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 June 30, 2008

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

FOR THE TRANSITION PERIOD FROM                        TO                        

Superior Bancorp

(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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 June 30, 2008
Common stock, $.001 par value		10,055,879

 

 

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			14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			34
ITEM 4. CONTROLS AND PROCEDURES			35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			36
ITEM 1A. RISK FACTORS			36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			36
ITEM 5. OTHER INFORMATION			37
ITEM 6. EXHIBITS			37
SIGNATURES			38
EX-10.1 2008 INCENTIVE COMPENSATION PLAN
EX-31.1 SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-31.2 SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
EX-32.1 SECTION 906 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-32.2 SECTION 906 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

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)

		June 30,				December 31,
		2008				2007
		(UNAUDITED)
ASSETS
Cash and due from banks		$	71,959			$	52,983
Interest-bearing deposits in other banks			4,010				6,916
Federal funds sold			3,366				3,452
Investment securities available for sale			356,408				361,171
Tax lien certificates			25,032				15,615
Mortgage loans held for sale			29,097				33,408
Loans, net of unearned income			2,148,751				2,017,011
Less: Allowance for loan losses			(27,243	)			(22,868	)
Net loans			2,121,508				1,994,143
Premises and equipment, net			103,565				104,799
Accrued interest receivable			15,857				16,512
Stock in FHLB			23,412				14,945
Cash surrender value of life insurance			47,290				45,277
Goodwill and other intangibles			185,442				187,520
Other assets			52,612				48,684
TOTAL ASSETS		$	3,039,558			$	2,885,425
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	221,087			$	207,602
Interest-bearing			1,973,020				1,993,009
TOTAL DEPOSITS			2,194,107				2,200,611
Advances from FHLB			405,830				222,828
Federal funds purchased and security repurchase agreements			7,218				17,075
Note payable			9,500				9,500
Junior subordinated debentures owed to unconsolidated subsidiary trusts			53,571				53,744
Accrued expenses and other liabilities			20,547				31,625
TOTAL LIABILITIES			2,690,773				2,535,383
STOCKHOLDERS’ EQUITY
Common stock, par value $.001 per share; authorized 15,000,000 shares; shares issued 10,382,410 and 10,380,658, respectively; outstanding 10,055,879 and 10,027,079, respectively			10				10
Surplus			329,087				329,232
Retained earnings			35,094				33,557
Accumulated other comprehensive (loss) income			(3,138	)			174
Treasury stock, at cost — 320,764 and 347,536 shares, respectively			(11,364	)			(12,309	)
Unearned ESOP stock			(531	)			(622	)
Unearned restricted stock			(373	)			—
TOTAL STOCKHOLDERS’ EQUITY			348,785				350,042
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,039,558			$	2,885,425

See Notes to Condensed Consolidated Financial Statements.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
INTEREST INCOME
Interest and fees on loans		$	36,708			$	34,986			$	74,053			$	69,297
Interest on taxable securities			4,143				4,096				8,195				8,535
Interest on tax-exempt securities			431				138				861				266
Interest on federal funds sold			18				156				98				283
Interest and dividends on other investments			732				691				1,376				1,429
Total interest income			42,032				40,067				84,583				79,810
INTEREST EXPENSE
Interest on deposits			16,709				18,780				36,962				36,249
Interest on other borrowed funds			3,016				2,770				5,808				6,019
Interest on junior subordinated debentures			919				1,004				1,934				1,996
Total interest expense			20,644				22,554				44,704				44,264
NET INTEREST INCOME			21,388				17,513				39,879				35,546
Provision for loan losses			5,967				1,000				7,838				1,705
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			15,421				16,513				32,041				33,841
NONINTEREST INCOME
Service charges and fees on deposits			2,192				1,894				4,296				3,684
Mortgage banking income			1,031				1,132				2,297				2,082
Investment securities gains			1,068				—				1,470				242
Change in fair value of derivatives			(418	)			118				632				(34	)
Increase in cash surrender value of life insurance			555				452				1,107				900
Gain on extinguishment of liabilities			2,918				—				2,918				—
Other income			1,660				942				2,888				1,750
TOTAL NONINTEREST INCOME			9,006				4,538				15,608				8,624
NONINTEREST EXPENSES
Salaries and employee benefits			12,058				10,168				24,199				20,236
Occupancy, furniture and equipment expense			4,120				2,995				8,180				6,142
Amortization of core deposit intangibles			896				304				1,792				609
Merger-related costs			13				107				121				426
Other expenses			6,189				4,484				11,248				8,670
TOTAL NONINTEREST EXPENSES			23,276				18,058				45,540				36,083
Income before income taxes			1,151				2,993				2,109				6,382
INCOME TAX EXPENSE			310				1,024				572				2,116
NET INCOME		$	841			$	1,969			$	1,537			$	4,266
BASIC NET INCOME PER COMMON SHARE		$	0.08			$	0.23			$	0.15			$	0.50
DILUTED NET INCOME PER COMMON SHARE		$	0.08			$	0.23			$	0.15			$	0.49
Weighted average common shares outstanding			10,016				8,613				10,014				8,611
Weighted average common shares outstanding, assuming dilution			10,056				8,735				10,051				8,747

