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 June 30, 2005or[  
                 ]
            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
                X
  Indicate
          the number of shares outstanding of each of the issuer's classes of common
          stock, as of the latest practicable date.




**Number
      of shares of Common Stock Outstanding as of July 31, 2005: 
      9,782,878**


Number
      of shares of Class B Stock Outstanding as
      of July 31, 2005:    2,652,475







**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 June 30, 2005
                (unaudited) and December 31, 2004
            1Consolidated
                Statements of Earnings for the
                Three and Six Months Ended June 30, 2005 and 2004
                (unaudited)
            2Consolidated
                Statements of
                Shareholders' Equity for the Year Ended December 31, 2004 and for
                the Six Months Ended June 30, 2005
                (unaudited)
            3Consolidated
                Statements of Cash Flows for
                the Six Months Ended June 30, 2005 and 2004
                (unaudited)
            4Notes
                to Interim Consolidated Financial Statements
                (unaudited)
            5Item
                2
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations
            11Item
                3
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            24Item
                4
            Controls
                and Procedures
            24









**Part
              II.**
            **Other
              Information**Item
                1
            Legal
                Proceedings
            25Item
                2
            Unregistered
                Sales of Equity Securities and Use
                of Proceeds
            25Item
                3
            Defaults
                upon Senior
                Securities
            25Item
                4
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5
            Other
                Information
            26Item
              6
            Exhibits
            26










**Table
            of Contents**


PART I - FINANCIAL INFORMATION


**Item
                      1.  Interim Consolidated Financial
                      Statements**
  **SNB
                        BANCSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                        BALANCE SHEETS**June
                        30,
                    
                    December
                        31,2005
                    
                    2004(Unaudited)(dollars
                        in thousands, except share data)**ASSETS**Cash
                        and cash equivalents
                    
                    $
                    21,435
                    
                    $
                    21,235Federal
                        funds sold
                    
                    
                    1,150
                    
                    
                    -Available-for-sale
                        securities, at fair value (amortized cost of $299,465 and$481,793
                        at June 30, 2005 and December 31, 2004, respectively)
                    
                    
                    294,467
                    
                    
                    475,155Held-to-maturity
                        securities, at amortized cost (fair value of $105,744 and$13,493
                        at June 30, 2005 and December 31, 2004, respectively)
                    
                    
                    105,056
                    
                    
                    13,368Loans
                    
                    
                    664,899
                    
                    
                    598,292Less
                        allowance for loan losses
                    
                    
                    (9,387
                    )
                    
                    (8,121
                    )Net
                        loans
                    
                    
                    655,512
                    
                    
                    590,171Premises
                        and equipment - net
                    
                    
                    19,615
                    
                    
                    16,137Accrued
                        interest receivable
                    
                    
                    4,262
                    
                    
                    4,485Other
                        assets
                    
                    
                    7,801
                    
                    
                    9,537TOTAL
                    
                    $
                    1,109,298
                    
                    $
                    1,130,088**LIABILITIES
                        AND SHAREHOLDERS' EQUITY**LIABILITIES:Deposits:Noninterest-bearing
                    
                    $
                    118,165
                    
                    $
                    110,858Interest-bearing
                    
                    
                    687,594
                    
                    
                    757,528Total
                        deposits
                    
                    
                    805,759
                    
                    
                    868,386Other
                        borrowings
                    
                    
                    173,100
                    
                    
                    132,900Accrued
                        interest payable
                    
                    
                    3,540
                    
                    
                    2,724Junior
                        subordinated debentures
                    
                    
                    38,250
                    
                    
                    38,250Other
                        liabilities
                    
                    
                    1,030
                    
                    
                    1,427Total
                        liabilities
                    
                    
                    1,021,679
                    
                    
                    1,043,687SHAREHOLDERS'
                        EQUITYPreferred
                      stock, $0.01 par value - 20,000,000 shares authorized, no sharesissued
                        or outstanding
                    
                    
                    -
                    
                    
                    -Common
                        stock, $0.01 par value - 50,000,000 shares authorized, 9,782,478
                        and
                        9,753,612shares
                        issued  and outstanding at June 30, 2005 and
                        December 31, 2004, respectively
                    
                    
                    98
                    
                    
                    98Class
                        B stock, $0.01 par value - 3,216,781 shares authorized, 2,652,475
                        and
                        2,679,041 sharesissued
                        and outstanding at June 30, 2005 and December 31, 2004,
                        respectively
                    
                    
                    27
                    
                    
                    27Capital
                        surplus
                    
                    
                    66,193
                    
                    
                    66,173Accumulated
                        other comprehensive loss - net unrealized loss on
                        available-for-salesecurities
                        - net of taxes
                    
                    
                    (3,286
                    )
                    
                    (4,315
                    )Retained
                        earnings
                    
                    
                    24,587
                    
                    
                    24,418Total
                        shareholders' equity
                    
                    
                    87,619
                    
                    
                    86,401TOTAL
                    
                    $
                    1,109,298
                    
                    $
                    1,130,088See
                        notes to interim consolidated financial statements.
  1
 **Table
                of
                Contents**
  **SNB
                          BANCSHARES, INC. AND
                          SUBSIDIARIES****CONSOLIDATED
                          STATEMENTS OF EARNINGS****(Unaudited)**Three
                          Months Ended
                      
                      Six
                          Months EndedJune
                          30,
                      
                      June
                          30,2005
                      
                      2004
                      
                      2005
                      
                      2004(dollars
                          in thousands, except per share data)INTEREST
                          INCOME:Loans-including
                          fees
                      
                      $
                      10,819
                      
                      $
                      7,085
                      
                      $
                      20,616
                      
                      $
                      13,586Securities:Taxable
                      
                      
                      3,593
                      
                      
                      4,030
                      
                      
                      7,519
                      
                      
                      7,351Nontaxable
                      
                      
                      159
                      
                      
                      19
                      
                      
                      292
                      
                      
                      41Federal
                          funds sold and earning deposits
                      
                      
                      47
                      
                      
                      22
                      
                      
                      61
                      
                      
                      121Total
                          interest income
                      
                      
                      14,618
                      
                      
                      11,156
                      
                      
                      28,488
                      
                      
                      21,099INTEREST
                          EXPENSE:Demand
                          deposits
                      
                      
                      1,708
                      
                      
                      1,025
                      
                      
                      3,494
                      
                      
                      1,976Certificates
                          and other time deposits
                      
                      
                      2,768
                      
                      
                      2,336
                      
                      
                      5,436
                      
                      
                      4,529Other
                          borrowings
                      
                      
                      1,556
                      
                      
                      827
                      
                      
                      3,063
                      
                      
                      1,493Total
                          interest expense
                      
                      
                      6,032
                      
                      
                      4,188
                      
                      
                      11,993
                      
                      
                      7,998NET
                          INTEREST INCOME
                      
                      
                      8,586
                      
                      
                      6,968
                      
                      
                      16,495
                      
                      
                      13,101PROVISION
                          FOR LOAN LOSSES
                      
                      
                      650
                      
                      
                      900
                      
                      
                      1,250
                      
                      
                      1,650NET
                          INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                      
                      
                      7,936
                      
                      
                      6,068
                      
                      
                      15,245
                      
                      
                      11,451NONINTEREST
                          INCOME:Service
                          charges on deposit accounts
                      
                      
                      228
                      
                      
                      193
                      
                      
                      451
                      
                      
                      430Gain
                          on sale of securities-net
                      
                      
                      128
                      
                      
                      144
                      
                      
                      128
                      
                      
                      503Impairment
                          write-down of securities
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (6,144
                      )
                      
                      -Other
                      
                      
                      189
                      
                      
                      151
                      
                      
                      376
                      
                      
                      299Total
                          noninterest income
                      
                      
                      545
                      
                      
                      488
                      
                      
                      (5,189
                      )
                      
                      1,232NONINTEREST
                          EXPENSE:Salaries
                          and employee benefits
                      
                      
                      2,934
                      
                      
                      2,757
                      
                      
                      5,867
                      
                      
                      5,441Net
                          occupancy expense
                      
                      
                      440
                      
                      
                      438
                      
                      
                      845
                      
                      
                      887Data
                          processing
                      
                      
                      414
                      
                      
                      271
                      
                      
                      827
                      
                      
                      557Legal
                          and professional fees
                      
                      
                      353
                      
                      
                      153
                      
                      
                      742
                      
                      
                      290FDIC
                          deposit insurance premium
                      
                      
                      31
                      
                      
                      28
                      
                      
                      60
                      
                      
                      53Other
                      
                      
                      732
                      
                      
                      763
                      
                      
                      1,458
                      
                      
                      1,401Total
                          noninterest expense
                      
                      
                      4,904
                      
                      
                      4,410
                      
                      
                      9,799
                      
                      
                      8,629EARNINGS
                          BEFORE INCOME TAXES
                      
                      
                      3,577
                      
                      
                      2,146
                      
                      
                      257
                      
                      
                      4,054PROVISION
                          FOR INCOME TAXES
                      
                      
                      1,222
                      
                      
                      729
                      
                      
                      88
                      
                      
                      1,378NET
                          EARNINGS
                      
                      $
                      2,355
                      
                      $
                      1,417
                      
                      $
                      169
                      
                      $
                      2,676EARNINGS
                          PER SHARE:Basic
                      
                      $
                      0.19
                      
                      $
                      0.20
                      
                      $
                      0.01
                      
                      $
                      0.38Diluted
                      
                      
                      0.19
                      
                      
                      0.20
                      
                      
                      0.01
                      
                      
                      0.37See
                          notes to interim consolidated financial statements.
 2
 **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(dollars
                            in thousands, except share data)BALANCE
                            -- December 31, 2003
                        
                        $
                        37
                        
                        $
                        33
                        
                        $
                        13,974
                        
                        $
                        (1,748
                        )
                        $
                        18,471
                        
                        $
                        30,767Change
                            in unrealized loss on available-for-sale securities --
                            net
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,105
                        )
                        
                        
                        
                        
                        (2,105
                        )Less
                            reclassification adjustment for gains included in net
                            earnings -- net of
                            tax
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (462
                        )
                        
                        
                        
                        
                        (462
                        )Net
                            Earnings
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,947
                        
                        
                        5,947Total
                            comprehensive income (Note 1)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,380Conversion
                            of 610,425 shares of Class B stock into 610,425 shares
                            of common
                            stock
                        
                        
                        6
                        
                        
                        (6
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Issuance
                            of 5,438,664 shares of common stock
                        
                        
                        55
                        
                        
                        
                        
                        
                        52,199
                        
                        
                        
                        
                        
                        
                        
                        
                        52,254BALANCE
                            -- December 31, 2004
                        
                        
                        98
                        
                        
                        27
                        
                        
                        66,173
                        
                        
                        (4,315
                        )
                        
                        24,418
                        
                        
                        86,401Change
                            in unrealized loss on available-for-sale securities --
                            net
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,942
                        )
                        
                        
                        
                        
                        (2,942
                        )Less
                            reclassification adjustment for losses included in net
                            earnings -- net of
                            tax
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,971
                        
                        
                        
                        
                        
                        3,971Net
                            Earnings
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        169
                        
                        
                        169Total
                            comprehensive income (Note 1)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,198Conversion
                            of 26,566 shares of Class B stock into 26,566 shares
                            of common
                            stock
                        
                        
                        -
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Issuance
                            of 2,300 shares of common stock
                        
                        
                        -
                        
                        
                        
                        
                        
                        12
                        
                        
                        
                        
                        
                        
                        
                        
                        12Tax
                            benefit related to exercise of stock options
                        
                        
                        
                        
                        
                        
                        
                        
                        8
                        
                        
                        
                        
                        
                        
                        
                        
                        8BALANCE
                            -- June 30, 2005
                        
                        $
                        98
                        
                        $
                        27
                        
                        $
                        66,193
                        
                        $
                        (3,286
                        )
                        $
                        24,587
                        
                        $
                        87,619See
                            notes to interim consolidated financial statements.
 3
 **Table
                  of Contents**
   **SNB
                            BANCSHARES, INC. AND
                            SUBSIDIARIES****CONSOLIDATED
                            STATEMENTS OF CASH FLOWS****(Unaudited)**Six
                            Months Ended June 30,2005
                        
                        2004(dollars
                            in thousands)CASH
                          FLOWS FROM OPERATING ACTIVITIES:Net
                            Earnings
                        
                        $
                        169
                        
                        $
                        2,676Adjustments
                            to reconcile net earnings to net cash provided by operating
                            activities:Depreciation
                            and amortization
                        
