The aggregate amount of forward commitments was $147.6 million as of September 30, 2010. The fair value of the commitments was $0.3 million as of September 30, 2010.

Forward Purchase Commitments

If the Corporation determines that the amount of its forward sales commitments exceeds the amount necessary to mitigate the interest rate risk in the rate lock commitments, it will enter into forward purchase commitments to purchase MBS on an agreed-upon date and price similar to the terms of forward sales commitments. These commitments are non-hedging derivatives in accordance with FASB guidance and recorded at fair value. The aggregate amount of forward purchase commitments was $45.3 million as of September 30, 2010. The fair value of the commitments was $(0.1) million as of September 30, 2010.

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

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


	September 30, 2010					December 31, 2009
			Estimated					Estimated
	Notional		Fair			Notional		Fair
	Amount		Value			Amount		Value
	(Dollars in thousands)
Interest rate derivatives designated as hedges of fair value:
Interest rate swap on brokered certificates of deposit	$	2,777	$	374		$	2,777	$	228
Interest rate derivatives designated as hedges of cash flows:
Interest rate swaps on subordinated debenture		—		—			22,000		(766	)
Non-hedging derivatives:
Brokered certificates of deposit interest rate swap		723		97			723		59
Mortgage loan held for sale interest rate lock commitment		93,891		825			41,038		(370	)
Mortgage loan forward sales commitments		147,598		305			—		—
Mortgage loan forward purchase commitments		45,321		(115	)		—		—
Commercial loan interest rate swap with loan customer		3,690		407			3,766		323
Commercial loan interest rate swap with financial institution		3,690		(407	)		3,766		(323	)

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


	Weighted-Average
	Interest			Interest
	Rate			Rate
	Paid			Received
Interest rate swaps:
Fair value hedge on brokered certificates of deposit interest rate swap		0.43	%		4.70	%
Non-hedging interest rate swap on commercial loan		6.73			6.73

Gains, Losses and Derivative Cash Flows

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

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


	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Interest rate swap on brokered certificates of deposit:
Amount of gain included in interest expense on deposits	$	30		$	29		$	89		$	79
Amount of loss included in other noninterest income		(5	)		(12	)		(5	)		(492	)

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


	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Interest rate swap on subordinated debenture:
Net loss included in interest expense on subordinated debt	$	(105	)	$	(142	)	$	(420	)	$	(301	)
Amount of gain (loss) recognized in other comprehensive income		575			(138	)		384			66
Amount of loss recognized in other income		(975	)		—			(1,129	)		—

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

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


	For the					For the
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010			2009		2010			2009
	(Dollars in thousands)
Non-hedging derivatives:
Brokered certificates of deposit interest rate swap	$	21		$	19	$	62		$	(53	)
Mortgage loan held for sale interest rate lock commitment		195			428		1,195			715
Mortgage loan forward sales commitments		956			—		(305	)		—
Mortgage loan forward purchase commitments		324			—		(115	)		—
Net settlement of forward purchase and sale commitments		(2,323	)		—		(2,323	)		—

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. 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 was approximately $3.2 million as of September 30, 2010.

Note 7 — Segment Reporting

The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama Region consists of operations located throughout Alabama. The Florida Region consists of operations located primarily in the Tampa Bay area and panhandle region of Florida. The Corporation’s reportable segments are managed as separate business units because they are located in different geographic areas. Both segments derive revenues from the delivery of financial services. These services include commercial loans, mortgage loans, consumer loans, deposit accounts and other financial services. Administrative and other banking activities include the results of the Corporation’s investment portfolio, home mortgage division, brokered deposits and borrowed funds positions.

The Corporation evaluates performance and allocates resources based on profit or loss from operations. There are no material inter-segment sales or transfers. Net interest income is used as the basis for performance evaluation rather than its components, total interest income and total interest expense. The accounting policies used by each reportable segment are the same as those discussed in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009. All costs, except corporate administration and income taxes, have been allocated to the reportable segments. Therefore, combined amounts agree to the consolidated totals.


							Total						Superior
	Alabama			Florida			Alabama and			Administrative			Bancorp
	Region			Region			Florida			and Other			Combined
	(Dollars in thousands)
Three Months Ended September 30, 2010
Net interest income	$	10,278		$	9,071		$	19,349		$	2,171		$	21,520
Provision for loan losses (1)		5,158			36,396			41,554			60,552			102,106
Noninterest income		2,042			427			2,469			5,338			7,807
Noninterest expense		9,674			9,258			18,932			17,210			36,142

Operating loss	$	(2,512	)	$	(36,156	)	$	(38,668	)	$	(70,253	)		(108,921	)

Income tax benefit														26,972

Net loss													$	(135,893	)


Total assets	$	1,040,934		$	1,222,415		$	2,263,349		$	930,152		$	3,193,501

Three Months Ended September 30, 2009
Net interest income	$	9,870		$	9,828		$	19,698		$	4,215		$	23,913
Provision for loan losses (1)		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)	$	1,976		$	864		$	2,840		$	(1,259	)	$	1,581

Income tax expense														701

Net income													$	880


Total assets	$	1,067,866		$	1,222,358		$	2,290,224		$	936,346		$	3,226,570


Nine Months Ended September 30, 2010
Net interest income	$	30,368		$	30,741		$	61,109		$	7,069		$	68,178
Provision for loan losses (1)		8,020			55,365			63,385			98,211			161,596
Noninterest income		6,015			1,317			7,332			15,215			22,547
Noninterest expense		27,992			22,664			50,656			46,828			97,484

Operating profit (loss)	$	371		$	(45,971	)	$	(45,600	)	$	(122,755	)	$	(168,355	)

Income tax expense														27,000

Net loss													$	(195,355	)

Nine Months Ended September 30, 2009
Net interest income	$	26,861		$	28,294		$	55,155		$	12,801		$	67,956
Provision for loan losses (1)		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)	$	2,783		$	5,828		$	8,611		$	(23,687	)	$	(15,076	)

Income tax benefit														(6,686	)

Net loss													$	(8,390	)


(1)		Provision for loan losses for Alabama and Florida segments primarily represents charge-offs during the periods presented. Any provision in excess of charge-offs initially flows through Administrative and Other.

Note 8 —Net Loss per Common Share

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


	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Numerator:
Net (loss) income	$	(135,893	)	$	880		$	(195,355	)	$	(8,390	)
Less preferred stock dividends and amortization		(1,887	)		(1,167	)		(2,786	)		(3,477	)

For basic and diluted, net loss applicable to common stockholders	$	(137,780	)	$	(287	)	$	(198,141	)	$	(11,867	)

Denominator:
For basic, weighted average common shares outstanding		12,531			10,984			12,164			10,373
Effect of dilutive stock options		—			—			—			—

Average common shares outstanding, assuming dilution		12,531			10,984			12,164			10,373


Basic net loss per common share	$	(11.00	)	$	(0.03	)	$	(16.29	)	$	(1.14	)

Diluted net loss per common share	$	(11.00	)	$	(0.03	)	$	(16.29	)	$	(1.14	)

Basic net loss per common share is calculated by dividing net loss, less dividend requirements on outstanding preferred stock, by the weighted-average number of common shares outstanding for the period.

Diluted net loss per common share takes into consideration the pro forma dilution assuming certain warrants, unvested restricted stock and unexercised stock option awards were converted or exercised into common shares. Common stock equivalents of 20,290 and 299,830 and 303,549 and 152,535 were not included in computing diluted net loss per share for the three and nine months ended September 30, 2010 and 2009, respectively, as they were considered anti-dilutive.

Note 9 — Comprehensive Loss

Total comprehensive income (loss) was $(133.6) million and $(190.4) million for the three and nine months ended September 30, 2010, respectively, and $1.4 million and $(8.0) million for the three and nine months ended September 30, 2009, respectively. Total comprehensive income (loss) consists of net loss and other comprehensive income (loss). The components of other comprehensive income (loss) for the three and nine months ended September 30, 2010 and 2009 are as follows:


	Pre-Tax			Income Tax			Net of
	Amount			Expense			Income Tax
	(Dollars in thousands)
Three Months Ended September 30, 2010
Unrealized gain on available-for-sale securities	$	2,406		$	(890	)	$	1,516
Reclassification adjustment for losses realized in net loss		306			(113	)		193
Unrealized loss on derivatives		(75	)		28			(47	)
Reclassification adjustment for losses realized in net loss		975			(361	)		614

Net unrealized gain	$	3,612		$	(1,336	)	$	2,276

Three Months Ended September 30, 2009
Unrealized gain on available-for-sale securities	$	3,119		$	(1,154	)	$	1,965
Reclassification adjustment for gains realized in net loss		(2,121	)		785			(1,336	)
Unrealized loss on derivatives		(219	)		81			(138	)

Net unrealized gain	$	779		$	(288	)	$	491


Nine Months Ended September 30, 2010
Unrealized gain on available-for-sale securities	$	7,977		$	(2,951	)	$	5,026
Reclassification adjustment for gains realized in net loss		(852	)		315			(537	)
Unrealized loss on derivatives		(363	)		135			(228	)
Reclassification adjustment for losses realized in net loss		1,129			(418	)		711

Net unrealized gain	$	7,891		$	(2,919	)	$	4,972

Nine Months Ended September 30, 2009
Unrealized loss on available-for-sale securities	$	(8,936	)	$	3,306		$	(5,630	)
Reclassification adjustment for losses realized in net loss		9,506			(3,517	)		5,989
Unrealized gain on derivatives		106			(39	)		67

Net unrealized gain	$	676		$	(250	)	$	426

Note 10 — Income Taxes

The Corporation recognized income tax expense of $27.0 million for the three and nine months ended September 30, 2010, respectively, compared to an income tax expense (benefit) of $0.7 million and $(6.7) million for the three and nine months ended September 30, 2009, respectively. The difference between the effective tax rates in 2010 and the blended federal statutory rate of 34% and state tax rates between 5% and 6% was primarily due to the recognition of an additional $66.9 million and $88.9 million valuation allowance against the Corporation’s deferred tax assets (“DTAs”) during the three and nine months ended September 30,2010, respectively. The Corporation’s total valuation allowance was $90.1 million at September 30, 2010, which has reduced the net DTA to $0.0. The difference between the effective and statutory tax rates in 2009 was primarily due to certain tax-exempt income from investments and income reported from insurance policies.

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. These calculations are based on many complex factors, including estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

The recognition of DTAs is based upon management’s judgment that realization of the asset is more likely than not. Management’s judgment is based on estimates concerning various future events and uncertainties, including future reversals of existing taxable temporary differences, the timing and amount of future income earned by the Corporation’s subsidiaries, and the implementation of various tax planning strategies to maximize realization of the DTA. A complete discussion of management’s assessment of the realizability of the Corporation’s DTAs is included in the 2009 Annual Report on Form 10-K under the heading “Critical Accounting Estimates,” in Management’s Discussion and Analysis and in Note 14 to the 2009 consolidated financial statements.

Management evaluates the realizability of DTAs quarterly and, if necessary, adjusts the valuation allowance accordingly. Based on the net loss incurred in the second and third quarters, management has revised its assessment of the realizablity of the DTAs as of September 30, 2010 and recorded a $90.1 million valuation allowance. As a result, beginning in the third quarter of 2010, the Corporation no longer considers future taxable income in determining the realizability of its DTA. The Corporation’s estimate of the realization of its DTA is solely based on future reversals of existing taxable temporary differences and currently available tax planning strategies. Additionally, management may further increase the valuation allowance in the near term if estimates of future taxable income are reduced due to further deteriorations in market conditions or the economy, which could produce additional credit losses within the loan and investment portfolios.

Note 11 — Stock Incentive Plan

In April 2010, the Corporation’s stockholders approved the Superior Bancorp 2010 Incentive Compensation Plan (the “2010 Plan”) which succeeded the 2008 Plan. The purpose of the 2010 Plan is to provide additional incentive for the Corporation’s 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 2010 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 2010 Plan is 1,500,000 shares plus an annual addition of shares on January 1 of each year equal to two percent of the number of shares of the Corporation’s outstanding common stock at that time.

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 tables below.

The fair value of each option award is estimated on the date of grant based upon the Black-Scholes pricing model that uses the assumptions noted in the following table. The risk-free interest rate is based on the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term. 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 months ended September 30:


	2010			2009
Risk-free interest rate		2.57	%		2.57	%
Volatility factor		55.79			55.38
Expected term (in years)		5.00			5.00
Dividend yield		0.00			0.00

A summary of stock option activity as of September 30, 2010 and changes during the nine months ended is shown below (dollars in thousands):


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
For the Nine Months Ended September 30, 2010	Number			Price		Term		Value
Under option, beginning of period		925,647		$	26.85
Granted		5,000			3.44
Exercised		—			—
Forfeited		(25,119	)		14.62
Under option, end of period		905,528		$	27.06		4.96	$	—

Exercisable at end of period		613,028		$	31.91		2.63	$	—

Weighted-average fair value per option of options granted during the period	$	3.44

As of September 30, 2010, there was $0.2 million of total unrecognized compensation expense related to the unvested awards. This expense will be recognized over approximately the next 30 months unless the shares vest earlier based on achievement of benchmark trading price levels. During the three and nine months ended September 30, 2010, the Corporation recognized approximately $0.1 million and $0.2 million, respectively, in compensation expense related to options granted. During the three and nine months ended September 30, 2009, the Corporation recognized approximately $0.1 million and $0.4 million, respectively, in compensation expense related to options granted.

Note 12 — Fair Value Measurements

In accordance with FASB guidance, the Corporation measures fair value at the price that would be received by selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Corporation prioritizes the assumptions that market participants would use in pricing the asset or liability (“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 for 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 Corporation’s assets and liabilities measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset as of September 30, 2010:


			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
September 30, 2010
*Investment securities available-for-sale*
U.S. Agency securities	$	18,596	$	—	$	18,596	$	—
MBS
U.S. Agency MBS pass-through		105,698		—		105,698		—
U.S. Agency CMO		83,779		—		83,779		—
Private-label CMO		13,269		—		7,129		6,140

Total MBS		202,746		—		196,606		6,140
State, county and municipal securities		30,167		—		28,645		1,522
Corporate obligations
Corporate debt		4,000		—		4,000		—
Pooled trust preferred securities		3,579		—		—		3,579
Single issue trust preferred securities		1,775		—		—		1,775

Total corporate obligations		9,354		—		4,000		5,354
Equity securities		139		139		—		—

Total investment securities available-for-sale		261,002		139		247,847		13,016
*Derivative assets*		1,876		—		1,876		—

Total recurring basis measured assets	$	262,878	$	139	$	249,723	$	13,016


*Derivative liabilities*	$	1,000	$	—	$	1,000	$	—

Total recurring basis measured liabilities	$	1,000	$	—	$	1,000	$	—


			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
December 31, 2009
*Investment securities available-for-sale*
U.S. Agency securities	$	53,681	$	—	$	53,681	$	—
MBS
U.S. Agency pass-through		163,724		—		163,724		—
U.S. Agency CMO		12,759		—		12,759		—
Private-label CMO		16,191		—		8,771		7,420

Total MBS		192,674		—		185,254		7,420
State, county and municipal securities		31,462		—		29,733		1,729
Corporate obligations
Corporate debt		4,000		—		4,000		—
Pooled trust preferred securities		3,203		—		—		3,203
Single issue trust preferred securities		977		—		—		977

Total corporate obligations		8,180		—		4,000		4,180
Equity securities		313		313		—		—

Total investment securities available-for-sale		286,310		313		272,668		13,329
*Derivative assets*		610		—		610		—

Total recurring basis measured assets	$	286,920	$	313	$	273,278	$	13,329


*Derivative liabilities*	$	1,459	$	—	$	1,459	$	—

Total recurring basis measured liabilities	$	1,459	$	—	$	1,459	$	—

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 a single issue trust preferred security and CDOs backed by pooled trust preferred securities and certain private-label mortgage-backed securities. The fair value of the trust preferred securities is calculated using an income approach based on various spreads to LIBOR determined after a review of applicable financial data and credit ratings (see Note 3 — Trust Preferred Securities). As of September 30, 2010, the fair values of five private-label mortgage-backed securities totaling $6.1 million were measured using Level 3 inputs because the market has become illiquid, as indicated by few, if any, trades during the period. Prior to June 30, 2009, these securities were previously measured using Level 2 inputs. 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. 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 3 — Mortgage-backed 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 periods indicated, 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-Sale Securities
	September 30,
	2010			2009
	(Dollars in thousands)
Balance at January 1	$	13,329		$	18,497
Transfer into level 3 category during the year		—			13,978
Total gains (losses) (realized and unrealized)
Included in earnings — investment security loss		(405	)		(15,150	)
Included in other comprehensive loss		1,783			(1,554	)
Other changes due to principal payments		(1,691	)		(1,192	)

Balance at September 30	$	13,016		$	14,579

Total amount of loss for the period year-to-date included in earnings attributable to the change in unrealized gains (losses) related to assets held at September 30	$	(405	)	$	(15,150	)

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 for the periods indicated:


			Quoted Prices
			in
			Active Markets
			for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
September 30, 2010
Mortgage loans held-for-sale	$	63,884	$	—	$	63,884	$	—
Impaired loans, net of specific allowance		192,850		—		—		192,850
Other foreclosed real estate		58,766		—		—		58,766
Other real estate held-for-sale		3,258		—		—		3,258

Total nonrecurring basis measured assets	$	318,758	$	—	$	63,884	$	254,874


December 31, 2009
Mortgage loans held-for-sale	$	71,879	$	—	$	71,879	$	—
Impaired loans, net of specific allowance		155,545		—		—		155,545
Other foreclosed real estate		41,618		—		—		41,618
Other real estate held-for-sale		3,349		—		—		3,349

Total nonrecurring basis measured assets	$	272,391	$	—	$	71,879	$	200,512

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. These loans are collateral-dependent, and their 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 also determined based on such appraisals, if significant. Appraised and reported values are 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.

Other Foreclosed Real Estate

Other real estate, acquired through partial or total satisfaction of loans, is carried at the lower of cost or fair value, less estimated selling expenses. At the date of acquisition, any difference between the fair value and book value of the asset is charged to the allowance for loan losses. The value of other foreclosed real estate collateral is determined based on appraisals by qualified licensed appraisers approved and hired by the Corporation. Appraised and reported values are 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 the client’s business. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Other Real Estate Held- for- Sale

Other real estate held-for-sale, which consists primarily of closed branch locations, is carried at the lower of cost or fair value, less estimated selling expenses. The fair value of other real estate held-for-sale is determined based on management’s appraisal of properties’ assessed values and general market conditions. Other real estate held-for-sale is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and short-term instruments, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:

Tax Lien Certificates

The carrying amount of tax lien certificates approximates their fair value.

Net Loans

Fair values for variable-rate loans that re-price frequently and have no significant change in credit risk are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amounts payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit (“CDs”) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on advances from the FHLB Atlanta to a schedule of aggregated expected monthly maturities on time deposits.

Advances from FHLB Atlanta

The fair values of FHLB Atlanta advances are based on pricing supplied by FHLB Atlanta.

Federal Funds Borrowed and Security Repurchase Agreements

The carrying amount of federal funds borrowed and security repurchase agreements approximate their fair values.

Notes Payable

The carrying amount of variable notes payable approximates their fair values. The fair value for fixed-rate notes payable is estimated using a discounted cash flow calculation that applies an interest rate based on a credit spread above the current Treasury yield.

Subordinated debentures

Rates currently available in the market for preferred offerings with similar terms and maturities are used to estimate fair value.

Limitations

Fair value estimates are made at a specific point in time and are based on relevant market information, which is continuously changing. Because no quoted market prices exist for a significant portion of the Corporation’s financial instruments, fair values for such instruments are based on management’s assumptions with respect to future economic conditions, estimated discount rates, estimates of the amount and timing of future cash flows, expected loss experience, and other factors. These estimates are subjective in nature involving uncertainties and matters of significant judgment; therefore, they cannot be determined with precision. Changes in the assumptions could significantly affect the estimates.

