UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549









**FORM
      10-Q**










[
                X
                ]
            Quarterly
                Report Under Section 13 or 15(d)Of
                the Securities Exchange Act of 1934 forThe
                Quarterly Period Ended September 30, 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
            by check mark whether the registrant is a shell company (as defined in
            Exchange
            Act Rule 12b-2).
  YES
                    
                    
                    No
                    X




Number
        of
        shares of Common Stock Outstanding as of October 31, 2005:
        9,782,878
 Number
        of
        shares of Class B Stock Outstanding as of October 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 September 30, 2005
                (unaudited) and December 31, 2004
            1Consolidated
                Statements of Earnings for the
                Three and Nine Months Ended September 30, 2005
                and 2004
                (unaudited)
            2Consolidated
                Statements of Changes in
                Shareholders' Equity for the Year Ended December 31, 2004 and for
                the Nine Months Ended September 30, 2005
                (unaudited)
            3Consolidated
                Statements of Cash Flows for
                the Nine Months Ended September 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
            23Item
                4
            Controls
                and Procedures
            23









**Part
              II.**
            **Other
              Information**Item
                1
            Legal
                Proceedings
            24Item
                2
            Unregistered
                Sales of Equity Securities and Use
                of Proceeds
            24Item
                3
            Defaults
                upon Senior
                Securities
            24Item
                4
            Submission
                of Matters to a Vote of Security Holders
            24Item
                5
            Other
                Information
            24Item
              6
            Exhibits
            24










**Table
            of Contents**
     PART I - FINANCIAL INFORMATION
 **Item
                            1.  Interim Consolidated Financial
                            Statements**
  **SNB
                                BANCSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                                BALANCE SHEETS****(Unaudited)**September
                                30,
                            
                            December
                                31,2005
                            
                            2004(In
                                thousands, except share data)**ASSETS**Cash
                                and cash equivalents
                            $
                            26,739
                            
                            $
                            21,235Federal
                                funds sold
                            
                            1,450
                            
                            
                            -Available
                                for sale securities, at fair value (amortized cost
                                of $311,750
                                and$481,793
                                  at September 30, 2005 and December 31, 2004,
                                  respectively)
                            
                            304,536
                            
                            
                            475,155Held
                                to maturity securities, at amortized cost (fair value
                                of $103,535
                                and$13,493
                                at September 30, 2005 and December 31, 2004, respectively)
                            
                            103,937
                            
                            
                            13,368Loans
                            
                            658,003
                            
                            
                            598,292Less
                                allowance for loan losses
                            
                            (9,185
                            )
                            
                            (8,121
                            )Net
                                loans
                            
                            648,818
                            
                            
                            590,171Premises
                                and equipment - net
                            
                            21,835
                            
                            
                            16,137Accrued
                                interest receivable
                            
                            4,507
                            
                            
                            4,485Other
                                assets
                            
                            8,925
                            
                            
                            9,537TOTAL
                            $
                            1,120,747
                            
                            $
                            1,130,088**LIABILITIES
                                AND SHAREHOLDERS' EQUITY**LIABILITIES:Deposits:Noninterest-bearing
                            $
                            128,090
                            
                            $
                            110,858Interest-bearing
                            
                            610,229
                            
                            
                            757,528Total
                                deposits
                            
                            738,319
                            
                            
                            868,386Other
                                borrowings
                            
                            250,500
                            
                            
                            132,900Accrued
                                interest payable
                            
                            3,191
                            
                            
                            2,724Junior
                                subordinated debentures
                            
                            38,250
                            
                            
                            38,250Other
                                liabilities
                            
                            2,150
                            
                            
                            1,427Total
                                liabilities
                            
                            1,032,410
                            
                            
                            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,9,782,878
                                and 9,753,612 shares issued and outstanding atSeptember
                                30, 2005 and December 31, 2004, respectively
                            
                            98
                            
                            
                            98Class
                                B stock, $0.01 par value - 3,216,781 shares authorized,
                                2,652,475
                                and2,679,041
                                shares issued and outstanding at September 30, 2005
                                andDecember
                                31, 2004, respectively
                            
                            27
                            
                            
                            27Capital
                                surplus
                            
                            66,195
                            
                            
                            66,173Accumulated
                                other comprehensive loss - net unrealized loss on
                                available-for-sale
                                securities - net of taxes
                            
                            (4,744
                            )
                            
                            (4,315
                            )Retained
                                earnings
                            
                            26,761
                            
                            
                            24,418Total
                                shareholders' equity
                            
                            88,337
                            
                            
                            86,401TOTAL
                            $
                            1,120,747
                            
                            $
                            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
                        
                        Nine
                            Months EndedSeptember
                            30,
                        
                        September
                            30,2005
                        
                        2004
                        
                        2005
                        
                        2004(In
                            thousands, except per share amounts)INTEREST
                            INCOME:Loans-including
                            fees
                        
                        $
                        11,551
                        
                        $
                        8,031
                        
                        $
                        32,167
                        
                        $
                        21,617Securities:Taxable
                        
                        
                        3,845
                        
                        
                        4,184
                        
                        
                        11,364
                        
                        
                        11,535Nontaxable
                        
                        
                        197
                        
                        
                        50
                        
                        
                        489
                        
                        
                        91Federal
                            funds sold and earning deposits
                        
                        
                        41
                        
                        
                        14
                        
                        
                        102
                        
                        
                        135Total
                            interest income
                        
                        
                        15,634
                        
                        
                        12,279
                        
                        
                        44,122
                        
                        
                        33,378INTEREST
                            EXPENSE:Demand
                            deposits
                        
                        
                        1,860
                        
                        
                        1,215
                        
                        
                        5,354
                        
                        
                        3,190Certificates
                            and other time deposits
                        
                        
                        2,899
                        
                        
                        2,179
                        
                        
                        8,335
                        
                        
                        6,708Other
                            borrowings
                        
                        
                        2,412
                        
                        
                        1,319
                        
                        
                        5,475
                        
                        
                        2,812Total
                            interest expense
                        
                        
                        7,171
                        
                        
                        4,713
                        
                        
                        19,164
                        
                        
                        12,710NET
                            INTEREST INCOME
                        
                        
                        8,463
                        
                        
                        7,566
                        
                        
                        24,958
                        
                        
                        20,668PROVISION
                            FOR LOAN LOSSES
                        
                        
                        600
                        
                        
                        625
                        
                        
                        1,850
                        
                        
                        2,275NET
                            INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                        
                        
                        7,863
                        
                        
                        6,941
                        
                        
                        23,108
                        
                        
                        18,393NONINTEREST
                            INCOME:Service
                            charges on deposit accounts
                        
                        
                        195
                        
                        
                        193
                        
                        
                        646
                        
                        
                        623Gain on
                            sale of securities-net
                        
                        
                        -
                        
                        
                        197
                        
                        
                        128
                        
                        
                        700Impairment
                            write-down of securities
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (6,144
                        )
                        
                        -Other
                        
                        
                        196
                        
                        
                        153
                        
                        
                        572
                        
                        
                        453Total
                            noninterest income
                        
                        
                        391
                        
                        
                        543
                        
                        
                        (4,798
                        )
                        
                        1,776NONINTEREST
                            EXPENSE:Salaries
                            and employee benefits
                        
                        
                        2,912
                        
                        
                        2,944
                        
                        
                        8,779
                        
                        
                        8,386Net
                            occupancy expense
                        
                        
                        477
                        
                        
                        494
                        
                        
                        1,322
                        
                        
                        1,382Data
                            processing
                        
                        
                        457
                        
                        
                        284
                        
                        
                        1,284
                        
                        
                        841Legal
                            and professional fees
                        
                        
                        295
                        
                        
                        158
                        
                        
                        1,037
                        
                        
                        448FDIC
                            deposit insurance premium
                        
                        
                        29
                        
                        
                        31
                        
                        
                        89
                        
                        
                        84Other
                        
                        
                        777
                        
                        
                        820
                        
                        
                        2,235
                        
                        
                        2,221Total
                            noninterest expense
                        
                        
                        4,947
                        
                        
                        4,731
                        
                        
                        14,746
                        
                        
                        13,362EARNINGS
                            BEFORE INCOME TAXES
                        
                        
                        3,307
                        
                        
                        2,753
                        
                        
                        3,564
                        
                        
                        6,807PROVISION
                            FOR INCOME TAXES
                        
                        
                        1,133
                        
                        
                        935
                        
                        
                        1,221
                        
                        
                        2,313NET
                            EARNINGS
                        
                        $
                        2,174
                        
                        $
                        1,818
                        
                        $
                        2,343
                        
                        $
                        4,494EARNINGS
                            PER SHARE:Basic
                        
                        $
                        0.17
                        
                        $
                        0.20
                        
                        $
                        0.19
                        
                        $
                        0.58Diluted
                        
                        
                        0.17
                        
                        
                        0.19
                        
                        
                        0.19
                        
                        
                        0.57See
                            notes to interim consolidated financial
                            statements.
 2
 **Table
                of Contents**
  **SNB
                              BANCSHARES, INC. AND SUBSIDIARIES**
                          ******CONSOLIDATED
                              STATEMENTS OF CHANGES IN 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
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (4,400
                          )
                          