                        
                        707
                        
                        
                        652Provision
                            for loan losses
                        
                        
                        1,250
                        
                        
                        1,650Amortization
                            and accretion of premiums and discounts on investment
                            securities --
                            net
                        
                        
                        308
                        
                        
                        450Gain
                            on sales of securities -- net
                        
                        
                        (128
                        )
                        
                        (503
                        )Impairment
                            write-down of securities
                        
                        
                        6,144
                        
                        
                        -Loss
                            on sale of real estate acquired by foreclosure
                        
                        
                        2
                        
                        
                        -Tax
                            benefit related to exercise of stock options
                        
                        
                        8
                        
                        
                        -Decrease
                            (increase) in accrued interest receivable
                        
                        
                        223
                        
                        
                        (890
                        )Decrease
                            (increase) in other assets
                        
                        
                        173
                        
                        
                        (318
                        )Increase
                            in accrued interest payable
                        
                        
                        816
                        
                        
                        240Decrease
                            in other liabilities
                        
                        
                        (397
                        )
                        
                        (192
                        )Net
                            cash provided by operating activities
                        
                        
                        9,275
                        
                        
                        3,765CASH
                          FLOWS FROM INVESTING ACTIVITIES:Purchases
                            of held-to-maturity securities
                        
                        
                        (94,771
                        )
                        
                        -Purchases
                            of available-for-sale securities
                        
                        
                        (9,497
                        )
                        
                        (284,226
                        )Proceeds
                            from sales of available-for-sale securities
                        
                        
                        166,492
                        
                        
                        130,822Proceeds
                            from maturities, calls or principal repayments of investment
                            securities
                        
                        
                        22,091
                        
                        
                        21,004Proceeds
                            from sales of real estate acquired by foreclosure
                        
                        
                        893
                        
                        
                        -Net
                            increase in loans
                        
                        
                        (66,591
                        )
                        
                        (91,272
                        )Increase
                            in federal funds sold
                        
                        
                        (1,150
                        )
                        
                        (2,905
                        )Purchase
                            of bank premises and equipment
                        
                        
                        (4,127
                        )
                        
                        (718
                        )Net
                            cash provided by (used in) investing activities
                        
                        
                        13,340
                        
                        
                        (227,295
                        )CASH
                          FLOWS FROM FINANCING ACTIVITIES:Net
                            increase (decrease) in deposits
                        
                        
                        (62,627
                        )
                        
                        122,285Net
                            increase in other borrowings
                        
                        
                        40,200
                        
                        
                        90,700Proceeds
                            from issuance of common stock
                        
                        
                        12
                        
                        
                        -Net
                            cash provided by (used in) financing activities
                        
                        
                        (22,415
                        )
                        
                        212,985INCREASE
                          (DECREASE) IN CASH AND CASH EQUIVALENTS
                        
                        
                        200
                        
                        
                        (10,545
                        )CASH
                          AND EQUIVALENTS -- Beginning of year
                        
                        
                        21,235
                        
                        
                        27,928CASH
                          AND EQUIVALENTS -- End of period
                        
                        $
                        21,435
                        
                        $
                        17,383SUPPLEMENTAL
                          DISCLOSURES:Interest
                            paid
                        
                        $
                        11,177
                        
                        $
                        7,758Income
                            taxes paid
                        
                        
                        211
                        
                        
                        1,791Other
                            real estate owned acquired through foreclosure
                        
                        
                        -
                        
                        
                        2,964See
                            notes to interim consolidated financial statements.
 
  4
 **Table
                    of
                    Contents**
 **SNB
                BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                  to Interim Consolidated Financial Statements**
 **June
                30, 2005**
 **(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. Certain
                      amounts within the
                      accompanying interim consolidated financial statements have
                      been reclassified to
                      conform to the current presentation. Such reclassifications
                      had no effect on net
                      income or total shareholders’ equity as previously reported. 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 interim consolidated financial statements and
                      the notes thereto
                      should be read in conjunction with the Company’s audited consolidated financial
                      statements as of and for the year ended December 31, 2004.
                      The results of
                      operations for the period ended June 30, 2005 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 currently accounts for its stock-based employee compensation
                      plan using
                      the intrinsic value-based method of accounting defined in APB
                      25, as permitted,
                      and discloses pro forma information as if accounted for using
                      the fair
                      value-based method as prescribed by accounting principles.
                      Because the exercise
                      price of the Company’s employee stock options equals the market price of the
                      underlying stock on the date of grant, no compensation expense
                      is recognized on
                      options granted.
 
 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 earnings or earnings
                      per share. Pro forma information regarding net earnings 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 a 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 of employee stock options.
                      The following
                      table shows information related to stock-based compensation
                      in both the reported
                      and pro forma earnings per share amounts (dollars in thousands,
                      except per share
                      data):
  Three
                                  Months Ended June 30,
                              
                              Six
                                  Months Ended June 30,2005
                              
                              2004
                              
                              2005
                              
                              2004Net
                                  earning-as reported
                              
                              $
                              2,355
                              
                              $
                              1,417
                              
                              $
                              169
                              
                              $
                              2,676Less
                                  total stock-based employee compensation expense
                                  determinedunder
                                  the fair value based method - net of related tax
                                  effects
                              
                              
                              147
                              
                              
                              19
                              
                              
                              290
                              
                              
                              38Net
                                  earnings (loss)-pro forma
                              
                              $
                              2,208
                              
                              $
                              1,398
                              
                              $
                              (121
                              )
                              $
                              2,638Earnings
                                  per share:Basic:As
                                  reported
                              
                              $
                              0.19
                              
                              $
                              0.20
                              
                              $
                              0.01
                              
                              $
                              0.38Pro
                                  forma
                              
                              
                              0.18
                              
                              
                              0.20
                              
                              
                              (0.01
                              )
                              
                              0.38Diluted:As
                                  reported
                              
                              $
                              0.19
                              
                              $
                              0.20
                              
                              $
                              0.01
                              
                              $
                              0.37Pro
                                  forma
                              
                              
                              0.18
                              
                              
                              0.19
                              
                              
                              (0.01
                              )
                              
                              0.37
 5
 **Table
                        of
                        Contents**
 **SNB
                  BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                  to Interim Consolidated Financial Statements**
 **June 30,
                  2005**
 **(Unaudited)**
 
  The
                    Company expects to adopt the provisions of SFAS No. 123R, *“Share-Based
                    Payment (Revised 2004),”* on
                    January 1, 2006. Among other things, SFAS 123R eliminates the
                    ability to account
                    for stock-based compensation using APB 25 and requires that such
                    transactions be
                    recognized as compensation cost in the income statement based
                    on their fair
                    values on the date of the grant. See *Recent
                    Accounting Standards* in
                    this
                    note for additional information.
 
 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 common and Class B 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 and amounts in thousands, except
                    per share
                    data):
 Three
                                    Months Ended June 30,
                                  
                                  Six
                                      Months Ended June 30,2005
                                  
                                  2004
                                  
                                  2005
                                  
                                  2004Net
                                      earnings-as reported
                                  
                                  $
                                  2,355
                                  
                                  $
                                  1,417
                                  
                                  $
                                  169
                                  
                                  $
                                  2,676Basic:Weighted
                                      average shares outstanding
                                  
                                  
                                  12,435
                                  
                                  
                                  6,994
                                  
                                  
                                  12,435
                                  
                                  
                                  6,994Basic
                                      earnings per common share
                                  
                                  $
                                  0.19
                                  
                                  $
                                  0.20
                                  
                                  $
                                  0.01
                                  
                                  $
                                  0.38Diluted:Weighted
                                      average shares outstanding
                                  
                                  
                                  12,435
                                  
                                  
                                  6,994
                                  
                                  
                                  12,435
                                  
                                  
                                  6,994Potentially
                                      dilutive common shares from options
                                  
                                  
                                  156
                                  
                                  
                                  239
                                  
                                  
                                  177
                                  
                                  
                                  231Weighted
                                      average shares and potentially dilutive common
                                      shares
                                      outstanding
                                  
                                  
                                  12,591
                                  
                                  
                                  7,233
                                  
                                  
                                  12,612
                                  
                                  
                                  7,225Diluted
                                      earnings per common share
                                  
                                  $
                                  0.19
                                  
                                  $
                                  0.20
                                  
                                  $
                                  0.01
                                  
                                  $
                                  0.37
 Recent
                      Accounting Standards
 In
                      December 2004, the FASB issued SFAS No. 123R, *“Share-Based
                      Payment (Revised 2004).”* SFAS
                      123R
                      establishes standards for the accounting for transactions in
                      which an entity (i)
                      exchanges its equity instruments for goods or services, or
                      (ii) incurs
                      liabilities in exchange for goods or services that are based
                      on the fair value
                      of the entity’s equity instruments or that may be settled by the issuance
                      of the
                      equity instruments. SFAS 123R eliminates the ability to account
                      for stock-based
                      compensation using APB 25 and requires that such transactions
                      be recognized as
                      compensation cost in the income statement based on their fair
                      values on the date
                      of the grant. SFAS 123R was to be effective for the Company
                      on July 1, 2005;
                      however, the required implementation date was recently delayed
                      until January 1,
                      2006. The Company will transition to fair value based accounting
                      for stock-based
                      compensation using a modified version of prospective application
“(modified
                      prospective application)”. Under modified prospective application, as it is
                      applicable to the Company, SFAS 123R applies to new awards
                      and to awards
                      modified, repurchased, or cancelled after January 1, 2006.
                      Additionally,
                      compensation cost for the portion of awards for which the requisite
                      service has
                      not been rendered (generally referring to non-vested awards)
                      that are
                      outstanding as of January 1, 2006 must be recognized as the
                      remaining requisite
                      service is rendered during the period of and/or the periods
                      after the adoption
                      of SFAS 123R. The attribution of compensation cost for those
                      earlier awards will
                      be based on the same method and on the same grant-date fair
                      values previously
                      determined for the pro forma disclosures required for companies
                      that did not
                      adopt the fair value accounting method for stock-based employee
                      compensation.
                      Based on the stock-based compensation awards outstanding as
                      of June 30, 2005 for
                      which the requisite service is not expected to be fully rendered
                      prior to
                      January 1, 2006, the Company expects to recognize additional
                      pre-tax, quarterly
                      compensation cost of approximately $201 thousand beginning
                      in the first quarter
                      of 2006 as a result of the adoption of SFAS 123R. Future levels
                      of compensation
                      cost recognized related to stock-based compensation awards
                      (including the
                      aforementioned expected costs during the period for adoption)
                      may be impacted by
                      new awards and/or modifications, repurchases and cancellations
                      of existing
                      awards before and after the adoption of this standard.
   6
 **Table
                        of
                        Contents**
 **SNB
                    BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                    to Interim Consolidated Financial Statements**
 **June 30,
                    2005**
 **(Unaudited)**
  **(2)
                      Securities**
 
 The
                      amortized cost and fair value of investment securities at June
                      30, 2005 and
                      December 31, 2004 were as follows (dollars in thousands):
  **As
                                  of June 30, 2005****Gross**
                              
                              **Gross****Amortized**
                              
                              **Unrealized**
                              
                              **Unrealized**
                              
                              **Fair****Cost**
                              
                              **Gains**
                              
                              **Losses**
                              
                              **Value****Available-for-Sale:**U.S.
                                  government agency securities
                              
                              $
                              117,987
                              
                              $
                              8
                              
                              $
                              (1,799
                              )
                              $
                              116,196Mortgage-backed
                                  securities
                              
                              
                              90,436
                              
                              
                              147
                              
                              
                              (2,055
                              )
                              
                              88,528Collateralized
                                  mortgage obligations
                              
                              
                              70,190
                              
                              
                              -
                              
                              
                              (1,367
                              )
                              
                              68,823Obligations
                                  of state and political subdivisions
                              
                              
                              2,628
                              
                              
                              52
                              
                              
                              (29
                              )
                              
                              2,651Other
                                  securities
                              
                              
                              18,224
                              
                              
                              81
                              
                              
                              (36
                              )
                              
                              18,269Total
                              
                              $
                              299,465
                              
                              $
                              288
                              
                              $
                              (5,286
                              )
                              $
                              294,467**Held-to-Maturity**Mortgage-backed
                                  securities
                              
                              $
                              43,622
                              
                              $
                              336
                              
                              $
                              -
                              
                              $
                              43,958Collateralized
                                  mortgage obligations
                              
