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 March 31, 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 April 30, 2005: 
9,758,412**


Number of shares of Class B Stock Outstanding as
of April 30, 2005:    2,676,541








**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 March 31, 2005
      (unaudited) and December 31, 2004
    1Consolidated Statements of Earnings for the
      Three Months Ended March 31, 2005 and 2004
      (unaudited)
    2Consolidated Statements of Shareholders' Equity
      for the Year Ended December 31, 2004 and for the Three Months Ended March
      31, 2005 (unaudited)
    3Consolidated Statements of Cash Flows for the Three
      Months Ended March 31, 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
    21Item 4
    Controls and Procedures
    21









**Part II.**
    **Other
    Information**Item 1
    Legal Proceedings
    22Item 2
    Unregistered Sales of Equity Securities and Use
      of Proceeds
    22Item 3
    Defaults upon Senior
      Securities
    22Item 4
    Submission of Matters to a Vote of Security Holders
    22Item 5
    Other Information
    22Item
      6
    Exhibits
    22




****


****





**Table of Contents**


PART I - FINANCIAL INFORMATION


******Item
      1.  Interim Consolidated Financial
      Statements******
  **SNB
      BANCSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS**March
      31,
    
    December
      31,2005
    
    2004(Unaudited)(In
      thousands, except share data)**ASSETS**Cash
      and cash equivalents
    
    $
    41,723
    
    $
    21,235Federal
      funds sold
    
    
    1,210
    
    
    -Available
      for sale securities, at fair value (amortized cost of $338,193 and
      $481,793 at March 31, 2005 andDecember
      31, 2004, respectively)
    
    
    330,126
    
    
    475,155Held
      to maturity securities, at amortized cost (fair value of $41,171 and
      $13,493 at March 31, 2005 andDecember
      31, 2004, respectively)
    
    
    41,558
    
    
    13,368Loans
    
    
    630,048
    
    
    598,292Less
      allowance for loan losses
    
    
    (8,738
    )
    
    (8,121
    )Net
      loans
    
    
    621,310
    
    
    590,171Premises
      and equipment - net
    
    
    17,769
    
    
    16,137Accrued
      interest receivable
    
    
    4,076
    
    
    4,485Other
      assets
    
    
    10,206
    
    
    9,537TOTAL
    
    $
    1,067,978
    
    $
    1,130,088**LIABILITIES
      AND SHAREHOLDERS' EQUITY**LIABILITIES:Deposits:Noninterest-bearing
    
    $
    111,408
    
    $
    110,858Interest-bearing
    
    
    755,961
    
    
    757,528Total
      deposits
    
    
    867,369
    
    
    868,386Other
      borrowings
    
    
    75,500
    
    
    132,900Accrued
      interest payable
    
    
    2,975
    
    
    2,724Junior
      subordinated debentures
    
    
    38,250
    
    
    38,250Other
      liabilities
    
    
    514
    
    
    1,427Total
      liabilities
    
    
    984,608
    
    
    1,043,687SHAREHOLDERS'
      EQUITY:Preferred
      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, 9,758,412 and
      9,753,612 shares issued and outstanding atMarch
      31, 2005 and December 31, 2004, respectively
    
    
    98
    
    
    98Class
      B stock, $0.01 par value - 3,216,781 shares authorized, 2,679,041 shares
      issued and outstanding at March 31, 2005and
      December 31, 2004, respectively
    
    
    27
    
    
    27Capital
      surplus
    
    
    66,190
    
    
    66,173Accumulated
      other comprehensive loss - net unrealized loss on available-for-sale
      securities - net of taxes
    
    
    (5,177
    )
    
    (4,315
    )Retained
      earnings
    
    
    22,232
    
    
    24,418Total
      shareholders' equity
    
    
    83,370
    
    
    86,401TOTAL
    
    $
    1,067,978
    
    $
    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 EndedMarch
      31,2005
    
    2004(In
      thousands, except per share data)INTEREST
      INCOME:Loans-including
      fees
    
    $
    9,797
    
    $
    6,501Securities:Taxable
    
    
    3,926
    
    
    3,321Nontaxable
    
    
    133
    
    
    22Federal
      funds sold and earning deposits
    
    
    14
    
    
    99Total
      interest income
    
    
    13,870
    
    
    9,943INTEREST
      EXPENSE:Demand
      deposits
    
    
    1,786
    
    
    951Certificates
      and other time deposits
    
    
    2,668
    
    
    2,193Other
      borrowings
    
    
    1,507
    
    
    666Total
      interest expense
    
    
    5,961
    
    
    3,810NET
      INTEREST INCOME
    
    
    7,909
    
    
    6,133PROVISION
      FOR LOAN LOSSES
    
    
    600
    
    
    750NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    7,309
    
    
    5,383NONINTEREST
      INCOME:Service
      charges on deposit accounts
    
    
    223
    
    
    237Gain
      (loss) on sale of securities-net
    
    
    -
    
    
    359Impairment
      write-down of securities
    
    
    (6,144
    )
    