The estimated fair values of the Corporation’s financial instruments for the periods indicated are as follows:


	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(Dollars in thousands)
Financial assets:
Cash and due from banks	$	66,937	$	66,937	$	74,020	$	74,020
Interest-bearing deposits in other banks		195,212		195,212		23,714		23,714
Federal funds sold		1,946		1,946		2,036		2,036
Securities available for sale		261,002		261,002		286,310		286,310
Tax lien certificates		19,849		19,849		19,292		19,292
Mortgage loans held for sale		63,884		63,884		71,879		71,879
Net loans		2,264,500		2,297,632		2,430,813		2,440,026
Stock in FHLB		16,907		16,907		18,212		18,212
Accrued interest receivable		51,277		51,277		50,142		50,142
Derivative assets		1,876		1,876		610		610
Financial liabilities:
Deposits		2,776,830		2,799,858		2,656,573		2,671,504
Advances from FHLB		216,325		235,785		218,322		233,028
Security repurchase agreements		726		726		841		841
Note payable		45,201		46,898		45,917		45,917
Subordinated debentures		81,518		59,801		84,170		51,609
Derivative liabilities		1,000		1,000		1,459		1,459

Note 13 — Stockholders’ Equity

During the second quarter of 2010, Cambridge Savings Bank (“Cambridge”) exchanged $3.5 million of trust preferred securities issued by the Corporation’s wholly-owned unconsolidated subsidiary, Superior Capital Trust I, for 849,156 shares of the Corporation’s common stock, pursuant to an agreement dated January 15, 2010. The number of shares of common stock issued to Cambridge was based on 77% of the face value of the trust preferred securities divided by a weighted average of the sales prices of newly issued shares of the Corporation’s common stock sold between the date of the agreement and the closing of the exchange ($2.4 million at $3.19 per share and $1.1 million at $3.15 per share). The Corporation recorded a net after-tax gain of $0.5 million upon exchange of the trust preferred securities. The exchange increased stockholders’ equity by approximately $3.2 million, consisting of both the increase in equity upon recording a $0.5 million gain on exchange of the securities and the value of the newly issued shares.

On January 20, 2010, the Corporation entered into an agreement with KBW, Inc. (“KBW”) pursuant to which KBW will exchange $4.0 million of trust preferred securities issued by the Corporation’s wholly-owned unconsolidated subsidiary, Superior Capital Trust I, for shares of the Corporation’s common stock. The number of shares of common stock to be issued to KBW will equal 50% of the face value of the trust preferred securities divided by the greater of the following prices of the Corporation’s common stock during the ten trading days prior to the closing of the exchange: (1) the average of the closing prices or (2) 90% of the volume-weighted average price. The consummation of the transaction is conditioned upon obtaining consent of the Corporation’s stockholders if required by NASDAQ, and other customary closing conditions. Consummation of the transaction remains pending.

Neither the Corporation nor its affiliates have any material relationship with Cambridge other than in respect of the exchange agreement. Neither the Corporation nor its affiliates have any material relationship with KBW, except that the Corporation has engaged an affiliate of KBW to assist it in formulating and implementing strategies to strengthen its capital position.

In the second quarter, the Corporation issued Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”) with a liquidation value of $11.1 million for cash consideration of $11.1 million. At the same time, the Corporation issued to the purchasers five-year warrants to purchase 792,859 shares of the Corporation’s common stock at an exercise price of $3.50 per share. The fair value of the warrants was determined to be $1.2 million using the Black-Scholes option-pricing model and the value allocated using the proportional method. The assumptions used in the model were: risk-free rate of 2.38%, volatility factor of 65.90% and a dividend yield of 0.00%. The Series B Preferred Stock had a beneficial conversion feature of $2.5 million as of the date of issuance. The value of the warrants and the beneficial conversion

feature is being amortized against retained earnings as part of the preferred stock dividend until December 15, 2010. The Series B Preferred Stock is mandatorily convertible upon the earlier of December 15, 2010 or the completion of additional capital financing by the Corporation, but is not voluntarily convertible by the holder prior to such time. If the Series B Preferred Stock converts in conjunction with the consummation of additional capital financing, the conversion rate will be the lower of $2.89 or 83% of the offering price of the additional financing. If the Series B Preferred Stock converts on December 15, 2010, the conversion rate will be the lower of $2.89 or 83% of the 10-day volume-weighted trailing average of closing prices of the Corporation’s common stock.

In addition, during the second quarter, the Corporation issued Series C Cumulative Convertible Preferred Stock with a liquidation value of $0.3 million for cash consideration in the same amount along with five-year warrants to purchase 21,429 shares of its common stock at an exercise price of $3.50. The fair value of the warrants, which were nominal, was determined using the Black-Scholes option-pricing model and the value allocated using the proportional method. The assumptions used in the model were: risk-free rate of 2.38%, volatility factor of 65.90% and a dividend yield of 0.00%. The value of the warrants is being amortized against retained earnings as part of the preferred stock dividend until December 15, 2010. The Series C Preferred Stock is mandatorily convertible upon the earlier of December 15, 2010 or the completion of additional capital financing by the Corporation, but is not voluntarily convertible by the holder prior to such time. The conversion rate of the Series C Preferred Stock is the market price (the “Market Price”) of the Corporation’s common stock on the trading day immediately preceding the date of issuance of the Series C Preferred Stock. However, if stockholder approval is obtained prior to conversion, the conversion rate of the Series C Preferred Stock will be the lower of (a) the Market Price and (b) 83% of the offering price of additional capital financings by the Corporation or, if no such financing occurs, the 10-day volume-weighted trailing average of closing prices of the Corporation’s common stock prior to December 15, 2010.

There were no underwriting discounts or commissions in connection with the sale of Series B Preferred Stock or Series C Preferred Stock.

Note 14 — Subsequent Event

On November 4, 2010, the Corporation issued a press release announcing its entry, together with its wholly-owned subsidiary, Superior Bank (the “Bank”) into certain agreements with the Office of Thrift Supervision (“OTS”). On November 2, 2010 (the “Effective Date”), the Corporation and the Bank each entered into a Stipulation and Consent with the OTS, the Corporation’s and the Bank’s primary federal regulator, whereby each of the Corporation and the Bank consented to the issuance of an Order to Cease and Desist issued by the OTS, without admitting or denying that any grounds exist for the issuance of the Cease and Desist Orders.

The summaries that follow do not purport to be complete and are qualified by reference to the exhibits included in a Form 8-K filed by the Corporation with the SEC on November 4, 2010, which are incorporated herein and which set forth complete copies of the Stipulations and Orders.

The Bank Order provides, among other things, that:

	•		The Bank shall cease and desist from any action for or toward causing, bringing about, participating in, counseling, or aiding and abetting unsafe or unsound banking practices that resulted in certain occurrences specified in the Bank Order.

	•		No later than March 31, 2011, the Bank shall achieve, and maintain thereafter, a Tier 1 (Core) Capital Ratio of at least 10.0% and a Total Risk-Based Capital Ratio of at least 14.0% after funding an adequate allowance for loan losses.

	•		Within 60 days of the Effective Date, the Bank shall adopt and submit to the OTS a written capital plan to achieve and maintain the foregoing capital levels, specifying target dates to reach those capital levels. If the Bank fails to achieve the required capital levels in the prescribed time frame or otherwise fails to meet its capital plan, then within 15 days the Bank shall prepare a contingency plan, which shall detail actions to be taken specified in the Bank Order.

	•		Effective immediately, the Bank (i) will not originate or purchase or commit to originate or purchase, any new construction, multifamily, non-residential, land or commercial mortgage loans (“Covered Loans”), nor may the Bank renew or modify an existing Covered Loans without meeting specified conditions; (ii) will not without the prior written approval of the OTS increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the prior quarter; and (iii) will limit its acceptance or extension of brokered deposits.

	•		Within 60 days of the Effective Date, the Bank shall (i) submit to the OTS a business plan through 2012 for achieving profitability and a business plan to reduce the Bank’s level of problem assets, (ii) revise its policies, procedures and methodology relating to the timely

			establishment and maintenance of an adequate allowance for loan losses; (iii) revise its written internal asset review and classification program to address all corrective action set forth in the 2010 OTS Examination, which, among other things, will provide for the appointment of a qualified, experienced and independent third party to conduct annual reviews of the Bank’s loan portfolio and assessments of the Bank’s internal asset review process; (iv) revise its program for controlling risks associated with concentrations of credit; and (v) revise its Enterprise Risk Management Plan, and within 90 days of the Effective Date, the Bank shall submit to the OTS an assessment of the Bank’s board and management prepared by an independent third party.

	•		The Bank is to implement a liquidity funding plan that is to include the designation of specific actions that will be taken to reduce the Bank’s dependency on volatile funding sources and a detailed cash flow analysis.

	•		Effective immediately, the Bank shall (i) not make any “golden parachute payments” or prohibited indemnification payment unless the Bank has complied with 12. C.F.R. Part 359 and 12 C.F.R Section 545.121; (ii) comply with the OTS prior notification requirements for changes in directors and senior executive officers set forth in 12 C.F.R. Part 563, Subpart H; (iii) not enter into, extend or revise any contractual arrangement relating to compensation or benefits with any senior executive officer or director; and (iv) not enter into any arrangement or contract with a third party service provider that is significant or outside the Bank’s normal course of business without obtaining written non-objection from the OTS.

The Bank Order will remain in effect until terminated, modified or suspended by the OTS.

The Corporation Order provides, among other things, that:

The Corporation shall cease and desist from any action for or toward causing, bringing about, participating in counseling, or aiding and abetting unsafe or unsound banking practices that resulted in certain occurrences specified in the Corporation Order.

	•		Within 60 days of the Effective Date, the Corporation shall submit to the OTS (i) a plan to maintain and enhance the Corporation’s capital and the Bank’s capital and ensure that the Bank complies with the requirement imposed on it in the Bank Order; and (ii) a business plan through calendar year 2012 for achieving profitability.

	•		The Corporation shall (i) not accept from the Bank or declare or pay any dividends or capital distributions; (ii) not incur or increase any debt without the prior written non-objection of the OTS; (iii) not make any “golden parachute payment” or any prohibited indemnification payment unless the Corporation complies with 12 C.F.R. Part 359; (iv) comply with the OTS’s prior notification requirements for changes in directors and senior executive officers set forth in 12 C.F.R. Part 563, Subpart H; (v) not enter into, renew or extend any contractual arrangements related to compensation or benefits with any director or senior executive officer of the Corporation without first providing prior written notice to the OTS; and (vi) not enter into any arrangement or contract with a third party service provider that is significant or outside the normal course of business without obtaining written non-objection from the OTS.

The Corporation Order will remain in effect until terminated, modified or suspended by the OTS.

Failure by the Corporation and the Bank to comply with the provisions of their respective Orders, could result in further enforcement actions by the OTS which could ultimately lead to our common stock losing all its value. While the Corporation and the Bank intend to take such actions as may be necessary to comply with the requirements of the Orders, there can be no assurance that the Corporation or the Bank will be able to comply fully with the Orders, or that efforts to comply with the Orders will not have adverse effects on the operations and financial condition of the Corporation or the Bank.

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, 2010, condensed consolidated financial condition and results of operations for the three and nine months ended September 30, 2010 and 2009. 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, 2009.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. Some of the disclosures in this Quarterly Report on Form 10-Q, including any statements preceded by, followed by, or which include, the words “may,” “could,” “should,” “will,” “would,” “hope,” “might,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “assume” or similar expressions constitute forward-looking statements.

These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business, including our expectations and estimates with respect to our revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality, the adequacy of our allowance for loan losses and other financial data and capital and performance ratios.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, these statements involve risks and uncertainties which are subject to change based on various important factors (some of which are beyond our control). Such forward-looking statements should, therefore, be considered in light of various important factors set forth from time to time in our reports and registration statements filed with the SEC. The following factors, among others, could cause our financial performance to differ materially from our goals, plans, objectives, intentions, expectations and other forward-looking statements: (1) our ability to raise additional capital to meet regulatory requirements set forth in the Orders to Cease and Desist or fund future growth; (2) the adequacy of our allowance for loan losses to cover actual losses and impact of credit risk exposures; (3) greater loan losses than historic levels and increased allowance for loan losses; (4) our ability to comply with any requirements imposed on us and Superior Bank by the Orders to Cease and Desist issued to each of us by the OTS or additional restrictions imposed by our regulators; (5) restrictions or limitations on our access to funds from Superior Bank; (6) our ability to resolve any regulatory, legal or judicial proceeding on acceptable terms and its effect on our financial condition or results of operations; (7) the effect of natural or environmental disasters, such as, among other things, hurricanes and oil spills, in our geographic markets; (8) the strength of the United States economy in general and the strength of the regional and local economies in which we conduct operations; (9) changes in local economic conditions in the markets in which we operate; (10) the continued weakening in the real estate values in the markets in which we operate; (11) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (12) increases in FDIC deposit insurance premiums and assessments; (13) inflation or deflation and interest rate, market and monetary fluctuations; (14) our timely development of new products and services in a changing environment, including the features, pricing and quality compared to the products and services of our competitors; (15) the willingness of users to substitute competitors’ products and services for our products and services; (16) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory requirements or developments; (17) the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies; (18) changes in accounting policies, principles and guidelines applicable to us; (19) our focus on lending to small to mid-size community-based businesses, which may increase our credit risk; (20) technological changes; (21) changes in consumer spending and savings habits; (22) the continuing instability in the domestic and international capital markets; (23) the effects on our operations of policy initiatives or laws that have been and may continue to be introduced by the Presidential administration or Congress and related regulatory actions, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder; (24) our ability to successfully integrate the assets, liabilities, customers, systems and management we acquire or merge into our operations; and (25) other factors and information contained in reports and other filings we make with the SEC.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this quarterly report. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

We do not intend to update our forward-looking information and statements, whether written or oral, to reflect change. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Overview

Our principal subsidiary is Superior Bank, a federal savings bank. Superior Bank has principal offices in Birmingham, Alabama and Tampa, Florida, and operates 73 banking offices in Alabama (45) and Florida (28). Superior Bank’s consumer finance subsidiaries operate an additional 24 consumer finance offices in northern Alabama, doing business as 1^st Community Credit and Superior Financial Services. We had assets of approximately $3.166 billion, loans of approximately $2.416 billion, deposits of approximately $2.777 billion and stockholders’ equity of approximately $15.4 million as of September 30, 2010. Total assets decreased 1.72% compared to $3.222 billion as of December 31, 2009. Loans decreased 2.3% compared to $2.473 billion as of December 31, 2009. Total deposits increased 4.5% from $2.657 billion as of December 31, 2009.

We incurred a net loss for the three months ended September 30, 2010 of $135.9 million compared to net income of $0.9 million in the three months ended September 30, 2009. Included in the net loss for the three months ended September 30, 2010, was an increase in credit-related costs (i.e. provisions for loan loss, other real estate owned (“OREO”) expense, collection costs, etc.) of $108.3 million. We also recorded a $66.9 million deferred tax valuation allowance during the period which eliminated any tax benefit on our loss for the three months ended September 30, 2010.

The large provisions for loan losses and OREO charges in this and the preceding quarter are, in part, the result of appraisal updates that have produced valuations that were substantially less than those previously obtained. The decline in values is attributable to a number of factors, certainly including continued decreases in comparable valuations on which these appraisals are based under standard appraisal protocols. Additionally, as discussed in greater detail below, the Gulf Oil Spill had a significant impact on expectations for recovery of real estate values in the Gulf region, where many of our properties are located. As the result of this process, the provision for loan loss in the third quarter of 2010 was $102.1 million, bringing the total allowance for loan loss to $151.4 million at quarter end. Of this amount, approximately $103.1 million is allocated to specific credits under ASC 310-35. (See “Impaired Loans” section for more detail). In comparison to the second quarter of 2010, historical loss ratios continued to increase as the bank realized losses in all major loan categories with the majority of loss experience in construction loans secured by undeveloped or partially-developed land. (See “Risk Factors — Risks Relating to Our Business” elsewhere in this report.)

Our non-performing loans increased to $277.5 million, or 11.48% of loans as of September 30, 2010, from $231.4 million, or 9.32% of loans as of June 30, 2010. The overall increase in nonperforming loans was primarily related to our real estate construction loan portfolios. Loans in the 30-89 days past due category decreased to 1.47% of total loans as of September 30, 2010 from 1.78% of total loans as of June 30, 2010. Non-performing assets were 10.63% of total assets as of September 30, 2010 compared to 8.25% as of June 30, 2010.

Our annualized ratio of net charged-off loans to average loans increased to 4.85% for the three months ended September 30, 2010 compared to 2.26% for the three months ended June 30, 2010 and 1.03% for the three months ended December 31, 2009. Of the $30.2 million net charge-offs for the three months ended September 30, 2010, Superior Bank’s net charge-offs were $29.6 million, or 4.75% of consolidated average loans on an annualized basis, and our two consumer finance companies’ net charge-offs were $0.6 million, or 0.10% of consolidated average loans on an annualized basis.

Our loan loss provision significantly increased over the provision reflected in previous periods, with a provision of $102.1 million for the three months ended September 30, 2010, compared to $50.4 million for the three months ended June 30, 2010 and $5.2 million for the three months ended September 30, 2009. As of September 30, 2010, the allowance for loan losses increased by $72.0 million to $151.4 million, or 6.27% of net loans, compared to $79.4 million, or 3.20% of net loans, as of June 30, 2010. In addition, our losses and expenses on OREO were $6.2 million during the three months ended September 30, 2010 and $3.4 million for the three months ended June 30, 2010, an increase from the $2.8 million during the three months ended September 30, 2009, reflecting dispositions of several foreclosed properties for less than their carrying values.

Our loans, net of unearned income, were $2.416 billion as of September 30, 2010, a decrease of 2.7%, or $67.0 million, from $2.483 billion as of June 30, 2010. As of September 30, 2010, we had a decrease in balances outstanding in certain categories of loans, primarily in construction lending, which decreased $47.6 million to $632.8 million compared to $680.4 million as of June 30, 2010.

Our primary source of revenue is net interest income, which is determined by calculating the difference between income earned on interest-earning assets, such as loans and investments, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Our results of operations are also affected by credit costs, including the provision for loan losses, losses and other costs on foreclosed properties (“foreclosure losses”), and by other noninterest expenses, such as salaries and benefits, occupancy expenses and provision for income taxes. The effects of these noninterest expenses are partially offset by noninterest sources of revenue, such as service charges and fees on deposit accounts and mortgage banking income. Our volume of business is influenced by competition in our markets and overall economic conditions including such factors as market interest rates, business spending and consumer confidence. (See “Risk Factors — Risks Relating to Our Business” elsewhere in this report.)

Net interest income decreased to $21.5 million during the three months ended September 30, 2010 from $23.2 million for the three months ended June 30, 2010, and decreased from $23.9 million for the three months ended September 30, 2009. The net interest margin was 2.77% for the three months ended September 30, 2010 compared to 3.02% for the three months ended June 30, 2010 and 3.36% for the three months ended September 30, 2009. The effect on net interest margin of loans being placed on non-accrual status has been significant. Additionally, the net interest margin reflected our decision to maintain higher levels of very short-term investments for liquidity purposes. These investments, which averaged $220 million and $152 million for the three and nine months ended September 30, 2010, respectively, had an average yield of 0.36% and 0.37%, respectively, which led to a decline in the yield on earning assets.

Certain Factors Contributing to Our Recent Results and Our Response to Those Factors

The Economic Downturn. The financial crisis of 2008 and the economic downturn that followed have led to our recent losses as well as those at many other financial institutions. Those events have eroded capital at financial institutions and left markets uncertain as to the industry’s prospects in late 2010 and beyond. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy, a decline in the value of collateral supporting loans, and the decreased ability of retail and commercial borrowers to meet repayment schedules. The competition for deposits has increased significantly due to liquidity concerns at many of those same institutions. The downturn and resulting capital erosion have been especially pronounced in the Southeast, which has experienced especially sharp declines in real estate value and has been uniquely affected by the substantial oil leak resulting from the explosion of the Deepwater Horizon drilling rig in April 2010 (the “Gulf Oil Spill”) and its aftermath.

Efforts to Deleverage and Add Capital. In response to the financial crisis, as previously reported, we have taken affirmative steps to repair capital erosion and address the pressures of our holding Company’s indebtedness and the OTS scrutiny of declining capital at Superior Bank. During the third quarter of 2009, we sold approximately 1.5 million shares of our common stock to approximately 20 accredited investors raising approximately $3.3 million. In November 2009, our shareholders approved an increase in authorized shares from 20 million to 200 million to facilitate potential offerings, at the recommendation of management. In December 2009, we issued approximately $69 million in aggregate principal amount of trust preferred securities and a like amount of related junior subordinated debentures through a wholly-owned unconsolidated subsidiary trust to the U.S. Treasury Department. The trust preferred securities were issued in exchange for 69,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation amount of $1,000 per share, which the Treasury Department had purchased in December 2008 under the Troubled Assets Relief Program’s Capital Purchase Program (“TARP”). In January 2010, we entered into agreements with each of Cambridge Savings Bank and KBW, Inc. pursuant to which we would exchange common stock for an aggregate of $7.5 million in trust preferred securities. In May 2010, we completed the exchange of $3.5 million in trust preferred securities held by Cambridge Savings Bank. We have not completed the exchange with KBW, Inc. In May and June of 2010, we issued $11.1 million of Series B Cumulative Preferred Stock for cash consideration equal to $11.1 million and $300,000 of Series C Cumulative Convertible Preferred Stock for cash consideration of $300,000. This preferred stock is mandatorily convertible upon the earlier of December 15, 2010 or our completion of additional capital financing but is not voluntarily convertible by the holder prior to such time subject to NASDAQ requirements.

