Edgar Filing: SUPERIOR BANCORP

SUPERIOR BANCORP

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC

FORM 10-Q

(Mark One)


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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006


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

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

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

Yes o No þ

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


Class		Outstanding as of September 30, 2006

Common stock, $.001 par value		26,428,942

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			33
ITEM 4. CONTROLS AND PROCEDURES			33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			34
ITEM 1A. RISK FACTORS			34
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			34
ITEM 5. OTHER INFORMATION			34
ITEM 6. EXHIBITS			35
SIGNATURES			36
EX-31.01 SECTION 302, CERTIFICATION OF THE PEO
EX-31.02 SECTION 302, CERTIFICATION OF THE PFO
EX-32.01 SECTION 906, CERTIFICATION OF THE PEO
EX-32.02 SECTION 906, CERTIFICATION OF THE PFO

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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


	September 30,			December 31,
	2006			2005
	(UNAUDITED)
ASSETS
Cash and due from banks	$	32,964		$	35,088
Interest-bearing deposits in other banks		7,063			9,772
Federal funds sold		1,973			—
Investment securities available for sale		306,339			242,306
Tax lien certificates		7,254			289
Mortgage loans held for sale		18,523			21,355
Loans, net of unearned income		1,257,640			963,253
Less: Allowance for loan losses		(13,222	)		(12,011	)

Net loans		1,244,418			951,242

Premises and equipment, net		66,921			56,017
Accrued interest receivable		9,801			7,081
Stock in FHLB		9,372			10,966
Cash surrender value of life insurance		40,228			39,169
Goodwill and other intangibles		60,293			12,090
Other assets		30,949			30,094

TOTAL ASSETS	$	1,836,098		$	1,415,469


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	119,030		$	92,342
Interest-bearing		1,303,413			951,354

TOTAL DEPOSITS		1,422,443			1,043,696
Advances from FHLB		146,090			181,090
Federal funds borrowed and security repurchase agreements		32,464			33,406
Notes payable		3,597			3,755
Junior subordinated debentures owed to unconsolidated subsidiary trusts		31,959			31,959
Accrued expenses and other liabilities		18,661			16,498

TOTAL LIABILITIES		1,655,214			1,310,404
STOCKHOLDERS’ EQUITY
Common stock, par value $.001 per share; authorized 50,000,000 shares; shares issued 26,645,239 and 20,221,456, respectively; outstanding 26,428,942 and 19,980,261, respectively		27			20
Surplus		160,571			87,979
Retained earnings		24,431			21,494
Accumulated other comprehensive loss		(2,454	)		(2,544	)
Treasury stock, at cost		(310	)		(341	)
Unearned ESOP stock		(1,381	)		(1,543	)

TOTAL STOCKHOLDERS’ EQUITY		180,884			105,065

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,836,098		$	1,415,469

See Notes to Condensed Consolidated Financial Statements.

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


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006		2005
	(Dollars in thousands, except per share data)
INTEREST INCOME
Interest and fees on loans	$	23,366	$	16,063		$	62,038	$	46,531
Interest on taxable securities		3,248		2,919			8,757		8,789
Interest on tax-exempt securities		106		62			273		179
Interest on federal funds sold		142		163			229		354
Interest and dividends on other investments		596		272			1,418		769

Total interest income		27,458		19,479			72,715		56,622
INTEREST EXPENSE
Interest on deposits		12,653		7,346			30,833		19,911
Interest on other borrowed funds		3,093		1,927			8,212		5,665
Interest on subordinated debentures		797		732			2,338		2,116

Total interest expense		16,543		10,005			41,383		27,692

NET INTEREST INCOME		10,915		9,474			31,332		28,930
Provision for loan losses		550		500			1,850		2,750

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		10,365		8,974			29,482		26,180
NONINTEREST INCOME
Service charges and fees on deposits		1,137		1,239			3,417		3,517
Mortgage banking income		919		693			2,158		1,901
Investment securities losses		—		—			—		(977	)
Change in fair value of derivatives		6		(863	)		43		(160	)
Increase in cash surrender value of life insurance		443		389			1,222		1,131
Insurance proceeds		—		—			—		5,000
Other income		315		479			1,377		1,466

TOTAL NONINTEREST INCOME		2,820		1,937			8,217		11,878
NONINTEREST EXPENSES
Salaries and employee benefits		6,390		6,048			18,064		17,377
Occupancy, furniture and equipment expense		1,806		1,898			5,391		5,938
Management separation costs		—		64			—		15,402
Merger-related costs		350		—			350		—
Subsidiary start-up costs		135		—			135		—
Other operating expenses		3,525		3,028			9,799		11,126

TOTAL NONINTEREST EXPENSES		12,206		11,038			33,739		49,843

Income (loss) before income taxes		979		(127	)		3,960		(11,785	)
INCOME TAX EXPENSE (BENEFIT)		166		(264	)		1,022		(4,909	)

NET INCOME (LOSS)		813		137			2,938		(6,876	)
PREFERRED STOCK DIVIDENDS		—		—			—		305
EFFECT OF EARLY CONVERSION OF PREFFERED STOCK		—		—			—		2,006


NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS	$	813	$	137		$	2,938	$	(9,187	)

BASIC NET INCOME (LOSS) PER COMMON SHARE	$	0.04	$	0.01		$	0.14	$	(0.49	)

DILUTED NET INCOME (LOSS) PER COMMON SHARE	$	0.04	$	0.01		$	0.14	$	(0.49	)

Weighted average common shares outstanding		22,234		19,625			20,810		18,920
Weighted average common shares outstanding, assuming dilution		22,849		20,240			21,444		18,920

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,
	2006			2005
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES	$	8,741		$	(6.540	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in other banks		2,709			4,071
Net increase in federal funds sold		(1,009	)		(14,565	)
Proceeds from sales of securities available for sale		149,730			57,150
Proceeds from maturities of investment securities available for sale		10,921			26,274
Purchases of investment securities available for sale		(44,729	)		(54,765	)
Purchases of tax lien certificates		(6,965	)		—
Net (increase) decrease in loans		(159,078	)		30,332
Net cash received in business combination		4,459			—
Proceeds from sales of premises and equipment		1,228			3,243
Purchases of premises and equipment		(8,683	)		(1,654	)
Proceeds from sale of repossessed assets		1,214			—
Other operating activities, net		1,594			(34	)

Net cash (used) provided by investing activities		(48,609	)		50,052

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts		103,084			(14,925	)
Net decrease in FHLB advances and other borrowed funds		(66,396	)		(38,595	)
Payments made on notes payable		(158	)		(158	)
Proceeds from sale of common stock		1,214			9,122
Cash dividends paid		—			(305	)

Net cash provided (used) by financing activities		37,744			(44,861	)

Net decrease in cash and due from banks		(2,124	)		(1,349	)
Cash and due from banks at beginning of period		35,088			23,489

CASH AND DUE FROM BANKS AT END OF PERIOD	$	32,964		$	22,140

See Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. For a summary of significant accounting policies that have been consistently followed, see Note 1 to the Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included. Operating results for the three- and nine-month periods ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The condensed statement of financial condition at December 31, 2005, which has been derived from the financial statements audited by Carr, Riggs & Ingram, LLC, independent public accountants, as indicated in their report, dated March 16, 2006, included in the Corporation’s Annual Report on Form 10-K, does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

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

Note 2 — Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 155

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

Statement of Financial Accounting Standards No. 156

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

FASB Interpretation No. 48

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

Emerging Issues Task Force No. 06-05

In September 2006, the FASB ratified a consensus reached by the Emerging Issues Task Force, or EITF, on Issue No. 06-05, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance,” requires that the amount that could be realized under a life insurance contract as of the date of the statement of financial position should be reported as an asset. The EITF concluded that a policyholder should consider any additional amounts (i.e., amounts other than cash surrender value) included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. When it is probable that contractual restrictions would limit the amount that could be realized, these contractual limitations should be considered when determining the realizable amounts. Amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized. Amounts that are recoverable beyond one year from the surrender of the policy should be discounted to present value. A policyholder should determine the amount that could be realized under the insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Any amount that would ultimately be realized by the policyholder upon the assumed surrender of the final policy (or final certificate in a group policy) should be included in the amount that could be realized under the insurance contract. A policyholder should not discount the cash surrender value component of the amount that could be realized when contractual restrictions on the ability to surrender a policy exist. However, if the contractual limitations prescribe that the cash surrender value component of the amount that could be realized is a fixed amount, then the amount that could be realized should be discounted. EITF Issue No. 06-05 is effective for fiscal years beginning after December 15, 2006 and should be applied through either (1) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or (2) a change in accounting principle through retrospective application to all prior periods. The application of EITF Issue No. 06-05 is not expected to have a material impact on the Corporation’s financial condition or results of operations.

Staff Accounting Bulletin No. 108

In September 2006 the SEC issued Staff Accounting Bulletin (SAB) No. 108, Quantifying Financial Misstatements, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” (current year income statement perspective) and “iron curtain” (year-end balance perspective) approaches. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. Management does not expect this guidance to have a material effect on the Corporation’s financial condition, results of operations or cash flows.

