UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

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

Commission File number 0-25033

Superior Bancorp

(Exact Name of Registrant as Specified in its Charter)

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

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

(205) 327-1400
(Registrant’s Telephone Number, Including Area Code)

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

Yes þ No o

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

Yes o No o

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

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

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

Yes o No þ

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

Class		Outstanding as of May 7, 2010
Common stock, $.001 par value		12,560,457

 

 

TABLE OF CONTENTS

		Page
PART I   FINANCIAL INFORMATION
Item 1.     Financial Statements			3
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3.     Quantitative and Qualitative Disclosures about Market Risk			61
Item 4.     Controls and Procedures			62
PART II  OTHER INFORMATION
Item 1.     Legal Proceedings			63
Item 1A.  Risk Factors			63
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 3.     Defaults Upon Senior Securities			63
Item 4.     Other Information			63
Item 5.     Exhibits			63
SIGNATURES			64
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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

		March 31,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Cash and due from banks		$	50,529			$	74,020
Interest-bearing deposits in other banks			113,531				23,714
Federal funds sold			2,129				2,036
Total cash and cash equivalents			166,189				99,770
Investment securities available-for-sale			324,823				286,310
Tax lien certificates			15,832				19,292
Mortgage loans held-for-sale			54,367				71,879
Loans, net of unearned income			2,505,465				2,472,697
Allowance for loan losses			(43,190	)			(41,884	)
Net loans			2,462,275				2,430,813
Premises and equipment, net			102,485				104,022
Accrued interest receivable			15,181				15,581
Stock in FHLB			18,212				18,212
Cash surrender value of life insurance			50,616				50,142
Core deposit and other intangible assets			15,720				16,694
Other real estate			46,679				41,618
Other assets			71,978				67,536
Total assets		$	3,344,357			$	3,221,869
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	263,546			$	257,744
Interest-bearing			2,489,832				2,398,829
Total deposits			2,753,378				2,656,573
Advances from FHLB			218,323				218,322
Security repurchase agreements			1,201				841
Notes payable			46,032				45,917
Subordinated debentures, net			84,413				84,170
Accrued expenses and other liabilities			53,857				24,342
Total liabilities			3,157,204				3,030,165
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.001 per share; shares authorized 5,000,000:
Series A, fixed rate cumulative perpetual preferred stock, -0- shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively			—				—
Common stock, par value $.001 per share; shares authorized 200,000,000; shares issued 11,687,406 and 11,673,837, respectively; outstanding 11,687,406 and 11,667,794, respectively			12				12
Surplus — warrants			8,646				8,646
— common			322,189				322,043
Accumulated deficit			(136,630	)			(130,889	)
Accumulated other comprehensive loss			(6,829	)			(7,825	)
Unearned ESOP stock			(219	)			(263	)
Unearned restricted stock			(16	)			(20	)
Total stockholders’ equity			187,153				191,704
Total liabilities and stockholders’ equity		$	3,344,357			$	3,221,869

See Notes to Condensed Consolidated Financial Statements.

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

		Three Months Ended
		March 31,
		2010				2009
Interest income:
Interest and fees on loans		$	36,342			$	34,952
Interest on taxable securities			2,911				4,009
Interest on tax-exempt securities			312				428
Interest on federal funds sold			1				5
Interest and dividends on other investments			372				362
Total interest income			39,938				39,756
Interest expense:
Interest on deposits			11,525				14,893
Interest on other borrowed funds			2,522				2,342
Interest on subordinated debentures			2,386				1,193
Total interest expense			16,433				18,428
Net interest income			23,505				21,328
Provision for loan losses			9,127				3,452
Net interest income after provision for loan losses			14,378				17,876
Noninterest income:
Service charges and fees on deposits			2,216				2,387
Mortgage banking income			2,010				1,691
Investment securities losses
Total other-than-temporary impairment losses (“OTTI”)			(200	)			(10,504	)
Portion of OTTI recognized in other comprehensive loss			2				4,659
Investment securities loss			(198	)			(5,845	)
Change in fair value of derivatives			210				(199	)
Increase in cash surrender value of life insurance			568				515
Other income			1,406				1,216
Total noninterest income (loss)			6,212				(235	)
Noninterest expenses:
Salaries and employee benefits			14,200				12,309
Occupancy, furniture and equipment			4,763				4,416
Amortization of core deposit intangibles			870				985
FDIC assessments			1,380				457
Foreclosure losses			2,577				569
Other expenses			6,019				5,327
Total noninterest expenses			29,809				24,063
Loss before income taxes			(9,219	)			(6,422	)
Income tax benefit			(3,479	)			(2,848	)
Net loss			(5,740	)			(3,574	)
Preferred stock dividends and amortization			—				1,143
Net loss applicable to common stockholders		$	(5,740	)		$	(4,717	)
Weighted average common shares outstanding			11,645				10,053
Weighted average common shares outstanding, assuming dilution			11,645				10,053
Basic net loss per common share		$	(0.49	)		$	(0.47	)
Diluted net loss per common share		$	(0.49	)		$	(0.47	)

See Notes to Condensed Consolidated Financial Statements.