Concurrently, with the capital raising efforts described above, in October 2009, we retained Keefe Bruyette & Woods, Inc. (“KBW”), a leading advisor in the financial services sector, to explore strategic alternatives including potential avenues to effectuate a broad recapitalization. We, together with KBW, explored a variety of internal options, including conversion of preferred stock to trust preferred securities, conversion of trust preferred securities to common stock, investment portfolio trading to lower risk ratings on investment securities, securitization of residential mortgage loans, wholesale loan sales, transfer of assets to a newly created entity and a public equity offering. In addition, KBW, with our support, also has explored external investment alternatives. KBW contacted 39 institutions, including various investment funds and several funds holding shelf charters, exploring various capital-raising and restructuring alternatives. Many of those institutions attended meetings with our management and performed due diligence reviews. In the summer of 2010, several private equity firms and “shelf charter” funds conducted extensive due diligence on proposals related to a new equity investment, but none were completed due to the constraints of our existing capital structure. We continue, with KBW’s assistance, to explore various restructuring alternatives that would enable us to satisfy the OTS’ current directives discussed below. (See “Recent Developments” below in this Item 2.)

Events Specific to the Third Quarter of 2010. In the third quarter of 2010 our results worsened as the Gulf Oil Spill proved to have a far more adverse economic effect on the Gulf region than had been anticipated, and we became subject to increasing regulatory scrutiny as a result of the U.S. government’s and banking regulatory agencies responses to the crisis. Because the Gulf Oil Spill stalled much of the fishing, tourism and drilling in the region, it has resulted in dramatically decreased real estate appraisals in the region and these declines in real estate values and general economic activity have adversely affected Superior Bank’s loan portfolio. Of the $549 million in loans identified as being directly or indirectly impacted by the oil spill, specific reserves of $56.0 million have been allocated as of September 30, 2010, up from $26.2 million as of June 30, 2010. The extent to which the region will continue to experience depressed real estate values cannot be predicted with any certainty. Additionally, we are submitting a claim to the Gulf Coast Claims Facility and have received an assigned claim number. The amount, if any, of a recovery from the Fund is speculative at this time.

Finally, partially as the result of the regulatory restrictions and the need to have Superior Bancorp conserve capital to address the consequences of the Gulf Oil Spill, we have enacted liquidity constraints for our holding company and have deferred payments on our financings and indebtedness. In August 2010, we deferred regularly scheduled interest payments on all issues of our junior subordinated debentures relating to our five different issues of trust preferred securities aggregating $118.2 million in principal amount, as we are permitted to do under the terms of the debentures and related trust preferred securities (subject to various limitations and exceptions) for a period of up to five years. The terms provide that so long as interest is deferred, interest will continue to accrue. Furthermore, the terms of the debentures and related trust preferred securities provide that upon the expiration or termination of deferrals, all accrued and unpaid interest will be due and payable on the debentures, and a corresponding amount of distributions will be payable on the related trust preferred securities. During the deferral period, we may not, among other things and with limited exceptions, pay cash dividends or repurchase our common stock or preferred stock nor make any payment on outstanding debt obligations that rank equally with or junior to the debentures. We estimate that the deferral of interest on our debentures preserves approximately $7 million per year in cash flow comprising interest on the debentures and dividends on the related trust preferred securities.

Need for Additional Capital. We have been unable to refinance or repay our existing credit facility with BB&T which matured on November 3, 2010, after extensions. The existing credit facility is secured by all of our stock in Superior Bank. We have not had regulatory approval or sufficient cash to satisfy our obligations under the existing credit facility, we lack unencumbered collateral with which to acquire adequate secured financing, and we are prohibited from making payments on securities that rank equally with or junior to the debentures. In addition, any debt we incur, or material agreements we enter into, must be first approved by the OTS. Thus, we are in default under the existing credit facility and lack the ability to repay or refinance that indebtedness, either of which would require regulatory approvals, that would require, among other things, that the OTS be satisfied with the sufficiency of capital available to Superior Bank and with the capital available to us to support the Bank. Absent substantial new capital for us and Superior Bank, these are likely to result in adverse regulatory action and which may take various forms. We are continuing to consider and explore various restructuring alternatives that would enable us to satisfy the OTS’ current directives discussed below under “Recent Developments” in this Item 2.

Recent Developments

On November 2, 2010 (the “Effective Date”), we and Superior Bank each entered into a Stipulation and Consent with the OTS, whereby we and the Bank each consented to the issuance of an Order to Cease and Desist issued by the OTS, without admitting or denying that that any grounds existed for issuance of the Orders to Cease and Desist.

The summaries that follow do not purport to be complete and are qualified by reference to the full text of the Stipulations and the Orders to Cease and Desist that are included as Exhibits to our Form 8-K filed with the SEC on November 4, 2010.

The Order to Cease and Desist issued to Superior Bank provides, among other things, that:

	•		Superior Bank shall cease and desist from any action for or toward causing, bringing about, participating in, counseling, or aiding and abetting unsafe or unsound banking practices, which resulted in certain occurrences that are specified in the Superior Bank Order.

	•		No later than March 31, 2011, Superior Bank shall achieve, and maintain thereafter, a Tier 1 (Core) Capital Ratio of at least 10.0% and a Total Risk-Based Capital Ratio of at least 14.0% after funding an adequate allowance for loan losses.

	•		Within 60 days of the Effective Date, Superior Bank shall adopt and submit to the OTS a written capital plan to achieve and maintain the foregoing capital levels specifying target dates to reach certain capital levels. If Superior Bank fails to achieve the required capital levels in the prescribed time frame or otherwise fails to meet its capital plan, then within 15 days Superior Bank shall prepare a contingency plan, which shall detail further actions to be taken to achieve (i) merger with, or acquisition by another federally insured depository institution, or (ii) voluntary dissolution.

	•		Beginning on the Effective Date, Superior Bank (i) will not originate or purchase or commit to originate or purchase, any new construction, multifamily, non-residential, land or commercial mortgage loans (“Covered Loans”), nor may Superior Bank renew or modify an existing Covered Loans without meeting specified conditions; and (ii) will not, without the prior written approval of the OTS, increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the prior quarter.

	•		Within 60 days of the Effective Date, Superior Bank (i) shall submit to the OTS a business plan through 2012 for achieving profitability and a business plan to reduce Superior Bank’s level of problem assets, (ii) shall revise its policies, procedures and methodology relating to the timely establishment and maintenance of an adequate allowance for loan losses; (iii) shall revise its written internal asset review and classification program to address all corrective action set forth in the OTS’s 2010 Examination, which, among other things, will provide for the appointment of a qualified, experienced and independent third party to conduct annual reviews of Superior Bank’s loan portfolio and assessments of the Bank’s internal asset review process; (iv) shall revise its program for controlling risks associated with concentrations of credit; (v) shall revise its Enterprise Risk Management Plan; and (vi) within 90 days of the Effective Date, Superior Bank shall submit to the OTS an assessment of Superior Bank’s board and management prepared by an independent third party.

	•		Superior Bank is to implement a liquidity funding plan that is to include the designation of specific actions that will be taken to reduce Superior Bank’s dependency on volatile funding sources and a detailed cash flow analysis.

	•		Beginning on the Effective Date, Superior Bank (i) shall not make any “golden parachute payments” or prohibited indemnification payment unless Superior Bank has complied with 12. C.F.R. Part 359 and 12 C.F.R Section 545.121; (ii) shall comply with the OTS prior notification requirements for changes in directors and senior executive officers set forth in 12 C.F.R. Part 563, Subpart H; (iii) shall not enter into, extend or revise any contractual arrangement relating to compensation or benefits with any senior executive officer or director; and (iv) shall not enter into any arrangement or contract with a third party service provider that is significant or outside Superior Bank’s normal course of business without obtaining written non-objection from the OTS.

The Superior Bank Order to Cease and Desist will remain in effect until terminated, modified or suspended by the OTS.

The Superior Bancorp Order to Cease and Desist issued to us by the OTS provides, among other things, that:

We shall cease and desist from any action for or toward causing, bringing about, participating in counseling, or aiding and abetting unsafe or unsound banking practices, which resulted in certain occurrences that are specified in the Order.

	•		Within 60 days of the Effective Date, we shall submit to the OTS (i) a plan to maintain and enhance our capital and Superior Bank’s capital and ensure that Superior Bank complies with the requirements imposed on it in the Superior Bank Order to Cease and Desist summarized above; and (ii) a business plan through calendar year 2012 for achieving profitability.

	•		We (i) shall not accept from Superior Bank or declare or pay any dividends or capital distributions; (ii) shall not incur or increase any debt without the prior written non-objection of the OTS; (iii) shall not make any “golden parachute payment” or any prohibited indemnification payment unless the Company complies with 12 C.F.R. Part 359; (iv) shall comply with the OTS’s prior notification requirements for changes in directors and senior executive officers set forth in 12 C.F.R. Part 563, Subpart H; (v) shall not enter into, renew or extend any contractual arrangements related to compensation or benefits with any of our directors or senior executive officers without first providing prior written notice to the OTS; and (vi) not enter into any arrangement or contract with a third party service provider that is significant or outside the normal course of business without obtaining written non-objection from the OTS.

The Order to Cease and Desist issued to us will remain in effect until terminated, modified or suspended by the OTS.

Failure by Superior Bank or us to comply with the provisions of the Cease and Desist Order issued to each of us by the OTS, could result in further enforcement actions by the OTS, which could ultimately lead to our common stock losing all its value. While we and Superior Bank intend to take such actions as may be necessary to comply with the requirements of the Orders, there can be no assurance that we or Superior Bank will be able to comply fully with the Orders, or that efforts to comply with the Orders will not have adverse effects on the operations and financial conditions of Superior Bank or us.

Customer deposits and performing, non-classified loans are unaffected by the Stipulations or the Orders to Cease and Desist. Deposits remain fully covered by FDIC insurance to at least $250,000 per depositor. In addition, non-interest bearing transaction accounts and qualified NOW checking accounts are fully guaranteed by the FDIC for an unlimited amount of coverage.

Liquidity and Capital

Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) increased $164.3 million to $264.1 million as of September 30, 2010 from $99.8 million as of December 31, 2009. As of September 30, 2010, short-term liquid assets were 8.3% of total assets, compared to 3.1% as of December 31, 2009. 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 and federal funds sold. Management believes it has established sufficient sources of funds to meet its anticipated liquidity needs. (See “Risk Factors — Risks Relating to Our Business” elsewhere in this report.)

Superior Bank is operating at capital levels that are well below those established by regulation to be considered “adequately capitalized”, with a total risk-based capital ratio of 5.04%, a Tier I core capital ratio of 2.63% and a Tier I risk-based capital ratio of 3.38% as of September 30, 2010. (See “Recent Developments” above in this Item 2 for a discussion of a recent requirement imposed by the OTS that the Tier 1 core capital ratio be raised to 10%, and that the Tier 1 risk-based capital ratio be raised to 14%, both by March 31, 2011.) We are currently pursuing a variety of initiatives aimed at increasing our capital and returning to “well capitalized” status. (See “Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” above in this Item 2 for a discussion of those initiatives.)

Recent Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements elsewhere in this Report for other recent accounting pronouncements that are not expected to have a significant effect on our financial condition, results of operations or cash flows.

Results of Operations

For the three months ended September 30, 2010, we reported a net loss of $135.9 million, primarily as a result of increases in the provision for loan losses of $96.9 million, foreclosure losses of $4.9 million, salaries and benefits of $1.8 million

For the nine months ended September 30, 2010, we reported a net loss of $195.4 million, primarily as a result of increases in the provision for loan losses of $147.0 million, foreclosure losses of $8.5 million, and salaries and benefits of $5.1 million.

Changes in other components of our operations are discussed in the various sections that follow. The following table presents key data for the periods indicated:


	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars in thousands, except per share data)
Net (loss) income	$	(135,893	)	$	880		$	(195,355	)	$	(8,390	)
Net loss applicable to common shareholders		(137,780	)		(287	)		(198,141	)		(11,867	)
Net loss per common share (diluted)		(11.00	)		(0.03	)		(16.29	)		(1.14	)
Net interest margin		2.77	%		3.36	%		2.99	%		3.23	%
Net interest spread		2.65			3.17			2.86			3.04
Return on average assets		(16.25	)		0.11			(7.88	)		(0.36	)
Return on average stockholders’ equity		(379.45	)		1.44			(149.31	)		(4.54	)
Common book value per share	$	(.55	)	$	14.82		$	(.55	)	$	14.82

The following tables depict, 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,
	2010									2009
	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)	$	2,519,036		$	34,108			5.37	%	$	2,487,262		$	36,783			5.87	%
Investment securities
Taxable		236,996			2,299			3.85			256,194			3,362			5.21
Tax-exempt (2)		29,341			458			6.19			41,384			655			6.28

Total investment securities		266,337			2,757			4.11			297,578			4,017			5.36
Federal funds sold		1,579			1			0.25			1,849			1			0.21
Other investments		256,520			542			0.84			66,766			471			2.80

Total interest-earning assets		3,043,472			37,408			4.88			2,853,455			41,272			5.74
Noninterest-earning assets:
Cash and due from banks		66,015									61,211
Premises and equipment		102,534									105,327
Accrued interest and other assets		188,257									171,092
Allowance for loan losses		(81,635	)								(33,780	)

Total assets	$	3,318,643								$	3,157,305


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	600,576		$	1,538			1.02	%	$	649,622		$	2,129			1.30	%
Savings deposits		360,376			896			0.99			257,163			872			1.35
Time deposits		1,565,726			8,409			2.13			1,400,972			10,312			2.92
Other borrowings		265,775			2,505			3.74			279,528			2,619			3.72
Subordinated debentures (2)		81,296			2,828			13.80			60,743			1,204			7.86

Total interest-bearing liabilities		2,873,749			16,176			2.23			2,648,028			17,136			2.57
Noninterest-bearing liabilities:
Demand deposits		277,453									251,696
Accrued interest and other liabilities		25,367									14,391

Total liabilities		3,176,569									2,914,115
Stockholders’ equity		142,074									243,190

Total liabilities and stockholders’ equity	$	3,318,643								$	3,157,305

Net interest income/net interest spread					21,232			2.65	%					24,136			3.17	%

Net yield on earning assets								2.77	%								3.36	%

Taxable equivalent adjustment (2):
Investment securities					(156	)								(223	)
Interest expense on subordinated debentures					444									—

Net interest income				$	21,520								$	23,913


	Nine Months Ended September 30,
	2010									2009
	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)	$	2,541,124		$	106,662			5.61	%	$	2,446,491		$	107,693			5.89	%
Investment securities
Taxable		249,816			7,835			4.19			282,666			11,148			5.27
Tax-exempt (2)		29,793			1,406			6.31			41,062			1,962			6.39

Total investment securities		279,609			9,241			4.42			323,728			13,110			5.41
Federal funds sold		2,158			4			0.25			4,176			8			0.26
Other investments		189,288			1,307			0.92			65,422			1,289			2.63

Total interest-earning assets		3,012,179			117,214			5.20			2,839,817			122,100			5.75
Noninterest-earning assets:
Cash and due from banks		69,712									71,085
Premises and equipment		102,548									105,309
Accrued interest and other assets		186,716									161,194
Allowance for loan losses		(55,864	)								(30,948	)

Total assets	$	3,315,291								$	3,146,457


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	640,799		$	5,653			1.18	%	$	654,703		$	6,495			1.33	%
Savings deposits		334,368			2,986			1.19			230,969			2,697			1.56
Time deposits		1,523,135			25,183			2.21			1,387,712			33,125			3.19
Other borrowings		267,517			7,568			3.78			301,595			7,558			3.35
Subordinated debentures (2)		83,335			8,502			13.64			60,796			3,602			7.92

Total interest-bearing liabilities	$	2,849,154			49,892			2.34		$	2,635,775			53,477			2.71
Noninterest-bearing liabilities:
Demand deposits		269,618									243,094
Accrued interest and other liabilities		21,913									18,715

Total liabilities		3,140,685									2,897,584
Stockholders’ equity		174,606									248,873

Total liabilities and stockholders’ equity	$	3,315,291								$	3,146,457

Net interest income/net interest spread					67,322			2.86	%					68,623			3.04	%

Net yield on earning assets								2.99	%								3.23	%

Taxable equivalent adjustment (2):
Investment securities					(477	)								(667	)
Interest expense on subordinated debentures					1,333									—

Net interest income				$	68,178								$	67,956


(1)		Nonaccrual loans are included in loans, net of unearned income. No adjustment has been made for these loans in the calculation of yields.

(2)		Interest income/expense and yields are presented on a fully taxable equivalent basis using a tax rate of 34%.

The largest component of our net income is net interest income, which is the difference between the income earned on interest-earning assets and interest paid on deposits and borrowings. The following table summarizes the changes in the components of net interest income for the periods indicated:


	Increase (Decrease) in
	Three Months Ended September 30,									Nine Months Ended September 30,
	2010 vs. 2009									2010 vs. 2009
	Average			Income/			Yield/			Average			Income/			Yield/
	Balance			Expense			Rate			Balance			Expense			Rate
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income	$	31,774		$	(2,675	)		(0.50	)%	$	94,633		$	(1,031	)		(0.28	)%
Investment securities
Taxable		(19,198	)		(1,063	)		(1.36	)		(32,850	)		(3,313	)		(1.08	)
Tax-exempt		(12,043	)		(197	)		(0.09	)		(11,269	)		(556	)		(0.08	)

Total investment securities		(31,241	)		(1,260	)		(1.25	)		(44,119	)		(3,869	)		(0.99	)
Federal funds sold		(270	)		—			0.04			(2,018	)		(4	)		(0.01	)
Other investments		189,754			71			(1.96	)		123,866			18			(1.71	)

Total interest-earning assets	$	190,017			(3,864	)		(0.86	)	$	172,362			(4,886	)		(0.55	)

Interest-bearing liabilities:
Demand deposits	$	(49,046	)	$	(591	)		(0.28	)%	$	(13,904	)	$	(842	)		(0.15	)%
Savings deposits		103,213			24			(0.36	)		103,399			289			(0.37	)
Time deposits		164,754			(1,903	)		(0.79	)		135,423			(7,942	)		(0.98	)
Other borrowings		(13,753	)		(114	)		0.02			(34,078	)		10			0.43
Subordinated debentures		20,553			1,624			5.94			22,539			4,900			5.72

Total interest-bearing liabilities	$	225,721			(960	)		(0.34	)	$	213,379			(3,585	)		(0.37	)

Net interest income/net interest spread					(2,904	)		(0.52	)%					(1,301	)		(0.18	)%

Net yield on earning assets								(0.59	)%								(0.24	)%

Taxable equivalent adjustment:
Investment securities					67									190
Interest expense on subordinated debentures					444									1,333

Net interest income				$	(2,393	)							$	222

The following table sets forth, on a taxable equivalent basis, the effect that the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods indicated:


	Three Months Ended September 30,									Nine Months Ended September 30,
	2010 vs. 2009 (1)									2010 vs. 2009 (1)
	Increase			Changes Due To						Increase			Changes Due To
	(Decrease)			Rate			Volume			(Decrease)			Rate			Volume
	(Dollars in thousands)									(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans	$	(2,675	)	$	(3,144	)	$	469		$	(1,031	)	$	(5,166	)	$	4,135
Interest on securities:
Taxable		(1,063	)		(826	)		(237	)		(3,313	)		(2,114	)		(1,199	)
Tax-exempt		(197	)		(9	)		(188	)		(556	)		(24	)		(532	)
Interest on federal funds		—			—			—			(4	)		—			(4	)
Interest on other investments		71			(515	)		586			18			(1,241	)		1,259

Total interest income		(3,864	)		(4,494	)		630			(4,886	)		(8,545	)		3,659
Expense from interest-bearing liabilities:
Interest on demand deposits		(591	)		(438	)		(153	)		(842	)		(709	)		(133	)
Interest on savings deposits		24			(271	)		295			289			(736	)		1,025
Interest on time deposits		(1,903	)		(3,017	)		1,114			(7,942	)		(10,932	)		2,990
Interest on other borrowings		(114	)		14			(128	)		10			914			(904	)
Interest on subordinated debentures		1,624			1,121			503			4,900			3,238			1,662

Total interest expense		(960	)		(2,591	)		1,631			(3,585	)		(8,225	)		4,640

Net interest income	$	(2,904	)	$	(1,903	)	$	(1,001	)	$	(1,301	)	$	(320	)	$	(981	)


(1)		The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

Noninterest income

Noninterest income decreased $0.7 million and increased $13.5 million to $7.8 million and $22.5 million for the three and nine months ended September 30, 2010, respectively, compared to $8.5 million and $9.1 million for the three and nine months ended September 30, 2009, respectively. The decrease for the quarter was primarily due to a loss on the sale of securities and a change in the fair value of derivatives. The increase for the year was primarily due to an increase in mortgage banking income. See “Financial Condition – Investment Securities” for additional discussion. The components of noninterest income for the periods indicated consisted of the following:


	Three Months Ended September 30,
	2010			2009		% Change
	(Dollars in thousands)
Service charges and fees on deposits	$	2,268		$	2,595		(12.60	)%
Mortgage banking income		6,198			1,506		311.55
Investment securities gains (losses)		(306	)		2,121	NCM
Change in fair value of derivatives		(1,481	)		435		(440.46	)
Increase in cash surrender value of life insurance		576			568		1.41
Gain on exchange of subordinated debt for common stock		—			—	NCM
Other noninterest income		552			1,254		(55.98	)

Total	$	7,807		$	8,479	NCM		%


	Nine Months Ended September 30,
	2010			2009			% Change
	(Dollars in thousands)
Service charges and fees on deposits	$	6,819		$	7,506			(9.15	)%
Mortgage banking income		10,875			5,468			98.88
Investment securities gains (losses)		852			(9,506	)	NCM
Change in fair value of derivatives		(1,510	)		170		NCM
Increase in cash surrender value of life insurance		1,702			1,623			4.87
Gain on exchange of subordinated debt for common stock		507			—		NCM
Other noninterest income		3,302			3,811			(13.36	)

Total	$	22,547		$	9,072		NCM		%

NCM — not considered meaningful.