Statement of Financial Accounting Standards No. 158

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R) SFAS No. 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. SFAS No. 158 requires an employer to (a) recognize in its statement of financial position an asset for a plan’s over funded status or a liability for a plan’s under funded status, (b) measure a plan’s assets and its obligations that determine its funded status at the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined postretirement plan in the year in which the changes occur. Those changes will be reported in the comprehensive income of a business entity. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006, for publicly traded companies. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. As of September 30, 2006 the Corporation does not have a defined benefit pension; however, with the acquisition of Community Bancshares, Inc. during the fourth quarter, the Corporation’s financial statements will begin to reflect the accounting for Community Bancshares, Inc.’s existing defined benefit pension. Management has not determined the impact that SFAS No. 158 will have on the Corporation’s statement of financial position at December 31, 2006 or on the Corporation’s comprehensive income for the period ending December 31, 2006.

Statement of Financial Accounting Standards No. 157

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management does not expect that the adoption of this standard will have a material impact on the Corporation’s financial statements.

Emerging Issues Task Force No. 06-04

In July 2006, the Emerging Issues Task Force (“EITF”) of FASB issued a draft abstract for EITF Issue No. 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangement”. This draft abstract from EITF reached a consensus that for an endorsement split-dollar life

insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The Task Force concluded that a liability for the benefit obligation under SFAS No. 106 has not been settled through the purchase of an endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus reached in EITF Issue No. 06-04. This new accounting standard will be effective for fiscal years beginning after December 15, 2007. At September 30, 2006, the Corporation has no endorsement split-dollar life insurance arrangements outstanding on any of its bank- owned life insurance.

Note 3 — Acquisitions

The Corporation completed the acquisition of 100% of the outstanding stock of Kensington Bankshares, Inc. of Tampa, Florida (“Kensington”) on August 31, 2006 in exchange for 6,226,722 shares of the Corporation’s common stock valued at approximately $71,300,000. The shares were valued by using the average of the closing prices of the Corporation’s stock for several days prior to and after the terms of the acquisition were agreed to and announced. The total purchase price, which includes certain direct acquisition costs, totaled $71,803,000. As a result of the acquisition the Corporation now operates the 12 banking locations in the Tampa Bay area of Florida. This area will be the Corporation’s largest market and has a higher projected population growth than any of its current banking markets.

The Kensington transaction resulted in $44,826,000 of goodwill allocated to the Florida reporting unit and $3,544,000 of core deposit intangibles. The goodwill acquired is not tax deductible. The amount allocated to the core deposit intangible was determined by an independent valuation and is being amortized over an estimated useful life of ten years.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Corporation is in the process of obtaining third-party valuations and appraisals of the loan portfolio and real property; thus, the allocation of the purchase price is subject to refinement:


*(Dollars in thousands)*	Amount
Cash and due from banks	$	4,454
Federal funds sold		964
Investment securities		180,151
Loans, net		136,854
Premises and equipment, net		5,559
Goodwill		44,826
Core deposit and other intangibles		3,544
Other assets		4,732
Deposits		(276,186	)
Repurchase agreements		(30,050	)
Other liabilities		(3,045	)

Total consideration paid for Kensington	$	71,803

The results of operations of the Corporation subsequent to the acquisition date are included in the Corporation’s consolidated statements of operations. The following pro forma information for the periods ended September 30, 2006 and 2005 reflects the Corporation’s estimated consolidated results of operations as if the acquisition of Kensington occurred at January 1 of the respective period, unadjusted for potential cost savings.


*(Dollars in thousands, except per share data)*	2006		2005
Net interest income and noninterest income	$	46,337	$	48,998
Net income (loss)		4,807		(4,329	)
Net income (loss) available to common shareholders		4,807		(6,640	)
Earnings per common share — basic	$	0.18	$	(0.26	)
Earnings per common share — diluted	$	0.17	$	(0.26	)

On November 7, 2006, the Corporation completed its acquisition of Community Bancshares, Inc., which was merged with and into the Corporation. As a result of the merger, the Corporation will operate the 18 banking locations and 15 consumer finance company locations in the State of Alabama previously owned by Community Bancshares. The combination of the two community bank holding companies creates a banking franchise totaling approximately $2.4 billion in assets that serves its customers through 57 banking offices and 18 consumer finance company offices from Huntsville, Alabama to Tampa, Florida.

As a result of the merger, Community Bancshares shareholders will receive .8974 shares of the Corporation’s common stock for each share of Community Bancshares stock they own. Based on the Corporation’s closing share price on November 7, 2006, the total value of the merger was approximately $93.6 million.

Note 4 — Asset Sales

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

Note 5 — Segment Reporting

The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama Region consists of operations located throughout the state of Alabama. The Florida Region consists of operations located in the panhandle region of Florida. The Corporation’s reportable segments are managed as separate business units because they are located in different geographic areas. Both segments derive revenues from the delivery of financial services. These services include commercial loans, mortgage loans, consumer loans, deposit accounts and other financial services.

The Corporation evaluates performance and allocates resources based on profit or loss from operations. There are no material inter-segment sales or transfers. Net interest revenue is used as the basis for performance evaluation rather than its components, total interest revenue and total interest expense. The accounting policies used by each reportable segment are the same as those discussed in Note 1 to the Consolidated Financial Statements included in the Corporation’s Form 10-K for the year ended December 31, 2005. All costs have been allocated to the reportable segments. Therefore, combined amounts agree to the consolidated totals (in thousands).


	Alabama			Florida
	Region			Region			Combined
Three months ended Sept 30, 2006
Net interest income	$	6,500		$	4,415		$	10,915
Provision for loan losses		(71	)		621			550
Noninterest income		2,556			264			2,820
Noninterest expense (1)		10,531			1,675			12,206
Income tax (benefit) expense		(623	)		789			166
Net (loss) income		(781	)		1,594			813
Total assets		1,167,107			668,991			1,836,098
Three months ended Sept 30, 2005
Net interest income	$	6,277		$	3,197		$	9,474
Provision for loan losses		503			(3	)		500
Noninterest income		1,917			20			1,937
Noninterest expense (1) (2)		9,986			1,052			11,038
Income tax (benefit) expense		(968	)		704			(264	)
Net (loss) income		(1,327	)		1,464			137
Total assets		1,149,436			226,883			1,376,319
Nine months ended Sept 30, 2006
Net interest income	$	19,395		$	11,936		$	31,331
Provision for loan losses		961			889			1,850
Noninterest income		7,459			758			8,217
Noninterest expense (1)(2)		29,896			3,842			33,738
Income tax (benefit) expense		(1,551	)		2,573			1,022
Net (loss) income		(2,452	)		5,390			2,938
Nine months ended Sept 30, 2005
Net interest income	$	19,812		$	9,118		$	28,930
Provision for loan losses		2,615			135			2,750
Noninterest income (3)		11,205			673			11,878
Noninterest expense (1) (2)		46,616			3,227			49,843
Income tax (benefit) expense		(6,813	)		1,904			(4,909	)
Net (loss) income		(11,401	)		4,525			(6,876	)


(1)		Noninterest expense for the Alabama region includes all expenses for the holding company, which have not been prorated to the Florida region.

(2)		See Notes 4 and 12 concerning the amount of gain on the sale of assets and management separation costs.

(3)		Noninterest income for the nine-month period ended September 30, 2005 includes $5.0 million in insurance proceeds.

Note 6 — Net Income (Loss) per Common Share

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Numerator:
Net income (loss)	$	813	$	137	$	2,938	$	(6,876	)
Less preferred dividends		—		—		—		305
Less effect of preferred stock conversion		—		—		—		2,006

For basic and diluted, net income (loss)	$	813	$	137	$	2,938	$	(9,187	)


Denominator:
For basic, weighted average common shares outstanding		22,234		19,625		20,810		18,920
Effect of dilutive stock options and restricted stock		615		615		634		—

Average diluted common shares outstanding		22,849		20,240		21,444		18,920

Basic net income (loss) per common share	$	.04	$	.01	$	.14	$	(.49	)

Diluted net income (loss) per common share	$	.04	$	.01	$	.14	$	(.49	)

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

Common stock equivalents of 1,109,000 were not included in computing diluted net loss per common share for the nine-month period ended September 30, 2005 because their effects were anti-dilutive.

Note 7 — Comprehensive (Loss) Income

Total comprehensive income (loss) was $3,308,000 and $3,027,000, respectively, for the three- and nine-month periods ended September 30, 2006 and $(970,000) and $(7,537,000) respectively, for the three- and nine-month periods ended September 30, 2005. Total comprehensive income (loss) consists of net income (loss) and the unrealized gain or loss on the Corporation’s available-for-sale investment securities portfolio arising during the period.

Note 8 — Income Taxes

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

The Corporation’s federal and state income tax returns for the years 2000 through 2004 are open for review and examination by governmental authorities. In the normal course of these examinations, the Corporation is subject to challenges from governmental authorities regarding amounts of taxes due. The Corporation has received notices of proposed adjustments relating to state taxes due for the years 2002 and 2003, which include proposed adjustments relating to income apportionment of a subsidiary. Management believes adequate provision for income taxes has been recorded for all years open for review and intends to vigorously contest the proposed adjustments. To the

extent that final resolution of the proposed adjustments results in significantly different conclusions from management’s current assessment of the proposed adjustments, the effective tax rate in any given financial reporting period may be materially different from the current effective tax rate.