See Notes to Condensed Consolidated Financial Statements.

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

		Six Months Ended
		June 30,
		2008				2007
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	11,446			$	9,518
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in other banks			2,906				6,276
Net decrease in federal funds sold			86				12,342
Proceeds from sales of securities available for sale			36,142				2,400
Proceeds from maturities of investment securities available for sale			92,189				45,040
Purchases of investment securities available for sale			(127,153	)			(12,451	)
Purchase of tax lien certificates			(9,417	)			(2,144	)
Net increase in loans			(147,573	)			(71,556	)
Purchases of premises and equipment			(8,078	)			(4,483	)
Proceeds from sale of premises and equipment			7,567				1,223
Proceeds from sale of repossessed assets			4,009				1,943
Increase in stock in FHLB			(8,467	)			(416	)
Other investing activities, net			(1,089	)			72
Net cash used by investing activities			(158,878	)			(21,754	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits			(6,666	)			14,503
Net increase (decrease) in FHLB advances and other borrowed funds			173,074				(2,829	)
Payments made on notes payable			—				(87	)
Proceeds from notes payable			—				500
Proceeds from sale of common stock			—				30
Net cash provided by financing activities			166,408				12,117
Net increase (decrease) in cash and due from banks			18,976				(119	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD			52,983				49,783
CASH AND DUE FROM BANKS AT END OF PERIOD		$	71,959			$	49,664

See Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. For a summary of significant accounting policies that have been consistently followed, see Note 1 to the Consolidated Financial Statements included in Superior Bancorp’s (“the Corporation’s”) Annual Report on Form 10-K for the year ended December 31, 2007. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included in these condensed consolidated financial statements. Operating results for the three- and six-month periods ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The Condensed Consolidated Statement of Financial Condition at December 31, 2007, presented herein, has been derived from the financial statements audited by Grant Thornton LLP, independent registered public accountants, as indicated in their report, dated March 14, 2008, included in the Corporation’s Annual Report on Form 10-K. The Condensed Consolidated Financial Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Restatement to Reflect 1-for-4 Reverse Stock Split

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

Note 2 — Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 157

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

Statement of Financial Accounting Standards No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 would allow the Corporation to make an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after November 15, 2007. The Corporation evaluated SFAS 159 and determined that the fair value option would not be elected for any financial asset or liability reported on the Corporation’s consolidated statement of financial condition as of January 1, 2008 (date of adoption), nor has the Corporation applied the provisions of SFAS 159 to any financial asset or liability recognized during the six-month period ended June 30, 2008.

Statement of Financial Accounting Standards No. 141(R)

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

Note 2 — Recent Accounting Pronouncements — (Continued)

determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, “Accounting for Contingencies.” SFAS 141R is expected to have an impact on the Corporation’s accounting for business combinations, if any, closing on or after January 1, 2009.