                          
                          
                          
                          (4,400
                          )Plus reclassification
                              adjustment for losses included in net earnings -- net
                              of
                              tax
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,971
                          
                          
                          
                          
                          
                          3,971Net
                              Earnings
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,343
                          
                          
                          2,343Total
                              comprehensive income (Note 1)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,914Conversion
                              of 26,566 shares of Class B stock into 26,566 shares
                              of common
                              stock
                          
                          
                          -
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Issuance
                              of 2,700 shares of common stock
                          
                          
                          -
                          
                          
                          
                          
                          
                          14
                          
                          
                          
                          
                          
                          
                          
                          
                          14Tax
                              benefit related to exercise of stock options
                          
                          
                          
                          
                          
                          
                          
                          
                          8
                          
                          
                          
                          
                          
                          
                          
                          
                          8BALANCE
                              -- September 30, 2005
                          
                          $
                          98
                          
                          $
                          27
                          
                          $
                          66,195
                          
                          $
                          (4,744
                          )
                          $
                          26,761
                          
                          $
                          88,337See
                              notes to interim consolidated financial
                              statements.
 3
 **Table
                  of Contents**
   **SNB
                              BANCSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                              STATEMENTS OF CASH FLOWS****(Unaudited)**Nine
                              Months Ended September 30,2005
                          
                          2004(dollars
                              in thousands)CASH
                              FLOWS FROM OPERATING ACTIVITIES:Net
                              Earnings
                          
                          $
                          2,343
                          
                          $
                          4,494Adjustments
                              to reconcile net earnings to net cash provided by operating
                              activities:Depreciation
                              and amortization
                          
                          
                          1,063
                          
                          
                          949Provision
                              for loan losses
                          
                          
                          1,850
                          
                          
                          2,275Amortization
                              and accretion of premiums and discounts on investment
                              securities --
                              net
                          
                          
                          445
                          
                          
                          670Gain
                              on sales of securities -- net
                          
                          
                          (128
                          )
                          
                          (700
                          )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
                          
                          
                          (22
                          )
                          
                          (1,405
                          )Decrease
                              (increase) in other assets
                          
                          
                          (257
                          )
                          
                          25Increase
                              in accrued interest payable
                          
                          
                          467
                          
                          
                          161Decrease
                              in other liabilities
                          
                          
                          723
                          
                          
                          322Net
                              cash provided by operating activities
                          
                          
                          12,638
                          
                          
                          6,791CASH
                              FLOWS FROM INVESTING ACTIVITIES:Purchases
                              of held-to-maturity securities
                          
                          
                          (97,903
                          )
                          
                          (11,214
                          )Purchases
                              of available-for-sale securities
                          
                          
                          (35,168
                          )
                          
                          (293,844
                          )Proceeds
                              from sales of available-for-sale securities
                          
                          
                          169,399
                          
                          
                          180,250Proceeds
                              from maturities, calls or principal repayments of investment
                              securities
                          
                          
                          36,685
                          
                          
                          31,676Proceeds
                              from sales of real estate acquired by foreclosure
                          
                          
                          893
                          
                          
                          -Net
                              increase in loans
                          
                          
                          (60,497
                          )
                          
                          (132,122
                          )Decrease
                              (increase) in federal funds sold
                          
                          
                          (1,450
                          )
                          
                          1,460Purchase
                              of bank premises and equipment
                          
                          
                          (6,640
                          )
                          
                          (2,222
                          )Net
                              cash provided by (used in) investing activities
                          
                          
                          5,319
                          
                          
                          (226,016
                          )CASH
                              FLOWS FROM FINANCING ACTIVITIES:Net
                              increase (decrease) in deposits
                          
                          
                          (130,067
                          )
                          
                          81,226Net
                              increase in other borrowings
                          
                          
                          117,600
                          
                          
                          73,700Proceeds
                              from issuance of common stock
                          
                          
                          14
                          
                          
                          52,242Net
                              cash provided by (used in) financing activities
                          
                          
                          (12,453
                          )
                          
                          207,168INCREASE
                              (DECREASE) IN CASH AND CASH EQUIVALENTS
                          
                          
                          5,504
                          
                          
                          (12,057
                          )CASH
                              AND EQUIVALENTS -- Beginning of year
                          
                          
                          21,235
                          
                          
                          27,928CASH
                              AND EQUIVALENTS -- End of period
                          
                          $
                          26,739
                          
                          $
                          15,871SUPPLEMENTAL
                              DISCLOSURES:Interest
                              paid
                          
                          $
                          18,697
                          
                          $
                          13,201Income
                              taxes paid
                          
                          
                          701
                          
                          
                          2,976Other
                              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**
 **September
                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
                        included in the
                        Company’s Annual Report on Form 10-K. The results of operations for
                        the period
                        ended September 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
                        Accounting Principles
                        Board Opinion No. 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 September 30,
                                
                                Nine
                                    Months Ended September 30,2005
                                
                                2004
                                
                                2005
                                
                                2004Net
                                    earning-as reported
                                
                                $
                                2,174
                                
                                $
                                1,818
                                
                                $
                                2,343
                                
                                $
                                4,494Less
                                    total stock-based employee compensation expense
                                    determined under the fair
                                    value based method - net of related tax effects
                                
                                
                                145
                                
                                
                                68
                                
                                
                                435
                                
                                
                                106Net
                                    earnings-pro forma
                                
                                $
                                2,029
                                
                                $
                                1,750
                                
                                $
                                1,908
                                
                                $
                                4,388Earnings
                                    per share:Basic:As
                                    reported
                                
                                $
                                0.17
                                
                                $
                                0.20
                                
                                $
                                0.19
                                
                                $
                                0.58Pro
                                    forma
                                
                                
                                0.16
                                
                                
                                0.19
                                
                                
                                0.15
                                
                                
                                0.57Diluted:As
                                    reported
                                
                                $
                                0.17
                                
                                $
                                0.19
                                
                                $
                                0.19
                                
                                $
                                0.57Pro
                                    forma
                                
                                
                                0.16
                                
                                
                                0.19
                                
                                
                                0.15
                                
                                
                                0.55
 5
 **Table
                        of
                        Contents**
 **SNB
                  BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                  to Interim Consolidated Financial Statements**
 **September 30,
                  2005**
 **(Unaudited)**
 
  The
                      Company expects to adopt the provisions of Statement of Financial
                      Accounting
                      Standards (“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
                                    
                                    Nine
                                        Months EndedSeptember
                                        30,
                                    
                                    September
                                        30,2005
                                    
                                    2004
                                    
                                    2005
                                    
                                    2004Net
                                        earnings-as reported
                                    
                                    $
                                    2,174
                                    
                                    $
                                    1,818
                                    
                                    $
                                    2,343
                                    
                                    $
                                    4,494Basic:Weighted
                                        average shares outstanding
                                    
                                    
                                    12,435
                                    
                                    
                                    9,137
                                    
                                    
                                    12,435
                                    
                                    
                                    7,713Basic
                                        earnings per common share
                                    
                                    $
                                    0.17
                                    
                                    $
                                    0.20
                                    
                                    $
                                    0.19
                                    
                                    $
                                    0.58Diluted:Weighted
                                        average shares outstanding
                                    
                                    
                                    12,435
                                    
                                    
                                    9,137
                                    
                                    
                                    12,435
                                    
                                    
                                    7,713Potentially
                                        dilutive common shares from options
                                    