Note 9 — Junior Subordinated Debentures

The Corporation has sponsored two trusts, TBC Capital Statutory Trust II (“TBC Capital II”) and TBC Capital Statutory Trust III (“TBC Capital III”), of which 100% of the common equity is owned by the Corporation. The trusts were formed for the purpose of issuing Corporation-obligated mandatory redeemable trust preferred securities to third-party investors and investing the proceeds from the sale of such trust preferred securities solely in junior subordinated debt securities of the Corporation (the debentures). The debentures held by each trust are the sole assets of that trust. Distributions on the trust preferred securities issued by each trust are payable semi-annually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Corporation has entered into agreements which, taken collectively, fully and unconditionally guarantee the trust preferred securities subject to the terms of each of the guarantees. The debentures held by the TBC Capital II and TBC Capital III capital trusts are, or were, first redeemable, in whole or in part, by the Corporation on September 7, 2010 and July 25, 2006, respectively.

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

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


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

Total junior subordinated debentures owed to unconsolidated subsidiary trusts	$	31,959	$	31,959

As of September 30, 2006 and December 31, 2005, the interest rate on the $16,495,000 subordinated debentures was 9.30% and 7.67%, respectively.

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

Note 10 — Stockholders’ Equity

Stockholder’s equity during the nine-month period ended September 30, 2006 increased primarily as a result of stock transactions totaling approximately $72,600,000, which includes the Kensington merger (See Note 3).

On April 1, 2002, the Corporation issued 157,500 shares of restricted common stock to certain directors and key employees pursuant to the Second Amended and Restated 1998 Stock Incentive Plan. Under the Restricted Stock Agreements, the stock may not be sold or assigned in any manner for a five-year period that began on April 1, 2002. During this restricted period, the participant is eligible to receive dividends and exercise voting privileges. The restricted stock also has a corresponding vesting period, with one-third vesting at the end of each of the third, fourth and fifth years. The restricted stock was issued at $7.00 per share, or $1,120,000, and classified as a contra-equity account, “Unearned restricted stock”, in stockholders’ equity. During 2003, 15,000 shares of this restricted common stock were forfeited. During the second quarter of 2005, an additional 29,171 shares of this restricted stock were forfeited. On January 24, 2005, the Corporation issued 49,375 additional shares of restricted common stock to certain key employees. Under the terms of the management separation agreement entered into during 2005 (see Note 12), vesting was accelerated on 124,375 shares of restricted stock. As of September 30, 2006, 6,668 shares of unvested restricted stock issued to continuing directors remained outstanding. The outstanding shares of restricted stock are included in the diluted earnings per share calculation, using the treasury stock method, until the shares

vest. Once vested, the shares become outstanding for basic earnings per share. For the year ended December 31, 2005, the Corporation recognized $648,000 in restricted stock expense, primarily related to the accelerated vesting from the management separation agreements included in the amount of management separation costs. No restricted stock expense was recognized for the three- and nine-month periods ended September 30, 2006. For the period ended September 30, 2005, the Corporation recognized $599,000 in restricted stock expense, of which $486,000 was related to the accelerated vesting from the management separation agreements and was included in the amount of management separation costs.

The Corporation adopted a leveraged employee stock ownership plan (the “ESOP”) effective May 15, 2002 that covers all eligible employees who are at least age 21 and have completed a year of service. As of September 30, 2006, the ESOP has been leveraged with shares of the Corporation’s common stock purchased in the open market and classified as a contra-equity account, “Unearned ESOP shares,” in stockholders’ equity.

On January 29, 2003, the ESOP trustees finalized a $2,100,000 promissory note to reimburse the Corporation for the funds used to leverage the ESOP. The unreleased shares and a guarantee by the Corporation secure the promissory note, which has been classified as a note payable on the Corporation’s statement of financial condition. As the debt is repaid, shares are released from collateral based on the proportion of debt service associated with the debt repaid. Principal payments on the debt are $17,500 per month for 120 months. The interest rate is adjusted annually to the Wall Street Journal prime rate. Released shares are allocated to eligible employees at the end of the plan year based on the employee’s eligible compensation to total compensation. The Corporation recognizes compensation expense during the period as the shares are earned and committed to be released. As shares are committed to be released and compensation expense is recognized, the shares become outstanding for basic and diluted earnings per share computations. The amount of compensation expense reported by the Corporation is equal to the average fair value of the shares earned and committed to be released during the period.

Compensation expense recognized by the Corporation with respect to the ESOP during the nine-month periods ended September 30, 2006 and 2005 was $229,000 and $135,000 respectively. The ESOP shares as of September 30, 2006 were as follows:


Allocated shares		82,028
Estimated shares committed to be released		20,025
Unreleased shares		171,347

Total ESOP shares		273,400

Fair value of unreleased shares	$	3,144,100

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion 25”). The new standard, which became effective for the Corporation in the first quarter of 2006, requires companies to recognize an expense in the statement of operations for the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation method. This expense will be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS 123R carries forward prior guidance on accounting for awards to non-employees. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately prior to the modification. The Corporation expects to recognize compensation expense for any stock awards granted after December 31, 2005. Since all of the Corporation’s stock option awards granted prior to December 31, 2005 have vested in full, no future compensation expense will be recognized on these awards. During the first quarter of 2005, the Corporation granted 1,690,937 options to the new management team. These options have exercise prices ranging from $8.17 to $9.63 per share and were granted outside of the stock incentive plan as part of the inducement package for new management. These shares are included in the tables below.

The Corporation has established a stock incentive plan for directors and certain key employees that provides for the granting of restricted stock and incentive and nonqualified options to purchase up to 2,500,000 shares of the Corporation’s common stock. The compensation committee of the Board of Directors determines the terms of the

restricted stock and options granted. All options granted have a maximum term of ten years from the grant date, and the option price per share of options granted cannot be less than the fair market value of the Corporation’s common stock on the grant date. Some of the options granted under the plan in the past vested over a five-year period, while others vested based on certain benchmarks relating to the trading price of the Corporation’s common stock, with an outside vesting date of five years from the date of grant. More recent grants have followed this benchmark-vesting formula.

The fair value of each option award is estimated on the date of grant based upon the Black-Scholes pricing model that uses the assumptions noted in the following table. 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-month period ended September 30, 2006:


Risk-free interest rate	4.54	%
Volatility factor	30.16	%
Expected term (in years)	5.00
Dividend yield	0.00	%

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


						Weighted-
				Weighted-		Average
				Average		Remaining
				Exercise		Contractual		Aggregate
	Number			Price		Term		Intrinsic Value
Under option, beginning of period		3,031,946		$	7.81
Granted		159,000			10.72
Exercised		(145,818	)		6.34
Forfeited		(20,031	)		7.06

Under option, end of period		3,025,097		$	8.04		7.61	$	9,694,401

Exercisable at end of period		2,871,097		$	7.89		7.61	$	8,926,957

Weighted-average fair value per option of options granted during the period	$	3.75

The total intrinsic value of options exercised during the three- and nine-month periods ended September 30, 2006 was $26,000 and $767,000, respectively. As of September 30, 2006, there was $493,000 of total unrecognized compensation expense related to the unvested awards. This expense will be recognized over a twenty-six month period unless the shares vest earlier based on achievement of benchmark trading price levels. During the three- and nine-month periods ended September 30, 2006, the Corporation recognized approximately $41,000 and $88,000, respectively, in compensation expense related to options granted.

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


	For the Three Months			For the Nine Months
	Ended			Ended
	September 30, 2005			September 30, 2005
Net income (loss):
As reported	$	137		$	(6,876	)
Pro forma		(200	)		(10,929	)
Loss per common share:
As reported	$	.01		$	(.49	)
Pro forma		(.01	)		(.70	)
Diluted loss per common share:
As reported	$	.01		$	(.49	)
Pro forma		(.01	)		(.70	)

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


Risk-free interest rate	4.33	%
Volatility factor	44.00	%
Weighted average expected term	7.00
Dividend yield	0.00	%

Note 11 — Derivative Instruments and Hedging Activities

The Corporation uses derivative financial instruments to assist in its interest rate risk management process. As of September 30, 2006 and December 31, 2006 the Corporation’s derivative financial instruments include interest rate exchange contracts (“swaps”).

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

As of September 30, 2006 and December 31, 2005, the Corporation had entered into $46,500,000 notional amount of swaps (“CD swaps”) to hedge the interest rate risk inherent in certain of its brokered certificates of deposits (“brokered CDs”). The CD swaps are used to convert the fixed rate paid on the brokered CDs to a variable rate based upon three-month LIBOR. Prior to the first quarter of 2006, these transactions did not qualify for fair value hedge accounting under SFAS 133 (see Note 1). During the first quarter of 2006, the Corporation designated these CD swaps as fair value hedges. As fair value hedges, the net cash settlements from the designated swaps are reported as part of net interest income. In addition, the Corporation will recognize in current earnings the change in fair value of both the interest rate swap and related hedged brokered CDs, with the ineffective portion of the hedge relationship reported in noninterest income. The fair value of the CD swaps is reported on the Condensed Consolidated Statements of Financial Condition in other liabilities and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. As of September 30, 2006, the amount of CD swaps designated as fair value hedges totaled $46,210,000.