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

		Three Months Ended
		March 31,
		2010				2009
Net cash provided by (used in) operating activities		$	20,226			$	(14,082	)
Investing activities
Proceeds from maturities of investment securities available-for-sale			29,989				15,335
Purchase of investment securities available-for-sale			(37,262	)			(5,290	)
Net increase in loans			(52,596	)			(54,732	)
Redemptions of tax lien certificates			4,236				7,401
Purchase of tax lien certificates			(776	)			(2,419	)
Purchase of premises and equipment			(234	)			(3,365	)
Proceeds from sale of premises and equipment			—				77
Proceeds from sale of foreclosed assets			5,720				1,993
Decrease in stock of FHLB			—				2,074
Net cash used in investing activities			(50,923	)			(38,926	)
Financing activities
Net increase in deposits			96,785				164,809
Decrease in FHLB advances			—				(119,890	)
Proceeds from note payable			—				38,575
Net increase in other borrowed funds			331				—
Cash dividends paid			—				(672	)
Net cash provided by financing activities			97,116				82,822
Net increase in cash and cash equivalents			66,419				29,814
Cash and cash equivalents at beginning of period			99,770				89,448
Cash and cash equivalents at end of period		$	166,189			$	119,262

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, 2009. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included in these condensed consolidated financial statements. Operating results for the three-month period ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The Condensed Consolidated Statement of Financial Condition as of December 31, 2009, presented herein has been derived from the financial statements audited by Grant Thornton LLP, independent registered public accountants, as indicated in their report, dated March 11, 2010, included in our Annual Report on Form 10-K. The Condensed Consolidated Financial Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Reclassifications

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

Note 2 — Recent Accounting Pronouncements

In June, 2009 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 860 - Accounting for Transfers of Financial Assets (“Topic 860”). Topic 860 is a revision to preceding guidance and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-16 — Transfers and Servicing — Accounting for Transfers of Financial Assets (“ASU 2009 -16”). This update formally codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets and provides a revision for Topic 860 to require more information about transfers of financial assets. This statement and update became effective for interim and annual reporting periods beginning January 1, 2010. The adoption of this statement and update did not have a material impact on the Corporation’s consolidated financial statements.

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

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

periods beginning after December 15, 2009. The Corporation adopted these disclosure requirements of ASU 2010-06 as of January 1, 2010. The adoption of this update did not have an impact to the Corporation’s financial position, results of operations or cash flows (See Note 11). The disclosures about purchases, sales, issuances and settlements in the roll forward activity of activity in the Level 3 fair value measurements will become effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

Note 3 — Investment Securities

The amortized cost and estimated fair values of investment securities as of March 31, 2010 are shown below:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
		(Dollars in thousands)
Investment securities available-for-sale
U.S. Agency securities		$	37,105			$	93			$	318			$	36,880
Mortgage-backed securities (“MBS”):
U.S. Agency pass-through			176,551				3,111				209				179,453
U.S. Agency collateralized mortgage obligation (“CMO”)			52,318				174				164				52,328
Private-label CMO			17,973				181				2,958				15,196
Total MBS			246,842				3,466				3,331				246,977
State, county and municipal securities			31,216				331				372				31,175
Corporate obligations:
Corporate debt			4,120				—				120				4,000
Pooled trust preferred securities			8,180				—				4,809				3,371
Single issue trust preferred securities			5,000				—				2,938				2,062
Total corporate obligations			17,300				—				7,867				9,433
Equity securities			563				—				205				358
Total investment securities available-for-sale		$	333,026			$	3,890			$	12,093			$	324,823

Investment securities with an amortized cost of $241.9 million as of March 31, 2010 were pledged to secure public funds and for other purposes as required or permitted by law.

