General

The following is a narrative discussion and analysis of significant changes in our results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and selected financial data included elsewhere in this document.

Overview

Our principal subsidiary is Superior Bank (the "Bank"), which has since November 1, 2005, been chartered as a federal savings bank. Prior to that date, Superior Bank operated as an Alabama state bank. The Bank is headquartered in Birmingham, Alabama and operates 77 banking offices in Florida and Alabama. The Bank's consumer finance subsidiaries operate an additional 24 consumer finance offices in North Alabama. We had assets of approximately $3.053 billion, loans of approximately $2.315 billion, deposits of approximately $2.343 billion and stockholders' equity of approximately $251 million at December 31, 2008. Our primary source of 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.

The U.S. economy is in a severe recession. Our focus has been on maintenance of credit quality under challenging conditions, positioning our company to take advantage of the disruption in the banking industry, and serving our customer base well so that we can deliver long-term shareholder value as the national economy recovers. However, the effects of this recession have produced declining valuations within our investment securities and loan portfolios. In addition, our goodwill impairment testing resulted in a $160 million non-cash charge during the fourth quarter of 2008.

As a result of the above, we reported a net loss of $163.2 million, or $16.31 per common share in 2008. Included in this net loss is the $160 million goodwill impairment charge and a $6.3 million non-cash after-tax other-than-temporary impairment charge on Fannie Mae and Freddie Mac preferred stock and certain mortgage-backed securities. Our earnings were also negatively impacted by a significantly higher provision for loan losses and lower net interest margin, offset somewhat by an increase in other noninterest income, such as service charges on customer deposits and mortgage banking income.

Our operating earnings, excluding goodwill charges and other-than-temporary impairment ("OTTI") charges, were $2.2 million, or $0.22 per share. We believe that this data represents our current earning capacity without giving effect to non-cash charges, and we are providing this data because we believe that it may be helpful to shareholders in analyzing our performance. In deriving this estimate of current earnings capacity, we have excluded goodwill charges of $160 million, or $15.90 per share, and OTTI charges of $6.3 million, or $0.63 per share. All amounts are presented on an after-tax basis. Goodwill impairment charges and OTTI are included in financial results presented in accordance with generally accepted accounting principles ("GAAP"). We believe the exclusion of goodwill impairment charges and OTTI in expressing operating earnings and "operating earnings per common share" provides a meaningful basis for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing our operating results and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business, because management does not consider goodwill impairment charges and OTTI to be relevant to ongoing operating results. Management and the Board of Directors utilize these non-GAAP financial measure to analyze our performance and compare our operating results with other institutions.

Subsequent to the year ended December 31, 2008, and as part of the Presidential administration's response to the economic recession and conditions in the banking industry, several initiatives have been announced that will affect our operations. They include a special assessment to restore the FDIC insurance fund (which may be part of a

series of special assessments, or alternatively, of higher premiums) and a federal program to subsidize mortgage restructurings that involve concessions from lenders. Both initiatives will negatively affect our results, but due to the preliminary nature of both, it is not possible to quantify the impact of either. Furthermore, it is probable that similar initiatives may be announced in the future.

During 2008, our net interest income increased by 10.8%, primarily due to an increase in the volume of average interest-earning assets. The increase in our interest-earning assets resulted primarily from an overall increase in the average volume of our loan portfolio. Our average loans during 2008 increased $334 million, or 18%, over 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 seasoned residential mortgage loans with a balance of approximately $52 million during the second quarter of 2008.

Service charges and fees were up 16.8% in 2008 from 2007 due to an increase in our customer base and adjustments to our fee structures consistent with market rates. Mortgage banking income increased 2.9% in 2008 due to an increase in the volume of mortgage loan originations throughout the year.

Total noninterest expenses, excluding goodwill impairment, increased from 2007 to 2008 primarily due to our branch expansion, which resulted in higher personnel costs and occupancy expenses. All other noninterest expenses remained relatively stable in 2008 compared to 2007.

Our nonperforming assets increased during 2008 as a result of weaknesses in the residential construction and mortgage loan portfolios. We have increased our allocation of allowance for loan losses related to these sectors of our loan portfolio and have taken a proactive approach to monitor these loans. We will continue to maintain an active role in the management of these credits to minimize loss. As with the first year of any credit cycle, nonperforming loans, past due loans and charged-off loans will increase. The level of deterioration is dependent on the quality of loan underwriting and risk pricing used during the loan's origination several years ago. If underwriting and pricing are done properly, the effect of any deterioration in credit will be reduced. The Bank is fortunate to have senior bankers who have experienced several previous challenging credit cycles.