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

As of September 30, 2006 and December 31, 2005, these CD swaps had a recorded negative fair value of $1,165,000 and $992,000 and a weighted average life of 8.14 and 8.89 years, respectively. The weighted average fixed rate (receiving rate) was 4.75% and the weighted average variable rate (paying rate) was 5.40% and 4.22% (LIBOR based), respectively.

In October 2006, subsequent to the September 30, 2006 statement of financial condition, the Corporation entered into certain interest rate floor contracts that have not been qualified for hedge accounting treatment and will be used as an economic hedge. An interest rate floor is a contract in which the counterparty agrees to pay to the difference between a current market rate of interest and an agreed rate multiplied by the amount of the notional amount. The Corporation entered into $50,000,000 interest rate floor contracts for a 3-year period with a 4.25% floor on the 3-month LIBOR rate. The Corporation paid a $248,000 premium. These economic hedges will be carried at fair value and changes in the fair value of these derivatives and any payments received will be recognized in noninterest income.

Note 12 — Management Separation Costs

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

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

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

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

In connection with the above management separation transactions, the Corporation recognized pre-tax expenses of $64,000 and $15.4 million for the three- and nine- month periods ended September 30, 2005. At September 30, 2006 and 2005, the Corporation had $1.2 million and $4.3 million, respectively, of accrued liabilities related to these agreements.

Note 13 — Tax Lien Certificates

During the first nine months of 2006, the Corporation purchased $7.0 million in tax lien certificates from various municipalities in Alabama, Illinois, New Jersey, and South Carolina. Tax lien certificates represent a priority lien against real property for which assessed real estate taxes are delinquent. Tax lien certificates are classified as nonmarketable investment securities and are carried at cost, which approximates realizable value.

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

Basis of Presentation

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

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

Recent Developments

On August 31, 2006, we completed the acquisition of Kensington, which was merged with and into the Corporation. Under the terms of the merger agreement, we issued 1.6 shares of our common stock for each share of Kensington stock issued and additional common stock for certain outstanding Kensington stock options. Based on the closing price per share for our common stock on August 31, 2006, the transaction was valued at approximately $71.8 million at the time of closing (including certain direct acquisition costs). As a result of the merger, we now operate the 12 banking locations in the state of Florida previously owned by Kensington. The Tampa Bay area will be the Corporation’s largest market and has a higher projected population growth than any of our current banking markets. The merger is expected to be accretive to our earnings. (See Note 3)

On November 7, 2006, we completed our acquisition of Community Bancshares, Inc., which was merged with and into Superior Bancorp. As a result of the merger, we will operate the 18 banking locations and 15 consumer finance company locations in the State of Alabama previously owned by Community Bancshares. The combination of the two community bank holding companies creates a banking franchise totaling approximately $2.4 billion in assets that serves its customers through 57 banking offices and 18 consumer finance company offices from Huntsville, Alabama to Tampa, Florida.

As a result of the merger, Community Bancshares shareholders will receive .8974 shares of our common stock for each share of Community Bancshares stock they own. Based on our closing share price on November 7, 2006, the total value of the merger was approximately $93.6 million.

Overview

Our principal subsidiary is Superior Bank, a federal savings bank headquartered in Birmingham, Alabama, which operates 57 banking offices in Alabama and Florida and 18 consumer finance company offices in Alabama. Other subsidiaries include TBC Capital Statutory Trust II (“TBC Capital II”), a Connecticut statutory trust, TBC Capital Statutory Trust III (“TBC Capital III”), a Delaware business trust, and Morris Avenue Management Group, Inc. (“MAMG”), an Alabama corporation, all of which are wholly owned. TBC Capital II and TBC Capital III are unconsolidated special purpose entities formed solely to issue cumulative trust preferred securities. MAMG is a real estate management company that manages our headquarters, our branch facilities and certain other real estate owned by Superior Bank.

Our total assets were $1.836 billion at September 30, 2006, an increase of $420.6 million, or 29.7%, from $1.415 billion as of December 31, 2005. Our total loans, net of unearned income, were $1.258 billion at September 30, 2006, an increase of $294.4 million, or 30.6%, from $963.3 million as of December 31, 2005. Our total deposits were $1.422 billion at September 30, 2006, an increase of $378.7 million, or 36.3%, from $1.044 billion as of December 31, 2005. Our total stockholders’ equity was $180.9 million at September 30, 2006, an increase of $75.8 million, or 72.2%, from $105.1 million as of December 31, 2005.

The primary source of our revenue is net interest income, which is the difference between income earned on interest-earning assets, such as loans and investments, and interest paid on interest-bearing liabilities, such as deposits and

borrowings. Our results of operations are also affected by the provision for loan losses and other noninterest expenses such as salaries and benefits, occupancy expenses and provision for income taxes. The effects of these noninterest expenses are partially offset by noninterest sources of revenue such as service charges and fees on deposit accounts and mortgage banking income. Our volume of business is influenced by competition in our markets and overall economic conditions, including such factors as market interest rates, business spending and consumer confidence.

Management reviews the adequacy of the allowance for loan losses on a quarterly basis. The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses, which is based on the factors and risk identification procedures discussed in the following pages, requires the use of judgments and estimates that may change in the future. Changes in the factors used by management to determine the adequacy of the allowance or the availability of new information could cause the allowance for loan losses to be increased or decreased in future periods. In addition, our regulatory agencies, as part of their examination process, may require that additions or reductions be made to the allowance for loan losses based on their judgments and estimates.

Results of Operations

Net income was $813,000 for the three-month period ended September 30, 2006 (third quarter of 2006), compared to $137,000 for the three-month period ended September 30, 2005 (third quarter of 2005). The increase in our net income during the third quarter of 2006 compared to the third quarter of 2005 is primarily the result of an increase in net interest income and an increase in noninterest income offset by slightly higher noninterest expenses. Basic and diluted net income per common share was $.04 and $.01, respectively, for the third quarters of 2006 and 2005, based on weighted average common shares outstanding for the respective periods. Return on average assets, on an annualized basis, was .20% for the third quarter of 2006, compared to .04% for the third quarter of 2005. Return on average stockholders’ equity, on an annualized basis, was 2.46% for the third quarter of 2006, compared to 0.54% for the third quarter of 2005. Book value per share at September 30, 2006, was $6.84, compared to $5.26 at December 31, 2005. Tangible book value per share at September 30, 2006 was $4.56, compared to $4.65 at December 31, 2005.

Net income was $2.9 million for the nine-month period ended September 30, 2006 (first nine months of 2006), compared to a $9.2 million net loss for the nine-month period ended September 30, 2005 (first nine months of 2005). Basic and diluted net income (loss) per common share was $.14 for the first nine months of 2006 and $(.49) for the first nine months of 2005, based on weighted average common shares outstanding for the respective periods. The net loss per common share for the first nine months of 2005 reflects $15.4 million in management separation costs (see Note 12 to the condensed consolidated financial statements) and the $2.0 million effect from the early conversion of our convertible preferred stock (see Note 6). Return on average assets, on an annualized basis, was .26% for the first nine months of 2006 compared to (0.65%) for the first nine months of 2005. Return on average stockholders’ equity, on an annualized basis, was 3.44% for the first nine months of 2006 compared to (9.09%) for the first nine months of 2005.

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

Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. Net interest income increased $1.4 million, or 15.2%, to $10.9 million for the third quarter of 2006 compared to $9.5 million for the third quarter of 2005. Net interest income increased primarily due to a $7.9 million increase in total interest income offset by a $6.5 million increase in total interest expense. The increase in total interest income is primarily due to a 115-basis point increase in the average interest rate on loans and a $226.4 million increase in the average volume of loans.

The increase in total interest expense is attributable to a 130-basis point increase in the average interest rate paid on interest-bearing liabilities and a $225.5 million increase in the volume of average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 4.67% for the third quarter of 2006, compared to 3.37% for the third quarter of 2005. Our net interest spread and net interest margin were 2.71% and 2.94%, respectively, for the third quarter of 2006, compared to 2.90% and 3.06% for the third quarter of 2005.

Average interest-earning assets for the third quarter of 2006 increased $244.1 million, or 19.8%, to $1.478 billion from $1.234 billion in the third quarter of 2005. Average interest-bearing liabilities increased by $225.5 million, or 19.1%, to $1.404 billion for the third quarter of 2006 from $1.178 billion for the third quarter of 2005. The ratio of average interest-earning assets to average interest-bearing liabilities was 105.3% and 104.7% for the third quarters of 2006 and 2005, respectively. Average interest-bearing assets produced a taxable equivalent yield of 7.38% for the third quarter of 2006, compared to 6.27% for the third quarter of 2005. Our net interest margin was reduced approximately 10 basis points by the effect of an incorrect interest rate that had been applied to a single deposit account, which was detected and corrected during the third quarter.

Net interest income increased $2.4 million, or 8.3%, to $31.3 million for the first nine months of 2006 compared to $28.9 million for the first nine months of 2005. Net interest income increased primarily due to a $16.1 million increase in total interest income offset by a $13.7 million increase in total interest expense. The increase in total interest income is primarily due to a 118-basis point increase in the average interest rate on loans and a $124.4 million increase in the average volume of loans.