    -Other
    
    
    187
    
    
    148Total
      noninterest income
    
    
    (5,734
    )
    
    744NONINTEREST
      EXPENSE:Salaries
      and employee benefits
    
    
    2,933
    
    
    2,684Net
      occupancy expense
    
    
    389
    
    
    439Data
      processing
    
    
    413
    
    
    286Legal
      and professional fees
    
    
    389
    
    
    137FDIC
      deposit insurance premium
    
    
    29
    
    
    25Other
    
    
    742
    
    
    648Total
      noninterest expense
    
    
    4,895
    
    
    4,219EARNINGS
      (LOSS) BEFORE INCOME TAXES
    
    
    (3,320
    )
    
    1,908PROVISION
      (BENEFIT) FOR INCOME TAXES
    
    
    (1,134
    )
    
    649NET
      EARNINGS (LOSS)
    
    $
    (2,186
    )
    $
    1,259EARNINGS
      (LOSS) PER SHARE:Basic
    
    $
    (0.18
    )
    $
    0.18Diluted
    
    
    (0.17
    )
    
    0.17See
      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(In
      thousands, except per 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
    
    
    
    
    
    
    
    
    
    
    
    (4,917
    )
    
    
    
    
    (4,917
    )Less
      reclassification adjustment for gains included in net earnings -- net of
      tax
    
    
    
    
    
    
    
    
    
    
    4,055
    
    
    
    
    
    4,055Net
      Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,186
    )
    
    (2,186
    )Total
      comprehensive loss (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,048
    )Conversion
      of 2,500 shares of Class B stock into 2,500 shares of common
      stock
    
    -
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    -Issuance
      of 2,300 shares of common stock
    
    
    -
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    12Tax
      benefit related to exercise of stock options
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    5BALANCE
      -- March 31, 2005
    
    $
    98
    
    $
    27
    
    $
    66,190
    
    $
    (5,177
    )
    $
    22,232
    
    $
    83,370See
      notes to interim consolidated financial statements.
 3
 **Table of Contents**
 **SNB
      BANCSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH
      FLOWS****(Unaudited)**Three
      Months Ended March 31,2005
    
    2004(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Earnings (Loss)
    
    $
    (2,186
    )
    $
    1,259Adjustments
      to reconcile net earnings (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
    
    
    355
    
    
    246Provision
      for loan losses
    
    
    600
    
    
    750Amortization
      and accretion of premiums and discounts on investment securities --
      net
    
    
    163
    
    
    166Gain
      on sales of securities -- net
    
    
    -
    
    
    (359
    )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
    
    
    5
    
    
    -Decrease
      (increase) in accrued interest receivable
    
    
    409
    
    
    (126
    )Increase
      in other assets
    
    
    (1,032
    )
    
    (2,272
    )Increase
      (decrease) in accrued interest payable
    
    
    251
    
    
    (265
    )Increase
      (decrease) in other liabilities
    
    
    (913
    )
    
    331Net
      cash provided by (used in) operating activities
    
    
    3,798
    
    
    (270
    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of held-to-maturity securities
    
    
    (28,444
    )
    
    -Purchases
      of available-for-sale securities
    
    
    (216
    )
    
    (144,384
    )Proceeds
      from sales of available-for-sale securities
    
    
    128,371
    
    
    105,205Proceeds
      from maturities, calls or principal repayments of investment
      securities
    
    
    9,392
    
    
    7,180Proceeds
      from sales of real estate acquired by foreclosure
    
    
    893
    
    
    -Net
      increase in loans
    
    
    (31,739
    )
    
    (36,612
    )Increase
      in federal funds sold
    
    
    (1,210
    )
    
    (25,005
    )Purchase
      of bank premises and equipment
    
    
    (1,952
    )
    
    (184
    )Net
      cash provided by (used in) investing activities
    
    
    75,095
    
    
    (93,800
    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase (decrease) in deposits
    
    
    (1,017
    )
    
    109,932Net
      decrease in other borrowings
    
    
    (57,400
    )
    
    (22,300
    )Proceeds
      from issuance of common stock
    
    
    12
    
    
    -Net
      cash provided by (used in) financing activities
    
    
    (58,405
    )
    
    87,632INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    20,488
    
    
    (6,438
    )CASH
      AND EQUIVALENTS -- Beginning of year
    
    
    21,235
    
    
    27,928CASH
      AND EQUIVALENTS -- End of period
    
    $
    41,723
    
    $
    21,490SUPPLEMENTAL
      DISCLOSURES:Interest
      paid
    
    $
    5,710
    
    $
    4,075Income
      taxes paid
    
    
    221
    
    
    84Other
      real estate owned acquired through foreclosure
    
    
    -
    
    
    2,214See
      notes to interim consolidated financial statements.
  4
 **Table of
Contents**
 **SNB
BANCSHARES, INC. AND SUBSIDIARIES**
 ****Notes
to Interim Consolidated Financial
Statements**** **March
31, 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. 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 March 31, 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 (in thousands except per share
amounts):
 Three
      Months Ended March 31,2005
    