                              
                              47,214
                              
                              
                              192
                              
                              
                              (121
                              )
                              
                              47,285Obligations
                                  of state and political subdivisions
                              
                              
                              14,220
                              
                              
                              298
                              
                              
                              (17
                              )
                              
                              14,501Total
                              
                              $
                              105,056
                              
                              $
                              826
                              
                              $
                              (138
                              )
                              $
                              105,744**As
                                  of December 31, 2004****Gross**
                              
                              
                              **Gross****Amortized**
                              
                              
                              **Unrealized**
                              
                              
                              **Unrealized**
                              
                              
                              **Fair****Cost**
                              
                              
                              **Gains**
                              
                              
                              **Losses**
                              
                              
                              **Value****Available-for-Sale:**U.S.
                                  government agency securities
                              
                              $
                              278,972
                              
                              $
                              6
                              
                              $
                              (4,220
                              )
                              $
                              274,758Mortgage-backed
                                  securities
                              
                              
                              101,320
                              
                              
                              250
                              
                              
                              (1,682
                              )
                              
                              99,888Collateralized
                                  mortgage obligations
                              
                              
                              78,627
                              
                              
                              4
                              
                              
                              (1,031
                              )
                              
                              77,600Obligations
                                  of state and political subdivisions
                              
                              
                              2,630
                              
                              
                              44
                              
                              
                              (16
                              )
                              
                              2,658Other
                                  securities
                              
                              
                              20,244
                              
                              
                              63
                              
                              
                              (56
                              )
                              
                              20,251Total
                              
                              $
                              481,793
                              
                              $
                              367
                              
                              $
                              (7,005
                              )
                              $
                              475,155**Held-to-Maturity**Collateralized
                                  mortgage obligations
                              
                              $
                              5,275
                              
                              $
                              -
                              
                              $
                              (14
                              )
                              $
                              5,261Obligations
                                  of state and political subdivisions
                              
                              
                              8,093
                              
                              
                              146
                              
                              
                              (7
                              )
                              
                              8,232Total
                              
                              $
                              13,368
                              
                              $
                              146
                              
                              $
                              (21
                              )
                              $
                              13,493
  Included
                          in other securities above is the Company’s investment in Federal Reserve Bank
                          and Federal Home Loan Bank stock of $12.1 million and $14.4
                          million at June 30,
                          2005 and December 31, 2004, 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.
 
 Declines
                          in the fair value of individual securities below their
                          cost that are
                          other-than-temporary result in write-downs, as a realized
                          loss, of the
                          individual securities to their fair value. Accordingly
                          during the quarter ended
                          March 31, 2005, as the result of management’s decision to restructure a portion
                          of the available-for-sale securities portfolio, the Company
                          recognized a pre-tax
                          $6.1 million impairment write-down to adjust the carrying
                          value of the
                          approximately $169.0 million in securities identified for
                          sale to their fair
                          value. For further information regarding the restructuring,
                          see “Item 2.
 7
 **Table
                              of
                              Contents**
 **SNB
                          BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                          to Interim Consolidated Financial Statements**
 **June 30,
                          2005**
 **(Unaudited)**
 
 Management’s
                            Discussion and Analysis of Financial Condition and Results
                            of Operations -
                            Results of Operations for the Six Months Ended June 30,
                            2005 and 2004 -
                            General.”
 
 Management
                            believes that based upon the credit quality of the securities,
                            none of the
                            unrealized loss on securities is considered other-than-temporary
                            at June 30,
                            2005. 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 June 30, 2005
                            is as follows (dollars in
                            thousands):
 Less
                                        than 12 months
                                    
                                    12
                                        months or longer
                                    
                                    TotalGross
                                    
                                    
                                    
                                    Gross
                                    
                                    
                                    
                                    GrossFair
                                    
                                    Unrealized
                                    
                                    Fair
                                    
                                    Unrealized
                                    
                                    Fair
                                    
                                    UnrealizedValue
                                    
                                    Loss
                                    
                                    Value
                                    
                                    Loss
                                    
                                    Value
                                    
                                    Loss**Available-for-Sale:**U.S.
                                        Government securities
                                    
                                    $
                                    35,614
                                    
                                    $
                                    (383
                                    )
                                    $
                                    72,575
                                    
                                    $
                                    (1,416
                                    )
                                    $
                                    108,189
                                    
                                    $
                                    (1,799
                                    )Mortgage-backed
                                        securities
                                    
                                    
                                    8,711
                                    
                                    
                                    (188
                                    )
                                    
                                    69,002
                                    
                                    
                                    (1,867
                                    )
                                    
                                    77,713
                                    
                                    
                                    (2,055
                                    )Collateralized
                                        mortgage obligations
                                    
                                    
                                    20,837
                                    
                                    
                                    (187
                                    )
                                    
                                    47,800
                                    
                                    
                                    (1,180
                                    )
                                    
                                    68,637
                                    
                                    
                                    (1,367
                                    )Obligations
                                        of state and political subdivisions
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    1,362
                                    
                                    
                                    (29
                                    )
                                    
                                    1,362
                                    
                                    
                                    (29
                                    )Other
                                        securities
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    3,192
                                    
                                    
                                    (36
                                    )
                                    
                                    3,192
                                    
                                    
                                    (36
                                    )Total
                                    
                                    $
                                    65,162
                                    
                                    $
                                    (758
                                    )
                                    $
                                    193,931
                                    
                                    $
                                    (4,528
                                    )
                                    $
                                    259,093
                                    
                                    $
                                    (5,286
                                    )**Held-to-Maturity:**Collateralized
                                        mortgage obligations
                                    
                                    $
                                    18,115
                                    
                                    $
                                    (121
                                    )
                                    $
                                    -
                                    
                                    $
                                    -
                                    
                                    $
                                    18,115
                                    
                                    $
                                    (121
                                    )Obligations
                                        of state and political subdivisions
                                    
                                    
                                    1,760
                                    
                                    
                                    (17
                                    )
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    1,760
                                    
                                    
                                    (17
                                    )Total
                                    
                                    $
                                    19,875
                                    
                                    $
                                    (138
                                    )
                                    $
                                    -
                                    
                                    $
                                    -
                                    
                                    $
                                    19,875
                                    
                                    $
                                    (138
                                    )
 Investment
                                securities with amortized costs of $245.4 million
                                and $355.5 million and fair
                                values of $241.1 million and $349.8 million at June
                                30, 2005 and December 31,
                                2004, 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**
 
 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 of Company common stock 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 June 30, 2005 and December
                                31, 2004, options to
                                purchase 1,255,800 and 1,265,700 shares of the Company’s common stock,
                                respectively, were outstanding.
 8
 **Table
                              of
                              Contents**
 **SNB
                            BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                            to Interim Consolidated Financial Statements**
 **June 30,
                            2005**
 **(Unaudited)**
  
 A
                                  summary
                                  of changes in outstanding options is as follows:
  Six
                                            Months Ended
                                          June
                                            30, 2005
                                        
                                        Year
                                            Ended
                                          December
                                            31, 2004Number
                                            of Options
                                        
                                        Weighted
                                            Average Exercise Price
                                        
                                        Number
                                            of Options
                                        
                                        Weighted
                                            Average Exercise PriceShares
                                            under option -- beginning of period
                                        
                                        
                                        1,265,700
                                        
                                        $
                                        9.32
                                        
                                        
                                        340,500
                                        
                                        $
                                        5.00Options
                                            granted
                                        
                                        
                                        25,000
                                        
                                        
                                        12.06
                                        
                                        
                                        945,500
                                        
                                        
                                        10.82Options
                                            forfeited
                                        
                                        
                                        (32,600
                                        )
                                        
                                        9.37
                                        
                                        
                                        (18,000
                                        )
                                        
                                        6.94Options
                                            exercised
                                        
                                        
                                        (2,300
                                        )
                                        
                                        5.00
                                        
                                        
                                        (2,300
                                        )
                                        
                                        5.00Shares
                                            under option -- end of period
                                        
                                        
                                        1,255,800
                                        
                                        
                                        9.38
                                        
                                        
                                        1,265,700
                                        
                                        
                                        9.32Options
                                            exercisable -- end of period
                                        
                                        
                                        124,100
                                        
                                        
                                        5.00
                                        
                                        
                                        132,400
                                        
                                        
                                        5.00Weighted
                                            average fair value of options granted
                                            during the period
                                        
                                        
                                        
                                        
                                        $
                                        10.01
                                        
                                        
                                        
                                        
                                        $
                                        4.57Remaining
                                            authorized options under approved plan
                                            -- end of period
                                        
                                        
                                        39,600
                                        
                                        
                                        
                                        
                                        
                                        32,000
  The
                                  fair
                                  value of options at date of grant was estimated
                                  using the Black-Scholes
                                  options-pricing model with the following weighted-average
                                  assumptions:
 2005
                                          
                                          2004
                                          
                                          2003
                                          
                                          2002Expected
                                              life (years)
                                          
                                          
                                          9
                                          
                                          
                                          7
                                          
                                          
                                          -
                                          
                                          
                                          7Risk
                                              free interest rate
                                          
                                          
                                          4.18
                                          %
                                          
                                          4.23
                                          %
                                          
                                          -
                                          
                                          
                                          4.19
                                          %Volatility
                                          
                                          
                                          81.90
                                          %
                                          
                                          31.00
                                          %
                                          
                                          -
                                          
                                          
                                          31.00
                                          %Dividend
                                              yield
                                          
                                          
                                          0.00
                                          %
                                          
                                          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 June 30, 2005, 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.
 
 9
 **Table
                                      of
                                      Contents**
  **SNB
                                  BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                                  to Interim Consolidated Financial Statements**
 **June 30,
                                  2005**
 **(Unaudited)**
   The
                                following is a summary of the Company’s and the Bank’s capital ratios at June
                                30, 2005 and December 31, 2004 (dollars in thousands):
 
  To
                                          Be CategorizedAs
                                          Well CapitalizedUnder
                                          PromptFor
                                          Capital
                                      
                                      Corrective
                                          ActionActual
                                      
                                      Adequacy
                                          Purposes
                                      
                                      ProvisionsAmount
                                      
                                      Ratio
                                      
                                      Amount
                                      
                                      Ratio
                                      
                                      Amount
                                      
                                      Ratio**CONSOLIDATED*:**As
                                          of June 30, 2005 (Unaudited)Total
                                          Capital (to Risk-Weighted Assets)
                                      
                                      $
                                      137,193
                                      
                                      
                                      18.72
                                      %
                                      $
                                      58,958
                                      
                                      
                                      8.00
                                      %Tier
                                          I Capital (to Risk-Weighted Assets)
                                      
                                      
                                      121,175
                                      
                                      
                                      16.57
                                      
                                      
                                      29,479
                                      
                                      
                                      4.00Tier
                                          I Capital (to Total Assets)
                                      
                                      
                                      121,175
                                      
                                      
                                      11.29
                                      
                                      
                                      43,178
                                      
                                      
                                      4.00As
                                          of December 31, 2004Total
                                          Capital (to Risk-Weighted Assets)
                                      
                                      $
                                      136,756
                                      
                                      
                                      19.86
                                      %
                                      $
                                      55,091
                                      
                                      
                                      8.00
                                      %Tier
                                          I Capital (to Risk-Weighted Assets)
                                      
                                      
                                      122,049
                                      
                                      
                                      17.72
                                      
                                      
                                      27,545
                                      
                                      
                                      4.00Tier
                                          I Capital (to Total Assets)
                                      
                                      
                                      122,049
                                      
                                      
                                      10.87
                                      
                                      
                                      44,913
                                      
                                      
                                      4.00**BANK:**As
                                          of June 30, 2005 (Unaudited)Total
                                          Capital (to Risk-Weighted Assets)
                                      
                                      $
                                      121,571
                                      
                                      
                                      16.54
                                      %
                                      $
                                      58,844
                                      
                                      
                                      8.00
                                      %
                                      $
                                      73,554
                                      
                                      
                                      10.00
                                      %Tier
                                          I Capital (to Risk-Weighted Assets)
                                      
                                      
                                      112,374
                                      
                                      
                                      15.29
                                      
                                      
                                      29,422
                                      
                                      
                                      4.00
                                      
                                      
                                      44,133
                                      
                                      
                                      6.00Tier
                                          I Capital (to Total Assets)
                                      
                                      
                                      112,374
                                      
                                      
                                      10.42
                                      
                                      
                                      43,120
                                      
                                      
                                      4.00
                                      
                                      
                                      53,899
                                      
                                      
                                      5.00As
                                          of December 31, 2004Total
                                          Capital (to Risk-Weighted Assets)
                                      