Noninterest expenses

Noninterest expenses increased $10.5 million, or 40.9%, and $20.0 million, or 25.8%, to $36.1 million and $97.5 million for the three and nine months ended September 30, 2010, respectively, from $25.6 million and $77.5 million for the three and nine months ended September 30, 2009, respectively. These increases were primarily due to increased foreclosure losses, salaries and employee benefits, FDIC assessments and professional fees. Our foreclosure losses relate to various costs incurred to acquire, maintain and dispose of other real estate acquired through foreclosure. These costs are directly related to the volume of foreclosures, which have increased due to the negative credit cycle. These costs could increase in future periods, depending on the duration of the credit cycle, and have a material impact on our operating expenses. Our professional fees have increased as a result of certain capital raising activities and collection activities. These cost are expected to remain at these levels for the near future. Noninterest expenses included the following for the periods indicated:


	Three Months Ended September 30,
					%
	2010		2009		Change
	(Dollars in thousands)
Noninterest Expenses
Salaries and employee benefits	$	14,062	$	12,234		14.94	%
Occupancy, furniture and equipment expense		5,012		4,478		11.92
Amortization of core deposit intangibles		870		985		(11.68	)
FDIC assessments		2,613		921		183.71
Foreclosure losses		6,187		1,337		362.75
Professional fees		2,545		815		212.27
Insurance expense		908		682		33.14
Postage, stationery and supplies		671		777		(13.64	)
Communications expense		752		760		(1.05	)
Advertising expense		588		615		(4.39	)
Other operating expense		1,934		2,038		(5.10	)

Total	$	36,142	$	25,642		40.95	%


	Nine Months Ended September 30,
					%
	2010		2009		Change
	(Dollars in thousands)
Noninterest Expenses
Salaries and employee benefits	$	42,102	$	36,976		13.86	%
Occupancy, furniture and equipment expense		14,625		13,397		9.17
Amortization of core deposit intangibles		2,609		2,956		(11.74	)
FDIC assessment		5,846		3,310		76.62
Foreclosure losses		12,122		3,656		231.56
Professional fees		5,363		2,607		105.72
Insurance expense		2,435		1,903		27.96
Postage, stationery and supplies		2,135		2,264		(5.70	)
Communications expense		2,187		2,322		(5.81	)
Advertising expense		1,885		1,952		(3.43	)
Other operating expense		6,175		6,159		0.26

Total	$	97,484	$	77,502		25.78	%

Income tax

We recognized income tax expense of $27.0 million for the three and nine months ended September 30, 2010, respectively, compared to income tax expense (benefit) of $0.7 million and $(6.7) million for the three and nine months ended September 30, 2009, respectively. The difference between the effective tax rates in 2010 and the blended federal statutory rate of 34% and state tax rates between 5% and 6% was primarily due to the recognition of an additional $66.9 million and $88.9 million valuation allowance against our deferred tax assets (“DTAs”) during the three and nine months ended September 30,2010, respectively. Our total valuation allowance was $90.1 million at September 30, 2010 which has reduced the net DTA to $0.0. The difference between the effective and statutory tax rates in 2009 was primarily due to certain tax-exempt income from investments and income reported from insurance policies.

The recognition of DTAs is based upon management’s judgment that realization of the asset is more likely than not. Management’s judgment is based on estimates concerning various future events and uncertainties, including future reversals of existing taxable temporary differences, the timing and amount of future income earned by our subsidiaries, and the implementation of various tax planning strategies to maximize realization of the DTAs. A complete discussion of management’s assessment of the realizability of our DTAs is included in our 2009 Annual Report on Form 10-K under the heading “Critical Accounting Estimates” in Management’s Discussion and Analysis and in Note 14 to the 2009 consolidated financial statements.

Management evaluates the realizability of DTAs quarterly and, if necessary, adjusts the valuation allowance accordingly. Based on the net loss incurred in the second and third quarters, management has revised its assessment of the realizablity of the DTAs as of September 30, 2010 and recorded a $90.1 million valuation allowance. As a result, beginning in the third quarter of 2010, we no longer consider future taxable income in determining the realizability of its DTA. Our estimate of the realization of its DTA is solely based on future reversals of existing taxable temporary differences and currently available tax planning strategies. Additionally, management may further increase the valuation allowance in the near term if estimates of future taxable income are reduced due to further deteriorations in market conditions or the economy, which could produce additional credit losses within the loan and investment portfolios.

Provision for Loan Losses and Loan Charge-offs

The provision for loan losses was $102.1 million for the three months ended September 30, 2010, compared to $50.4 million for the three months ended June 30, 2010 and $5.2 million for the three months ended September 30, 2009. During the three months ended September 30, 2010, we had net charged-off loans totaling $30.2 million, compared to net charged-off loans of $14.1 million and $4.3 million for the three months ended June 30, 2010 and September 30, 2009, respectively. The annualized ratio of net charged-off loans to average loans was 4.95% for the three months ended September 30, 2010, compared to 2.26% and 0.71% for the three months ended June 30, 2010 and September 30, 2009, respectively. The allowance for loan losses was $151.4 million, or 6.27% of loans, net of unearned income, as of September 30, 2010, compared to $79.4 million, or 3.20%, and $34.3 million, or 1.41%, as of June 30, 2010 and September 30, 2009, respectively.

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


	For The Three Months Ended
	September 30,			June 30,			September 30,			December 31,
	2010			2010			2009			2009
	(Dollars in thousands)
Beginning allowance for loan losses	$	79,425		$	43,190		$	33,504		$	34,336
Provision for loan losses		102,106			50,363			5,169			13,947
Total charge-offs		30,422			14,633			4,546			6,793
Total recoveries		(253	)		(505	)		(209	)		(394	)

Net charge-offs		30,169			14,128			4,337			6,399

Ending allowance for loan losses	$	151,362		$	79,425		$	34,336		$	41,884

Total loans, net of unearned income	$	2,415,862		$	2,482,560		$	2,434,534		$	2,472,697

Allowance for loan losses to total loans, net of unearned income		6.27	%		3.20	%		1.41	%		1.69	%


	For The Nine Months Ended						Year Ended
	September 30,			September 30,			December 31,
	2010			2009			2009
	(Dollars in thousands)
Beginning allowance for loan losses	$	41,884		$	28,850		$	28,850
Provision for loan losses		161,596			14,602			28,550
Total charge-offs		52,837			9,868			16,661
Total recoveries		(719	)		(752	)		(1,145	)

Net charge-offs		52,118			9,116			15,516

Ending allowance for loan losses	$	151,362		$	34,336		$	41,884

See “Financial Condition — Allowance for Loan Losses” for additional discussion

Results of Segment Operations

We have two reportable segments, the Alabama Region and the Florida Region. The Alabama Region consists of operations located throughout Alabama. The Florida Region consists of operations located primarily in the Tampa Bay area and panhandle region of Florida. Please see Note 7 — Segment Reporting in the accompanying notes to consolidated financial statements included elsewhere in this report for additional disclosure regarding our segment reporting. Operating profit (loss) by segment is presented below for the periods indicated:


	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Alabama region	$	(2,512	)	$	1,976		$	371		$	2,783
Florida region		(36,156	)		864			(45,971	)		5,828
Administrative and other		(70,253	)		(1,259	)		(122,755	)		(23,687	)
Income tax expense (benefit)		26,972			701			27,000			(6,686	)

Consolidated net (loss) benefit	$	(135,893	)	$	880		$	(195,355	)	$	(8,390	)

Alabama Region

Operating income (loss) was ($2.5) million and $0.4 million for the three and nine months ended September 30, 2010, respectively, compared to $2.0 million and $2.8 million for the three and nine months ended September 30, 2009, respectively, primarily due to an increase in the provision for loan losses.

Net interest income for the three and nine months ended September 30, 2010 increased $0.4 million and $3.5 million, or 4.1% and 13.1%, respectively, compared to the same periods in the prior year. The increase was the result of a decrease in the average cost of interest-bearing liabilities. See the analysis of net interest income included in the section captioned “Net Interest Income” elsewhere in this discussion.

The provision for loan losses for the three and nine months ended September 30, 2010 increased $3.8 million and $3.6 million, or 269..0% and 80.9%, respectively, compared to the same periods in the prior year. See the analysis of the provision for loan losses included in the section captioned “Provision for Loan Losses and Loan Charge-offs” elsewhere in this discussion.

Noninterest income for the three and nine months ended September 30, 2010 decreased $0.2 million and $0.5 million, or 8.9% and 7.7%, respectively, compared to the same periods in the prior year, primarily due to a decline in service charges. See the analysis of noninterest income in the section captioned “Noninterest Income” included elsewhere in this discussion.

Noninterest expense for the three and nine months ended September 30, 2010 increased $0.9 million and $1.8 million, or 10.7% and 7.0%, respectively, compared to the same periods in the prior year. This was primarily the result of an increase in the costs of foreclosed assets. See additional analysis of noninterest expense included in the section captioned “Noninterest Expense” included elsewhere in this discussion.

Florida Region

The Florida segment experienced an operating loss of $36.2 million and $46.0 million for the three and nine months ended September 30, 2010, respectively, compared to operating income of $0.9 million and $5.8 million for the same periods in the prior year. The decrease in profits was primarily the result of an increase in the provision for loan losses.

Net interest income for the three and nine months ended September 30, 2010 decreased $0.8 million and increased $2.4 million, or 7.7% and 8.6%, respectively, compared to the same periods in the prior year. The decrease was primarily a result of a decline in loan yield resulting from an increase in nonperforming loans. The increase was the result of a decrease in the average cost of interest-bearing liabilities. See the analysis of net interest income included in the section captioned “Net Interest Income” elsewhere in this discussion.

The provision for loan losses for the three and nine months ended September 30, 2010 increased $32.9 million and $48.9 million, respectively, compared to the same periods in the prior year. See the analysis of the provision for loan losses included in the section captioned “Provision for Loan Losses and Loan Charge-offs” elsewhere in this discussion.

Noninterest income for the three and nine months ended September 30, 2010 decreased $0.1 million and $0.2 million, or 11.6% and 12.9%, respectively, compared to the same periods in the prior year, primarily due to a decline in service charges. See the analysis of noninterest income in the section captioned “Noninterest Income” included elsewhere in this discussion.

Noninterest expense for the three and nine months ended September 30, 2010 increased $3.3 million and $5.2 million, or 56.6% and 29.7%, respectively, compared to the same periods in the prior year, primarily as a result of an increase in the costs of foreclosed assets and professional fees. See additional analysis of noninterest expense included in the section captioned “Noninterest Expense” included elsewhere in this discussion.

Fair Value Measurements

We measure fair value at the price we would receive by selling an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize 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 for 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.

As of September 30, 2010 and December 31, 2009, we had $267.9 million, or 46.1%, and $213.8 million, or 38.2%, respectively, of total assets valued at fair value that are considered Level 3 valuations using unobservable inputs. As shown in Note 12 to the consolidated financial statements, available-for-sale securities with a carrying value of $13.0 million and $13.3 million, as of September 30, 2010 and December 31, 2009, respectively, were included in the Level 3 assets category measured at fair value on a recurring basis. These securities consist primarily of certain private-label mortgage-backed securities (“MBS”) and collateralized debt obligations (“CDOs”) backed by pooled trust preferred securities and a single issuer’s trust preferred security. As the market for these securities became less active and pricing less reliable, management determined that the trust preferred securities should be transferred to a Level 3 category during the third quarter of 2008, and that six private-label MBS be transferred during the second and third quarters of 2009.

Management measures fair value on the trust preferred securities based on various spreads to LIBOR determined after its review of applicable financial data and credit ratings (See “Financial Condition — Investment Securities” below for additional discussion). As of September 30, 2010, the fair values of five private-label MBS totaling $6.1 million were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. Prior to June 30, 2009, these securities were measured using Level 2 inputs. 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. The discount rates used in the valuation model were based on a yield that the market would require for securities with maturities and risk characteristics similar to the securities being measured (See “Financial Condition – Investment Securities – Mortgage-backed securities”). The remaining Level 3 assets, totaling $254.9 million, include loans which have been impaired, foreclosed other real estate and other real estate held for sale, which are valued on a nonrecurring basis based on appraisals of the collateral. The value of this collateral is based primarily on appraisals by qualified licensed appraisers approved and hired by management. Appraised and reported values are 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 the client’s business. The collateral is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. See Note 12 to the condensed consolidated financial statements for additional disclosures regarding fair value measurements.

Financial Condition

Total assets were $3.166 billion as of September 30, 2010, a decrease of $55.4 million, or 1.72%, from $3.222 billion as of December 31, 2009. Average total assets for the three months ended September 30, 2010 were $3.319 billion, and were funded by average total liabilities of $3.177 billion and average total stockholders’ equity of $142.1 million.

Short-term liquid assets

Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) increased $164.3 million to $264.1 million as of September 30, 2010 from $99.8 million as of December 31, 2009. As of September 30, 2010, short-term liquid assets were 8.3% of total assets, compared to 3.1% as of December 31, 2009. We continually monitor our liquidity position and will increase or decrease our short-term liquid assets as we deem necessary. (See “Liquidity” below in this Item 2 for additional discussion.)

Investment Securities

Total investment securities decreased $25.3 million, or 8.8%, to $261.0 million as of September 30, 2010, from $286.3 million as of December 31, 2009. Average investment securities were $266.3 million and $279.6 million for the three and nine months ended September 30, 2010, respectively, compared to $297.6 million and $320.5 million for the same periods in the prior year. Investment securities were 8.8% of interest-earning assets as of September 30, 2010 compared to 9.9% as of December 31, 2009. The investment portfolio produced an average taxable equivalent yield of 4.11% and 4.42% for the three and nine months ended September 30, 2010, respectively, compared to 5.36% and 5.41% for the three and nine months ended September 30, 2009, respectively.

During the second quarter, we sold certain U.S. Agency securities and U.S Agency MBS with combined amortized cost and market values of $87.4 million and $89.1 million, respectively. We reinvested a portion of the proceeds into a like amount of U. S Agency MBS guaranteed by the Government National Mortgage Association (“Ginnie Mae”). This repositioning is expected to reduce the duration of the portfolio and improve risk-based capital. We realized a net gain of approximately $1.7 million. A portion of these securities had impairment losses of approximately $0.2 million, which we realized in the first quarter.

Investment Portfolio

The following table presents the carrying value of securities we held as of the periods indicated:


	Available-for-Sale
	September 30,		December 31,		Percent
	2010		2009		Change
	(Dollars in thousands)
*Investment securities available-for-sale*:
U.S. agency securities	$	18,596	$	53,681		(65.4	)%
MBS
U.S. Agency pass-through		105,698		163,724		(35.4	)
U.S. Agency collateralized mortgage obligation (“CMO”)		83,779		12,759	NCM
Private-label CMO		13,269		16,191		(18.0	)

Total MBS		202,746		192,674		5.2
State, county and municipal securities		30,167		31,462		(4.1	)
Corporate obligations
Corporate debt		4,000		4,000		—
Pooled trust preferred securities		3,579		3,203		11.7
Single issue trust preferred securities		1,775		977		81.7

Total corporate obligations		9,354		8,180		14.4

Equity securities		139		313		(55.6	)

Total investment securities available-for-sale	$	261,002	$	286,310		(8.8	)%

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


	Less than 12 Months				More than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses (1)		Value		Losses (1)		Value		Losses (1)
	(Dollars in thousands)
*Temporarily Impaired*
MBS
U.S. Agency pass-through	$	74	$	—	$	239	$	7	$	313	$	7
U.S. Agency CMO		38		—		—		—		38		—
Private-label CMO		—		—		5,903		850		5,903		850

Total MBS		112		—		6,142		857		6,254		857
State, county and municipal securities		1,585		79		970		129		2,555		208
Corporate obligations:
Corporate debt		—		—		4,000		82		4,000		82
Single issue trust preferred securities		—		—		1,775		3,225		1,775		3,225

Total corporate obligations		—		—		5,775		3,307		5,775		3,307

Total temporarily impaired securities		1,697		79		12,887		4,293		14,584		4,372
*Other-than-temporarily Impaired*
MBS
Private-label CMO		—		—		3,094		1,384		3,094		1,384
Corporate obligations
Pooled trust preferred securities		—		—		3,579		4,501		3,579		4,501

Total OTTI securities		—		—		6,673		5,885		6,673		5,885

Total temporarily and other-than-temporarily impaired	$	1,697	$	79	$	19,560	$	10,178	$	21,257	$	10,257


(1)		Unrealized losses are included in other comprehensive income (loss), net of unrealized gains and applicable income taxes.

Other-Than-Temporary-Impairment

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

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

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

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, 2010, our securities portfolio consisted of 198 securities, 27 of which were in an unrealized loss position. The majority of unrealized losses are related to our private-label CMOs and trust preferred securities, as discussed below.

Mortgage-backed securities

As of September 30, 2010, approximately 93% of the dollar volume of MBS we held were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Ginnie Mae, institutions which the government has affirmed its commitment to support, and these securities have nominal unrealized losses. Our MBS portfolio also includes 10 private-label CMOs with a market value of $13.3 million, which had net unrealized losses of approximately $2.0 million as of September 30, 2010. These private-label CMOs were rated AAA at purchase. The following is a summary of the investment grades for these securities (Dollars in thousands):


			Credit Support		Net
Rating			Coverage		Unrealized
Moody/Fitch	Count		Ratios (1)		(Loss) Gain
A1/NR		1		2.61	$	(162	)
Aaa/NR		1		4.73		—
NR/AAA		1		3.08		111
NR/AA		1		3.26		(143	)
B2/AA		1		N/A		(452	)
B2/NR		1		3.99		(56	)
NR/BBB		1		2.17		(37	)
Caa2/CCC (2)		1		0.75		(1,384	)
NR/C (2)		2		0.00-0.25		128

Total		10			$	(1,995	)


(1)		The Credit Support Coverage Ratio determines the multiple of credit support, based on assumptions for the performance of the loans within the delinquency pipeline. The assumptions used are: Current Collateral Support/ ((60 day delinquencies x.60) + (90 day delinquencies x.70) + (foreclosures x 1.00) + (other real estate x 1.00)) x .40 for loss severity.