                                    
                                    165
                                    
                                    
                                    210
                                    
                                    
                                    173
                                    
                                    
                                    215Weighted
                                        average shares and potentially dilutive common
                                        shares
                                        outstanding
                                    
                                    
                                    12,600
                                    
                                    
                                    9,347
                                    
                                    
                                    12,608
                                    
                                    
                                    7,928Diluted
                                        earnings per common share
                                    
                                    $
                                    0.17
                                    
                                    $
                                    0.19
                                    
                                    $
                                    0.19
                                    
                                    $
                                    0.57
 Recent
                      Accounting Standards
 In
                        December 2004, the Financial Accounting Standards Board (“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 will be effective for the Company
                        on 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 September 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**
 **September 30,
                    2005**
 **(Unaudited)**
  **(2)
                      Securities**
 
 The
                        amortized cost and fair value of investment securities at
                        September 30, 2005 and
                        December 31, 2004 were as follows (dollars in thousands):
  **As
                                    of September 30, 2005****Gross**
                                
                                **Gross****Amortized**
                                
                                **Unrealized**
                                
                                **Unrealized**
                                
                                **Fair****Cost**
                                
                                **Gains**
                                
                                **Losses**
                                
                                **Value****Available
                                    for Sale:**U.S.
                                    government agency securities
                                
                                $
                                136,987
                                
                                $
                                2
                                
                                $
                                (2,793
                                )
                                $
                                134,196Mortgage-backed
                                    securities
                                
                                
                                84,644
                                
                                
                                91
                                
                                
                                (2,713
                                )
                                
                                82,022Collateralized
                                    mortgage obligations
                                
                                
                                65,414
                                
                                
                                1
                                
                                
                                (1,803
                                )
                                
                                63,612Obligations
                                    of state and political subdivisions
                                
                                
                                3,557
                                
                                
                                34
                                
                                
                                (36
                                )
                                
                                3,555Other
                                    securities
                                
                                
                                21,148
                                
                                
                                52
                                
                                
                                (49
                                )
                                
                                21,151Total
                                
                                $
                                311,750
                                
                                $
                                180
                                
                                $
                                (7,394
                                )
                                $
                                304,536**Held
                                    to Maturity**Mortgage-backed
                                    securities
                                
                                $
                                41,517
                                
                                $
                                -
                                
                                $
                                (176
                                )
                                $
                                41,341Collateralized
                                    mortgage obligations
                                
                                
                                45,067
                                
                                
                                7
                                
                                
                                (277
                                )
                                
                                44,797Obligations
                                    of state and political subdivisions
                                
                                
                                17,353
                                
                                
                                174
                                
                                
                                (130
                                )
                                
                                17,397Total
                                
                                $
                                103,937
                                
                                $
                                181
                                
                                $
                                (583
                                )
                                $
                                103,535As
                                    of December 31, 2005Gross
                                
                                
                                **Gross**Amoritized
                                
                                
                                **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 $14.9 million and
                            $14.4 million at September
                            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.
                            Management’s Discussion and Analysis of Financial Condition and
                            Results of
                            Operations - Results of Operations for the Nine Months
                            Ended September 30, 2005
                            and 2004 - General.”
 7
 **Table
                              of
                              Contents**
 **SNB
                          BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                          to Interim Consolidated Financial Statements**
 **September 30,
                          2005**
 **(Unaudited)**
 
 Management
                              believes that based upon the credit quality of the
                              securities, none of the
                              unrealized loss on securities is considered other-than-temporary
                              at September
                              30, 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 September 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 agency securities
                                      
                                      $
                                      50,435
                                      
                                      $
                                      (560
                                      )
                                      $
                                      79,759
                                      
                                      $
                                      (2,233
                                      )
                                      $
                                      130,194
                                      
                                      $
                                      (2,793
                                      )Mortgage-backed
                                          securities
                                      
                                      
                                      7,637
                                      
                                      
                                      (129
                                      )
                                      
                                      67,654
                                      
                                      
                                      (2,584
                                      )
                                      
                                      75,291
                                      
                                      
                                      (2,713
                                      )Collateralized
                                          mortgage obligations
                                      
                                      
                                      18,633
                                      
                                      
                                      (322
                                      )
                                      
                                      44,838
                                      
                                      
                                      (1,481
                                      )
                                      
                                      63,471
                                      
                                      
                                      (1,803
                                      )Obligations
                                          of state and political subdivisions
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      1,354
                                      
                                      
                                      (36
                                      )
                                      
                                      1,354
                                      
                                      
                                      (36
                                      )Other
                                          securities
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      3,213
                                      
                                      
                                      (49
                                      )
                                      
                                      3,213
                                      
                                      
                                      (49
                                      )Total
                                      
                                      $
                                      76,705
                                      
                                      $
                                      (1,011
                                      )
                                      $
                                      196,818
                                      
                                      $
                                      (6,383
                                      )
                                      $
                                      273,523
                                      
                                      $
                                      (7,394
                                      )**Held-to-Maturity:**Mortgage-backed
                                          Securities
                                      
                                      $
                                      41,340
                                      
                                      $
                                      (176
                                      )
                                      $
                                      -
                                      
                                      $
                                      -
                                      
                                      $
                                      41,340
                                      
                                      $
                                      (176
                                      )Collateralized
                                          mortgage obligations
                                      
                                      
                                      31,839
                                      
                                      
                                      (277
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      31,839
                                      
                                      
                                      (277
                                      )Obligations
                                          of state and political subdivisions
                                      
                                      
                                      8,799
                                      
                                      
                                      (130
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      8,799
                                      
                                      
                                      (130
                                      )Total
                                      
                                      $
                                      81,978
                                      
                                      $
                                      (583
                                      )
                                      $
                                      -
                                      
                                      $
                                      -
                                      
                                      $
                                      81,978
                                      
                                      $
                                      (583
                                      )
 Investment
                                  securities with amortized costs of $229.0 million
                                  and $355.5 million and fair
                                  values of $223.0 million and $349.8 million at
                                  September 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 September 30, 2005
                                  and December 31, 2004, options
                                  to purchase 1,255,400 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**
 **September 30,
                            2005**
 **(Unaudited)**
  
 A
                                  summary
                                  of changes in outstanding options is as follows:
  Nine
                                              Months Ended
                                            September
                                              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
                                          
                                          
                                          (2,700
                                          )
                                          
                                          5.00
                                          
                                          
                                          (2,300
                                          )
                                          
                                          5.00Shares
                                              under option -- end of period
                                          
                                          
                                          1,255,400
                                          
                                          
                                          9.38
                                          
                                          
                                          1,265,700
                                          
                                          
                                          9.32Options
                                              exercisable -- end of period
                                          
                                          
                                          306,700
                                          
                                          
                                          8.47
                                          
                                          
                                          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 September 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**
 **September 30,
                                  2005**
 **(Unaudited)**
   The
                                  following is a summary of the Company’s and the Bank’s capital ratios at
                                  September 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 September 30, 2005 (Unaudited)Total
                                            Capital (to Risk-Weighted Assets)
                                        
                                        $
                                        140,027
                                        
                                        
                                        19.04
                                        %
                                        $
                                        58,828
                                        
                                        
                                        8.00
                                        %Tier
                                            I Capital (to Risk-Weighted Assets)
                                        
                                        
                                        124,992
                                        
                                        
                                        17.00
                                        
                                        
                                        29,414
                                        
                                        
                                        4.00Tier
                                            I Capital (to Total Assets)
                                        
                                        
                                        124,992
                                        
                                        
                                        11.15
                                        
                                        
                                        44,834
                                        
                                        
                                        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 September 30, 2005 (Unaudited)Total
                                            Capital (to Risk-Weighted Assets)
                                        
                                        $
                                        124,324
                                        
                                        
                                        16.91
                                        %
                                        $
                                        58,809
                                        
                                        
                                        8.00
                                        %
                                        $
                                        73,511
                                        
                                        
                                        10.00
                                        %Tier
                                            I Capital (to Risk-Weighted Assets)
                                        
                                        
                                        115,139
                                        
                                        
                                        15.66
                                        
                                        
                                        29,404
                                        
                                        
                                        4.00
                                        
                                        
                                        44,106
                                        
                                        
                                        6.00Tier
                                            I Capital (to Total Assets)
                                        