The increase in total interest expense is attributable to a 121-basis point increase in the average interest rate paid on interest-bearing liabilities and a $90.0 million increase in the volume of average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 4.30% for the first nine months of 2006, compared to 3.09% for the first nine months of 2005. Our net interest spread and net interest margin were 2.88% and 3.10%, respectively, for the first nine months of 2006, compared to 2.97% and 3.10% for the first nine months of 2005.

Average interest-earning assets for the first nine months of 2006 increased $106.0 million, or 8.5%, to $1.356 billion from $1.251 billion in the first nine months of 2005. Average interest-bearing liabilities increased by $90.0 million, or 7.5%, to $1.288 billion for the first nine months of 2006 from $1.198 billion for the first nine months of 2005. The ratio of average interest-earning assets to average interest-bearing liabilities was 105.4% and 104.4% for the first nine months of 2006 and 2005, respectively. Average interest-bearing assets produced a taxable equivalent yield of 7.18% for the first nine months of 2006, compared to 6.06% for the first nine months of 2005.

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


	Three Months Ended September 30,
	2006								2005
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income (1)	$	1,157,948		$	23,366		8.01	%	$	931,598		$	16,063		6.84	%
Investment securities
Taxable		271,730			3,248		4.74			253,960			2,919		4.56
Tax-exempt (2)		10,600			161		6.01			6,897			94		5.40

Total investment securities		282,330			3,409		4.79			260,857			3,013		4.58
Federal funds sold		10,512			142		5.36			18,904			163		3.42
Other investments		27,368			596		8.64			22,743			272		4.74

Total interest -earning assets		1,478,158			27,513		7.38			1,234,102			19,511		6.27
Noninterest-earning assets:
Cash and due from banks		32,339								34,991
Premises and equipment		62,702								55,849
Accrued interest and other assets		93,061								84,175
Allowance for loan losses		(12,832	)							(12,368	)

Total assets	$	1,653,428							$	1,396,749


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	356,319		$	3,631		4.04		$	362,520		$	2,094		2.29
Savings deposits		22,488			33		0.58			25,178			9		0.14
Time deposits		758,425			8,989		4.70			579,977			5,243		3.59
Other borrowings		235,218			3,093		5.22			179,306			1,927		4.26
Subordinated debentures		31,959			797		9.89			31,959			732		9.09

Total interest - bearing liabilities		1,404,409			16,543		4.67			1,178,940			10,005		3.37
Noninterest-bearing liabilities:
Demand deposits		100,872								94,219
Accrued interest and other liabilities		16,984								22,112
Stockholders’ equity		131,163								101,478

Total liabilities and stockholders’ equity	$	1,653,428							$	1,396,749

Net interest income/net interest spread					10,970		2.71	%					9,506		2.90	%

Net yield on earning assets							2.94	%							3.06	%

Taxable equivalent adjustment:
Investment securities (2)					55								32

Net interest income				$	10,915							$	9,474


(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 and yields are presented on a fully taxable equivalent basis using a tax rate of 34 percent.

The following table sets forth, on a taxable equivalent basis, the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the three months ended September 30, 2006 and 2005.


	Three Months Ended September 30, (1)
	2006 vs. 2005
	Increase			Changes Due To
	(Decrease)			Rate			Volume
	(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans	$	7,303		$	3,017		$	4,286
Interest on securities:
Taxable		329			119			210
Tax-exempt		67			11			56
Interest on federal funds		(21	)		69			(90	)
Interest on other investments		324			260			64

Total interest income		8,002			3,476			4,526

Expense from interest-bearing liabilities:
Interest on demand deposits		1,537			1,573			(36	)
Interest on savings deposits		24			25			(1	)
Interest on time deposits		3,746			1,878			1,868
Interest on other borrowings		1,166			489			677
Interest on subordinated debentures		65			65			—

Total interest expense		6,538			4,030			2,508

Net interest income	$	1,464		$	(554	)	$	2,018


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


	Nine Months Ended September 30,
	2006								2005
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
						(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income (1)	$	1,067,972		$	62,038		7.77	%	$	943,550		$	46,531		6.59	%
Investment securities
Taxable		251,590			8,757		4.65			260,734			8,789		4.51
Tax-exempt (2)		9,466			414		5.84			6,716			271		5.39

Total investment securities		261,056			9,171		4.70			267,450			9,060		4.53
Federal funds sold		5,876			228		5.19			16,134			354		2.93
Other investments		21,775			1,418		8.71			23,551			769		4.37

Total interest -earning assets		1,356,679			72,855		7.18			1,250,685			56,714		6.06
Noninterest-earning assets:
Cash and due from banks		24,927								32,212
Premises and equipment		58,823								57,325
Accrued interest and other assets		84,416								83,712
Allowance for loan losses		(12,394	)							(12,649	)

Total assets	$	1,512,451							$	1,411,285


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	331,086		$	7,969		3.22		$	333,912		$	4,849		1.94
Savings deposits		21,152			51		0.32			26,812			30		0.15
Time deposits		685,864			22,813		4.45			614,288			15,032		3.27
Other borrowings		217,535			8,212		5.05			190,589			5,665		3.97
Subordinated debentures		31,959			2,338		9.78			31,959			2,116		8.85

Total interest - bearing liabilities		1,287,596			41,383		4.30			1,197,560			27,692		3.09
Noninterest-bearing liabilities:
Demand deposits		95,376								93,936
Accrued interest and other liabilities		15,386								18,636
Stockholders’ equity		114,093								101,153

Total liabilities and stockholders’ equity	$	1,512,451							$	1,411,285

Net interest income/net interest spread					31,472		2.88	%					29,022		2.97	%

Net yield on earning assets							3.10	%							3.10	%

Taxable equivalent adjustment:
Investment securities (2)					141								92

Net interest income				$	31,331							$	28,930


(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 and yields are presented on a fully taxable equivalent basis using a tax rate of 34 percent.


	Nine Months Ended September 30, (1)
	2006 vs. 2005
	Increase			Changes Due To
	(Decrease)			Rate			Volume
	(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans	$	15,507		$	8,931		$	6,576
Interest on securities:
Taxable		(32	)		275			(307	)
Tax-exempt		143			24			119
Interest on federal funds		(126	)		177			(303	)
Interest on other investments		649			711			(62	)

Total interest income		16,141			10,118			6,023

Expense from interest-bearing liabilities:
Interest on demand deposits		3,120			3,161			(41	)
Interest on savings deposits		21			28			(7	)
Interest on time deposits		7,781			5,882			1,899
Interest on other borrowings		2,547			1,676			871
Interest on subordinated debentures		222			222			—

Total interest expense		13,691			10,969			2,722

Net interest income	$	2,450		$	(851	)	$	3,301


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

Noninterest income. Noninterest income increased $883,000, or 45.6%, to $2.8 million for the third quarter of 2006 from $1.9 million for the third quarter of 2005, primarily due to the ($863,000) decrease in the fair value of our interest rate swaps in the third quarter of 2005. The fair value adjustment for the third quarter of 2006 was $6,000 (see Note 11). Service charges and fees on deposits decreased ($102,000), or 8.2%, to $1.13 million in the third quarter of 2006 from $1.24 million in the third quarter of 2005. Management is currently pursuing new accounts and customers through direct marketing and other promotional efforts to increase this source of revenue. Mortgage banking income increased $226,000, or 32.6%, to $919,000 in the third quarter of 2006 from $693,000 in the third quarter of 2005, primarily due to increased volume of sales in 2006 as compared to 2005.

Noninterest income decreased $3.7 million, or 30.8%, to $8.2 million for the first nine months of 2006 from $11.9 million for the first nine months of 2005, primarily due to the $5.0 million in insurance proceeds we received in the second quarter of 2005 offset slightly by the loss on the sale of securities in the first nine months of 2005 of ($977,000). The investment portfolio losses were realized as a result of a $50 million sale of bonds in the investment portfolio that closed in April 2005. We reinvested the proceeds in bonds intended to enhance the yield and cash flows of our investment securities portfolio. The new investment securities were classified as available for sale. Service charges and fees on deposits decreased $100,000, or 2.8%, to $3.4 million in the first nine months of 2006 from $3.5 million in the first nine months of 2005. Mortgage banking income increased by $257,000, or 13.5%, to $2.16 million in the first nine months of 2006 from $1.90 million in the first nine months of 2005.

Noninterest expenses. Noninterest expenses increased $1.2 million, or 10.6%, to $12.2 million for the third quarter of 2006 from $11.0 million for the third quarter of 2005. This increase is primarily due to $897,000 in merger-related expenses, business start-up costs, and other losses, including the write-down on other real estate and litigation settlements. We expect to recognize additional merger-related costs in the fourth quarter of 2006. Salaries and benefits increased $342,000, or 5.7%, to $6.39 million for the third quarter of 2006 from $6.05 million for the third quarter of 2005. Occupancy and equipment expenses decreased $92,000, or 4.8%, to $1.8 million for the third quarter of 2006 from $1.9 million for the third quarter of 2005. Other operating expenses increased $497,000 in the third quarter of 2006, primarily due to other losses and the write-down on other real estate in the third quarter of 2006 described above.