(2)		Includes all private-label CMOs that have OTTI. See discussion that follows.

During the first and third quarters of 2010, we recognized immaterial amounts of OTTI on two of the private-label CMOs. The assumptions used in the valuation model include expected future default rates, loss severity and prepayments. The model also takes into account the structure of the security, including credit support. Based on these assumptions, the model calculates and projects the timing and amount of interest and principal payments expected for the security. As of September 30, 2010, the fair values of the three private-label CMO securities with OTTI totaled $3.7 million and were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. The discount rates used in the valuation model were based on a yield that the market would require for securities with maturities and risk characteristics similar to the securities being measured (See Note 12 for additional disclosure). The following table provides additional information regarding these CMO valuations as of September 30, 2010 (dollars in thousands):


			Discount										Year-to-Date
			Margin								Actual		OTTI
	Price		Basis				Cumulative		Average		60+ Days		Credit
Security	(%)		Points		Yield		Default		Security		Delinquent		Portion			Other			Total
CMO 1		10.76		1756		18%		55.09%		50%		16.27%	$	(54	)	$	(85	)	$	(139	)
CMO 2		17.57		1629		17%		49.04%		45%		27.72%		—			—			—
CMO 4		63.01		1440		16%		29.38%		45%		16.67%		(97	)		74			(23	)

													$	(151	)	$	(11	)	$	(162	)

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

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

State, county and municipal securities

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

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

Trust preferred securities

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

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

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

	•		terms of the CDO structure, as laid out in the indenture;

	•		the cash flow waterfall (for both interest and principal);

	•		overcollateralization and interest coverage tests;

	•		events of default/liquidation;

	•		mandatory auction call;

	•		optional redemption;

	•		hedge agreements; and

	•		discounted cash flow modeling.

On the basis of the evaluation of collateral credit, and in combination with a review of historical industry default data and current/near-term operating conditions, appropriate default and recovery probabilities are determined for each piece of collateral in the CDO; specifically, we estimate 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, we formulate a recovery assumption 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, assigned a probability that the deferral will ultimately cure.

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

historically, gradually leveling off thereafter.

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

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


										Year-to-Date
										Other-than-temporary-impairment
	Single/	Class/	Amortized		Fair		Unrealized			Credit
Name	Pooled	Tranche	Cost		Value		Loss			Portion			Other			Total
MM Caps Funding I Ltd	Pooled	MEZ	$	2,135	$	896	$	(1,239	)	$	—		$	—		$	—
MM Community Funding Ltd	Pooled	B		1,957		789		(1,168	)		(20	)		(117	)		(137	)
Preferred Term Securities V	Pooled	MEZ		1,145		808		(337	)		(61	)		37			(24	)
Tpref Funding III Ltd	Pooled	B-2		2,843		1,086		(1,757	)		(174	)		43			(131	)
Emigrant Capital Trust (1)	Single	Sole		5,000		1,775		(3,225	)		—			—			—

			$	13,080	$	5,354	$	(7,726	)	$	(255	)	$	(37	)	$	(292	)


			Original Collateral -			Performing Collateral -
			Percent of Actual			Percent of Expected
	Lowest	Performing	Deferrals and			Deferrals and			Excess
Name	Rating	Banks	Defaults			Defaults			Subordination (2)
MM Caps Funding I Ltd	C	21		21	%		18	%		0	%
MM Community Funding Ltd	C	7		25	%		29	%		0	%
Preferred Term Securities V	CCC	2		5	%		36	%		0	%
Tpref Funding III Ltd	C	22		28	%		20	%		0	%
Emigrant Capital Trust (1)	NR	NA	NA			NA			NA

Fair Value

Discount Margin

Yield

Name

(Price to Par)

(Basis Points)

MM Caps Funding I Ltd

44.79

Swap + 1800

9.48% Fixed

MM Community Funding Ltd

15.77

LIBOR + 1500

LIBOR + 310

Preferred Term Securities V

58.85

LIBOR + 1600

LIBOR + 210

Tpref Funding III Ltd

27.16

LIBOR + 1200

LIBOR + 190

Emigrant Capital Trust (1)

35.50

LIBOR + 1162

LIBOR + 200


(1)		There has been no notification of deferral or default on this issue. An analysis of the company, including discussion with its management, indicates there is adequate capital and liquidity to service the debt. The discount margin of 1162 basis points was derived from implied credit spreads from certain publicly traded trust preferred securities within the issuer’s peer group.

(2)		Excess subordination represents the additional defaults in excess of both the current and projected defaults the issue can absorb before the security experiences any credit impairment. Excess subordination is calculated by determining what level of defaults an issue can experience before the security has any credit impairment and then subtracting both the current and projected future defaults.

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

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

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


	For the Three			For the Nine
	Months Ended			Months Ended
	September 30, 2010			September 30, 2010
	(Dollars in thousands)
Balance at beginning of period	$	8,924		$	8,869
Amounts related to credit losses for which an OTTI was not previously recognized		—			154
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		309			405
Reductions for securities where there is an intent to sell or requirement to sell		—			(154	)
Reductions for securities that are in total default		(1,434	)		(1,434	)
Reductions for increases in cash flows expected to be collected		(447	)		(488	)

Balance at end of period	$	7,352		$	7,352

Loans

Composition of Loan Portfolio, Yield Changes and Diversification

Our loans, net of unearned income, were $2.416 billion as of September 30, 2010, a decrease of $57.0 million from $2.473 billion as of December 31, 2009. Mortgage loans held for sale were $63.9 million as of September 30, 2010, a decrease of 11.1%, or $8.0 million, from $71.9 million as of December 31, 2009. Average loans, including mortgage loans held for sale, for the three months ended September 30, 2010 were $2.519 billion compared to $2.463 billion for the year ended December 31, 2009. Loans, net of unearned income, comprised 81.2% of interest-earning assets as of September 30, 2010, compared to 85.4% as of December 31, 2009. Mortgage loans held for sale comprised 2.2% of interest-earning assets as of September 30, 2010, compared to 2.5% as of December 31, 2009. The average yield of the loan portfolio was 5.37%, 5.66% and 5.84% for the three months ended September 30, 2010, June 30, 2010 and December 31, 2009, respectively. The decrease in the average yield was primarily the result of a generally lower level of market rates and the effect of increasing nonaccrual loans.

The following table details the distribution of our loan portfolio by category for the periods presented:

Distribution of Loans by Category


	September 30, 2010						December 31, 2009
				Percent of						Percent of
	Amount			Total			Amount			Total
	(Dollars in thousands)
Commercial and industrial	$	177,905			7.36	%	$	213,329			8.62	%
Real estate — construction and land development		632,792			26.16			680,445			27.48
Real estate — mortgages
Single-family		699,428			28.92			691,364			27.93
Commercial		820,483			33.92			801,813			32.39
Other		31,242			1.29			28,885			1.17
Consumer		56,160			2.32			58,785			2.37
Other		817			0.03			969			0.04

Total loans		2,418,827			100.00	%		2,475,590			100.00	%

Unearned income		(2,965	)					(2,893	)
Allowance for loan losses		(151,362	)					(41,884	)

Net loans	$	2,264,500					$	2,430,813

The following table shows the amount of total loans, net of unearned income, by segment and the percent change for the periods indicated:


	September 30,		December 31,		Percent
	2010		2009		Change
	(Dollars in thousands)
Total loans, net of unearned income	$	2,415,862	$	2,472,697		(2.3	)%
Alabama segment		969,673		996,545		(2.7	)
Florida segment		1,176,382		1,213,202		(3.0	)
Other		269,807		262,950		2.6

A further analysis of the components of our real estate construction and land development and real estate mortgage loans for the periods indicated is as follows:


	Residential		Commercial
	Development		Development		Total
	(Dollars in thousands)
Real estate — construction and land development

*As of September 30, 2010*
Alabama segment	$	153,994	$	74,520	$	228,514
Florida segment		109,471		264,379		373,850
Other		6,171		24,257		30,428

Total	$	269,636	$	363,156	$	632,792

*As of December 31, 2009*
Alabama segment	$	163,978	$	102,339	$	266,317
Florida segment		129,590		265,767		395,357
Other		7,856		10,915		18,771

Total	$	301,424	$	379,021	$	680,445


	Single-
	family		Commercial
	(Dollars in thousands)
Real estate — mortgages

*As of September 30, 2010*
Alabama segment	$	425,650	$	307,787
Florida segment		225,971		467,987
Other		47,807		44,709

Total	$	699,428	$	820,483

*As of December 31, 2009*
Alabama segment	$	461,365	$	296,520
Florida segment		189,245		475,218
Other		40,754		30,075

Total	$	691,364	$	801,813

Allowance for Loan Losses

Overview

It is the responsibility of management to assess and maintain the allowance for loan losses at a level it believes is appropriate to absorb the estimated credit losses within our loan portfolio through the provision for loan losses. The determination of our allowance for loan losses is based on management’s analysis of the credit quality of the loan portfolio including its judgment regarding certain internal and external factors that affect loan collectability. This process is performed on a quarterly basis under the oversight of the Board of Directors. The estimation of the allowance for loan losses is based on two basic components — those estimations calculated in accordance with the requirements of ASC 450-20, and those specific impairments under ASC 310-35 (see discussions below). The calculation of the allowance for loan losses is inherently subjective, and actual losses could be greater or less than the estimates.

ASC 450-20

Under ASC 450-20, estimated losses on all loans that have not been identified with specific impairment under ASC 310-35 are calculated based on the historical loss ratios applied to our standard loan categories using a rolling average adjusted for certain qualitative risk factors, as shown below. In addition to these standard loan categories, management may identify other areas of risk based on its analysis of such qualitative risk factors and estimate additional losses as it deems necessary. The qualitative risk factors that management uses in its estimate include, but are not limited to, the following:

	•		trends in volume;

	•		effects of changes in credit concentrations;

	•		levels of and trends in delinquencies, classified loans and non-performing assets;

	•		levels of and trends in charge-offs and recoveries;

	•		changes in lending policies and underwriting guidelines;

	•		national and local economic trends and condition; and

	•		mergers and acquisitions.

ASC 310-35

Pursuant to ASC 310-35, impaired loans are loans that are specifically reviewed and for which it is probable that we will be unable to collect all amounts due according to the terms of the loan agreement (see “Impaired Loans” section below). Impairment is measured by comparing the recorded investment in the loan with the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. A valuation allowance is provided to the extent that the measure of the impaired loans is less than the recorded investment. A loan is not considered impaired during a period of delay in payment if we continue to expect that all amounts due will ultimately be collected according to the terms of the loan agreement. Our Credit Administration department maintains supporting documentation regarding collateral valuations and/or discounted cash flow analyses.

The following table summarizes certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the periods indicated:

Summary of Loan Loss Experience


	Three Months Ended						Nine Months Ended						Year Ended
	September 30,						September 30,						December 31,
	2010			2009			2010			2009			2009
	(Dollars in thousands)
Allowance for loan losses at beginning of period	$	79,425		$	33,504		$	41,884		$	28,850		$	28,850
Charge-offs:
Commercial and industrial		2,085			299			5,020			496			1,390
Real estate — construction and land development		22,076			1,751			35,171			2,806			4,870
Real estate — mortgage
Single-family		4,198			1,396			8,001			2,764			5,372
Commercial		1,003			85			1,952			933			1,094
Other		57			—			57			186			210
Consumer		964			966			2,404			2,368			3,346
Other		39			49			232			315			379

Total charge-offs		30,422			4,546			52,837			9,868			16,661
Recoveries:
Commercial and industrial		11			36			70			144			161
Real estate — construction and land development		42			9			62			35			68
Real estate — mortgage
Single-family		55			27			146			59			71
Commercial		1			35			31			40			277
Other		13			13			74			230			251
Consumer		91			51			225			134			186
Other		40			38			111			110			131

Total recoveries		253			209			719			752			1,145

Net charge-offs		30,169			4,337			52,118			9,116			15,516
Provision for loan losses		102,106			5,169			161,596			14,602			28,550

Allowance for loan losses at end of period	$	151,362		$	34,336		$	151,362		$	34,336		$	41,884


Loans at end of period, net of unearned income	$	2,415,862		$	2,434,534		$	2,415,862		$	2,434,534		$	2,472,697
Average loans, net of unearned income		2,467,685			2,422,871			2,490,827			2,384,287			2,401,805
Ratio of ending allowance to ending loans		6.27	%		1.41	%		6.27	%		1.41	%		1.69	%
Ratio of net charge-offs to average loans (1)		4.85			0.71			2.79			0.51			0.65
Net charge-offs as a percentage of:
Provision for loan losses		29.55			83.90			32.25			62.43			54.35
Allowance for loan losses (1)		79.08			50.10			45.87			35.36			37.04
Allowance for loan losses as a percentage of nonperforming loans		65.40			22.50			65.40			22.50			26.25


(1)		Annualized.

The allowance as a percentage of loans, net of unearned income, as of September 30, 2010 was 6.27%, compared to 3.20% and 1.69% as of June 30, 2010 and December 31, 2009, respectively.

The allowance for loan losses as a percentage of nonperforming loans, excluding TDRs, increased to 65.4% as of September 30, 2010 from 34.32% as of June 30, 2010 and 26.25% as of December 31, 2009. Approximately $74.7 million of the allowance for loan losses was specifically allocated to nonperforming loans as of September 30, 2010. As of September 30, 2010, nonperforming loans were $277.5 million, of which $273.0 million, or 98.4%, were loans secured by real estate compared to $231.4 million, or 98.2%, as of June 30, 2010. See “Nonperforming Assets”.

Three Months Ended September 30, 2010 compared to Three Months Ended June 30, 2010

Net charge-offs increased $13.1 million to $30.2 million for the three months ended September 30, 2010 from $14.1 million during the three months ended June 30, 2010. Of the $30.2 million, $21.1 million, or 69.5%, was related to a six large real estate construction relationships with original outstanding balances totaling approximately $47.8 million. Overall, net charge-offs for real estate loans increased $16.6 million to $27.2 million. Net charge-offs of commercial loans decreased by $0.7 million to $2.1 million. Net charge-offs of consumer loans increased by $0.2 million to $0.9 million. Net charge-offs as a percentage of the allowance for loan losses were 79.08% for the three months ended September 30, 2010, up from 71.34% for the three months ended June 30, 2010 and up from 50.10% for three months ended September 30, 2009.

Net charge-offs related to construction and land development real estate loans increased $14.5 million to $22.0 million during the three months ended September 30, 2010, from $7.5 million for the three months ended June 30, 2010. Residential construction and land development net charge-offs accounted for $13.8 million, or 62.4%, of the total losses from this portfolio, with $8.3 million, or 37.6%, coming from commercial real estate construction and land development. Within the residential construction losses, $10.0 million or 72.2% was secured by undeveloped or partially developed land; the remainder was secured by single family residences under construction. Geographically, $7.6 million, or 55% of residential construction losses was located in Florida; the remaining $6.3 million located in Alabama or other states. Within the commercial construction losses, $7.8 million, or 93.5%, were secured by undeveloped or partially developed land. Geographically, $7.7 million, or 91.9%, was located in Alabama with the remainder in Florida.

Nine Months Ended September 30, 2010 compared to the Nine Months Ended September 30, 2009

Net charge-offs increased $43.0 million to $52.1 million for the nine months ended September 30, 2010 from $9.1 million during the nine months ended September 30, 2009. Net charge-offs of real estate loans increased $38.5 million to $44.9 million. Net charge-offs of commercial loans increased by $4.6 million to $5.0 million. Net charge-offs of consumer loans decreased $0.1 million to $2.3 million. Net charge-offs as a percentage of the allowance for loan losses were 45.87% for the nine months ended September 30, 2010, up from 35.36% for the nine months ended September 30, 2009.

Net charge-offs related to construction and land development real estate loans increased $32.3 million to $35.1 million during the nine months ended September 30, 2010, from $2.8 million for the nine months ended September 30, 2009. Residential construction and land development net charge-offs accounted for $24.9 million, or 70.8%, of the total losses from this portfolio, with $10.2 million, or 29.2%, coming from commercial real estate residential construction and land development. Within the residential construction losses, $20.2 million, or 80.8%, were secured by undeveloped or partially developed land; the remainder was secured by single family residences under construction. Geographically, $18.1 million, or 72.6%, of residential construction losses were located in Florida; the remaining $6.8 million, or 27.4%, were located in Alabama or other states. Within the commercial construction losses, $9.5 million, or 93.1%, were secured by undeveloped or partially developed land. Geographically, $7.7 million, or 75.2%, was located in Alabama with the remainder in Florida.

Allocation of the Allowance for Loan Losses

The allowance for loan losses calculation is segregated into various segments that include specific allocations for loans, portfolio segments and general allocations for portfolio risk.

Risk ratings are subject to independent review by internal loan review, which also performs ongoing, independent review of the risk management process. The risk management process includes underwriting, documentation and collateral control. Loan review is centralized and independent of the lending function. The loan review results are reported to senior management and the Audit and

Enterprise Risk Management Committee of the Board of Directors. Credit Administration relies upon the independent work of loan review in risk rating and developing its recommendations to the Audit and Enterprise Risk Management Committee of the Board of Directors for the allocation of the allowance for loan losses, and performs this function independent of the lending area of Superior Bank.

We historically have allocated our allowance for loan losses to specific loan categories. Although the allowance for loan losses is allocated, it is available to absorb losses in the entire loan portfolio. This allocation is made for estimation purposes only and is not necessarily indicative of the allocation between categories in which future losses may occur, nor is it limited to the categories to which it is allocated.

Allocation of the Allowance for Loan Losses


	September 30, 2010					June 30, 2010					December 31, 2009
			Percent					Percent					Percent
			of Loans					of Loans					of Loans
			in Each					in Each					in Each
			Category					Category					Category
			to Total					to Total					to Total
	Amount		Loans			Amount		Loans			Amount		Loans
	(Dollars in thousands)
Commercial and industrial	$	7,278		7.4	%	$	5,975		7.5	%	$	2,356		8.6	%
Real estate — construction and land development		83,651		26.2			43,392		27.4			17,971		27.5
Real estate — mortgages
Single-family		23,602		28.9			16,860		28.2			12,342		27.9
Commercial		34,337		33.9			11,142		33.3			7,019		32.4
Other		696		1.3			209		1.3			371		1.2
Consumer		1,798		2.3			1,847		2.3			1,825		2.4

Total	$	151,362		100.0	%	$	79,425		100.0	%	$	41,884		100.0	%

During the second quarter of 2010, management decided to increase the various qualitative risk factors applied to the historical loss calculations to address the increased levels of inherent risks associated with the impact of the Gulf Oil Spill. (See “Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” above in this Item 2 for a discussion of the Gulf Oil Spill.) Management identified approximately $549 million in loans to customers that could be directly or indirectly impacted by the spill with the majority of these customers located along the Alabama and Northwest Florida coastal regions. Within this group, $149 million, or 27%, could be categorized as beach-front properties which could be more directly impacted by this spill. Four major loan categories were identified as being most susceptible to the impact of the spill: Real Estate Construction, 1-4 Family Mortgage Loans, Commercial Real Estate Mortgage loans, and Commercial, Financial, and Industrial (C & I) loans.

As demonstrated in the table above, the overall levels of required allowance increased significantly over the course of 2010 with the largest impact occurring in the third quarter of 2010. Specific reserve levels and historical loss ratios were the drivers of this increase with the level of specific allocation required relative to impaired loans being the most significant. (See “Impaired Loans” section below for more detail). In comparison to the second quarter of 2010, historical loss ratios continued to increase as the bank realized losses in all major loan categories with the majority of loss experience in construction loans secured by undeveloped or partially-developed land. Because of this, management decided to further delineate losses for certain loan categories in the third quarter of 2010. In particular, management analyzed real estate construction loan losses and decided to further segment the historical loss calculation for real estate construction loans secured by developed and undeveloped land to better account for the inherent risks associated with this class of loan. Management believes that this segmentation is useful and necessary in that it provides a better accounting of construction losses and further isolates the overall inherent risks associated with this loan portfolio, In light of these factors, management believes that the increased level of allowance for loan losses is adequate. (See “Risk Factors – Risks Relating to Our Business” elsewhere herein.)

During the nine months ended September 30, 2010, we increased the allowance for loan losses related to construction and land development real estate loans by $65.6 million, from $18.0 million as of December 31, 2009 to $83.7 million as of September 30, 2010, because of continued weakness and increasing levels of risk due to general economic conditions in the construction and land development real estate markets throughout our franchise. As mentioned previously, management decided to further delineate loan losses relative to construction and land development loans by segregating loans secured by undeveloped or partially developed land. This segment accounted for $64.7 million, or 77.4%, of the total allowance for loan losses for this category; the remainder was related to loans secured by improved properties.