                                        
                                        115,139
                                        
                                        
                                        10.29
                                        
                                        
                                        44,776
                                        
                                        
                                        4.00
                                        
                                        
                                        55,971
                                        
                                        
                                        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 September 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.
   **(5)
                                  Recent Developments**
  On
                                    October 27, 2005 the Board of Directors approved
                                    the redemption on December 6,
                                    2005 of its 10.20% junior subordinated debentures
                                    in the aggregate amount of
                                    $7.3 million issued by the Company to SNB Capital
                                    Trust I, in order to allow SNB
                                    Capital Trust I to redeem on December 6, 2005
                                    all of its 10.20% Trust Preferred
                                    Securities in the amount of $7.1 million and
                                    its 10.20% Common Securities in the
                                    amount of $222 thousand at a redemption price
                                    equal to the $10.00 liquidation
                                    amount of each security plus all accrued and
                                    unpaid interest per security
                                    through the redemption date. The Trust Preferred
                                    Securities were originally
                                    issued on December 6, 2000. All interest accruing
                                    on the Trust Preferred
                                    Securities and the Trust Common Securities will
                                    cease to accrue effective on the
                                    redemption date. Wachovia Bank, N.A., property
                                    trustee of the Trust Preferred
                                    Securities, will notify the holders of the redemption.
                                    Among the holders of the
                                    Trust Preferred Securities are The Joella and
                                    Stewart Morris Foundation owning
                                    approximately $5.7 million and Caralisa Morris
                                    Simon owning $500 thousand.
                                    Stewart Morris is Senior Chairman of the Company,
                                    and Caralisa Morris Simon is
                                    Chairman of the Company. Approximately $30.9
                                    million of junior subordinated
                                    debentures related to three other trust preferred
                                    securities transactions in
                                    2003 will remain outstanding following the completion
                                    of this
                                    redemption.
 10
 **Table
                                    of Contents**
 **SNB
                              BANCSHARES, INC. AND SUBSIDIARIES**
 **Notes
                              to Interim Consolidated Financial Statements**
 **September 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.
 **Recent
                              Developments**
  On
                                October 27, 2005 the Board of Directors approved
                                the redemption on December 6,
                                2005 of its 10.20% junior subordinated debentures
                                in the aggregate amount of
                                $7.3 million issued by the Company to SNB Capital
                                Trust I, in order to allow SNB
                                Capital Trust I to redeem on December 6, 2005 all
                                of its 10.20% Trust Preferred
                                Securities in the amount of $7.1 million and its
                                10.20% Common Securities in the
                                amount of $222 thousand at a redemption price equal
                                to the $10.00 liquidation
                                amount of each security plus all accrued and unpaid
                                interest per security
                                through the redemption date. The Trust Preferred
                                Securities were originally
                                issued on December 6, 2000. All interest accruing
                                on the Trust Preferred
                                Securities and the Trust Common Securities will cease
                                to accrue effective on the
                                redemption date. Wachovia Bank, N.A., property trustee
                                of the Trust Preferred
                                Securities, will notify the holders of the redemption.
                                Among the holders of the
                                Trust Preferred Securities are The Joella and Stewart
                                Morris Foundation owning
                                approximately $5.7 million and Caralisa Morris Simon
                                owning $500 thousand.
                                Stewart Morris is Senior Chairman of the Company,
                                and Caralisa Morris Simon is
                                Chairman of the Company. Approximately $30.9 million
                                of junior subordinated
                                debentures related to three other trust preferred
                                securities transactions in
                                2003 will remain outstanding following the completion
                                of this
                                redemption.
 
 **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 annual report on Form 10-K
                              for the year ended
                              December 31, 2004. 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 September
                              30, 2005 and
                              2004*
 
 General
 For
                              the
                              three months ended September 30, 2005, we recorded
                              net earnings of $2.2 million
                              or $0.17 per diluted common and Class B share, an increase
                              of $356 thousand or
                              19.6% compared with net earnings of $1.8 million or
                              $0.19 per diluted share for
                              the same period in 2004. This increase in net earnings
                              was principally comprised
                              of an $897 thousand increase in net interest income,
                              partially offset by a $152
                              thousand decrease in noninterest income, a $216 thousand
                              increase in total
                              noninterest expense and a $198 thousand increase in
                              the provision for income
                              taxes. Notwithstanding the increase in net earnings,
                              the slight decrease in
                              diluted earnings per share for the third 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
                              third quarter of 2005 were
                              12.6 million compared with 9.3 million weighted average
                              shares outstanding
                              during the third quarter of 2004.
 
 
 Net
                              Interest Income
 When
                              comparing the third quarter of 2005 to the same quarter
                              in 2004, net interest
                              income increased $897 thousand, primarily due to an
                              increase of $3.3 million in
                              interest income, partially offset by a $2.5 million
                              increase in interest
                              expense. The net interest margin on a tax equivalent
                              basis increased 29 basis
                              points to 3.14% for the quarter ended September 30,
                              2005 compared with 2.85% for
                              the same period in 2004.
 
 Interest
                              income from loans increased by $3.5 million, or 43.8%,
                              to $11.5 million for the
                              quarter ended September 30, 2005, compared with $8.0
                              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 $658.8
                              million in the third quarter of 2005 compared with
                              $533.6 million in the third
                              quarter of 2004, an increase of $125.2 million, or
                              23.5%. The average yield on
                              loans increased 97 basis points to 6.86% for the quarter
                              ended September 30,
                              2005 compared with 5.89% for the same period in 2004.
 
 Interest
                              income from investment securities decreased by $192
                              thousand, or 4.5%, to $4.0
                              million for the quarter ended September 30, 2005 compared
                              with $4.2 million for
                              the same period in 2004. This decrease was primarily
                              due to the reduction in
                              securities principal balances, partially offset by
                              the increase in average
                              yields. Investment securities averaged $406.4 million
                              in the third quarter of
                              2005 compared with $517.0 million in the third quarter
                              of 2004, a decrease of
                              $110.6 million or 21.4%. The average yield on investment
                              securities increased 88
                              basis points to 4.08% for the quarter ended September
                              30, 2005 compared with
                              3.20% for the same period in 2004.
 
 Interest
                              expense increased 52.2%, or $2.5 million, to $7.2 million
                              for the quarter ended
                              September 30, 2005 compared with $4.7 million for the
                              same period in 2004. The
                              increase was principally due to the 112 basis point
                              increase in the average rate
                              paid to 3.15% for the quarter ended September 30, 2005,
                              compared with 2.03% for
                              the same period in 2004. The average balance of interest-bearing
                              liabilities
                              decreased $19.9 million or 2.2% from $922.8 million
                              for the quarter ended
                              September 30, 2004 compared with $902.9 million for
                              the same period in 2005. The
                              decrease in average interest-bearing liabilities was
                              principally due to a
                              decrease in time deposits of $11.4 million or 3.3%
                              combined with a decrease in
                              NOW, savings and money market account deposits of $6.6
                              million or 2.0%. This
                              decrease in high cost deposits was partially offset
                              by a $5.3 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 September
                                                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
                                            
                                            $
                                            658,760
                                            
                                            $
                                            11,551
                                            
                                            
                                            6.86
                                            %
                                            $
                                            533,607
                                            
                                            $
                                            8,031
                                            
                                            
                                            5.89
                                            %Investment
                                                securities
                                            
                                            
                                            406,438
                                            
                                            
                                            4,042
                                            
                                            
                                            4.08
                                            
                                            
                                            517,041
                                            
                                            
                                            4,234
                                            
                                            
                                            3.20Federal
                                                funds sold
                                            
                                            
                                            3,449
                                            
                                            
                                            31
                                            
                                            
                                            3.52
                                            
                                            
                                            816
                                            
                                            
                                            3
                                            
                                            
                                            1.33Interest-earning
                                                deposits in other financial institutions
                                            
                                            
                                            1,106
                                            
                                            
                                            10
                                            
                                            
                                            3.58
                                            
                                            
                                            2,985
                                            
                                            
                                            11
                                            
                                            
                                            1.45Total
                                                interest-earning assets
                                            
                                            
                                            1,069,753
                                            
                                            
                                            15,634
                                            
                                            
                                            5.79
                                            %
                                            
                                            1,054,449
                                            
                                            
                                            12,279
                                            
                                            
                                            4.55
                                            %Less
                                                allowance for loan losses
                                            
                                            
                                            (9,414
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (7,258
                                            )Total
                                                interest-earning assets, net of allowance
                                            