The amortized cost and estimated fair values of investment securities as of March 31, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Securities Available-for-sale
		Amortized				Estimated
		Cost				Fair Value
		(Dollars in thousands)
Due in one year or less		$	280			$	280
Due after one year through five years			7,286				7,212
Due after five years through ten years			41,958				41,780
Due after ten years			36,660				28,574
Mortgage-backed securities			246,842				246,977
		$	333,026			$	324,823

There were no sales of available-for-sale securities during the three-month periods ended March 31, 2010 and 2009. In April 2010, the Corporation sold certain U.S Agency MBS with combined amortized cost and market values of $79.2 million and $80.7 million, respectively. The Corporation reinvested a portion of the proceeds into a like amount of U. S Agency MBS guaranteed by Government National Mortgage Association (“Ginnie Mae”). This repositioning is expected to reduce the duration of the portfolio and improve risk-based capital. In addition, the Corporation will realize a net gain of approximately $1.4 million. A portion of these securities had impairment losses of approximately $0.2 million, which management realized in the first quarter.

The following table summarizes the investment securities with unrealized losses as of March 31, 2010 by aggregated major security type and length of time in a continuous unrealized loss position:

		Less than 12 Months								More than 12 Months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses (1)				Value				Losses (1)				Value				Losses (1)
		(Dollars in thousands)
Temporarily Impaired
U.S. Agency securities		$	22,998			$	318			$	—			$	—			$	22,998			$	318
Mortgage-backed securities:
U.S. Agency pass-through			13,955				201				239				8				14,194				209
U.S. Agency CMO			9,969				164				—				—				9,969				164
Private-label CMO			—				—				11,215				1,337				11,215				1,337
Total MBS			23,924				365				11,454				1,345				35,378				1,710
State, county and municipal securities			8,581				196				2,061				176				10,642				372
Corporate obligations:
Corporate debt			—				—				4,000				120				4,000				120
Single issue trust preferred securities			—				—				2,062				2,938				2,062				2,938
Total corporate obligations			—				—				6,062				3,058				6,062				3,058
Equity securities			—				—				358				205				358				205
Total temporarily impaired securities			55,503				879				19,935				4,784				75,438				5,663
Other-than-temporarily Impaired
Mortgage-backed securities:
Private-label CMO			—				—				3,017				1,621				3,017				1,621
Corporate obligations:
Pooled trust preferred securities			—				—				3,371				4,809				3,371				4,809
Total OTTI securities			—				—				6,388				6,430				6,388				6,430
Total temporarily and other-than-temporarily impaired		$	55,503			$	879			$	26,323			$	11,214			$	81,826			$	12,093

     The following is a summary of the total count by category of investment securities with gross unrealized losses as of March 31, 2010:

		Less than				Greater Than
		12 Months				12 Months				Total
Temporarily Impaired
U.S. Agency securities			4				—				4
Mortgage-backed securities:
U.S. Agency pass-through			3				1				4
U.S. Agency CMO			1				—				1
Private-label CMO			—				7				7
Total MBS			4				8				12
State, county and municipal securities			24				7				31
Corporate obligations:
Corporate debt			—				3				3
Single issue trust preferred securities			—				1				1
Total corporate obligations			—				4				4
Equity securities			—				3				3
Total temporarily impaired securities			32				22				54
Other-than-temporarily Impaired
Mortgage-backed securities:
Private-label CMO			—				1				1
Corporate obligations:
Pooled trust preferred securities			—				4				4
Total OTTI securities			—				5				5
Total temporarily and other-than-temporarily impaired			32				27				59

Other-Than-Temporary Impairment (“OTTI”)

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

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

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

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

determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of March 31, 2010, our securities portfolio consisted of 225 securities, 59 of which were in an unrealized loss position. The majority of unrealized losses are related to our private-label CMOs and trust preferred securities, as discussed below.

Mortgage-backed securities

As of March 31, 2010, approximately 94% of the dollar volume of mortgage-backed securities we held was issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Ginnie Mae, institutions which the government has affirmed its commitment to support, and these securities have nominal unrealized losses. Our mortgage-backed securities portfolio also includes 10 private-label CMOs with a market value of $15.2 million, which had net unrealized losses of approximately $2.8 million as of March 31, 2010. These private-label CMOs were rated AAA at purchase. The following is a summary of the investment grades for these securities (Dollars in thousands):