                                      $
                                      119,017
                                      
                                      
                                      17.35
                                      %
                                      $
                                      54,881
                                      
                                      
                                      8.00
                                      %
                                      $
                                      68,601
                                      
                                      
                                      10.00
                                      %Tier
                                          I Capital (to Risk-Weighted Assets)
                                      
                                      
                                      110,896
                                      
                                      
                                      16.17
                                      
                                      
                                      27,440
                                      
                                      
                                      4.00
                                      
                                      
                                      41,161
                                      
                                      
                                      6.00Tier
                                          I Capital (to Total Assets)
                                      
                                      
                                      110,896
                                      
                                      
                                      9.89
                                      
                                      
                                      44,854
                                      
                                      
                                      4.00
                                      
                                      
                                      56,068
                                      
                                      
                                      5.00*
                                          At June 30, 2005 and December 31, 2004,
                                          Tier I Capital (for purposes of
                                          determining the Tier I Capital to Total
                                          Assets ratio and the Tier I
                                          Capital to Risk-Weighted Assets ratio)includes
                                          a portion of the Company's Trust Preferred
                                          Securities as allowed by
                                          regulatory capital guidelines. 
                                          Trust Preferred Securities amounts
                                          not included in Tier I Capital areincluded
                                          in Tier II Capital for purposes of determining
                                          the Total Capital to
                                          Risk-Weighted Assets ratio.
 10
 **Table
                                    of Contents**
 **SNB
                              BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                              to Interim Consolidated Financial Statements**
 **June 30,
                              2005**
 **(Unaudited)**
   **Item
                          2.****Management's
                          Discussion and Analysis of Financial Condition and Results
                          of
                          Operations**
 
 **Special
                          Cautionary Notice Regarding Forward-Looking Statements**
 
 Statements
                          and financial analysis contained in this report on Form
                          10-Q that are not
                          historical facts are forward-looking statements made pursuant
                          to the safe harbor
                          provisions of the Private Securities Litigation Reform
                          Act of 1995.
                          Forward-looking statements are based on assumptions and
                          involve a number of
                          risks and uncertainties that could cause actual results
                          to differ materially
                          from current expectations, future results, performance
                          or achievements expressed
                          or implied by such forward-looking statements. Such risks
                          and uncertainties
                          include, but are not limited to, the following:
  ·
                                  the
                                      effects of future economic and business conditions
                                      on usand our
                                      customers;
  ·
                                  changes
                                    in statutes and governmental regulations
                                    or their
                                    interpretations including changes in tax
                                    requirements and tax
                                    rates;
  ·
                                  changes
                                    in interest rates which could reduce our
                                    net interest margins, asset
                                    valuations and expense expectations;
  ·
                                  increased
                                    competition from other banks and financial institutions
                                    for customer
                                    deposits and loans;
 ·
                                    changes
                                      in the levels of loan prepayments and the resulting
                                      effects on the value
                                      of our loan portfolio;
 ·
                                  the
                                    failure of assumptions underlying the establishment
                                    of and provisions made
                                    to the allowance for loan losses;
  ·
                                  increased
                                    credit risk in our assets and increased operating
                                    risk caused by a
                                    material change in commercial, consumer and/or
                                    real estate loans as a
                                    percentage of the total loan portfolio;
  ·
                                  changes in the availability
                                    of funds resulting in
                                    increased costs or reduced liquidity;
  ·
                                  the
                                    effect of changes in accounting policies and
                                    practices which may be
                                    adopted by regulatory agencies and/or the Financial
                                    Accounting Standards
                                    Board;
  ·
                                  our 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 our 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. We believe we
                          have chosen these
                          assumptions or bases in good faith and that they are reasonable.
                          However, we
                          caution you that assumptions or bases almost always vary
                          from actual results,
                          and the differences between assumptions or bases and actual
                          results can be
                          material. We do not intend (and are not obligated) to publicly
                          update or
                          otherwise revise any forward-looking statement, unless
                          the securities laws
                          require us to do so.
 11
 **Table
                              of
                              Contents**
  **Overview**
  We
                              generate the majority of our revenue from interest
                              on loans, service charges on
                              customer accounts and income from investment securities.
                              This revenue is offset
                              by interest expense paid on deposits and other borrowings
                              and noninterest
                              expense such as administrative and occupancy expenses.
                              Net interest income is
                              the difference between interest income on interest-earning
                              assets such as loans
                              and securities and interest expense on interest-bearing
                              liabilities such as
                              customer deposits and other borrowings which are used
                              to fund those assets. Net
                              interest income is our largest source of net income.
                              Interest rate fluctuations,
                              as well as changes in the amount and type of earning
                              assets and liabilities,
                              combine to affect net interest income.
 
 Noninterest
                              income is another source of income for us. We receive
                              fees from our deposit
                              customers in the form of service fees and other fees
                              for services provided to
                              the customer. Other services such as safe deposit,
                              wire transfer and lock box
                              fees provide additional fee income. We may also generate
                              income from the sale of
                              investment securities. The fees collected by us and
                              any gains on sales of
                              securities are found in our consolidated statements
                              of earnings under
“noninterest income.” Offsetting these earnings are operating expenses referred
                              to as “noninterest expense.” Because banking is a very people intensive
                              industry, our largest operating expense is employee
                              compensation and
                              benefits.
 
 **Critical
                            Accounting Policies**
 Our
                              accounting policies are integral to understanding the
                              results reported. Our
                              accounting policies are described in Note 1 to the
                              consolidated financial
                              statements included in our 2004 annual report on Form
                              10-K. The policies related
                              to the allowance for loan losses and stock-based compensation
                              require a
                              significant amount of subjective and complex judgment
                              and assumptions by our
                              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 our 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.
 
 Stock-based
                              Compensation - We account for stock-based employee
                              compensation plans based on
                              the “intrinsic value method” provided in Accounting Principles Board Opinion
                              (APB) No. 25, “Accounting for Stock Issued to Employees,” and related
                              Interpretations. Because of the exercise price of our
                              employee stock options
                              equals the market price of the underlying stock on
                              the date of grant, no
                              compensation expense is recognized on options granted.
                              Compensation expense for
                              stock awards is based on the market price of the stock
                              on the date of grant and
                              is recognized ratably over the service period of the
                              award. We make pro-forma
                              disclosure of net earnings and earnings per share assuming
                              the fair value-based
                              accounting method discussed in Note 1 to our consolidated
                              financial statements.
                              The fair value of stock options granted is estimated
                              at the date of grant using
                              the Black-Scholes option-pricing model. This model
                              requires the input of highly
                              subjective assumptions.
 
 We
                              expect
                              to adopt the provisions of SFAS No. 123R “Share-Based Payment (Revised 2004),”
                              on January 1, 2006. Among other things, SFAS No. 123R
                              eliminates the ability to
                              account for stock-based compensation using the intrinsic
                              value based method of
                              accounting and requires that such transactions be recognized
                              as compensation
                              expense in the income statement based on their fair
                              values on the date of the
                              grant. SFAS No. 123R was to be effective on July 1,
                              2005; however the required
                              implementation date was recently delayed until January
                              1, 2006. SFAS No. 123R
                              will require that management make assumptions including
                              stock price volatility
                              and employee turnover that are utilized to measure
                              compensation
                              expense.
 12
 **Table
                              of
                              Contents**
  *Results
                            of Operations for the Three Months Ended March 31, 2005
                            and
                            2004*
 
 General
 For
                              the
                              three months ended June 30, 2005, we recorded net earnings
                              of $2.4 million or
                              $0.19 per diluted common and Class B share, an increase
                              of $938 thousand or
                              66.2% compared with net earnings of $1.4 million or
                              $0.20 per diluted share for
                              the same period in 2004. This increase in net earnings
                              was principally comprised
                              of a $1.6 million increase in net interest income and
                              a $250 thousand decrease
                              in the provision for loan losses, partially offset
                              by a $494 thousand increase
                              in noninterest expenses and a $493 thousand increase
                              in the provision for income
                              taxes. Notwithstanding the increase in net earnings,
                              the slight decrease in
                              diluted earnings per share for the second quarter of
                              2005 compared with the same
                              period in 2004 is the result of the comparative impact
                              of the 5.4 million shares
                              of common stock issued in connection with our initial
                              public offering in August
                              2004. For computation of diluted earnings per share,
                              weighted average shares of
                              common stock and Class B stock outstanding during the
                              second quarter of 2005
                              were 12.6 million compared with 7.2 million weighted
                              average shares outstanding
                              during the second quarter of 2004.
   Net
                              Interest Income
 When
                            comparing the second quarter of 2005 to the same quarter
                            in 2004, net interest
                            income increased $1.6 million, primarily due to an increase
                            of $3.5 million in
                            interest income, partially offset by a $1.8 million increase
                            in interest
                            expense. The net interest margin increased 53 basis points
                            to 3.33% for the
                            quarter ended June 30, 2005 compared with 2.80% for the
                            same period in
                            2004.
 
 Interest
                            income from loans increased by $3.7 million, or 52.7%,
                            to $10.8 million for the
                            quarter ended June 30, 2005, compared with $7.1 million
                            for the same period in
                            2004. This increase was primarily the result of an increase
                            in average loan
                            volume aided by an increase in the average yield, with
                            loans averaging $641.7
                            million in the second quarter of 2005 compared with $486.4
                            million in the second
                            quarter of 2004, an increase of $155.2 million, or 31.9%.
                            The average yield on
                            loans increased 91 basis points to 6.67% for the quarter
                            ended June 30, 2005
                            compared with 5.76% for the same period in 2004.
 
 Interest
                            income from investment securities decreased by $297 thousand,
                            or 7.3%, to $3.8
                            million for the quarter ended June 30, 2005 compared
                            with $4.0 million for the
                            same period in 2004. This decrease was due to the reduction
                            in securities
                            principal balances, partially offset by the increase
                            in average yields resulting
                            from the restructuring of the bond portfolio. Investment
                            securities averaged
                            $386.9 million in the second quarter of 2005 compared
                            with $504.5 million in the
                            second quarter of 2004, a decrease of $117.6 million
                            or 23.3%. The average yield
                            on investment securities increased 76 basis points to
                            3.97% for the quarter
                            ended June 30, 2005 compared with 3.21% for the same
                            period in 2004.
 
 Interest
                            expense increased 44.0%, or $1.8 million, to $6.0 million
                            for the quarter ended
                            June 30, 2005 compared with $4.1 million for the same
                            period in 2004. The
                            increase was principally due to the 92 basis points increase
                            in the average rate
                            paid to 2.80% for the quarter ended June 30, 2005, compared
                            with 1.88% for the
                            same period in 2004. The average balance of interest-bearing
                            liabilities
                            decreased $31.4 million or 3.5% from $895.8 million for
                            the quarter ended June
                            30, 2004 compared with $864.4 million for the same period
                            in 2005. The decrease
                            in average interest-bearing liabilities was principally
                            due to a decrease in
                            time deposits of $34.6 million or 8.6%. This decrease
                            in high cost deposits was
                            partially offset by a $13.5 million increase in noninterest-bearing
                            deposits. We
                            expect a continued downward trend in deposits as we allow
                            brokered and internet
                            CD deposits to roll-off and be replaced with core deposit
                            growth from our
                            expanding branch network and contractual depository relationships
                            within the
                            communities we serve.
 