                                            
                                            1,060,339
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,047,191Non-earning
                                                assets:Cash
                                                and due from banks
                                            
                                            
                                            19,831
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            13,116Premises
                                                and equipment
                                            
                                            
                                            20,702
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            13,061Accrued
                                                interest receivable and other assets
                                            
                                            
                                            13,330
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            15,542Total
                                                noninterest-earning assets
                                            
                                            
                                            53,863
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            41,719Total
                                                assets
                                            
                                            $
                                            1,114,202
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            1,088,910**Liabilities
                                                and Shareholders' Equity:**Interest-bearing
                                                liabilities:NOW,
                                                savings, and money market accounts
                                            
                                            $
                                            327,733
                                            
                                            $
                                            1,860
                                            
                                            
                                            2.25
                                            %
                                            $
                                            334,347
                                            
                                            $
                                            1,215
                                            
                                            
                                            1.45
                                            %Time
                                                deposits
                                            
                                            
                                            339,671
                                            
                                            
                                            2,899
                                            
                                            
                                            3.39
                                            
                                            
                                            351,116
                                            
                                            
                                            2,179
                                            
                                            
                                            2.47Other
                                                borrowed funds
                                            
                                            
                                            197,209
                                            
                                            
                                            1,711
                                            
                                            
                                            3.39
                                            
                                            
                                            199,093
                                            
                                            
                                            753
                                            
                                            
                                            1.51Junior
                                                subordinated debentures
                                            
                                            
                                            38,250
                                            
                                            
                                            701
                                            
                                            
                                            7.17
                                            
                                            
                                            38,250
                                            
                                            
                                            566
                                            
                                            
                                            5.79Total
                                                interest-bearing liabilities
                                            
                                            
                                            902,863
                                            
                                            
                                            7,171
                                            
                                            
                                            3.15
                                            %
                                            
                                            922,806
                                            
                                            
                                            4,713
                                            
                                            
                                            2.03
                                            %Noninterest-bearing
                                                liabilities:Demand
                                                deposits
                                            
                                            
                                            117,312
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            111,968Accrued
                                                interest payable and other liabilities
                                            
                                            
                                            5,449
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,536Total
                                                noninterest-bearing liabilities
                                            
                                            
                                            122,761
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            115,504Total
                                                liabilities
                                            
                                            
                                            1,025,624
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,038,310Shareholders'
                                                equity
                                            
                                            
                                            88,578
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            50,600Total
                                                liabilities and shareholders' equity
                                            
                                            $
                                            1,114,202
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            1,088,910Net
                                                interest income
                                            
                                            
                                            
                                            
                                            $
                                            8,463
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            7,566Net
                                                interest spread
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2.64
                                            %
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2.52
                                            %Net
                                                interest margin (tax equivalent)
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3.14
                                            %
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2.85
                                            %(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 September 30,
                                            2005 Compared with the Same Period in
                                            2004****Increase
                                            (Decrease)****Due
                                            to Change in****Volume**
                                        
                                        **Rate**
                                        
                                        **Total****Interest-earning
                                            assets:**Loans
                                        
                                        $
                                        1,858
                                        
                                        $
                                        1,662
                                        
                                        $
                                        3,520Securities
                                        
                                        
                                        (890
                                        )
                                        
                                        698
                                        
                                        
                                        (192
                                        )Federal
                                            funds sold
                                        
                                        
                                        9
                                        
                                        
                                        19
                                        
                                        
                                        28Interest-bearing
                                            deposits in other financial institutions
                                        
                                        
                                        (7
                                        )
                                        
                                        6
                                        
                                        
                                        (1
                                        )Total
                                            increase (decrease) in interest income
                                        
                                        
                                        970
                                        
                                        
                                        2,385
                                        
                                        
                                        3,355**Interest-bearing
                                            liabilities:**NOW,
                                            savings and money market accounts
                                        
                                        
                                        (24
                                        )
                                        
                                        669
                                        
                                        
                                        645Time
                                            deposits
                                        
                                        
                                        (71
                                        )
                                        
                                        791
                                        
                                        
                                        720Other
                                            borrowed funds
                                        
                                        
                                        (7
                                        )
                                        
                                        965
                                        
                                        
                                        958Junior
                                            subordinated deferrable interest debentures
                                        
                                        
                                        -
                                        
                                        
                                        135
                                        
                                        
                                        135Total
                                            increase (decrease) in interest expense
                                        
                                        
                                        (102
                                        )
                                        
                                        2,560
                                        
                                        
                                        2,458Increase
                                            (decrease) in net interest income
                                        
                                        $
                                        1,072
                                        
                                        $
                                        (175
                                        )
                                        $
                                        897
 Provision
                                    for Loan Losses
 We
                                    utilize our migration analysis to aid in the
                                    evaluation of the adequacy of our
                                    allowance for loan losses. Based upon this analysis,
                                    as well as other factors
                                    which management must assess, we recorded a provision
                                    for loan losses of $600
                                    thousand for the quarter ended September 30,
                                    2005 compared with $625 thousand
                                    for the same period in 2004. Additionally, we
                                    experienced net charge-offs of
                                    $802 thousand for the quarter ended September
                                    30, 2005, compared with net
                                    charge-offs of $81 thousand for the same period
                                    in 2004. At September 30, 2005,
                                    the allowance for loan losses as a percentage
                                    of total loans was 1.40% compared
                                    with 1.35% at September 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 $391 thousand in the third quarter
                                    of 2005 compared with $543
                                    thousand in the third quarter of 2004, a decrease
                                    of $152 thousand or 28.0%,
                                    primarily as a result of reduced gains on sales
                                    of securities. We posted $197
                                    thousand in gains on sales of securities in the
                                    third quarter of 2004 compared
                                    with no sales of securities during the same period
                                    in 2005.
 
 Noninterest
                                    Expense and Provision for Federal Income Taxes
 Noninterest
                                    expense for the third quarter of 2005 was $4.9
                                    million compared with $4.7
                                    million for the third quarter of 2004, an increase
                                    of $216 thousand, or 4.6%,
                                    primarily due to an increase of $173 thousand
                                    in data processing expenses and an
                                    increase of $137 thousand in legal and professional
                                    fees associated with being a
                                    publicly traded company, including Sarbanes-Oxley
                                    compliance costs, partially
                                    offset by a $32 thousand decrease in salaries
                                    and employee benefit expenses, and
                                    a $17 thousand decrease in net occupancy expense.
                                    The provision for Federal
                                    income taxes increased $198 thousand due to the
                                    increase in net earnings. The
                                    effective tax rate was approximately 34.26% for
                                    the quarter ended September 30,
                                    2005 and 33.96% for the same period in
                                    2004.
  15
 **Table
                                  of
                                  Contents**
   *Results
                                of Operations for the Nine Months Ended September
                                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 of 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, and sold 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 September 30, 2005, the average life of our securities
                                portfolio was
                                approximately 3.6 years.
 
 For
                                the
                                nine months ended September 30, 2005, we recorded
                                net earnings of $2.3 million
                                or $0.19 per diluted common and Class B share, a
                                decrease of $2.2 million or
                                47.9% compared with $4.5 million or $0.57 per diluted
                                share for the same period
                                in 2004. This $2.2 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 $1.4 million increase in noninterest
                                expense and a decrease in
                                gains on sales of securities of $572 thousand, partially
                                offset by a $4.3
                                million increase in net interest income, a $1.1 million
                                decrease in the
                                provision for income taxes and a $425 thousand decrease
                                in the provision for
                                loan losses.
 
 Net
                                Interest Income
 When
                                comparing the nine months ended September 30, 2005
                                to the same period in 2004,
                                net interest income increased $4.3 million, primarily
                                due to an increase of
                                $10.7 million in interest income, partially offset
                                by a $6.4 million increase in
                                interest expense. The net interest margin on a tax
                                equivalent basis increased 31
                                basis points to 3.12% for the nine months ended September
                                30, 2005 compared with
                                2.81% for the same period in 2004.
 
 Interest
                                income from loans increased $10.6 million, or 48.8%,
                                to $32.2 million for the
                                nine months ended September 30, 2005, compared with
                                $21.6 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 $638.1
                                million for the nine months ended September 30, 2005
                                compared with $485.5
                                million in the same period in 2004, an increase of
                                $152.6 million, or 31.4%. The
                                average yield on loans increased 80 basis points
                                to 6.65% for the nine months
                                ended September 30, 2005 compared with 5.85% for
                                the same period in
                                2004.
 