    
    
    2004Net
      earning (loss)-as reported
    
    
    
    
    $
    (2,186
    )
    
    
    
    $
    1,259Less
      total stock-based employee compensation expense determined under the fair
      value basedmethod
      - net of related tax effects
    
    
    
    
    
    150
    
    
    
    
    
    20Net
      earning (loss)-pro forma
    
    
    
    
    $
    (2,336
    )
    
    
    
    $
    1,239Earnings
      per share:Basic:As
      reported
    
    
    
    
    $
    (0.18
    )
    
    
    
    $
    0.18Pro
      forma
    
    
    
    
    
    (0.19
    )
    
    
    
    
    0.18Diluted:As
      reported
    
    
    
    
    $
    (0.17
    )
    
    
    
    $
    0.17Pro
      forma
    
    
    
    
    
    (0.18
    )
    
    
    
    
    0.17
 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.
 5
 **Table of
Contents**
 **SNB
BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
to Interim Consolidated Financial Statements**
 **March 31,
2005**
 **(Unaudited)**
 
  
 Earnings
per Share
Earnings
per share are presented under two formats: basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing net
earnings available to holders of common stock and Class B stock by the weighted
average number of common and Class B shares outstanding for the reporting
period. Diluted earnings per share is computed by dividing net earnings by the
weighted average number of 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 in thousands, except per share data):

For
      the Three Months ended March 31,2005
    
    2004Net
      earnings (loss)
    
    
    
    
    $
    (2,186
    )
    $
    1,259Basic:Weighted
      average shares outstanding
    
    
    
    
    
    12,435
    
    
    6,994Basic
      earnings (loss) per common share
    
    
    
    
    $
    (0.18
    )
    $
    0.18Diluted:Weighted
      average shares outstanding
    
    
    
    
    
    12,435
    
    
    6,994Potentially
      dilutive common shares from options
    
    
    
    
    
    417
    
    
    203Weighted
      average shares and potentially dilutive common shares
      outstanding
    
    
    
    
    
    12,852
    
    
    7,197Diluted
      earnings (loss) per common share
    
    
    
    
    $
    (0.17
    )
    $
    0.17
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 March 31, 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**
 **March 31,
2005**
 **(Unaudited)**
  **(2)
Securities**

The
amortized cost and fair value of investment securities at March 31, 2005 and
December 31, 2004 were as follows (in thousands):

**As
      of March 31, 2005****Gross**
    
    **Gross****Amortized**
    
    **Unrealized**
    
    **Unrealized**
    
    **Fair****Cost**
    
    **Gains**
    
    **Losses**
    
    **Value****Available-for-Sale:**U.S.
      government agency securities
    
    $
    147,482
    
    $
    -
    
    $
    (2,910
    )
    $
    144,572Mortgage-backed
      securities
    
    
    96,074
    
    
    159
    
    
    (3,016
    )
    
    93,217Collateralized
      mortgage obligations
    
    
    74,570
    
    
    1
    
    
    (2,264
    )
    
    72,307Obligations
      of state and political subdivisions
    
    
    2,629
    
    
    32
    
    
    (39
    )
    
    2,622Other
      securities
    
    
    17,438
    
    
    35
    
    
    (65
    )
    
    17,408Total
    
    $
    338,193
    
    $
    227
    
    $
    (8,294
    )
    $
    330,126**Held-to-Maturity**Mortgage-backed
      securities
    
    $
    13,726
    
    $
    -
    
    $
    (143
    )
    $
    13,583Collateralized
      mortgage obligations
    
    
    17,062
    
    
    -
    
    
    (239
    )
    
    16,823Obligations
      of state and political subdivisions
    
    
    10,770
    
    
    78
    
    
    (83
    )
    
    10,765Total
    
    $
    41,558
    
    $
    78
    
    $
    (465
    )
    $
    41,171****
    
    **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 $11.6 million and $14.4 million at March 31,
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 $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. Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations for the Three Months Ended March 31, 2005 and 2004 -
General.”
  7
 **Table of
Contents**
 **SNB
BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
to Interim Consolidated Financial Statements**
 **March 31,
2005**
 **(Unaudited)**
 
 Management
believes that based upon the credit quality of the securities, only the
unrealized loss on securities identified for sale are considered
other-than-temporary at March 31, 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
March 31, 2005 is as follows (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 agency securities
    
    $
    125,359
    
    $
    (2,910
    )
    $
    19,213
    
    $
    -
    
    $
    144,572
    
    $
    (2,910
    )Mortgage-backed
      securities
    
    
    31,859
    
    
    (964
    )
    
    51,988
    
    
    (2,052
    )
    
    83,847
    
    
    (3,016
    )Collateralized
      mortgage obligations
    
    
    46,138
    
    
    (1,050
    )
    
    25,778
    
    
    (1,214
    )
    