Staff Accounting Bulletin No. 109

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

Statement of Financial Accounting Standards No. 161

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

Note 3 — Acquisitions

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

The People’s transaction resulted in $47,313,000 of goodwill allocated to the Florida reporting unit and $9,810,000 of core deposit intangibles. The goodwill acquired is not tax-deductible. The amount allocated to the core deposit intangible was determined by an independent valuation and is being amortized over an estimated useful life of ten years based on the undiscounted cash flow.

Note 3 — Acquisitions — (Continued)

Pro forma Results of Operations

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

		Six Months
		Ended
(Dollars in thousands, except per share data)		June 30, 2007
Pro forma net interest income and noninterest income		$	50,836
Pro forma net income			6,156
Pro forma earnings per common share — basic		$	0.60
Pro forma earnings per common share — diluted			0.59

Note 4 — Segment Reporting

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

The Corporation evaluates performance and allocates resources based on profit or loss from operations. There are no material inter-segment sales or transfers. Net interest income is used as the basis for performance evaluation rather than its components, total interest income and total interest expense. The accounting policies used by each reportable segment are the same as those discussed in Note 1 to the Consolidated Financial Statements included in the Corporation’s Form 10-K for the year ended December 31, 2007. All costs, except corporate administration and income taxes, have been allocated to the reportable segments. Therefore, combined amounts agree to the consolidated totals (in thousands).

										Total								Superior
		Alabama				Florida				Alabama and				Administrative				Bancorp
		Region				Region				Florida				and Other				Combined
Three months ended June 30, 2008
Net interest income		$	8,012			$	9,108			$	17,120			$	4,268			$	21,388
Provision for loan losses			946				660				1,606				4,361				5,967
Noninterest income			1,745				490				2,235				6,771				9,006
Noninterest expense			7,468				5,405				12,873				10,403				23,276
Operating profit (loss)		$	1,343			$	3,533			$	4,876			$	(3,725	)			1,151
Income tax expense																			310
Net income																		$	841
Total assets		$	1,046,413			$	1,141,009			$	2,187,422			$	852,136			$	3,039,558
Three months ended June 30, 2007
Net interest income		$	8,972			$	8,024			$	16,996			$	517			$	17,513
Provision for loan losses			434				256				690				310				1,000
Noninterest income			1,675				351				2,026				2,512				4,538
Noninterest expense			6,286				3,018				9,304				8,754				18,058
Operating profit (loss)		$	3,927			$	5,101			$	9,028			$	(6,035	)			2,993
Income tax expense																			1,024
Net income																		$	1,969
Total assets		$	975,538			$	725,860			$	1,701,398			$	768,895			$	2,470,293

Note 4 — Segment Reporting — (Continued)

										Total								Superior
		Alabama				Florida				Alabama and				Administrative				Bancorp
		Region				Region				Florida				and Other				Combined
Six months ended June 30, 2008
Net interest income		$	15,624			$	18,728			$	34,352			$	5,527			$	39,879
Provision for loan losses			1,802				1,518				3,320				4,518				7,838
Noninterest income			3,606				940				4,546				11,062				15,608
Noninterest expense			15,092				10,889				25,981				19,559				45,540
Operating profit (loss)		$	2,336			$	7,261			$	9,597			$	(7,488	)			2,109
Income tax expense																			572
Net income																		$	1,537
Six months ended June 30, 2007
Net interest income		$	18,396			$	16,555			$	34,951			$	595			$	35,546
Provision for loan losses			1,038				350				1,388				317				1,705
Noninterest income			3,411				663				4,074				4,550				8,624
Noninterest expense			12,367				6,098				18,465				17,618				36,083
Operating profit (loss)		$	8,402			$	10,770			$	19,172			$	(12,790	)			6,382
Income tax expense																			2,116
Net income																		$	4,266

Note 5 — Net Income per Common Share

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Numerator:
For basic and diluted, net income		$	841			$	1,969			$	1,537			$	4,266
Denominator:
For basic, weighted average common shares outstanding			10,016				8,613				10,014				8,611
Effect of dilutive stock options and restricted stock			40				122				37				136
Average diluted common shares outstanding			10,056				8,735				10,051				8,747
Basic net income per common share		$	.08			$	.23			$	.15			$	.50
Diluted net income per common share		$	.08			$	.23			$	.15			$	.49