 Interest
                                income from investment securities increased by $227
                                thousand, or 2.0%, to $11.9
                                million for the nine months ended September 30, 2005
                                compared with $11.6 million
                                for the same period in 2004. This increase was due
                                to an increase in average
                                yields offset by a decrease in the average balance
                                due to the restructuring of
                                our securities portfolio. The average yield on investment
                                securities increased
                                60 basis points to 3.79% for the nine months ended
                                September 30, 2005 from 3.19%
                                for the same period in 2004. The average balance
                                of investment securities was
                                $426.4 million for the nine months ended June 30,
                                2005 compared with $478.1
                                million for the same period in 2004, a decrease of
                                $51.6 million or 10.8%.
 
 Interest
                                expense increased 50.8%, or $6.5 million, to $19.2
                                million for the nine months
                                ended September 30, 2005 compared **** with
                                $12.7 million for the same period in 2004. The increase
                                was principally due to
                                the 88 basis point increase in the average rate paid
                                to 2.83% for the nine
                                months ended September 30, 2005, from 1.95% for the
                                same period in 2004. The
                                average balance of interest-bearing liabilities increased
                                $33.8 million or 3.9%
                                from $870.5 million for the nine months ended September
                                30, 2004 compared with
                                $904.3 million for the same period in 2005. The increase
                                in average liabilities
                                was comprised primarily of an increase in borrowings
                                of $32.3 million or 26.7%,
                                combined with a slight increase in interest-bearing
                                deposits of $1.6 million or
                                0.2%. Noninterest-bearing demand deposits increased
                                $8.5 million or 8.1% and
                                lower cost NOW, savings and money market accounts
                                increased $9.0 million or
                                2.7%, more than offsetting the $7.4 million or 2.0%
                                decline in higher cost time
                                deposits. We continued our strategy of allowing brokered
                                and internet CD
                                deposits to roll off upon maturity, as these higher
                                costing deposits decreased
                                approximately $72.4 million or 88.5% to $9.4 million
                                at September 30, 2005
                                compared with $81.8 million at September 30, 2004.
 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 Nine Months Ended September 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
                                            
                                            $
                                            638,095
                                            
                                            $
                                            32,167
                                            
                                            
                                            6.65
                                            %
                                            $
                                            485,532
                                            
                                            $
                                            21,617
                                            
                                            
                                            5.85
                                            %Investment
                                                securities
                                            
                                            
                                            426,444
                                            
                                            
                                            11,853
                                            
                                            
                                            3.79
                                            
                                            
                                            478,067
                                            
                                            
                                            11,626
                                            
                                            
                                            3.19Federal
                                                funds sold
                                            
                                            
                                            1,894
                                            
                                            
                                            46
                                            
                                            
                                            3.18
                                            
                                            
                                            11,446
                                            
                                            
                                            80
                                            
                                            
                                            0.92Interest-earning
                                                deposits in other financial institutions
                                            
                                            
                                            2,375
                                            
                                            
                                            56
                                            
                                            
                                            3.13
                                            
                                            
                                            7,168
                                            
                                            
                                            55
                                            
                                            
                                            1.00Total
                                                interest-earning assets
                                            
                                            
                                            1,068,808
                                            
                                            
                                            44,122
                                            
                                            
                                            5.49
                                            %
                                            
                                            982,213
                                            
                                            
                                            33,378
                                            
                                            
                                            4.46
                                            %Less
                                                allowance for loan losses
                                            
                                            
                                            (8,945
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (6,572
                                            )Total
                                                interest-earning assets, net of allowance
                                            
                                            
                                            1,059,863
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            975,641Non-earning
                                                assets:Cash
                                                and due from banks
                                            
                                            
                                            17,366
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            15,269Premises
                                                and equipment
                                            
                                            
                                            18,645
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            12,799Accrued
                                                interest receivable and other assets
                                            
                                            
                                            13,829
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            12,921Total
                                                noninterest-earning assets
                                            
                                            
                                            49,840
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            40,989Total
                                                assets
                                            
                                            $
                                            1,109,703
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            1,016,630**Liabilities
                                                and Shareholders' Equity:**Interest-bearing
                                                liabilities:NOW,
                                                savings, and money market accounts
                                            
                                            $
                                            346,896
                                            
                                            $
                                            5,354
                                            
                                            
                                            2.06
                                            %
                                            $
                                            337,891
                                            
                                            $
                                            3,190
                                            
                                            
                                            1.26
                                            %Time
                                                deposits
                                            
                                            
                                            366,234
                                            
                                            
                                            8,335
                                            
                                            
                                            3.04
                                            
                                            
                                            373,668
                                            
                                            
                                            6,708
                                            
                                            
                                            2.40Other
                                                borrowed funds
                                            
                                            
                                            152,899
                                            
                                            
                                            3,479
                                            
                                            
                                            3.00
                                            
                                            
                                            120,642
                                            
                                            
                                            1,209
                                            
                                            
                                            1.34Junior
                                                subordinated debentures
                                            
                                            
                                            38,250
                                            
                                            
                                            1,996
                                            
                                            
                                            6.88
                                            
                                            
                                            38,250
                                            
                                            
                                            1,603
                                            
                                            
                                            5.51Total
                                                interest-bearing liabilities
                                            
                                            
                                            904,279
                                            
                                            
                                            19,164
                                            
                                            
                                            2.83
                                            %
                                            
                                            870,451
                                            
                                            
                                            12,710
                                            
                                            
                                            1.95
                                            %Noninterest-bearing
                                                liabilities:Demand
                                                deposits
                                            
                                            
                                            113,615
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            105,136Accrued
                                                interest payable and other liabilities
                                            
                                            
                                            4,600
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,258Total
                                                noninterest-bearing liabilities
                                            
                                            
                                            118,215
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            108,394Total
                                                liabilities
                                            
                                            
                                            1,022,494
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            978,845Shareholders'
                                                equity
                                            
                                            
                                            87,209
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            37,785Total
                                                liabilities and shareholders' equity
                                            
                                            $
                                            1,109,703
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            1,016,630Net
                                                interest income
                                            
                                            
                                            
                                            
                                            $
                                            24,958
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            20,668Net
                                                interest spread
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2.66
                                            %
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2.51
                                            %Net
                                                interest margin (tax equivalent)
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3.12
                                            %
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2.81
                                            %(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 Nine Months Ended September 30, 2005
                                          Compared with the Same Period in
                                          2004****Increase
                                          (Decrease)****Due
                                          to Change in****Volume**
                                      
                                      **Rate**
                                      
                                      **Total****Interest-earning
                                          assets:**Loans
                                      
                                      $
                                      6,675
                                      
                                      $
                                      3,875
                                      
                                      $
                                      10,550Securities
                                      
                                      
                                      (1,230
                                      )
                                      
                                      1,457
                                      
                                      
                                      227Federal
                                          funds sold
                                      
                                      
                                      (66
                                      )
                                      
                                      32
                                      
                                      
                                      (34
                                      )Interest-bearing
                                          deposits in other financial institutions
                                      
                                      
                                      (36
                                      )
                                      
                                      37
                                      
                                      
                                      1Total
                                          increase (decrease) in interest income
                                      
                                      
                                      5,343
                                      
                                      
                                      5,401
                                      
                                      
                                      10,744**Interest-bearing
                                          liabilities:**NOW,
                                          savings and money market accounts
                                      
                                      
                                      85
                                      
                                      
                                      2,079
                                      
                                      
                                      2,164Time
                                          deposits
                                      
                                      
                                      (133
                                      )
                                      
                                      1,760
                                      
                                      
                                      1,627Other
                                          borrowed funds
                                      
                                      
                                      322
                                      
                                      
                                      1,948
                                      
                                      
                                      2,270Junior
                                          subordinated deferrable interest debentures
                                      
                                      
                                      -
                                      
                                      
                                      393
                                      
                                      
                                      393Total
                                          increase (decrease) in interest expense
                                      
                                      
                                      274
                                      
                                      
                                      6,180
                                      
                                      
                                      6,454Increase
                                          (decrease) in net interest income
                                      
                                      $
                                      5,069
                                      
                                      $
                                      (779
                                      )
                                      $
                                      4,290
  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
                                $1.9 million for the nine months ended September
                                30, 2005 compared with $2.3
                                million for the same period in 2004. For the nine
                                months ended September 30,
                                2005, we experienced net charge-offs of $786 thousand
                                compared with net
                                charge-offs of $452 thousand for the same period
                                in 2004. Although the provision
                                recorded for the nine months ended September 30,
                                2005 is less than the provision
                                for the same period in 2004, the allowance for loan
                                losses as a percentage of
                                total loans at September 30, 2005 increased to 1.40%
                                compared with 1.35% at
                                September 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 $4.8 million in the nine
                                months ended September 30,
                                2005 compared with income of $1.8 million for the
                                same period in 2004, with the
                                decrease primarily due to the $6.1 million non-recurring
                                impairment writedown
                                loss on our securities portfolio related to the balance
                                sheet restructuring plan
                                during the first quarter of 2005 and a $572 thousand
                                decrease in gains on sales
                                of securities.
 