						Credit Support				Net
Rating						Coverage				Unrealized
Moody/Fitch		Count				Ratios (1)				(Loss) Gain
A1/NR			1				3.04			$	(114	)
Aaa/NR			1				3.76				(1	)
NR/AAA			1				3.04				(154	)
NR/AA			1				2.90				(313	)
Baa2-/AA			1				N/A				(582	)
B2-/NR			1				4.09				(116	)
NR/BBB			1				2.62				(57	)
Caa1-/CCC (2)			1				1.24				(1,621	)
NR/C (2)			2				0.08 - 0.36				181
Total			10							$	(2,777	)

During the first quarter of 2010, the Corporation recognized an immaterial amount of OTTI on one of the private-label CMOs. The assumptions used in the valuation model include expected future default rates, loss severity and prepayments. The model also takes into account the structure of the security, including credit support. Based on these assumptions, the model calculates and projects the timing and amount of interest and principal payments expected for the security. As of March 31, 2010, the fair values of the three private-label CMO securities with OTTI totaling $4.0 million were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. The discount rates used in the valuation model were based on a yield that the market would require for such securities with maturities and risk characteristics similar to the securities being measured (See Note 11 for additional disclosure). The following table provides additional information regarding these CMO valuations as of March 31, 2010 (Dollars in thousands):

						Discount																								Year-to-Date
						Margin																Actual				OTTI
		Price				Basis								Cumulative				Average				60+ Days				Credit
Security		(%)				Points				Yield				Default				Security				Delinquent				Portion				Other				Total
CMO 1			18.45				1710				18	%			58.33	%			50	%			9.30	%			$ —				$ —				$ —
CMO 2			20.30				1608				17	%			49.07	%			45	%			28.33	%			—				—				—
CMO 4			60.34				1387				17	%			27.16	%			45	%			15.82	%			(21	)			—				(21	)
																											$(21	)			$ —				$(21	)

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

As of March 31, 2010, management did not intend to sell these securities, nor was it more likely than not that the Corporation will be required to sell the securities before the entire amortized cost basis is recovered since the current financial condition of the Corporation, including liquidity and interest rate risk, will not require such action.

State, county and municipal securities

The unrealized losses in the municipal securities portfolio are primarily impacted by changes in interest rates. This portfolio segment was not experiencing any credit problems as of March 31, 2010. We believe that all contractual cash flows will be received on this portfolio.

As of March 31, 2010, management did not intend to sell these securities, nor was it more likely than not that we will be required to sell the securities before the entire amortized cost basis is recovered since our current financial condition, including liquidity and interest rate risk, will not require such action.

Trust preferred securities

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

	•		Detailed credit and structural evaluation for each piece of collateral in the CDO;
	•		Collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities);
	•		Terms of the CDO structure, as laid out in the indenture;
	•		The cash flow waterfall (for both interest and principal);
	•		Overcollateralization and interest coverage tests;
	•		Events of default/liquidation;
	•		Mandatory auction call;
	•		Optional redemption;
	•		Hedge agreements; and
	•		Discounted cash flow modeling.

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

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

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

The following tables provide various information and fair value model assumptions regarding our CDOs as of March 31, 2010 (Dollars in thousands):

																						Year-to-Date
																		Other-than-temporary-impairment
		Single/		Class/		Amortized				Fair				Unrealized				Credit
Name		Pooled		Tranche		Cost				Value				Loss				Portion				Other				Total
MM Caps Funding I Ltd		Pooled		MEZ		$	1,940			$	902			$	(1,038	)		$	—			$	—			$	—
MM Community Funding Ltd		Pooled		B			2,028				839				(1,189	)			—				—				—
Preferred Term Securities V		Pooled		MEZ			1,209				403				(806	)			(24	)			—				(24	)
Tpref Funding III Ltd		Pooled		B-2			3,027				1,227				(1,800	)			—				—				—
Emigrant Capital Trust (1)		Single		Sole			5,000				2,062				(2,938	)			—				—				—
						$	13,204			$	5,433			$	(7,771	)		$	(24	)		$	—			$	(24	)

										Original Collateral -				Performing Collateral -
										Percent of Actual				Percent of Expected
		Lowest				Performing				Deferrals and				Deferrals and				Excess
Name		Rating				Banks				Defaults				Defaults				Subordination (2)
MM Caps Funding I Ltd		Ca					22				17	%			18	%			0	%
MM Community Funding Ltd		Ca					8				21	%			39	%			0	%
Preferred Term Securities V		Ba3					1				5	%			44	%			0	%
Tpref Funding III Ltd		Ca					24				24	%			28	%			0	%
Emigrant Capital Trust (1)		NR				NA				NA				NA				NA

Fair Value

Discount Margin

Yield

Name

(Price to Par)

(Basis Points)