  13
 **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. All balances are daily average balances
                                  and nonaccruing loans have been
                                  included in the table as loans carrying a zero
                                  yield (dollars in
                                  thousands).
 For
                                              the Three Months Ended June 30,2005
                                          
                                          2004Average
                                          
                                          Interest
                                          
                                          Average
                                          
                                          Average
                                          
                                          Interest
                                          
                                          AverageOutstanding
                                          
                                          Earned/
                                          
                                          Yield/
                                          
                                          Outstanding
                                          
                                          Earned/
                                          
                                          Yield/Balance
                                          
                                          Paid
                                          
                                          Rate
                                              (1)
                                          
                                          Balance
                                          
                                          Paid
                                          
                                          Rate
                                              (1)**Assets:**Interest-earning
                                              assets:Loans
                                          
                                          $
                                          641,650
                                          
                                          $
                                          10,819
                                          
                                          
                                          6.67
                                          %
                                          $
                                          486,394
                                          
                                          $
                                          7,085
                                          
                                          
                                          5.76
                                          %Investment
                                              securities
                                          
                                          
                                          386,894
                                          
                                          
                                          3,752
                                          
                                          
                                          3.97
                                          
                                          
                                          504,454
                                          
                                          
                                          4,049
                                          
                                          
                                          3.21Federal
                                              funds sold
                                          
                                          
                                          1,366
                                          
                                          
                                          10
                                          
                                          
                                          2.81
                                          
                                          
                                          8,371
                                          
                                          
                                          19
                                          
                                          
                                          0.91Interest-earning
                                              deposits in other financial institutions
                                          
                                          
                                          5,032
                                          
                                          
                                          37
                                          
                                          
                                          2.91
                                          
                                          
                                          956
                                          
                                          
                                          3
                                          
                                          
                                          1.33Total
                                              interest-earning assets
                                          
                                          
                                          1,034,942
                                          
                                          
                                          14,618
                                          
                                          
                                          5.64
                                          %
                                          
                                          1,000,175
                                          
                                          
                                          11,156
                                          
                                          
                                          4.43
                                          %Less
                                              allowance for loan losses
                                          
                                          
                                          (9,013
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (6,501
                                          )Total
                                              interest-earning assets, net of allowance
                                          
                                          
                                          1,025,929
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          993,674Non-earning
                                              assets:Cash
                                              and due from banks
                                          
                                          
                                          14,907
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          14,348Premises
                                              and equipment
                                          
                                          
                                          18,810
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          12,661Accrued
                                              interest receivable and other assets
                                          
                                          
                                          13,150
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          13,479Total
                                              noninterest-earning assets
                                          
                                          
                                          46,867
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          40,488Total
                                              assets
                                          
                                          $
                                          1,072,796
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          1,034,162**Liabilities
                                              and Shareholders' Equity:**Interest-bearing
                                              liabilities:NOW,
                                              savings, and money market accounts
                                          
                                          $
                                          337,496
                                          
                                          $
                                          1,708
                                          
                                          
                                          2.03
                                          %
                                          $
                                          342,693
                                          
                                          $
                                          1,025
                                          
                                          
                                          1.20
                                          %Time
                                              deposits
                                          
                                          
                                          369,909
                                          
                                          
                                          2,768
                                          
                                          
                                          3.00
                                          
                                          
                                          404,545
                                          
                                          
                                          2,336
                                          
                                          
                                          2.32Junior
                                              subordinated debentures
                                          
                                          
                                          38,250
                                          
                                          
                                          671
                                          
                                          
                                          6.94
                                          
                                          
                                          38,250
                                          
                                          
                                          516
                                          
                                          
                                          5.34Other
                                              borrowed funds
                                          
                                          
                                          118,715
                                          
                                          
                                          885
                                          
                                          
                                          2.95
                                          
                                          
                                          110,287
                                          
                                          
                                          311
                                          
                                          
                                          1.12Total
                                              interest-bearing liabilities
                                          
                                          
                                          864,370
                                          
                                          
                                          6,032
                                          
                                          
                                          2.80
                                          %
                                          
                                          895,775
                                          
                                          
                                          4,188
                                          
                                          
                                          1.88
                                          %Noninterest-bearing
                                              liabilities:Demand
                                              deposits
                                          
                                          
                                          118,122
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          104,646Accrued
                                              interest payable and other liabilities
                                          
                                          
                                          4,127
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,423Total
                                              noninterest-bearing liabilities
                                          
                                          
                                          122,249
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          108,069Total
                                              liabilities
                                          
                                          
                                          986,619
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,003,844Shareholders'
                                              equity
                                          
                                          
                                          86,177
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          30,318Total
                                              liabilities and shareholders' equity
                                          
                                          $
                                          1,072,796
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          1,034,162Net
                                              interest income
                                          
                                          
                                          
                                          
                                          $
                                          8,586
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          6,968Net
                                              interest spread
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.84
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.55
                                          %Net
                                              interest margin (tax equivalent)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3.33
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.80
                                          %(1)
                                              Annualized
 14
 **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 June 30, 2005**
                                            **Compared
                                              with the Same Period in 2004****Increase
                                              (Decrease)****Due
                                              to Change in****Volume**
                                          
                                          **Rate**
                                          
                                          **Total****Interest-earning
                                              assets:**Loans
                                          
                                          $
                                          2,231
                                          
                                          $
                                          1,503
                                          
                                          $
                                          3,734Investment
                                              securities
                                          
                                          
                                          (941
                                          )
                                          
                                          644
                                          
                                          
                                          (297
                                          )Federal
                                              funds sold
                                          
                                          
                                          (16
                                          )
                                          
                                          7
                                          
                                          
                                          (9
                                          )Interest-earning
                                              deposits in other financial institutions
                                          
                                          
                                          14
                                          
                                          
                                          20
                                          
                                          
                                          34Total
                                              increase in interest income
                                          
                                          
                                          1,288
                                          
                                          
                                          2,174
                                          
                                          
                                          3,462**Interest-bearing
                                              liabilities:**NOW,
                                              savings and money market accounts
                                          
                                          
                                          (16
                                          )
                                          
                                          699
                                          
                                          
                                          683Time
                                              deposits
                                          
                                          
                                          (200
                                          )
                                          
                                          632
                                          
                                          
                                          432Junior
                                              subordinated debentures
                                          
                                          
                                          -
                                          
                                          
                                          155
                                          
                                          
                                          155Other
                                              borrowed funds
                                          
                                          
                                          23
                                          
                                          
                                          551
                                          
                                          
                                          574Total
                                              increase (decrease) in interest expense
                                          
                                          
                                          (193
                                          )
                                          
                                          2,037
                                          
                                          
                                          1,844Increase
                                              in net interest income
                                          
                                          $
                                          1,481
                                          
                                          $
                                          137
                                          
                                          $
                                          1,618
  Provision
                                  for Loan Losses
 We
                                  utilize our migration analysis to aid in the evaluation
                                  of the adequacy of our
                                  allowance for loan losses account. Based upon this
                                  analysis, as well as other
                                  factors which management must assess, we recorded
                                  a provision for loan losses of
                                  $650 thousand for the quarter ended June 30, 2005
                                  compared with $900 thousand
                                  for the same period in 2004. Additionally, we experienced
                                  net charge-offs of $1
                                  thousand for the quarter ended June 30, 2005, compared
                                  with net charge-offs of
                                  $152 thousand for the same period in 2004. At June
                                  30, 2005, the allowance for
                                  loan losses as a percentage of total loans was
                                  1.41% compared with 1.36% at June
                                  30, 2004. 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
 Noninterest
                                  income totaled $545 thousand in the second quarter
                                  of 2005 compared with $488
                                  thousand in the second quarter of 2004, an increase
                                  of $57 thousand or 11.7%.
                                  The increase is comprised of increases in service
                                  charges on deposit accounts
                                  and other noninterest income, partially offset
                                  by a decrease in net gains on
                                  sales of securities.
 
 Noninterest
                                  Expense and Provision for Federal Income Taxes
 Noninterest
                                  expense for the second quarter of 2005 was $4.9
                                  million compared with $4.4
                                  million for the second quarter of 2004, an increase
                                  of $494 thousand, or 11.2%.
                                  This $494 thousand increase was comprised primarily
                                  of an increase of $200
                                  thousand in legal and professional fees associated
                                  with being a publicly traded
                                  company, including compliance with the provisions
                                  of the Sarbanes-Oxley Act, an
                                  increase of $177 thousand in salaries and employee
                                  benefits and an increase of
                                  $143 thousand in data processing resulting from
                                  technology upgrades. The
                                  provision for Federal income taxes increased $493
                                  thousand due to the increase
                                  in net earnings. The effective tax rate was approximately
                                  34.17% for the quarter
                                  ended June 30, 2005 and 34% for the same period
                                  in
                                  2004.
 
  15
 **Table
                                  of
                                  Contents**
   *Results
                              of Operations for the Six Months Ended June 30, 2005
                              and
                              2004*
 
 General
 During
                              March 2005, our Board of Directors approved a plan
                              to reposition our balance
                              sheet by reducing the amount of low-yielding investment
                              securities and using a
                              portion of the proceeds to de-leverage our borrowing
                              position. The Board
                              approved this plan in an effort to reduce our liability
                              sensitive position and
                              to improve our net interest margin. We identified for
                              sale from our
                              available-for-sale securities portfolio approximately
                              $169.0 million in U.S.
                              Government callable agency bonds, with coupon rates
                              of 3.07% or less and with a
                              weighted average yield of 2.76%. As a result this decision,
                              we incurred an
                              impairment write-down loss of approximately $6.1 million
                              before tax, or
                              approximately $4.1 million net of tax, during the quarter
                              ended March 31, 2005.
 
 We
                              completed sales of approximately $130.0 million of
                              the identified $169.0 million
                              in securities during March 2005, selling the remainder
                              in April. Of the
                              approximately $163.0 million in net proceeds from the
                              sale of low yielding
                              securities, we used $75 million to pay down Federal
                              Home Loan Bank borrowings,
                              which had an average rate of approximately 2.48%. In
                              addition, we reinvested
                              approximately $88 million in securities with a weighted
                              average yield of
                              approximately 4.90%. Of the approximately $88 million
                              reinvested in higher
                              yielding securities, approximately $19.9 million in
                              securities were purchased
                              and settled in March, with approximately $67.4 million
                              settling in April and
                              $500 thousand settling in May, 2005. The average life
                              of our securities
                              portfolio increased to approximately 3.5 years after
                              completion of the sales and
                              reinvestments compared with approximately 3.0 years
                              before the transactions. As
                              of June 30, 2005, the average life of our securities
                              portfolio was approximately
                              3.3 years.
 
 For
                              the
                              six months ended June 30, 2005, we recorded net earnings
                              of $169 thousand or
                              $0.01 per diluted common and Class B share, a decrease
                              of $2.5 million or 93.7%
                              compared with $2.7 million or $0.37 per diluted share
                              for the same period in
                              2004. This $2.5 million decrease in net earnings was
                              principally the result of
                              the impairment write-down loss of approximately $6.1
                              million before tax, along
                              with a $1.2 million increase in noninterest expense,
                              partially offset by a $3.4
                              million increase in net interest income and a $1.3
                              million decrease in the
                              provision for income taxes.
 
 Net
                              Interest Income
 When
                              comparing the six months ended June 30, 2005 to the
                              same period in 2004, net
                              interest income increased $3.4 million, primarily due
                              to an increase of $7.4
                              million in interest income, partially offset by a $4.0
                              million increase in
                              interest expense. The net interest margin increased
                              32 basis points to 3.11% for
                              the six months ended June 30, 2005 compared with 2.79%
                              for the same period in
                              2004.
 
 Interest
                              income from loans increased $7.0 million, or 51.7%,
                              to $20.6 million for the six
                              months ended June 30, 2005, compared with $13.5 million
                              for the same period in
                              2004. This increase was primarily the result of an
                              increase in loan volume aided
                              by an increase in the average yield, with loans averaging
                              $627.6 million for the
                              six months ended June 30, 2005 compared with $461.2
                              million in the same period
                              in 2004, an increase of $166.4 million, or 36.0%. The
                              average yield on loans
                              increased 70 basis points to 6.53% for the six months
                              ended June 30, 2005
                              compared with 5.83% for the same period in 2004.
 
 Interest
                              income from investment securities increased by $420
                              thousand, or 5.7%, to $7.8
                              million for the six months ended June 30, 2005 compared
                              with $7.4 million for
                              the same period in 2004. This increase was due to an
                              increase in average yields
                              offset by a decrease in average balance due to the
                              restructuring of our
                              securities portfolio. The average yield on investment
                              securities increased 42
                              basis points to 3.65% for the six months ended June
                              30, 2005 from 3.23% for the
                              same period in 2004. The average balance of investment
                              securities was $436.6
                              million for the six months ended June 30, 2005 compared
                              with $458.4 million for
                              the same period in 2004, a decrease of $21.8 million
                              or 4.8%.
 