Non-performing assets, including non-accrual loans, loans past due 90 days and accruing, and foreclosed assets (collectively "NPAs"), were relatively stable for the fourth quarter, declining to $85.7 million, or 3.67% of loans and other real estate owned at December 31, 2008, from $86.3 million, or 3.85%, at September 30, 2008 and increasing from $29.7 million, or 1.47%, at December 31, 2007, which is in line with management's expectations. Of these NPAs, $40.6 million are in the Alabama Region and $45.1 million are in the Florida Region.

Loans in the 30-89 days past due (DPD) category increased modestly to 1.05% of total loans at December 31, 2008 from 0.86% of total loans at September 30, 2008. Past-due loans that were 90 DPD and still accruing decreased during the fourth quarter, moving to 0.35% at December 31, 2008 from 0.37% as of September 30, 2008. Loans in this category are included in NPAs.

As 2008 progressed, we increased our provision for loan losses and our allowance for loan losses as it became clear that the economy was showing signs of deterioration. The provision for loan losses was $13.1 million for the year ended December 31, 2008, an increase of $8.6 million, or 188.7%, from $4.5 million the year ended December 31, 2007. In 2008, we had net charged-off loans totaling $7.1 million, compared to net charged-off loans of $4.3 million in the year ended December 31, 2007. The annualized ratio of net charged-off loans to average loans was 0.33% for the year ended December 31, 2008, compared to 0.24% for the year ended December 31, 2007. The allowance for loan losses totaled $28.9 million, or 1.25% of loans, net of unearned income, at December 31, 2008, compared to $22.9 million, or 1.13% of loans, net of unearned income, at December 31, 2007. 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. (See "Critical Accounting Estimates" below.)

As of December 31, 2008 the Bank was considered "well capitalized" with a 12.15% total risk-based capital ratio. We took the opportunity to raise additional capital through a $10 million privately-placed debt offering in late September, 2008. In addition, we received $69 million of additional capital from the U.S. Treasury Troubled Asset Relief Program ("TARP") through the sale of preferred stock and warrants in December, 2008. We believe that the

additional capital thus raised will allow us to continue substantial customer and balance sheet growth for the foreseeable future.

Critical Accounting Estimates

In preparing financial information, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods shown. The accounting principles we follow and the methods of applying these principles conform to accounting principles generally accepted in the United States and to general banking practices. Our most significant estimates and assumptions are related primarily to our allowance for loan losses, income taxes, fair value measurements and goodwill impairment and are summarized in the following discussion and in the notes to the consolidated financial statements.

Allowance for Loan Losses

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 section "Financial Condition - Allowance for Loan Losses", 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 regulators, 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.

Income Taxes

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

Our determination of the realization of deferred tax assets (net of valuation allowances) is based upon management's judgment of various future events and uncertainties, including future reversals of existing taxable temporary differences, the timing and amount of future income earned by our subsidiaries and the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A portion of the amount of the deferred tax asset that can be realized in any year is subject to certain statutory federal income tax limitations. We believe that our subsidiaries will be able to generate sufficient operating earnings to realize the deferred tax benefits. We evaluate quarterly the realizability of the deferred tax assets and, if necessary, adjust any valuation allowance accordingly.

In July 2006, the Financial Accounting Standards Board ("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 ("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 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. We adopted FIN 48 on January 1, 2007 (see Note 14 to the Consolidated Financial Statements).

Intangible and Long-lived Assets

Intangible assets include primarily goodwill, which is the excess of cost over the fair value of net assets of acquired businesses (see Note 2 to the Consolidated Financial Statements), and core deposit intangible assets, which

are amounts recorded related to the value of acquired non-maturity deposits. Core deposit intangibles are amortized over their expected useful lives.

Long-lived assets, including purchased intangible assets subject to amortization, such as our core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

For purposes of testing goodwill for impairment, management uses both the income and market approaches to value its reporting units. The income approach quantifies the present value of future economic benefits by the "capitalizing of benefits" method or the "discounted cash flow" ("DCF") method. In estimating the fair value of our reporting units under the income approach model, management used the DCF method, which relies on a forecast of growth and earnings over a period of time and includes a measure of cash flow based on projected earnings and projected dividends, or dividend-paying capacity, in addition to an estimate of a residual value. The projected future cash flows are discounted using a discount rate determined under a build-up approach using the risk-free rate of return, adjusted equity beta, equity risk premium, and a company-specific risk factor. The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management.

Management uses the "guideline company transaction" method to apply the market approach. Management selected a group of comparable transactions that it believes would likely reference comparable transactions pricing when making a decision to purchase the applicable reporting unit. An estimate of value can be determined by comparing the financial condition of the subject reporting unit against the financial characteristics and pricing information of the comparable companies.