    71,916
    
    
    (2,264
    )Obligations
      of state and political subdivisions
    
    
    -
    
    
    -
    
    
    1,353
    
    
    (39
    )
    
    1,353
    
    
    (39
    )Other
      securities
    
    
    1,557
    
    
    (25
    )
    
    1,572
    
    
    (40
    )
    
    3,129
    
    
    (65
    )Total
    
    $
    204,913
    
    $
    (4,949
    )
    $
    99,904
    
    $
    (3,345
    )
    $
    304,817
    
    $
    (8,294
    )**Held-to-maturity:**Mortgage-backed
      securities
    
    $
    13,583
    
    $
    (143
    )
    $
    -
    
    $
    -
    
    $
    13,583
    
    $
    (143
    )Collateralized
      mortgage obligations
    
    
    14,646
    
    
    (239
    )
    
    -
    
    
    -
    
    
    14,646
    
    
    (239
    )Obligations
      of state and political subdivisions
    
    
    4,024
    
    
    (83
    )
    
    -
    
    
    -
    
    
    4,024
    
    
    (83
    )Total
    
    $
    32,253
    
    $
    (465
    )
    $
    -
    
    $
    -
    
    $
    32,253
    
    $
    (465
    )
 Investment
securities with amortized costs of $255.9 million and $355.5 million and fair
values of $248.7 million and $349.8 million at March 31, 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 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 March 31, 2005 and December 31, 2004, options to purchase 1,259,400 and
1,265,700 shares of the Company’s common stock, respectively, were
outstanding.
 
 A summary
of changes in outstanding options is as follows:
 
 Three
      Months Ended March 31, 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
    
    
    (29,000
    )
    
    9.52
    
    
    (18,000
    )
    
    6.94Options
      exercised
    
    
    (2,300
    )
    
    5.00
    
    
    (2,300
    )
    
    5.00Shares
      under option -- end of period
    
    
    1,259,400
    
    
    9.38
    
    
    1,265,700
    
    
    9.32Options
      exercisable -- end of period
    
    
    125,100
    
    
    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
    
    
    36,000
    
    
    
    
    
    32,000
 8
 **Table of
Contents**
 **SNB
BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
to Interim Consolidated Financial Statements**
 **March 31,
2005**
 **(Unaudited)**
  
 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 March 31, 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.
 
 The
following is a summary of the Company’s and the Bank’s capital ratios at March
31, 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 March 31, 2005 (Unaudited)Total
      Capital (to Risk-Weighted Assets)
    
    
    
    
    $
    134,648
    
    
    19.36
    %
    $
    55,623
    
    
    8.00
    %Tier
      I Capital (to Risk-Weighted Assets)
    
    
    
    
    
    118,416
    
    
    17.03
    
    
    27,811
    
    
    4.00Tier
      I Capital (to Total Assets)
    
    
    
    
    
    118,416
    
    
    10.29
    
    
    46,037
    
    
    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 March 31, 2005 (Unaudited)Total
      Capital (to Risk-Weighted Assets)
    
    
    
    
    $
    118,081
    
    
    16.98
    %
    $
    55,599
    
    
    8.00
    %
    $
    69,499
    
    
    10.00
    %Tier
      I Capital (to Risk-Weighted Assets)
    
    
    
    
    
    109,343
    
    
    15.73
    
    
    27,800
    
    
    4.00
    
    
    41,700
    
    
    6.00Tier
      I Capital (to Total Assets)
    
    
    
    
    
    109,343
    
    
    9.51
    
    
    45,979
    
    
    4.00
    
    
    57,473
    
    
    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 March 31, 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 Assetsratio)
      includes a portion of the Company's Trust Preferred Securities as allowed
      by regulatory capital guidelines.  Trust Preferred Securities amounts
      not included in Tier ICapital
      are included in Tier II Capital for purposes of determining the Total
      Capital to Risk-Weighted Assets ratio.
 9
 **Table of Contents**
 ****
 **SNB
BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
to Interim Consolidated Financial Statements**
 **March 31,
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.
 
 10
 **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.
 11
 **Table of
Contents**
  *Results
of Operations for the Three Months Ended March 31, 2005 and
2004*
 
 General
 During
March 2005, our Board of Directors approved a plan to reposition its balance
sheet by reducing the amount of low-yielding investment securities and using a
portion of the proceeds to de-leverage its borrowing position. The Board
approved this plan in an effort to reduce its liability sensitive position and
to improve its 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, selling the remainder subsequently 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 cost of funds 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 effective duration of our securities
portfolio increased to approximately 3.4 years after completion of the sales and
planned reinvestments compared with approximately 3.0 years before the
transactions.
 
 For the
three months ended March 31, 2005, we recorded a net loss of $2.2 million or
$0.17 per diluted common and Class B share, a decrease of $3.4 million or 273.6%
compared with net earnings of $1.2 million or $0.17 per diluted share for the
same period in 2004. This $3.4 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 decrease in noninterest income excluding the impairment
write-down of securities of $334 thousand and a $676 thousand increase in
noninterest expense, partially offset by a $1.8 million increase in net interest
income and a $1.8 million decrease in the provision for income
taxes.
 