(Basis Points)

MM Caps Funding I Ltd

$

43.04

Swap + 1700

9.48% Fixed

MM Community Funding Ltd

16.78

LIBOR + 1500

LIBOR + 310

Preferred Term Securities V

29.34

LIBOR + 1400

LIBOR + 210

Tpref Funding III Ltd

30.67

LIBOR + 1200

LIBOR + 190

Emigrant Capital Trust (1)

41.24

LIBOR + 1123

LIBOR + 200

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

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

As of March 31, 2010, management did not intend to sell these securities, nor is it more likely than not that the Corporation will be required to sell the securities before the entire amortized cost basis is recovered since the current financial condition of the Corporation, including liquidity and interest rate risk, will not require such action.

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

		For the
		Three Months Ended
		March 31, 2010
		(Dollars in thousands)
Balance at beginning of period		$	8,869
Amounts related to credit losses for which an OTTI was not previously recognized			154
Increases in credit loss for which an OTTI was previously recognized when the investor does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost			45
Reductions for securities where there is an intent to sell or requirement to sell			(154	)
Reductions for increases in cash flows expected to be collected			(28	)
Balance at end of period		$	8,886

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

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

As of March 31, 2010, the Corporation had stock in FHLB Atlanta totaling $18.2 million (its par value), which is presented separately on the face of the statement of financial condition. There is no ready market for the stock and no quoted market values, as only member institutions are eligible to be shareholders and all transactions are, by charter, to take place at par with FHLB Atlanta as the only purchaser. Therefore, the Corporation accounts for this investment as a long-term asset and carries it at cost. Management reviews this stock quarterly for impairment and conducts its analysis in accordance with ASC 942-325-35-3.

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

	•		The significance of the decline in net assets of FHLB Atlanta as compared to the capital stock amount for FHLB Atlanta and the length of time this decline has persisted;
	•		Commitments by FHLB Atlanta to make payments required by law or regulation and the level of such payments in relation to the operating performance of FHLB Atlanta;
	•		The impact of legislative and regulatory changes on financial institutions and, accordingly, on the customer base of FHLB Atlanta; and
	•		The liquidity position of FHLB Atlanta.

Management has reviewed publicly available information regarding the financial condition of FHLB Atlanta and concluded that no impairment existed based on its assessment of the ultimate recoverability of the par value of the investment. FHLB Atlanta reported net income of $283.5 million for 2009, a $29.7 million, or 11.7% increase from 2008. During the second quarter of 2009, FHLB Atlanta reinstated its dividend at a rate of 0.84%, 0.41% and 0.27%, for the second, third and fourth quarters of 2009, respectively, resulting in an annualized dividend rate of 0.38%. In addition, a decision was made by the Board of the FHLB Atlanta to retain a larger portion of earnings and significantly higher capital ratios than in previous years. On the basis of a review of the financial condition, cash flow, liquidity and asset quality indicators of the FHLB Atlanta as of the end of 2009, management has concluded that no impairment exists on the Corporation’s investment in the stock of FHLB Atlanta. This is a long-term investment that serves a business purpose of enabling us to enhance the liquidity of the Corporation’s subsidiary, Superior Bank, through access to the lending facilities of FHLB Atlanta. For the foregoing reasons, management believes that FHLB Atlanta’s current position does not indicate that the Corporation’s investment will not be recoverable at par, the cost, and thus the investment was not impaired as of March 31, 2010.

Note 4 — Notes Payable

The following is a summary of notes payable as of March 31, 2010 (Dollars in thousands):

Note payable to bank, borrowed under $7,000,000 line of credit, due September 3, 2010; interest is based on Wall Street prime plus 1.25 but not less than 4.5%, secured by 100% of the outstanding Superior Bank stock		$	7,000
Senior note guaranteed under the TLGP, due March 30, 2012, 2.625% fixed rate due semi-annually			40,000
Less: Discount, FDIC guarantee premium and other issuance costs			(968	)
Total notes payable		$	46,032

The Corporation has agreed to seek OTS approval before incurring any new debt or renewing any existing debt.

Note 5 — Derivative Financial Instruments

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

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

Interest Rate Swaps

The Corporation has entered into interest rate swaps (“CD swaps”) to convert the fixed rate paid on brokered certificates of deposit (“CDs”) to a variable rate based upon three-month London Interbank Offered Rate (“LIBOR”). As of March 31, 2010 and December 31, 2009, the Corporation had $0.7 million in notional amount of CD swaps which had not been designated as hedges. These CD swaps had not been designated as hedges because they represent the portion of the interest rate swaps that are over-hedged due to principal reductions on the brokered CDs.