Our allocation of the allowance for loan losses related to single-family mortgage loans increased to $23.6 million as of September 30, 2010 from $12.3 million as of December 31, 2009. This allocation reflects the continued risk exposure due to the current downturn in the national economy and the effect on the housing sector which has increased our foreclosure activity within this portfolio. As of September 30, 2010, only 4.9% of our loans secured by single family properties had a loan-to-value (“LTV”) that was 90% or greater and were without private mortgage insurance (“PMI”) or other government guarantee.

Nonperforming Assets

Nonperforming assets increased $59.7 million, or 21.3%, to $336.6 million as of September 30, 2010 from $276.9 million as of June 30, 2010. As a percentage of net loans plus nonperforming assets, nonperforming assets increased to 13.60% as of September 30, 2010 from 10.95% as of June 30, 2010. (See “Certain Factors Contributing to Recent Results and Our Response to Those Factors” in Part I, Item 2 of this Report.) The overall increase in nonperforming assets was primarily related to our real estate construction loan and commercial mortgage loan portfolios. In the third quarter of 2010, the bank added $69.8 million in new non-performing real estate construction loans. Of these new loans, sixteen large ($1.0 million and over) credits, totaling $55.4 million, accounted for over 79% of this increase; geographically, nine credits ($35.6 million of the total) were located in Florida with seven credits ($19.8 million of the total) located in Alabama and Kentucky. Also during the third quarter of 2010, the bank experienced reductions of non-performing real estate construction loans totaling $35.1 million due to payment/payoff activity, charge-offs, or through movement to OREO via foreclosure. Of this reduction, two large credits, totaling $4.8 million, accounted for 13.7% of the total; both of these credits were located outside of Florida. The total effect of all of these changes resulted in a net increase in non-performing real estate construction loans totaling $34.7 million for the third quarter of 2010. The commercial real estate increase was the result of eight commercial real estate credits, totaling $14.2 million, primarily in the office category. All of these credits were located in Florida. In all cases, management continues to actively work to mitigate the risks of loss across all categories of the loan portfolio. Nonetheless, recently imposed regulatory constraints on the modification of multifamily, non-residential, land or commercial mortgage loans is in some instances, impeding these mitigation efforts. (See “Recent Developments” above in this Item 2 for a discussion of the regulatory constraints.) The following table shows our nonperforming assets for the periods indicated:


	September 30,			December 31,
	2010			2009
	(Dollars in thousands)
Nonaccrual	$	272,028		$	155,631
Accruing loans 90 days or more delinquent		5,425			3,920

Total nonperforming loans		277,453			159,551
Other real estate owned assets		58,766			41,618
Repossessed assets		394			380

Total nonperforming assets	$	336,613		$	201,549

Restructured and performing under restructured terms, net of specific allowance	$	117,650		$	110,777


Nonperforming loans as a percentage of loans		11.48	%		6.45	%

Nonperforming assets as a percentage of loans plus nonperforming assets		13.60	%		8.01	%

Nonperforming assets as a percentage of total assets		10.63	%		6.26	%

The following is a summary of nonperforming loans by category for the periods indicated:


	September 30,		December 31,
	2010		2009
	(Dollars in thousands)
Commercial and industrial	$	3,434	$	1,797
Real estate — construction and land development
Residential		116,582		23,818
Commercial		51,939		49,240
Real estate — mortgages
Single-family		51,172		52,323
Commercial		53,002		30,343
Other		200		436
Consumer		1,124		734
Other		—		860

Total nonperforming loans	$	277,453	$	159,551

A delinquent loan is ordinarily placed on nonaccrual status no later than when it becomes 90 days past due and management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that the collection of interest is doubtful. When a loan is placed on nonaccrual status, all unpaid interest which has been accrued on the loan during the current period is reversed and deducted from earnings as a reduction of reported interest income; any prior period accrued and unpaid interest is reversed and charged against the allowance for loan losses. No additional interest income is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may be an actual write-down or charge-off of the principal balance of the loan to the allowance for loan losses.

As of September 30, 2010, single-family residential mortgages accounted for $51.2 million, or 18.3%, of total nonperforming loans, down $2.6 million from $53.8 million as of June 30, 2010. Foreclosure activity during the three months ended September 30, 2010 resulted in $24.3 million of net new foreclosures, with residential construction properties accounting for $4.6 million, or 18.8%, commercial construction properties accounting for $8.0, or 33.0%; single family residential properties accounting for $9.2 million, or 37.8%, and CRE properties accounting for another $2.5 million, or 10.4%. Approximately 63% of foreclosures originated in Alabama and the remaining 37% originated in Florida. Our OREO acquired through foreclosure was $58.8 million as of September 30, 2010 a increase of $13.6 million from $45.2 million as of June 30, 2010, which resulted from increased foreclosure activity.

The following is a summary of OREO by category for the periods indicated:


	September 30,		December 31,
	2010		2009
	(Dollars in thousands)
Acreage	$	4,860	$	2,251
Commercial buildings		14,542		5,226
Residential condominiums		1,340		2,730
Residential single-family homes		21,981		15,696
Residential lots		11,090		14,613
Other		4,953		1,102

Other real estate owned	$	58,766	$	41,618

Other real estate, acquired through partial or total satisfaction of loans, is carried at the lower of cost or fair value, less estimated selling expenses. At the date of acquisition, any difference between the fair value and book value of the asset is charged to the allowance for loan losses. The value of other foreclosed real estate collateral is determined based on appraisals by qualified licensed appraisers approved and hired by our management. Appraised and reported values are 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 the client’s business. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Impaired Loans

As of September 30, 2010, our recorded investment in impaired loans, under ASC 310-35 was $413.5 million, an increase of $13.8 million from $399.7 million as of June 30, 2010. (See “Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” above in this Item 2.) During the third quarter of 2010, approximately $150.1 million in loans experienced reduced impairment levels due to charge-off/write down activity (OREO), updated property valuations and/or lower cash-flow impairments due to performance/amortization by the borrower yielding lower impairments; resulting in the release of approximately $17.2 million in specific reserve levels. Also during the third quarter of 2010, we added approximately $65 million new impairments, primarily non-accrual loans. The related collateral valuation analyses resulted in new required specific reserve levels of $16.8 million. Approximately $117.0 million in existing impaired loans, or 28% of total impaired loans, received updated appraised valuations resulting in higher specific reserve levels of $35.8 million. The remaining $99.8 million required additional reserve levels primarily due to lower estimated property valuations and/or increased cash flow impairments relative to concessions made during troubled-debt-restructurings (TDRs); resulting in additional specific reserve levels of $20.5 million. At the individual credit level, over 54% of the overall increase in specific reserve could be attributed to thirteen (13) credits over $1.0 million which accounted for $30.2 million of the total increase. Management does expect that impaired loans will continue to be a significant factor in the overall determination of appropriate reserve levels. See Part II, Item 1A. “Risk Factors — Risks Relating to Our Business.”

Of our total impaired loans, approximately $298.1 million were located in the Florida Region, $105.9 million were located in the Alabama Region, and $9.5 million were located in other areas. Approximately $103.0 million of the allowance for loan losses was specifically allocated to these loans, providing 24.9% coverage. Additionally, $411.1 million, or 99.4%, of the $413.5 million in impaired loans are secured by real estate.

The following is a summary of impaired loans and the specifically allocated allowance for loan losses by category for the periods indicated:


	September 30, 2010				December 31, 2009
	Oustanding		Specific		Oustanding		Specific
	Balance		Allowance		Balance		Allowance
	(Dollars in thousands)
Commercial and industrial	$	2,433	$	1,272	$	3,032	$	1,053
Real estate — construction and land development
Residential		90,477		28,926		31,912		3,044
Commercial, including raw land		119,800		30,009		82,356		3,675
Real estate — mortgages
Single-family		61,620		12,318		53,229		5,005
Commercial		137,081		29,925		109,222		1,686
Other		2,135		596		500		62
Consumer		—		—		97		2

Total	$	413,546	$	103,046	$	280,348	$	14,527

At the time a loan is identified as impaired, it is evaluated and valued at the lower of cost or fair value. For collateral dependent loans, 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. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers approved and hired by management. The value of business equipment is determined based on appraisals by qualified licensed appraisers approved and hired by management, if significant. Appraised and reported values are 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.

Our other impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. Impairment measured under this method is comprised primarily of loans considered TDRs where the terms of these loans have been restructured based on the expected future cash flows. A restructuring of debt constitutes a TDR if for economic or legal reasons related to borrower’s financial difficulties we grant a concession to the borrower that we would not otherwise consider.

All impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

The following is a summary of our TDRs as of September 30, 2010:


	Restructured
	Performing				Not-Performing
	in accordance				in accordance
	with restructured terms				with restructured terms
	Oustanding		Specific		Oustanding		Specific
	Balance		Allowance		Balance		Allowance
	(Dollars in thousands)
*Alabama:*
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate — construction and land development		474		89		801		188
Real estate — mortgages
Single-family		11,599		1,444		3,799		826
Commercial		7,044		1,024		—		—
Consumer		—		—		—		—

Total	$	19,117	$	2,557	$	4,600	$	1,014


*Florida*
Commercial and industrial	$	393	$	393	$	—	$	—
Real estate — construction and land development		31,185		4,152		14,984		8,789
Real estate — mortgages
Single-family		13,184		1,526		1,940		571
Commercial		82,062		19,663		16,181		3,279
Consumer		—		—		—		—

Total	$	126,824	$	25,734	$	33,105	$	12,639


*Total*
Commercial and industrial	$	393	$	393	$	—	$	—
Real estate — construction and land development		31,659		4,241		15,785		8,977
Real estate — mortgages
Single-family		24,783		2,970		5,739		1,397
Commercial		89,106		20,687		16,181		3,279
Consumer		—		—		—		—

Total	$	145,941	$	28,291	$	37,705	$	13,653

Potential Problem Loans

In addition to nonperforming loans, management has identified $38.3 million in potential problem loans as of September 30, 2010. Potential problem loans are loans where known information about possible credit problems of the borrowers causes management to have doubts as to the ability of such borrowers to comply with the present repayment terms. Potential problem loans may become nonperforming loans in future periods. Three categories accounted for 94.1% of total potential problem loans. Real estate construction loans account for 26.2% of the total and single family residential loans and commercial real estate loans accounted for 28.4% and 39.5%, respectively. Geographically, 67.5% of the loans were located in Florida, with the remainder located in Alabama. In each case, management is actively working a plan of action to ensure that any loss exposure is mitigated and will continue to monitor the cash flow and collateral characteristics of each credit. Included in potential problem loans are seven relationships exceeding $1.0 million that total $16.8 million. The remaining $21.5 million all represent relationships of less than $1.0 million.

Deposits

Noninterest-bearing deposits were $276.5 million as of September 30, 2010, an increase of 7.3%, or $18.7 million, from $257.7 million as of December 31, 2009. Noninterest-bearing deposits were 10.0% and 9.7% of total deposits as of September 30, 2010 and December 31, 2009.

Interest-bearing deposits were $2.500 billion as of September 30, 2010, an increase of 4.2%, or $101.5 million, from $2.399 billion as of December 31, 2009. Interest-bearing deposits averaged $2.498 billion for the nine months ended September 30, 2010 compared to $2.273 billion for the nine months ended September 30, 2009. The average rate paid on all interest-bearing deposits during the nine months ended September 30, 2010 and 2009, was 1.81% and 2.48%, respectively.

As shown below, there were significant increases in our demand and savings deposits within our reportable segments that represent core deposits received through our branch network. Growth in our core deposit base has largely been concentrated in 22 de novo branches opened between 2006 and 2010, which have grown to $575.6 million as of September 30, 2010. Of this growth, $35.9 million occurred in the nine months ended September 30, 2010. This expansion of our core funding has significantly improved our liquidity and has enabled us to grow earning assets while reducing reliance on borrowings and other non-core sources.

The following table sets forth the composition of our total deposit accounts as of the periods indicated:


	September 30,		December 31,		Percent
	2010		2009		Change
	(Dollars in thousands)
Noninterest-bearing demand	$	276,473	$	257,744		7.3	%
Alabama segment		147,189		137,160		7.3
Florida segment		116,177		103,621		12.1
Other		13,107		16,963		(22.7	)
Interest-bearing demand		583,409		690,677		(15.5	)
Alabama segment		354,640		385,246		(7.9	)
Florida segment		227,016		233,740		(2.9	)
Other		1,753		71,691		(97.6	)
Savings		342,451		284,430		20.4
Alabama segment		173,499		151,263		14.7
Florida segment		166,674		131,185		27.1
Other		2,278		1,982		14.9
Time deposits		1,574,497		1,423,722		10.6
Alabama segment		762,631		663,510		14.9
Florida segment		658,766		555,262		18.6
Other		153,100		204,950		(25.3	)

Total deposits	$	2,776,830	$	2,656,573		4.5	%

Alabama segment	$	1,437,959	$	1,337,179		7.5	%

Florida segment	$	1,168,633	$	1,023,808		14.1	%

Other	$	170,238	$	295,586		(42.4	)%

Borrowings

During the nine months ended September 30, 2010, average borrowed funds decreased $26.5 million, or 9.0%, to $267.5 million, from $294.0 million for the year ended December 31, 2009. The average rate paid on borrowed funds during the nine months ended September 30, 2010 and 2009 was 3.78%, and 3.35%, respectively. The existence and stability of these funding sources are important to our maintenance of short-term and long-term liquidity.

As of September 30, 2010, advances from the FHLB decreased $2.0 million to $216.3 million from $218.3 million as of December 31, 2009. FHLB Atlanta advances had a weighted average interest rate of approximately 3.44% as of September 30, 2010. The advances are secured by FHLB Atlanta stock, agency securities and a blanket lien on certain residential real estate loans and commercial loans, all

with a carrying value of approximately $940.0 million as of September 30, 2010. We had approximately $170.4 million available in unused advances under the blanket lien subject to the availability of qualifying collateral.

On September 3, 2010, we entered into a second modification and limited waiver agreement (the “Agreement”) related to the $5.9 million outstanding on its line of credit with a regional bank. The Agreement extended the maturity date to November 3, 2010 and provides a limited waiver of certain rights and covenants under the original loan agreement. (See “Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” above in this Item 2 for a discussion of the current status of this loan and the necessity to restructure it.)

In addition, we have deferred regularly scheduled interest payments on all issues of our junior subordinated debentures relating to our five different issues of trust preferred securities aggregating approximately $118 million in principal amount currently outstanding. During the deferral period, the respective trusts will likewise suspend the declaration and payment of dividends on the trust preferred securities. The terms of the junior subordinated debentures and the related documents governing the respective issues of trust preferred securities contemplate the possibility of such deferrals and allow us to defer payments without default or penalty. The deferrals are for up to five years.

So long as interest is deferred on the junior subordinated debentures and corresponding distributions are deferred on the trust preferred securities, interest will continue to accrue on the junior subordinated notes, and that deferred interest will also accrue interest. We may terminate the deferrals and resume payments at any time. Upon the termination or expiration of the deferrals, all accrued and unpaid interest will be due and payable on the junior subordinated debentures, and a corresponding amount of distributions will be payable on the trust preferred securities. (See “Certain Factors Contributing to Our Recent Results and Our Response to those Factors” above in this Item 2 for a discussion of the deferrals.)

We have agreed to seek OTS approval before incurring any new debt or renewing any existing debt. See Note 14 to the condensed consolidated financial statements.

Stockholders’ Equity

Overview

Our stockholders’ equity was $15.4 million as of September 30, 2010 compared to $191.7 million as of December 31, 2009. The decrease was primarily due to the net loss for the period, partially offset by the preferred stock issuances and the exchange of trust preferred debt for common stock discussed below.

During the second quarter, we issued $11.1 million in liquidation value of our Series B Cumulative Convertible Preferred Stock (“Preferred Stock”) for an amount of equal cash consideration. In addition, we issued $0.3 million in liquidation value of our Series C Preferred Stock for an equal amount of cash. We also consummated our agreement with Cambridge Savings Bank and exchanged $3.5 million of our outstanding non-pooled trust preferred securities for 849,156 newly issued shares of our common stock, which resulted in an increase to our common equity of $2.9 million and a gain on exchange of debt in the amount of $0.5 million, net of tax. Please refer to the Condensed Consolidated Statement of Changes in Stockholders’ Equity and Note 13 — Stockholders’ Equity to the Condensed Consolidated Financial Statements for additional information.

Other Comprehensive Income

The components of other comprehensive (loss) income for the periods indicated are as follows:


	Pre-Tax			Income Tax			Net of
	Amount			Expense			Income Tax
	(Dollars in thousands)
Three Months Ended September 30, 2010
Unrealized gain on available-for-sale securities	$	2,406		$	(890	)	$	1,516
Reclassification adjustment for losses realized in net loss		306			(113	)		193
Unrealized loss on derivatives		(75	)		28			(47	)
Reclassification adjustment for losses realized in net loss		975			(361	)		614

Net unrealized gain	$	3,612		$	(1,336	)	$	2,276

Three Months Ended September 30, 2009
Unrealized gain on available-for-sale securities	$	3,119		$	(1,154	)	$	1,965
Reclassification adjustment for gains realized in net loss		(2,121	)		785			(1,336	)
Unrealized loss on derivatives		(219	)		81			(138	)

Net unrealized gain	$	779		$	(288	)	$	491


Nine Months Ended September 30, 2010
Unrealized gain on available-for-sale securities	$	7,977		$	(2,951	)	$	5,026
Reclassification adjustment for gains realized in net loss		(852	)		315			(537	)
Unrealized loss on derivatives		(363	)		135			(228	)
Reclassification adjustment for losses realized in net loss		1,129			(418	)		711

Net unrealized gain	$	7,891		$	(2,919	)	$	4,972

Nine Months Ended September 30, 2009
Unrealized loss on available-for-sale securities	$	(8,936	)	$	3,306		$	(5,630	)
Reclassification adjustment for losses realized in net loss		9,506			(3,517	)		5,989
Unrealized gain on derivatives		106			(39	)		67

Net unrealized gain	$	676		$	(250	)	$	426

Please refer to the “Financial Condition — Investment Securities” section for additional discussion regarding the realized/unrealized gains and losses on the investment securities portfolio.

Regulatory Capital

The table below represents Superior Bank’s regulatory and minimum regulatory capital requirements for the period indicated:


											To Be Well
						For					Capitalized Under
						Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Superior Bank
September 30, 2010
Tier 1 Core Capital (to Adjusted Total Assets)	$	82,988		2.63	%	$	126,090		4.00	%	$	157,613		5.00	%
Total Capital (to Risk Weighted Assets)		123,933		5.04			196,661		8.00			245,827		10.00
Tier 1 Capital (to Risk Weighted Assets)		82,988		3.38		NA		NA				147,496		6.00
Tangible Capital (to Adjusted Total Assets)		82,988		2.63			47,284		1.50		NA		NA

As described in Note 14 to the condensed consolidated financial statements we entered into an agreement with the OTS which stipulates that by no later than March 31, 2011, the Bank shall achieve, and maintain thereafter, a Tier 1 (Core) Capital Ratio of at least 10.0% and a Total Risk-Based Capital Ratio of at least 14.0% after funding an adequate allowance for loan losses. See Part II, Item 1A. “Risk Factors — Risks Relating to Our Business.”

Liquidity

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 internally generated sources of liquidity we have access to external sources of liquidity, including the Federal Reserve Discount Window and the Federal Home Loan Bank of Atlanta Advance Program (“FHLB”).

While scheduled loan repayments and maturing investments are relatively predictable, interest rates, general economic conditions and competition primarily influence deposit flows and early loan payments. Management places constant emphasis on the maintenance of adequate liquidity to meet conditions that might reasonably be expected to occur. While we believe that these sources are currently adequate, there can be no assurance these sources will be sufficient to meet future liquidity demands. See Part II, Item 1A. “Risk Factors — Risks Relating to Our Business.”

As shown in the Condensed Consolidated Statement of Cash Flows, operating activities provided $26.1 million and used $25.5 million for the nine months ended September 30, 2010 and 2009, respectively.

Investing activities provided funds of $9.7 million for the nine months ended September 30, 2010 primarily as a result of sales and maturities of investment securities and the sale of foreclosed real estate offset by an increase in loans and the purchase of investment securities. For the nine months ended September 30, 2009, investing activities used funds of $105.2 primarily due to purchases of investment securities and an increase in loans, partially offset by maturities and principal pay-downs in the investment securities portfolio.