 Net
Interest Income
 When
comparing the first quarter of 2005 to the same quarter in 2004, net interest
income increased $1.8 million, primarily due to an increase of $3.9 million in
interest income, partially offset by a $2.2 million increase in interest
expense. The net interest margin increased 14 basis points to 2.91% for the
quarter ended March 31, 2005 compared with 2.77% for the same period in
2004.
 
 Interest
income from loans increased by $3.3 million, or 50.7%, to $9.8 million for the
quarter ended March 31, 2005, compared with $6.5 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 $613.4 million in the
first quarter of 2005 compared with $436.1 million in the first quarter of 2004,
an increase of $177.3 million, or 40.6% and an increase in the average yield on
loans for the quarter ended March 31, 2005 to 6.39% compared with 5.90% for the
same period of 2004.
 
 Interest
income from investment securities increased by $716 thousand, or 21.4%, to $4.1
million for the quarter ended March 31, 2005 compared with $3.3 million for the
same period in 2004. This increase was due to increases in both securities
principal balances and yields, with investment securities averaging $486.9
million in the first quarter of 2005 compared with $412.3 million in the first
quarter of 2004, an increase of $74.6 million or 18.1%. The average yield on
investment securities increased to 3.39% for the quarter ended March 31, 2005
from 3.24% for the same period in 2004.
 
 Interest
expense increased 56.5%, or $2.2 million, to $6.0 million for the quarter ended
March 31, 2005 compared with $3.8 million for the same period in 2004. The
increase was principally due to the 63 basis points increase in the average rate
paid to 2.56% for the quarter ended March 31, 2005, from 1.93% for the same
period in 2004. The average balance of interest-bearing liabilities increased
$153.9 million or 19.4% from $792.2 million for the quarter ended March 31, 2004
compared with $946.1 million for the same period in 2005. The increase in
average liabilities was due to an increase in borrowings of $90.5 million or
175.1% and deposit growth of $63.4 million or 9.0%.
 
   12
 **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.

For
      the Three Months Ended March 31,2005
    
    2004Average
    
    Interest
    
    Average
    
    Average
    
    Interest
    
    AverageOutstanding
    
    Earned/
    
    Yield/
    
    Outstanding
    
    Earned/
    
    Yield/Balance
    
    Paid
    
    Rate
      (1)
    
    Balance
    
    Paid
    
    Rate
      (1)(Dollars
      in thousands)**Assets:**Interest-earning
      assets:Loans
    
    $
    613,375
    
    $
    9,797
    
    
    6.39
    %
    $
    436,066
    
    $
    6,501
    
    
    5.90
    %Investment
      Securities
    
    
    486,885
    
    
    4,059
    
    
    3.39
    
    
    412,277
    
    
    3,343
    
    
    3.24Federal
      funds sold
    
    
    838
    
    
    5
    
    
    2.40
    
    
    25,269
    
    
    59
    
    
    0.92Interest-earning
      deposits in other financial institutions
    
    
    986
    
    
    9
    
    
    3.72
    
    
    17,607
    
    
    40
    
    
    0.91Total
      interest-earning assets
    
    
    1,102,084
    
    
    13,870
    
    
    5.06
    %
    
    891,219
    
    
    9,943
    
    
    4.43
    %Less
      allowance for loan losses
    
    
    (8,396
    )
    
    
    
    
    
    
    
    (5,949
    )Total
      interest-earning assets, net of allowance
    
    
    1,093,688
    
    
    
    
    
    
    
    
    885,270Non-earning
      assets:Cash
      and due from banks
    
    
    17,333
    
    
    
    
    
    
    
    
    18,366Premises
      and equipment
    
    
    16,375
    
    
    
    
    
    
    
    
    12,672Accrued
      interest receivable and other assets
    
    
    15,024
    
    
    
    
    
    
    
    
    9,713Total
      noninterest-earning assets
    
    
    48,732
    
    
    
    
    
    
    
    
    40,751Total
      assets
    
    $
    1,142,420
    
    
    
    
    
    
    
    $
    926,021**Liabilities
      and Shareholders' Equity:**Interest-bearing
      liabilities:NOW,
      savings, and money market accounts
    
    $
    375,990
    
    $
    1,786
    
    
    1.93
    %
    $
    336,670
    
    $
    951
    
    
    1.14
    %Time
      deposits
    
    
    389,669
    
    
    2,668
    
    
    2.78
    
    
    365,592
    
    
    2,193
    
    
    2.41Other
      borrowed funds
    
    
    142,167
    
    
    883
    
    
    2.48
    
    
    51,683
    
    
    145
    
    
    1.11Junior
      subordinated debentures
    
    
    38,250
    
    
    624
    
    
    6.52
    
    
    38,250
    
    
    521
    
    
    5.39Total
      interest-bearing liabilities
    
    
    946,076
    
    
    5,961
    
    
    2.56
    %
    
    792,195
    
    
    3,810
    
    
    1.93
    %Noninterest-bearing
      liabilities:Demand
      deposits
    
    
    105,280
    
    
    