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

Fair Value Hedges

As of March 31, 2010 and December 31, 2009, the Corporation had $2.8 million in notional amount of CD swaps designated and qualified as fair value hedges. These CD swaps were designated as hedging instruments to hedge the risk of changes in the fair value of the underlying brokered CD due to changes in interest rates. As of March 31, 2010 and December 31, 2009, the amount of CD swaps designated as hedging instruments had a recorded fair value of $0.3 million and $0.2 million, respectively, and a weighted average life of 2.4 years and 2.5 years, respectively. The weighted average fixed rate (receiving rate) was 4.70% and the weighted average variable rate (paying rate) was 0.30% (LIBOR based).

Cash Flow Hedges

The Corporation has entered into interest rate swap agreements designated and qualified as a hedge with notional amounts of $22.0 million to hedge the variability in cash flows on $22.0 million of junior subordinated debentures. Under the terms of the interest rate swaps, which mature September 15, 2012, the Corporation receives a floating rate based on 3-month LIBOR plus 1.33% (1.59% as of March 31, 2010) and pays a weighted average fixed rate of 4.42%. As of March 31, 2010 and December 31, 2009, these interest rate swap agreements are recorded as liabilities in the amount of $0.9 million and $0.8 million, respectively.

Interest Rate Lock Commitments

In the ordinary course of business, the Corporation enters into certain commitments with customers in connection with residential mortgage loan applications. Such commitments are considered derivatives under FASB guidance and are required to be recorded at fair value. The aggregate amount of these mortgage loan origination commitments was $65.4 million and $41.0 million as of March 31, 2010 and December 31, 2009, respectively. The fair value of the origination commitments was $(0.2) million and $(0.4) million as of March 31, 2010 and December 31, 2009, respectively.

The notional amounts and estimated fair values of interest rate derivative contracts outstanding as of March 31, 2010 and December 31, 2009 are presented in the following table. The Corporation obtains dealer quotations to value its interest rate derivative contracts designated as hedges of cash flows, while the fair values of other interest rate derivative contracts are estimated utilizing internal valuation models with observable market data inputs. The estimated fair values of these derivatives are included in the Assets and Liabilities Recorded at Fair Value on a Recurring Basis table of Note 11 to the condensed consolidated financial statements.

		March 31, 2010								December 31, 2009
						Estimated								Estimated
		Notional				Fair				Notional				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
Interest rate derivatives designated as hedges of fair value:
Interest rate swap on brokered certificates of deposit		$	2,777			$	260			$	2,777			$	228
Interest rate derivatives designated as hedges of cash flows:
Interest rate swaps on subordinated debenture			22,000				(924	)			22,000				(766	)
Non-hedging interest rate derivatives:
Brokered certificates of deposit interest rate swap			723				68				723				59
Mortgage loan held for sale interest rate lock commitment			65,365				(177	)			41,038				(370	)
Commercial loan interest rate swap			3,740				347				3,766				323
Commercial loan interest rate swap			3,740				(347	)			3,766				(323	)

The weighted-average rates paid and received for interest rate swaps outstanding as of March 31, 2010 were as follows:

		Weighted-Average
		Interest				Interest
		Rate				Rate
		Paid				Received
Interest rate swaps:
Fair value hedge on brokered certificates of deposit interest rate swap			0.30	%			4.70	%
Cash flow hedge interest rate swaps on subordinated debentures			4.42				1.59
Non-hedging interest rate swap on commercial loan			6.73				6.73

Gains, Losses and Derivative Cash Flows

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

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

		For the
		Three Months Ended
		March 31,
		2010				2009
		(Dollars in thousands)
Interest rate swap on brokered certificates of deposit:
Amount of gain included in interest expense on deposits		$	30			$	23
Amount of gain (loss) included in other noninterest income			1				(430	)

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

		For the
		Three Months Ended
		March 31,
		2010				2009
		(Dollars in thousands)
Interest rate swap on subordinated debenture:
Net loss included in interest expense on subordinated debt		$	(156	)		$	(55	)
Amount of loss recognized in other comprehensive income			(99	)			(29	)

No ineffectiveness related to interest rate derivatives designated as hedges of cash flows was recognized in the condensed consolidated statements of operations during the reported periods. The accumulated net after-tax loss related to effective cash flow hedge included in accumulated other comprehensive income was $0.6 million as of March 31, 2010 and 2009.