Noninterest expenses decreased $16.1 million, or 32.3%, to $33.7 million for the first nine months of 2006 from $49.8 million for the first nine months of 2005. This decrease is primarily due to the management separation costs of $15.4 million incurred in the first nine months of 2005. The management separation costs primarily included severance payments, accelerated vesting of restricted stock and professional fees (see Note 12 to the condensed consolidated financial statements). Salaries and benefits increased $687,000, or 4.0%, to $18.1 million for the first nine months of 2006 from $17.4 million for the first nine months of 2005. Occupancy and equipment expenses decreased $547,000, or 9.2%, to $5.4 million for the first nine months of 2006 from $5.9 million for the first nine months of 2005. This decline is primarily due to a reduction in depreciation expense attributable to assets being sold or becoming fully depreciated and the effect of budget initiatives implemented by management. Other operating expenses decreased $1.3 million primarily due to the $1.0 million write-down of other real estate in the first nine months of 2005 and the $355,000 loss on the sale of our corporate aircraft in the first quarter of 2005.

Income tax expense. We recognized income tax expense of $166,000 for the third quarter of 2006, compared to a tax benefit of ($264,000) for the third quarter of 2005. We recognized $1.0 million in income tax expense for the first nine months of 2006, compared to an income tax benefit of ($4.9) million for the first nine months of 2005 based on a pre-tax loss of $11.8 million. The difference in the effective tax rate and the federal statutory rate of 34% for the three- and nine-month periods ended September 30, 2006 and 2005 is due primarily to certain tax-exempt income from investments and insurance policies. Also, we recognized a $161,000 tax credit recapture related to the sale of condominium units in our corporate headquarters building in the second quarter of 2006 (See Note 4 to the condensed consolidated financial statements).

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

Provision for Loan Losses. The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Management reviews the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan loss calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using an eight-point scale, with loan officers having the primary responsibility for assigning risk ratings and for the timely reporting of changes in the risk ratings. These processes, and the assigned risk ratings, are subject to review by our internal loan review function and chief credit officer. Based on the assigned risk ratings, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss. Generally, regulatory reserve percentages are applied to these categories to estimate the amount of loan loss allowance, adjusted for previously mentioned risk factors. Impaired loans are reviewed specifically and separately under Statement of Financial Accounting Standards (“SFAS”) No. 114 to determine the appropriate reserve allocation. Management compares the investment in an impaired loan with the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral,

if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non- rated loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level. See “Financial Condition — Allowance for Loan Losses” for additional discussion.

The provision for loan losses was $550,000 for the third quarter of 2006, an increase of $50,000, or 10.0%, from $500,000 in the third quarter of 2005. The provision for loan losses was $1.9 million for the first nine months of 2006, a decrease of $900,000, or 32.7%, from $2.8 million in the first nine months of 2005. The decrease from 2005 is due to the identification of approximately $3.2 million in classified loans in the second quarter of 2005 and charge-offs in the second quarter of 2005 related to the reassessment of collateral values on certain nonperforming commercial credits and the settlement of a disputed collateral lien.

During the third quarter of 2006, we had net charged-off loans totaling $654,000, compared to net charged-off loans of $739,000 in the third quarter of 2005. The annualized ratio of net charged-off loans to average loans was 0.23% and 0.21% for the three- and nine-month periods ended September 30, 2006, compared to 0.31% and 0.46 % for the three and nine-month periods ended September 30, 2005. The allowance for loan losses totaled $13.2 million, or 1.05% of loans, net of unearned income, at September 30, 2006, compared to $12.0 million, or 1.25% of loans, net of unearned income, at December 31, 2005. See “Financial Condition — Allowance for Loan Losses” for additional discussion.

Financial Condition

Total assets were $1.836 billion at September 30, 2006, an increase of $420.6 million, or 29.7%, from $1.415 billion as of December 31, 2005. $355.6 million of this increase is related to the Kensington acquisition. Average total assets for the first nine months of 2006 were $1.512 billion, which was supported by average total liabilities of $1.498 billion and average total stockholders’ equity of $114.1 million.

Short-term liquid assets. Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) decreased $2.9 million, or 6.8%, to $42.0 million at September 30, 2006 from $44.9 million at December 31, 2005. At September 30, 2006, short-term liquid assets comprised 2.2% of total assets, compared to 3.2% at December 31, 2005. We continually monitor our liquidity position and will increase or decrease our short-term liquid assets as we deem necessary.

Investment Securities. Total investment securities increased $64.0 million, or 26.4%, to $306.3 million at September 30, 2006, from $242.3 million at December 31, 2005. Mortgage-backed securities, which comprised 39.9% of the total investment portfolio at September 30, 2006, increased $30.6 million, or 33.3%, to $122.4 million from $91.8 million at December 31, 2005. Investments in U.S. agency securities, which comprised 41.8% of the total investment portfolio at September 30, 2006, increased $30.6 million, or 31.4 %, to $128.1 million from $97.5 million at December 31, 2005. The Kensington acquisition accounted for all of the increase in agency securities. We acquired approximately $184.1 million in agencies from Kensington and then subsequently sold approximately $113.0 million in an effort to de-leverage our balance sheet.

During the first nine months of 2005, we had a $50 million sale of bonds in the investment portfolio that closed in April 2005. We reinvested the proceeds in bonds intended to enhance the yield and cash flows of our investment securities portfolio. The new investment securities were classified as available for sale. The total investment portfolio at September 30, 2006 comprised 19.0% of all interest-earning assets compared to 19.4% at December 31, 2005, and produced an average taxable equivalent yield of 4.70 % for the first nine months of 2006 and 4.53% for the first nine months of 2005.

Tax lien certificates. During the first nine months of 2006, we purchased $7.0 million in tax certificates from various municipalities in Alabama, Illinois, New Jersey, and South Carolina. Tax lien certificates represent a priority lien against real property for which assessed real estate taxes are delinquent. Tax lien certificates are classified as nonmarketable investment securities and are carried at cost, which approximates realizable value.

Loans. Loans, net of unearned income, totaled $1.258 billion at September 30, 2006, an increase of 30.6%, or $294.4 million, from $963.3 million at December 31, 2005. Kensington accounted for $134.0 million of the increase. Mortgage loans held for sale totaled $18.5 million at September 30, 2006, a decrease of $2.8 million from $21.3 million at December 31, 2005. Average loans, including mortgage loans held for sale, totaled $1.067 billion for the first nine months of 2006 compared to $943.6 million for the first nine months of 2005. Loans, net of unearned income, comprised 78.2% of interest-earning assets at September 30, 2006, compared to 77.2% at December 31, 2005. Mortgage loans held for sale comprised 1.2% of interest-earning assets at September 30, 2006, compared to 1.7% at December 31, 2005. The loan portfolio produced an average yield of 7.77% for the first nine months of 2006, compared to 6.59% for the first nine months of 2005.

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

DISTRIBUTION OF LOANS BY CATEGORY
(Dollars in thousands)


	September 30, 2006						December 31, 2005
				Percent of						Percent of
	Amount			Total			Amount			Total
Commercial and industrial	$	154,228			12.2	%	$	135,454			14.0	%
Real estate — construction and land development		472,316			37.5			326,418			33.8
Real estate — mortgage
Single-family		316,930			25.2			243,183			25.2
Commercial		266,674			21.2			210,611			21.8
Other		29,977			2.4			27,503			2.9
Consumer		17,871			1.4			21,122			2.2
Other		1,511			.1			498			.1

Total loans					100.0	%		964,789			100.0	%

Unearned income		(1,867	)					(1,536	)
Allowance for loan losses		(13,222	)					(12,011	)


Net loans	$	1,244,418					$	951,242

Premises and Equipment, net. Premises and equipment totaled $66.9 million at September 30, 2006, an increase of 19.5%, or $10.9 million, from $56.0 million at December 31, 2005. Kensington accounted for approximately $5.5 million of this increase. In addition to assets acquired in the Kensington acquisition, the increase is due to asset purchases of $6.0 million, primarily attributable to two parcels of land to build two new branches ($2.7 million), purchase of a former branch bank building for a new branch bank ($1.8 million), and purchases of other equipment, offset by depreciation ($1.5 million) and the sale of assets ($1.1 million) (see Note 4 to the condensed consolidated financial statements).

Goodwill and other intangible assets. Goodwill and other intangible assets increased $48.2 million to $60.3 million at September 30, 2006 from $12.09 million at December 31, 2005. The Kensington acquisition added $44.8 million in goodwill and $3.5 million in core deposit intangible (See Note 3 to the Condensed Consolidated Financial Statements). We are still in the process of obtaining third-party valuations and appraisals on the Kensington loan portfolio and real property. These final valuations and appraisals will affect the amount allocated to goodwill.

Deposits. Noninterest-bearing deposits totaled $119.0 million at September 30, 2006, an increase of 28.9%, or $26.7 million, from $92.3 million at December 31, 2005. Kensington accounted for approximately $26.3 million of this increase. Noninterest-bearing deposits comprised 8.4% of total deposits at September 30, 2006, compared to 8.8% at December 31, 2005. Of total noninterest-bearing deposits, $71.5 million, or 60.1%, were in the Alabama branches, while $47.5 million, or 39.9%, were in the Florida branches.