Financing activities provided $128.5 million and $171.6 million in funds for the nine months ended September 30, 2010 and 2009, respectively, primarily as a result of an increase in customer deposits. In addition, during the nine months ended September 30, 2010 funds were provided by the issuance of preferred stock. During the nine months ended September 30, 2009, additional increases in funds were provided by proceeds from senior unsecured debt and were partially offset by the maturity of FHLB Atlanta advances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information shown under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk-Interest Rate Sensitivity” included in our Annual Report on Form 10-K for the year ended December 31, 2009, is hereby incorporated herein by reference.

Market risk is the risk of loss arising from adverse changes in the fair values of financial instruments due to changes in interest rates, exchange rates, commodity prices, equity prices or credit quality.

Interest Rate Sensitivity

Our primary market risk component is interest rate risk (“IRR”). We define interest rate risk as an adverse change in our net interest income (“NII”) or net present value (“NPV”) ratio due to changing interest rates. IRR results because changing interest rates affect the values of and the cash flows generated by our assets, liabilities, and off-balance sheet items in different ways.

Sensitivity Measurement

Financial simulation models are the primary tools we use to measure interest rate risk exposures. By examining a range of hypothetical deterministic interest rate scenarios, these models provide management with information regarding the potential impact on NII and NPV caused by changes in interest rates.

The models are built to simulate the cash flows and accounting accruals generated by the financial instruments on our balance sheet, and for NII simulations, the cash flows generated by the new business we anticipate over a 12-month forecast horizon. Numerous assumptions are made in the modeling process, including balance sheet composition, the pricing, re-pricing and maturity characteristics of existing business and new business. Additionally, loan and investment prepayment, administered rate account elastisities and other option risks are considered as well as the uncertainty surrounding future customer behavior.

Interest Rate Exposures

Superior Bank’s net interest income simulation model projects that net interest income over a 12-month horizon will increase on an annual basis by 0.85%, or approximately $792,000, assuming an instantaneous and parallel increase in interest rates of 200 basis points. The following is a comparison of these measurements for the periods indicated:

Change (in Basis Points)

Increase in Net Interest Income

in Interest Rates

September 30, 2010

December 31, 2009

(12-Month Projection)

Amount

Percent

Amount

Percent

(Dollars in thousands)

+ 200 BP (1)

792

0.85

2,200

2.30

- 200 BP (2)

NCM


(1)		Results are within our asset and liability management policy.

(2)		Not considered meaningful in the current rate environment.

NPV is defined a the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities plus the present value of net expected cash inflows from existing financial derivatives and off-balance sheet contracts. NPV is in essence a discounted cash flow valuation of the firm’s equity. The NPV ratio is the NPV divided by the present value of existing assets. The NPV ratio is in essence a leverage ratio expressed in present value terms. To measure long-term exposures to changing interest rates we have set minimum NPV ratios for a range of hypothetical determinate interest rate scenarios. We have chosen to measure NPV ratio rather than Economic Value of Equity (“EVE”) sensitivities to better align its methodologies with those of its primary regulator. Superior Bank’s NPV model projects that it’s NPV ratio will be 7.22% and 7.78% assuming an instantaneous and parallel increase in interest rates of 100 and 200 basis points, respectively. Assuming an instantaneous and parallel decrease of 100 basis points, NPV is projected to be 6.46% (although such a decline is unlikely given the present low level of interest rates). The NPV shifts produced by these scenarios are within the limits of our asset and liability management policy. The following table sets forth Superior Bank’s NPV ratio limits as of September 30, 2010:


Change (in Basis Points) in Interest Rates	NPV Ratio
+ 200 BP		7.78	%
+ 100 BP		7.22
0 BP		6.44
- 100 BP		6.46

Both the net interest income and NPV simulations include assumptions regarding balances, asset prepayment speeds and interest rate relationships among balances that management believes to be reasonable for the various interest rate environments. Differences in actual occurrences from these assumptions, as well as non-parallel changes in the yield curve, may change our market risk exposure.

ITEM 4. CONTROLS AND PROCEDURES

CEO and CFO Certification

Appearing as exhibits to this report are Certifications of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”). The Certifications are required to be made by Rule 13a-14 under the Securities Exchange Act of 1934, as amended. This Item contains the information about the evaluation that is referred to in the Certifications, and the certifications should be read in conjunction with the information set forth below in this Item 4 for a more complete understanding of the Certifications.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures to ensure that material information required to be disclosed in our Exchange Act reports is made known to the officers who certify our financial reports and to other members of our senior management and our Board of Directors.

Based on their evaluation as of September 30, 2010, our CEO and our CFO have concluded that our disclosure controls and procedures (as defined in Rule 13a-l5(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures.

All internal controls systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements in our financial statements, including the possibility of circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

While we are a party to various legal proceedings arising in the ordinary course of business, we believe that there are no proceedings threatened or pending against us at this time that will individually, or in the aggregate, materially adversely affect our business, financial condition or results of operations. We believe that we have strong claims and defenses in each lawsuit in which we are involved. While we believe that we will prevail in each lawsuit, there can be no assurance that the outcome of the pending, or any future, litigation, either individually or in the aggregate, will not have a material adverse effect on our financial condition or our results of operations.

See Note 14 to Condensed Consolidated Financial Statements herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments” for a discussion of Orders to Cease and Desist recently issued to Superior Bank and us by the OTS.

ITEM 1A. RISK FACTORS

Risks Relating To Our Business

We are currently subject to Orders to Cease and Desist which may adversely affect our business. On November 2, 2010 (the “Effective Date”), Superior Bancorp and Superior Bank each entered into a Stipulation and Consent to Issuance of Order to Cease and Desist with the OTS, our and Superior Bank’s primary federal regulator, whereby we and Superior Bank each consented to the issuance by the OTS of an Order to Cease and Desist, without admitting or denying that any grounds exist for the issuance of such Orders.

The Order to Cease and Desist issued to Superior Bank provides, among other things, that:

•

Superior Bank must cease and desist from any action for or toward causing, bringing about, participating in, counseling, or aiding and abetting unsafe or unsound banking practices that resulted in certain occurrences specified in the Superior Bank Order.

	•		No later than March 31, 2011, Superior Bank must achieve, and maintain thereafter, a Tier 1 (Core) Capital Ratio of at least 10.0% and a Total Risk-Based Capital Ratio of at least 14.0% after funding an adequate allowance for loan losses.

	•		Within 60 days of the Effective Date, Superior Bank must adopt and submit to the OTS a written capital plan to achieve and maintain the foregoing capital levels specifying target dates to reach certain capital levels. If Superior Bank fails to achieve the required capital levels in the prescribed time frame or otherwise fails to meet its capital plan, then within 15 days Superior Bank shall prepare a contingency plan, which shall detail actions to be taken to achieve (i) merger or acquisition by another federally insured depository institution or (ii) voluntary dissolution.

	•		Beginning with the Effective Date, Superior Bank (i) will not originate or purchase or commit to originate or purchase any new construction, multifamily, non-residential, land or commercial mortgage loans (“Covered Loans”), nor may Superior Bank renew or modify an existing Covered Loans without meeting specified conditions; and (ii) will not without the prior written approval of the OTS increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the prior quarter.

	•		Within 60 days of the Effective Date, Superior Bank must (i) submit to the OTS a business plan through 2012 for achieving profitability and a business plan to reduce Superior Bank’s level of problem assets, (ii) revise its policies, procedures and methodology relating to the timely establishment and maintenance of an adequate allowance for loan losses; (iii) revise its written internal asset review and classification program to address all corrective action set forth in the 2010 OTS Examination, which, among other things, will provide for the appointment of a qualified, experienced and independent third party to conduct annual reviews of Superior Bank’s loan portfolio and assessments of Superior Bank’s internal asset review process; (iv) revise its program for controlling risks associated with concentrations of credit; (v) revise its Enterprise Risk Management Plan; and (vi) within 90 days of the Effective Date, Superior Bank shall submit to the OTS an assessment of Superior Bank’s board and management prepared by an independent third party.

	•		Superior Bank must implement a liquidity funding plan that is to include the designation of specific actions that will be taken to reduce Superior Bank’s dependency on volatile funding sources and a detailed cash flow analysis.

	•		Beginning with the Effective Date, Superior Bank (i) will not make any “golden parachute payments” or prohibited indemnification payment unless the Bank has complied with 12. C.F.R. Part 359 and 12 C.F.R Section 545.121; (ii) will comply with the OTS prior notification requirements for changes in directors and senior executive officers; (iii) will not enter into, extend or revise any contractual arrangement relating to compensation or benefits with any senior executive officer or director; and (iv) will not enter into any arrangement or contract with a third party service provider that is significant or outside Superior Bank’s normal course of business without obtaining written non-objection from the OTS.

The Order issued to the Corporation provides, among other things, that:

	•		We must cease and desist from any action for or toward causing, bringing about, participating in counseling, or aiding and abetting unsafe or unsound banking practices that resulted in certain occurrences specified in the Order issued to us.

	•		Within 60 days of the Effective Date, we must submit to the OTS (i) a plan to maintain and enhance our capital and Superior Bank’s capital and ensure that Superior Bank complies with the requirement imposed on it in the Superior Bank Order; and (ii) a business plan through calendar year 2012 for achieving profitability.

	•		We must (i) not accept from Superior Bank or declare or pay any dividends or capital distributions; (ii) not incur or increase any debt without the prior written non-objection of the OTS; (iii) not make any “golden parachute payment” or any prohibited indemnification payment unless we comply with 12 C.F.R. Part 359; (iv) comply with the OTS’s prior notification requirements for changes in directors and senior executive officers; (v) not enter into, renew or extend any contractual arrangements related to compensation or benefits with any director or senior executive officer without first providing prior written notice to the OTS; and (vi) not enter into any arrangement or contract with a third party service provider that is significant or outside our normal course of business without obtaining written non-objection from the OTS.

The Orders will remain in effect until terminated, modified or suspended by the OTS.

While we intend to take such actions as may be necessary to comply with the requirements of the Orders, there can be no assurance that we will be able to comply fully with the Orders, or that efforts to comply with the Orders will not have adverse effects on the operations and financial condition of us or the Bank. Failure by us or Superior Bank to comply with the provisions of the respective

Orders, could result in further enforcement actions by the OTS, which could ultimately lead to our common stock losing all its value.

We have deferred interest on our outstanding subordinated debentures (and the related trust preferred securities) and anticipate that we will continue to defer this interest for the foreseeable future. We deferred interest on our $118.2 million of subordinated debentures as of August 24, 2010, which resulted in the deferral and accrual of $2.4 million of regularly scheduled interest payments that otherwise would have been paid during the third quarter. The terms of the subordinated debentures allow us to defer interest payments for up to 5 years, and we presently anticipate that we will continue to do so. If we defer interest payments for the full 5 years, we would owe approximately $44.3 million in deferred interest including the compounding effect of interest on deferred interest. At the end of the deferral period, we will be required to pay all of the deferred interest. As a result of the deferral, we are prohibited from declaring or paying any dividends on our common stock, from repurchasing or otherwise acquiring such common stock, from making any liquidation payments with respect to our capital stock and from making any payment of principal of or interest on, or repaying, repurchasing or redeeming any of our affiliates’ securities that rank pari passu with the subordinated debentures or junior to the subordinated debentures.

We depend on cash dividends from Superior Bank to meet our obligations but the Orders prohibit such dividends without prior approval of the OTS. Our primary source of income is dividends from Superior Bank. The Orders provide that we cannot receive cash dividends from Superior Bank without the prior approval of the OTS. We do not know when or if we will receive approval for Superior Bank to pay dividends to us. If we do not receive OTS approval for Superior Bank to pay dividends to us for an extended period of time, we may not be able to service our debt, including our credit facility with BB&T or pay our obligations as they become due.

We may fail to raise additional capital to meet regulatory requirements. We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Further under the Orders we are required to submit a written capital plan and improve our capital levels to a Tier I (Core) Capital Ratio of at least 10.0% and a Total Risk-Based Capital Ratio of at least 14.0% both by March 31, 2011. In addition, we may need additional capital in the future to support growth. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, as needed, on favorable economic terms, or other terms acceptable to us. Our current efforts to raise capital may not be successful. We can give no assurance that any capital raise we under-take would not be substantially dilutive to, or result in the elimination of prevent equity interests. Because of the amount of capital needed to meet the capital levels imposed by the Orders to Cease and Desist, if we cannot raise additional capital when needed, our ability to operate without additional regulatory or other restrictions, and our operating results, could be materially adversely affected and could ultimately lead to our common stock losing all its value. (See “Risks Related to an Investment in Our Common Stock” below in this Item 1A.)

We incurred a net loss in our last fiscal year and for the first nine months of the current fiscal year and losses may continue in the future. We incurred a net loss of $19.9 million for our fiscal year ended December 31, 2009, and have incurred a net loss of $195.4 million for the nine months ended September 30, 2010. The loss for the fiscal year ended December 31, 2009 was primarily due to the increases in the provision for loan losses foreclosure losses and other-than-temporary impairment (“OTTI”) of investment securities we hold, as well as an increase in our FDIC assessment. The loss for the nine months ended September 30, 2010 was primarily due to increases in the provision for loan losses and foreclosure losses. These losses may continue in the future, and no assurance can be given as to when we may return to profitability or the level of any profitability.

The current economic environment poses significant challenges for us and our industry and could adversely affect our financial condition and results of operations. We are operating in a challenging and uncertain economic environment, both nationally and in our local markets. Financial institutions continue to be affected by declines in the real estate market and constrained financial markets. Declines in the housing market beginning in 2008 and continuing into 2010, including falling home prices and increasing delinquencies, foreclosures and unemployment, have resulted in significant write-downs of asset values by many financial institutions, including us. Continued concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their clients and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer credit quality issues, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Many financial institutions have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets has had, and may continue to have, an adverse effect on our business, financial condition and results of operations. For example, a deepening national economic recession or further deterioration in local economic conditions in our market areas could cause losses that exceed our allowance for loan losses. We cannot predict when economic conditions are likely to improve. We may also face additional risks in connection with the current economic environment, including the following:

	•		Economic conditions that negatively affect housing prices and the job market have caused, and may continue to cause, the credit quality of our loan portfolios to deteriorate, and that deterioration in credit quality has had, and could continue to have, a negative effect on our business.

	•		Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities.

	•		Market conditions can change rapidly in the current economic environment, and, if they do, the processes we use to estimate our allowance for loan losses and reserves may no longer be reliable.

	•		The value of our securities portfolio may decline.

	•		Our industry faces increased regulation, and compliance with such regulatory changes has increased our costs and the complexity of our compliance processes and may continue to do so.

	•		Natural and environmental disasters, such as hurricanes or oil spills, have adversely affected and may continue to adversely affect the local economies in which we operate, with the potential for further deterioration in credit quality in those markets as well as a general reduction in business activity. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” elsewhere herein.)

As these conditions or similar ones continue to exist or worsen, we could experience continuing or increased adverse effects on our business, financial condition and results of operations.

Our allowance for loan losses may not be adequate to cover actual losses. If our allowance for loan losses is not sufficient to cover our actual loan losses, our losses could continue to increase. The determination of the adequacy of our allowance for loan losses is based on management’s analysis of the credit quality of the loan portfolio, which is reviewed regularly. Management maintains an allowance for loan losses based upon, among other things:

	•		trends in volume;

	•		effects of changes in credit concentrations;

	•		levels of and trends in delinquencies, classified loans and non-performing assets;

	•		levels of and trends in charge-offs and recoveries;

	•		changes in lending policies and underwriting guidelines;

	•		national and local economic trends and conditions; and

	•		mergers and acquisitions.

Based on those factors, management makes various assumptions and judgments about the ultimate collectability of our loan portfolios. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. In addition, federal regulators periodically review our allowance for loan losses and may require us to increase our allowance or recognize further loan charge-offs, based on judgments different than those of our management. Higher charge-off rates or an increase in our allowance for loan losses, separately or in combination, may have a material adverse effect on our capital position and our overall financial performance and may increase our cost of funds. The amount of future loan losses may be affected by changes in economic, operating and other conditions, which may be beyond our control, and these losses may exceed current estimates. As a result of the economic downturn and continued adverse effects of the Gulf Oil Spill, we have increased our allowance for loan losses. While we believe that our allowance for loan losses is adequate to cover current losses, we cannot guarantee that we will not need to increase our allowance for loan losses or that regulators will not require an increase in our allowance. Either of these occurrences could materially and adversely affect our financial condition and results of operations.

Further deterioration of local economic conditions where we operate could have a continuing negative effect on us. Our success depends significantly on the general economic conditions of the geographic markets we serve in Alabama and Florida. The local economic conditions in these areas significantly affect our commercial, real estate and construction loan activity, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally, will improve in the near term, in which case we could continue to experience losses and write-downs of assets, and could face increased capital and liquidity constraints or other business challenges. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” elsewhere herein.) A continuing deterioration in economic conditions could result in the following consequences, among others, any of which could have a material adverse effect on our business:

	•		loan delinquencies may increase;

	•		problem assets and foreclosures may increase;

	•		demand for our products and services may decline; and

	•		collateral for loans we make, especially loans secured by real estate, may decline in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans.

See “— Events in our geographic markets could adversely affect us” below.

Liquidity needs could adversely affect our results of operations and financial condition. Superior Bank’s primary sources of funds are customer deposits, principal and interest payments on loans, federal funds sold and maturities and sales of investment securities. Scheduled loan repayments are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors outside of our control, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural or environmental disasters and international instability. Deposit levels and early loan payments may be affected by a number of factors, including changes in prevailing interest rates, general economic conditions and competition. In addition to these internally generated sources of liquidity we have access to external sources of liquidity, including, the Federal Reserve Discount Window and the Federal Home Loan Bank of Atlanta Advance Program (“FHLB”). While we believe that these sources are currently adequate, there can be no assurance these sources will be sufficient to meet future liquidity demands of Superior Bank and we are subject to restrictions on the acceptance or extension of brokered deposits.

Changes in monetary policy and interest rates could adversely affect our profitability. Our results of operations are affected by decisions of monetary authorities, particularly the Federal Reserve. Our profitability depends to a significant extent on our net interest income. Net interest income is the difference between income we receive from interest-earning assets and interest we pay to fund those assets. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, could affect not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but also our ability to originate loans and obtain deposits and the average duration of our mortgage-backed securities portfolio.

Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments. Changes in interest rates could also adversely affect some of our noninterest income sources. For example, if mortgage interest rates increase, the demand for residential mortgage loans will likely decrease, which will have an adverse effect on our mortgage loan fee income. Declines in security values could further reduce our investment income.

In light of changing conditions in the national economy and in the financial markets, particularly the uncertain economic environment, the continuing threat of terrorist acts and the current military operations in the Middle East, we cannot predict possible future changes in interest rates, which may negatively affect our deposit levels, our loan demand and our business and earnings. Furthermore, the actions of the United States and other governments in response to ongoing economic crises may result in currency fluctuations, exchange controls, market disruption and other adverse effects.

Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition. Non-performing assets adversely affect our net earnings in various ways. We expect to continue to have a provision for loan losses relating to non-performing loans that is higher than our historical experience. We generally do not record interest income on non-performing loans or other real estate owned, thereby reducing our earnings, while our loan administration costs are higher for non-performing loans. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then-fair market value of the collateral, which may ultimately result in a loss. An increase in the level of non-performing assets increases our risk profile and may affect the capital levels our regulators believe are appropriate. While we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. Further, restrictions that have been imposed by the OTC on our ability to modify certain categories of loans is impeding our ability to successfully structure workouts. In addition, the resolution of non-performing assets requires significant commitments of time from management, which may reduce the time available for the performance of their other responsibilities. There can be no assurance that we will not experience future increases in non-performing assets.

A significant portion of our loan portfolio is secured by real estate, and events that negatively affect the real estate market could hurt our business. As of September 30, 2010, approximately 90.3% of our loans were secured by real estate mortgages. Approximately 55.7% of these loans are secured by real estate mortgages in Florida. The real estate collateral for these loans provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value over the life of the loan. A further weakening of the real estate market in our market areas could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral. Further, the value of the collateral underlying a given loan, and the realizable value of such collateral in a foreclosure sale, likely will be negatively affected by the continuing downturn in the real estate market. Thus, we may not be able to realize the full value of underlying collateral securing some of our loans, particularly those secured by real estate. If we are not able to realize the full value of underlying collateral in the event of a loan default, there could be an adverse effect our business, financial condition, and results of operations and the price of our securities. Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, or environmental disasters such as oil spills, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively affect our financial condition. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” elsewhere herein.)