A critical assumption used in estimating the fair value of our reporting units is the discount rate which can change as the business environment changes. A decrease in the discount rate by one percentage point results in a $32 million increase in the estimated fair value of our reporting units. An increase of one percentage point results in a decrease of $24 million in the fair value of all our reporting units. See "Note 1 - Summary of Significant Accounting Policies
- Intangible Assets" to our consolidated financial statements for additional information.

Management tested goodwill for impairment during the fourth quarter of 2008 and recorded a $160 million impairment charge for that quarter representing all of the goodwill intangible asset. The primary cause of the goodwill impairment within our reporting units was the significant decline in the estimated fair value of the units as a result of increases in nonperforming loans, overall decline in our market capitalization and compression of the net interest margin, all resulting from the economic crisis and its effect on financial institutions which occured during the fourth quarter.

Fair Value Measurements

In September 2006, the FASB issued SFAS 157, 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 our financial position or results of operations. 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 through troubled loans. We do not expect that the adoption of SFAS 157 for these nonfinancial assets and liabilities will have a material impact on our financial position or results of operations.

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

At December 31, 2008 we had $66.3 million, or 15.8% of total assets valued at fair value that are considered Level 3 valuations using unobservable inputs. As shown below, available-for-sale securities with a carrying value of $26 million at January 1, 2008 were transferred during the third quarter of 2008 from the Level 2 classification into the Level 3 assets category measured at fair value on a recurring basis. These securities consist primarily of bank and pooled trust preferred securities and have a fair value of $18.5 million at December 31, 2008. As the market for these securities became less active and pricing less reliable, management determined that these securities should be transferred to the Level 3 category as management's estimates and projections had to rely more on it's interpretations of available market data. The remaining Level 3 assets totaling $47.8 are loans which have been impaired under SFAS 114 and are valued on a nonrecurring basis based on the underlying collateral.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents our 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
                                              December 31,          Identical Assets         Observable Inputs          Inputs
                                                  2008                 (Level 1)                 (Level 2)             (Level 3)

Available for sale securities                $       347,142      $                164      $           328,481      $      18,497
Derivative assets                                      1,427                         -                    1,427                  -

Total recurring basis measured assets        $       348,569      $                164      $           329,908      $      18,497

Derivative liabilities                       $         1,534      $                  -      $             1,534      $           -

Total recurring basis measured liabilities   $         1,534      $                  -      $             1,534      $           -

Valuation Techniques - Recurring Basis

Securities Available for Sale. When quoted prices are available in an active market, securities are classified as Level 1. These securities include investments in Fannie Mae and Freddie Mac preferred stock. For securities reported at fair value utilizing Level 2 inputs, we obtain fair value measurements from an independent pricing service. These fair value measurements consider observable market data that may include benchmark yield curves, reported trades, broker/dealer quotes, issuer spreads and credit information, among other inputs. In certain cases where there is limited activity, securities are classified as Level 3 within the valuation hierarchy. These securities include primarily bank and pooled trust preferred securities.

Derivative financial instruments. Derivative financial instruments are measured at fair value based on modeling that utilizes observable market inputs for various interest rates published by 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.

Changes in Level 3 fair value measurements. The table below includes a roll-forward of the consolidated statement of financial condition amounts for the year ended December 31, 2008, for changes in fair value of financial instruments within Level 3 of the valuation hierarchy. Level 3 financial instruments typically include unobservable components, but may also include some observable components that may be validated to external sources. The gains or (losses) in the following table may include changes to fair value due in part to observable factors that may be part of the valuation methodology.

           Level 3 Assets Measured at Fair Value on a Recurring Basis


                                                                          Available for
                                                                         Sale Securities
                                                                          (In thousands)

Balance at January 1, 2008 (date of adoption)                            $              -
Transfer into Level 3 during third quarter 2008                                    25,956
Total net losses for the year-to-date included in other comprehensive
loss                                                                               (7,459 )

Balance at December 31, 2008                                             $         18,497

Net realized losses included in net loss for the year-to-date relating
to Level 3 assets held at December 31, 2008                              $              -

Assets Recorded at Fair Value on a Nonrecurring Basis

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


                                                          Quoted Prices
                                                               in
                                     Fair Value        Active Markets for        Significant Other        Significant
                                         at                 Identical               Observable           Unobservable
                                    December 31,             Assets                   Inputs                Inputs
                                        2008                (Level 1)                (Level 2)             (Level 3)

Mortgage loans held for sale        $      22,040      $                 -      $            22,040      $           -
Impaired loans, net of specific
allowance                                  47,774                        -                        -             47,774

Total nonrecurring basis measured
assets                              $      69,814      $                 -      $            22,040      $      47,774

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.

. . .