Note 6 — Comprehensive (Loss) Income

Total comprehensive (loss) income was $(3,263,000) and $(1,775,000) for the three- and six-month periods ended June 30, 2008, respectively, and $118,000 and $2,842,000 for the three- and six-month periods ended June 30, 2007, respectively. Total comprehensive (loss) income consists of net income and the unrealized gain or loss on the Corporation’s available-for-sale investment securities portfolio arising during the period. A summary of the Corporation’s net unrealized gains and losses before tax is shown below:

		Net Unrealized Gain (Loss)
		June 30,				December 31,				Dollar
		2008				2007				Change, Pre-tax
		(Dollars in thousands)
U.S. agencies		$	129			$	1,011			$	(882	)
State and political subdivisions			(793	)			(173	)			(620	)
Mortgage-backed securities			(1,742	)			194				(1,936	)
Corporate debt & other securities			(3,643	)			(1,892	)			(1,751	)
Net unrealized loss		$	(6,049	)		$	(860	)		$	(5,189	)

Note 6 — Comprehensive (Loss) Income — (Continued)

The market for certain securities held in the available-for-sale investment securities portfolio remained volatile during the second quarter of 2008 due to extraordinary economic and market conditions. As a result of this volatility, the market price for many types of securities at June 30, 2008 were lower than at March 31, 2008 and December 31, 2007. Management continually monitors our securities portfolio regarding cash flow and credit-rating adjustments, among other factors. Based on its review, management does not believe any unrealized loss as of June 30, 2008 represents an other-than-temporary impairment. Management believes the unrealized losses on these securities are primarily the result of changes in the liquidity levels in the market in addition to changes in general market interest rates and not the result of material changes in the credit characteristics of the investment portfolio. In addition, at June 30, 2008 management had the positive intent and ability to hold these securities to recovery or maturity.

Note 7 — Income Taxes

The effective tax rate decreased in the three- and six- month periods ended June 30, 2008 primarily as a result of lower levels of pre-tax income. The difference in the effective tax rate in the three- and six-month periods ended June 30, 2008 and 2007, and the blended federal statutory rate of 34% and state tax rates of 5% and 6% is due primarily to tax-exempt income from investments and insurance policies. The Corporation adopted the provisions of FIN 48 as of January 1, 2007, the effect of which is described below.

FASB Interpretation No. 48

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related recognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation was effective for fiscal years beginning after December 15, 2006.

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

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

All state income tax matters have been concluded for years through 2001. The Corporation has received notices of proposed adjustments relating to state taxes due for the years 2002 and 2003, which include proposed adjustments relating to income apportionment of a subsidiary. Management anticipates that these examinations may be finalized in the foreseeable future. However, based on the status of these examinations, and the protocol of finalizing audits by the taxing authority, which could include formal legal proceedings, it is not possible to estimate the impact of any changes to the previously recorded uncertain tax positions. There have been no significant changes to the status of these examinations during the six-month period ended June 30, 2008.

Note 8 — Stockholders’ Equity

1-for-4 Reverse Stock Split

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

Note 8 — Stockholders’ Equity — (Continued)

Stock Incentive Plan

The Corporation established the Third Amended and Restated 1998 Stock Incentive Plan (the “1998 Plan”) for directors and certain key employees that provides for the granting of restricted stock and incentive and nonqualified options to purchase up to 625,000 (restated for 1-for-4 reverse stock split) shares of the Corporation’s common stock of which substantially all available shares have been granted. The compensation committee of the Board of Directors determines the terms of the restricted stock and options granted. All options granted have a maximum term of ten years from the grant date, and the option price per share of options granted cannot be less than the fair market value of the Corporation’s common stock on the grant date. Some of the options granted under the plan in the past vested over a five-year period, while others vested based on certain benchmarks relating to the trading price of the Corporation’s common stock, with an outside vesting date of five years from the date of grant. More recent grants have followed this benchmark-vesting formula.