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

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

		For the
		Three Months Ended
		March 31,
		2010				2009
		(Dollars in thousands)
Non-hedging interest rate derivatives:
Brokered certificates of deposit interest rate swap		$	16			$	(45	)
Mortgage loan held for sale interest rate lock commitment			193				276
Commercial loan interest rate swap			—				—

Counterparty Credit Risk

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

The aggregate cash collateral posted with the counterparties as collateral by the Corporation related to derivative contracts was approximately $3.2 million as of March 31, 2010.

Note 6 — Segment Reporting

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

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

										Total								Superior
		Alabama				Florida				Alabama and				Administrative				Bancorp
		Region				Region				Florida				and Other				Combined
		(Dollars in thousands)
Three Months Ended March 31, 2010
Net interest income		$	10,148			$	10,727			$	20,875			$	2,630			$	23,505
Provision for loan losses			973				7,218				8,191				936				9,127
Noninterest income			1,964				452				2,416				3,796				6,212
Noninterest expense			8,741				6,956				15,697				14,112				29,809
Operating profit (loss)		$	2,398			$	(2,995	)		$	(597	)		$	(8,622	)			(9,219	)
Income tax benefit																			(3,479	)
Net loss																		$	(5,740	)
Total assets		$	1,056,322			$	1,283,070			$	2,339,392			$	1,004,965			$	3,344,357
Three Months Ended March 31, 2009
Net interest income		$	8,060			$	9,071			$	17,131			$	4,197			$	21,328
Provision for loan losses			1,612				1,478				3,090				362				3,452
Noninterest income			2,071				515				2,586				(2,821	)			(235	)
Noninterest expense			8,312				5,736				14,048				10,015				24,063
Operating profit (loss)		$	207			$	2,372			$	2,579			$	(9,001	)		$	(6,422	)
Income tax benefit																			(2,848	)
Net loss																		$	(3,574	)
Total assets		$	1,096,855			$	1,147,653			$	2,244,508			$	884,961			$	3,129,469

Note 7 —Net Loss per Common Share

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

		For the
		Three Months Ended
		March 31,
		2010				2009
Numerator:
Net loss		$	(5,740	)		$	(3,574	)
Less preferred stock dividends and amortization			—				1,143
For basic and diluted, net loss applicable to common stockholders		$	(5,740	)		$	(4,717	)
Denominator:
For basic, weighted average common shares outstanding			11,645				10,053
Effect of dilutive stock options			—				—
Average common shares outstanding, assuming dilution			11,645				10,053
Basic net loss per common share		$	(0.49	)		$	(0.47	)
Diluted net loss per common share		$	(0.49	)		$	(0.47	)

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

Diluted net loss per common share takes into consideration the pro forma dilution assuming certain warrants, unvested restricted stock and unexercised stock option awards were converted or exercised into common shares. Common stock equivalents of 463,871 and 86,663 were not included in computing diluted net loss per share for the three-month periods ended March 31, 2010 and 2009, respectively, as they were considered anti-dilutive.

Note 8 — Comprehensive Loss

Total comprehensive loss was $4.7 million and $5.2 million for the three-month periods ended March 31, 2010 and 2009, respectively. Total comprehensive loss consists of net loss and other comprehensive loss. The components of other comprehensive loss for the three-month periods ending March 31, 2010 and 2009 are as follows:

		Pre-Tax				Income Tax				Net of
		Amount				Expense				Income Tax
		(Dollars in thousands)
Three Months Ended March 31, 2010
Unrealized gain on available-for-sale securities		$	1,540			$	(570	)		$	970
Reclassification adjustment for losses realized in net loss			198				(73	)			125
Unrealized loss on derivatives			(158	)			59				(99	)
Net unrealized gain		$	1,580			$	(584	)		$	996
Three Months Ended March 31, 2009
Unrealized loss on available-for-sale securities		$	(8,394	)		$	3,105			$	(5,289	)
Reclassification adjustment for losses realized in net loss			5,845				(2,163	)			3,682
Unrealized loss on derivatives			(29	)			11				(18	)
Net unrealized loss		$	(2,578	)		$	953			$	(1,625	)

Note 9 — Income Taxes

The Corporation recognized an income tax benefit of $3.5 million for the first quarter of 2010 compared to $2.8 million for the first quarter of 2009. The difference between the effective tax rates in 2010 and 2009 and the blended federal statutory rate of 34% and state tax rates between 5% and 6% was primarily due to certain tax-exempt income from investments and income reported from insurance policies.

