UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549









**FORM 10-Q**










[ X ]
Quarterly Report Under Section 13 or 15(d)Of the Securities Exchange Act of 1934 forThe Quarterly Period Ended September 30, 2004or[    ]
Transition Report Pursuant to Section 13 or 15(d)Of the Securities Exchange Act of 1934For the Transition Period from ______ to ______





Commission Fi le Number: **000-50904**




**SNB BANCSHARES, INC.**(Exact name of registrant as specified in charter)






**TEXAS**

**76-0472829**(State or other jurisdiction
of incorporation)

(IRS Employer
Identification No.)


**14060 Southwest Freeway****Sugar Land, Texas 77478**(Address of Principal executive office)**(281) 269-7200**(Registrant's telephone number)








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
X

No








Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).




YES


No


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




**Common and Class B Stock Outstanding: 12,431,853 as of November 1, 2004**








**Table of Contents**




****SNB Bancshares, Inc. and Subsidiaries**
**Form 10-Q******Table of Contents******


**Part I.**
**Financial Information**Item 1
Interim Consolidated Financial StatementsConsolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2004 and 2003 (unaudited)Consolidated Statements of Shareholders' Equity for the Year Ended December 31, 2003 and for the Nine Months Ended September 30, 2004 (unaudited)Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (unaudited)Notes to Interim Consolidated Financial Statements (unaudited)Item 2
Management's Discussion and Analysis of Financial Condition and Results of OperationsItem 3
Quantitative and Qualitative Disclosures About Market RiskItem 4
Controls and Procedures









**Part II.**
**Other Information**Item 1
Legal ProceedingsItem 2
Unregistered Sales of Equity Securities and Use of ProceedsItem 3
Defaults upon Senior SecuritiesItem 4
Submission of Matters to a Vote of Security HoldersItem 5
Other InformationItem 6
Exhibits




****


****





**Table of Contents**


**PART I - FINANCIAL INFORMATION**


******Item 1.  Interim Consolidated Financial Statements******  **SNB BANCSHARES, INC. AND SUBSIDIARIES******CONSOLIDATED BALANCE SHEETS******(Unaudited)**September 30,

December 31,2004

2003(In thousands, except share data)**ASSETS**Cash and cash equivalents

$
15,871

$
27,928Federal funds sold


1,735


3,195Available for sale securities, at fair value (amortized cost of $497,217 and $415,269 at September 30, 2004and December 31, 2003, respectively)


492,370


412,620Held to maturity securities, at amortized cost (fair value of $11,319 at September 30, 2004)


11,214


-Loans


553,185


424,479Less allowance for loan losses


(7,473
)

(5,650
)Net Loans


545,712


418,829Premises and equipment - Net


13,837


12,691Accrued interest receivable


4,905


3,500Other assets


8,892


5,078TOTAL

$
1,094,536

$
883,841**LIABILITIES AND SHAREHOLDERS' EQUITY**LIABILITIES:Deposits:Noninterest-bearing

$
103,007

$
101,749Interest-bearing


712,190


632,222Total Deposits


815,197


733,971Other borrowings


151,500


77,800Accrued interest payable


2,250


2,089Junior subordinated debentures


38,250


38,250Other liabilities


1,286


964Total liabilities


1,008,483


853,074SHAREHOLDERS' EQUITYPreferred stock, $0.01 par value - 20,000,000 shares authorized, no shares issued or outstanding


-


-Common stock, $0.01 par value - 50,000,000 shares authorized, 9,750,312 and 3,735,523 shares issuedand oustanding at September 30, 2004 and December 31, 2003, respectively


97


37Class B stock, $0.01 par value - 3,216,781 shares authorized, 2,680,041 and 3,258,466 shares issuedand outstanding at September 30, 2004 and December 31, 2003, respectively


27


33Capital surplus


66,162


13,974Accumulated other comprehensive income (loss) - net unrealized gain (loss) on available-for-salesecurities - net of taxes


(3,198
)

(1,748
)Retained earnings


22,965


18,471Total shareholders' equity


86,053


30,767TOTAL

$
1,094,536

$
883,841See notes to interim consolidated financial statements.
 
 ****Table of Contents****
  **SNB BANCSHARES, INC. AND SUBSIDIARIES******CONSOLIDATED STATEMENTS OF EARNINGS******(Unaudited)**Three Months Ended

Nine Months EndedSeptember 30,

September 30,2004

2003

2004

2003(In thousands, except per share data)INTEREST INCOME:Loans-including fees

$
8,031

$
6,224

$
21,617

$
17,829Securities:Taxable


4,184


2,338


11,535


5,927Nontaxable


50


24


91


74Federal funds sold and earning deposits


14


3


135


31Total interest income


12,279


8,589


33,378


23,861INTEREST EXPENSE:Demand deposits


1,215


606


3,190


2,038Certificates and other time deposits


2,179


1,788


6,708


4,594Other borrowings


1,319


742


2,812


1,779Total interest expense


4,713


3,136


12,710


8,411NET INTEREST INCOME


7,566


5,453


20,668


15,450PROVISION FOR LOAN LOSSES


625


660


2,275


2,101NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES


6,941


4,793


18,393


13,349NONINTEREST INCOME:Service charges on deposit accounts


193


210


623


674Gain on sale of securities


27


0


27


0Loss on sale of securities


170


(1
)

673


880Gain (loss) on sale of securities-net


197


(1
)

700


880Other


153


147


453


423Total noninterest income


543


356


1,776


1,977NONINTEREST EXPENSE:Salaries and employee benefits


2,944


2,347


8,386


6,839Net occupancy expense


483


407


1,350


1,215Data processing


284


284


841


871Legal and professional fees


158


139


448


419FDIC deposit insurance premium


31


20


84


61Other


831


648


2,253


1,954Total noninterest expense


4,731


3,845


13,362


11,359EARNINGS BEFORE INCOME TAXES


2,753


1,304


6,807


3,967PROVISION FOR INCOME TAXES


935


443


2,313


1,349NET EARNINGS

$
1,818

$
861

$
4,494

$
2,618EARNINGS PER SHARE:Basic

$
0.20

$
0.12

$
0.58

$
0.37Diluted


0.19


0.12


0.57


0.37See notes to interim consolidated financial statements.
 ******Table of Contents******  **SNB BANCSHARES, INC. AND SUBSIDIARIES******CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY******(Unaudited)**Common Stock

Class B Stock

Capital Surplus

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Total Shareholders' Equity(In thousands, except per share data)BALANCE -- December 31, 2002

$
37

$
33

$
13,974

$
1,331

$
15,054

$
30,429Change in unrealized gain (loss) on available-for-sale securities--net











(2,499
)




(2,499
)Less reclassification adjustment for gains included in net earnings--net of tax











(580
)