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

During the first quarter of 2005, the Corporation granted 422,734 options to the new management team. These options have exercise prices ranging from $32.68 to $38.52 per share and were granted outside of the stock incentive plan as part of the inducement package for new management. These shares are included in the table below.

The fair value of each option award is estimated on the date of grant based upon the Black-Scholes pricing model that uses the assumptions noted in the following table. The risk-free interest rate is based on the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the underlying options. Expected volatility has been estimated based on historical data. The expected term has been estimated based on the five-year vesting date and change of control provisions. The Corporation used the following weighted-average assumptions for the six-month periods ended June 30, 2008 and 2007:

		2008				2007
Risk free interest rate			4.50	%			4.37	%
Volatility factor			29.11	%			29.34	%
Weighted average life of options (in years)			5.00				5.00
Dividend yield			0.00	%			0.00	%

A summary of stock option activity as of June 30, 2008 and changes during the six months then ended is shown below:

										Weighted-
						Weighted-				Average
						Average				Remaining
						Exercise				Contractual				Aggregate
		Number				Price				Term				Intrinsic Value
Under option, January 1, 2008			802,048			$	32.28
Granted			6,625				19.60
Forfeited			(1,250	)			45.40
Under option, June 30, 2008			807,423			$	32.95				6.23			$	—
Exercisable at end of period.			691,653			$	31.76				4.98			$	—
Weighted-average fair value per option of options granted during the period		$	6.70

Note 8 — Stockholders’ Equity — (Continued)

As of June 30, 2008, there was $696,000 of total unrecognized compensation expense related to the unvested awards. This expense will be recognized over a 25- to 30- month period unless the options vest earlier based on achievement of benchmark trading price levels. During the three-and six- month periods ended June 30, 2008, the Corporation recognized approximately $161,000 and $321,000, respectively, in compensation expense related to options granted. During the three- and six- month periods ended June 30, 2007, the Corporation recognized approximately $86,000 and $169,000, respectively, in compensation expense related to options granted.

In January 2008, members of the Corporation’s management received restricted common stock grants totaling 26,788 shares. These grants exclude certain senior executive management who received cash under the short-term management incentive plan in lieu of restricted stock. The grant date fair value of this restricted common stock is equal to $18.56 per share or $497,000 which will be recognized over a 24-month period as 50% of the stock vests on January 22, 2009 with the remaining 50% vesting on January 22, 2010. During the three- and six- month periods ended June 30, 2008, the Corporation recognized approximately $62,000 and $124,000, respectively, in compensation expense related to restricted stock. The outstanding shares of restricted common stock are included in the diluted earnings per share calculation, using the treasury stock method, until the shares vest. Once vested, the shares become outstanding for basic earnings per share. If an executive’s employment terminates prior to a vesting date for any reason other than death, disability or a change in control, the unvested stock is forfeited pursuant to the terms of the restricted common stock agreement. Unvested restricted common stock becomes immediately vested upon death, disability or a change in control. Under the restricted common stock agreements, the restricted stock may not be sold or assigned in any manner during the vesting period, but the executive will have the rights of a shareholder with respect to the stock (i.e. the right to vote, receive dividends, etc), prior to vesting.

Note 9 — Fair Value Measurements

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

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

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

Note 9 — Fair Value Measurements — (Continued)

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

						Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		June 30,				Identical Assets				Observable Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Available for sale securities		$	356,408			$	—			$	356,408			$	—
Derivative assets			114				—				114				—
Total recurring basis measured assets		$	356,522			$	—			$	356,522			$	—
Derivative liabilities		$	103			$	—			$	103			$	—
Total recurring basis measured liabilities		$	103			$	—			$	103			$	—

Valuation Techniques — Recurring Basis

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

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

Assets Recorded at Fair Value on a Nonrecurring Basis

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

						Quoted Prices in				Significant Other				Significant
		Fair Value at				Active Markets for				Observable				Unobservable
		June 30,				Identical Assets				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Mortgage loans held for sale		$	29,097			$	—			$	29,097			$	—
Impaired loans, net of specific allowance			39,468				—				—				39,468
Total nonrecurring basis measured assets		$	68,565			$	—			$	29,097			$	39,468