    
    
    
    
    
    98,717Accrued
      interest payable and other liabilities
    
    
    4,209
    
    
    
    
    
    
    
    
    2,816Total
      noninterest-bearing liabilities
    
    
    109,489
    
    
    
    
    
    
    
    
    101,533Total
      liabilities
    
    
    1,055,565
    
    
    
    
    
    
    
    
    893,728Shareholders'
      equity
    
    
    86,855
    
    
    
    
    
    
    
    
    32,293Total
      liabilities and shareholders' equity
    
    $
    1,142,420
    
    
    
    
    
    
    
    $
    926,021Net
      interest income
    
    
    
    
    $
    7,909
    
    
    
    
    
    
    
    $
    6,133Net
      interest spread
    
    
    
    
    
    
    
    
    2.50
    %
    
    
    
    
    
    
    
    2.50
    %Net
      interest margin (tax equivalent)
    
    
    
    
    
    
    
    
    2.91
    %
    
    
    
    
    
    
    
    2.77
    %(1)
      Annualized
 13
 **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 March 31, 2005 Compared with the Same Period in
      2004****Increase
      (Decrease)****Due
      to Change in****Volume**
    
    **Rate**
    
    **Total****Interest-earning
      assets:**Loans
    
    $
    2,578
    
    $
    718
    
    $
    3,296Investment
      securities
    
    
    597
    
    
    119
    
    
    716Federal
      funds sold
    
    
    (55
    )
    
    1
    
    
    (54
    )Interest-bearing
      deposits in other financial institutions
    
    
    (37
    )
    
    6
    
    
    (31
    )Increase
      (decrease) in interest income
    
    
    3,083
    
    
    844
    
    
    3,927**Interest-bearing
      liabilities:**NOW,
      savings and money market accounts
    
    
    110
    
    
    725
    
    
    835Time
      deposits
    
    
    143
    
    
    332
    
    
    475Other
      borrowed funds
    
    
    248
    
    
    490
    
    
    738Junior
      subordinated debentures
    
    
    -
    
    
    103
    
    
    103Increase
      (decrease) in interest expense
    
    
    501
    
    
    1,650
    
    
    2,151Increase
      (decrease) in net interest income
    
    $
    2,582
    
    $
    (806
    )
    $
    1,776
   Provision
for Loan Losses
 During
the quarter ended March 31, 2005, we recorded a provision for loan losses of
$600 thousand compared with $750 thousand for the same period in 2004.
Additionally, we experienced net recoveries of $17 thousand for the quarter
ended March 31, 2005, compared with net charge-offs of $219 thousand for the
same period in 2004. At March 31, 2005, the allowance for loan losses as a
percentage of total loans was 1.39% compared with 1.34% at March 31, 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 $5.7 million in the first quarter of 2005 compared with
income of $744,000 in the first quarter of 2004, with the decrease primarily due
to the $6.1 million impairment charge related to the restructuring of our
securities portfolio during the first quarter of 2005 and the fact that there
were no gains on the sale of securities in the first quarter of 2005 compared
with $359,000 in gains on sales of securities during the same period in
2004.
 
 Noninterest
Expense and Provision for Federal Income Taxes
 Noninterest
expense for the first quarter of 2005 was $4.9 million compared with $4.2
million for the first quarter of 2004, an increase of $676 thousand, or 16.0%.
This $676 thousand increase was comprised primarily of an increase of $252
thousand in legal and professional fees associated with being a publicly traded
company, an increase of $249 thousand in salaries and employee benefits and an
increase of $127 thousand in data processing resulting from infrastructure
improvements and technology upgrades. The provision for Federal income taxes
decreased $1.8 million due to the $2.1 million tax benefit arising from the
impairment write-down of securities, which more than offset the tax provision on
other earnings in the quarter ended March 31, 2005. The effective tax rate was
approximately 34% for both the quarter ended March 31, 2005 and the same period
in 2004.
  
  14
 **Table of
Contents**
  
 *Financial
Condition*
 
 General
 As of
March 31, 2005 we had total assets of $1.1 billion, total loans of $630.0
million, total deposits of $867.4 million and total shareholders’ equity of
$83.4 million. Total assets decreased by $62.1 million from December 31, 2004 to
March 31, 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 $145.0 million in available for sale securities, partially offset by and
increases of $28.2 million in held to maturity securities and $20.5 million in
cash and cash equivalents. Additionally, there was growth in net loans of $31.1
million.
 
 In March
under the previously announced restructuring and de-leveraging plan, we
identified for sale 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 a 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 Three Months Ended March 31, 2005 and 2004 -
General.”
 