Interest-bearing deposits totaled $1.303 billion at September 30, 2006, an increase of 37.0%, or $352.0 million, from $951.4 million at December 31, 2005. Kensington accounted for approximately $230.1 million of this increase. Interest-bearing deposits averaged $1.038 billion for the first nine months of 2006 compared to $975.0 million for the first nine months of 2005. The average rate paid on all interest-bearing deposits during the first nine months of 2006 was 3.97%, compared to 2.73% for the first nine months of 2005. Of total interest-bearing deposits, $836.7 million, or 64.2%, were in the Alabama branches, while $466.7 million, or 35.8%, were in the Florida branches.

Borrowings. Advances from the Federal Home Loan Bank (“FHLB”) totaled $146.1 million at September 30, 2006 and $181.1 million at December 31, 2005. Borrowings from the FHLB were used primarily to fund growth in the loan portfolio and have a weighted average interest rate of approximately 5.25% at September 30, 2006. The advances are secured by FHLB stock, agency securities and a blanket lien on certain residential real estate loans and commercial loans.

Junior Subordinated Debentures. We have sponsored two trusts, TBC Capital Statutory Trust II (“TBC Capital II”) and TBC Capital Statutory Trust III (“TBC Capital III”), of which we own 100% of the common stock. The trusts were formed for the purpose of issuing mandatory redeemable trust preferred securities to third-party investors and investing the proceeds from the sale of such trust preferred securities solely in our junior subordinated debt securities (the debentures). The debentures held by each trust are the sole assets of that trust. Distributions on the trust preferred securities issued by each trust are payable semi-annually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. We have entered into agreements which, taken collectively, fully and unconditionally guarantee the trust preferred securities subject to the terms of each of the guarantees. The debentures held by the TBC Capital II and TBC Capital III capital trusts are, or were, first redeemable, in whole or in part, by us on September 7, 2010 and July 25, 2006, respectively.

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

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


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

Total junior subordinated debentures owed to unconsolidated subsidiary trusts	$	31,959	$	31,959

As of September 30, 2006 and December 31, 2005, the interest rate on the $16,495,000 subordinated debentures was 9.30% and 7.67%, respectively.

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

Derivatives. We use derivative financial instruments to assist in our interest rate risk management process. As of September 30, 2006 and December 31, 2006 our derivative financial instruments include interest rate exchange contracts (“swaps”).

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

As of September 30, 2006 and December 31, 2005, we had entered into $46,500,000 notional amount of swaps (“CD swaps”) to hedge the interest rate risk inherent in certain of our brokered certificates of deposits (“brokered CDs”). The CD swaps are used to convert the fixed rate paid on the brokered CDs to a variable rate based upon three-month LIBOR. Prior to the first quarter of 2006, these transactions did not qualify for fair value hedge accounting under SFAS 133 (see Note 1). During the first quarter of 2006, we designated these CD swaps as fair value hedges. As fair value hedges, the net cash settlements from the designated swaps are reported as part of net interest income. In addition, we will recognize in current earnings the change in fair value of both the interest rate swap and related hedged brokered CDs, with the ineffective portion of the hedge relationship reported in noninterest income. The fair value of the CD swaps is reported on the Condensed Consolidated Statements of Financial

Condition in other liabilities and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. As of September 30, 2006, the amount of CD swaps designated as fair value hedges totaled $46,210,000.

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

In October 2006, subsequent to the September 30, 2006 statement of financial condition, we entered into certain interest rate floor contracts that have not been qualified for hedge accounting treatment and will be used as an economic hedge. An interest rate floor is a contract in which the counterparty agrees to pay to the difference between a current market rate of interest and an agreed rate multiplied by the amount of the notional amount. We entered into $50,000,000 interest rate floor contracts for a 3-year period with a 4.25% floor on the 3-month LIBOR rate. We paid a $248,000 premium. Changes in the fair value of these derivatives and any payments received will be recognized in noninterest income. The fair value of these derivatives is included in either other assets or other liabilities.

Allowance for Loan Losses. We maintain an allowance for loan losses within a range we believe is adequate to absorb estimated losses inherent in the loan portfolio. We prepare a quarterly analysis to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan losses. Generally, we estimate the allowance using specific reserves for impaired loans, and other factors, such as historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, economic conditions and other pertinent information. The level of allowance for loan losses to net loans will vary depending on the quarterly analysis.

We manage and control risk in the loan portfolio through adherence to credit standards established by the board of directors and implemented by senior management. These standards are set forth in a formal loan policy, which establishes loan underwriting and approval procedures, sets limits on credit concentration and enforces regulatory requirements. In addition, we have engaged Credit Risk Management, LLC, an independent loan review firm, to supplement our existing independent loan review function.

Loan portfolio concentration risk is reduced through concentration limits for borrowers, collateral types and geographic diversification. Concentration risk is measured and reported to senior management and the board of directors on a regular basis.

The allowance for loan loss calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using an eight-point scale, with the loan officer having the primary responsibility for assigning risk ratings and for the timely reporting of changes in the risk ratings. These processes, and the assigned risk ratings, are subject to review by our internal loan review function and senior management. Based on the assigned risk ratings, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss. Generally, regulatory reserve percentages (5%, Special Mention; 15%, Substandard; 50%, Doubtful; 100%, Loss) are applied to these categories to estimate the amount of loan loss allowance required, adjusted for previously mentioned risk factors.

Pursuant to SFAS No. 114, impaired loans are specifically reviewed loans for which it is probable that we will be unable to collect all amounts due according to the terms of the loan agreement. 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. Larger groups of homogenous loans such as consumer installment and residential real estate mortgage loans are collectively evaluated for impairment.

Reserve percentages assigned to pass rated homogeneous loans are based on historical charge-off experience adjusted for current trends in the portfolio and other risk factors.

As stated above, 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 the Audit Committee of the board of directors and senior management. We have a centralized loan administration services department to serve our entire bank. This department provides standardized oversight for compliance with loan approval authorities and bank lending policies and procedures, as well as centralized supervision, monitoring and accessibility.

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-Month						Nine-Month
	Period Ended						Period Ended						Year Ended
	September 30,						September 30,						December 31,
	2006			2005			2006			2005			2005
	(Dollars in thousands)
Allowance for loan losses at beginning of period	$	12,311		$	12,263		$	12,011		$	12,543		$	12,543
Allowance of acquired bank		1,016			—			1,016			—			—
Charge-offs:
Commercial and industrial		456			256			1,071			1,417			2,097
Real estate — construction and land development		—			280			44			354			358
Real estate — mortgage
Single-family		87			102			537			601			795
Commercial		226			136			321			1,131			1,432
Other		4			6			15			26			85
Consumer		141			251			545			631			630
Other		—			1			2			255			345

Total charge-offs		914			1,032			2,535			4,415			5,742
Recoveries:
Commercial and industrial		104			75			322			285			413
Real estate — construction and land development		2			11			123			36			37
Real estate — mortgage
Single-family		27			47			83			329			335
Commercial		21			11			75			135			526
Other		17			24			63			97			118
Consumer		89			114			215			211			280
Other		—			11			—			53			1

Total recoveries		260			293			881			1,146			1,710

Net charge-offs		654			739			1,654			3,269			4,032
Provision for loan losses		550			500			1,850			2,750			3,500

Allowance for loan losses at end of period	$	13,223		$	12,024		$	13,223		$	12,024		$	12,011

Loans at end of period, net of unearned income	$	1,257,640		$	903,398		$	1,257,640		$	903,398		$	963,253
Average loans, net of unearned income		1,135,317			931,598			1,050,562			943,550			947,212
Ratio of ending allowance to ending loans		1.05	%		1.33	%		1.05	%		1.33	%		1.25	%
Ratio of net charge-offs to average loans (1)		0.23	%		0.31	%		0.21	%		0.46	%		0.43	%
Net charge-offs as a percentage of:
Provision for loan losses		118.91	%		147.80	%		89.41	%		118.87	%		115.20	%
Allowance for loan losses (1)		19.62	%		24.38	%		16.72	%		36.35	%		33.57	%
Allowance for loan losses as a percentage of nonperforming loans		307.15	%		196.21	%		307.15	%		196.21	%		252.76	%


(1)		Annualized.

Over the past 18 months, we have realized significant improvements in overall asset quality. Nonperforming assets (NPA’s) as a percentage of total loans plus NPA’s has decreased consistently, to 0.45% as of September 30, 2006, from 0.68% as of December 31, 2005 and 1.32% as of December 31, 2004. Net charge-offs-to-average loans improved to an annualized ratio of 0.21% for the nine-month period ended September 30, 2006, from 0.43% for the year ended December 31, 2005 and 1.52% for the year ended December 31, 2004. With improvements in overall asset quality and recovery efforts, the requirement for additional provision for loan losses decreased significantly. The provision for loan losses for the nine-month period ended September 30, 2006 decreased 32.7%, or $900,000, from the provision for the nine-month period ended September 30, 2005. In addition, the total required allowance for loan losses as a percentage of total loans decreased from 1.25% at December 31, 2005 to 1.05% at September 30, 2006. Management believes that these improvements are reflective of an improved credit culture and overall credit quality.