Valuation Techniques — Nonrecurring Basis

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

Impaired Loans. Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral

Note 9 — Fair Value Measurements — (Continued)

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

Note 10 — Gain on Extinguishment of Liabilities

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

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

Basis of Presentation

The following is a discussion and analysis of our June 30, 2008 condensed consolidated financial condition and results of operations for the three- and six-month periods ended June 30, 2008 and 2007. All significant intercompany accounts and transactions have been eliminated. Our accounting and reporting policies conform to generally accepted accounting principles applicable to financial institutions.

This information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in our Annual Report on Form 10-K for the year ended December 31, 2007.

Recent Developments

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

Overview

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

Our principal subsidiary is Superior Bank (“Bank”), a federal savings bank headquartered in Birmingham, Alabama, which operates 75 banking offices from Huntsville, Alabama to Venice, Florida and 22 consumer finance company offices in Alabama. Our Florida franchise currently has 31 branches. The Bank has completed its de novo branch strategy with 20 planned branches opened in key Alabama and Florida market’s since September 2006. The Bank has invested approximately $25 to $30 million toward its de novo expansion program.

Second quarter 2008 net income was $841,000, or $.08 per share, compared to $695,000 for the first quarter of 2008 and $2.0 million for the second quarter of 2007. Second quarter 2008 net income includes the effect of $1.3 million, net of tax, in new branch overhead expense and $564,000, net of tax, in core deposit intangible amortization compared to second quarter 2007 core deposit amortization of $192,000, net of tax. Also, included in our second quarter net income are $2.5 million, net of tax, in gains from the sale of securities and the extinguishment of certain liabilities. Second quarter 2007 results do not include the effect of our acquisition of People’s Community Bancshares, Inc.(“People’s”), which was completed on July 27, 2007.

Our second quarter 2008 net interest income increased to $21.4 million or 16% from $18.5 million for the first quarter of 2008 and 22% from $17.5 million for the second quarter of 2007. Net interest margin increased to 3.39% compared to 3.04% for the first quarter of 2008.

Our total assets were $3.0 billion at June 30, 2008, an increase of $154 million, or 5.34%, from $2.9 billion as of December 31, 2007. Our total deposits at June 30, 2008 remained level at $2.2 billion from March 31, 2008 and December 31, 2007. Total deposits increased 16% from June 30, 2007. The acquisition of People’s accounted for approximately 13% of the 16% deposit growth since June 30, 2007. As of June 30, 2008 our de novo branches accounted for approximately $223 million of core deposits, predominantly from new customer relationships. Customer dislocation resulting from recent merger activities of certain other financial institutions in our markets also contributed to the deposit performance.

Loans increased to $2.2 billion at June 30, 2008, an increase of 6.5% from December 31, 2007 and 24.9% from June 30, 2007. Loan growth occurred across all of our Alabama and Florida markets, with primary expansion occurring in the commercial, mortgage and commercial real estate sectors of our loan portfolio. In addition, we purchased a pool of residential mortgage loans with a balance of approximately $52 million during the second quarter of 2008.

With regard to credit quality at June 30, 2008, non-performing loans (“NPLs”) were 1.83% of total loans compared to 1.49% at March 31, 2008 and 1.26% at December 31, 2007, which is in line with management’s expectations. The $8.4 million NPL increase during the second quarter of 2008 from the first quarter of 2008 was predominantly located in Florida and includes real estate relationships primarily secured by residential properties in various stages of development.

Other Real Estate Owned (“OREO”) increased $5.8 million during the second quarter of 2008 to $12.6 million. The increase in OREO is composed primarily of properties in Alabama consisting of single-family homes and residential lots. Of total OREO, $10.3 million is located in Alabama and $2.3 million is in Florida.

Overall past due loans increased during the second quarter with the 90 days past due (DPD) and still accruing category moving to 0.09% at June 30, 2008 from 0.00% and 0.10% as a percentage of total loans at March 31, 2008 and December 31, 2007, respectively. Loans in the 30-89 DPD category increased to 2.05% from 1.25% and 1.13% as a percentage of total loans at March 31, 2008 and December 31, 2007, respectively.