 Noninterest
                                Expense and Provision for Federal Income Taxes
 Noninterest
                                expense for the nine months ended September 30, 2005
                                was $14.7 million compared
                                with $13.4 million for the same period in 2004, an
                                increase of $1.3 million, or
                                10.4%. This increase was comprised primarily of an
                                increase of $589 thousand in
                                legal and professional fees associated with being
                                a publicly traded company, an
                                increase of $443 thousand in data processing resulting
                                from technology upgrades
                                and an increase of $393 thousand in salaries and
                                employee benefits. The
                                provision for Federal income taxes decreased $1.1
                                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 nine months ended
                                September 30, 2005. The effective tax rate was approximately
                                34.26% for the nine
                                months ended September 30, 2005 and 33.98% for the
                                same period in
                                2004.
 18
 **Table
                          of
                          Contents**
  *Financial
                      Condition*
 
 General
 As
                        of
                        September 30, 2005 we had total assets of $1.1 billion, total
                        loans of $658.0
                        million, total deposits of $738.3 million and total shareholders’ equity of
                        $88.3 million. Total assets decreased by $9.3 million from
                        December 31, 2004 to
                        September 30, 2005. The decrease, primarily due to the restructuring
                        of a
                        portion of the securities portfolio as discussed previously,
                        is comprised of a
                        decrease of $170.6 million in available for sale securities,
                        partially offset by
                        increases of $90.6 million in held to maturity securities
                        and $58.6 million in
                        net loans.
 
 Under
                        the
                        previously described 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 $75.0 million was used to pay down Federal
                        Home Loan Bank
                        borrowings, which had an average cost of funds of 2.76%,
                        and $88.0 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 Nine Months Ended
                        September 30, 2005
                        and 2004 - General.”
 
 From
                        December 31, 2004 to September 30, 2005, total liabilities
                        decreased by $11.3
                        million. When comparing the two dates, deposits decreased
                        $130.1 million and
                        other borrowings increased $117.6 million. The decrease in
                        deposits was
                        principally the result of our decision to allow higher cost
                        brokered and
                        internet CD deposits to roll off as they mature, as well
                        as decreases in public
                        fund deposits. 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 $1.9 million from December
                        31, 2004 to September
                        30, 2005 primarily as a result of our net earnings of $2.3
                        million for the nine
                        months ended September 30, 2005, partially offset by a $429
                        thousand increase in
                        unrealized losses on the available for sale securities portfolio.
 
 Loan
                        Portfolio
 Total
                        loans were $658.3 million as of September 30, 2005, an increase
                        of $59.7 million
                        or 10.0% compared with loans of $598.3 million as of December
                        31, 2004. Loan
                        growth occurred primarily in commercial mortgage loans, which
                        increased $39.5
                        million or 14.8%, and construction and land development loans,
                        which increased
                        $14.3 million or 11.6% .
 
 The
                      following table summarizes our loan portfolio by type as of
                      the dates indicated
                      (dollars in thousands):
  As
                                    of September 30, 2005
                                
                                As
                                    of December 31, 2004Amount
                                
                                Percent
                                
                                Amount
                                
                                PercentBusiness
                                    and industrial
                                
                                $
                                77,614
                                
                                
                                11.8
                                %
                                $
                                70,101
                                
                                
                                11.7
                                %Real
                                    estate:Construction
                                    and land development
                                
                                
                                137,997
                                
                                
                                21.0
                                
                                
                                123,655
                                
                                
                                20.7Residential
                                
                                
                                123,908
                                
                                
                                18.8
                                
                                
                                126,200
                                
                                
                                21.1Commercial
                                    mortgages
                                
                                
                                306,610
                                
                                
                                46.6
                                
                                
                                267,158
                                
                                
                                44.7Consumer
                                
                                
                                13,135
                                
                                
                                2.0
                                
                                
                                12,592
                                
                                
                                2.1Other
                                
                                
                                345
                                
                                
                                0.0
                                
                                
                                227
                                
                                
                                0.0Gross
                                    loans
                                
                                
                                659,609
                                
                                
                                100.2
                                
                                
                                599,933
                                
                                
                                100.3Less
                                    unearned discounts and fees
                                
                                
                                (1,606
                                )
                                
                                (0.2
                                )
                                
                                (1,641
                                )
                                
                                (0.3
                                )Total
                                    loans
                                
                                $
                                658,003
                                
                                
                                100.0
                                %
                                $
                                598,292
                                
                                
                                100.0
                                %
  Nonperforming
                      Assets
 Nonperforming
                        assets were $11.8 million and $4.8 million as of September
                        30, 2005 and December
                        31, 2004, respectively. The increase in nonperforming assets
                        of $7.0 million was
                        principally comprised of an $8.0 million increase in nonaccrual
                        loans, partially
                        offset by an $830 thousand decrease in other real estate
                        owned. The increase in
                        nonaccrual loans was primarily a result of one $3.9 million
                        business and
                        industrial loan, collateralized by furniture, fixtures and
                        equipment and by
                        accounts receivable, and four commercial mortgage loans totaling
                        $4.1 million
                        placed on nonaccrual status during the period. Although the
                        business and
                        industrial loan is performing in accordance with its terms,
                        management was
                        concerned about its future performance and placed it on nonaccrual
                        status during
                        June 2005. Two real estate loans, both related to the same
                        guarantor and placed
                        on nonaccrual status in February 2005, consisted of one loan
                        in the amount of
                        $2.4 million collateralized by multi-family real estate and
                        another loan in the
                        amount of $711 thousand collateralized by commercial real
                        estate. Although these
                        two loans are performing in accordance with their terms,
                        management was
                        concerned about the cash flow of the related properties and
                        the financial status
                        of the related guarantor. The other two commercial real estate
                        loans, in the
                        total amount of $940 thousand, both collateralized by one
                        office/warehouse
                        facility, were placed on nonaccrual status in July 2005 when
                        the borrower filed
                        for bankruptcy. The $830 thousand decrease in other real
                        estate owned resulted
                        from the sale of one commercial property acquired through
                        foreclosure. Our
                        ratios of nonperforming assets to total loans and other real
                        estate were 1.79%
                        and 0.80% as of September 30, 2005 and December 31, 2004,
                        respectively.
 As
                          a
                          percentage of total loans and other real estate owned,
                          nonperforming assets were
                          1.79% at September 30, 2005, compared with 1.15% at September
                          30, 2004. At June
                          30, 2005, nonperforming assets were $10.7 million, or 1.61%
                          of total loans and
                          other real estate owned.
 19
 **Table
                        of
                        Contents**
  The
                      following table presents information regarding nonperforming
                      assets as of the
                      dates indicated (dollars in thousands):
 As
                                    of September 30, 2005
                                
                                As
                                    of December 31, 2004Nonaccrual
                                    loans
                                
                                $
                                9,472
                                
                                
                                $
                                1,489Accruing
                                    loans past due 90 days or more
                                
                                
                                -
                                
                                
                                
                                62Restructured
                                    loans
                                
                                
                                1,839
                                
                                
                                
                                1,917Other
                                    real estate and repossessed assets
                                
                                
                                490
                                
                                
                                
                                1,320Total
                                    nonperforming assets
                                
                                $
                                11,801
                                
                                
                                $
                                4,788Nonperforming
                                    assets to total loans and other real estate
                                
                                
                                1.79
                                %
                                
                                
                                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
                          September 30, 2005, the allowance for loan losses amounted
                          to $9.2 million or
                          1.40% 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 81.20%
                          as of September 30,
                          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
                                