Nonperforming Assets. NPA’s decreased $1.0 million, to $5.6 million as of September 30, 2006 from $6.6 million at December 31, 2005. As a percentage of net loans plus NPA’s, NPA’s decreased from 0.68% at December 31, 2005 to 0.45% at September 30, 2006. The following table represents our nonperforming assets for the dates indicated:

NONPERFORMING ASSETS


	September 30,			December 31,
	2006			2005
	(Dollars in thousands)
Nonaccrual	$	4,032		$	4,550
Accruing loans 90 days or more delinquent		65			49
Restructured		208			153

Total nonperforming loans		4,305			4,752
Other real estate owned		1,304			1,842

Total nonperforming assets	$	5,609		$	6,594

Nonperforming loans as a percentage of loans		0.34	%		0.49	%

Nonperforming assets as a percentage of loans plus nonperforming assets		0.45	%		0.68	%

Nonperforming assets as a percentage of total assets		0.32	%		0.47	%

Loans past due 30 days or more, net of non-accruals, remained low at 0.47% for September 30, 2006, compared to 0.35% at December 31, 2005.

The following is a summary of nonperforming loans by category for the dates shown:


	September 30,		December 31,
	2006		2005
	(Dollars in thousands)
Commercial and industrial	$	988	$	1,797
Real estate — construction and land development		425		469
Real estate — mortgages
Single-family		2,159		1,639
Commercial		638		675
Other		—		11
Consumer		95		161

Total nonperforming loans	$	4,305	$	4,752

A delinquent loan is placed on nonaccrual status when it becomes 90 days or more 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 interest, which has been accrued on the loan during the current period but remains unpaid, 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 ultimately be an actual write-down or charge-off of the principal balance of the loan to the allowance for loan losses, which may necessitate additional charges to earnings.

Impaired Loans. At September 30, 2006, the recorded investment in impaired loans under SFAS 114 totaled $2.6 million, with approximately $869,000 in allowance for loan losses specifically allocated to impaired loans. This represents a decrease of $900,000 from $3.5 million at December 31, 2005. The following is a summary of impaired loans and the specifically allocated allowance for loan losses by category as of September 30, 2006:


	Outstanding		Specific
	Balance		Allowance
	(Dollars in thousands)
Commercial and industrial	$	864	$	413
Real estate — construction and land development		476		134
Real estate — mortgages
Commercial		859		254
Other		450		68

Total	$	2,649	$	869

Potential Problem Loans. In addition to nonperforming loans, management has identified $2.6 million in potential problem loans as of September 30, 2006, compared to $1.1 million as of December 31, 2005. 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 and may result in disclosure of such loans as nonperforming. The balance primarily consists of one relationship totaling $2.2 million in which the borrowers were experiencing cash-flow shortages; however, the overall liquidity of the guarantors provided adequate strength to support the credit in the short-term. We are working closely with the borrowers and will continue to monitor the borrowers’ cash-flow position.

Stockholders’ Equity. At September 30, 2006, total stockholders’ equity was $180.9 million, an increase of $75.8 million from $105.1 million at December 31, 2005. The increase in stockholders’ equity during the first nine months of 2006 resulted primarily from stock transactions, including the acquisition of Kensington in a stock merger (see Note 3 to the Condensed Consolidated Financial Statements), of $72.6 million, and net income of $2.9 million. These increases were partially offset by a net loss in comprehensive income for the mark-to-market adjustment to available-for-sale securities and the amortization of the cost of ESOP shares totaling $0.3 million. As of September 30, 2006 we had 26,645,239 shares of common stock issued and 26,428,942 shares outstanding.

Regulatory Capital. The table below represents our and our federal thrift subsidiary’s regulatory and minimum regulatory capital requirements at September 30, 2006 (dollars in thousands):


											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2006
Tier 1 Core Capital (to Adjusted Total Assets)
Corporation	$	146,127		8.25	%	$	70,814		4.00	%	$	88,517		5.00	%
Superior Bank		140,518		7.99			70,387		4.00			87,983		5.00
Total Capital (to Risk Weighted Assets)
Corporation		158,708		11.00			115,476		8.00			144,345		10.00	%
Superior Bank		153,099		10.69			114,622		8.00			143,278		10.00
Tier 1 Capital (to Risk Weighted Assets)
Corporation		146,127		10.12			N/A		N/A		$	86,607		6.00	%
Superior Bank		140,518		9.81			N/A		N/A			85,967		6.00
Tangible Capital (to Adjusted Total Assets)
Superior Bank		140,518		7.99			26,395		1.50			N/A		N/A

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 sources of liquidity, we have access to purchased funds from several regional financial institutions and brokered deposits, and may borrow from the FHLB under a blanket floating lien on certain commercial loans and residential real estate loans. Also, we have established certain repurchase agreements with a large financial institution. 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. Management believes it has established sufficient sources of funds to meet its anticipated liquidity needs.

As shown in the Condensed Consolidated Statement of Cash Flows, operating activities provided $8.7 million in funds in the first nine months of 2006, primarily due to net income of $2.9 million plus depreciation expense and provision for loan losses of $2.3 million and $1.9 million, respectively. Additional cash flows from operations included a net decrease in mortgage loans held for sale and other assets offset by increases in accrued expenses and deferred taxes. This compares to a net use of funds of $6.5 million in the first nine months of 2005, primarily due to a net loss of $6.9 million.

Investing activities were a net user of funds in the first nine months of 2006 primarily due to an increase in loans and investments offset by the sale of a majority of the securities obtained in the Kensington merger in an effort to de-leverage our balance sheet. Investing activities were a net provider in the first nine months of 2005 due to calls and sales of available-for-sale securities, and a decrease in loans. We sold securities in 2005 as part of a strategy to de-leverage our balance sheet.

Financing activities were a net provider of funds in the first nine months of 2006, as we increased our levels of brokered certificates of deposit to finance our loan growth. Financing activities were a net user of funds in the first nine months of 2005 due to decreases in deposits and FHLB advances and other borrowings offset slightly by the exercise of stock options.

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). 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) the strength of the United States economy in general and the strength of the regional and local economies in which we conduct operations; (2) 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; (3) inflation, interest rate, market and monetary fluctuations; (4) our ability to successfully integrate the assets, liabilities, customers, systems and management we acquire or merge into our operations; (5) 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; (6) the willingness of users to substitute competitors’ products and services for our products and services; (7) 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; (8) our ability to resolve any legal proceeding on acceptable terms and its effect on our financial condition or results of operations; (9) technological changes; (10) changes in consumer spending and savings habits; (11) regulatory, legal or judicial proceedings, and (12) the effect of natural disasters, such as hurricanes, in our geographic markets.

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 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 changes. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in our quantitative or qualitative disclosures about market risk as of September 30, 2006 from those presented in our annual report on Form 10-K for the year ended December 31, 2005.

The information set forth 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, 2005, is hereby incorporated herein by reference.

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 Principal Financial Officer (“PFO”). The Certifications are required to be made by Rule 13a - 14 of 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 information set forth below in this Item 4 should be read in conjunction with the Certifications for a more complete understanding of the Certifications.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and PFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We conducted an evaluation (the “Evaluation”) of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and PFO, as of September 30, 2006. Based upon the Evaluation, our CEO and PFO have concluded that, as of September 30, 2006, our disclosure controls and procedures are effective to ensure that material information relating to The Banc Corporation and its subsidiaries is made known to management, including the CEO and PFO, particularly during the period when our periodic reports are being prepared.

Except as set forth below, there have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As previously disclosed, we identified a material weakness in internal control over financial reporting at December 31, 2005 relating to our use of the “short-cut method” of hedge accounting with respect to certain interest rate swaps

(“CD swaps”) relating to brokered certificates of deposits. For more information regarding this material weakness, see Item 9A, Controls and Procedures, in our annual report on Form 10-K for the year ended December 31, 2005. To remediate this material weakness, management engaged external consultants to provide support and technical expertise regarding the documentation, initial and ongoing testing and valuations of our interest rate swaps and application of hedge accounting to enhance our existing internal financial control policies and procedures with respect to the types of swaps at issue to ensure that they are accounted for in accordance with generally accepted accounting principles as currently interpreted. Based on such remediation, we have concluded that our current accounting for such transactions does not represent a material weakness in our internal control over financial reporting and that our internal control over financial accounting was effective at September 30, 2006.

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.

ITEM 1A. RISK FACTORS

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the year ended December 31, 2005, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in our most recent Form 10-K. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see “Forward-Looking Statements” under Part I, Item 2 above.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On August 23, 2006, we held a special meeting of stockholders, at which our stockholders voted to approve the merger of Kensington Bankshares, Inc. with and into Superior Bancorp, as follows:


FOR	AGAINST		ABSTAIN
12,997,496		26,035		5,491

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibit:


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

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

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

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

SIGNATURES

Pursuant with 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.


	SUPERIOR BANCORP (Registrant)
Date: November 9, 2006	By:	/s/ C. Stanley Bailey
		C. Stanley Bailey
		Chief Executive Officer


Date: November 9, 2006	By:	/s/ James C. Gossett
		James C. Gossett
		Chief Accounting Officer (Principal Financial and Accounting Officer)

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