 From
December 31, 2004 to March 31, 2005, total liabilities decreased by $59.1
million primarily due the reduction in borrowings due to the balance sheet
de-leveraging. When comparing the two periods, deposits decreased $1.0 million
and other borrowings decreased $57.4 million. Shareholders' equity decreased
$3.0 million from December 31, 2004 to March 31, 2005 primarily as a result of
the loss recognized and unrealized losses on the available-for-sale securities
portfolio.
 
 Loan
Portfolio
 Total
loans were $630.0 million as of March 31, 2005, an increase of $31.7 million or
5.3% compared with loans of $598.3 million as of December 31, 2004. Loan growth
occurred primarily in commercial mortgage loans, which increased $15.4 million
or 5.8%.
 
 The
following table summarizes our loan portfolio by type as of the dates indicated
(dollars in thousands):
 
 March
      31, 2005
    
    December
      31, 2004Amount
    
    Percent
    
    Amount
    
    PercentBusiness
      and industrial
    
    $
      71,463
    
    11.3
    %
    $
      70,101
    
    11.7
    %Real
      estate:Construction
      and land development
    
    
    130,543
    
    
    20.7
    
    
    123,655
    
    
    20.7Residential
      mortgages
    
    
    134,495
    
    
    21.4
    
    
    126,200
    
    
    21.1Commercial
      mortgages
    
    
    282,548
    
    
    44.9
    
    
    267,158
    
    
    44.7Consumer
    
    
    12,489
    
    
    2.0
    
    
    12,592
    
    
    2.1Other
    
    
    159
    
    
    -
    
    
    227
    
    
    -Gross
      loans
    
    
    631,697
    
    
    100.3
    
    
    599,933
    
    
    100.3Less
      unearned discounts and fees
    
    
    (1,649
    )
    
    (0.3
    )
    
    (1,641
    )
    
    (0.3
    )Total
      loans
    
    $
    630,048
    
    
    100.0
    %
    $
    598,292
    
    
    100.0
    %
 Nonperforming
Assets
 Nonperforming
assets were $7.0 million and $4.8 million as of March 31, 2005 and December 31,
2004, respectively. The increase in nonperforming assets of $2.2 million was
principally comprised of a $3.2 million increase in nonaccrual loans, offset by
an $895 thousand decrease in other real estate owned. The increase in nonaccrual
loans was primarily a result of two loans placed on nonaccrual in January 2005
totaling $3.1 million collateralized by commercial properties and with one
guarantor. 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 1.11% and 0.80% as of March 31, 2005 and December 31, 2004,
respectively.
   15
 **Table of
Contents**
 The
following table presents information regarding nonperforming assets as of the
dates indicated (dollars in thousands):
  As
      of March 31,
    
    As
      of December 31,2005
    
    2004Nonaccrual
      loans
    
    $
    4,677
    
    $
    1,489Accruing
      loans past due 90 days or more
    
    
    -
    
    
    62Restructured
      loans
    
    
    1,891
    
    
    1,917Other
      real estate
    
    
    425
    
    
    1,320Total
      nonperforming assets
    
    $
    6,993
    
    $
    4,788Nonperforming
      assets to total loans and other real estate
    
    
    1.11
    %
    
    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
March 31, 2005, the allowance for loan losses amounted to $8.7 million or 1.39%
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 133.04% as of March 31, 2005 from
234.17% as of December 31, 2004.
  The
following table summarizes the activity in our allowance for loan losses during
the periods indicated (dollars in thousands):
  As
      of and for the Three Months Ended
    
    As
      of and for the Year Ended December 31,March
      31, 2005
    
    2004Average
      loans outstanding
    
    $
    613,375
    
    $
    509,142Total
      loans outstanding at end of period
    
    $
    630,048
    
    $
    598,292Allowance
      for loan losses at beginning of period
    
    $
    8,121
    
    $
    5,650Provision
      for loan losses
    
    
    600
    
    
    2,950Charge-Offs:Business
      and industrial
    
    
    -
    
    
    (242
    )Real
      estate
    
    
    -
    
    
    (262
    )Consumer
    
    
    (23
    )
    
    (110
    )Total
      charge-offs
    
    
    (23
    )
    
    (614
    )Recoveries:Business
      and industrial
    
    
    26
    
    
    50Real
      estate
    
    
    12
    
    
    63Consumer
    
    
    2
    
    
    22Total
      recoveries
    
    
    40
    
    
    135Net
      recoveries (charge-offs)
    
    
    17
    
    
    (479
    )Allowance
      for loan losses at end of period
    
    $
    8,738
    
    $
    8,121Allowance
      for loan losses to end of period loans
    
    
    1.39
    %
    
    1.36
    %Net
      charge-offs (recoveries) to average loans
    
    
    (0.01
    )
    
    0.09Allowance
      for loans losses to end of period nonperforming loans
    
    
    133.04
    
    
    234.17
 
 16
 **Table of
Contents**
 Securities
 As of
March 31, 2005, investment securities totaled $371.7 million, a decrease of
$116.8 million or 23.9% 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
identified for sale from its 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%, and
recorded a write-down impairment charge of approximately $6.1 million before tax
on the identified $169.0 million in securities. Approximately $130.0 million of
the identified $169.0 million in securities were sold during March 2005. In
addition, approximately $3 million in Federal Home Loan Bank stock was sold
during the quarter ended March 31, 2005.
 