Net loan charge-offs as a percentage of average loans were 0.38% during the second quarter of 2008, compared to 0.29% and 0.33% during the first quarter of 2008 and fourth quarter of 2007, respectively. Of the $2.0 million net charge-offs in the second quarter of 2008, our subsidiary Bank’s charge-offs were $1.5 million or 0.28% of average loans, and the consumer finance company charge-offs were $490,000 or 0.10% of average loans. Of the Bank’s charge-offs, 56% related to 1-4 family mortgages and 42% related to real estate construction.

The provision for loan losses was $6.0 million in the second quarter of 2008, increasing the allowance for loan losses to 1.27% of net loans, or $27.2 million, at June 30, 2008, compared to 1.13% of net loans, or $23.3 million at March 31, 2008. Our management believes the allowance for loan losses at June 30, 2008 appropriately reflects management’s best estimate of potential losses in the loan portfolio. Management’s assessment of our credit quality is based on various internal and external factors that affect the collectability of loans.

Our subsidiary Bank continues to be categorized as “well capitalized” under regulatory guidelines with a total risk-based capital ratio of 10.22% as of June 30, 2008. Other key equity ratios of the Bank at June 30, 2008 were total equity to total assets of 13.08% and tangible equity to tangible assets of 7.40%.

Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) increased $16.0 million, or 25.2%, to $79.3 million at June 30, 2008 from $63.3 million at December 31, 2007. At June 30, 2008, short-term liquid assets comprised 2.6% of total assets, compared to 2.2% at December 31, 2007. Management continually monitors our liquidity position and will increase or decrease short-term liquid assets as necessary. Our principal sources of funds are deposits, principal and interest payments on loans, federal funds sold and maturities and sales of investment securities. In addition to these sources of liquidity, we have access to a minimum of $250 million in additional funding from traditional sources. Management believes it has established sufficient sources of funds to meet its anticipated liquidity needs.

Fair Value Measurements

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

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

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

						Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		June 30,				Identical Assets				Observable Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Available for sale securities		$	356,408			$	—			$	356,408			$	—
Derivative assets			114				—				114				—
Total recurring basis measured assets		$	356,522			$	—			$	356,522			$	—
Derivative liabilities		$	103			$	—			$	103			$	—
Total recurring basis measured liabilities		$	103			$	—			$	103			$	—

Valuation Techniques — Recurring Basis

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

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

Assets Recorded at Fair Value on a Nonrecurring Basis

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

		Assets
		Measured at				Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		June 30,				Identical Assets				Observable Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Mortgage loans held for sale		$	29,097			$	—			$	29,097			$	—
Impaired loans, net of specific allowance			39,468				—				—				39,468
Total nonrecurring basis measured assets		$	68,565			$	—			$	29,097			$	39,468

Valuation Techniques — Nonrecurring Basis

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

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

Results of Operations

Net income decreased $1.2 million, or 57.3% to $841,000 for the three-months ended June 30, 2008 (second quarter of 2008), from $2.0 million for the three months ended June 30, 2007 (second quarter of 2007). Net income decreased $2.8 million, or 64.0% to $1.5 million for the six months ended June 30, 2008 (first six months of 2008), from $4.3 million for the six months ended June 30, 2007 (first six months of 2007). The following table sets forth key earnings data for the periods indicated:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
		(Dollars in thousands, except per share data)
Superior Bancorp and Subsidiaries
Net income		$	841			$	1,969			$	1,537			$	4,266
Net income per common share (diluted)			0.08				0.23				0.15				0.49
Net interest margin			3.39	%			3.39	%			3.21	%			3.46	%
Net interest spread			3.17	%			3.06	%			2.96	%			3.14	%
Return on average assets			0.11	%			0.32	%			0.10	%			0.35	%
Return on average tangible assets			0.12	%			0.34	%			0.11	%			0.37	%
Return on average stockholders’ equity			0.96	%			2.83	%			0.88	%			3.10	%
Return on average tangible equity			2.04	%			5.26	%			1.87	%			5.79	%
Book value per share		$	34.68			$	32.18			$	34.68			$	32.18
Tangible book value per share			16.24				17.30				16.24				17.30

The decrease in our net income during the second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 is primarily the result of increases in the provision for loan losses. The increase in provision for loan losses reflects the effect of the current credit cycle and the overall economic environment. See “Financial Condition — Allowance for Loan Losses” for additional discussion.