                                As
                                    of and for theNine
                                    Months Ended
                                
                                Year
                                    EndedSeptember
                                    30, 2005
                                
                                December
                                    31, 2004Average
                                    loans outstanding
                                
                                $
                                638,095
                                
                                $
                                509,142Total
                                    loans outstanding
                                
                                $
                                658,003
                                
                                $
                                598,292Allowance
                                    for loan losses at beginning of period
                                
                                $
                                8,121
                                
                                $
                                5,650Provision
                                    for loan losses
                                
                                
                                1,850
                                
                                
                                2,950Charge-Offs:Business
                                    and industrial
                                
                                
                                (801
                                )
                                
                                (242
                                )Real
                                    estate
                                
                                
                                -
                                
                                
                                (262
                                )Consumer
                                
                                
                                (68
                                )
                                
                                (110
                                )Total
                                    charge-offs
                                
                                
                                (869
                                )
                                
                                (614
                                )Recoveries:Business
                                    and industrial
                                
                                
                                59
                                
                                
                                50Real
                                    estate
                                
                                
                                13
                                
                                
                                63Consumer
                                
                                
                                11
                                
                                
                                22Total
                                    recoveries
                                
                                
                                83
                                
                                
                                135Net
                                    recoveries (charge-offs)
                                
                                
                                (786
                                )
                                
                                (479
                                )Allowance
                                    for loan losses at end of period
                                
                                $
                                9,185
                                
                                $
                                8,121Allowance
                                    for loan losses to end of period loans
                                
                                
                                1.40
                                %
                                
                                1.36
                                %Net
                                    charge-offs to average loans
                                
                                
                                0.12
                                
                                
                                0.09Allowance
                                    for loans losses to end of period nonperforming
                                    loans
                                
                                
                                81.20
                                
                                
                                234.17
 
 20
 **Table
                            of
                            Contents**
  Securities
 As
                        of
                        September 30, 2005, investment securities totaled $408.5
                        million, a decrease of
                        $80.00 million or 16.4% 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 nine months ended
                        September 30, 2005, we purchased approximately $133.1 million
                        in securities and
                        received principal payments of approximately $36.7 million.
 
 As
                        of
                        September 30, 2005, securities represented 36.4% of total
                        assets compared with
                        43.2% of total assets as of December 31, 2004.
 
 Deposits
 As
                        of
                        September 30, 2005, NOW accounts, money market accounts and
                        savings deposits
                        accounted for 44.8% of total deposits, while certificates
                        of deposit made up
                        37.9% of total deposits. Total deposits were $738.3 million
                        as of September 30,
                        2005, a decrease of $130.1 million or 15.0% compared with
                        $868.4 million as of
                        December 31, 2004. We continued our strategy of allowing
                        brokered and internet
                        CD deposits to roll off upon maturity, as these higher costing
                        deposits
                        decreased approximately $71.3 million or 88.4% to $9.4 million
                        at September 30,
                        2005 compared with $80.7 million at December 31, 2004. Additionally,
                        our NOW,
                        savings and money market accounts decreased approximately
                        $67.6 million to
                        $330.5 million at September 30, 2005 compared with $398.1
                        million at December
                        31, 2004, primarily related to seasonal needs of our contractual
                        public funds
                        depository relationships.
 
 As
                        of
                        September 30, 2005, we had $128.1 million in noninterest-bearing
                        deposits
                        compared with $110.9 million as of December 31, 2004, an
                        increase of $17.2
                        million or 15.5%. The average cost of deposits, including
                        noninterest bearing
                        deposits, was 2.21% for the nine months ended September 30,
                        2005 compared with
                        1.68% for the year ended December 31, 2004.
 
 Other
                        Borrowings
 Other
                        borrowings totaled $250.5 million as of September 30, 2005,
                        an increase of
                        $117.6 million or 88.5% compared with $132.9 million as of
                        December 31, 2004.
                        The increase is principally due to funding our $130.1 million
                        decrease in
                        deposits related primarily to our strategy of allowing broker
                        and internet
                        deposits to run off upon maturity, and to aid in funding
                        or $59.7 million growth
                        in the loan portfolio from December 31, 2004 to September
                        30,
                        2005.
 **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
                        September 30, 2005, shareholders’ equity totaled $88.3 million, an increase of
                        $1.9 million or 2.2% compared with $86.4 million as of December
                        31, 2004. The
                        increase is comprised of $2.3 million in net earnings for
                        the period and a $429
                        thousand increase in the unrealized losses net of taxes 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. As of September 30, 2005, the Bank remained 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.
  21
 **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
                        September 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
                                
                                $
                                19,994
                                
                                $
                                351
                                
                                $
                                4,460
                                
                                $
                                97,082
                                
                                $
                                53,009
                                
                                $
                                233,577
                                
                                $
                                408,473Loans
                                
                                
                                307,648
                                
                                
                                39,128
                                
                                
                                34,297
                                
                                
                                97,327
                                
                                
                                112,777
                                
                                
                                68,432
                                
                                
                                659,609Federal
                                    funds sold
                                
                                
                                1,450
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                1,450Total
                                    interest-earning assets
                                
                                
                                329,092
                                
                                
                                39,479
                                
                                
                                38,757
                                
                                
                                194,409
                                
                                
                                165,786
                                
                                
                                302,009
                                
                                
                                1,069,532Interest-bearing
                                    liabilities:NOW,
                                    money market and savings deposits
                                
                                $
                                330,463
                                
                                $
                                -
                                
                                $
                                -
                                
                                $
                                -
                                
                                $
                                -
                                
                                $
                                -
                                
                                $
                                330,463Certificates
                                    of deposit and other time deposits
                                
                                
                                45,247
                                
                                
                                118,891
                                
                                
                                56,365
                                
                                
                                27,667
                                
                                
                                31,596
                                
                                
                                -
                                
                                
                                279,766Borrowed
                                    funds
                                
                                
                                175,500
                                
                                
                                75,000
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                250,500Junior
                                    subordinated debentures
                                
                                
                                10,310
                                
                                
                                20,620
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                7,320
                                
                                
                                38,250Total
                                    interest-bearing liabilities
                                
                                
                                561,520
                                
                                
                                214,511
                                
                                
                                56,365
                                
                                
                                27,667
                                
                                
                                31,596
                                
                                
                                7,320
                                
                                
                                898,979Cumulative
                                    GAP
                                
                                $
                                (232,428
                                )
                                $
                                (407,460
                                )
                                $
                                (425,068
                                )
                                $
                                (258,326
                                )
                                $
                                (124,136
                                )
                                $
                                170,553Cumulative
                                    GAP to total assets
                                
                                
                                (20.74
                                )%
                                
                                (36.36
                                )%
                                
                                (37.93
                                )%
                                
                                (23.05
                                )%
                                
                                (11.08
                                )%
                                
                                15.22
                                %Cumulative
                                    interest-earning assets to cumulative interest-bearing
                                    liabilities
                                
                                
                                58.61
                                %
                                
                                47.49
                                %
                                
                                48.93
                                %
                                
                                69.96
                                %
                                
                                86.08
                                %
                                
                                118.97
                                %
 Our
                                  one-year cumulative GAP position as of September
                                  30, 2005 was negative $425.1
                                  million or (37.9)% 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.
 
 The
                                  following table sets forth our simulation analysis
                                  as of September 30,
                                  2005:
 
 **Change
                                            in Rates**
                                        
                                        **%
                                            Change in****Net
                                            Income**-100
                                            bp
                                        
                                        13.1%0 bp
                                        
                                        —+100
                                            bp
                                        
                                        (10.1)%+200
                                            bp
                                        
                                        (41.5)%
  22
 **Table
                              of
                              Contents**
 
 Based
                            on
                            the September 30, 2005 simulation analysis, we estimate
                            our net income would
                            decrease by approximately 41.5% 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 10.1% 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 13.1% 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 quarterly report
                            on Form 10-Q.
 
 **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.
 
 23
 **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**
 
 The
                                    following exhibits are furnished herewith:
  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.
 24
 **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:   November
                                          10, 2005
                                        By:
                                        /s/ 
                                          Harvey
                                          ZinnPresident
                                          and Chief
                                          Executive Officer
   Date:   November
                                          10, 2005
                                        By:
                                        /s/ 
                                          R. Darrell
                                          BrewerChief
                                          Financial
                                          Officer