 As of
March 31, 2005, securities represented 34.8% of total assets compared with 43.2%
of total assets as of December 31, 2004.
 
 Deposits
 As of
March 31, 2005, NOW accounts, money market accounts and savings deposits
accounted for 42.5% of total deposits, while certificates of deposit made up
44.6% of total deposits. Total deposits were $867.4 million as of March 31,
2005, a decrease of $1.0 million or 0.1% compared with $868.4 million as of
December 31, 2004. As of March 31, 2005, we had $111.4 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
2.07% for the three months ended March 31, 2005 compared with 1.68% for the year
ended December 31, 2004.
 
 Other
Borrowings
 Other
borrowings totaled $75.5 million as of March 31, 2005, a decrease of $57.4
million of 43.4% compared with $132.9 million as of December 31, 2004. The
decrease is due to the previously discussed balance sheet restructuring and
de-leveraging.
  **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
March 31, 2005, shareholders’ equity totaled $83.3 million, a decrease of $3.0
million or 3.5% compared with $86.4 million as of December 31, 2004. The
decrease is comprised of the $2.2 million in net loss and an $862 thousand
decrease due to the change in the fair value of available-for-sale securities.
Regulatory agencies for banks and bank holding companies utilize capital
guidelines designed to measure Tier I and total capital and take into
consideration the risk inherent in both on-balance-sheet and off-balance-sheet
items. We remain 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 to 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,
based on 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
of 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 Bank’s ALCO committee on an
ongoing basis.
 17
 **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 March
31, 2005:
  **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****(Dollars
      in thousands)**Interest-earning
      assets:Securities
    
    $
    16,641
    
    $
    606
    
    $
    528
    
    $
    104,336
    
    $
    57,934
    
    $
    191,639
    
    $
    371,684Loans
    
    
    299,664
    
    
    36,010
    
    
    28,050
    
    
    73,671
    
    
    118,963
    
    
    75,339
    
    
    631,697Federal
      funds sold
    
    
    1,210
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,210Total
      interest-earning assets
    
    
    317,515
    
    
    36,616
    
    
    28,578
    
    
    178,007
    
    
    176,897
    
    
    266,978
    
    
    1,004,591Interest-bearing
      liabilities:NOW,
      money market and savings deposits
    
    $
    368,949
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    368,949Certificates
      of deposit and other time deposits
    
    
    45,859
    
    
    245,173
    
    
    63,471
    
    
    24,141
    
    
    5,424
    
    
    2,944
    
    
    387,012Borrowed
      funds
    
    
    500
    
    
    75,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    75,500Junior
      subordinated debentures
    
    
    -
    
    
    30,930
    
    
    -
    
    
    -
    
    
    -
    
    
    7,320
    
    
    38,250Total
      interest-bearing liabilities
    
    
    415,308
    
    
    351,103
    
    
    63,471
    
    
    24,141
    
    
    5,424
    
    
    10,264
    
    
    869,711Cumulative
      GAP
    
    $
    (97,793
    )
    $
    (412,280
    )
    $
    (447,173
    )
    $
    (293,307
    )
    $
    (121,834
    )
    $
    134,880Cumulative
      GAP to total assets
    
    
    (9.16
    )%
    
    (38.60
    )%
    
    (41.87
    )%
    
    (27.46
    )%
    
    (11.41
    )%
    
    12.63
    %Cumulative
      interest-earning assets to cumulative interest-bearing liabilities
    
    
    76.45
    %
    
    46.21
    %
    
    46.12
    %
    
    65.66
    %
    
    85.82
    %
    
    115.51
    %
   Our
one-year cumulative GAP position as of March 31, 2005 was negative $447.2
million or (41.9)% of 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.
  18
 **Table of
Contents**
 
 The
following table sets forth our simulation analysis as of March 31,
2005:
  **Change
      in Rates**
    
    **%
      Change in**
      **Net
      Income**-100
      bp
    
    
    6.50
    %0
      bp
    
    
    --+100
      bp
    
    
    (0.1
    )%+200
      bp
    
    
    (31.9
    )%
 Based on
the March 31, 2005 simulation analysis, we estimate our net income would
decrease by approximately 31.9% 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 0.1% 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 6.5% 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.
 19
 **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**
 
 Not
applicable.
 
 **Item
5.****Other
Information**
 
 Not
applicable.
 
 **Item
6.****Exhibits**
 
 Exhibits.
  31.1 Certification of the Chief Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
and Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2 Certification of the Chief Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
and Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1 Certification of the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 32.2 Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 20
 **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:   May 13, 2005
    By:
    /s/  Harvey ZinnPresident and Chief Executive
      Officer
   Date:   May 13, 2005
    By:
    /s/  R. Darrell BrewerChief Financial
  Officer