(580
)Net Earnings














3,417


3,417Total comprehensive income

















338Conversion of 47,645 shares of Class B stock into 47,645 sharesof common stock


-


-











-BALANCE -- December 31, 2003

$
37

$
33

$
13,974

$
(1,748
)
$
18,471

$
30,767Change in unrealized gain (loss) on available-for-sale securities--net











(988
)




(988
)Less reclassification adjustment for gains included in net earnings--net of tax











(462
)




(462
)Net Earnings














4,494


4,494Total comprehensive income

















3,044Conversion of 578,480 shares of Class B stock into 578,480shares of common stock


6


(6
)










-Issuance of 5,436,364 shares of common stock


54





52,188








52,242BALANCE -- September 30, 2004

$
97

$
27

$
66,162

$
(3,198
)
$
22,965

$
86,053See notes to interim consolidated financial statements.
 ********Table of Contents********   **SNB BANCSHARES, INC. AND SUBSIDIARIES******CONSOLIDATED STATEMENTS OF CASH FLOWS******(Unaudited)**Nine MonthsEnded September 30,2004

2003(In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net Earnings

$
4,494

$
2,618Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization


949


1,074Provision for loan losses


2,275


2,101Net amortization and accretion of premiums and discounts on investment securities


670


1,360Gain on sales of securities


(700
)

(886
)Increase in accrued interest receivable


(1,405
)

(1,405
)Decrease (Increase) in other assets


25


(1,676
)Increase in accrued interest payable


161


220Increase (Decrease) in other liabilities


322


(603
)Net cash provided by operating activities


6,791


2,803CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of held-to-maturity securities


(11,214
)

-Purchases of available-for-sale securities


(293,844
)

(519,320
)Sales of available-for-sale securities


180,250


271,381Maturities, calls and principal repayments of available-for-sale securities


31,676


51,278Net increase in loans


(132,122
)

(66,155
)Net change in federal funds sold


1,460


44Purchase of bank premises and equipment


(2,222
)

(2,965
)Net cash used in investing activities


(226,016
)

(265,737
)CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits


81,226


148,049Net increase in other borrowings


73,700


68,402Issuance of junior subordinated debt


-


30,930Proceeds from sale of common stock


52,242


-Net cash provided by financing activities


207,168


247,381DECREASE IN CASH AND CASH EQUIVALENTS


(12,057
)

(15,553
)CASH AND EQUIVALENTS -- Beginning of year


27,928


44,190CASH AND EQUIVALENTS -- End of period

$
15,871

$
28,637SUPPLEMENTAL DISCLOSURES:Interest paid

$
13,201

$
11,139Income taxes paid


2,976


2,399Other real estate owned acquired through foreclosure


2,964


736See notes to interim consolidated financial statements.  **********Table of Contents**********  **SNB BANCSHARES, INC. AND SUBSIDIARIES**
 ****Notes to Interim Consolidated Financial Statements**** **September 30, 2004**
 **(Unaudited)**
  **(1) Summary of Significant Accounting Policies**
 
 Basis of Presentation
 The consolidated financial statements include the accounts of SNB Bancshares, Inc. ("Bancshares") and its wholly-owned subsidiary, SNB Corporation (collectively the "Company"). SNB Corporations wholly-owned subsidiaries are Southern National Bank of Texas (the "Bank") and Commerce Green Realty. All significant intercompany balances and transactions have been eliminated in consolidation.
 
 The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States of America. All adjustments, which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements, have been included. These financial statements and the notes thereto should be read in conjunction with the Companys audited financial statements as of and for the year ended December 31, 2003. The results of operations for the period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
 
 Stock Based Compensation
 The Company accounts for its stock-based employee compensation plan using the intrinsic value-based method of accounting, as permitted, and discloses pro forma information as if accounted for using the fair value-based method as prescribed by accounting principles and has been determined as if the Company accounted for its employee stock option plan under the fair value method. No stock-based compensation expense is reflected in net income, because all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.
 
 If compensation cost for the Companys stock-based compensation plan had been determined on the fair value method at the grant dates for awards, there would have been no material impact on the Companys reported net income or earnings per share. Pro forma information regarding net income and earnings per share is required under accounting principles and has been determined as if the Company accounted for its employee stock option plan under the fair value method. The fair value of options was estimated using the Black-Scholes option pricing model. Because employee stock options have differing characteristics and changes in the subjective input assumptions can materially affect the fair value estimate, the Black-Scholes valuation model does not necessarily provide a reliable measure of the fair value employee stock options. The following table shows information related to stock-based compensation in both the reported and pro forma earnings per share amounts:
   Three Months Ended



Nine Months EndedSeptember 30,



September 30,2004



2003



2004



2003(In thousands, except per share data)Net earning-as reported




$
1,818




$
861




$
4,494




$
2,618Less total stock-based employee compensation expense determined underthe fair value based method - net of related tax effects





43





15





73





45$
1,775




$
846




$
4,421




$
2,573Earnings per share:Basic:As reported




$
0.20




$
0.12




$
0.58




$
0.37Pro forma




$
0.19




$
0.12




$
0.57




$
0.37Diluted:As reported




$
0.19




$
0.12




$
0.57




$
0.37Pro forma




$
0.19




$
0.12




$
0.57




$
0.37
 
 ************Table of Contents************
 
 **SNB BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes to Interim Consolidated Financial Statements**
 **September 30, 2004**
 **(Unaudited)**
 
  
 Recent Accounting Standards
 In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, *Consolidation of Variable Entities* (FIN 46), to address perceived weaknesses in accounting for entities commonly known as special-purpose or off-balance-sheet. In addition to numerous FASB Staff Positions written to clarify and improve the application of FIN 46, the FASB recently announced a deferral for certain entities, and an amendment to FIN 46 entitled FASB Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities* (FIN 46R).
 
 FIN 46 establishes consolidation criteria for entities for which "control" is not easily discernable under Accounting Research Bulletin 51, *Consolidated Financial Statements* , which is based on the premise that holders of the equity of an entity control the entity by virtue of voting rights. FIN 46 provides guidance for identifying the party with a controlling financial interest resulting from arrangements or financial interests rather than from voting interest. FIN 46 defines the term "variable interest entity" (VIE) and is based on the premise that if a business enterprise absorbs a majority of the VIEs expected losses and/or receives a majority of its expected residual returns (measures of risk and reward), that enterprise (the primary beneficiary) has a controlling financial interest in the VIE. The assets, liabilities, and results of the activities of the VIE should be included in the consolidated financial statements of the primary beneficiary.
 