 Interest
                              expense increased 50.0%, or $4.0 million, to $12.0
                              million for the six months
                              ended June 30, 2005 compared with $8.0 million for
                              the same period in 2004. The
                              increase was principally due to the 76 basis points
                              increase in the average rate
                              paid to 2.67% for the six months ended June 30, 2005,
                              from 1.91% for the same
                              period in 2004. The average balance of interest-bearing
                              liabilities increased
                              $61.0 million or 7.2% from $844.0 million for the six
                              months ended June 30, 2004
                              compared with $905.0 million for the same period in
                              2005. The increase in
                              average liabilities was comprised of an increase in
                              borrowings of $49.4 million
                              or 61.0% and interest-bearing deposit growth of $11.6
                              million or 1.6%.
 16
 **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. All balances are daily average balances
                                  and nonaccruing loans have been
                                  included in the table as loans carrying a zero
                                  yield (dollars in
                                  thousands).
 For
                                              the Six Months Ended June 30,2005
                                          
                                          2004Average
                                          
                                          Interest
                                          
                                          Average
                                          
                                          Average
                                          
                                          Interest
                                          
                                          AverageOutstanding
                                          
                                          Earned/
                                          
                                          Yield/
                                          
                                          Outstanding
                                          
                                          Earned/
                                          
                                          Yield/Balance
                                          
                                          Paid
                                          
                                          Rate
                                              (1)
                                          
                                          Balance
                                          
                                          Paid
                                          
                                          Rate
                                              (1)**Assets:**Interest-earning
                                              assets:Loans
                                          
                                          $
                                          627,591
                                          
                                          $
                                          20,616
                                          
                                          
                                          6.53
                                          %
                                          $
                                          461,230
                                          
                                          $
                                          13,586
                                          
                                          
                                          5.83
                                          %Investment
                                              securities
                                          
                                          
                                          436,613
                                          
                                          
                                          7,811
                                          
                                          
                                          3.65
                                          
                                          
                                          458,366
                                          
                                          
                                          7,392
                                          
                                          
                                          3.23Federal
                                              funds sold
                                          
                                          
                                          1,104
                                          
                                          
                                          15
                                          
                                          
                                          2.65
                                          
                                          
                                          16,821
                                          
                                          
                                          77
                                          
                                          
                                          0.91Interest-earning
                                              deposits in other financial institutions
                                          
                                          
                                          3,020
                                          
                                          
                                          46
                                          
                                          
                                          3.04
                                          
                                          
                                          9,281
                                          
                                          
                                          44
                                          
                                          
                                          0.94Total
                                              interest-earning assets
                                          
                                          
                                          1,068,328
                                          
                                          
                                          28,488
                                          
                                          
                                          5.34
                                          %
                                          
                                          945,698
                                          
                                          
                                          21,099
                                          
                                          
                                          4.43
                                          %Less
                                              allowance for loan losses
                                          
                                          
                                          (8,706
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (6,225
                                          )Total
                                              interest-earning assets, net of allowance
                                          
                                          
                                          1,059,621
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          939,473Non-earning
                                              assets:Cash
                                              and due from banks
                                          
                                          
                                          16,113
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          16,358Premises
                                              and equipment
                                          
                                          
                                          17,599
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          12,461Accrued
                                              interest receivable and other assets
                                          
                                          
                                          14,082
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          11,594Total
                                              noninterest-earning assets
                                          
                                          
                                          47,795
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          40,413Total
                                              assets
                                          
                                          $
                                          1,107,416
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          979,886**Liabilities
                                              and Shareholders' Equity:**Interest-bearing
                                              liabilities:NOW,
                                              savings, and money market accounts
                                          
                                          $
                                          356,637
                                          
                                          $
                                          3,494
                                          
                                          
                                          1.98
                                          %
                                          $
                                          339,681
                                          
                                          $
                                          1,976
                                          
                                          
                                          1.17
                                          %Time
                                              deposits
                                          
                                          
                                          379,735
                                          
                                          
                                          5,436
                                          
                                          
                                          2.89
                                          
                                          
                                          385,069
                                          
                                          
                                          4,529
                                          
                                          
                                          2.37Junior
                                              subordinated debentures
                                          
                                          
                                          38,250
                                          
                                          
                                          1,295
                                          
                                          
                                          6.73
                                          
                                          
                                          38,250
                                          
                                          
                                          1,037
                                          
                                          
                                          5.36Other
                                              borrowed funds
                                          
                                          
                                          130,376
                                          
                                          
                                          1,768
                                          
                                          
                                          2.70
                                          
                                          
                                          80,985
                                          
                                          
                                          456
                                          
                                          
                                          1.13Total
                                              interest-bearing liabilities
                                          
                                          
                                          904,998
                                          
                                          
                                          11,993
                                          
                                          
                                          2.67
                                          %
                                          
                                          843,985
                                          
                                          
                                          7,998
                                          
                                          
                                          1.91
                                          %Noninterest-bearing
                                              liabilities:Demand
                                              deposits
                                          
                                          
                                          111,737
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          101,682Accrued
                                              interest payable and other liabilities
                                          
                                          
                                          4,168
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,118Total
                                              noninterest-bearing liabilities
                                          
                                          
                                          115,905
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          104,800Total
                                              liabilities
                                          
                                          
                                          1,020,903
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          948,785Shareholders'
                                              equity
                                          
                                          
                                          86,513
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          31,101Total
                                              liabilities and shareholders' equity
                                          
                                          $
                                          1,107,416
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          979,886Net
                                              interest income
                                          
                                          
                                          
                                          
                                          $
                                          16,495
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          13,101Net
                                              interest spread
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.67
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.52
                                          %Net
                                              interest margin (tax equivalent)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3.11
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.79
                                          %(1)
                                              Annualized
 17
 **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 Six Months Ended June 30, 2005**
                                      **Compared
                                        with the Same Period in 2004****Increase
                                        (Decrease)****Due
                                        to Change in****Volume**
                                    
                                    **Rate**
                                    
                                    **Total****Interest-earning
                                        assets:**Loans
                                    
                                    $
                                    4,807
                                    
                                    $
                                    2,223
                                    
                                    $
                                    7,030Securities
                                    
                                    
                                    (348
                                    )
                                    
                                    767
                                    
                                    
                                    419Federal
                                        funds sold
                                    
                                    
                                    (70
                                    )
                                    
                                    8
                                    
                                    
                                    (62
                                    )Interest-earning
                                        deposits in other financial institutions
                                    
                                    
                                    (29
                                    )
                                    
                                    31
                                    
                                    
                                    2Total
                                        increase in interest income
                                    
                                    
                                    4,360
                                    
                                    
                                    3,029
                                    
                                    
                                    7,389**Interest-bearing
                                        liabilities:**NOW,
                                        savings and money market accounts
                                    
                                    
                                    98
                                    
                                    
                                    1,420
                                    
                                    
                                    1,518Time
                                        deposits
                                    
                                    
                                    (63
                                    )
                                    
                                    970
                                    
                                    
                                    907Junior
                                        subordinated debentures
                                    
                                    
                                    -
                                    
                                    
                                    258
                                    
                                    
                                    258Other
                                        borrowed funds
                                    
                                    
                                    278
                                    
                                    
                                    1,034
                                    
                                    
                                    1,312Total
                                        increase in interest expense
                                    
                                    
                                    313
                                    
                                    
                                    3,682
                                    
                                    
                                    3,995Increase
                                        (decrease) in net interest income
                                    
                                    $
                                    4,047
                                    
                                    $
                                    (653
                                    )
                                    $
                                    3,394
  Provision
                              for Loan Losses
 We
                              utilize our migration analysis to aid in the evaluation
                              of the adequacy of our
                              allowance for loan losses account. Based upon this
                              analysis, as well as other
                              factors which management must assess, we recorded a
                              provision for loan losses of
                              $1.3 million for the quarter ended June 30, 2005 compared
                              with $1.7 million for
                              the same period in 2004. Additionally, we experienced
                              net recoveries of $16
                              thousand for the six months ended June 30, 2005, compared
                              with net charge-offs
                              of $371 thousand for the same period in 2004. At June
                              30, 2005, the allowance
                              for loan losses as a percentage of total loans was
                              1.41% compared with 1.36% at
                              June 30, 2004. 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
 Noninterest
                              income totaled a loss of $5.2 million in the six months
                              ended June 30, 2005
                              compared with income of $1.2 million for the same period
                              in 2004, with the
                              decrease primarily due to the $6.1 million impairment
                              write-down related to the
                              restructuring of our securities portfolio during the
                              first quarter of 2005 and a
                              $375 thousand decrease in gains on sales of securities.
 
 Noninterest
                              Expense and Provision for Federal Income Taxes
 Noninterest
                              expense for the six months ended June 30, 2005 was
                              $9.8 million compared with
                              $8.6 million for the same period in 2004, an increase
                              of $1.2 million, or 13.6%.
                              This increase was comprised primarily of an increase
                              of $452 thousand in legal
                              and professional fees associated with being a publicly
                              traded company, an
                              increase of $426 thousand in salaries and employee
                              benefits and an increase of
                              $270 thousand in data processing resulting from technology
                              upgrades. The
                              provision for Federal income taxes decreased $1.3 million
                              due to the $2.1
                              million tax benefit arising from the impairment write-down
                              of securities,
                              partially offset by the tax provision on other earnings
                              in the six months ended
                              June 30, 2005. The effective tax rate was approximately
                              34.25% for the six
                              months ended June 30, 2005 and 34% for the same period
                              in 2004.
 18
 **Table
                          of
                          Contents**
  *Financial
                      Condition*
 
 General
 As
                      of
                      June 30, 2005 we had total assets of $1.1 billion, total loans
                      of $664.9
                      million, total deposits of $805.8 million and total shareholders’ equity of
                      $87.6 million. Total assets decreased by $20.8 million from
                      December 31, 2004 to
                      June 30, 2005. The decrease, primarily due to the restructuring
                      of a portion of
                      the securities portfolio as further discussed below, is comprised
                      of a decrease
                      of $180.7 million in available for sale securities, partially
                      offset by
                      increases of $91.7 million in held to maturity securities and
                      $65.3 million in
                      net loans.
 
 Under
                      the
                      previously announced restructuring and de-leveraging plan,
                      we sold approximately
                      $169.0 million in U.S. Government callable agency bonds, which
                      had a weighted
                      average yield of approximately 2.76%. As a result of the decision
                      to sell these
                      investments, we recorded an other-than-temporary impairment
                      charge of $6.1
                      million, or $4.1 million after tax. Of the $163.0 million in
                      proceeds from such
                      sales, approximately $75 million was used to pay down Federal
                      Home Loan Bank
                      borrowings, which had an average cost of funds of 2.76%, and
                      $88 million was
                      reinvested in securities, which have weighted average yield
                      of approximately
                      4.90%. For further information regarding the restructuring,
                      see “Item 2.
                      Management’s Discussion and Analysis of Financial Condition and Results
                      of
                      Operations - Results of Operations for the Six Months Ended
                      June 30, 2005 and
                      2004 - General.”
 
 From
                      December 31, 2004 to June 30, 2005, total liabilities decreased
                      by $22.0
                      million. When comparing the two dates, deposits decreased $62.6
                      million and
                      other borrowings increased $40.2 million. The decrease in deposits
                      was
                      principally the result of decreases in public fund deposits,
                      as well as our
                      decision to allow higher cost brokered and internet CD deposits
                      to roll off as
                      they mature. The increase in other borrowings resulted from
                      the decrease in
                      deposits coupled with funding our growth in loans, which more
                      than offset the
                      paydowns associated with the balance sheet restructuring previously
                      discussed.
                      Shareholders' equity increased $1.2 million from December 31,
                      2004 to June 30,
                      2005 primarily as a result of the reduction of unrealized losses
                      on the
                      available-for-sale securities portfolio.
 
 Loan
                      Portfolio
 Total
                      loans were $664.9 million as of June 30, 2005, an increase
                      of $66.6 million or
                      11.1% compared with loans of $598.3 million as of December
                      31, 2004. Loan growth
                      occurred primarily in commercial mortgage loans, which increased
                      $31.4 million
                      or 11.7%, and construction and land development loans, which
                      increased $23.0
                      million or 18.6%.
 