An increase in loan prepayments may adversely affect our profitability. The rate at which borrowers prepay loans is dependent on a number of factors outside our control, including changes in market interest rates, conditions in the housing and financial markets and general economic conditions. We cannot always accurately predict prepayment rates. If the prepayment rates with respect to our loans are greater than we anticipate, there may be a negative impact on our profitability because we may not be able to reinvest prepayment proceeds at rates comparable to those we received on the prepaid loans, particularly in a time of falling interest rates.

Events in our geographic markets could adversely affect us. Our business is concentrated in six geographic regions in Alabama and Florida. Any adverse changes in market or economic conditions in Alabama and Florida may increase the risk that our customers will be unable to make their loan payments. In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in local market conditions and general economic conditions. Any period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in general or in our markets in Alabama and Florida, in particular, could adversely affect our results of operations and financial condition. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Contributing to Our Recent Results and Our Response to Those Factors” elsewhere herein.)

With most of our loans concentrated in a small number of markets, further declines in local economic conditions could adversely affect the values of our real estate collateral. Thus, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse.

In addition, natural or environmental disasters, such as hurricanes, tornados and oil spills, in our markets could adversely affect our business. The occurrence of such natural disasters in our markets could result in a decline in the value or destruction of mortgaged properties and in an increase in the risk of delinquencies, foreclosures or losses on these loans and may impact our customers’ ability to repay loans.

We face substantial competition. There are numerous competitors in our geographic markets, including national, regional and local banks and thrifts and other financial services businesses, some of which have substantially greater resources, higher brand visibility and a wider geographic presence than we have. Some of these competitors may offer a greater range of services, more favorable pricing and greater customer convenience than we are able to. In addition, in some of our markets, there are a significant number of new banks and other financial institutions that have opened in the recent past or are expected to open in the near future, and such new competitors may also seek to exploit our markets and customer base. If we are unable to maintain and grow our market share in the face of such competition, our results of operations will be adversely affected.

We are subject to extensive regulation. Our operations are subject to regulation and examination by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). We are also subject to applicable regulations of the FHLB. Regulation by these entities is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our stockholders. We and Superior Bank are currently subject to the Orders from the OTS and have agreed to regulatory actions in the Consent Orders that include, among others, the submission of a capital plan with more stringent capital requirements. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments” elsewhere herein.) We may incur substantial costs in complying with such regulations and the Orders. The OTS could take additional actions against us if we fail to comply with the Consent Orders including penalties or additional regulatory enforcement actions, which could lead to our common stock losing all its value. The terms of the additional Consent Orders and any enforcement actions could have a material adverse effect on our business, financial condition or results of operations and the value of our common stock.

In addition, we are subject to numerous consumer protection laws and other laws relating to the operation of financial institutions. Our failure to comply with such laws could expose us to liability, which could have a material adverse effect on our results of operations.

Recently enacted financial reform legislation will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new regulations that are expected to increase our costs of operations. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act will eliminate the OTS, our current federal regulator, one year from the enactment of the law, currently expected to take place on July 22, 2011. As a result, the Comptroller of the Currency, the primary federal regulator for national banks, will become the primary federal regulator of Superior Bank, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) will have exclusive authority to regulate all thrift holding companies that were formerly regulated by the OTS, including us.

In addition, the Dodd-Frank Act will eliminate the federal prohibitions on paying interest on demand deposits effective one year after the date of its enactment, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

Among the many requirements in the Dodd-Frank Act are those imposing leverage and risk-based capital levels for thrift holding companies. These regulations may call for higher levels of capital than current regulations. Generally, newly-issued trust preferred securities will no longer be eligible as Tier 1 capital, but our currently outstanding trust preferred securities will be grandfathered.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. Noninterest-bearing transaction accounts have unlimited deposit insurance through December 31, 2013.

The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials and directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.

The Dodd-Frank Act creates a new Bureau of Consumer Financial Protection with broad powers to supervise and enforce consumer protection laws. The Bureau will have broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau will have examination and enforcement authority over all banks with more than $10 billion in assets. Savings institutions with less than $10 billion in assets will continue to be examined for compliance with consumer laws by their primary bank regulator.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, compliance with this new law and its implementing regulations clearly will result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition and results of operations.

Additional regulatory requirements especially those imposed under ARRA, EESA or other legislation intended to strengthen the U.S. financial system, could adversely affect us. Recent government efforts to strengthen the U.S. financial system, including the implementation of the American Recovery and Reinvestment Act (“ARRA”), the Emergency Economic Stabilization Act (“EESA”), the Temporary Liquidity Guarantee Program (“TLGP”) and special assessments imposed by the FDIC, subject us, to the extent applicable, to additional regulatory fees, corporate governance requirements, restrictions on executive compensation, restrictions on declaring or paying dividends, restrictions on stock repurchases, limits on tax deductions for executive compensation and prohibitions against golden parachute payments. These fees, requirements and restrictions, as well as any others that may be imposed in the future, may have a material and adverse effect on our business, financial condition, and results of operations.

We may become subject to more stringent capital requirements. In addition to the increased capital requirements we are subject to as a result of the Orders, which are described above, the Dodd-Frank Act would require the federal banking agencies to establish stricter risk-based capital requirements and leverage limits to apply to thrift holding companies. In addition, the “Basel III” standards recently announced by the Basel Committee on Banking Supervision, if adopted, could lead to significantly higher capital requirements, higher capital charges and more restrictive leverage and liquidity ratios. The standards would, among other things, impose more restrictive eligibility requirements for Tier 1 and Tier 2 capital; increase the minimum Tier 1 common equity ratio to 4.5 percent, net of regulatory deductions, and introduce a capital conservation buffer of an additional 2.5 percent of common equity to risk-weighted assets, raising the target minimum common equity ratio to 7 percent; increase the minimum Tier 1 capital ratio to 8.5 percent inclusive of the capital conservation buffer; increase the minimum total capital ratio to 10.5 percent inclusive of the capital buffer; and introduce a countercyclical capital buffer of up to 2.5 percent of common equity or other fully loss absorbing capital for periods of excess credit growth. Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3 percent, based on a measure of total exposure rather than total assets, and new liquidity standards.

The new Basel III capital standards will be phased in from January 1, 2013 until January 1, 2019, and it is not yet known how these standards will be implemented by U.S. regulators generally or how they will be applied to financial institutions of our size. There can be no assurance that implementation of these standards, or any other new regulations, will not adversely affect our ability to pay dividends, or require us to reduce business levels or raise capital, including in ways that may adversely affect our results of operations or financial condition.

The imposition of certain restrictions on our executive compensation as a result of our decision to participate in the CPP may have material adverse effects on our business and results of operations. As a result of our election to participate in the CPP, we have adopted the Treasury Department’s standards for executive compensation and corporate governance for the period during which the Treasury Department holds any of our equity issued under the CPP. These standards generally apply to our Chief Executive Officer, our Chief Financial Officer and the three next most highly compensated executive officers, referred to collectively as the senior executive officers, and, in the case of some standards, to other of our employees as well. The standards include: (i) ensuring that incentive compensation plans and arrangements do not encourage unnecessary and excessive risks that threaten the value of us and Superior Bank, (ii) prohibiting a bonus payment to any of the five most highly compensated employees unless paid in the form of long-term restricted stock, (iii) requiring a “clawback” of any bonus or incentive compensation paid to a senior executive officer or any of the 20 next most highly compensation employees based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate, (iv) prohibiting golden parachute payments to a senior executive officer or any of the five next most highly compensated employees, (v) prohibiting reimbursement or “gross-up” of taxes paid with respect to compensation for any of our senior executive officers or the 20 next most highly compensated employees, and (vi) agreeing not to deduct, for tax purposes, compensation paid to an employee in excess of $500,000. These restrictions may place us at a competitive disadvantage in attracting and retaining management.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition. Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline to historical lows in the designated reserve ratio. The FDIC expects a higher rate of insured institution failures in the next few years. The FDIC has substantially increased its premium assessments, and may raise the premiums even higher in the future. We expect to pay significantly higher FDIC premiums in the future. Additional special assessments may be imposed by the FDIC for future periods. Participants in the TLGP for noninterest-bearing transaction deposit accounts pay additional annual assessments to the FDIC. The FDIC required all insured institutions to prepay insurance premiums through 2012 in order to recapitalize the Deposit Insurance Fund. In the case of Superior Bank, this prepayment aggregated $15.9 million in the fourth quarter of 2009. Future increases in FDIC insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Superior Bank. Management cannot predict what insurance assessment rates will be in the future.

We are dependent upon the services of our management team. Our operations and strategy are directed by our senior management team, most of whom have joined Superior Bancorp since January 2005. Any loss of the services of members of our management team could have a material adverse effect on our results of operations and our ability to implement our business strategy.

Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially affect our reported financial condition and results of operations. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, regulatory agencies, the Financial Accounting Standards Board, and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes may be hard to predict and can materially affect how we record and report our financial condition and results of operations.

The accuracy of our financial statements and related disclosures could be affected because we are exposed to conditions or assumptions different from the judgments, assumptions or estimates used in our critical accounting policies. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which we summarize in our Annual Report on Form 10-K for the year ended December 31, 2009, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates about the future that materially affect our financial disclosures. For example, material estimates that are particularly susceptible to significant change underlie the determination of the allowance for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our audited consolidated financial statements and related disclosures.

Future losses could result in the recording of additional valuation allowance against our deferred tax assets (“DTA”). We evaluate quarterly the realizability of our net DTA and, if necessary, adjust our valuation allowance accordingly. The recognition of DTA is based upon management’s judgment that realization of the asset is more likely than not. Management’s judgment is based on estimates concerning various future events and uncertainties, including future reversals of existing taxable temporary differences, the timing and amount of future income earned by our subsidiaries and the implementation of various tax planning strategies to maximize realization of the DTA. As a result of book losses incurred in 2010, 2009 and 2008, we are in a three-year-cumulative loss position and there are no taxes paid in prior years that are

available for the carryback period. A cumulative loss position is considered significant negative evidence in assessing the realizability of a DTA. (See Note 10 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and Note 14 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009).

Issuances or sales of common stock or other equity securities could result in an “ownership change” as defined for U.S. federal income tax purposes. If an “ownership change” were to occur, our ability to fully utilize a significant portion of our U.S. federal and state tax net operating losses and certain built-in losses that have not been recognized for tax purposes could be impaired as a result of the operation of Section 382 of the Internal Revenue Code. Our ability to use certain realized net operating losses and unrealized built-in losses to offset future taxable income may be significantly limited if we experience an “ownership change” as defined by Section 382 of the Internal Revenue Code of 1986 (the “Code”). An ownership change under Section 382 generally occurs when a change in the aggregate percentage ownership of the stock of the corporation held by five percent stockholders increases by more than fifty percentage points over a rolling three-year period. A corporation experiencing an ownership change generally is subject to an annual limitation on its utilization of pre-change losses and certain post-change recognized built-in losses equal to the value of the stock of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation is increased each year to the extent that there is an unused limitation in a prior year. Since U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation also effectively provides a cap on the cumulative amount of pre-change losses and certain post-change recognized built-in losses that may be utilized. Pre-change losses and certain post-change recognized built-in losses in excess of the cap are effectively unable to be used to reduce future taxable income. In some circumstances, issuances or sales of our stock (including any common stock or other equity issuances or debt-for-equity exchanges and certain transactions involving our stock that are outside of our control) could result in an “ownership change” under Section 382.

If an “ownership change” under Section 382 were to occur, the value of our net operating losses and a portion of the net unrealized built-in losses would be impaired which could result in a significant increase in our future tax liability and could negatively affect our financial condition and operations.

Our financial condition and outlook may be adversely affected by damage to our reputation. Our financial condition and outlook is highly dependent upon perceptions of our business practices and reputation. Our ability to attract and retain customers and employees could be adversely affected if our reputation is damaged. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, or inappropriate disclosure or inadequate protection of customer information, as well as from actions taken by government regulators and community organizations in response to that conduct. Damage to our reputation could give rise to legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. Additionally, reputational damage could result in a loss of deposits, thereby reducing liquidity and reducing our ability to leverage our capital into earnings.

We will realize additional future losses if the proceeds we receive upon liquidation of assets are less than the carrying value of such assets. We may dispose of non-performing assets. We may also sell assets in the future that are not currently identified as non-performing assets. We will realize additional future losses if the proceeds we receive upon dispositions of assets are less than the recorded carrying value of such assets. Furthermore, if market conditions continue to decline, the magnitude of losses we may realize upon the disposition of assets may increase, which could materially adversely affect our business, financial condition and results of operations.

The failures of other financial institutions could adversely affect us. Our ability to engage in routine funding transactions could be adversely affected by the actions and potential failures of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or concerns about, one or more financial institutions with which we do business, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default by our counterparty or client. In addition, failures of other financial institutions, and in particular, the failure of community banks, could damage our reputation and credibility. Any such losses or damage to our reputation could materially and adversely affect our financial condition and results of operations. Further, we could experience increases in deposits and assets as a result of other financial institution difficulties or failure, which could increase the capital we need to support growth.

An interruption or breach in security with respect to our information systems, as well as information systems of our outsourced service providers, could have a material adverse effect on us. We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security with respect to our information systems, as well as information systems of our outsourced service providers, could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation, any of which could result in failures or disruptions in our client relationship management, general ledger, deposit, loan and other systems, resulting in a material adverse effect on our business, financial condition and results of operations.

Risks Related To an Investment in Our Common Stock

Certain regulatory enforcement actions or certain restructuring transactions could result in our currently outstanding stock being cancelled or otherwise losing all its value. If we cannot meet the additional capital requirements imposed on us by the OTS in the Orders to Cease and Desist (see Note 14 to Condensed Consolidated Financial Information, “Management’s Discussion and Analysis of Results of Operations — Recent Developments,” elsewhere herein and “Risks Relating to Our Business immediately above”), the OTS could take further enforcement action against us that could lead to our common stock losing all its value. We can give no assurance that any capital raise we under-take would not be substantially dilutive to, or result in the elimination of prevent equity interests.

Our common stock is equity and is subordinate to our existing and future indebtedness and preferred stock. Shares of common stock are equity interests in us and are not indebtedness. As such, shares of common stock will rank junior to all of our indebtedness, debentures and preferred stock and to other non-equity claims against us and our assets available to satisfy claims against us, including in any liquidation or similar proceeding. Additionally, holders of our common stock are subject to the prior dividend and liquidation rights of holders of our outstanding preferred stock, debentures and the holders of our trust preferred securities. As of September 30, 2010, we had $118.2 million of subordinated debentures issued in connection with trust preferred securities, including $69,100,000 issued in connection with the trust preferred securities held by the U.S. Treasury. Payments of the principal and interest on the trust preferred securities are unconditionally guaranteed by us. Upon any liquidation, lenders and holders of our debt securities and preferred stock would receive distributions of our available assets prior to holders of our common stock.

Our stock price may be volatile due to limited trading volume and general market conditions. Our common stock is traded on the NASDAQ Global Market. However, the average daily trading volume in our common stock is relatively small, typically less than 90,000 shares per day and sometimes significantly less. Trades involving a relatively small number of shares may have a substantial effect on the market price of our common stock, and it may be difficult for investors to acquire or dispose of large blocks of stock without significantly affecting the market price. The most recent closing bid price for our common stock was 88 cents per share.

In addition, market fluctuations, industry factors, general economic conditions and political events, including economic slowdowns or recessions, interest rate changes or market trends, also could cause our stock price to decrease regardless of our results of operations. Stock prices of thrift holding companies, such as ours, have been negatively affected by the current condition of the financial markets.

Our common stock could be delisted if we do not comply with listing standards. Under NASDAQ rules, a listed company will be considered out of compliance with its listing standards if the minimum bid price is less than $1.00 per share over a 30-trading day period. If we receive notice from NASDAQ of noncompliance and cannot cure such noncompliance for any reason within the applicable time frame, our common stock may be delisted.

Our ability to pay dividends and to repurchase shares of common stock is restricted. We do not currently pay dividends on our common stock. Under the Orders to Cease and Desist, our board of directors must obtain the written consent of the OTS prior to the declaration or payment of any dividends. “(See Note 14 to Condensed Consolidated Financial Information, “Management’s Discussion and Analysis of Results of Operations — Recent Developments” elsewhere herein and “Risks Relating to Our Business” immediately above”). This restriction will remain in effect until such time as the OTS modifies, terminates, or otherwise suspends the restriction.

Our ability to pay dividends is limited by regulatory requirements, the Orders to Cease and Desist and the need to maintain sufficient consolidated capital to meet the capital needs of our business, including capital needs related to future growth. Our primary source of income is the payment of dividends to us by Superior Bank. Superior Bank, in turn, is likewise subject to regulatory requirements that currently restrict its ability to pay such dividends to us and by the need to maintain sufficient capital for its operations and obligations. Under its Order to Cease and Desist, Superior Bank is also prohibited from paying dividends to us without the prior approval of the OTS. In the event Superior Bank is unable to pay dividends to us, we will not be able to service our debt or pay our obligations as they become due.

At September 30, 2010, we had $118.2 million in liquidation value amount of outstanding subordinated debentures (and the related trust preferred securities). In August 2010, we deferred the interest payments on all of our subordinated debentures and related trust preferred

securities. As a result, we cannot pay dividends, repurchase shares of our common stock or make any payments to the holders of our common stock in the event of our liquidation.

The exercise of our warrants would dilute existing stockholders’ ownership interest. In connection with the sale of certain preferred securities and subordinated notes, we granted warrants to purchase shares of our common stock, including a warrant to initially purchase 1,923,792 shares of common stock at an initial exercise price of $5.38 to the Treasury Department (the “Treasury Warrant”), a warrant to initially purchase 1,000,000 shares of common stock at an initial exercise price of $7.53 to the purchaser of subordinated notes (the “Debt Warrant”), warrants to initially purchase 792,859 shares of common stock at an initial exercise price of $3.50 to the purchasers of our Series B Preferred Stock and warrants to initially purchase 21,429 shares of common stock at $3.50 to the purchasers of our Series C Preferred Stock. These warrants are subject to adjustment under certain circumstances. If any warrant holder exercises its warrant that would result in dilution to the ownership interest of our existing stockholders and dilute the earnings per share of our common stock. No assurance can be given that our common stock currently outstanding will not (i) be cancelled in a plan of reorganization or (ii) or otherwise lose all its value, as the result of a liquidation, should it occur, of our wholly-owned subsidiary. (See “Certain Regulatory enforcement actions or certain restructuring transactions could result in our currently outstanding stock being cancelled or otherwise losing all its value” above in these Risks Related to an Investment in Our Common Stock.)

We may issue additional shares of common stock or equity derivative securities that will dilute the percentage ownership interest of existing stockholders and the book value per share of our common stock. Subject to applicable NASDAQ rules, our board generally has the authority, without action by or vote of our stockholders, to issue all or part of any authorized but unissued shares of common stock for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. We may seek additional equity capital to comply with the Orders to Cease and Desist and regulatory requirements and to develop our business. Any issuance of additional shares of common stock or equity derivative securities or the exercise of existing equity derivative securities will dilute the percentage ownership interest of our existing stockholders and may dilute the book value per share of our common stock. In addition, new investors may also have rights, preferences and privileges that are senior to our common stockholders. No assurance can be given that our common stock currently outstanding will not (i) be cancelled in a plan of reorganization or (ii) or otherwise lose all its value, as the result of a liquidation, should it occur, of our wholly-owned subsidiary. (See “Certain Regulatory enforcement actions or certain restructuring transactions could result in our stock being cancelled or otherwise losing all its value” above in these Risks Related to an Investment in Our Common Stock.)

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We have not paid dividends on our Series B and Series C Cumulative Convertible Preferred Stock which were payable as of September 15, 2010. As of November 12, 2010, the total amount of such dividends was approximately $686,000.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibit:

31.1		Certification of principal executive officer pursuant to Rule 13a-14(a).

31.2		Certification of principal financial officer pursuant to Rule 13a-14(a).

32.1		Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.

32.2		Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: November 15, 2010	By:	/s/ C. Stanley Bailey
		C. Stanley Bailey
		Chief Executive Officer


Date: November 15, 2010	By:	/s/ James A. White
		James A. White
		Chief Financial Officer (Principal Financial Officer)

SUPERIOR BANCORP 10-Q