 On January 1, 2004, the Company adopted FIN 46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." Upon adoption, the trusts that previously issued the outstanding company-obligated mandatorily redeemable trust preferred securities were deconsolidated from the Companys Consolidated Financial Statements. Instead, the junior subordinated debentures issued by the Company to these subsidiary trusts are shown as liabilities in the consolidated balance sheet and interest expense associated with the junior subordinated debentures is shown in the consolidated statements of income. The Consolidated Financial Statements have been restated to reflect the adoption of FIN 46R. Adoption of FIN 46R did not affect previously reported amounts for net income and shareholders equity.
 
 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Many instruments affected by this standard were previously classified as equity. The Company adopted SFAS 150 on January 1, 2004 and its adoption had no effect on the consolidated financial statements.
 
 In March 2004, the Emerging Issues Task Force ("EITF") reached consensus on Issue 03-01 (EITF 03-01), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF 03-01 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. This Issue specifically addresses whether an investor has the ability and intent to hold an investment until recovery. On September 30, 2004, the Financial Accounting Standards Board deferred the effective date of the Issue's guidance on how to evaluate and recognize an impairment loss that is other-than-temporary. This Issue's guidance is pending the issuance of a final FASB Staff Position ("FSP") relating to the draft FSP EITF Issue 03-01-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its application to Certain Investments," which the Board may issue as early as November. This deferral did not change the disclosure guidance which remains effective for fiscal years ending after December 15, 2003. Matters being considered by the FASB which may impact the Company's financial reporting include the accounting as a component in determining net income for declines in market value of debt securities which are due solely to changes in market interest rates and the effect of sales of available-for-sale securities which have market values below cost at the time of sale and whether such sale indicates an absence of intent and ability of the investor to hold to a forecasted recovery of the investment's value to its original cost.
 **************Table of Contents**************  **SNB BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes to Interim Consolidated Financial Statements**
 **September 30, 2004**
 **(Unaudited)**
  Earnings per Share
 Earnings per share are presented under two formats: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net earnings available to holders of common stock and Class B stock by the weighted average number of common and Class B shares outstanding for the reporting period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding adjusted for the incremental shares issuable upon exercise of outstanding stock options. The incremental shares for the assumed exercise of the outstanding options were determined by application of the treasury stock method. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. Basic and diluted earnings per share were computed as follows (dollars in thousands, except per share data):
 Three Months Ended



Nine Months EndedSeptember 30,



September 30,2004



2003



2004



2003Net earnings




$
1,818




$
861




$
4,494




$
2,618Basic:Weighted average shares outstanding





9,137





6,994





7,713





6,994Basic earnings per share




$
0.20




$
0.12




$
0.58




$
0.37Diluted:Weighted average shares outstanding





9,137





6,994





7,713





6,994Potentially dilutive common shares from options





210





253





215





169Weighted average shares and potentially dilutive common shares outstanding


9,347





7,247





7,928





7,163Diluted earnings per share




$
0.19




$
0.12




$
0.57




$
0.37
   
 
 ****************Table of Contents****************
 **SNB BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes to Interim Consolidated Financial Statements**
 **September 30, 2004**
 **(Unaudited)**
 
 **(2) Securities**
 
 The amortized cost and fair value of investment securities at September 30, 2004 and December 31, 2003 were as follows (in thousands):
  **As of September 30, 2004****Gross**

**Gross****Amortized**

**Unrealized**

**Unrealized**

**Fair****Cost**

**Gains**

**Losses**

**Value****Available-for-Sale:**U.S. Government securities

$
286,969

$
47

$
(2,762
)
$
284,254Mortgage-backed securities


106,600


291


(1,384
)

105,507Collateralized mortgage obligations


83,028


16


(1,137
)

81,907Obligations of state and political subdivisions


2,158


41


(10
)

2,189Other securities


18,462


83


(32
)

18,513Total

$
497,217

$
478

$
(5,325
)
$
492,370**Held-to-maturity:**Collateralized mortgage obligations

$
5,424

$
-

$
(13
)
$
5,411Obligations of state and political subdivisions


5,790


118


-


5,908Total

$
11,214

$
118

$
(13
)
$
11,319 **As of December 31, 2003****Gross**

**Gross****Amortized**

**Unrealized**

**Unrealized**

**Fair****Cost**

**Gains**

**Losses**

**Value****Available-for-Sale:**U.S. Government securities

$
245,977

$
374

$
(2,376
)
$
243,975Mortgage-backed securities


71,419


639


(277
)

71,781Collateralized mortgage obligations


83,308


151


(970
)

82,489Obligations of state and political subdivisions


2,525


60


(269
)

2,316Other securities


12,040


19


-


12,059Total

$
415,269

$
1,243

$
(3,892
)
$
412,620
 Included in Other securities above is the Companys investment in Federal Reserve Bank and Federal Home Loan Bank stock of $12.7 million and $7.8 million at September 30, 2004 and December 30, 2003, respectively. The carrying value of Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based on the respective redemption provisions of the Federal Reserve Bank and the Federal Home Loan Bank.
   ******************Table of Contents****************** **SNB BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes to Interim Consolidated Financial Statements**
 **September 30, 2004**
 **(Unaudited)**
  
 Declines in the fair value of individual securities below their cost that are other than temporary would result in write-downs, as a realized loss, of the individual securities to their fair value. Management believes that based upon the credit quality of the securities, none of the unrealized loss on securities is considered other-than-temporary at September 30, 2004. An analysis of gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2004 is as follows (in thousands):
 Less than 12 months

12 months or longer

TotalGross



Gross



GrossFair

Unrealized

Fair

Unrealized

Fair

UnrealizedValue

Losses

Value

Losses

Value

Losses**Available-for-Sale:**U.S. Government securities

$
181,403

$
(1,571
)
$
62,809

$
(1,191
)
$
244,212

$
(2,762
)Mortgage-backed securities


81,835


(1,218
)

10,646


(166
)

92,481


(1,384
)Collateralized mortgage obligations


51,801


(557
)

19,794


(580
)

71,595


(1,137
)Obligations of state and political subdivisions


1,384


(10
)

-


-


1,384


(10
)Other securities


1,537


(7
)

1,560


(25
)

3,097


(32
)Total

$
317,960

$
(3,363
)
$
94,809

$
(1,962
)
$
412,769

$
(5,325
)**Held-to-maturity:**Collateralized mortgage obligations

$
5,411

$
(13
)
$
-

$
-

$
5,411

$
(13
)Obligations of state and political subdivisions


-


-


-


-


-


-Total

$
5,411

$
(13
)
$
-

$
-

$
5,411

$
(13
)
 Investment securities with amortized costs of $287.6 million and $114.5 million and fair values of $284.0 million and $113.4 million at September 30, 2004 and December 31, 2003, respectively, were pledged to collateralize public deposits and Federal Home Loan Bank advances and for other purposes required or permitted by law.
 