 The
                      following table summarizes our loan portfolio by type as of
                      the dates indicated
                      (dollars in thousands):
  June
                                  30, 2005
                              
                              December
                                  31, 2004Amount
                              
                              Percent
                              
                              Amount
                              
                              PercentBusiness
                                  and industrial
                              
                              $
                              78,626
                              
                              
                              11.8
                              %
                              $
                              70,101
                              
                              
                              11.7
                              %Real
                                  estate:Construction
                                  and land development
                              
                              
                              146,661
                              
                              
                              22.1
                              
                              
                              123,655
                              
                              
                              20.7Residential
                                  mortgages
                              
                              
                              129,366
                              
                              
                              19.5
                              
                              
                              126,200
                              
                              
                              21.1Commercial
                                  mortgages
                              
                              
                              298,510
                              
                              
                              44.9
                              
                              
                              267,158
                              
                              
                              44.7Consumer
                              
                              
                              13,242
                              
                              
                              2.0
                              
                              
                              12,592
                              
                              
                              2.1Other
                              
                              
                              229
                              
                              
                              -
                              
                              
                              227
                              
                              
                              -Gross
                                  loans
                              
                              
                              666,634
                              
                              
                              100.3
                              
                              
                              599,933
                              
                              
                              100.3Less
                                  unearned discounts and fees
                              
                              
                              (1,735
                              )
                              
                              (0.3
                              )
                              
                              (1,641
                              )
                              
                              (0.3
                              )Total
                                  loans
                              
                              $
                              664,899
                              
                              
                              100.0
                              %
                              $
                              598,292
                              
                              
                              100.0
                              %
  Nonperforming
                      Assets
 Nonperforming
                      assets were $10.7 million and $4.8 million as of June 30, 2005
                      and December 31,
                      2004, respectively. The increase in nonperforming assets of
                      $5.9 million was
                      principally comprised of a $6.9 million increase in nonaccrual
                      loans, partially
                      offset by an $895 thousand decrease in other real estate owned.
                      The increase in
                      nonaccrual loans was primarily a result of a $3.9 million business
                      and
                      industrial loan, collateralized by furniture, fixtures and
                      equipment and by
                      accounts receivable, and two commercial mortgage loans totaling
                      $3.1 million
                      placed on nonaccrual status during the period. Although the
                      business and
                      industrial loan was performing in accordance with its terms,
                      management was
                      concerned about its future performance and placed it on nonaccrual
                      status. The
                      $895 thousand decrease in other real estate owned resulted
                      from the sale of one
                      commercial property acquired through foreclosure. Our ratio
                      of nonperforming
                      assets to total loans and other real estate was 1.61% and 0.80%
                      as of June 30,
                      2005 and December 31, 2004, respectively.
 19
 **Table
                        of
                        Contents**
  The
                      following table presents information regarding nonperforming
                      assets as of the
                      dates indicated (dollars in thousands):
 As
                                  of June 30,
                              
                              As
                                  of December 31,2005
                              
                              2004Nonaccrual
                                  loans
                              
                              $
                              8,389
                              
                              $
                              1,489Accruing
                                  loans past due 90 days or more
                              
                              
                              -
                              
                              
                              62Restructured
                                  loans
                              
                              
                              1,865
                              
                              
                              1,917Other
                                  real estate
                              
                              
                              425
                              
                              
                              1,320Total
                                  nonperforming assets
                              
                              $
                              10,679
                              
                              $
                              4,788Nonperforming
                                  assets to total loans and other real estate
                              
                              
                              1.61
                              %
                              
                              0.80
                              %
  Allowance
                        for Loan Losses
 Our
                        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
                        June 30, 2005, the allowance for loan losses amounted to
                        $9.4 million or 1.41%
                        of total loans. As of December 31, 2004, the allowance for
                        loan losses amounted
                        to $8.1 million or 1.36% of total loans. The allowance for
                        loan losses as a
                        percentage of nonperforming loans decreased to 91.54% as
                        of June 30, 2005 from
                        234.17% as of December 31, 2004.
                 
 20
 **Table
                            of
                            Contents**
  The
                      following table summarizes the activity in our allowance for
                      loan losses during
                      the periods indicated (dollars in thousands):
  As
                                of and for the
                            
                            As
                              of and for theSix
                                Months Ended
                            
                            Year
                                Ended December 31,June
                                30, 2005
                            
                            2004Average
                                loans outstanding
                            
                            $
                            627,591
                            
                            $
                            509,142Total
                                loans outstanding at end of period
                            
                            $
                            664,899
                            
                            $
                            598,292Allowance
                                for loan losses at beginning of period
                            
                            $
                            8,121
                            
                            $
                            5,650Provision
                                for loan losses
                            
                            
                            1,250
                            
                            
                            2,950Charge-Offs:Business
                                and industrial
                            
                            
                            (6
                            )
                            
                            (242
                            )Real
                                estate
                            
                            
                            -
                            
                            
                            (262
                            )Consumer
                            
                            
                            (42
                            )
                            
                            (110
                            )Total
                                charge-offs
                            
                            
                            (48
                            )
                            
                            (614
                            )Recoveries:Business
                                and industrial
                            
                            
                            41
                            
                            
                            50Real
                                estate
                            
                            
                            12
                            
                            
                            63Consumer
                            
                            
                            11
                            
                            
                            22Total
                                recoveries
                            
                            
                            64
                            
                            
                            135Net
                                recoveries (charge-offs)
                            
                            
                            16
                            
                            
                            (479
                            )Allowance
                                for loan losses at end of period
                            
                            $
                            9,387
                            
                            $
                            8,121Allowance
                                for loan losses to end of period loans
                            
                            
                            1.41
                            %
                            
                            1.36
                            %Net
                                charge-offs (recoveries) to average loans
                            
                            
                            (0.01
                            )
                            
                            0.09Allowance
                                for loans losses to end of period nonperforming loans
                            
                            
                            91.54
                            
                            
                            234.17
   Securities
 As
                      of
                      June 30, 2005, investment securities totaled $399.5 million,
                      a decrease of $89.0
                      million or 18.2% compared with $488.5 million as of December
                      31, 2004. This
                      decrease was principally the result of the Board approved decision
                      in March 2005
                      to restructure a portion of the investment securities portfolio.
                      We sold from
                      our available-for-sale securities portfolio approximately $169.0
                      million in U.S.
                      Government callable agency bonds, with coupon rates of 3.07%
                      or less and with a
                      weighted average yield of 2.76%. In addition during the six
                      months ended June
                      30, 2005, we purchased $94.8 million in securities with the
                      intent to hold until
                      maturity and received principal repayments of $22.1 million.
 
 As
                      of
                      June 30, 2005, securities represented 36.0% of total assets
                      compared with 43.2%
                      of total assets as of December 31, 2004.
 
 Deposits
 As
                      of
                      June 30, 2005, NOW accounts, money market accounts and savings
                      deposits
                      accounted for 40.6% of total deposits, while certificates of
                      deposit made up
                      44.7% of total deposits. Total deposits were $805.7 million
                      as of June 30, 2005,
                      a decrease of $62.6 million or 7.2% compared with $868.4 million
                      as of December
                      31, 2004. As of June 30, 2005, we had $118.2 million in noninterest-bearing
                      deposits compared with $110.9 million as of December 31, 2004.
                      The average cost
                      of deposits, including noninterest bearing deposits, was 2.12%
                      for the six
                      months ended June 30, 2005 compared with 1.68% for the year
                      ended December 31,
                      2004.
 
 Other
                      Borrowings
 Other
                      borrowings totaled $173.1 million as of June 30, 2005, an increase
                      of $40.2
                      million or 30.3% compared with $132.9 million as of December
                      31, 2004. The
                      increase is principally due to growth in the loan portfolio.
 
 21
 **Table
                          of
                          Contents**
  **LIQUIDITY
                      AND CAPITAL RESOURCES**
 
 Our
                      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. We use our funding resources principally
                      to meet our
                      ongoing commitments to fund maturing deposits and deposit withdrawals,
                      repay
                      borrowings, purchase securities, fund existing and continuing
                      loan commitments,
                      maintain our 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.
 
 As
                      of
                      June 30, 2005, shareholders’ equity totaled $87.6 million, an increase of $1.2
                      million or 1.4% compared with $86.4 million as of December
                      31, 2004. The
                      increase is comprised of a $1.0 million increase due to the
                      change in the fair
                      value of available-for-sale securities and the $169 thousand
                      in net earnings for
                      the period. 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. The Bank remains well capitalized with all capital ratios
                      above minimum
                      requirements.
 
 **INTEREST
                      RATE SENSITIVITY AND MARKET RISK**
 
 Our
                      asset
                      liability and funds management policy provides management with
                      the necessary
                      guidelines for effective funds management, and we have established
                      a measurement
                      system for monitoring our net interest rate sensitivity position.
                      We manage our
                      sensitivity position within established guidelines.
 
 As
                      a
                      financial institution, our primary component of market risk
                      is interest rate
                      volatility. Fluctuations in interest rates will ultimately
                      impact both the level
                      of income and expense recorded on most of our assets and liabilities,
                      and the
                      market value of all interest-earning assets and interest-bearing
                      liabilities,
                      other than those which have a short term maturity. Based upon
                      the nature of our
                      operations, we are not subject to foreign exchange or commodity
                      price risk. We
                      do not own any trading assets.
 
 Interest
                      rate risk is the potential of economic losses due to future
                      interest rate
                      changes. These economic losses can be reflected as a loss of
                      future net interest
                      income and/or a loss of current fair market values. The objective
                      is to measure
                      the effect on net interest income and to adjust the balance
                      sheet to minimize
                      the inherent risk while at the same time maximizing income.
                      Management realizes
                      certain risks are inherent, and that the goal is to identify
                      and accept the
                      risks.
 
 Our
                      exposure to interest rate risk is managed by the Bank’s Asset Liability
                      Committee (ALCO), which is composed of outside members of the
                      board of directors
                      of the Bank as well as our senior officers in accordance with
                      policies approved
                      by the Bank’s board of directors. The ALCO formulates strategies based
                      on
                      appropriate levels in interest rate risk. In determining the
                      appropriate level
                      of interest rate risk, the ALCO considers the impact on earnings
                      and capital, of
                      the current outlook on interest rates, potential changes in
                      interest rates,
                      regional economies, liquidity, business strategies and other
                      factors. The ALCO
                      meets monthly to review, among other things, the sensitivity
                      of assets and
                      liabilities to interest rate changes, the book and market values
                      of assets and
                      liabilities, unrealized gains and losses, purchase and sale
                      activity,
                      commitments to originate loans and the maturities of investments
                      and borrowings.
                      Additionally, the ALCO reviews liquidity, cash flow flexibility,
                      maturities of
                      deposits and deposit activity. Management uses two methodologies
                      to manage
                      interest rate risk: (1) an analysis of relationships between
                      interest-earning
                      assets and interest-bearing liabilities; and (2) an interest
                      rate shock
                      simulation model. We have traditionally managed our business
                      to reduce our
                      overall exposure to changes in interest rates; however, under
                      current policies
                      approved by our board of directors, management has been given
                      some latitude to
                      increase our interest rate sensitivity position within certain
                      limits if, in
                      management’s judgment, it will enhance profitability. As a result, changes
                      in
                      market interest rates may have a greater impact on our financial
                      performance in
                      the future than they have had historically.
 
 To
                      effectively measure and manage interest rate risk, we use an
                      interest rate shock
                      simulation model to determine the impact on our net interest
                      income and on our
                      investment portfolio and its resultant impact, net of Federal
                      income taxes, on
                      our shareholders’ equity, under various interest rate scenarios, balance sheet
                      trends and strategies. From these simulations, interest rate
                      risk is quantified
                      and appropriate strategies are developed and implemented. Additionally,
                      duration
                      and market value sensitivity measures are utilized when they
                      provide added value
                      to the overall interest rate risk management process. The overall
                      interest rate
                      risk position and strategies are reviewed by the ALCO committee
                      on an ongoing
                      basis.
   22
 **Table
                        of Contents**
  We
                      manage
                      our exposure to interest rates by structuring our balance sheet
                      in the ordinary
                      course of business. We do not currently enter into instruments
                      such as leveraged
                      derivatives, structured notes, interest rate swaps, caps, floors,
                      financial
                      options, financial futures contracts or forward delivery contracts
                      for the
                      purpose of reducing interest rate risk.
 
 An
                      interest rate sensitive asset or liability is one that, within
                      a defined time
                      period, either matures or experiences an interest rate change
                      in line with
                      general market interest rates. The management of interest rate
                      risk is performed
                      by analyzing the maturity and repricing relationships between
                      interest-earning
                      assets and interest-bearing liabilities at specific points
                      in time (GAP) and by
                      analyzing the effects of interest rate changes on net interest
                      income over
                      moving 12-month periods of time by projecting the performance
                      of the mix of
                      assets and liabilities in varied interest rate environments.
                      Interest rate
                      sensitivity reflects the potential effect on net interest income
                      of a movement
                      in interest rates. A company is considered to be asset sensitive,
                      or having a
                      positive GAP, when the amount of its interest-earning assets
                      maturing or
                      repricing within a given period exceeds the amount of its interest-bearing
                      liabilities also maturing or repricing within that time period.
                      Conversely, a
                      company is considered to be liability sensitive, or having
                      a negative GAP, when
                      the amount of its interest-bearing liabilities maturing or
                      repricing within a
                      given period exceeds the amount of its interest-earning assets
                      also maturing or
                      repricing within that time period. During a period of rising
                      interest rates, a
                      negative GAP would tend to affect net interest income adversely,
                      while a
                      positive GAP would tend to result in an increase in net interest
                      income. During
                      a period of falling interest rates, a negative GAP would tend
                      to result in an
                      increase in net interest income, while a positive GAP would
                      tend to affect net
                      interest income adversely.
 