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

		Increase (Decrease) in
		Second Quarter 2008 vs 2007												First Six Months of 2008 vs 2007
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
		(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income		$	460,736			$	1,722				(1.44	)%		$	431,755			$	4,756				(1.29	)%
Investment securities
Taxable			(4,008	)			47				0.14				(18,380	)			(340	)			0.06
Tax-exempt			27,696				444				0.20				27,473				902				0.25
Total investment securities			23,688				491				0.22				9,093				562				0.16
Federal funds sold			(8,371	)			(138	)			(3.20	)			(3,868	)			(185	)			(2.48	)
Other investments			4,327				41				0.18				961				(53	)			(0.38	)
Total interest-earning assets		$	480,380				2,116				1.10			$	437,941				5,080				(0.98	)
Interest-bearing liabilities:
Demand deposits		$	143,457				(1,050	)			(1.44	)		$	151,707				(477	)			(0.98	)
Savings deposits			42,627				252				0.57				28,303				379				0.62
Time deposits			115,935				(1,273	)			(0.87	)			137,770				811				(0.44	)
Other borrowings			150,445				246				(1.90	)			88,636				(211	)			(1.66	)
Subordinated debentures			9,787				(85	)			(2.30	)			9,779				(62	)			(1.94	)
Total interest-bearing liabilities		$	462,251				(1,910	)			(1.21	)		$	416,195				440				(0.80	)
Net interest income/net interest spread							4,026				0.11	%							4,640				(0.18	)%
Net yield on earning assets											0.00	%											(0.25	)%
Taxable equivalent adjustment:
Investment securities							151												307
Net interest income						$	3,875											$	4,333

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 June 30,
		2008												2007
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
		(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income (1)		$	2,154,077			$	36,708				6.85	%		$	1,693,341			$	34,986				8.29	%
Investment securities
Taxable			313,426				4,143				5.32				317,434				4,096				5.18
Tax-exempt (2)			41,284				653				6.36				13,588				209				6.16
Total investment securities			354,710				4,796				5.44				331,022				4,305				5.22
Federal funds sold			3,377				18				2.14				11,748				156				5.34
Other investments			49,941				732				5.90				45,614				691				6.08
Total interest-earning assets			2,562,105				42,254				6.63				2,081,725				40,138				7.73
Noninterest-earning assets:
Cash and due from banks			61,729												43,635
Premises and equipment			102,445												95,099
Accrued interest and other assets			289,167												229,238
Allowance for loan losses			(24,104	)											(18,867	)
Total assets		$	2,991,342											$	2,430,830
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	663,103			$	3,780				2.29	%		$	519,646			$	4,830				3.73	%
Savings deposits			86,838				385				1.78				44,211				133				1.21
Time deposits			1,232,648				12,544				4.09				1,116,713				13,817				4.96
Other borrowings			362,038				3,016				3.35				211,593				2,770				5.25
Subordinated debentures			53,613				919				6.89				43,826				1,004				9.19
Total interest-bearing liabilities			2,398,240				20,644				3.46				1,935,989				22,554				4.67
Noninterest-bearing liabilities:
Demand deposits			219,647												179,366
Accrued interest and other liabilities			21,701												36,780
Stockholders’ equity			351,754												278,695
Total liabilities and stockholders’ equity		$	2,991,342											$	2,430,830
Net interest income/net interest spread							21,610				3.17	%							17,584				3.06	%
Net yield on earning assets											3.39	%											3.39	%
Taxable equivalent adjustment:
Investment securities (2)							222												71
Net interest income						$	21,388											$	17,513