 **(3) Shareholders Equity**
 
 Common Stock - In the third quarter of 2004 the Company completed an initial public offering of its common stock (par value $0.01 per share), in which it sold 5,436,364 shares at $10.50 per share. Net proceeds, after deducting underwriting commissions of $4.0 million and offering expenses of $842 thousand, in the amount of $52.2 million were credited to shareholders equity.
 
 Stock Options - In March 2002, the shareholders of the Company approved a Stock Option Plan which provides for the grant of stock options as incentives and rewards for employees and directors of the Company. The shareholders of the Company approved an amendment to the Stock Option Plan on June 7, 2004 to increase the maximum number of shares issuable under the Stock Option Plan from 500,000 to 1,300,000 shares. The exercise price of the outstanding options is the fair market value of the shares of common stock at the date of grant and the outstanding options vest ratably over a 5-year period. The Stock Option Plan expires November 21, 2012. At September 30, 2004 and December 31, 2003, options to purchase 1,284,000 and 340,500 shares of the Companys common stock, respectively, were outstanding.
 ********************Table of Contents******************** ****
 **SNB BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes to Interim Consolidated Financial Statements**
 **September 30, 2004**
 **(Unaudited)**
 
 A summary of changes in outstanding options is as follows:
 **Nine months ended September 30, 2004**

**Year Ended December 31, 2003**Number of Options

Weighted Average Exercise Price

Number of Options

Weighted Average Exercise PriceOutstanding at beginning of period


340,500

$
5.00


363,000

$
5.00Granted- employees


910,500


10.82


-


-Granted - directors


35,000


10.82


-


-Exercised


-


-


-


-Forfeited


(2,000
)

5.00


(22,500
)

5.00Outstanding at end of period


1,284,000


9.29


340,500


5.00Exercisable at end of period


67,700


5.00


68,100


5.00Weighted average fair value of options granted during period




$
4.57





-Remaining authorized shares under approved plan at end of period


16,000





159,500
 The fair value of options at date of grant was estimated using the Black-Scholes options-pricing model with the following weighted-average assumptions:
 2004

2003

2002Expected life (years)


7


-


7Risk free interest rate


4.23
%

-


4.19
%Volatility


31.00
%

-


31.00
%Dividend yield


0.00
%

-


0.00
%
 **(4) Regulatory Matters**
 
 The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Any institution that fails to meet its minimum capital requirements is subject to actions by regulators that could have a direct material effect on its financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines based on the assets, liabilities and certain off-balance-sheet items as calculated under the regulatory accounting practices. The Banks capital amounts and classification under the regulatory framework for prompt corrective action are also subject to qualitative judgments by the regulators about the components, risk weightings and other factors.
 
 To meet the capital adequacy requirements, the Company must maintain minimum capital amounts and ratios as defined in the regulations. As of September 30, 2004, the most recent notification from the OCC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There have been no conditions or events since that notification which management believes have changed the Banks category.
 **********************Table of Contents**********************  **SNB BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes to Interim Consolidated Financial Statements**
 **September 30, 2004**
 **(Unaudited)**
   The following is a summary of the Companys and the Banks capital ratios at September 30, 2004 and December 31, 2003 (dollars in thousands):
 
   To Be CategorizedAs Well CapitalizedUnder PromptFor Capital

Corrective ActionActual

Adequacy Purposes

ProvisionsAmount

Ratio

Amount

Ratio

Amount

Ratio**CONSOLIDATED*:**As of September 30, 2004 (Unaudited)Total Capital (to Risk-Weighted Assets)

$
133,801


20.56
%
$
52,063


8.00
%Tier I Capital (to Risk-Weighted Assets)


118,972


18.28


26,033


4.00Tier I Capital (to Total Assets)


118,972


10.83


43,942


4.00As of December 31, 2003Total Capital (to Risk-Weighted Assets)

$
74,244


15.35
%
$
39,214


8.00
%Tier I Capital (to Risk-Weighted Assets)


43,329


8.84


19,607


4.00Tier I Capital (to Total Assets)


43,329


5.09


34,027


4.00**BANK:**As of September 30, 2004 (Unaudited)Total Capital (to Risk-Weighted Assets)

$
116,370


17.92
%
$
51,951


8.00
%
$
64,939


10.00
%Tier I Capital (to Risk-Weighted Assets)


108,897


16.77


25,974


4.00


38,961


6.00Tier I Capital (to Total Assets)


108,897


9.92


43,910


4.00


54,888


5.00As of December 31, 2003Total Capital (to Risk-Weighted Assets)

$
75,227


15.39
%
$
39,095


8.00
%
$
48,868


10.00
%Tier I Capital (to Risk-Weighted Assets)


69,577


14.24


19,547


4.00


29,321


6.00Tier I Capital (to Total Assets)


69,577


8.19


33,966


4.00


47,457


5.00* At September 30, 2004 and December 31, 2003, Tier I Capital ( for Purposes of determining the Tier I Capital to Total Assets ratio and the Tier I Capital to Risk-WeightedAssets ratio) includes a portion of the Company's Trust Preferred Securities as allowed by regulatory capital guidelines.  Trust Preferred Securities amounts not includedin Tier I Capital are included in Tier II Capital for purposes of determining the Total Capital to Risk-Weighted Assets ratio.
     ************************Table of Contents************************   ****Item 2.****Management's Discussion and Analysis of Financial Condition and Results of Operations****
 **Special Cautionary Notice Regarding Forward-Looking Statements**
 
 
 Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Companys operations or performance. When the Company uses any of the words "believe," "expect", "anticipate", "estimate", "continue", "intend", "may", "will", "should", or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:
 
 ·
the effects of future economic and business conditions on the Company and its customers;  ·
changes in governmental legislation and regulations or their interpretations thereof, including changes in tax requirements and tax rates;  ·
the risks of changes in interest rates which could reduce the Companys net interest margins, asset valuations and expense expectations;  ·
competition from other banks and financial institutions for customer deposits and loans;  ·
the failure of assumptions underlying the establishment of reserves for loan losses;  ·
changes in the levels of loan prepayments and the resulting effects on the value of the Companys loan portfolio;  ·
the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;  ·
the effect of changes in accounting policies and practices which may be adopted by regulatory agencies and/or the Financial Accounting Standards Board;  ·
the Companys ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive technological changes;  ·
acquisition and integration of acquired businesses;  ·
the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;  ·
acts of terrorism, hostilities or other international or domestic calamities; and  ·
other risks and uncertainties listed from time to time in the Companys reports filed with the Securities and Exchange Commission. 
 A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless the securities laws require the Company to do so.
 **************************Table of Contents**************************  **Overview**
 
 Net earnings for the three months ended September 31, 2004 were $1.8 million or $0.19 per diluted common and Class B share, an increase of $957 thousand or 111.1% compared with $861 thousand or $0.12 per diluted share for the same period in 2003. Net earnings for the nine months ended September 30, 2004 were $4.5 million or $0.57 per diluted share, an increase of $1.9 million or 71.7% compared with $2.6 million or $0.37 per diluted share for the same period in 2004. As of September 30, 2004 the Company had total assets of $1.1 billion, total loans of $553.2 million, total deposits of $815.2 million and total shareholders equity of $86.1 million.
 