 The
                      following table sets forth our interest rate sensitivity analysis
                      as of June 30,
                      2005 (dollars in thousands):
 **Volumes
                                  Subject to Repricing Within****Greater****0-30**
                              
                              **31-180**
                              
                              **181-365**
                              
                              **1-3**
                              
                              **3-5**
                              
                              **than****days**
                              
                              **days**
                              
                              **days**
                              
                              **years**
                              
                              **years**
                              
                              **5
                                  years**
                              
                              **Total**Interest-earning
                                  assets:Securities
                              
                              $
                              17,184
                              
                              $
                              727
                              
                              $
                              266
                              
                              $
                              98,954
                              
                              $
                              36,060
                              
                              $
                              246,332
                              
                              $
                              399,523Loans
                              
                              
                              319,319
                              
                              
                              42,117
                              
                              
                              33,396
                              
                              
                              78,523
                              
                              
                              121,907
                              
                              
                              71,372
                              
                              
                              666,634Federal
                                  funds sold
                              
                              
                              1,150
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              1,150Total
                                  interest-earning assets
                              
                              
                              337,653
                              
                              
                              42,844
                              
                              
                              33,662
                              
                              
                              177,477
                              
                              
                              157,967
                              
                              
                              317,704
                              
                              
                              1,067,307Interest-bearing
                                  liabilities:NOW,
                                  money market and savings deposits
                              
                              $
                              327,181
                              
                              $
                              -
                              
                              $
                              -
                              
                              $
                              -
                              
                              $
                              -
                              
                              $
                              -
                              
                              $
                              327,181Certificates
                                  of deposit and other time deposits
                              
                              
                              37,704
                              
                              
                              213,771
                              
                              
                              64,118
                              
                              
                              27,407
                              
                              
                              15,746
                              
                              
                              1,667
                              
                              
                              360,413Borrowed
                                  funds
                              
                              
                              98,100
                              
                              
                              75,000
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              173,100Junior
                                  subordinated debentures
                              
                              
                              -
                              
                              
                              30,930
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              7,320
                              
                              
                              38,250Total
                                  interest-bearing liabilities
                              
                              
                              462,985
                              
                              
                              319,701
                              
                              
                              64,118
                              
                              
                              27,407
                              
                              
                              15,746
                              
                              
                              8,987
                              
                              
                              898,944Cumulative
                                  GAP
                              
                              $
                              (125,332
                              )
                              $
                              (402,189
                              )
                              $
                              (432,645
                              )
                              $
                              (282,575
                              )
                              $
                              (140,354
                              )
                              $
                              168,363Cumulative
                                  GAP to total assets
                              
                              
                              (11.30
                              )%
                              
                              (36.26
                              )%
                              
                              (39.00
                              )%
                              
                              (25.47
                              )%
                              
                              (12.65
                              )%
                              
                              15.18
                              %Cumulative
                                  interest-earning assets to cumulative interest-bearing
                                  liabilities
                              
                              
                              72.93
                              %
                              
                              48.61
                              %
                              
                              48.91
                              %
                              
                              67.68
                              %
                              
                              84.23
                              %
                              
                              118.73
                              %
 Our
                                one-year cumulative GAP position as of June 30, 2005
                                was negative $432.6 million
                                or (39.0)% of total assets. This is a one-day position
                                that is continually
                                changing and is not indicative of our position at
                                any other time. We are
                                liability sensitive because, in part, we maintain
                                high balances of public fund
                                NOW accounts and money market accounts which are
                                subject to immediate changes in
                                interest rates. Shortcomings are inherent in any
                                GAP analysis since certain
                                assets and liabilities may not move proportionally
                                as interest rates
                                change.
 
 In
                                addition to GAP analysis, we use an interest rate
                                risk simulation model and
                                shock analysis to test the interest rate sensitivity
                                of net interest income and
                                the balance sheet, respectively. Contractual maturities
                                and repricing
                                opportunities of loans are incorporated in the model
                                as are prepayment
                                assumptions, maturity data and call options within
                                the investment portfolio. We
                                assume instantaneous and sustained 200 and 100 basis
                                point increases and a 100
                                basis point decline in the yield curve. Management
                                then prepares assumptions on
                                how the various rates on interest-earning assets
                                and interest-bearing
                                liabilities would react to these basis point shocks.
                                Assumptions based on past
                                experience are incorporated into the model for nonmaturity
                                deposit accounts. The
                                ALCO approves the interest rate assumptions on at
                                least a quarterly
                                basis.
  23
 **Table
                              of
                              Contents**
 
 The
                          following table sets forth our simulation analysis as of June
                          30,
                          2005:
  **Change
                                      in Rates**
                                  
                                  **%
                                      Change in**
                                    **Net
                                      Income**-100
                                      bp
                                  
                                  
                                  7.2
                                  %0
                                      bp
                                  
                                  
                                  --+100
                                      bp
                                  
                                  
                                  (2.2
                                  )%+200
                                      bp
                                  
                                  
                                  (31.5
                                  )%
 Based
                              on
                              the June 30, 2005 simulation analysis, we estimate
                              our net income would decrease
                              by approximately 31.5% over the next 12 months assuming
                              an instantaneous and
                              sustained 200 basis point increase in rates. A 100
                              basis point instantaneous and
                              sustained increase in rates would decrease our net
                              income by approximately 2.2%
                              over the next 12 months, while a 100 basis point instantaneous
                              and sustained
                              decrease in rates over the same period would increase
                              our net income by
                              approximately 7.2% for the period. Our policy guideline
                              for the impact of
                              interest rate shocks on our net income is +/- 20%.
                              The ALCO Committee is
                              responsible for determining what steps, if any, should
                              be taken to bring the
                              shock results in line with policy. The ALCO Committee
                              considers whether the
                              results are temporary or long-term, the magnitude of
                              the shock results, the
                              average lives of the interest-earning assets and interest-bearing
                              liabilities
                              and the requirement for liquidity needs versus earnings
                              improvement.
 
 Our
                              simulation analysis assumes an immediate change in
                              interest rates for those
                              interest-earning assets and interest-bearing liabilities
                              that could change
                              immediately. For other such assets and liabilities,
                              the rates change when the
                              related assets and liabilities mature or reprice. We
                              have found that
                              historically interest rates on deposits change more
                              slowly than assets in a
                              rising rate environment than in a declining rate environment.
 
 **Item
                              3.** **Quantitative
                              and Qualitative Disclosures About Market Risk**
 
 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 this report.
 
 **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.
 
 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.
 24
 **Table
                                  of
                                  Contents**
  **PART
                                  II - OTHER
                                  INFORMATION**
 
 **Item
                                  1.****Legal
                                  Proceedings**
 
 Not
                                  applicable.
 
 **Item
                                  2.****Unregistered
                                  Sales of Equity Securities and Use of Proceeds**
 
 Not
                                  applicable.
 
 **Item
                                  3.****Defaults
                                  Upon Senior Securities**
 
 Not
                                  applicable.
 
 **Item
                                  4.****Submission
                                  of Matters to a Vote of Security Holders**
  The
                                    Company's Annual Meeting of Shareholders was
                                    held on May 26, 2005. At the
                                    meeting, the shareholders of the Company considered
                                    and acted upon the following
                                    proposals:
 
 1.
                                          Colonel
                                              Wallace J. McKenzie was elected as
                                              a Common Stock director to serve on
                                              the
                                              Company's Board of Directors until
                                              the Company's 2006 Annual Meeting of
                                              Shareholders and until his successor
                                              is duly elected and qualified. A
                                              total of 8,162,209 shares were voted
                                              in favor of Colonel McKenzie and
                                              506,600 shares were withheld from
                                              voting.
  2.
                                          Richard
                                              D. Parker was elected as a Common Stock
                                              director to serve on the Company's
                                              Board of Directors until the Company's
                                              2006 Annual Meeting of Shareholders
                                              and until his successor is duly elected
                                              and qualified. A total of
                                              8,217,409 shares were voted in favor
                                              of Mr. Parker and 451,400 shares were
                                              withheld from voting.
  3.
                                          General
                                              Edmond S. Solymosy was elected as a
                                              Common Stock director to serve on the
                                              Company's Board of Directors until
                                              the Company's 2006 Annual Meeting of
                                              Shareholders and until his successor
                                              is duly elected and qualified. A
                                              total of 8,167,409 shares were voted
                                              in favor of General Solymosy and
                                              501,400 shares were withheld from
                                              voting.
  4.
                                          Robert
                                              P. Viles, M.D. was elected as a Common
                                              Stock director to serve on the
                                              Company's Board of Directors until
                                              the Company's 2006 Annual Meeting of
                                              Shareholders and until his successor
                                              is duly elected and qualified. A
                                              total of 8,167,409 shares were voted
                                              in favor of Dr. Viles and 501,400
                                              shares were withheld from voting.
  5.
                                          Stewart
                                              Morris was elected as a Class B Stock
                                              director to serve on the Company's
                                              Board of Directors until the Company's
                                              2006 Annual Meeting of Shareholders
                                              and until his successor is duly elected
                                              and qualified. A total of
                                              2,583,819 shares were voted in favor
                                              of Mr. Morris and 1,000 shares were
                                              withheld from voting.
  6.
                                          Caralisa
                                              Morris Simon was elected as
                                              a Class B Stock director to serve on
                                              the
                                              Company's Board of Directors until
                                              the Company's 2006 Annual Meeting of
                                              Shareholders and until her successor
                                              is duly elected and qualified. A
                                              total of 2,583,319 shares were voted
                                              in favor of Ms. Simon and 1,500
                                              shares were withheld from voting.
  7.
                                          James
                                              W. Stevens was elected as a
                                              Class B Stock director to serve on
                                              the
                                              Company's Board of Directors until
                                              the Company's 2006 Annual Meeting of
                                              Shareholders and until his successor
                                              is duly elected and qualified. A
                                              total of 2,583,819 shares were voted
                                              in favor of Mr. Stevens and 1,000
                                              shares were withheld from voting.
  8.
                                          Dan
                                              Wilford was elected as a Class
                                              B Stock director to serve on the
                                              Company's Board of Directors until
                                              the Company's 2006 Annual Meeting of
                                              Shareholders and until his successor
                                              is duly elected and qualified. A
                                              total of 2,583,819 shares were voted
                                              in favor of Mr. Wilford and 1,000
                                              shares were withheld from voting.
  9.
                                          Harvey
                                              E. Zinn was elected as a Class B Stock
                                              director to serve on the Company's
                                              Board of Directors until the Company's
                                              2006 Annual Meeting of Shareholders
                                              and until his successor is duly elected
                                              and qualified. A total of
                                              2,583,969 shares were voted in favor
                                              of Mr. Zinn and 850 shares were
                                              withheld from voting.
  10.
                                            The
                                                appointment of Deloitte & Touche LLP as the independent registered
                                                public accounting firm of the Company
                                                for the fiscal year ending December
                                                31, 2005 was ratified. A total of
                                                10,491,678 shares voted in favor
                                                of the
                                                appointment, 743,750 shares voted
                                                against and 18,200 shares abstained
                                                from
                                                voting on the proposal.
  25
 **Table
                                        of Contents**
 **Item
                                  5.****Other
                                  Information**
 
 Not
                                  applicable.
 
 **Item
                                  6.****Exhibits**
 
 Exhibits.
  31.1
                                    Certification of the Chief Executive Officer
                                    pursuant to Rule 13a-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 Rule 13a-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.
 26
 **Table
                                    of
                                    Contents**
  **Signatures**
 
 
 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:   August
                                          12, 2005
                                        By:
                                        /s/ 
                                          Harvey
                                          ZinnPresident
                                          and Chief
                                          Executive Officer
   Date:   August
                                          12, 2005
                                        By:
                                        /s/ 
                                          R. Darrell
                                          BrewerChief
                                          Financial
                                          Officer