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

The recognition of deferred tax assets (“DTA”) is based upon management’s judgment that realization of the asset is more likely than not. Management’s judgment is based on estimates concerning various future events and uncertainties, including future reversals of existing taxable temporary differences, the timing and amount of future income earned by our subsidiaries and the implementation of various tax planning strategies to maximize realization of the DTA. Although realization is not assured, management believes that the realization of the net DTA is more likely than not. A complete discussion of management’s assessment of the realizability of the Corporation’s DTA is included in the 2009 Annual Report on Form 10-K under the heading “Critical Accounting Estimates,” of Management’s Discussion and Analysis and in Note 14 to the 2009 consolidated financial statements. There have been no significant changes to the Corporation’s DTA during the first quarter of 2010, or management’s assessment or conclusions regarding its realizability that need to be addressed in this Quarterly Report on Form 10-Q.

Note 10 — Stock Incentive Plan

In April 2010, the Corporation’s stockholders approved the Superior Bancorp 2010 Incentive Compensation Plan (the “2010 Plan”) which succeeded the 2008 Plan. The purpose of the 2010 Plan is to provide additional incentive for the Corporation’s directors and key employees to further the growth, development and financial success of the Corporation and its subsidiaries by personally benefiting through the ownership of the Corporation’s common stock, or other rights which recognize such growth, development and financial success. The Corporation’s Board also believes the 2010 Plan will enable it to obtain and retain the services of directors and employees who are considered essential to its long-range success by offering them an opportunity to own stock and other rights that reflect the Corporation’s financial success. The maximum aggregate number of shares of common stock that may be issued or transferred pursuant to awards under the 2010 Plan is 1,500,000 shares plus an annual addition of shares on January 1 of each year equal to two percent of the number of shares of the Corporation’s outstanding common stock at that time.

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

The fair value of each option award is estimated on the date of grant based upon the Black-Scholes pricing model that uses the assumptions noted in the following table. The risk-free interest rate is based on the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term. Expected volatility has been estimated based on historical data. The expected term has been estimated based on the five-year vesting date and change of control provisions. The Corporation used the following weighted-average assumptions for the three-month periods ended March 31:

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

A summary of stock option activity as of March 31, 2010 and changes during the three months ended is shown below (Dollars in thousands):

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
For the Three Months Ended March 31, 2010		Number				Price				Term				Value
Under option, beginning of period			925,647			$	26.85
Granted			5,000				3.44
Exercised			—				—
Forfeited			(10,744	)			5.82
Under option, end of period			919,903			$	26.97				5.64			$	37
Exercisable at end of period			625,153			$	31.76				2.92			$	—
Weighted-average fair value per option of options granted during the period		$	3.44

As of March 31, 2010, there was $0.3 million of total unrecognized compensation expense related to the unvested awards. This expense will be recognized over approximately the next 30 months unless the shares vest earlier based on achievement of benchmark trading price levels. During the three months ended March 31, 2010 and 2009, the Corporation recognized approximately $0.1 million and $0.1 million, respectively, in compensation expense related to options granted.

Note 11 — Fair Value Measurements

In accordance with FASB guidance, the Corporation measures fair value at the price that would be received by selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Corporation prioritizes the assumptions that market participants would use in pricing the asset or liability (“inputs”) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs 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 Corporation’s assets and liabilities measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset as of March 31, 2010:

						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable
		Fair				Identical Assets				Observable Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
March 31, 2010		(Dollars in thousands)
Investment securities available-for-sale
U.S. Agency securities		$	36,880			$	—			$	36,880			$	—
Mortgage-backed securities (“MBS”):
U.S. Agency MBS pass-through			179,453				—				179,453				—
U.S. Agency CMO			52,328				—				52,328				—
Private-label CMO			15,196				—				8,302				6,894
Total MBS			246,977				—				240,083				6,894
State, county and municipal securities			31,175				—				29,517				1,658
Corporate obligations:
Corporate debt			4,000				—				4,000				—
Pooled trust preferred securities			3,371				—				—				3,371
Single issue trust preferred securities			2,062				—				—				2,062
Total corporate obligations			9,433				—				4,000				5,433
Equity securities			358				358				—				—
Total investment securities available-for-sale			324,823				358				310,480				13,985
Derivative assets			675				—				675				—
Total recurring basis measured assets		$	325,498			$	358			$	311,155			$	13,985
Derivative liabilities		$	1,448			$	—			$	1,448			$	—
Total recurring basis measured liabilities		$	1,448			$	—			$	1,448			$	—