 **Recent Developments**
 
 On October 12, 2004, the Company opened its fourth full service location in Katy, Texas at 5733 Second Street. This location, in the area known as Old Town Katy, serves as the Companys entry-point into the Katy market. Additionally, the Company has purchased land in Katy, on Highway 99 at Cinco Ranch Boulevard, with the intention of opening a second branch location which will serve as the community headquarters for the Katy market. Construction is scheduled to begin in 2005 and the Company currently anticipate opening in the first quarter of 2006.
 
 **Critical Accounting Policies**
 
 The Company's accounting policies are integral to understanding the results reported. The Company's accounting policies are described in Note 1 to the consolidated financial statements included in the Company's prospectus dated August 17, 2004. The policies related to the allowance for loan losses require a significant amount of subjective and complex judgment and assumptions by the Company's management. Because of the nature of judgments and assumptions made by our management, actual results could differ from these judgments and assumptions, which could have a material impact on the Company's financial condition and results of operations.
 
 Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable losses incurred on loans. Loans are charged to the allowance when the loss actually occurs or when a determination is made that a probable loss has occurred. Recoveries are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for loan losses is adequate to absorb losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb losses. Managements judgment as to the level of probable losses on existing loans involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and managements internal review of the loan portfolio. In determining the collectability of certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond our control.
 
 
 *Results of Operations for the Three Months Ended September 30, 2004 and 2003*
 
 General
 Net earnings for the third quarter of 2004 were $1.8 million compared with $861 thousand for the same quarter in 2003, an increase of $957 thousand or 111.1%. The $957 thousand increase in net earnings was primarily due to the following: a $2.1 million increase in net interest income, partially offset by an $886 thousand increase in noninterest expense and a $492 thousand increase in the provision for Federal income taxes.
 
 Diluted earnings per share for the third quarter of 2004 were $0.19 per share compared with $0.12 per share for the third quarter of 2003. Basic earnings per share for the third quarter of 2004 were $0.20 compared with $0.12 for the same period in 2003. Earnings per share did not increase to the same extent as net earnings due to the issuance of 5,436,364 shares of common stock in the Companys initial public offering in August and September 2004. Returns on average assets and average equity for the three months ended September 30, 2004 were 0.66% and 14.20%, respectively.
  ****************************Table of Contents**************************** 
 Net Interest Income
 When comparing the third quarter of 2004 to the same quarter in 2003, net interest income increased $2.1 million, primarily due to an increase of $3.7 million in interest income, partially offset by a $1.6 million increase in interest expense. The net interest margin decreased 5 basis points to 2.85% for the quarter ended September 30, 2004 compared with 2.90% for the same period in 2003. Interest income from loans increased by $1.8 million, or 29.0%, to $8.0 million for the quarter ended September 30, 2004, compared with $6.2 million for the same period in 2003. This increase was primarily the result of the combined effect of an increase in loan volume, with loans averaging $533.6 million in this quarter compared with $394.7 million in the third quarter of 2003, an increase of $138.9 million, or 35.2% and a decrease in the average yield on loans for the quarter to 5.89% compared with 6.17% for the same period of 2003.
 
 Interest income from investment securities increased by $1.9 million, or 79.3%, to $4.2 million for the quarter ended September 30, 2004 compared with $2.4 million for the same period in 2003. This increase was due to increases in both yields and securities principal balances, with investment securities averaging $517.0 million in the third quarter of 2004 compared with $351.0 million in the third quarter of 2003, an increase of $166.0 million or 47.3%. The average yield on investment securities increased to 3.20% from 2.63% for the same period in 2003.
 
 The average balance of interest-bearing liabilities increased $261.0 million or 39.4% from the quarter ended September 30, 2003 compared with the same period in 2004, while the average rate paid increased 0.15%, to 2.03% for the quarter ended September 30, 2004, from 1.88% for the same period in 2003. The increase in average liabilities was due primarily to deposit growth of $164.1 million or 31.5%, an increase in borrowings of $87.3 million or 78.1% and an increase of $9.6 million in junior subordinated debentures. The average balance of interest-earning assets increased $307.3 million from the quarter ended September 30, 2003 compared with the same period in 2004, while the average yield increased 0.05% to 4.55% from 4.50%.
   ******************************Table of Contents****************************** The following table sets forth for the periods indicated an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net interest margin for the same periods. Nonaccruing loans have been included in the table as loans carrying a zero yield.
  
 For the Three Months Ended September 30,2004

2003Average

Interest

Average

Average

Interest

AverageOutstanding

Earned/

Yield/

Outstanding

Earned/

Yield/Balance

Paid

Rate (1)

Balance

Paid

Rate (1)(Dollars in thousands)**Assets:**Interest-earning assets:Loans

$
533,607

$
8,031


5.89
%
$
394,725

$
6,224


6.17
%Securities


517,041


4,234


3.20


351,008


2,362


2.63Federal funds sold


816


3


1.33


727


1


0.40Interest-earning deposits in other financial institutions


2,985


11


1.45


739


2


1.14Total interest-earning assets


1,054,449


12,279


4.55
%

747,199


8,589


4.50
%Less allowance for loan losses


(7,258
)







(4,962
)Total interest-earning assets, net of allowance


1,047,191








742,237Non-earning assets:Cash and due from banks


13,116








26,928Premises and equipment


13,061








12,537Accrued interest receivable and other assets


15,542








8,324Total noninterest-earning assets


41,719








47,789Total assets

$
1,088,910







$
790,026**Liabilities and Shareholders' Equity:**Interest-bearing liabilities:NOW, savings, and money market accounts

$
334,347

$
1,215


1.45
%
$
231,421

$
606


1.04
%Time deposits


351,116


2,179


2.47


289,938


1,788


2.45Other borrowed funds


199,093


753


1.51


111,806


327


1.16Junior subordinated debentures


38,250


566


5.79


28,612


415


5.67Total interest-bearing liabilities


922,806


4,713


2.03
%

661,777


3,136


1.88
%Noninterest-bearing liabilities:Demand deposits


111,968








94,880Accrued interest payable and other liabilities


3,536








3,552Total noninterest-bearing liabilities


115,504








98,432Total liabilities


1,038,310








760,209Shareholders' equity


50,600








29,817Total liabilities and shareholders' equity

$
1,088,910







$
790,026Net interest income




$
7,566







$
5,453Net interest spread








2.52
%







2.62
%Net interest margin








2.85
%







2.90
%(1) Annualized
 
 
 ********************************Table of Contents********************************
   The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major category of interest-earning assets and interest-bearing liabilities, which distinguishes between the changes attributable to changes in volume (changes in volume multiplied by old rate) and changes in rates (changes in rates multiplied by new volume). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to rate (dollars in thousands).
 **For the Three Months Ended September 30, 2004**
**Compared with the Same Period in 2003****Increase (Decrease)**

******Due to Change in****Volume**

**Rate**

**Total****(Dollars in thousands)****Interest-earning assets:**Loans

$
2,154

$
(347
)
$
1,807Securities


781


1,091


1,872Federal funds sold


-


2


2Interest-bearing deposits in other financial institutions


6


3


9Total increase in interest income


2,941


749


3,690**Interest-bearing liabilities:**NOW, savings and money market accounts


3


606


609Time deposits


376


15


391Other borrowed funds


254


172


426Junior subordinated debentures


137


14


151Total increase in interest expense


770


807


1,577Increase (decrease) in net interest income

$
2,171

$
(58
)
$
2,113
 Provision for Loan Losses
 During the quarter ended September 30, 2004, the Company recorded a provision for loan losses of $625 thousand compared with $660 thousand for the same period in 2003. The provision recorded in the third quarter of 2004 is less than the amount recorded in the third quarter of 2003 based upon the current level of unallocated reserves and the decrease in nonperforming loans. At September 30, 2004, the allowance for loan losses as a percentage of total loans was 1.35% compared with 1.33% at December 31, 2003. At September 30, 2004, The Company had nonperforming loans totaling $4.2 million, a decrease of $332 thousand, or 7.37% compared with $4.5 million at December 31, 2003. Nonperforming loans are those loans on non-accrual status as well as those loans greater than ninety days delinquent and still accruing interest. At September 30, 2004, nonperforming assets (which include nonperforming loans, real estate owned and repossessed assets) were $6.4 million and the ratio of nonperforming assets to total assets was 1.15%, compared to 1.07% at December 31, 2003. At September 30, 2004, the allowance for loan losses as a percentage of nonperforming loans was 178.82% compared to 125.25% at December 31, 2003.
 
 Noninterest Income
 Noninterest income for the third quarter of 2004 was $543 thousand, an increase of $187 thousand compared with the third quarter of 2004 to the same period in 2003. This increase was comprised primarily of a $198 thousand increase in the gain on sale of securities.
 
 Noninterest Expense and Provision for Federal Income Taxes
 Noninterest expense for the third quarter of 2004 was $4.7 million compared with $3.8 million for the third quarter of 2003, an increase of $886 thousand, or 23.0%. This $886 thousand increase was comprised primarily of an increase of $597 thousand in salaries and employee benefits and an increase of $183 thousand in other noninterest expense. The provision for Federal income taxes increased $492 thousand due to the increased amount of taxable income, with the effective tax rate being approximately 34% for both the quarter ended September 30, 2004 and the same period in 2003.
    **********************************Table of Contents********************************** 
 *Results of Operations for the Nine Months Ended September 30, 2004 and 2003*
 
 General
 Net earnings for the nine months ended September 30, 2004 were $4.5 million, an increase of $1.9 million or 71.7%, compared with $2.6 million for the same period in 2003. Diluted earnings per share for the nine months ended September 30, 2004 were $0.57, compared with $0.37 per share for the same period in 2003. Basic earnings per share for the nine months ended September 30, 2004 were $0.58, compared with $0.37 for the same period in 2003. The weighted average shares outstanding used in the basic earnings per share computations were 7,713,432 and 6,993,989 for the nine months ended September 30, 2004 and 2003, respectively.
 
 The $1.9 million increase in net earnings for the nine months ended September 30, 2004 compared with the same period in 2003 was primarily due to the following: a $5.2 million increase in net interest income, offset by a $2.0 million increase in noninterest expense, a $964 thousand increase in the provision for Federal income taxes, a $180 thousand decrease in the net gain on sales of securities and a $174 thousand increase in the provision for loan losses.
 
 Net Interest Income
 For the nine months ended September 30, 2004, net interest income increased $5.2 million to $20.7 million compared with $15.5 million for the same period in 2003. This 33.8% increase is due to a $9.5 million increase in interest income offset by a $4.3 million increase in interest expense. Net interest margin decreased 0.37% to 2.81% for the nine months ended September 30, 2004 from 3.18% for the same period in 2003.
 
 Interest income from loans increased by $3.8 million, or 21.2%, to $21.6 million for the nine months ended September 30, 2004, compared with $17.8 million for the same period in 2003. This increase was the result of increases in loan volumes which more than offset decreases in interest rates. Loans averaged $485.5 million for the nine months ended September 30, 2004 versus $372.7 million in the same period in 2003, with an increase of $112.9 million, or 30.3%. The average yield on loans for the nine months ended September 30, 2004 was 5.85% compared with 6.31% for the same period in 2003.
 
 Interest income from investment securities increased by $5.6 million, or 93.7% to $11.6 million for the nine months ended September 30, 2004, compared with $6.0 million for the same quarter in 2003. The majority of this increase was due to increases in volumes of securities, with investment securities averaging $478.1 million for the nine months ended September 30, 2004 compared with $273.4 million for the same period in 2003, an increase of $204.7 million or 74.8%. The average yield on investment securities increased to 3.19% for the nine months ended September 30, 2004 compared with 2.89% for the same period in 2003.
 
 The average balance of interest-bearing liabilities increased $309.8 million or 55.3% from the nine months ended September 30, 2003 compared with the same period in 2004, while the average rate paid decreased 0.06%, to 1.95% for the nine months ended September 30, 2004, from 2.01% for the same period in 2003. The increase in average liabilities is due primarily to average deposit growth of $250.3 million or 54.3%, an increase in average borrowings of $45.2 million or 60.0% and an increase in average junior subordinated debentures of $16.5 million or 75.6%, compared with the nine months ended September 30, 2003. The average balance of interest-earning assets increased $332.5 million, or 51.2%, for the nine months ended September 30, 2004 compared with the same period in 2003, while the average yield decreased 0.38% to 4.46% from 4.84%.
 ************************************Table of Contents************************************  The following table sets forth for the periods indicated an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net interest margin for the same periods. Nonaccruing loans have been included in the table as loans carrying a zero yield.
 For the Nine Months Ended September 30,2004

2003Average

Interest

Average

Average

Interest

AverageOutstanding

Earned/

Yield/

Outstanding

Earned/

Yield/Balance

Paid

Rate (1)

Balance

Paid

Rate (1)(Dollars in thousands)**Assets:**Interest-earning assets:Loans

$
485,532

$
21,617


5.85
%
$
372,656

$
17,829


6.31
%Securities


478,067


11,626


3.19


273,425


6,001


2.89Federal funds sold


11,446


80


0.92


903


7


1.08Interest-earning deposits in other financial institutions


7,168


55


1.00


2,757


24


1.15Total interest-earning assets


982,213


33,378


4.46
%

649,741


23,861


4.84
%Less allowance for loan losses


(6,572
)







(4,511
)Total interest-earning assets, net of allowance


975,641








645,230Non-earning assets:Cash and due from banks


15,269








27,958Premises and equipment


12,799








11,449Accrued interest receivable and other assets


12,921








6,079Total noninterest-earning assets


40,989








45,486Total assets

$
1,016,630







$
690,716**Liabilities and Shareholders' Equity:**Interest-bearing liabilities:NOW, savings, and money market accounts

$
337,891

$
3,190


1.26
%
$
229,782

$
2,037


1.19
%Time deposits


373,668


6,708


2.40


231,430


4,594


2.65Other borrowed funds


120,642


1,209


1.34


75,398


699


1.24Notes payable to bank


-


-


-


2,208


53


3.23Junior subordinated debentures


38,250


1,603


5.51


21,784


1,028


6.22Total interest-bearing liabilities


870,451


12,710


1.95
%

560,602


8,411


2.01
%Noninterest-bearing liabilities:Demand deposits


105,136








96,484Accrued interest payable and other liabilities


3,258








2,673Total noninterest-bearing liabilities


108,394








99,157Total liabilities


978,845








659,759Shareholders' equity


37,785








30,957Total liabilities and shareholders' equity

$
1,016,630







$
690,716Net interest income




$
20,668







$
15,450Net interest spread








2.51
%







2.83
%Net interest margin








2.81
%







3.18
%(1) Annualized
 **************************************Table of Contents**************************************

The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major category of interest-earning assets and interest-bearing liabilities, which distinguishes between the changes attributable to changes in volume (changes in volume multiplied by old rate) and changes in rates (changes in rates multiplied by new volume). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to rate (dollars in thousands).
**For the Nine Months Ended September 30, 2004 Compared with the Same Period in 2003****Increase (Decrease)**

******Due to Change in****Volume**

**Rate**

**Total****(Dollars in thousands)****Interest-earning assets:**Loans

$
5,331

$
(1,543
)
$
3,788Securities


4,465


1,160


5,625Federal funds sold


85


(12
)

73Interest-bearing deposits in other financial institutions


38


(7
)

31Total increase (decrease) in interest income


9,919


(402
)

9,517**Interest-bearing liabilities:**NOW, savings and money market accounts


10


1,143


1,153Time deposits


2,826


(712
)

2,114Other borrowed funds


420


90


510Notes payable to bank


(53
)

0


(53
)Junior subordinated debentures


767


(192
)

575Total increase in interest expense


3,970


329


4,299Increase (decrease) in net interest income

$
5,949

$
(731
)
$
5,218

Provision for Loan Losses
During the nine months September 30, 2004, the Company recorded a provision for loan losses of $2.3 million compared with $2.1 million for the same period in 2003. The provision recorded in 2004 is greater than the prior period due primarily to the increase in the size of the loan portfolio. At September 30, 2004, the allowance for loan losses as a percentage of total loans was 1.35% compared with 1.33% at December 31, 2003. While management believes that it has adequately provided for loan losses, it will continue to monitor the loan portfolio and make adjustments to the allowance for loan losses as it considers necessary to absorb known and inherent losses in the loan portfolio.

Noninterest Income
For the nine months ended September 30, 2004, noninterest income decreased slightly to $1.8 million compared with $2.0 million for the same period in 2003. The $201 thousand decrease was attributable to a $180 thousand decrease in the gain on sale of securities and a $51 thousand decrease in service charges on deposit accounts, partially offset by a $30 thousand increase in other noninterest income.

****************************************Table of Contents****************************************Noninterest Expense and Provision for Federal Income Taxes
Noninterest expense for the nine months ended September 30, 2004 was $13.4 million compared with $11.4 million for the same period in 2003, an increase of $2.0 million of 17.6%. This $2.0 million increase was comprised primarily of an increase in salaries and employee benefits of $1.5 million and an increase of $298 thousand in other noninterest expense. The provision for Federal income taxes increased $964 thousand due to the increased amount of taxable income, with the effective tax rate being approximately 34% for both the nine months ended September 30, 2004 and the same period in 2003.


*Financial Condition*

General
Total assets increased by $210.7 million from December 31, 2003 to September 30, 2004. The increase was primarily due to increases of $128.7 million in loans receivable, $79.8 million in available for sale securities and $11.2 million in held to maturity securities, partially offset by a decrease of $12.1 million in cash and cash equivalents.

From December 31, 2003 to September 30, 2004, total liabilities increased by $155.4 million primarily due to deposit growth and borrowing to fund asset growth. When comparing the two periods, deposits increased $81.2 million and other borrowings increased $73.7 million. Shareholders' equity increased $55.3 million from December 31, 2003 to September 30, 2004 primarily as a result of the $52.2 million in net proceeds from the issuance of common stock in the Companys initial public offering.

Loan Portfolio
Total loans were $553.2 million as of September 30, 2004, an increase of $128.7 million or 30.3% compared with loans of $424.5 million as of December 31, 2003. Loan growth occurred primarily in commercial mortgage loans, which increased $84.7 million or 48.2% and construction and land development loans, which increased $40.9 million or 62.3%.

The following table summarizes our loan portfolio by type as of the dates indicated (dollars in thousands):
September 30,

December 31,2004

2003Amount

Percent

Amount

PercentBusiness and industrial

$
64,152


11.6
%
$
55,218


13.0
%Real estate:Construction and land development


106,536


19.3


65,628


15.5Residential mortgages


110,828


20.0


117,593


27.7Commercial mortgages


260,359


47.1


175,686


41.4Consumer


12,715


2.3


11,092


2.6Other


154


0.0


198


0.1Gross loans


554,744


100.3


425,415


100.3Less unearned discounts and fees


(1,559
)

(0.3
)

(936
)

(0.3
)Total loans

$
553,185


100.0
%
$
424,479


100.0
%
Nonperforming Assets
Nonperforming assets were $6.4 million and $4.6 million as of September 30, 2004 and December 31, 2003, respectively. The increase was primarily due to an increase in other real estate as a result of one commercial and two residential properties acquired through foreclosure. The Companys ratio of nonperforming assets to total loans and other real estate was 1.15% and 1.07% as of September 30, 2004 and December 31, 2003, respectively.



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The following table presents information regarding nonperforming assets as of the dates indicated (dollars in thousands):
As of September 30,

As of December 31,2004

2003Nonaccrual loans

$
2,237

$
2,496Accruing loans past due 90 days or more


-


-Restructured loans


1,942


2,015Other real estate


2,183


40Total nonperforming assets

$
6,362

$
4,551Nonperforming assets to total loans and other real estate


1.15
%

1.07
%
Allowance for Loan Losses
The Companys allowance for loan losses is a reserve established through monthly charges to earnings in the form of a provision for loan losses. The allowance for loan losses represents managements estimate of the amount necessary to provide for known and inherent losses in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, managements judgment of the amount of the allowance necessary to absorb loan losses is approximate. The allowance for loan losses is also subject to regulatory examinations and determination by the regulatory agencies as to its adequacy.

As of September 30, 2004, the allowance for loan losses amounted to $7.5 million or 1.35% of total loans. As of December 31, 2003, the allowance for loan losses amounted to $5.7 million or 1.33% of total loans. The allowance for loan losses as a percentage of nonperforming loans increased to 178.82% as of September 30, 2004 from 125.25% as of December 31, 2003.


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The following table summarizes the activity in our allowance for loan losses during the periods indicated (dollars in thousands):
As of and for the Nine Months

As of and for the YearEnded September 30,

Ended December 31,2004

2003(Dollars in thousands)Average loans outstanding

$
485,532

$
383,844Total loans outstanding at end of period

$
553,185

$
424,479Allowance for loan losses at beginning of period

$
5,650

$
4,006Provision for loan losses


2,275


2,821Charge-Offs:Business and industrial


(242
)

(516
)Real estate


(235
)

(673
)Consumer


(84
)

(337
)Total charge-offs


(561
)

(1,526
)Recoveries:Business and industrial


33


185Real estate


60


51Consumer


16


113Total recoveries


109


349Net charge-offs


(452
)

(1,177
)Allowance for loan losses at end of period

$
7,473

$
5,650Alloance for loan losses to end of period loans


1.35
%

1.33
%Net charge-offs to average loans


0.09
%

0.31
%Allowance for loans losses to end of period nonperforming loans


178.82
%

125.25
%


Securities
As of September 30, 2004, investment securities totaled $503.6 million, an increase of $91.0 million or 22.1% compared with $412.6 million as of December 31, 2003. The increase is primarily due to security purchases of $305.1 million during the nine months ended September 30, 2004, partially offset by $211.9 million in sales, calls, maturities and principal repayments during the same period and a $2.2 million increase in net unrealized loss on available-for-sale securities. The growth in the securities portfolio was primarily in the categories of U.S. Government securities ($40.3 million) and mortgage-backed securities ($33.8 million). As of September 30, 2004, securities represented 46.0% of total assets compared with 46.7% of total assets as of December 31, 2003.

Deposits
As of September 30, 2004, NOW accounts, money market accounts and savings deposits accounted for 43.7% of total deposits, while certificates of deposit made up 43.7% of total deposits. Total deposits were $815.2 million as of September 30, 2004, an increase of $81.2 million or 11.1% compared with $734.0 million as of December 31, 2003. As of September 30, 2004, we had $103.0 million in noninterest-bearing deposits compared with $101.7 million as of December 31, 2003. The average cost of deposits, including noninterest bearing deposits, was 1.62% compared with 1.61% for the year ended December 31, 2003.

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Other Borrowings
Other borrowings totaled $151.5 million as of September 30, 2004, an increase of $73.7 million of 94.7% compared with $77.8 million as of December 31, 2003. The increase is due to borrowings to fund loan growth and securities purchases.


**LIQUIDITY AND CAPITAL RESOURCES**

The Company's primary sources of funds consist of deposits bearing market rates of interest, advances from the FHLB, principal payments on loans and securities and other types of borrowings. The Company uses its funding resources principally to meet its ongoing commitments to fund maturing deposits and deposit withdrawals, repay borrowings, purchase securities, fund existing and continuing loan commitments, maintain its liquidity and meet operating expenses. The cash and federal funds sold position, supplemented by amortizing investments along with payments and maturities within the loan portfolio, have historically created an adequate liquidity position.

In the third quarter of 2004, the Company completed an initial public offering of common stock (par value $0.01 per share), in which it sold 5,435,364 shares at $10.50 per share. Net proceeds, after deducting offering expenses of $842 thousand and the underwriting discount of $4.0 million, in the amount of $52.2 million were credited to shareholders equity. As of September 30, 2004, shareholders equity totaled $86.1 million, an increase of $55.3 million or 179.7% compared with $30.8 million as of December 31, 2003. The increase is comprised of the $52.2 million proceeds from the sale of common stock and $4.5 million in net income, partially offset by a $1.4 million decrease due to the change in the fair value of available-for-sale securities. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure Tier I and total capital and take into consideration the risk inherent in both on-balance-sheet and off-balance-sheet items.

****Item 3.****Quantitative and Qualitative Disclosures About Market Risk****
There have been no material changes in the Company's interest rate risk position since December 31, 2003. The Company's principal market risk exposure is to interest rates. For more information regarding quantitative and qualitative disclosures about market risk, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Interest Rate Sensitivity and Market Risk" in the Company's prospectus dated August 17, 2004 filed pursuant to Rule 424(b)(3).

****Item 4.****Controls and Procedures****

Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Company's management within the time periods specified in the Securities and Exchange Commission's rules and forms.

Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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****PART II - OTHER INFORMATION****
****Item 1.****Legal Proceedings****

Not applicable.

****Item 2.****Unregistered Sales of Equity Securities and Use of Proceeds****
Pursuant to a registration statement on Form S-1 (Registration No. 333-116366) filed with, and declared effective on August 17, 2004 by, the Securities and Exchange Commission, the Company sold 4,727,273 shares of its common stock at $10.50 per share, for an aggregate of $49.6 million, to the public in an underwritten firm commitment offering which closed on August 23, 2004. The underwriters exercised their 30-day option on September 13, 2004 to purchase an additional 709,091 shares to cover over-allotments. The managing underwriters for the public offering were Keefe, Bruyette & Woods, Inc., Hoefer & Arnett, Incorporated and Sanders Morris Harris Inc.

The Company received $52.2 million in net proceeds, after deduction of underwriting discounts of $4.0 million and $842,000 in offering expenses. Of the net proceeds, $35.0 million was contributed to the capital of the Bank and the balance will be used for general corporate purposes including the possible opening of additional branches and the possible acquisition of financial institutions.

****Item 3.****Defaults Upon Senior Securities****

Not applicable.

****Item 4.****Submission of Matters to a Vote of Security Holders****
Not applicable.

****Item 5.****Other Information****

Not applicable.

****Item 6.****Exhibits****

Exhibits.

31.1 Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:   November 15, 2004
By:
/s/  Harvey ZinnPresident and Chief Executive Officer


Date:   November 15, 2004
By:
/s/  R. Darrell BrewerChief Financial Officer